Earnings Call Transcript - RGR Q2 2022

Operator, Operator

Good day, and thank you for joining us. Welcome to the Q2 2022 Sturm, Ruger Earnings Conference Call. Please note that today's conference is being recorded. I will now turn the call over to Chris Killoy, President and CEO. Please proceed.

Chris Killoy, President and CEO

Good morning, and welcome to the Sturm, Ruger & Company's second quarter 2022 conference call. I'd like to ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements; then Tom Dineen, our Chief Financial Officer, will give an overview of the second quarter 2022 financial results; and then I will discuss our operations and the state of the market. After that, we'll get to your questions. Kevin?

Kevin Reid, General Counsel

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, 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-K for the year ended December 31, 2021, and of course, on the Form 10-Q for the second quarter of 2022, 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, 2021, and our Form 10-Q for the second quarter of 2022, 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 second quarter 2022 results.

Tom Dineen, Chief Financial Officer

Thanks, Chris. For the second quarter of 2022, net sales were $140.7 million and diluted earnings were $1.17 per share. For the corresponding period in 2021, net sales were $200.1 million and diluted earnings were $2.50 per share. The second quarter of 2021 was the highest quarter in sales and profitability in our history. For the first 6 months of 2022, net sales were $307.2 million and diluted earnings were $2.87 per share. For the corresponding period in 2021, net sales were $384.4 million and diluted earnings were $4.66 per share. The significant reduction in sales from last year reflects decreased consumer demand for firearms from the unprecedented levels of the surge that began in early 2020 and remained for most of 2021. Our profitability declined in 2022 from the unfavorable deleveraging of fixed costs resulting from the aforementioned decreased sales in production, plus inflationary cost increases in materials, commodities, services, energy, and transportation, partially offset by increased pricing. At July 2, 2022, our cash and short-term investments totaled $209 million. Our short-term investments are in a money market fund that invests exclusively in the United States Treasury instruments which mature within 1 year. Our current ratio was 6.1:1, and we had no debt. Our robust debt-free balance sheet provides versatility and strength as we explore and consider opportunities that may emerge in 2022 and beyond. At July 2, 2022, stockholders' equity was $387 million, which equates to a book value of $21.90 per share, of which $11.80 per share was cash and short-term investments. During the first 6 months of 2022, we generated $32 million of cash from operations. We reinvested $14 million of that back into the company in the form of capital expenditures. We estimate that 2022 capital expenditures will be approximately $25 million, predominantly related to new product development and to upgrade and modernize manufacturing equipment and facilities. In the first 6 months of 2022, we returned $27 million to our shareholders through the payment of dividends. Our Board of Directors declared a $0.47 per share quarterly dividend for shareholders of record as of August 17, 2022, payable on August 31, 2022. 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 second quarter. Chris?

Chris Killoy, President and CEO

Thanks, Tom. Our broad and diverse product family helped us navigate through the first half of 2022 as overall consumer demand subsided. While channel inventory of some of our product families, including certain polymer pistols and modern sporting rifles, have been largely replenished, inventories in many product families remain below desired levels. We continue to focus our production mix and prioritize the products that remain in demand, many of which remain undersupplied in the marketplace. These include: American centerfire rifles, 10/22 rimfire rifles, precision rifles, pistol-caliber carbines, LCRs, SR1911, our single-action and double-action revolver families, and of course, our Marlin 1895 lever-action rifles. I am excited about the progress that our new product development teams have made this year. As you know, we don't talk about new products until they are launched, but stay tuned. We are excited to continue to expand our Marlin product line with the reintroduction of the Marlin Model 1895 trapper. This lightweight stainless steel lever-action rifle is chambered in .45-70 and features a very accurate cold hammer forged threaded barrel. We continue to increase our production of Marlin rifles and look forward to introducing additional Ruger-made Marlin lever-action rifles in the near future. Sales of new products, including the PC Charger, the MAX-9 pistol, the LCP MAX pistol, and the Marlin 1895 lever-action rifle represented $33.8 million or 11% of firearm sales in the first 6 months of 2022. As a reminder, derivatives or 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, the Ruger-5.7 pistol, and the LCP II in .22 LR rifle, have now been in production for over 2 years and are no longer included in the new product sales calculation for the first half of 2022. Those firearms continue to sell well for us; they are just no longer captured in the new product metric. As I mentioned earlier, stay tuned for some exciting new products in the back half of the year. We will remain disciplined and committed to our strategy of pursuing manufacturing excellence and vigorously developing innovative and exciting new products. Those are the highlights of the second quarter of 2022. Operator, may we have the first question, please?

