Q3 2022 Sturm Ruger & Company Inc Earnings Call

November 3, 2022

Yeah.

Thank you for standing by and walk up to the Sturm Ruger <unk> Company, Inc. Third quarter 2022 earnings Conference call. At this time, all participants are in listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask a question at that time, Please press star one on your Touchstone telephone.

As a reminder, today's conference call is being recorded.

Now I'll turn the conference to your host Mr. Chris Callaway, President and Chief Executive Officer, Sir Please begin.

Good morning, and welcome to the Sturm Ruger <unk> Company third quarter 2022 conference call.

I'd like to ask Kevin Reid, our general counsel to read the caution on forward looking statements that accommodate our chief financial Officer will give an overview of the third quarter 2022 financial results and then I will discuss our operations in the state of the market after that we'll get to your questions Kevin sure Chris.

To remind everyone that statements made in the course of this meeting that state the companys or managements intentions hopes beliefs expectations or 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 to differ materially from those in the forward looking statements is contained from time to time in the Companys SEC filings, including but not limited to the company's reports on Form 10-K for the year ended December 31, 2021 and of course on the Form 10-Q for the third quarter of 2022, which we filed last night copies of these documents may be obtained by contacting the company.

The SEC on the company website at <unk> Dot Com Forest last corporate or the SEC website at SEC Gov. We do reference non-GAAP EBITDA. Please notice that please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2021, and our Form 10-Q for third.

Quarter of 2022, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward looking statements Chris.

Thank you Kevin now Tom will discuss the company's third quarter 2022 results.

Thanks, Chris.

For the third quarter of 2022, net sales of our $139 $4 million.

And diluted earnings were $1 <unk> per share.

For the corresponding period in 2021 net sales of our $178 2 million and diluted earnings were $1 98 per share.

For the first nine months of 2022 net sales were $446 6 million and diluted earnings were $3 90 per share.

For the corresponding period in 2021 net sales were $562 7 million.

And diluted earnings were $6 64 per share.

Consumer demand remained consistent with the second quarter, which was below the level of demand in 2021 dampen in part by inflationary pressures, which often constrained discretionary spending.

This resulted in a 21% reduction in our sales from the prior year.

Our profitability declined in the third quarter of 2022 from the third quarter of 2021, as our gross margin decreased from 36% to 28%.

The lower margin was driven by unfavorable deleveraging of fixed costs, resulting from decreased production and sales.

As well as inflationary cost increases and materials commodities services energy fuel.

Which were partially offset by increased pricing.

Our third quarter results benefited by an unusually low effective income tax rate of 12, 3% compared to 26, 7% for the.

The third quarter of 2021.

The decrease in the 2022 effective tax rate was attributable to research and development tax credits.

Similarly related to credits earned in prior years, which were realized through amended income tax returns in 2022.

In addition, our 2021 research and development credit was greater than originally estimated resulting in a favorable provision to return adjustment that was realized in the third quarter of 2022.

The impact of research and development tax credits on the effective tax rate is expected to decline in future years.

Our continued focus on financial discipline and the cultivation of long term shareholder value is evident in our strong debt free balance sheet.

At October one 2022, our cash and short term investments totaled $215 million.

Our short term investments are invested in the United States Treasury bills and in a money market fund that invests exclusively in the United States Treasury instruments, which mature within one year.

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

Our robust debt free balance sheet provides versatility and strength as we explore and consider opportunities that may emerge.

At October one 2020 to stockholders equity was $398 5 million, which equates to a book value of $22 56 per share of which $12 18 per share was cash and short term investments.

During the first nine months of 2022, we generated $53 million of cash from operations.

We reinvested $17 million of that back into the company in the form of capital expenditures.

We expect our 2022 capital expenditures related to new product introductions and upgrades to our manufacturing equipment and facilities to total approximately $25 million.

In addition to those investments in the fourth quarter of 2022, we purchased a 225000 square foot facility in May It in North Carolina for $8 3 million for use in our manufacturing and warehousing operations.

And the first nine months of 2022, we returned $36 million to our shareholders primarily through the payment of dividends.

We also repurchased a very modest quantity of our stock about 'twenty 100 shares during the third quarter.

Our board of directors declared a <unk> 41.

Per share quarterly dividend for shareholders of record as of November 16th 2022 payable on November 32022.

And.

Our quarterly dividend is approximately 40% of net income and therefore varies quarter to quarter.

That's the financial update for the third quarter Chris.

Thanks, Tom.

Similar demand in the third quarter remained consistent with the previous quarter, which was below the level of demand in 2021.

First nine months of 2022, Nick's background checks as adjusted by the National shooting Sports Foundation decreased 14%.

Sherri pressures, which often constrained discretionary spending provided a headwind throughout the quarter.

This was especially true for some product lines that saw a significant surge in demand over the past few years, including most modern sporting rifles and polymer set a fire pistols.

New products tend to fare better in this type of environment and our new product development teams delivered three innovative firearms in the third quarter that were received with great enthusiasm and excitement.

First the LC carbon a command companion carvey into the successful Ruger five seven pistol both chamber in the $5 seven by 28 caliber round.

