Sturm, Ruger & Company - Q1 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to Sturm, Ruger's first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. To remove yourself from queue, you may press star one one again. I would now like to hand the call over to Chris Killoy, President and CEO. Please go ahead.

Chris Killoy (President and CEO)

Good morning, and welcome to Sturm, Ruger & Company's first quarter 2024 conference call. I'll ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements. Tom Dineen, our Chief Financial Officer, will then give an overview of the first quarter of 2024 financial results, and then I will discuss our operations, including our recent reduction in force and profitability improvement plan and the market. After that, we'll get to your questions. Kevin?

Kevin Reid (General Counsel)

Thanks, Chris. As always, 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, or 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 to time in the company's SEC filings, including, but not limited to, the company's reports on Form 10-K for the year ended December 31, 2023, and of course, on the Form 10-Q for the first quarter of 2024, which we filed last night.

Copies of these documents may be obtained by contacting the company or the SEC, or on the company website at ruger.com/corporate, or of course, 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-K for the year ended December 31, 2023, and our Form 10-Q for the first quarter of 2024, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Chris?

Chris Killoy (President and CEO)

Thank you, Kevin. Now, Tom will discuss the company's first quarter 2024 results. Tom?

Tom Dineen (CFO)

Thanks, Chris. For 2024, net sales were $136.8 million, and diluted earnings were $0.40 per share. For the corresponding period in 2023, net sales were $149.5 million, and diluted earnings were $0.81 per share. Our profitability declined in the first quarter of 2024 from the first quarter of 2023, as our gross margin decreased from 26% to 21%. The lower margin was driven by a decrease in sales and production, a product mix shift toward products with relatively lower margins that remained in relatively stronger demand, unfavorable deleveraging of fixed costs resulting from the decreased production in sales, and inflationary cost increases in materials, commodities, services, wages, energy, fuel, and transportation.

In the first quarter of 2024, we implemented a reduction in force that impacted about 80 of our employees and resulted in a severance expense of $1.5 million. This charge reduced earnings by earnings per share by $0.07. Chris will provide further commentary on this action and the related profitability improvement plan during his remarks. At March 30, 2024, our cash and short-term investments totaled $115 million. Our short-term investments are invested in United States Treasury bills and in money market fund and in a money market fund that invests exclusively in United States Treasury instruments, which mature within one year. At March 30th, 2024, our current ratio was 5.2 to 1, and we had no debt. 5.2 is among our highest current ratios in recent history.

Stockholders' equity was $332 million, which equates to a book value of $19.08 per share, of which $6.63 was cash and short-term investments. In the first quarter of 2024, we generated $7.3 million of cash from operations. We reinvested $1.8 million of that back into the company in the form of capital expenditures. We expect our 2024 capital expenditures will total approximately $15 million, related to some exciting new product introductions, upgrades to our manufacturing equipment, and improvements to our facilities.

In the first quarter of 2024, we returned $7.3 million to our shareholders through the payment of $4.1 million of quarterly dividends and the repurchase of 75,000 shares of our common stock in the open market at an average price of $42.89 per share, for a total of $3.2 million. Our board of directors declared a 16-cent per share quarterly dividend for shareholders of record as of May 20, 2024, payable on June 7, 2024. As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter to quarter. Our variable dividend strategy, coupled with our strong debt-free balance sheet, allows us to continually and consistently provide returns to our shareholders without sacrificing our ability to capitalize on opportunities that emerge.

That's the financial update for the first quarter. Chris?

Chris Killoy (President and CEO)

Thanks, Tom. During the first quarter, we implemented a profitability improvement plan to ensure our long-term success and continued leadership in the firearms market. We restructured ourselves to better align and streamline some of our key functions of our organization: manufacturing, new product development, engineering, and customer and product service. By streamlining our workforce, we are better positioned to allocate resources and focus on our core strengths and strategic priorities and achieve greater efficiency and productivity. As part of this restructuring, we made some difficult decisions and undertook a reduction in force that impacted about. Given strong demand for many of our products and the skill set of the folks involved, approximately half of those impacted were able to be reassigned to direct manufacturing positions.