Operator, Operator

And our first question is from Mark Smith with Lake Street.

Mark Smith, Analyst

First question for me is, the orders looked pretty solid, backlog remains pretty high, but production declined pretty significantly as we look at it sequentially. Was that planned? Or were there any production issues? Labor shortages? Anything that kind of drove production down during the quarter?

Chris Killoy, President and CEO

Mark, good question. Certainly, labor and supply chain issues are something our teams face every day. But frankly, we made the decision to moderate our production, bring it down in several product families based on what we saw in what we call distributor sell-through. So we see what our distributors' inventory looks like, we see what they're selling to retail and what's going on in the marketplace. We proactively take those production rates down. You may recall, we have our SIOP meeting, sales inventory and operations planning meeting, every 2 weeks. In each one of those meetings, we typically move some families up in production levels and some down. In this case, over the course of the first half of the year, several that went down in production, and that was indeed planned.

Mark Smith, Analyst

Okay. So looking at that distributor sell-through, as we look at the backlog numbers, how firm is that backlog? Could we see cancellations? Or is there a situation where you guys could decide, 'Hey, we're not going to fill some of these aged back orders?'

Chris Killoy, President and CEO

Well, our orders with our wholesalers are all noncancelable. So those orders can't be canceled by the individual distributor. However, we're very cautious to make sure we're not overloading a distributor with a particular product line. So as we see, looking at their inventory, we make the decision perhaps not to ship what's on back order only because, again, we don't want to burden them and get them in financial trouble if they're already deep in a particular model, a particular SKU, etc. So it's a 2-way street; we watch that backlog. But again, it is noncancelable. And everything in that backlog ships at the current price. So even if it's been on there for a while, it's going to ship at today's price, not at the price it was entered at the time those orders were placed.

Mark Smith, Analyst

Okay. And then as we look at the inventory, we're back to kind of prepandemic as we look at kind of your inventory and distributor inventory. What's your comfort level with what you're seeing out there kind of from retail all the way back to you guys as far as inventory?

Chris Killoy, President and CEO

Yes. I mean, right now, what's in the channel and our inventory, in particular, we're very comfortable. Our distributors have settled into around our target of 6 turns is what we estimate, and we think they're right on track with that. Frankly, they're looking and asking for more inventory, particularly in some of the product lines, like I mentioned in the earlier remarks. Things like 10/22s, double- and single-action revolvers. There are Mark IV pistols and of course, Marlins; every call, somebody is asking, 'Can we get more Marlins?'

Mark Smith, Analyst

Okay. And that's kind of my next question. As we look at gross profit margin, obviously, a year ago, very high margin as things were really humming. But where do you see kind of that gross profit margin settling in as the industry has kind of normalized? And then walk through any maybe delta in that, given the Marlin business, how that looks on a gross profit margin basis?

Chris Killoy, President and CEO

We do not break down product line gross margins or provide forward-looking guidance. However, I can say that the team in Mayodan is doing an excellent job of getting the Marlin line operational. As we introduce more SKUs, there will be some challenges, but production is steadily increasing, which should benefit us throughout the year. The key factor influencing our overall gross margin numbers is the deleveraging of fixed costs. Compared to the same period last year, we are facing very tough comparisons since that was our highest quarter in terms of sales and profit in the company's history. Most of the decline in gross margin can be attributed to the deleveraging of those fixed costs.

Mark Smith, Analyst

Maybe a different way of asking the question, is there any reason that gross profit margin should differ significantly from prepandemic levels?

Chris Killoy, President and CEO

A lot of that depends on what we can do with pricing. Since the onset of the pandemic, we’ve implemented three price increases during that time. We are still facing rising material costs, freight, and transit costs, so part of that will depend on our ability to implement further price increases moving forward.

Operator, Operator

Our next question is from the line of Rommel Dionisio from Aegis Capital.

Rommel Dionisio, Analyst

Chris, in your prepared comments, you mentioned the Marlin business a bit, and it seems like you're quite enthusiastic about it. Now that you've had that business for several quarters, could you provide more detailed insights into what you've observed in that segment since the acquisition? You launched a significant new product in the lever action category, so what is the outlook for that moving forward? What changes have been made in the business from both a production and marketing perspective since you acquired it? Any insights into the future would be appreciated.

