Earnings Call: Q2 2021

Aug 5, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Sturm, Ruger Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Chris Killar, President and Chief Executive Officer, please go ahead. Thank you. Good morning, and welcome to the Sturm, Ruger and Company's Q2 2021 conference call. I would like to ask Kevin Reed, our General Counsel, to read the caution on forward looking statements. Then Tom Dineen, our Chief Financial Officer, will give an overview of the Q2 2021 financial results, And then I will discuss our operations and the state of the market. After that, we'll go to your questions. Kevin? Thanks, Chris. We want to remind everyone that statements made in the course of this meeting that state the company's or management's intentions, hopes, beliefs, expectations All 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 I'm in the company's SEC filings, including but not limited to the company's reports on Form 10 ks for the year ended December 31, 2020, And of course on the Form 10 Q for the Q2 of 2021, which we filed last night. Copies of these documents may be obtained by contacting the company or the SEC or on the company website atruber.com/corporate or 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 in our Form 10 ks for the year ended December 31, 2020 and our Form 10 Q for the Q2 of 2021, both of which are posted on our website in the Investor Relations section. Furthermore, the company disclaims all responsibility to update forward looking statements. Chris? Thank you, Kevin. Now Tom will discuss the company's Q2 2021 results. Tom? Thanks, Chris. For the Q2 of 2021, net sales were $200,100,000 and diluted earnings were $2.50 per share. For the comparable prior year period, net sales were $130,300,000 and diluted earnings were $1.05 per share. For the 1st 6 months of 2021, Net sales were $384,400,000 and diluted earnings were $4.66 per share. For the corresponding period in 2020, net sales were $253,900,000 and diluted earnings were $1.91 per share. The substantial increase in profitability for the 2nd quarter was attributable to the increase in sales and production, resulting in favorable leveraging of fixed costs, including depreciation, Engineering and other indirect labor expenses, a significant reduction in sales promotional activities and improved labor efficiencies. Not surprisingly, our strong financial results yielded robust cash generation. During the first half of twenty twenty one, We generated $76,200,000 of cash from operations. We reinvested $11,500,000 of that Back into the company in the form of capital expenditures. We estimate that 2021 capital expenditures will be approximately $20,000,000 predominantly related to new product development. Our ability to shift manufacturing equipment between cells and between facilities improves overall utilization and allows for reduced capital investment. Our balance sheet at July 3, 2021 remains rock solid. Our cash and short term investments, which are invested in USD bills, totaled $173,600,000 Our current ratio was 3.7:one And we had no debt. Our stockholders' equity was $319,100,000 which equates to a book value of $18.14 per share, of which $9.86 per share was cash and short term investments. Our shareholders continue to share in our success in a direct and timely manner. In the 1st 6 months of 2021, We returned $27,600,000 to our shareholders through the payment of dividends. Our Board of Directors declared a $1 per share Quarterly dividend for shareholders of record as of August 16, 2021, payable on August 27, 2021. Upon receiving the $1 quarterly dividend, shareholders will have received over $2.50 of dividends per share thus far in 2021. 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 Q2. Chris? Thanks, Tom. Thanks to our team of over 1900 hardworking folks in our The 7th consecutive quarter of meaningful growth in sales, profitability and virtually every financial and operating metric Despite the challenges posed by the COVID-nineteen pandemic, demand for our products has remained strong. The estimated unit sell through of the company's products from the independent Distributors to retailers increased 13% in the first half of twenty twenty one compared to the prior year period. For the same period, the National Instant Criminal Background Checks System, background checks as adjusted by the National Shooting Sports Foundation, commonly referred to as NICS checks, decreased 5%. The increase in the sell through of the company's products Compared favorably to the decrease in adjusted NICS background checks and may be attributable to the following: Strong consumer demand for Ruger products, increases in production for each of the past 7 quarters and the introduction of new products that have been met with New product development remains among our highest priorities. On the heels of the successful MAX 9 pistol launch Earlier this year, we introduced the Ruger LCP Max, a 3 80 auto pistol in June. This is the latest offering from the Ruger LCP family, which has set the standard for personal protection pistols for over a decade. The LCP MAX joins an impressive roster of products that were introduced in the past 2 years. These include the extremely popular Ruger 5.7 pistol, which is awarded the 2020 caliber award for best overall new product by the Professional Outdoor Media Association in conjunction with the NASGW. The LCP II in 22 Long Rifle, which is based on the venerable LCP platforms and utilizes our light rack system for easier slide manipulation and reduced recoil. The Wrangler revolver, our latest take on the classic single action revolver, which shows no signs of slowing down And the MAX 9 pistol, a versatile 9 millimeter pistol that has been met with tremendous excitement. In