Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the fourth quarter 2019, Sturm Ruger earnings Conference call.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised the todays conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to CEO and President Christopher Colo.
Thank you good morning, and welcome to the Sturm Ruger and company. Your end 2019 conference call I would like to ask Kevin read our general counsel to read the caution on forward looking statements then Tom Dineen, our Chief Financial Officer will give an overview of the fourth quarter and 2019 financial result.
And then I will discuss our operations and state of the Mark.
After that we'll get to your questions Kevin.
We want to remind everyone that statements made in the course of this meeting that fit the company's or management's intentions hopes beliefs expectations or predictions of its predictions of the future are forward looking statements.
It is important to note that the companys actual results could differ materially from those projected in such forward looking statements additional information concerning factors that could cause actual results could differ materially from those tend to forward looking statements contained from time to time and the company's SEC filings, including but not limited to the company's reports on form 10-K pretty your.
Ended December 31st 2019 and of course on the forms 10-Q for the first second and third quarters of 29 team.
Copies of these documents may be obtained by contract as a company while the FCC warn the company's website that Ruger dot com fortress corporate or the FCC website that FCC Dot go we do reference non-GAAP EBITDA. Please note that the reconciliation of GAAP net income to non-GAAP you bid I can be found in our form 10-K for the year ended there.
Number 31st 2019, and again our forms 10-Q for the first three quarters of 2019, which also are posted on our website.
Furthermore, the company disclaims all responsibility to update forward looking statements Chris.
Thanks, Kevin No Tom will discuss the company's 2019 results.
Thanks, Chris.
Before we get into the financial.
I'd like to acknowledge the delay in the filing of our form 10-K last night.
We plan to file our form 10-K at five o'clock Eastern time as we normally do.
Unfortunately, our third party service provider had a technical issue getting our form 10-K uploaded to the FCC.
As a result, our form 10-K, but not posted on the FCC website until six o'clock. This morning.
We apologize for any confusion or inconvenience.
Now to the financial results.
For 2019, net sales were $410.5 million and diluted earnings were one dollar and 82 cents per share.
For 2018, net sales were $495.6 million and diluted earnings were $2, an 88 cents per share.
For the fourth quarter of 2019.
Net sales were $105.1 million.
Diluted earnings were 46 cents per share.
For the corresponding period in 2018.
Net sales for a $121.1 million.
And diluted earnings were 69 cents per share.
The balance sheet.
At December 30, Onest 2019, our cash and short term investments, which are invested in U. S. T bells totaled $164.9 million.
Our current ratio was 4.1 to one and we had no debt.
At December 30, Onest 2019, stockholders' equity was $285.5 million, which equates to a book value of $16.05 per share.
Of which $9 in 28 cents per share, what's cash and short term investments.
Cash flows.
In 2019, regenerated $50 million of cash from operations.
We reinvested at $20 million of that back into the company in the form of capital expenditures primarily related to new products.
We estimate that 2020 capital expenditures will be approximately $20 million, but the focus again on new product development.
Cash returned to shareholders.
In 2019, we returned $16 million to our shareholders through the payment of $14 million a dividend.
And the repurchase of 44500 shares of our common stock in the open market at an average price of $44, an 83 cents per share for a total of $2 million.
Our board of directors declared an 18 cents per share quarterly dividend for shareholders of record as of March 13th 2020.
Payable on March 27, 2020.
As a reminder, our quarterly dividend is approximately 40% of that income and therefore varies quarter to quarter.
That's the financial update for 2019, Chris.
Thanks, Tom.
One of 19 was challenging here for the firearms industry as manufacturing overcapacity excess inventories at all levels in the channel and the continued softness in demand led to a marketplace saddled with undisciplined discounting reckless extension of payment terms and access excessive promotions.
Conversely, our promotional efforts in 2019 and more measured and instead, we focused on our long term objectives, which include investing in our new product development process strengthening our brand fortifying our balance sheet and bolstering the profitability of the Ruger product line for downstream distribution partners all.
Which enhance our delivery of shareholder value.
The estimated sell through of the company's products from the independent distributors to retailers in 2019 decreased 18% from 2018.
The reduction in the sell through of the company's products may be attributable to the following.
More aggressive promotions discounts rebates and the extension of payment terms offered by many of our competitors.
The loss of a formally significant distributor that ultimately filed for bankruptcy protection in June 2019, and the market disruption caused by the subsequent liquidation of its inventory of Ruger products.
The loss of three additional smaller distributors in the second half of 2019.
And decreased retailer inventories as he anticipation of further discounting continue to encourage cautious buying behavior by those retailers.
We use adjusted Nics background checks as a proxy for consumer firearms demand.
However, adjusted Nics is not a perfect metric as it can be impacted by changes in state laws and regulations and many directives and interpretations issued by government agencies.
For example, the use of state issued permits to carry firearms in lieu of nics background checks for certain transactions was significantly curtailed in 2019.
This resulted in the 2019 increases in adjusted Nics background checks for the states of Alabama, and Minnesota of 66% and 33% respectively.