This action resulted in a severance expense of $1.5 million in the first quarter and will result in annualized savings of approximately $9 million. In addition to the reduction in force, we identified opportunities for cost reduction and cost elimination in virtually every facet of the company. We expect to realize the benefit of some of these initiatives as quickly as the second quarter, while others will take more time to materialize. It took a lot of hard work, analysis, collaboration, and creativity to pull this plan together, and we'll keep working hard to see it to fruition. Throughout this process, we were guided by our core values of integrity, respect, innovation, and teamwork, and we will continue to abide by them as we pursue additional opportunities to consolidate functions and reduce or eliminate expenses wherever possible.

Although the overall firearms market declined in the first quarter, demand for several of our product families remained strong, including many of our recently introduced products: the 75th Anniversary Mark IV Target Pistol, 75th Anniversary 10/22 Rifles, 75th Anniversary LCP Max Pistol, the American Rifle Generation II family of rifles, the Mini-14 Tactical with side-folding stock, and the LC Carbine chambered in .45 Auto. This drove our sales increase from the fourth quarter and generated strong distributor sell-through of our products to retail. The estimated unit sell-through of our products from the independent distributors to retailers in the first quarter of 2024 increased 1% compared to the prior year period. NICS, NICS background checks, as adjusted by the National Shooting Sports Foundation, decreased 4% from the first quarter of 2023. Our prioritization of developing exciting and innovative new products continues to pay off.

New product sales, which include only major new products that were introduced in the past two years, totaled $42 million, or 32% of firearm sales in the first quarter of 2024. This was our second highest quarterly new product sales in recent memory, only slightly below the second quarter of 2021, which was a record year for us. In conjunction with our profitability improvement plan, we shifted resources and increased production to capitalize on the opportunities that this strong demand offers and increased our production from the fourth quarter. The strong consumer demand for our products resulted in a combined reduction of over 80,000 units in our finished goods inventory and the inventory of our products at distributors during the first quarter.

Over the past two quarters, this combined inventory has dropped over 160,000 units and now sits at the lowest it has been since the first quarter of 2022, when inventories were still being replenished as, after the surge of demand that started in 2020. Simply said, we continually adjust our production levels to conform with demand. As such, we plan on increasing our production again in the second quarter to begin to replenish those inventories, especially for the new products I mentioned earlier. Increased production will help us leverage our fixed costs and favorably impact our margins. The American Rifle Generation II family of rifles has been extraordinarily well-received and has quickly become one of our most sought-after product lines. Since this new platform was launched in December, we've introduced 47 SKUs, including the Standard, Ranch, and Predator models.

We are excited to further broaden the America- American Rifle Gen II offerings with introductions of several additional new models planned in 2024. Those were the highlights of the first quarter of 2024. Operator, may we have the first question?

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Smith of Lake Street.

Mark Smith (Senior Research Analyst)

Hi, guys. First question for me. I just wanted to dig in a little bit more about kind of the difference between orders during the quarter and production and shipments. Pretty big difference there. Was some of this timing of when orders came in, was this kind of planned? Maybe walk me through, you know, kind of your thoughts around, you know, the strength in orders, the demand that's out there, and kind of your ability to produce and ship to meet the demand.

Chris Killoy (President and CEO)

Good morning, Mark. What we really saw at the end of Q4 of 2023, we had the launch of the family of Generation II American Rifles. And when that happened, a lot of those orders were received in Q1. And of course, that's a higher priced product than the Gen I rifles and higher than, say, product lines such as the 10/22, Wrangler and LCP. So that resulted in quite a few orders received in Q1. And again, a lot of those will take time as we're ramping that line up in our facility in Mayodan. It'll take us time to fill that. We then additionally launched other models and other calibers and other SKUs that contributed to the orders received in Q1.

