Sturm, Ruger & Company, Inc.

Good day, and thank you for standing by. Welcome to Sturm Ruger's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To remove yourself from the queue, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Christopher Killoy, President and Chief Executive Officer. Please go ahead, sir.

Good morning, and welcome to the Sturm, Ruger & Company second quarter 2023 conference call. I'll ask Kevin Reed, our General Counsel, to read our caution on forward-looking statements. Then Tom Dineen, our Chief Financial Officer, will give an overview of the second quarter 2023 financial results. And then I will discuss our operations and the current market. After that, we'll get to your questions. Kevin?

Thanks, Chris. As usual, we want to remind everyone that statements made in the course of this meeting that say the company's or management's intentions, hopes, beliefs, expectations, or predictions of the future are poor-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, of course, the company's reports on the Form 10-K for the year ended December 31, 2022, and on the Form 10-Qs for the first and second quarters of 2023, the latter of 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 forward slash corporate, or the SEC website at SEC.gov. We do reference non-GAAP EBITDA. Please note that the reconciliation of net, excuse me, GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2022, and our Form 10-Qs for the first and second quarters of 2023, all of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Chris?

Thanks, Kevin. And now Tom will discuss the company's second quarter 2023 results.

Tom? Thanks, Chris. For the second quarter of 2023, net sales were $142.8 million and diluted earnings were $0.91 per share. For the corresponding period in 2022, Net sales were $140.7 million and diluted earnings were $1.17 per share. For the six months ended July 1st, 2023, net sales were $292.3 million and diluted earnings were $1.72 per share. For the corresponding period in 2022, net sales were $307.2 million and diluted earnings were $2.87 per share. Our profitability declined in the second quarter of 2023 from the second quarter of 2022 as our gross margin decreased from 31% to 27%. The lower margin was driven by a product mix shift for products with relatively lower margins that remain in stronger demand. Inflationary cost increases in materials, commodities, services, energy, and fuel Unfavorable deleveraging of fixed costs resulting from decreased production and increased sales promotional costs. While down from the prior quarter, we are pleased that our profitability this quarter improved from the first quarter of 2023 on essentially flat sales. Our continued focus on financial discipline and long-term shareholder value is evident in our strong debt-free balance sheets. At July 1st, 2023, our cash and short-term investments totaled $138 million. Our short-term investments are invested in United States Treasury bills and in a money market fund that invests exclusively in United States Treasury instruments, which mature within one year. At July 1st, 2023, our current ratio was 4.5 to 1, and we had no debt. Stockholders' equity was $333.2 million, which equates to a book value of $18.80 per share, of which $7.77 was cash and short-term investments. In the first half of 2023, we generated $21.8 million of cash from operations. We reinvested $4.9 million of that back into the company in the form of capital expenditures, We expect our 2023 capital expenditures will total approximately $20 million related to new product introductions, upgrades to our manufacturing equipment, and improvements to our facilities. In the first half of 2023, we returned $101.4 million to our shareholders through the payment of our quarterly dividends and a $5 per share special dividend paid in January of 2023. Our Board of Directors declared a $0.36 per share quarterly dividend for shareholders of record as of August 15, 2023, payable on August 30, 2023. 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?

Thanks, Tom. Our second quarter sales were essentially flat compared to last year, despite the softening demand in some product categories, including polymer pistols, bolt-action rifles, and modern sporting rifles. The estimated unit sell-through of our products from the independent distributors to retailers in the first half of 2023 decreased 7% compared to the prior year period. Comparatively, Nick's background checks, as adjusted by the National Shooting Sports Foundation, decreased 4% from the first half of 2022. We continually review independent distributor sell-through data and inventory trends and channel inventories as several of our product families remain below desired levels. We continue to adjust our level of production and the product mix to better align our output with current and expected consumer demand as we strive to capitalize on these opportunities and to better satisfy demand. Distributor inventories of several product categories are below pre-pandemic levels. including virtually all of our single-action revolvers, most of our double-action revolvers, and several of our rifles, the Mini-14 and the Hawkeye product family in particular. In addition to these legacy families, new products consistently help drive demand. We had several new product introductions in the first half of the year. Most notably, we launched two new additions to the Marlin lever-action rifle family. The Model 336 Classic, chambered in 3030 Winchester, and the Model 1894 Classic chambered in .44 Magnum. These products have been received with great excitement by our customers, and Marlins continue to be the most talked about and requested products in our lineup. In April, we launched the Super Wrangler Steel Frame Single Action Revolver, which comes with two cylinders, one for the inexpensive .22 Long Rifle ammunition and one for the more powerful .22 Magnum ammunition. The moderately priced Wrangler family has remained popular since its introduction in 2019. New product sales, which include only major new products that were introduced in the past two years, like the Marlins and Super Wranglers I just mentioned, totaled $63.3 million, or 23% of firearm sales in the first half of 2023. This includes the Max 9 Pistol, the LCP Max Pistol, the 1895 Marlin Lever Action Rifle, the LC Carbine Small Frame Auto Loading Rifle, the Security 380 Pistol, and the previously mentioned Marlin 336 Classic and the 1894 Classic lever-action rifles, and the Super Wrangler revolver. In the second quarter, we were also excited to introduce new pistols into California for the first time in 2014, due to some changes to the requirements for pistols to be sold in the state of California. Now our customers in California are able to purchase a Mark IV pistol, the SR-22 pistol, and the LCP pistol. all of which have been added to the California roster of certified handguns. We hope to add more in the second half of the year. Those are the highlights of the second quarter of 2023. Operator, may we have the first question?

