Earnings Call Transcript - RGR Q1 2021

Operator, Operator

Good day, and welcome to the Sturm, Ruger First Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded.

Christopher Killoy, CEO

Good morning, and welcome to the Sturm, Ruger & Company First Quarter 2021 Conference Call. I would 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 first quarter 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?

Kevin Reid, General Counsel

Sure, Chris. As we do each quarter, we want to remind everyone that statements made in the course of this presentation stating 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 in the company's SEC filings, including the company's reports on Form 10-K for the year ended December 31, 2020, and on the Form 10-Q for the first quarter 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 at ruger.com/corporate or the SEC website at sec.gov. We do reference non-GAAP EBITDA. Please note that the reconciliation of GAAP net income and non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2020, and our Form 10-Q for the first quarter 2021, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements.

Christopher Killoy, CEO

Thanks, Kevin. Now Tom will discuss the company's first quarter 2021 results. Tom?

Thomas Dineen, CFO

Thanks, Chris. For the first quarter of 2021, net sales were $184.4 million and diluted earnings were $2.16 per share. For the comparable prior year period, net sales were $123.6 million and diluted earnings were $0.87 per share. The substantial increase in profitability for the first quarter was attributable to the 49% increase in sales and production, which resulted in favorable leveraging of fixed costs, including depreciation, engineering, and other indirect labor expenses. Also, the significant reduction in sales, promotional, and rebate activity and improved labor efficiencies. The balance sheet. At April 3, 2021, our cash and short-term investments, which are invested in U.S. T-bills, totaled $146.1 million. Our current ratio was 3.5:1, and we had no debt. At April 3, 2021, stockholders' equity was $288.5 million, which equates to a book value of $16.41 per share, of which $8.31 per share was cash and short-term investments. During the first quarter of 2021, we generated $28 million of cash from operations. We reinvested $6 million of that back into the company in the form of capital expenditures. We estimate that 2021 capital expenditures will be approximately $20 million, predominantly related to new product development. Our ability to shift manufacturing equipment between cells and between facilities improves overall utilization and allows us for reduced capital investment. In the first quarter of 2021, we returned $12.5 million to our shareholders through the payment of dividends. Our Board of Directors declared a $0.86 per share quarterly dividend for shareholders of record as of May 17, 2021, payable on May 28, 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 first quarter. Chris?

Christopher Killoy, CEO

Thanks, Tom. The first quarter of 2021 marks the fifth 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 the first quarter of 2020, we strengthened our workforce and realized operational efficiencies despite the challenges posed by the COVID-19 pandemic throughout this period. Demand. The estimated unit sell-through of the company's products from the independent distributors to retailers increased 9% in the first quarter of 2021 compared to the prior year period. For the same period, the National Instant Criminal Background Check System background checks, as adjusted by the National Shooting Sports Foundation, commonly referred to as NICS checks, increased 13%. This growth is attributable to increased consumer demand for firearms in the first quarter of 2021 and has likely been constrained due to limited available inventory in the distribution channel. New product development. During this period of unprecedented growth, we did not allow ourselves to be distracted from our focus on new product development. Consequently, in March, we introduced the Ruger MAX-9, 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-57 pistol, which is awarded the 2020 Caliber Award for Best Overall New Product by the Professional Outdoor Media Association, in conjunction with 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. In the first quarter of 2021, new product sales represented $35 million or 21% of firearm sales compared to $23 million or 20% of firearm sales in the first quarter of 2020. As a reminder, derivatives and product line extensions of mature product families are not included in our new product sales calculation. 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 fourth quarter. Production and inventory. Since the first quarter of 2020, our workforce has been strengthened by 340 folks or 22%, and our quarterly unit production has increased by 180,000 units or 49%. This is 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 hard-working production folks at all of our facilities. Nevertheless, we have yet to catch up with the historic surge in demand. At the end of the first quarter in 2021, our finished goods inventory and distributor inventories of Ruger products were 153,000 units lower than at the end of the first quarter of 2020. COVID-19. Since its onset in March 2020, we have remained proactive in maintaining the 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; reducing hiring in early 2020 to help maintain the health and safety of our employees and the cleanliness of our facilities; encouraging employees to continue to work remotely wherever possible and maintaining social distancing throughout each manufacturing facility; 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; implementing additional cleaning and sanitizing, 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 mandating their use at all times in our facilities; issuing periodic guidance and reminders to all associates directly to their phones when possible to encourage them to engage in safe and responsible behaviors; and manufacturing and donating personal protective equipment to local hospitals, healthcare facilities, and police and fire departments in our local communities. With more of our folks getting vaccinated and positivity rates in our local communities remaining near or below the 5% benchmark, COVID-19 was less disruptive to our day-to-day operations in the first quarter of 2021 than the prior year. However, the future impact of COVID-19 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. We estimate that COVID-related costs will total approximately $1.5 million 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-19 and focus on our long-term goals and the creation of shareholder value. Those were the highlights of the first quarter of 2021. Operator, may we have the first question, please?