So I'm sure we'll be capitalizing on that throughout the Q2, Q3, and I'm sure those orders will continue to come in as we get closer to hunting season.

Mark Smith (Senior Research Analyst)

Okay. And then, you know, any other movement within kind of categories, you know, handgun versus rifle, lever action? Anything to call out where you're seeing strength or maybe where you're seeing, you know, any weakness in demand?

Chris Killoy (President and CEO)

Well, right now, you know, we talked about some of the strength in the 75th anniversary models. All of those anniversary models were priced to sell. 10/22 LCP and Mark IV models were all priced sharply, so they would be available to all of our customers. We think that's had the desired effect. We also have, of course, the Gen II American Centerfire rifles have been an enormous hit, and you know, things like the Mini-14 with the folding stock have also been a big hit. So it's been very positive. And of course, Marlin continues to do extremely well. The recent additions of the Dark Series and the addition in late 2024 of the .44 Magnum and .357 Magnum in the 1894 lines have been met with very, very strong demand.

We're frankly hiring direct labor. Despite the reduction in force, we have the help wanted sign out for direct labor to build guns at all three of our firearms plants.

Mark Smith (Senior Research Analyst)

Okay. Looking at gross profit margin a little bit, I wanted to see, you know, is there—are there pressures on costs that you're seeing today in anything in particular? Is it primarily labor? Is there anything else, that's putting pressure on gross profit margin?

Chris Killoy (President and CEO)

Well, the biggest thing was, you know, we had, you know, as we decreased production, you know, we've got unfavorable deleveraging of fixed costs, and then we've also got the inflationary cost impact on materials. You know, we got commodities, wages, services, all of that is impacting. And that's partly offset by increased pricing, but this year we had very modest price increases. The other thing is our mix of product. So, for example, when that demand shifts to those lower priced products, like the original LCP, the LCP Max, Mark IV, and 10/22 commemorative models, those are lower priced, and because we price them to sell, slightly lower margin than their counterparts in the standard product line. So I think all of that contributed to those decreased margins.

I think the biggest factor going forward will be taking production rates up in Q2 and Q3, and we think that that'll have a positive effect on the gross margins.

Mark Smith (Senior Research Analyst)

Great. As you talk about, you know, solid demand for some lower margin products, are those typically what we would think of as lower priced margin products? You know, I guess LCP, maybe the Wrangler, even the Super Wrangler. Is that putting more pressure than kind of inflationary pressures on gross profit margin?

Chris Killoy (President and CEO)

I'd say it's a mix. You know, and to the first part of your question about, yes, typically, it's the lower price products, but we've got other examples, where LCP, we make very good margins, for example. 10/22, we make strong margins. And so we've got some opportunity within those priced slightly lower than our standard counterpart, but still making good margins. I think where we're seeing, you know, some of the mix, the centerfire pistol market remains very competitive, but certain of our product lines are doing very well. And, you know, the biggest thing for us is trying to capitalize and move labor to where we can be most efficient within each factory. We've got three big factories. All of them are working hard to turn out exactly the right mix.

But like I said, all of them are trying to hire direct labor folks to get our production levels up.

Mark Smith (Senior Research Analyst)

Okay. And I think the last one for me, just would love your thoughts on kind of the competitive market today. And any insights you have on pricing in the market. Are you seeing peers discount, be more promotional, more specials that are out there, that you think is, you know, give some headwinds going forward?

Chris Killoy (President and CEO)

We're seeing some discounting, to be sure, particularly if a manufacturer is only one product line deep or wide. For example, for folks that only make, say, the AR-15 platform, it's tough for them in this market. That has not been a strong part of this market, and so there may be some additional discounting that we're seeing there. And again, centerfire pistols, we're seeing a lot of rebates there as well. So far, it's, you know, hasn't been too bad, but we're cautious going into 2024, and like I said, only had certain product lines that we gave modest price increases to. In years past, we, in fact, for I think several years before, we had an annual price increase that equated to about 3% January 1.

