Sturm, Ruger & Company, Inc. Q1 2024 Earnings Call Transcript

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May 8, 2024

Key Takeaways

  • For Q1 2024 net sales were $136.8 million with diluted EPS of $0.40, down from $149.5 million and $0.81 a year ago, as gross margin dropped from 26% to 21% due to lower volumes, a shift to lower-margin products, fixed-cost deleveraging and inflationary cost pressures.
  • The company rolled out a profitability improvement plan that included a reduction in force of about 80 indirect labor and salaried roles (incurring a $1.5 million severance charge) and is expected to yield approximately $9 million in annualized cost savings.
  • Sturm, Ruger closed Q1 with a debt-free balance sheet, $115 million in cash and short-term investments, a 5.2:1 current ratio and shareholders’ equity of $332 million (book value of $19.08 per share).
  • New product sales totaled $42 million (32% of firearms sales), driven by strong demand for 75th Anniversary models, the American Rifle Gen II series and other recent introductions.
  • Finished-goods and distributor inventories have declined by over 160,000 units since mid-2023 to the lowest level since Q1 2022, prompting plans to increase production in Q2 to replenish stock and enhance margins.
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Earnings Conference Call
Sturm, Ruger & Company, Inc. Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to Sturm and 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 I would now like to hand the call over to Chris Kalloy, President and CEO. Please go ahead.

Speaker 1

Good morning, and welcome to Sturm, Ruger and Company's Q1 2024 conference call. I'll ask Kevin Reed, our General Counsel, to read the caution on forward looking statements. Tom Denien, our Chief Financial Officer, will then give an overview of the Q1 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.

Speaker 1

Kevin? Thanks, Chris. As always, we

Speaker 2

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 that 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, 2023,

Speaker 1

and of

Speaker 2

course on the Form 10 Q for the Q1 of 2024, which we filed last night. Copies of these documents may be obtained by contacting the company or the SEC on the company website atluba.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 ks for the year ended December 31, 2023 and our Form 10 Q for the Q1 of 2024, both of which are posted to our website. Furthermore, the company disclaims all responsibility to

Speaker 1

update forward looking statements. Chris? Thank you, Kevin. Now Tom will discuss the company's Q1 2024 results. Tom?

Speaker 3

Thanks, Chris. For the Q1 of 2024, net sales were $136,800,000 and diluted earnings were $0.40 per share. For the corresponding period in 2023, net sales were $149,500,000 and diluted earnings were $0.81 per share. Our profitability declined in the Q1 of 2024 from the Q1 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 a relatively stronger demand, unfavorable deleveraging of fixed costs resulting from the decreased production and sales and inflationary cost increases in materials, commodities, services, wages, energy, fuel and transportation.

Speaker 3

In the Q1 of 2024, we implemented a reduction in force that impacted about 80 of our employees and resulted in a severance expense of $1,500,000 This charge reduced 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 $115,000,000 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 1 year. At March 30, 2024, our current ratio was 5.2:one and we had no debt. 5.2 is among our highest current ratios in recent history. Stockholders' equity was $332,000,000 which equates to book value of $19.08 per share, of which $6.63 was cash and short term investments.

Speaker 3

In the Q1 of 2024, we generated $7,300,000 of cash from operations. We reinvested $1,800,000 of that back into the company in the form of capital expenditures. We expect our 2024 capital expenditures will total approximately $15,000,000 related to some exciting new product introductions, upgrades to our manufacturing equipment and improvements to our facilities. In the Q1 of 2024, we returned $7,300,000 to our shareholders through the payment of $4,100,000 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 $3,200,000 Our Board of Directors declared a $0.16 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.

Speaker 3

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 Q1. Chris?

Speaker 1

Thanks, Tom. During the Q1, 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 our product.

Speaker 1

Given strong demand for many of our products and the skill sets of the folks involved, approximately half of those impacted were able to be reassigned to direct manufacturing positions. This action resulted in the severance expense of $1,500,000 in the Q1 and will result in annualized savings of approximately $9,000,000 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 Q2, while others will take more time to materialize. 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.

Speaker 1

Although the overall firearms market declined in the Q1, 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 tentwenty two rifles, 75th anniversary LCP Max pistol, the American Rifle Generation II family of rifles, the Mini-fourteen Tactical with side folding stock and the LC Carbine chambered in 45 Auto. This drove our sales increase in the Q4 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 Q1 of 2024 increased 1% compared to the prior year period. NICS background checks, as adjusted by the National Shooting Sports Foundation, decreased 4% from the Q1 of 2023.

