Earnings Call: Q1 2021

May 6, 2021

Good day and thank you for standing by. Welcome to the Sturm, Ruger First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen and answer session. Please be advised that today's conference is being recorded. Only. I would now like to hand the conference over to your speaker today, Mr. Chris Kolloy. Please go ahead. Good morning, and welcome to the Sturm, Ruger and Company First Quarter 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 Q1 2021 financial results, and then I will discuss our operations and the state of the market. After that, we'll get to your questions. Kevin? Only. Sure, Chris. As we do each quarter, we want to remind everyone that statements made in the course of this presentation that state the company's or management's intentions, hopes, beliefs, Expectations or predictions of the future are forward looking statements. It's 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 ks for the year ended December 31, 2020, and of course, on the Form 10 Q for the 1st quarter 2021, which we filed last night. Copies of these documents may be obtained by contacting the company or the SEC on the company website atruber.com/corporate or of course the SEC website at sec.gov. We do reference non GAAP EBITDA. Only. 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 a Form 10 Q for the Q1 2021, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward looking statements. Chris? Thanks, Kevin. Now Tom will discuss the company's Q1 2021 results. Tom? Only. Thanks, Chris. For the Q1 of 2021, net sales were $184,400,000 and diluted earnings were $2.16 per share. For the comparable prior year period, Net sales were $123,600,000 and diluted earnings were $0.87 per share. Only. The substantial increase in profitability for the Q1 was attributable to the 49% increase in sales and production, only, which resulted in favorable leveraging of fixed costs, including depreciation, engineering and other indirect labor expenses. Only. Also, the significant reduction in sales, promotional and rebate activity and improved labor efficiencies. Only. The balance sheet. At April 3, 2021, our cash and short term investments, which are invested in UST Bills, only. Totaled $146,100,000 Our current ratio was 3.5:one and we had no debt. Only. At April 3, 2021, stockholders' equity was $288,500,000 which equates to a book value of 16 point and $0.41 per share, of which $8.31 per share was cash and short term investments. Only. Cash flows. During the Q1 of 2021, we generated $28,000,000 of cash from operations. Only. We reinvested $6,000,000 of that back into the company in the form of capital expenditures. We estimate that 2021 capital expenditures only will be approximately $20,000,000 predominantly related to new product development. Our ability to shift manufacturing equipment between cells only mode and between facilities improves overall utilization and allows for reduced capital investment. Only. Cash returned to shareholders. In the Q1 of 2021, we returned $12,500,000 to our shareholders through the payment of dividends. Our Board of Directors declared an $0.86 per share quarterly dividend for shareholders of record as of May 17, only. 2021 payable on May 28, 2021. As a reminder, our quarterly dividend is approximately 40% of net income only and therefore varies quarter to quarter. That's the financial update for the Q1. Chris? Thanks, Tom. Only. The Q1 of 2021 marks the 5th consecutive quarter of meaningful growth in sales, profitability and virtually every financial and operating metric. Capitalizing on the historic surge in consumer demand that began late in Q1 of 2020, we strengthened our workforce and realized operational efficiencies despite the challenges posed by the COVID-nineteen pandemic throughout this period. Demand. Only. The estimated unit sell through of the company's products from the independent distributors to retailers increased 9% in the Q1 of 2021 only compared to the prior year period. For the same period, the National Instant Criminal Background Checks System background checks, only. As adjusted by the National Shooting Sports Foundation, commonly referred to as NICS checks, increased 13%. Only. This growth is attributable to increased consumer demand for firearms in the Q1 of 2021 and has likely been constrained due to limited only. New product development. During this period of unprecedented growth, We do not allow ourselves to be distracted from our focus of new product development. Consequently, in March, we introduced the Ruger Max 9, only. A versatile 9 millimeter pistol that has been met with tremendous excitement. The MAX 9 joins an impressive roster of products that were introduced in the past 8 quarters. These include the extremely popular Ruger 5.7 Pistol, which was 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, only, which is based on the venerable LCP platforms and utilizes our light rack system for easier slide manipulation and a reduced recoil. Only. The Wrangler Revolver, our latest take on the classic single action revolver, which shows no signs of slowing down. In the Q1 of 2021, new product sales represented $35,000,000 or 21% of firearm sales, compared to $23,000,000 or 20 percent of firearm sales in the Q1 of 2020. Only. As a reminder, derivatives and product line extensions of mature product families are not included in our new product sales calculation. Only. We look forward to additional exciting product launches in 2021, including the return of Marlin lever action rifles, which we plan to begin shipping in the 4th quarter. Only. Production and inventory. Since the Q1 of 2020, our workforce has been strengthened by 340 folks only or 22%, and our quarterly unit production has increased by 180,000 units or 49%. Only. That is really a phenomenal feat, and it was truly a company wide team effort. It involved operations, HR, marketing, facilities, supply chain, our nurses and EHS professionals and of course our dedicated and hardworking production folks at all of our