Q3 2021 Sturm Ruger & Company Inc Earnings Call

Good morning.

And welcome to the Q3 2021 stern read their earnings call.

At this time, all participants Arnold listen only mode.

We will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during this conference. Please pray start in zero on your Touchtone phone.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Chris Kilroy. Please go ahead.

Good morning, and welcome to the Sturm Ruger and company third quarter of 2021 conference Cool 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 third quarter 2021 financial results and then I will discuss our operations in the state of them.

Mark.

After that we'll get your questions Kevin Thanks, Chris.

Want to remind everyone that statements made in the course of this meeting the state the companies or management's intentions folks leafs expectations or predictions of the future are forward looking statements is.

It is important to note that the companies 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 and forward. Looking statements is contained from time to time, the company's SEC filings, including but not limited to the company's reports on the Form 10-K for the year ended.

December 31st 2020 and of course on the Form 10-Q of the third quarter of 2021, which would probably last night copy. These documents may be obtained by contacting the company or the SEC on the company website at <unk> Dot com forward slash corporate or of course, the SEC website SEC Dot Gov, we do reference non-GAAP EBITDA. Please no.

What is that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31st 2020, and on a Form 10-Q for the third quarter of 2021, both of which are posted to our web site. Furthermore, the company disclaims all responsibility to update forward looking statements Chris. Thank.

Thank you Kevin now Tom will discuss the company's third quarter of 2021 results.

Thanks, Chris.

For the third quarter of 2021 net.

Net sales are $178.2 million.

And diluted earnings were one dollar and 98 cents per share.

For the comparable prior year period.

Net sales are 145 $7 million and diluted earnings for one dollar and 39 cents per share.

For the first nine months of 2021 net.

Net sales were $562.7 million and diluted earnings were $6.64 per share.

For the corresponding period in 2020, net sales were $399.6 million and diluted earnings were $3.31 per share.

The substantial increase in profitability for the third quarter compared to the third quarter of 2020 was primarily attributable to the increase in sales and production, resulting in favorable leveraging of fixed costs, including depreciation engineering and other indirect labor expenses.

Compared to the second quarter of 2021 profitability decline principally due to three factors.

First.

All of our firearms facilities took a very well deserved shutdown week in July.

Which reduced the number of work days in the quarter to 59.

Compared to 64 workdays in queue too.

This decrease in production reduced sales and resulted in some unfavorable deleveraging of fixed costs.

Second after a relatively quiet second quarter Covid positive cases in our plants or then tripled in the third quarter. This resulted in significant increases in lost production.

And third following six quarters of exceptional demand accessory sales decreased from the second quarter adversely impacting our overall profitability.

Our strong financial results Gillis significant cash generation.

During the first nine months of 2021 regenerated $117 million of cash from operations.

We reinvested $15.6 million of that back into the company in the form of capital expenditures.

We estimate that 2021 capital expenditures will be approximately $20 million predominantly related to new product development.

Our ability to shift manufacturing equipment between sales and between facilities improves our overall utilization.

And allows for reduced capital investment.

Our balance sheet at October 2nd 2021 remains strong.

Our cash and short term investments, which are invested in Ust bills totaled.

[noise] totaled $192.7 million.

Our current ratio was three eight to one and we had no debt.

Our stockholders equity was $338.1 million.

Which equates to a book value of $19.21 per share.

Of which $10.95 per share with cash and short term investments.

In the first nine months of 2021, we returned $45.2 million to our shareholders through the payment of dividends.

Our board of directors declared a 79 cents per share quarterly dividend for shareholders of record as of November 15th 2021.

Payable on November 30th 2021.

Upon receiving the 79% quarterly dividend.

Shareholders will receive $3.36 of dividends per share in 2021.

As a reminder, or quarterly dividend is approximately 40% of net income and.

And therefore, it varies quarter to quarter.

That's the financial update for the quarter.

<unk>.

Thanks, Tom.

Demand for our products has remained strong despite a moderation of overall industry demand as reflected in the last two quarters of adjusted Nicks, we shipped all the firearms that we built this quarter without the need to aggressively promote or discount any of our products.

We've just begun to replenish the distributor and retail inventories that were largely depleted over the past 18 months, putting us in a great position as we head into the fourth quarter, which has traditionally been a period of strong demand.

The estimated unit sell through of the company's products from the independent distributors to retailers increased 9% in the first nine months of 2021 compared to the prior year period for.

For the same period, the national instant criminal background check system background checks is adjusted by the National shooting Sports Foundation, commonly referred to as Nick's checks decreased 11% the.