Just based on the competitive nature of this market, we were not able to implement those level of price increases this year.

Mark Smith (Senior Research Analyst)

Excellent. Thank you.

Chris Killoy (President and CEO)

Thanks, Mark.

Operator (participant)

Thank you. Our next question comes from the line of Rommel Dionisio of Aegis Capital.

Rommel Dionisio (Managing Director)

Thanks. Good morning. Chris, you know, I wonder if you could just give us some perspective on the thoughts behind the restructuring. I mean, you know, we're looking at your backlog numbers and inventories, the state of the industry. It doesn't seem like a time... you know, companies normally would enact a restructuring. Is this, you know, a move towards, you know, more flexible or flexible manufacturing, continuous improvement, supply chain efficiency? Or are you seeing something different in your long-term industry outlook that would, you know, kind of motivate you to, to, to enact a more permanent restructuring here? How, how should we think about that?

Chris Killoy (President and CEO)

Well, Rommel, good morning. The real thing is, you know, most of these folks were indirect labor folks. In fact, all of them were indirect labor, either salaried personnel or hourly folks working indirect labor jobs. And so when we eliminated those positions, as difficult as it was, it's partially as a result of some of the efficiencies we've gained with our lean manufacturing efforts, as well as our One Best Way initiative, where we're trying to consolidate activity amongst our plants.

Again, having three large manufacturing plants is a lot of opportunity for consolidation of activity, and this was one, as painful as it was, for us and for the folks involved, we thought it was the right long-term restructuring action to take to make sure that we're focusing on, our future and getting our, our margins in order, getting our costs in order, and knowing that we're gonna be in a competitive market for, the foreseeable future, we had to get right in terms of our cost structure, and that's what this intended to do. The good news is we're more able to move, as we said, about half those folks into direct labor positions.

So for example, a person who might have been working an indirect labor job, perhaps serving several product lines, is now working on the line itself, building firearms, and that was our intent.

Rommel Dionisio (Managing Director)

Okay, all right. Thanks for that color. Maybe just to follow up then, you know, the industry has not seen a demand surge for, you know, a few years now, and we're getting into an election year. Do you... You know, given the effects of the restructuring, do you still have that ability to quickly and rapidly flex up, if necessary, if the industry were to surge and, you know, obviously, your own, you know, brand name, so you see that kind of corresponding demand surge as the industry does tend to see every few years? Thanks.

Chris Killoy (President and CEO)

Yeah, absolutely. I mean, we're in the process of flexing up right now. Like I said, Q2 production has already moved ahead of where Q1 was, and that's our goal, and I suspect Q3 will be going in that direction as well. Despite things like NICS being down quarter-over-quarter or year-over-year, we've got some great opportunities ahead of us, and even though I don't typically speak in terms of forward-looking guidance, we've got some great new products coming that you'll see later this year. And that's part of the reason for our flexing our muscles now and increasing demand or increasing production, so we can be ready for those new products and perhaps shift people from some of the existing lines to some of those new products that are just getting started now.

Rommel Dionisio (Managing Director)

Okay, great. Thanks for the call. Looking forward to seeing the new products. Thanks, Chris.

Chris Killoy (President and CEO)

Thanks, Rommel.

Operator (participant)

Thank you. I would now like to turn the conference back to Chris Killoy for closing remarks. Sir?

Chris Killoy (President and CEO)

In closing, I would like to thank all of you for attending our call this morning and thank our shareholders for their continued investment in our company. I would like to thank our loyal customers and our 1,800 hardworking members of the Ruger team, who design, build, and sell rugged, reliable firearms. I hope you will be able to join us at our virtual 2024 annual meeting on Thursday, May 30th. Proxy notifications were sent out to shareholders in mid-April, so please be on the lookout and be sure to vote your shares in advance of the meeting. I appreciate your support. As we approach Memorial Day on May 27, please remember those service members who made the ultimate sacrifice to secure our freedoms. Thank you all.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.