Operator, Operator

Your first question will come from Ryan Meyers with Lake Street Capital.

Ryan Meyers, Analyst

First one for me here. So it looks like the units produced increased sequentially, which was nice to see. Can you just talk about your ramp in production during the quarter? And then if you think there's any opportunities where that can move higher throughout the year?

Christopher Killoy, CEO

Good question. We continued to hire folks, and our primary constraint is the increases in labor that we saw throughout the first quarter. As you may note from our Facebook pages and our website, we're continuing that hiring process in the second quarter. So that hiring process continues. Now part of that is associated with trying to increase production, 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 the fact that the 'help wanted' sign is still out is a pretty good indicator of what we're trying to accomplish.

Ryan Meyers, Analyst

That's helpful. 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 take on price increases, similar to what you did last year around October?

Christopher Killoy, CEO

Again, good question. I think 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 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. Because there's only so much we intend to absorb as we go forward. Despite the great operating efficiencies, we're seeing some real and meaningful increases through our supply chain and commodity pricing. The good news is our teams at the factories have done a phenomenal job navigating through those hiccups. But it's not something we're immune to.

Ryan Meyers, Analyst

Great. And then last one for me. So regarding Marlin, we're excited to see good lever action rifles again with the Marlin badge. 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 allocating the resources across the business?

Christopher Killoy, CEO

Yes. Good question. I think, as everyone knows, we've told folks we're starting with the 3 centerfire lever action lines to begin with. The Model 336, the 1894, and 1895, that is going to be incremental. Those are using both existing equipment that came to us with the purchase of the Remington brand from the Remington facilities. So we've moved that into our facility in Mayodan, North Carolina. That's a separate and distinct line. And then we've also added certain equipment and certain processes to ensure that all those guns are made to our standards in our building. And so we're looking forward to that, but that will indeed be incremental to existing Ruger products.

Operator, Operator

Your next question will come from Rommel Dionisio with Aegis Capital.

Rommel Dionisio, Analyst

Chris, I know I've asked this question in prior conference calls, but I'm going to go ahead and ask it again. You've prided yourself for so long on product quality, 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, 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 the product quality of the firearms that you're producing is every bit up to the standards that you've had in the past?

Christopher Killoy, CEO

Thanks, Rommel. Good question. One of the things we've done is beefed up our supplier quality teams. It's not only quality at Ruger but also quality at our suppliers, and it's really a team effort. To that extent, we've added some dedicated manufacturing staff to enhance that supplier quality function. As well as internally in the factory, we try to never lose sight of our main goal, which is making great firearms for our customers. So we've tried to keep our focus on that. We recognize the great responsibility we have to deliver good products to our customers, and that's what we intend to do going forward, whether it's a Ruger product or a Marlin branded product.