The increase in the sell through the company's products compared favorably to the decrease in adjusted Nick's background checks and.

And may be attributable to strong consumer demand for Ruger products increased production in 2021.

And the introduction of new products that have been met with strong man.

New product development continues to drive results the Max nine pistol in the Ruger LCP Max pistol, which were both launched in 2021 remain in strong demand.

In the first nine months of 2021, new product sales represented $116 million or 22% of firearm sales compared to $88 million or 24% of firearm sales in the first nine months of 2020.

As a reminder, we include only major products introduced in the past eight quarters in our new product sales network.

Derivatives product line extensions of mature product families and models introduced more than two years ago are not included.

We are hard at work on some exciting new product initiatives, including the return of Marlin lever action rifles, which we begin plan to begin shipping later in the fourth quarter.

Since March of 2020, our workforce has been strengthened by 370 folks an increase of just over 20% in our quarterly unit production has increased by more than 160000 units or 45% during that period.

A 20% increase in personnel, yielding a 45% increase in production that is a tremendous accomplishment by our operations teams at all of our manufacturing plants.

Despite the growth in production at the end of the third quarter of 2021 are finished goods inventories remained near historic lows and distributor inventories of Ruger products were 150000 units lower than they were at the end of 2019, the last time inventories, what we would consider normal or expected.

Pre COVID-19 levels.

As Tom mentioned earlier after an unprecedented 16 months run a seemingly insatiable product demand and continual monthly production increases we took a one week shutdown during the first week of July.

This was our first shutdown in two years, which gave our workforce a very well deserved break and allowed us to perform some routine maintenance and reconfigure some of our manufacturing operations.

The shutdown reduced our third quarter production sales and earnings but that was a small price to pay it was the right thing to do and I'm glad we did it.

Dedicated and hard working folks deserved and needed a break.

And after the shutdown we are better prepared as we head into what we expect will be a busy fourth quarter and 2022.

Since the onset of the COVID-19 pandemic in March 2020, we remain proactive in maintaining the health and safety of our employees and mitigating its impact on our own business.

We provide all hourly employees with additional paid time off and offer incentives to any employee who becomes vaccinated.

If practical we allow employees to work remotely.

And we continue to follow a robust cleaning sanitizing and social distancing protocols to maintain a cleaner and safer workplace.

With the United States once again seeing a rise in COVID-19 cases and positivity rates.

We remain vigilant and are proactively adjusting our plan accordingly to keep our associates healthy and safe and to minimize any disruption to our business.

Our financial strength, evidenced by our debt free balance sheet provides financial security and flexibility as we manage through the challenges like COVID-19, and remained focused on our long term goals and the creation of shareholder value.

In the third quarter, we added a 225000 square foot facility and made in North Carolina about a mile and a half down the road from our original made in building that we purchased in 2013.

This new facility double the size of our footprint and made and and provide some room for expansion. We moved our finished goods inventory or shop, Ruger operations and our customer service call center into the new facility.

This freed up some manufacturing space in our original building. In addition to the overall excuse me to the available space in the new facility.

Those are the highlights of the third quarter of 2021.

Brighter may we have the first question.

Ladies and gentlemen, I apologize for the interruption.

Hold while we get to retreat stinker lying.

There can be Harris.

Yes, I can hear you now.

Can we get the first question please.

Alrighty and your first question comes from the line of Ryan Myers with like Street capital markets.

Okay. Thanks for taking my question this morning.

So it looks like we saw units ordered calmed down a little bit to about 218000.

Compared to the past several quarters, which is quite a bit lower just wondering if you guys know packed with a little bit and give us some commentary on what's going on there for Ya soon retailers ordering last firearms or or why this number was quite a bit lower than what it's been in the past several quarters.

Yeah.

Ryan Thanks for the question I think is mostly you that followed Rover no.

We don't pay as much attention to that orders units ordered on a weekly or monthly basis will really look at what our distributors or salad. When you think about it I mean, we had a very full and still have a very full order book when we entered.

Two three and then when we exited Q3, we're still at 1.3 million units on order at the end of Q3 and at some point or distributors have enough on order and then this is.

We just met with our distributors at the National Association of Sporting goods wholesalers. The show in Columbus, Ohio last week, and that's a pretty healthy order book of 1.3 million units. So I think at some point those the incoming where rates slow they know they've got enough enough orders on and with Ruger. They know the orders would.

Ruger on noncancelable. Unlike some other companies and so I think that's primarily the reason.