the first half of twenty twenty one, new product sales represented $78,000,000 or 22% of firearm sales, compared to $48,000,000 or 21 percent of firearm sales in the first half of twenty twenty. As a reminder, derivatives and product line extensions of mature product families are not included in our new product sales calculation. Nonetheless, they are valuable additions to the Ruger catalog of products and are greatly appreciated by distributors, retailers and our loyal Ruger consumers. We look forward to the return of Marlin lever action rifles, which we plan to begin shipping in the 4th quarter. If you're interested in following our progress with the Marlin product line, check out Marlin Firearms on Facebook or Instagram. We have been delighted with the overwhelming interest and support that we have received from Marlin Fans. Since March of 2020, our workforce has been strengthened by approximately 400 folks, an increase of 25% And our quarterly unit production has increased by over 200,000 units or 58%. This outsized growth in production is indicative of our labor efficiency gains. And despite the growth in our And despite the growth in our output at the end of the Q2 of 2021, our finished goods inventory And distributor inventories of Ruger Products were 160,000 units lower than they were at the end of the Q1 of 2020. The last time these inventories were at what we would consider normal or expected pre COVID-nineteen levels. Since the onset of COVID-nineteen in March of 2020, we have remained proactive in maintaining health and safety of our employees and mitigating its impact on our business by providing all hourly employees with an additional 2 weeks of paid time off in 2020 and an additional week in 2021, providing cash and other incentives for employees to become fully vaccinated, Holding multiple on-site COVID-nineteen vaccination clinics at our manufacturing facilities, reducing hiring in early 2020 to help maintain the health and safety of employees and the cleanliness of our facilities, encouraging employees to continue to work remotely wherever possible And maintaining social distancing throughout each manufacturing facility, including in every manufacturing cell. Confidentially communicating with and assisting employees with potential health issues through our dedicated facility nurses, Restricting visitor access to minimize the introduction of new people into the factory environment, implementing additional Cleaning, sanitizing and improved ventilation and other health and safety processes to maintain a clean and safe workplace, providing all employees with multiple face mask coverings and other Personal protective equipment and currently mandating their use by unvaccinated and at risk individuals at all times in our facilities and issuing periodic guidance and reminders to all associates to encourage them to engage in safe and responsible behaviors. With the United States once again seeing a rise in COVID-nineteen cases and positivity rates, we remain vigilant and are proactively adjusting our plan to keep our associates healthy and safe and to minimize any disruption to our business. We estimate that COVID related costs will total approximately $1,500,000 in 2021. Included in this estimate is a $200 bonus for every employee who becomes fully vaccinated. Our financial strength evidenced by our debt free balance sheet provides financial security and flexibility as we manage through challenges Like COVID-nineteen, I remain focused on the long term goals and creation of shareholder value. Those are the highlights of the Q2 of 2021. Operator, may we have the first question? Thank you. Our first question comes from the line of Ryan Myers with Lake Street Capital. Your line is now open. Yes. Hi, good morning, guys. Thanks for taking my questions. First one for me, it was nice to see the production increase throughout the quarter. How are you guys kind of evaluating this throughout the rest of the year And then into next year, at some point, when you think that the backlog starts to tick down, how are you thinking about adding production as the year progresses? Thanks, Ryan. As you know, we don't give forward looking guidance, but I would tell you that our SIOP Process of sales inventory and operations planning, we go through that every 2 weeks. We look at every single product line. We look at inventory at Ruger, inventory at Wholesalers and the sell through from our wholesalers to retailer. And I think the key is going to be continuing those meetings every other week, Keeping track of each product line, watching our flow and frankly watching the flow of inventory into our distributors Regardless of whether it's Ruger inventory or competitors. So that process won't change. We're very flexible as far as our ability to moderate Our production levels, hiring certainly has an impact on our ability to ramp up quickly. But in terms of flexibility, the folks in our factories have demonstrated enormous flexibility within those model lines to vary the individual models and SKUs To meet what's needed for our distributors. So I'm very confident we'll be able to adapt to whatever the market throws us. All right. That's helpful. And then it looked like your The G and A expense was quite a bit lower than what we had expected and actually provided quite a bit of leverage in the model. So do you guys think you can keep the G and A at this level or would you expect it to pick up in the second half of the year? I believe, Ryan, it's up in actual dollars this quarter, but nothing out of the ordinary there. Okay. And then looking at input prices, are you guys seeing pressure anywhere? And then do you think that you can have the ability to take on Price increases as you see those pressures kind of like you