Rommel Dionisio, Analyst

Okay. And maybe just to follow up. It seems like there are somewhat different factors driving the continued demand surge here in 2021 as opposed to 2020. One of the things that I think you've talked about, and other companies have mentioned in 2020, was a lot of first-time shooters, especially women, being brought into the sport. I wonder if you could maybe talk about how much of the demand in 2021 is really coming from these first-time shooters being brought into the activity and to what extent that's benefiting current demand?

Christopher Killoy, CEO

Yes. Good question, Rommel. Certainly, part of it is the existing customer base to be sure, where we've got repeat buyers going out to get another Ruger firearm, particularly when it comes to new products that someone wants a newer niche product that they hadn't had before. In the new shooters, we continue to see evidence from our retailers. Our sales force stays in touch with the key retailers on a daily and weekly basis. We continue to see the impact of new shooters. The NSSF, our trade association, has estimated over 8 million potential new shooters. They are 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 nurture those folks. We need to ensure that their first firearm purchase isn't their last. They might have bought it for personal protection or home protection. But what we really need to do is make sure we introduce them to the broad range of firearms that are out there, so they can continue to enjoy the sport. A good example is someone who may have bought one of our LCP pistols during this past 18-month period. The LCP is a phenomenal gun, great to carry, but not the gun you want to enjoy at the range with your family. It's our responsibility to hook those customers on our other great products—such as our Mark IV .22 pistol, our 10/22 pistol, Precision Rimfires—things they can enjoy with family and friends. So that's one of the duties we have to grow and nurture that base of new customers that we've been afforded during the past 12 to 18-month period.

Operator, Operator

Your next question will come from Ryan Hamilton with Morgan Dempsey Capital Management.

Ryan Hamilton, Analyst

Congrats on the solid execution. I believe this is a record quarterly sales. Is that right?

Christopher Killoy, CEO

I think that may be correct. Though we hadn't counted that, I think that's correct, and we're very proud of it. We've had some announcements out to our employees this week to congratulate them on their achievements. We couldn't have done it without the great folks in all of our factories.

Ryan Hamilton, Analyst

Absolutely, well deserved. I know you don't split it out by month, but could you walk us through the cadence of the quarter, what you were seeing in January versus December, and so on?

Christopher Killoy, CEO

Certainly. Well, again, we don't usually give that level of detail. But again, because of our hiring efforts, which continued throughout the quarter, there was no inventory in our warehouse or distributors' warehouses at the end of the previous year. So there was no inventory to contribute to sales throughout the quarter. Everything that was built was basically shipped. This was driven by available labor and our ability to grow those production rates. So that's where you saw a steady drumbeat as we move through the quarter.

Ryan Hamilton, Analyst

Okay, great. Can you touch a little bit on your accessories business, what you're seeing there? Still strong demand?

Christopher Killoy, CEO

Yes, the accessories business has been extremely strong, particularly our magazine sales. We produce a lot of magazines that are specific to Ruger firearms, such as the 10/22s, with our BX-25, our standard BX-1 magazines. All those magazines have done extremely well throughout this period. And those are very high-margin products. We sell those magazines both directly to consumers via our shopruger.com website as well as through our distribution channel, through our standard independent wholesale distribution partners.

Ryan Hamilton, Analyst

Are you seeing any—I'm trying to think how I want to word this—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 or anything like that?

Christopher Killoy, CEO

Certain items, if they're—most of our firearms and equipment that goes onto the firearms are made in the U.S.A. The challenge is some of those items on ShopRuger, like the T-shirts and hats and some of the accessory items brought in from offshore, have seen some supply disruptions. But again, our folks have managed that pretty well, and we've really seen no negative impact there. The bulk of our components on every Ruger firearm comes from the U.S., and the team has done a phenomenal job managing through that, so we really haven't seen any disruption as it relates to offshore production. Where we've seen it, as I noted earlier, is on the supply chain problems throughout the manufacturing base in the U.S.

Ryan Hamilton, Analyst

Sure. So you guys are still on track for the fourth quarter to start shipping Ruger or Marlin. Remind me where those are going to be manufactured?