facilities. Only. Nevertheless, we have yet to catch up with the historic surge in demand. At the end of the Q1 in 2021, Our finished goods inventory and distributor inventories of Ruger Products were 153,000 units lower only then at the end of the Q1 of 2020. COVID-nineteen, since its onset in March 2020, only. We have remained proactive in maintaining the health and safety of our employees and mitigating its impact on our business. Only by providing all hourly employees with additional 2 weeks of paid time off in 2020 and an additional week in 2021, only providing cash and other incentives for employees to become fully vaccinated reducing hiring in early 2020 to help maintain the health and safety of our only mode and the cleanliness of our facilities, encouraging employees to continue to work remotely wherever possible only and maintain 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 to the factory environment, only. Implementing additional cleaning and sanitizing, improved ventilation and other health and safety processes only to maintain a clean and safe workplace, providing all employees with multiple face mask coverings and other personal protective equipment only and mandating their use at all times in our facilities. Issuing periodic guidance and reminders to all associates only directly to their phones when possible to encourage them to engage in safe and responsible behaviors and manufacturing and donating personal only. With more of our folks getting vaccinated and positivity rates in our local communities remain near or below the 5% benchmark, COVID-nineteen was less disruptive to our day to day operations in the Q1 of 2021 than the prior year. However, The future impact of COVID-nineteen is unknown and we remain vigilant. We are hopeful that the downward trend continues in 2021 and we are working hard to achieve that end. Only. 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, only provides financial security and flexibility as we manage through challenges like COVID-nineteen and focus on our long term goals and the creation of shareholder value. Only. Those are the highlights of the Q1 of 2021. Operator, may we have the first question, please? Only. Your first question will come from Ryan only. Hi, guys. Thanks for taking my questions. First one for me here. So it looks like the units produced increased only sequentially, which is nice to see. Can you just talk about your guys' ramp in production during the quarter and then if you think there's any opportunities where that can move higher throughout the year? Only. Good question. We continue to hire folks. That's our then our primary constraint is the additional The increases in labor that we saw throughout Q1, as you may note from our Facebook pages and our website, we're continuing that hiring process only in the Q2. So that hiring process continues. Now part of that is associated with trying to increase production, only. But it's also associated with things like new product development and things of that nature. So again, while we don't give forward looking guidance, I think our only. The fact that the Help Wanted sign is still out is a pretty good indicator of what we're trying to accomplish. That's helpful. Only. And then can you talk a little bit about what you're seeing in the inflationary environment? Any inputs where you guys are seeing some pressure? And if so, do you think you have the ability to only. Price increases kind of like you did last year around October? Again, good question. I think only. Manufacturers throughout the country are seeing a lot of pressure on their supply chains. We're no exception. We continue to see pricing pressures as well as supplier constraints. Our teams at the factories are doing a phenomenal only. Job managing through those day to day hiccups, but we are seeing some of that upward price pressure on our products. And again, we are considering where we go with pricing in the coming months. That's certainly a possibility and because there's only so much we intend to absorb only. As we go forward, despite the great operating efficiencies, we're seeing some real and meaningful increases through our supply chain and commodity price. Only. The good news is our again, our teams at the factories have done a phenomenal job navigating through those hiccups, but it's not something we're immune to. Only. Great. And then last one for me. So regarding Marlin, we're excited to see good lever action rifle again with the Marlin badge. Only. Will you have to take any production away from existing firearms to produce these new Marlin rifles? And if so, how do you balance the decision on only. Allocating the resources across the business. Yes, good question. I think as everyone knows, we've only. So folks, we're starting with the 3 Centerfire lever action lines to begin with, the Model only. 336, the 1894 and the 1895, that's going to be incremental. Those are using both existing equipment only. That came to us with the purchase of the Remington brand from the Remington facility. So we've moved that into our facility in only. Mayodan, North Carolina. That's a separate and distinct line. And then we've also added to that with certain equipment and certain processes to make sure they're all those guns are going to be made to our standards in our building. And so we're looking forward to that, But that will indeed be incremental to existing Ruger product. That's it for me. Thank you. Thank you. Only. Your next question will come from Amel Dionisio with Aegis Capital. Please proceed with your question. Thanks. Good morning, everyone. Only. Chris, I know I've asked this question on prior conference calls, but I'm going to go ahead and ask it again. You've prided yourself for so long on product quality, only. And I think that's been a key driver in the strength of the brand for so long here. As you ramp up production capacity so quickly, only. Could you just give us an update in terms of the amount of training and quality control and things of that nature to really ensure that