Okay that makes sense and then how are you guys thinking about pricing into the fourth quarter then into 2022.

Good question I don't anticipate.

Major changes in queue for however, I think with 2022, we are likely going to need some additional pricing adjustment too.

Really to compensate for what we're seeing a supply channel we're not we're not alone in that.

That's not unique to ruger within the industry or within any industry right now between the.

Commodities pricing raw material.

Great and everything else, we we use in commerce. Those prices are costs are increasing and I expect it will probably take a modest price increase on or about January one.

Okay, and then I.

Just kind of looking at supply chain wise, obviously, most of you guys with manufacturing done here in the United States, which is a positive.

I'd seen any sort of challenges anywhere as far as so let's see you know certain components or to do any sort of detail on how you guys might be impacted by the supply chain problems that it seems like everybody's talking about.

Good question I mean, you are correct in that virtually everything we that goes into a ruger firearm is procured in the United States. However, a lot of things like resins and some of those raw materials that are suppliers acquire may come in from offshore.

As well as just things like the.

The cost of fuel for the shipping in the trucking industry to move things about all of that factors in there, but our supply chain folks at the at the factories have done an amazing job navigating through that so far.

<unk> had some spot shortages, we're we're close but we haven't to my knowledge I don't think we've shut anything down we've been able to pivot.

A.

Well, perhaps make shift shift gears and make a different model 10 22 based on Ah.

A shortage of one particular stock of one particular site, but all of that has been able to then work through by our operations teams.

Okay. That's helpful. And then is there any way that you can.

Apply the impact of one week shutdown as far as.

Production uses that you guys didn't think you were able to get out there and any way you can quantify the actual shutdown itself.

Well.

When you look at the number of day working days and a quarter you got we will use a 4445 week quarter. So you've got basically five extra five days you weren't working so.

So it's seven 8% is typically what that impacts.

Okay, Alright, that's all I got for you. Thank you.

And your next question comes from the lineup Ramos Denunzio with ages capital.

Yes, good morning.

Just a couple of questions on now on the made in.

Expansion first.

I know, there's lots to talk about labor shortages and difficulty of procuring labor and parts of the country could you just gifts.

For what you know what it is in that particular part of the country is that does that issue at all and second sorry, if I missed this but you should talk about what the timing of.

Just just declaring estimate clearing out some room for additional expansion of manufacturing in the current facility and then and then you move I Wonder if you could just talk about the timing of all that thanks.

Yeah, well as I think you'd own rowing are three major manufacturing facilities are Newport, New Hampshire, Prescott, Arizona and made in North Carolina made the newest facility required that plant in 2013, and we've been steadily adding to that with new lines come in.

Team down there has done a great job. That's also the the the center of gravity for a Marlin acquisition.

Virtually everything we acquired from.

Remington on a Marlin transaction was sent to made an initially it was moved to a staging area and then integrated into our main factory.

And so what this allows us to do is really to expand our footprint and made and we're only a mile and a half down the road from our existing plan. It allows us to use our same Swat management team down there and frankly, our ability to hire folks has been been pretty solid.

The workforce and made it is a good one.

The people like working for Ruger and I think it provides a lot of.

Future opportunity. It doesn't mean, we're trying to move anything or clothes anything from the other factories on occasion, we may move.

One particular line or shift resources between factories.

But it doesn't mean, we're getting out of it any other locations, but it does give us a significant opportunity basically doubles are square footage.

And that plan is in the process of being updated as we speak to allow us that flexibility in manufacturing to move lines or add lines.

As needed.

Okay, but just to clarify you're gonna be you'll you'll be in good shape for the Marlin lever action launch here, it'll it'll be done and ready for that.

Yeah. So we're planning a mid December launch of the Marlin product line now will be initially as we just review with our wholesalers down at the at.

<unk> asked GW meetings last week, it will probably be less than the market wants in fact, I am sure based on the overwhelming demand we've seen from consumers and retailers I'm sure it will be fewer guns and fewer sku's than the market wants, but we will launch it probably on or about December 15th somewhere in that time period begin.

Those shipments to distributors and again I expect it will be lots of calls and E mails and.

Looking for more Marlins, because the first samples.

Frankly were just outstanding the first sample it I saw was.

Came off the line a few weeks ago and it was a beautiful model 18, 95, and 45 70 caliber.

Look gorgeous. So we're very excited about that and we are on track to that into queue for launch.

Okay, that's great thanks very much.

As a reminder of you would like to ask a question. Please press star one on your telephone keypad.