Excluding Alabama, and Minnesota, adjusted Nics decreased 1% in 2019 compared to an increase of 1% as reported.
Also adjusted Nics includes use gun sales, which can unduly impact its results for a particular period or comparison.
Despite its limitations and anomalies, we believe adjusted Nics provides insight into the underlying demand for firearms at the consumer level.
New product development.
Our commitment to new product development remains steadfast as evidenced by the strength of our new product introductions in 2019, which included the Ruger five seven pistol.
Which has been one of the hottest products in the industry since its launch in December in fact, it is on the front cover the most recent American Rifleman magazine.
The LCP too in 22 law rifle the latest additions to the LCP family of compact pistols.
Which was also introduced in December and continues to enjoy strong demand.
And the Wrangler revolver, whose demand has outstripped production since its launch last April despite a doubling of manufacturing capability.
New products represented $102 million or 26% of firearms sales in 2019 compared to $145.6 million or 30% of firearms sales in 2018.
In 2019, we ship well over 800 unique models in 40 major product families.
We have about 400 catalog models so half of the models that we shipped last year were non catalog models, which is not uncommon.
These were derivatives of existing models, featuring a different caliber barrel length or center.
Some of these distributors courses have been offered for many years as they remain as strong demand while others were new in 2019.
Loading the security nine compact pistols, and securing nine pro and Con pack pro models.
The Ruger American bolt action rifle and they are five six modern sporting rifle Chamberlain 350 legend.
The PC carving chassis models were free flow hand guards.
New Ruger custom shop offerings, including the Super GBP 100 revolver in nine millimeter 1911 officers style pistol and 10 22 competition month.
Derivatives are not included in our new product sales total because we include only major new products that were introduced in the past two years.
It's a pretty tough standard, but it helps us focus on the significant breakthrough new products.
Thanks to our longstanding unwavering commitment to new product development, we are in great shape product wise as we head into 2020.
Production in inventory.
We base, our production and manage our inventory levels, primarily through semi monthly reviews of the following.
Our sales the estimated sales of our products from the independent distributors to retailers.
Our inventory and the inventories of Ruger products at our independent distributors.
All of these reviews are done for each of our 40 product families.
While it's always tempting to maintain or either increased production to better utilize manufacturing capacity and leverage fixed costs, we take a more discipline approach and in 2019, we decreased total unit production by 18% or almost 300000 units from 2018.
Our manufacturing folks did a great job proactively manage our workforce in 2019 by implementing a hiring freeze, allowing attrition to reduce our workforce, reducing overtime and taking five additional shutdown days. In addition to our normal shutdown weak in July.
As a result, our finished goods inventory decreased by 13000 units and distributor inventories of our products decreased by 29000 units during 2019.
In the aggregate this was an 11% decrease in 2019.
This disciplined approach, which likely hindered our 2019 financial results has us well positioned for 2020.
Cash or cash generation in 2019 was $50 million, our cash and short term investment balance of $165 million is more than we need to support our daily operations.
Our financial strength places us in a unique an enviable position in our industry from which we can either profitably whether a storm or thrive in a recovering market always keeping an eye out for long term opportunities that may emerge.
Rest assured our capital allocation philosophy has not changed we're continually looking for opportunities to generate strong returns with our capital if we get to a point, where we decide that we will not be able to employ our accumulated capital return cash to our shareholders in the form of dividends.
As I stated at the beginning of my comments 29 team was a challenging year for a company, but I couldn't be any proud of our people and the way they managed through those challenges at each of our facilities that Ruger team continues to impress me with their commitment to excellence and drive for continuous improvement.
In Prescott, Arizona, we designed and lots of Ruger five seven pistol, along with a slew of security nine Mark for and 20 to 45 pistol derivatives and.
Distributor exclusives.
In Newport, New Hampshire, our teams rapidly increased production Cape capacity at the right revolver line almost exclusively with re purpose machines that were already in house.
They also delivered an amazing array of cool new products, such as the pistol caliber car being chassis models and numerous distributor exclusive.
And made in North Carolina, we reached the employment threshold needed to lock in our state and centers incentives for years to calm while delivering awesome new products such as the Airfiber five six pistol the American rifle and they are 556 Chamberlain Threefifty legend and in December the LCP to chambered in 22 long right.
Meanwhile, our teams at Pine free castings automated numerous high volume operations to improve repetitive emotion, ergonomics, and insourced heat treating to improve quality and delivery on the critical parts for a high impact new products, such as Ruger five seven pistol LCP 22, and the wrangler single action revolvers.
It out at Ruger precision metals, our metal injection molding facility in Ursitti, Missouri, we expanded capacity to support our new product launches and then all three D printing mold technology that led to the production of 22 molds in Q3 in Q4 with an average lead time only eight days per mold versus eight to 14 weeks.
Hello methods.
We are great stable of new products entering 2020, I'm very optimistic about our future.
As I tell our team at the kick off of any major trade show or at one of our quarterly all hands meetings. There is no company in this industry that I would rather be Ed and I consider a great privilege to serve as Ruger CEO.
Those are the highlights of 2019, operator may we believe how have the first question.