Next the small frame auto loading rifle or SFA are chambered in 308, Winchester, which combines the ballistic advantages of the 308 with a compact size and light weight of the traditional modern sporting rifle.

And third the Marlin model 18, 95 guide gun chambered in $45 70 government, which is our first three introduction of MRO and <unk> family of lever action rifles, and our first introduction of an alloy steel Marlin rifle would have blue finish.

Total sales of new products, which also include the PC charger the Max nine pistol LCP, Max pistol and tomorrow on $80 95, SPL and trapper lever action rifles represented $54 9 million or 13% of firearm sales in the first nine months of 2022.

As a reminder, derivatives and product line extensions of mature product families are not included in our new product sales calculation.

Several popular firearms that were considered new products in 2021, including the wrangler revolver of over five seven pistol and the LCP II in 22 long rifle.

Now then in production for over two years and are no longer included in the new product sales calculation for the first nine months of 2022.

We remain hard at work and look forward to introducing additional ruger and Ruger made marlin firearms.

In addition to ramping up production on our new products, we continue to prioritize our legacy products remain that remain in strong demand many of which were under supplied in the marketplace.

These include the American Sapphire rifles, 10, 22 rimfire rifles.

The mini 14 in many 30 rifles.

Our precision rifles.

The SRM 1911 family of pistols, and our single action and double action revolver families.

As Tom mentioned, we purchased a second facility in Maine, and North Carolina in October This building, which we had been leasing for about a year is roughly the same size as our original native plant and affords us greater flexibility as we consider our future company wide production and warehousing strategies.

We are excited for the opportunities that this new facility provides.

We remain disciplined and committed to our strategy of pursuing manufacturing excellence vigorously developing innovative and exciting new products and relentlessly cultivating long term shareholder value.

Those are the highlights of the third quarter of 2022, operator may we have the first question.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one one when your Touchstone telephone again star one line one moment please.

Our first question comes from the line of Ryan Meyers of Lake Street Capital. Your line is open.

Morning, guys. Thanks for taking my question first one for me just kind of want to dive into Margo I'm, a little bit what kind of impact are you guys seeing Marlon have on the numbers and how are you thinking about new product launches as we progressed throughout 2023 with that business.

Thanks, Brian as you know, we don't typically breakdown product families of individual product lines, but more when they start starting can contribute in a meaningful fashion as we noted we've got three different models up and running in production now.

This year Youll see.

A new slug of production coming in the form of the 894 rifles, which are the 357% and 44 Magnum a lever actions and Youll also see the traditional $3 36, and 33 and those those products will begin to to come in the line in the first half of this coming year.

Got it makes sense and then just kind of looking at the.

The orders during the quarter it seems like demand seems to be holding up well.

What are you guys seeing at retailers as far as demand and what will it take to move the channel inventory lower.

Good question Ryan.

We're seeing demand, particularly for new products remained strong well like we said, we launched with the LC carbine, the SFA or rifle and then the 895 guide gun.

Very pleased with the launch very pleased with the response from both distributors and retailers.

However, as we noted.

The modest 40 rifle category pretty much industry wide as well as the bulk of the center-fire Palma Frank pistols has slowed significantly from there.

20% in 2021, there is a lot of inventory both at retail and some of the distributors as well we're seeing a lot more promotional efforts, we're seeing things like rebates and discounting going on and likely going to see that at least through the first quarter I would expect.

Got it.

Last question for me.

Average selling price continuing to move higher just wondering if you can talk about.

How much of that is just pure price increases versus mix shifts.

And then if you guys are seeing kind of the newer firearms newer products, having an outsized impact on these asps.

Yes, Ryan one thing you'll note in the Q that we released last night.

Yes, when you look at our incoming order rate for Q3.

That was up to average selling price of units ordered was up to $421.

Largely due to the new products I, just mentioned <unk> and the Marlin guide good all of which carry relatively higher.

Price compared to some of our product lines like the $10 22, and our Wrangler for example, and so that's the primary impact impact you saw on both units ordered in the backlog and then in terms of units shipped because those products were launched.

Towards the end of Q3 their impact was not as great as it was on the order incoming order rate and the backlog.

Got it that's helpful. Thanks for taking my questions.

Thanks Ryan.

Thank you one more please.

Our next question comes from.

One moment. Our next question comes from the line of Rommel Dionisio of Aegis capital. Your line is open.

Good morning, Thank you.

Chris with your comments on competitive promotional activity.

Just wanted to sort of within categories of the farm sector are you seeing.

That activity I mean, we're clearly seeing that modern sporting rifles. Paul. This is Barry you have seen that some of the categories, where you're particularly strong some of the traditional rifle and revolver categories as well. Thanks.

Thanks Rommel.

To be honest, we've seen a couple of rifle manufacturers with consumer rebates out there, but it's not as extensive as it is on the polymer pistols or in a modern modern sporting rifle category are really not seeing too much in the way of discounting or promotional efforts on on.

Revolvers in particular.

Okay. Thanks for the color and maybe just a broader sort of macro question I mean, we've all seen these.