did last year around October? Good question, Ryan. We are seeing as most Manufacturers in the U. S. Are seeing upward pressure on commodities and our supply chain prices from our vendors As they deal with both COVID-nineteen and supply chain shortages, we did take a 3% Price increase, as you noted last October, we also took one this June. Mid June, just a few weeks ago, we implemented a 3 Across the board price increase that went into effect and that goes into effect in Ruger's case on everything to begin shipping out the door. The only thing we price protect are prepaid orders and law enforcement orders that are already booked with. All right. That's helpful. That's it for me. Thank you. Thank you. Our next question comes from the line of Ryan Hamilton with Morgan Dempsey Capital Management. Your line is now open. Good morning, everyone, and congrats on another record quarter. Thanks, Ryan. You bet. Kind of circling back to the labor question, as you ramp up production for Marlin as you're getting ready to ship out In the Q4, are you seeing any constraints there or have you already been building sizable inventory? Well, in the case of Marlin, we're really starting from scratch. We inherited or we in our purchase, we got some The machinery, some work in process, some raw materials, some parts, but really we needed to stand up that line down in our facility in Mayodan, North Carolina and the team down there has done a phenomenal job and we're going through that line part by part, gun by gun. And so we still a lot of work ahead of us. So we're really working through that process and we'll be the guns we'll be making and shipping in 4th quarter Will be parts and basically parts and materials that we've made in our line, Not things that we necessarily inherited or picked up in the sale. We're very excited about it. It's been going great. We've got a great team of folks down in Mayodan. And frankly, what's been very exciting for me personally is watching The level of effort that's been expected by our expended by our other factories, Newport and Prescott, Arizona, Helping with the launch down in May, we've got teams of engineers in the other two facilities working on small parts, working on wood stocks, things like that. All that's going to combine I think to a great re launch of Marlin in the Q4. And you're going to you'll be shipping completed Rifles in the Q4 as well, right, not just parts and accessories and whatnot? Yes, absolutely. We'll have completed rifles. It will be a limited offering. Initially, we'll start with the model 1895, 1894 and 336. Certainly not every single model and every single SKU that our customers are looking for. So it will take us a while To bring all of Marlin back to its full glory, but we're excited about it. And again, the focus is on those Centerfire Lever action SKUs in the beginning and the team has been doing a great job on that. Well, sometimes scarcity can drive demand. So I think that's a Good plan. Refresh my memory on Marlin, those new products will be classified under your new product definition? Absolutely. They're again, since they were around for a long time in they're formalized, but they're certainly brand new to Ruger and the amount of effort going into that is frankly a little bit staggering. I mean the team has been doing a fantastic job. When you think about standing up the supply chain, going through part by part, making sure every machine is up to snuff, Lots of work that needed to be done. And I think you may have heard me on a previous call, we talked about over 100 tractor trailer loads Of machinery, equipment, work in process and parts coming our way. And so it's been a big task, big undertaking down in Mayodan. You guys are phenomenal operators, so kudos there. I know you don't normally break this out, but when you're looking At new products and margins, are you seeing something with newer products, do you usually Demand of higher margin or versus legacy margins. Could you kind of maybe touch on that a little bit? I know it's product dependent between rifle and Pistols and whatnot, but could you maybe just touch on that a little bit and maybe what we can expect from a margin profile for Marlin products? I think it's probably hard to say at this point. I mean, one of the things you're seeing right now is, I think we talked about in the earnings release. When we have these production levels that we're currently at, we're covering a lot of fixed costs and that obviously has a very positive On gross margin, when we consider new products, what we're looking for is a very disciplined approach to maintaining a cost target As far as coming in where we need to in terms of building the product and then evaluating where that particular product fits in the marketplace, looking at the competition, Looking at the number of competitors, looking at those existing price points and some things have more flexibility than others. Certain categories obviously are very crowded. Others were trying to hit a very specific price point. Good example is the Wrangler, which we launched a year and a half or so back. The Wrangler revolvers to be successful really needed to hit a specific price point in the marketplace. So sometimes that can drive our approach to manufacturing processes and really that's one of the things we look at in that new product Development process is what's our opportunities based on the landscape of the market, the competitors, prevailing price points And where we think we can go with the features and benefits package to try to outperform the competition as best we can. That makes sense. One more for me and then I'll get back in line. Can you touch a little bit on the accessories business? What you're seeing there? Any issues Maybe filling orders