Sturm, Ruger & Company, Inc. (NYSE:RGR) Q3 2023 Earnings Call Transcript

Sturm, Ruger & Company, Inc. (NYSE:RGR) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Hello, and welcome to the Q3 2023 Sturm, Ruger Earnings Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. It is now my pleasure to introduce President and CEO, Chris Killoy.

Christopher Killoy: Good morning, and welcome to the Sturm, Ruger & Company Third Quarter 2023 Conference Call. I’ll ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements. Tom Dineen, our Chief Financial Officer, will then give an overview of the third quarter 2023 financial results, and then I will discuss our operations and the market. After that, we’ll get to your questions. Kevin?

Kevin Reid: Sure, Chris. We want to remind everyone that statements made in the course of this meeting that take the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the company’s actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company’s SEC filings, including, but not limited to the company’s reports on Form 10-K for the year ended December 31, 2022. And of course, the Forms 10-Q for the last — for the first, second and third quarter of 2023, the latter of which we filed last night.

Copy of the documents may be obtained by contacting the company or the SEC or on the company website at ruger.com/corporate/ or, of course, the SEC website at sec.gov. We do reference non-GAAP EBITDA. Please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found on our Form 10-K for the year ended December 31, 2022, and again, on the Forms 10-Q for the first, second and third quarter of 2023, all of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Chris?

Christopher Killoy: Thank you, Kevin. Now Tom will discuss the company’s third quarter 2023 results. Tom?

Thomas Dineen: Thanks, Chris. For the third quarter of 2023, net sales were $120.9 million and diluted earnings were $0.42 per share. For the corresponding period in 2022, net sales were $139.4 million and diluted earnings were $1.03 per share. For the 9 months ended September 30, 2023, net sales were $413.2 million and diluted earnings were $2.13 per share. For the corresponding period in 2022, net sales were $446.6 million, and diluted earnings were $3.90 per share. Our profitability declined in the third quarter of 2023 from the third quarter of 2022 as our gross margin decreased from 28% to 20%. The lower margin was driven by unfavorable deleveraging of fixed costs resulting from decreased production, increased sales promotional activity, including the price repositioning of our original LCP models and our Security-9 pistol.

Our product mix shift toward products in relatively higher demand with relatively lower margins and cost increases in materials, commodities, services, wages, energy, fuel and transportation. Our continued focus on financial discipline and long-term shareholder value is evident in our strong debt-free balance sheet. At September 30, 2023, our cash and short-term investments totaled $120 million. Our short-term investments are invested in the United States Treasury bills and in a money market fund that invests exclusively in United States Treasury instruments, which mature within 1 year. At September 30, 2023, our current ratio was 4.5:1, and we had no debt. Stockholders’ equity was $335.5 million which equates to a book value of $18.92 per share, of which $6.77 was cash and short-term investments.

In the first 9 months of 2023, we generated $17.3 million of cash from operations. We reinvested $11.6 million of that back into the company in the form of capital expenditures. We expect our 2023 capital expenditures will approximately total $20 million related to new product introductions, upgrades to our manufacturing equipment and improvements to our facilities. In the first 9 months of 2023, we returned $107.8 million to our shareholders through the payment of our quarterly dividends and a $5 per share special dividend paid in January 2023. Our Board of Directors declared a $0.17 per share quarterly dividend for shareholders of record as of November 15, 2023, payable on November 29, 2023. As a reminder, our quarterly dividend is approximately 40% of net income and therefore, varies quarter-to-quarter.

That’s the financial update for the quarter. Chris?

Christopher Killoy: Thanks, Tom. Our third quarter sales and profitability decreased from last year as overall firearms demand declined, creating a challenging promotion-rich marketplace. The estimated unit sell-through of our products from the independent distributors to retailers in the first 9 months of 2023 decreased 8% compared to the prior year period. Comparably, NICS background checks, as adjusted by the National Shooting Sports Foundation, decreased 7% from the first 9 months of 2022. We remain focused on our long-term strategy and adjusted production rates on various product lines to better match demand, which reduced our overall production. While our decreased production hindered current period profitability, we successfully managed inventory levels during the seasonally slow quarter with only a nominal increase in finished goods in our warehouses and essentially no change in distributor inventories.

We are well positioned heading into the fourth quarter. We stayed disciplined and offered only modest promotions in the third quarter. We ran 3 retailer promotions, one for each of the 10/22, the Wrangler and the American centerfire rifle product families to ensure we maintained our strong presence at retail. As Tom mentioned earlier, in September, we also repositioned our pricing on 2 products: the LCP pistol and the Security-9 pistol. This allowed retailers to offer these products at competitive prices in the very tight pistol market, while ensuring profitability for all 3 participants in the distribution channel; Ruger, distributors and the retailers. You may recall that we repositioned our pricing on the MAX-9 pistol in the first quarter of 2023.

We are extremely pleased with the results of this price strategy and the resulting performance of the MAX-9. As we did with the MAX-9, we protected the independent distributors inventories of LCP and Security-9 pistols, which adversely impacted our current margins, but will benefit us going forward as we continue to demonstrate our commitment and appreciation for the investment distributors make in Ruger products. They can rest assured that their investment in Ruger is sound and profitable. Our debt-free balance sheet and diverse product offerings have us well positioned to capitalize on the firearms market rebounds. We continue to look for opportunities to enhance our current products and to expand our product portfolio through product innovation and development.