Certainly as a reminder to ask a question you will need to press star one on your telephone to withdraw your question you May press the pound.
Our first question comes from the line of Ryan Hamilton with Morgan Dempsey [noise].
Good morning, everyone.
Morning.
You touched a little bit on an overcapacity in excess inventories could could you give us a little color as far as what the mix is oh. The oversupply is what you're seeing as far as a is it more long guns as it pistols could you just kind of touch on that a little.
Well I think as it relates to 2019, a lot of that has worked its way through the system.
We saw throughout 2019, I'd say excess capacity in the modern sporting rifle category in particular, a heavy discounting and in fact saw several manufacturers exit that category completely. So I think that a lot of that has worked its way through the system I'm optimistic that maybe that some of that capacity is it.
No longer there and that as we enter 2020, we're going to be in better shape, but certainly it ruger and hopefully as an industry.
Is that how is yours, you're you're really analyzing.
How inventories are increasing or decreasing by looking at the amount of discounting, but some of your competitors are doing.
As a one metric.
That's one metric the other courses we stay very in tune through our sales network through our distribution network.
Frankly, knowing what's going on at our competition, knowing whether there are certain competitors are struggling financially.
And we see the at both the level of discounting in the case a public company is of course, we can see their filing just like you can see the Ruger filings and we try to keep an eye on all those metrics and then in particular again as I mentioned, our signup process. The sales inventory operations planning process that we do every two weeks is really where we take a deep.
Dive bites each product family.
Does it any one time you may be increasing the rate of one product family and decreasing the rate at the other to take your take advantage of what's going on in the marketplace.
Sure that makes a lot of sense.
I asked every quarter just about cadence of the quarter could you kind of walk us through how.
December looks compared to November November to October and I know you had holiday on there, but you know they were just a little color on that would be appreciated.
Yeah, we yeah, we typically don't.
Comment on month to month specifics, but I will tell you throughout the fourth quarter, we saw a steady improvement and by the time, we hit December we saw.
Certainly it looked like things were selling through both from our distributors and at retail as you note from a part of the numbers. It Tom presented when you look at our inventories both at Ruger and then add what we saw with our distributors' inventories. Both those numbers were down we're very pleased to see the product that we shifted.
In December seem to have sold through a pretty well in.
Subsequent time periods from our distributors. So were we think that bodes well going forward.
Sure enough that that's good. Thank you when I'm looking at you do you touched on the loss of a a few smaller distributors one of the distributor falls out of the market do you see that volume soaked up by other distributors and what kind of time lag does it take for them to to observe.
First of all that.
That's good question.
What what typically happens depending on how that that distributor winds up their business, if its handle an orderly manner or something that inventory sold off to another.
Dribbler, obviously, we hope it's a ruger distributor.
And then other times, if it's somewhat less measured and a little bit more chaotic as we saw in some of the earlier bankruptcies.
Then it creates some disruption in the marketplace as far as discounting is as product is liquidated et cetera, but the biggest challenge and transitioning that business to other distributors is really opening up lines of credit.
The one one thing that we forget sometimes the distributors is there more than just warehouses and salespeople. They also put their working capital.
At risk into the marketplace to provide payment terms for our independent retailers and Rugers Kay.
Our national accounts are big box stores as well, so thats, an important function for distributors and that sometimes it takes more time than we would like to transition that from distributors, who goes out of business to the remaining distribution base.
Sure that's a good point.
Go out on head count you touched on on your staffing could you just give us a feel if there you're having any challenges feeling any specific rules.
Well right now.
Yeah, frankly, we've got the help wanted to find out each one of our facilities for folks to help us with production. We're also actively looking for additional engineering talent. We're always on a look out for good manufacturing engineers as well as design engineers. So.
That again, we have those on our website and that can be a good indication where the business is going.
No just have one more on raw material inputs and inflation of note.
No we really haven't seen that I think same things have settled down on the on the steel side of things we saw earlier in the year.
As a tariff.
Entered the equation.
When we buy all our steel domestically, but we did see a tightening of supply earlier in the year as domestic sources were perhaps.
Had more customers and they were used to but at this point, we haven't really seen an inflation for pricing standpoint, or a restriction of supply. So I think we're in pretty good shape.
So good where's the a annual shareholder date, yet this year.
Because of that figured out this year, it's going to be made in North Carolina, Yeah, Yeah, Okay that information.
Yeah, it's going to be in South Carolina on Wednesday may 13th we'll have a perfect tour for analysts at the factory and the actual meetings itself will be in Greensboro.
Perfect. Thank you very much.
Thanks Ryan.
And as a reminder, ladies and gentlemen, if you have a question. Please press star one.
And I'm showing no further questions so with that I'll turn the call back over to CEO and President Christopher <unk> for any further remarks.
In closing I would like to thank you for your continued interest in Ruger and I'd like to thank our loyal customers in the 1600 hardworking members of Ruger team, who design and manufacture rugged and reliable firearms everyday in our Ruger American factories I look forward to see many of you are 2020 annual meeting.
Wednesday may 13th in Greensboro, North Carolina.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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