Chris Killoy, President and CEO

Thank you, Rommel. As I mentioned, the entire company came together to support the Marlin acquisition. Teams from all three of our major factories participated in getting that line operational. The production of the rifles occurs in Mayodan, North Carolina, while our woodworking facility in New Hampshire produces the stocks for those guns. Everyone has been dedicated to achieving exceptional quality. We prioritize quality over quantity, and although many customers are eager for a higher production volume, we won't compromise on quality. It was crucial for us to get it right from the start. So far, the 1895 SBL, the trapper, and other models within the 1895 family are set for release. Later this year, we expect to introduce products from the 336 and 1894 families, which are all centerfire lever-action rifles included in our product plan. Our first opportunity to showcase these was at the NRA annual meetings in Houston a few weeks ago, where they received a lot of attention. When we introduced the new Marlins, it was great to hear feedback from long-time customers familiar with the Marlin lineage, and they were very pleased with what they saw. Former Marlin sales representatives expressed excitement about the branding elements we retained, such as the Marlin name and our commitment to detail. So far, the response from our public retailers and wholesalers has been promising, and we anticipate more success in that area. At the NRA show, Marlin branding was prominent alongside Ruger branding. Moving forward, you will continue to see the Marlin brand as a part of Ruger, which we are enthusiastic about and believe will pay off in the long term. We are still exploring some product lines, though they are not top priority at the moment, such as the Model 60. We will assess those and proceed as it makes sense, but our main focus remains on the centerfire lever-action rifles, and we have just begun to scratch the surface with this initiative.

Operator, Operator

Our next question is from Jim Misago from FactSet.

Unidentified Analyst, Analyst

Most of my questions have already been answered here, but per usual, I actually ask if you can walk us through the cadence of the quarter, kind of what you're seeing there? And maybe touch a little bit more on the inflation, getting better? Getting worse? Staying the same? Any relief there.

Chris Killoy, President and CEO

Sure. As you know, we don't break out the monthly statistics and figures. But I would say we're in a much more normal summer season. As those of you that follow the industry know, typically, we do slow down as you enter into the May, June, July time period. The other thing is, again, we, like many other manufacturers, take a shutdown in July and it's a 1-week shutdown. As we came into the summer, we did see some slowing of retail traffic. The good news is things associated with the fall hunting season seem to be coming on strong now. We're seeing a lot of interest in our American centerfire rifles, and we see that as very positive. The question about inflation, I mean, we've seen some significant increases over the past couple of years. Things like stainless steel up 7% from last year, carbon steel up 15%, and aluminum up 20%. Some of those are tough to stomach and are a factor in not only us trying to drive efficiencies through our lean business practices in every aspect of Ruger, but also looking at potential price increases. We just have to keep that in mind as we go forward.

Unidentified Analyst, Analyst

At least from what I'm seeing in my universe here, ammunition seems to be more available. Is that helping reverting you guys at all? I would assume that's helping. Any comments on that?

Chris Killoy, President and CEO

I think it is helping. We've seen ammunition settle back down, still in strong demand. But we've seen that settle back down from an availability standpoint. The good thing for Ruger is it gets our customers out to the range; it gets them out enjoying their products. Things like a 10/22 and a Ruger Mark IV pistol are meant to be shot and enjoyed. And so we're seeing, I think, as those prices stabilize and consumers are comfortable that they can find ammo on the shelf, they're getting back out to the range and enjoying our products. That's always good news for Ruger when you have some of the fun-to-shoot platforms that we have.

Unidentified Analyst, Analyst

Absolutely. And I think when you go to buy a new gun, it would be nice if you had ammo that you can, like you said, you could take to the range. Any comments on your accessories business? I know it's a small piece, but any thoughts there? What you're seeing?

Chris Killoy, President and CEO

I believe that the accessories business aligns closely with our firearms segment. When customers purchase firearms, they often visit our website, ShopRuger, to explore accessories that complement their new guns. We observe strong connections in this area. Our team has successfully met the demand for items like magazines and gun accessories, as well as appealing apparel and sportswear. Overall, this segment remains stable. We experienced a significant increase in gun sales, particularly when comparing to the second quarter of last year, which was exceptionally robust. This presented one of the toughest comparisons we've faced, and the same is true for accessories; that was also a challenging comparison for us.

Operator, Operator

I would now like to turn the call back over to Chris Killoy for closing remarks.

Chris Killoy, President and CEO

In closing, I would like to thank you for your continued interest in Ruger. And I would like to thank our loyal customers and our 1,900 hard-working members of the Ruger team who design, manufacture, and sell our rugged, reliable firearms every day in our American factories. Thank you.

Operator, Operator

Thank you. This does conclude today's conference call. Thank you for participating, and you may now disconnect.