2023 has been a busy year. Earlier this week, we introduced the Ruger-made Marlin Dark Series lever-action rifles, which will appeal to a broad variety of firearms enthusiasts interested in a more modern look and features to enhance the rifles classic design. Other new product introductions in 2023 include 2 other Marlin lever-action rifles, the Model 336 Classic, chambered in 30-30 Winchester, and the Model 1894 Classic lever-action rifles chambered in .44 Magnum. In April, we launched a Super Wrangler revolver, which comes with 2 cylinders, one for the inexpensive .22 rifle ammunition and one for the more powerful .22 Magnum ammunition. As we mentioned last quarter, in 2023, we are capitalizing on the opportunity to offer new Ruger pistols in California for the first time in 10 years, brought about by some recent changes in the pistol requirements.

To date, 4 Ruger pistols have been added to the California roster of certified handguns, including a Mark IV, the SR22, an LCP and a MAX-9 pistol. In the coming months, we look forward to introducing exciting new firearms in both the Ruger and Marlin brands as well as offering additional pistol to the California market. New product sales, which include only major new products that were introduced in the past 2 years, like the Marlins and Super Wranglers I just mentioned, totaled $90.5 million or 23% of firearm sales in the first 9 months of 2023. This includes the MAX-9 pistol, the LCP MAX pistol, the LCP Carbine, the Small-Frame Autoloading Rifle, Security-380 pistol and the aforementioned Super Wrangler revolver and all Marlin rifles. Last week, we attended the National Association of Sporting Goods Wholesalers Annual Expo, better known as the NASGW show in Columbus, Ohio.

We were honored to be recognized by the independent distributors as we were named Firearms Manufacturer of the Year and awarded Best New Rifle and Best New Overall Product for the Marlin Model 336. This was a great testament to our 1,800 loyal and hardworking associates. Those were the highlights of the third quarter of 2023. Operator, may we please have the first question.

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Q&A Session

Operator: [Operator Instructions]. And our first question comes from the line of Mark Smith with Lake Street.

Mark Smith: A handful of questions here for you this morning. First one, just looking at mix shift during the quarter, did we see it really shift towards lower-priced pistols and it sounds like that’s kind of what you were promoting during the quarter? Was that the biggest part of the mix shift?

Christopher Killoy: Well, Mark, I’m wondering if potentially you’re looking at the, say, the average selling price on incoming orders or outbound sales. And that’s — part of that is true, but it’s also part of the repositioning that we mentioned at the lower price point and the price we use to protect distributors’ inventory, that moved those numbers down, and that’s where that comes from. If we’re not for that, those — both those particular metrics would, in fact, be higher, I think, by about $70, if I recall.

Mark Smith: Okay. Yes, that was the thing was really the ASP on the orders received, certainly moved the lowest that we’ve seen in the last 1 year, 1.5 years or so. So and then similarly — similar question here, ASPs on backlog orders are still really high. Is this a higher mix of Marlin or other long rifles that’s kind of driving that? And if so, would you be able to meet some of that demand and get that — those rifles potentially shipped out during October ahead of kind of core hunting season.

Christopher Killoy: Good question. I mean certainly, the higher price points on the back order includes a lot of Marlin rifles, both the 1894, we recently introduced the 336 and even the 1895s have been introduced back in December, 2021. We have a significant backlog. We’re working very hard to catch up. The folks in Mayodan have done a great job adding capacity. Some of the folks may have heard me talk about that before. Basically, the 1895s and 336s are built on one line. And when we added in the 1894, it basically doubles our capacity. The 1894, which gives us a .44 Magnum. And very shortly, you’ll see the .357 Magnum. That helps us double capacity in Mayodan. So I’m optimistic that we’ll be able to catch up on that backlog.

But it’s still a good sign that the backlog remains intact. New Marlins that we’ve just introduced the Dark Series this week. Again, we’re pleased with the backlog. We’d like to be shipping more, but we want to make sure we focus on quality first, and then we’ll gradually eat into that backlog.

Mark Smith: Okay. And then you highlighted and talked a little bit about inventory, and it sounds like you’re pretty comfortable with the inventory. But as we look at the company’s inventory, it sounds like on finished goods, that moved higher and is that kind of at least recent history, kind of record highs here? How comfortable are you with the inventory that you guys have in your warehouse?

Christopher Killoy: Yes, the current inventory is pretty well balanced. And there’s a couple of categories that we know when things accelerate, we’re glad we have that inventory, the ability to ramp up quickly is something we wish we do faster, but one of the reasons we want to maintain that inventories to ensure that as the market rebounds, we’re well positioned for it. When you look at back into 2022 and 2021, certainly, some of those inventories were really artificially biased down. I mean you go back to early 2022 I think it was about 50,000 in inventory, very low. That’s really artificially too low. And as one of my old mentors remind me of the sales business, you can’t sell from an empty wagon. And so we think we’ve got a good inventory, good mix. We watch it very closely, and that’s the reason, frankly, we took production down this quarter as we kind of hit our safety stock levels in certain categories, we moved those production rates down.

Mark Smith: Okay. And the last one for me. Have you seen — as you talk to your retailers, but really distributor partners, any shift in demand, especially as we think about the last 30 days, we’re still kind of waiting on the NICS data, but any updates from your point of view on demand?