only. The product quality of the firearms that you're producing is every bit up to the standard that you've had in the past? Thanks. Thanks, Rommel. Good question. One of the things we've done only. As we beefed up our supplier quality teams, it's not only quality at Ruger, but it's quality at our suppliers and It's really a team effort. And to that extent, we've added some dedicated manufacturing staff to beef up that supplier quality function. Only. As well as internally in the factory, we try to never lose sight of job 1 is making great firearms for our customers. So only. We try to never take our eye off that ball. We try to recognize a great responsibility we have to deliver good products to our customers only. And that's what we intend to do so. Whether it's Aruba product or Marlin branded product, that's not going to change going forward. Only. Okay. And maybe just a follow-up. It seems like there's somewhat different factors driving the continued demand surge here in 2021 only as opposed to 2020. But one of the things that I think you've talked about and other companies have talked about in 2020 was, what are first time shooters, especially women being brought only mode. And I wonder if you could maybe talk about how much of the demand in 2021 is really kind of some of these first time shooters being brought only into the activity and to what extent that's having a benefit on current demand? Yes. Good question, Rommel. Only. Certainly, part of it is the existing customer base to be sure where we've got a multiple repeat buyer going out to get another Ruger firearm, particularly when it comes to new products that someone wants a new or niche product that they hadn't had before. In the new shooters, we continue to see that in the evidence we hear back from our retailers. Our sales force has been stays in touch with the retailers, the key retailers on a daily and weekly basis. Only. And we continue to see the impact of new shooters. I mean the NSSF, our trade association has estimated that as at north of 8,000,000 potential new They are certainly a much more diverse group and we welcome those new shooters to the fold. I think all of us as firearms manufacturers and Firearms enthusiasts have a duty to kind of nurture those folks. We need to make sure that their first firearm purchase isn't their last. They may have bought it only for personal protection or home protection. But what we really need to do is make sure we introduce them to the broad range of only. Good example is somebody who may have bought one of our LCP pistols only. During this past 18 month period, the LCP is a phenomenal gun, great gun to carry, But that's not the gun you want to go enjoy at the range for an afternoon with your family. We it's our job really to kind of hook that customer on our other great products, Things like our Mark 4 22 Pistol, our 10 22 Pistol, Precision Rim Fires, things that they can enjoy with their family and friends. Only. So that's one of the duties that we have, I think, to make sure we grow and nurture that base of new customers that only. We've been, I'll say, afforded during this past 12 to 18 month period. Okay. That's very helpful. Congrats on the quarter. Thanks. Only. Thanks, Rama. Only. Your next question will come from Ryan Hamilton with Morgan Dempsey Capital Management. Please proceed with your question. Good morning, guys. Hi, Ryan. Hi, Ryan. Only. Congrats on the solid execution. I believe this is a record quarterly sales. Is that right? Only. I think that may be correct. We hadn't touted that, but I think that's correct as we're very proud of it and we've only. We had some announcements out to our employees this week to congratulate them on their achievements, and we couldn't have done it without the great folks in all of our factories. Only. Absolutely, well deserved. I know you don't split it out by month, but could you walk us through the cadence of the quarter, kind of what you were seeing in January versus only. December and so on? Certainly. Well, again, we don't usually give that level of detail, but again, because of only. Hiring efforts, which continued throughout the quarter, in our case, there was basically ended the year with no inventory only. In our warehouse or basically distributors warehouses. So there is no inventory to contribute to sales throughout the quarter. So basically, you saw everything that was built was basically shipped. And so that was driven by available labor and our ability to only to grow those production rates. So that's where you saw kind of a steady drumbeat as we move through the quarter. Okay, great. Only. Could you touch a little bit on your accessories business, kind of what you're seeing there, still strong demand? Only. Yes, the accessories business has been extremely strong, particularly our magazine sales. We make a lot of magazines that are Specific to Ruger firearms, things like the 1022s with our BX25, our standard BX1 magazines. Only. And all those mags have done extremely well throughout this period as you might expect. And again, those are very high margin products. So only. We sell those mags both directly to consumers via our shopbrugger.com website as well as through our distribution channel through our normal independent only. Are you seeing any, trying to think how I want to word this. Only. The products that you don't manufacture on the accessory side, are you seeing any kind of constraints to filling orders because they may be behind only. Anything like that? Certain items, if they're most of our all of our firearms and all of our equipment that goes on the firearms are, by and large, made in the U. S. A. The challenge is some only. The challenges, some of those items on shop Ruger, maybe The t shirts and hats and some of the accessory items that those items that are brought in from offshore, we have seen some supply disruptions. Only. But again, our folks have managed that pretty well and we've really seen no negative impact there. Again, the bulk of our only. Components on every Ruger