because of strong demand? No, accessories have been very strong, both the accessories we ship out through our 2 step distribution wholesalers as well as our own SHOPRUBER results has been very strong for us. And as firearms sales increased demand for accessories, particularly things like magazines, that increase was evident throughout Q1 and Q2. So that was part of the strong performance of our accessories division. I think the accessories world tends to ebb and flow a little bit with firearms, sometimes it lags it a little bit, But the folks did a great job capitalizing on that demand in Q2, that's for sure. All right. Thanks. Great quarter. Thanks, Brian. Thank you. One moment for questions. We do have a follow-up question from the line of Ryan Hamilton with Morgan Dempsey Capital Management. Your line is open. So short line, I guess. That's what I was going to say, Ryan. You're right back in. I know I touch on this a lot over the past couple of quarters. And maybe you could touch a little bit on the ammunition component. From what I've been seeing is it's becoming available while it's still expensive. Are you seeing is that helping sales at all or is it still Kind of a question mark in your view. Well, I think as you noted in recent weeks, it Certainly, it seems to be coming somewhat more available than it was a year or so ago, when we saw the real shortages out there. But again, I know in Speaking with my counterparts and all the ammunition manufacturers, they work around the clock to keep up with demand. So It's certainly not a question of lack of effort on their part. I think the demand combination of increased demand as people Perhaps bought and put away some of that ammo and then all the new shooters we got, when we look at those numbers from the National Shooting Sports Foundation Of 8,000,000 to 12,000,000 potential new shooters, that's also spurred that increased demand. And I think between Those new shooters coming in, the resumption of ammunition production in the Remington facilities now operated by Vista, I think all of that probably is probably getting us closer back to normal in the ammunition world, but we still got a long way to go. I still get I hear from consumers who say they can't find ammo. So I think it's probably a mixed bag out there depending on where you are. But I think the key thing as good stewards of the firearms business is we want to make sure that those new shooters who did buy guns in the past Year or 18 months have access to that ammunition so they can get out to the range and enjoy their firearms And become lifelong users of firearms, not just 1 and done purchases. We'd like to see them Stay with Ruger, of course, but most importantly, stay with safe and responsible ownership of firearms in the future. No, that's good color. You touched a little bit on new shooters. Are you getting a feel at all that women are still Entering this field quite a bit as far as buying first time gun owners or buying a second or third gun or concealed carry, are you still seeing Strong demand from new women shooters? Absolutely. We're definitely seeing Many more female shooters coming into the marketplace. We're seeing a much more diverse crowd at the firearms retail counter, And we think that bodes well for us long term. I think that's great to see more women shooters in our ranks. We're trying to make sure that we've got firearms products oriented towards the females that are going to pick them up and use them. And we're going to continue to keep going after that part of the market as well. One more for me. I was looking just Looking through my notes here, you've got you said headcount was at about 1900 hardworking employees, which I couldn't agree more. Where do you see that roughly If you could have whatever you wanted, by the end of the year, where would you say that number should be? Well, I mean that's still a ways out. Obviously, we're at 5 or 6 months out to the end of the year. Right now, I would tell you we've got the Help Wanted sign out In all of our facilities, every one of our manufacturing facilities has a help wanted sign out there. Normal attrition Each at that number every day. So between normal attrition and ramping up some of those new product lines, we've got New products that are you look at like our Prescott, Arizona factory, they've got the MAX 9, they're still growing that line as well as Working on shipping out the Ruger 57 pistols, New Hampshire, got a couple of exciting new products teed up in that factory. And then of course, Mayodan, North Carolina, where we have the Marlin line coming into being, again, lots going on there and all 3 of them have the Help Wanted sign out. And if anyone is interested, go to our website, ruger.com/careers, and it's got the positions listed there. I'll put in my free plug for hiring some folks. And I've been to your Mayodan facility and it's magnificent. So yes, I would definitely second that. Thanks again for the time. I appreciate it. Thanks, Ryan. Thank you. There are no further questions. I will now turn the call over to Chris Killoy for closing remarks. Thanks, operator. In closing, I would like to thank you for your continued interest in Ruger. And I would like to thank the more than 1900 members of the team that continue to work together to exceed our expectations and to drive outstanding financial results. Finally, I would like to note that this month of August is National Shooting Sports Month, a time for all Americans to celebrate and enjoy the shooting sports with friends, Family and newcomers, they want to introduce to these lifelong activities. Visit letsgoshooting.org to learn more about how you can celebrate National Shooting Sports Month this August. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.