Cycles, before where you see demand surge and then sort of a dramatic drop off but does this feel like a bit of a softer landing to you than prior historical cycles going back 10, 15, 20 years and love to hear your thoughts on that thanks.

It's hard to predict Rommel I mean as.

You've probably heard me say in semiannual meetings over the last 30 years or so typically we've seen.

20 year over year up cycles in 10 year over year down cycle. So we've seen this before I think dealers are are in particular are managing their inventory.

A little wiser.

In conversations just last week at the National Association of Sporting goods wholesalers it.

Sounds like most of our distributors are all current with their retailers largely and not seeing much in the way of past due accounts.

Accounts, which is good and that's a positive indicator. So I don't know if I'd call. It a softer landing, but it's again positive indicators.

And of course, the demand for our legacy products remained strong things like the 10 to 20 twos are bolt action hunting rifles et cetera.

900, elevens in single and double action revolvers.

I think whether some of these downturns that are focused on certain categories that that's where the broad range of products that we have in our in our Arsenal I think help us a little bit.

Great that's very helpful. Thanks, Chris.

Thank you.

One moment please.

Our next question comes from the line of Jim Masao fast that your line is open.

I don't know why it does that but this is this is Ryan Hamilton from Morgan Dempsey.

Hey, guys.

Yeah.

On the inflation front, where are you guys getting pushed the most and are you starting to see any kind of relief.

I'd say, when we look at our commodity prices, Ryan or things like that.

We're seeing a stainless steel up seven 8% from last year carbon and alloy steel is up like 15% alumina was up significantly in 2021 up as much as 21%.

Course diesel fuel prices impact all of our freight both inbound and outbound. So those are the typical places we see the biggest biggest impact.

And are you seeing relief.

Seeing relief in terms of we're seeing some.

Some stability we're seeing for example, we're not seeing some of the aluminum prices seem to have stabilized.

We expect steel to continue to go up and also is that.

Just the pricing it's also the supply chain issues of getting certain steels.

But.

It looks like at least for now diesel may have stabilized, but I'm not sure I call. It just yet.

Okay.

One more on the Marlin side are you guys building inventory there or is it getting taken down pretty quick as soon as you manufacture it.

Yes, it's pretty much.

As soon as soon as we manufacturer has gone out the door to our distributors.

Our distributors are reporting pretty much the same the only time they are sitting on Marlin inventories. If there they are holding it for a promotion for one of their bigger retailers okay.

That's a good problem to have I guess.

On head Count where are you guys that and where would you like to be at.

Well were stable pretty much between 2890 800 folks across the board, we're still a certain of our factories, we're trying to hire a little more aggressively than others, particularly up in new Hampshire, and Newport facility, where we make a lot of our legacy product lines. All of our revolvers are 10 to 20 twos and some of our <unk>.

Action rifles, so we still got to help wanted sign out there and we're still hiring in the other facilities, but it's a little more stable in terms of overall demand.

Awesome and then last one for me I may have been touched on a little bit here.

Pricing in the quarter did you raise prices at all and what are your what are your plans for the remainder of the year.

Yes, we did not raise prices I think the biggest thing is as I have noted on the average selling price of the incoming order rates with the new products that we launched were fairly high dollar relative to certain other products we make.

The biggest thing in the average selling price category and however, we are looking at the inflation factors as well as competitive demands and take a look at if we have if we have a price increase it typically for Ruger is not in the fourth quarter, we typically announce it in the fourth quarter and implemented on January one.

Okay.

And then on new product like Marlin, you've already.

When it comes to market you've already factored in the price increase is that.

<unk>.

You put that in.

Asian before it goes to market is that safe to say.

Yes for sure although we launched it we launched <unk> in Q4 of last year, so that would be a consideration for a price increase this year and we'll have to look at that and just.

We typically evaluate everything product family by product family, but in the last couple of price increases have that across the board.

That will probably be similar to that this January.

Great well keep up the good work guys I appreciate the time.

Okay alright, thank you.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one one we have a question from Ryan Meyers of Lake Street Capital. Your line is open.

Yes.

Okay somehow got put back into the queue I actually don't have any questions.

Thank you.

Okay, I am showing no further questions at this time I'd like to turn the call back over to Chris <unk> for any closing remarks.

Thanks, operator in closing I would like to thank all of you for attending this call. This morning and for our shareholders for their continued investment in our company.

As we head towards the end of the year I encourage you to note the importance of two key dates next week next tuesday's election day, the defining event any democracy and extremely important date for our country.

As we head into uncertain global political and economic times your voice at the polls is of tremendous importance. Please educate yourself on the topics no the candidates and most importantly show up to vote.

Equally important is next Friday November 11th Veterans day, when we honor all of those who have served in our armed forces.

Without their sacrifice and service for this great country will have the ability to cast their votes earlier in the week. Please take a moment to say a quick prayer of thank you to all the rage servicemen and Servicewomen, who fly to obtain and protect this right for all of us.

We think all veterans, especially our veteran members of the Ruger team for their service and sacrifice to our country. Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Q3 2022 Sturm Ruger & Company Inc Earnings Call

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