Your next question is from Orion Hamilton with Morgan.

<unk> management.

Good morning, everyone. Congrats on I have a good quarter.

Thank you.

Yeah, you bet could you walk us through this could you walk us through the cadence of the quarter kind of how July looks compared to June and so on.

Well you know they.

We typically he'll give.

Information out on the monthly breakout, but we did start to see what we call. The I'll say this a little bit of a summer slowdown typically we see is seasonality come into our business.

And typically that slows down in in May June and July picks back up in August as people get ready for hunting season, we saw a little bit of that but nothing like in years past we still.

The dampening was more muted than we've seen in the past and so while there was a little bit of that slowdown as we hit those warmer months.

Nothing like in some years past with that traffic.

Really dies down at the store. So the interesting thing here was given that was so little inventory of retail it was difficult to tell as far as what was that in fact, one of the things you're seeing right. Now we hear every day is ample availability continues to impact.

Many product categories, we've seen certain hunting rifle calibers in short supply, but our friends in the ammunition business are doing their best to get caught up and I think it's getting better and we will get better as we go into 2022.

You just answered my next question I think you know me too well.

So.

Rushmore Chris.

And I know that you don't break the salt traditionally.

As a generalization do rifles demand a higher margin than most pistols and revolvers.

Not necessarily in a lot of it.

Margin in terms of percentage versus margin dollars.

We've got some relatively.

I'll say less expensive models that have.

Great gross margin percentages, but again from one dollar standpoint are not as significant as some of the other ones. So it's really model of family specific and obviously depends a lot on the composition of materials, we have in there to labor content and probably most significantly is a competition we face in the marketplace.

Sure I guess I am.

I'm trying to morrow, while what the impact.

From Marlin should be or is going to be and I know you don't break this down so that's that's.

That's kind of where I was gone.

I got you Yeah, we're we're still working through that and.

I expect it would be in line, it's obviously going to be incremental but it's expected it would be in line with our other rifle products that we build a ruger we've got will be making all the the.

The wood and laminate stocks for the Marlin product line. Those we made in our existing would plant up in Newport, New Hampshire. The teams up there have been doing a great job working together with the folks who made it and so I think it would be comparable to existing ruger.

Right with products.

We'll go we'll go Ruger name be stamped on the on the farm somewhere on the rifle.

No it won't it won't be in order to maintain the Marlin brand.

We're very proud of the Marlin brand in its history. We've got a couple of things I think Marlin collectors Wolf.

Be very excited about as far as you know how we configure the serial number some some minor changes that we think collectors will enjoy seeing.

But maintaining that Marlin legacy in the great things about Marlin, particularly the the Sapphire lever-action guns.

What we think are some great enhancements so more to come on that but we are very excited about it. We've got a good team of operations at product and marketing folks working on that rollout and I think we're going to have fun with it.

No that sounds great.

Last quarter I believe you said you were roughly at 1900 as far as head count goes where you're at today.

Roughly.

A little a little more probably about 1950, if I recall the the numbers from a few days ago. So about 1900 50 folks.

An enormous.

Push the new products, sorry, you're missing any any key elements on the design engineering or is it mostly on manufacturing where you'd like more bodies.

Well, we certainly.

Need more folks in all three of our factories right now that's for sure as far as building the guns.

But we're always on the lookout for Great Engineers, we've got a lot of those engineers have been committed to the Marlin product line and so again I think there's quite a few job postings. If you look at the root of a web site <unk> Dot com slash careers I think we've got a lot of salary to engineering positions as well as lots of opportunities in our factories.

And just one more for me I know you talked.

About the accessories business kind of slowed down a little bit.

Maybe maybe is that what you're seeing some of that normal summer slowdown.

And then expect.

Maybe a pick up back in the fall here.

It could have been some of that I think really we caught up with some of that backlog on those accessories and primary driver of that magazine's particular things like the X 20 fives.

Many 14 magazines et cetera.

We're trying to catch up on that for awhile, our supply chain wrapped up we got some of that and again I think.

The the long term demand is still going to be just fine. It's just a little bit of cyclicality in there.

Excellent.

No for the time that.

Alright, thanks right. Thank you.

We have no further questions in queue at this time, so I'd like to turn the conference back over kept management for any closing remarks.

Vice operator.

In closing I would like to thank you for your continued interest in group and I would like to thank the more than 1900 50 members of the Rover team that continue to put together.

And work hard to exceed our expectations and drive outstanding financial results. Thank you again.

This does conclude today's call. Thank you for your participation. He may now disconnect your lines.

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