firearm all come from the U. S. And the team has done a phenomenal job managing through that. So we really haven't seen any disruption only. As it relates to offshore production, we're seeing it as I noted earlier is kind of on the supply chain problems that we're seeing throughout the manufacturing base in the U. S. Only. Sure. I saw you guys are still on track for Q4 to start shipping Ruger Marlin. Remind me where it's going to be manufactured, where those are going to be manufactured? Only. Right. The initial group of firearms are going to come out of our Mayodan, North Carolina facility. Only. That's where the first models coming out of there will be the 336, the 1894 and the 1895. Those are the centerfire lever action guns. Only. Initially, that's what we'll be starting with in Q4. After that, we've got other portions of the Marlin product line, only. Things like the Model 60, Semi Automatic 22 Rifle, not certain if that will also be manufactured in Mayodan or one of our other facilities, only. But we'll continue to roll out and add to that Marlin product line as we go forward. And on the $20,000,000 expected in 2021 CapEx, is it safe to say a pretty good chunk of that is going to getting Marlin up to speed? Only. There's some of it, but no, I wouldn't say the bulk of it there by any means. I mean, certainly, we had some additional CapEx needed only to get everything up and running in the machines we bought when we acquired the Marlin brand. Only. But the bulk of it is really dedicated to other new products as well. We've got a bunch of other new products in the pipeline, a lot of exciting things that we're looking forward to. And so I think between that, our maintenance spend and some of our facility improvements, I think it's a mixture, but the bulk of it certainly is new product development. Only. Great. And kind of leading into that, the MAX9 was a major release that you guys had during COVID. Could you just touch a little bit as far as maybe how a new product launch was different during COVID than during a normal time? Open. Yes, good question. One of the things over the last couple of years, of course, everyone has moved to a more digital based product launch. Only. You're not sending out an envelope full of flyers for a retailer, for only. Instead, you're doing email blast, you're working with your ambassadors for digital launches, you're working with YouTubers. Only. And so a lot has shifted anyway. I think COVID-nineteen certainly accelerated that. And what we tried to do is make sure that if we're going to launch only. To new product during this period, that it's got to be something that's incremental. And by that, I mean, it comes with its own product line. Only. The MAX 9 line was already under development in our Prescott, Arizona facilities. Only. The folks out there did a great job continuing to fine tune that line, get it ready for launch. So when it came online, those MAX 9 units were all incremental only as opposed to several line extensions that are embedded in other product lines that we might have chosen to hold off on production only. Introducing rather because it would cannibalize existing sales. So the MAX 9 is a good example of one that was only. Incremental sales, incremental product line and all net new business for Ruger. Only. That's great. And just one more for me. Any indications that model selection may be dictated by only. The availability of a certain caliber ammunition? Good question. I mean, we've seen it with the ammo shortages throughout only. The country, I mean, in talking to my friends at the ammo companies, I know they are working around the clock to get ammo out to their customers. Only. But I think certainly at retail, there's been some of that. We certainly saw that in some cases, for example, in the bolt action rifle business only. In the fall, in some cases, certain people might have bought a caliber that they might not have been their first choice, But that was one that they could get ammo for. So I think we saw some of that. I think right now in the core handgun calibers, for example, only. People know that even though it's a little bit tight and maybe they're paying a little bit more than they'd like to, they're not shying away from 9 millimeter or 3.80 or 3.57 Magnum handguns. And I think like I said, I think a lot of those caliber choices were only. That may have been dictated by ammo availability were probably in the bolt action rifle category back in the fall. Do you offer any kind of sales promotion or maybe only. You buy a 9 millimeter pistol and it comes with 100 rounds of ammunition or something like that? Only. We've looked at those and I think we've done a couple of those some years ago. They get complicated as far as cross only. Promotion with other manufacturers when their inventory is tight. So right now, the good news is from a promotional standpoint, only. We haven't needed to run promotions and that's obviously helped contribute to our strength of the gross margin that you see in the financials. Only. But that's certainly something to consider down the road. Sounds good. Thanks again and great quarter. Thank you. Only. And at this time, we have no further questions in queue. I would now like to turn it back over to Chris Killoy for closing remarks. Only. Thanks, operator. In closing, I would like to thank you for your continued interest in Ruger. And I would like to thank the 1900 members of the Ruger team that Pulled together during the past 5 quarters as we rose to the challenges posed by the COVID-nineteen pandemic and capitalized on the opportunities to improve our operations and drive on tremendous financial growth. The company will host a virtual annual meeting of shareholders at 9 am Eastern Time on Wednesday, May 12. Only. The virtual meeting is open to shareholders as well as anyone interested in the company. The login information is available at www virtual shareholdermeeting.com/rgr2021. I hope you will all be able to join only. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.