Thank you. To ask your question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from the line of Mark Smith with Lake Street Capital Markets. Your line is now open.

Hey, good morning, everyone. This is Alex Cernyx on the line for Mark Smith today. Morning, Alex. Hi, Alex. Just firstly, could you guys talk about your current comfort levels with the channel inventory?

Yeah. Alex, this is Chris. You know, one of the things when we look at our channel inventories, we don't look at it just in terms of the aggregate amount. We also look at by product family. And there are certain product families that we're still, frankly, working very hard to catch up. And there are others who are satisfied with what's out there and what we have in inventory. And right now, when we look at our turns that our independent distributors have, they're just about six times a year. So we're comfortable with that. And, again, we think inventory is okay where it is right now. Of course, we'd always like to see that inventory move into retail and move on across the dealer's counter to the consumer. But right now, we're okay with where things are at.

That's great. Thank you for that. My follow-up here is, so we kind of see the industry seems to have dialed back from some promotions. Do you expect to have a re-promotional holiday season? And then if so, are you planning on participating in promotions there?

Good question, Alex. Well, actually, right now, if you look at what's going on in the industry, there are a lot of promotions out there. There's a lot of rebates. I was just looking at a couple of websites with the number of rebates is pretty strong right now from a variety of manufacturers. I suspect that's going to continue as we go forward, as we get closer to the periods like Black Friday and holiday selling season. So, again, too early to tell as far as, you know, we don't comment on forward-looking statements. But it is getting to be a much more traditional and a little more promotional-based activity out there than we'd seen in a couple of years.

That's very helpful. Thank you for taking my questions. That's all I got.

Thanks, Alex. Thank you. One moment for our next question, please. And our next question comes from Romel Dionisio with Aegis Capital. Your line is now open.

Good morning. Thank you. I want to ask, you know, in prior, if we look back over the last couple of decades, we've definitely seen some spikes in demand in election years. And I just wonder, two questions there. One is, are you starting to hear any of that in the channel in terms of an anticipation of that increased demand? And second, you know, you've enacted a lot of supply chain infrastructure investments over the last several years. And I wonder if You could just talk about, Chris, your ability to flex up in the next sort of part of the demand cycle. Thank you.

Thanks, Rommel. Good questions. First part, as far as any upcoming election increase in demand, certainly not seeing that right now. What we are seeing, I'd say, is traditionally in our business, we see kind of as things hit the May time period, they typically slow down as retail traffic increases. at the gun shops decrease. So we saw some of that beginning in May. We're optimistic that we're going to see a decent hunting season. We're excited, you know, with our bolt offering, our bolt action rifle offerings, and I think we're well positioned to capitalize on that. But again, you know, when it comes to the fall hunting season, probably too early to predict. You know, and your second question, as far as our ability to flex up, We've got three major gun plants as well as our metal injection molding facility in Earth City, Missouri. We built over 2 million units just a few years ago on an annualized basis. I think we've demonstrated our ability to flex up, but we're also able to, with our strong balance sheet, maintain a decent amount of inventory in certain product categories where we know it takes us a longer time to ramp up. If it does flex up, again, we've been through these cycles many times. We're ready to go. But I think at this point in time, we're not seeing any indications of kind of that artificial stimulus from a political season. We're just not seeing that, certainly at this point.

Okay, that's very helpful. Thanks, Chris.

Thanks, Rommel.

Thank you. As a reminder, to ask a question, you'll need to press star 11. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Killoy for closing comments.

Thanks, Operator. I'd like to thank all of you for attending this call, especially our shareholders. And I'd also like to thank our loyal customers and our 1,900 hardworking members of the Ruger team who design, build, and sell rugged, reliable firearms. And finally, just a reminder that August is National Shooting Sports Month, I encourage all of you to get outside or go to your favorite indoor range and safely enjoy what the Ruber Associates make and enjoy those with your friends and family. Thank you.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.