Christopher Killoy, CEO

Right. The initial group of firearms is going to come out of our Mayodan, North Carolina facility. The first models coming out there will be the 336, the 1894, and 1895, which are the centerfire lever action guns. Initially, that's what we will be starting with in Q4. After that, we've got other portions of the Marlin product line, such as the Model 60, semi-automatic 10/22 rifle. I'm not certain if that will also be manufactured in Mayodan or one of our other facilities, but we'll continue to roll out and add to that Marlin product line as we go forward.

Ryan Hamilton, Analyst

And on the $20 million expected in 2021 CapEx, is it safe to say a pretty good chunk of that is going toward getting Marlin up to speed?

Christopher Killoy, CEO

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 to get everything up and running in the machines we bought when we acquired the Marlin brand. 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—lots of exciting things that we're looking forward to. I think the mix includes maintenance spending and some facility improvements, but the bulk of it is certainly new product development.

Ryan Hamilton, Analyst

Great. And kind of leading into that, the MAX-9 was a major release that you had during COVID. Could you just touch a little bit on how a new product launch was different during COVID than during a normal time?

Christopher Killoy, CEO

Yes. Good question. Over the last couple of years, of course, everyone has moved to a more digital-based product launch. You're not sending out an envelope full of flyers for a retailer, for example. Instead, you're doing email blasts, working with your ambassadors for digital launches, collaborating with YouTubers, and so on. So a lot has shifted anyway. I think COVID-19 certainly accelerated that. What we tried to do was ensure that if we were going to launch a new product during this period, it would be something incremental. By that, I mean it comes with its own product line. The MAX-9 line was already under development in our Prescott, Arizona facility. The folks there did a great job continuing to fine-tune that line, getting it ready for launch. So when it came online, those MAX-9 units were all incremental as opposed to several line extensions that might have cannibalized existing sales. So the MAX-9 is a good example of new incremental sales and product lines, representing net new business for Ruger.

Ryan Hamilton, Analyst

No, that's great. And just one more for me. Any indications that model selection may be dictated by the availability of a certain caliber ammunition?

Christopher Killoy, CEO

Good question. We've seen it with the ammo shortages throughout the country. In talking to my friends at the ammo companies, I know they are working around the clock to get ammo out to their customers. But I think certainly, at retail, there has been some indication of that. We saw this in some cases, for example, in the bolt-action rifle business in the fall. In some cases, certain people might have bought a caliber that wasn't their first choice, but that was one they could get ammo for. So I think we saw some of that. I think right now in the core handgun calibers, people know that even though it's a little tight and they may be paying a bit more than they’d like to, they're not shying away from 9-millimeter, .380, or .357 Magnum handguns. I think many caliber choices that may have been influenced by ammo availability were likely in the bolt-action rifle category last fall.

Ryan Hamilton, Analyst

Do you offer any kind of sales promotion, or maybe you buy a 9-millimeter pistol and it comes with 100 rounds of ammunition or something like that?

Christopher Killoy, CEO

We've looked at those, and I think we've done a couple of those in some years past. They get complicated as far as cross-promotion with other manufacturers when their inventory is tight. Right now, the good news is, from a promotional standpoint, we haven't needed to run promotions, which has helped contribute to our strength of gross margin in the financials. But that's certainly something to consider down the road.

Operator, Operator

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.

Christopher Killoy, CEO

Thanks, operator. In closing, I would like to thank you for your continued interest in Ruger. I would also like to thank the 1,900 members of the Ruger team that pulled together during the past 5 quarters as we rose to the challenges posed by the COVID-19 pandemic and capitalized on the opportunities to improve our operations and drive tremendous financial growth. The company will host a virtual Annual Meeting of Shareholders at 9:00 a.m. Eastern Time on Wednesday, May 12. The virtual meeting is open to shareholders and anyone interested in the company. The log-in information is available at www.virtualshareholdermeeting.com/rgr2021. I hope you will all be able to join us. Thank you.

Operator, Operator

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