Speaker 1

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 2 years, totaled $42,000,000 or 32% of firearms sales in the Q1 of 2024. This was our 2nd highest quarterly new product sales in recent memory, only slightly below the Q2 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 4th 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 Q1.

Speaker 1

Over the past two quarters, this inventory this combined inventory has dropped over 160,000 units and now sits at the lowest it has been since the Q1 of 2022 when inventories were still being replenished 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 Q2 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.

Speaker 1

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 American Rifle Gen 2 offerings with introductions of several additional new models planned in 2024. Those were the highlights of the Q1 of 2024. Operator, may we have the first question?

Operator

Our first question comes from the line of Mark Smith of Lake Street.

Speaker 4

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?

Speaker 4

Maybe walk me through kind of your thoughts around the strength in orders, the demand that's out there and kind of your ability to produce and ship to meet the demand?

Speaker 1

Good morning, Mark. What we really saw at the end of Q4 2023, we had the launch of the family of Generation 2 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 1 rifles and higher than say product lines such as a tentwenty 2 Wrangler and LCP. So that resulted in quite a few orders received in Q1.

Speaker 1

And again, a lot of those will take time as we're ramping that line up in our facility in Maryland. It will 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. Okay.

Speaker 4

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

Speaker 1

Right now, we talked about some of the strength of our 75th anniversary models. All of those anniversary models were priced to sell. Tentwenty 2 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.

Speaker 1

We also have, of course, the Gen 2 American Centerfire rifles have been an enormous hit. And things like the Mini-fourteen with a 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.

Speaker 1

And 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 3 of our firearms plants.

Speaker 4

Okay. Looking at gross profit margin a little bit, I wanted to see, is there are there pressures on cost 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?

Speaker 1

Well, the biggest thing was we had as we decrease sale or decrease production, we've got unfavorable deleveraging of fixed costs. And then we've also got the inflationary cost impact on materials, 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 were lower priced and because we priced them to sell, slightly lower margin than our counterparts in the standard product line.

Speaker 1

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 will have a positive effect on gross margins.

Speaker 4

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

Speaker 1

I'd say it's a mix. And to the 10/22, we make strong margins. And so we've got some 10.22, we make strong margins. And so we've got some opportunity within those price slightly lower than our standard counterpart, but still making good margins. I think where we're seeing some of the mix, the sapphire pistol market remains very competitive, but certain of our product lines are doing very well.

Speaker 1

And the biggest thing for us is trying to capitalize and move labor to where we could be most efficient within each factory. The 3 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.

Speaker 4

Okay. And I think the last one for me, just would love your thoughts on kind of the competitive market today, 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 gives some headwinds going forward?

Speaker 1

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-fifteen platform, it's tough for them in this market. That has not been a strong part of this market. So there may be some additional discount that we're seeing there. And again, Cerifier Pistols, we're seeing a lot of rebates there as well.

Speaker 1

So far, it's not 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 this market, we were not able to implement those level of price increases this year.

Speaker 4

Excellent. Thank you.

Speaker 1

Thanks, Mark.

Operator

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

Speaker 5

Thanks. Good morning. Chris, I wonder if you could just give us some perspective on the thoughts behind the restructuring. I mean, we're looking at your backlog numbers and inventories in the industry. It doesn't seem like a time companies normally would enact a restructuring.

Speaker 5

Is this move towards more flexible manufacturing, continuous improvement, supply chain efficiency? Or are you seeing something different in your long term industry outlook that would kind of motivate you to enact a more permanent restructuring here? How should we think about that?

Speaker 1

Well, Rommel, good morning. The real thing is most of these folks were indirect labor folks. In fact, all of them 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 remanufacturing efforts as well as our One Best Way initiative, where we're trying to consolidate activity amongst our plants. Again, having 3 large manufacturing plants is a lot of opportunity for consolidation of activity.

Speaker 1

And this was one as painful as it was for us and for the folks involved, we thought it was a right long term restructuring action to take to make sure that we're focusing on our future and getting our margins in order, getting our costs in order and knowing that we're going to 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 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. Okay.

Speaker 5

All right. Thanks for that color. Maybe just a follow-up then. The industry has not seen a demand surge for a few years now and we're getting into an election year. Do you 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 and obviously your own brand name, so you see that kind of corresponding demand surge as the industry does tend to see every few years?

Speaker 5

Thanks.

Speaker 1

Yes, 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 mix 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.

Speaker 1

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.

Speaker 5

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

Speaker 1

Thanks, Rommel.

Operator

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

Speaker 1

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. And I would like to thank our loyal customers and our 1800 hard working members of the Aruna 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 30. 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.

Speaker 1

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

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

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