Sturm, Ruger & Company, Inc.
Q4 2019 Earnings Call Transcript

Published: 21 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Quarter 2019 Sturm, Ruger 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. [Operator Instructions]Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to CEO and President, Christopher Killoy.

[Christopher Killoy:]

Thank you. Good morning and welcome to the Sturm, Ruger & Company Year End 2019 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 fourth quarter and 2019 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:]

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, 2019, and of course, on the forms 10-Q for the first, second and third quarters of 2019.Copies of these documents may be obtained by contacting the company or the SEC or on the company’s 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 to non-GAAP EBITDA can be found in our Form 10-K for the year-ended December 31, 2019, and again, on our forms 10-Q for the first three quarters of 2019 which also are posted on our website.Furthermore, the company disclaims all responsibilities to update forward-looking statements. Chris?

[Christopher Killoy:]

Thank you, Kevin. Now, Tom, will discuss the company’s 2019 results.

[Thomas Dineen:]

Thanks, Chris. Before we get into the financials, I would like to acknowledge the delay in the filing of our Form 10-K last night. We plan to file our Form 10-K at 5 o’clock Eastern Time as we normally do. Unfortunately, our third-party service provider had a technical issue getting our Form 10-K uploaded to the SEC.As a result, our Form 10-K was not posted on the SEC website until 6 o’clock this morning. We apologize for any confusion or inconvenience.Now to the financial results, for 2019, net sales were $410.5 million and diluted earnings were $1.82 per share. For 2018, net sales were $495.6 million and diluted earnings were $2.88 per share. For the fourth quarter of 2019, net sales were $205.1 million and diluted earnings were $0.46 per share.For the corresponding period in 2018, net sales were $121.1 million and diluted earnings were $0.69 per share.The balance sheet, at December 31, 2019, our cash and short-term investments, which are invested in U.S. T-bills totaled $164.9 million. Our current ratio was 4.1 to 1 and we had no debt. At December 31, 2019, stockholders’ equity was $285.5 million, which equates to a book value of $16.05 per share, of which $9.28 per share was cash and short-term investments.Cash flows, in 2019, we generated $50 million of cash from operation. We reinvested $20 million of that back into the company in the form of capital expenditures, primarily related to new products. We estimate that 2020 capital expenditures will be approximately $20 million, with a focus, again, on new product development.Cash returned to shareholders, in 2019, we returned $16 million to our shareholders through the payment of $14 million of dividends and the repurchase of 44,500 shares of our common stock in the open market at an average price of $44.83 per share for a total of $2 million. Our Board of Directors declared an $0.18 per share quarterly dividend for shareholders of record as of March 13, 2020, payable on March 27, 2020.As a reminder, our quarterly dividend is approximately 40% of net income, and therefore, varies quarter-to-quarter. That’s the financial update for 2019. Chris?

[Christopher Killoy:]

Thanks, Tom. 2019 was a challenging year for the firearms industry as manufacturing overcapacity, excess inventories at all levels of the channel and a continued softness of demand led to a marketplace settled with undisciplined discounting, reckless extension of payment terms and excessive promotions.Conversely, our promotional efforts in 2019 were more measured, and instead, we focused on our long-term objectives, which include investing in our new product development process, strengthening our brand, fortifying our balance sheet and bolstering the profitability of the Ruger product line for our downstream distribution partners, all of which enhance our delivery of shareholder value.The estimated sell-through of the company’s products from the independent distributors to retailers in 2019 decreased 18% from 2018. The reduction in the sell-through of the company’s products may be attributable to the following

[Operator:]

Certainly. [Operator Instructions] Our first question comes from the line of Ryan Hamilton with Morgan Dempsey.

[Ryan Hamilton:]

Good morning, everyone.

[Christopher Killoy:]

Good morning.

[Ryan Hamilton:]

You touched a little bit on overcapacity and excess inventories. Could you give us a little color as far as what the mix of that oversupply is? What you’re seeing as far as is it more long range, is it pistols? Could you just kind of touch on that a little?

[Christopher Killoy:]

Well, I think as it relates to 2019, a lot of that has worked its way through the system. We saw throughout 2019, I’d say, excess capacity in the modern sport and rifle category, in particular; heavy discounting and, in fact, saw several manufacturers exit that category completely. So I think that a lot of that has worked its way through the system. I’m optimistic that maybe some of that capacity is no longer there, and as we enter 2020, we’re going to be in better shape certainly at Ruger, and hopefully, as an industry.

[Ryan Hamilton:]

Is that how you are really analyzing how inventories are increasing or decreasing, by looking at the amount of discounting that some of your competitors are doing? Is that one metric?

[Christopher Killoy:]

That’s one metric. The other, of course, is we stay very in tune through our sales network, through our distribution network, frankly, knowing what’s going on at our competition, knowing whether there certain competitors are struggling financially. And we see both the level of discounting, in the case of public companies of course, we can see their filings just like you can see the Ruger filings. And we try to keep an eye on all those metrics.And then in particular, again, as I mentioned, our SIOP process, the Sales Inventory Operations Planning process that we do every 2 weeks, is really where we take a deep dive by each product family, because at any one time, you may be increasing the rate of one product family and decreasing the rate of the other to take advantage of what’s going on in the marketplace.

[Ryan Hamilton:]

Sure, that makes a lot of sense. I asked every quarter just about cadence of the quarter. Could you kind of walk us through how December looked compared to November, November to October? And I know you had a holiday in there, but maybe just a little color on that would be appreciated.

[Christopher Killoy:]

Yeah, we typically don’t comment on month-to-month specifics. But I will tell you throughout the fourth quarter, we saw a steady improvement and by the time we hit December, we saw – certainly, it looked like things were selling through, both from our distributors and at retail.As you note from the numbers that Tom presented, when you look at our inventories, both at Ruger and then at what we saw with our distributors’ inventories, both those numbers were down. We’re very pleased to see that the product that we shipped in December seems to have sold through pretty well in subsequent time periods from our distributors. So we’re – we think that bodes well going forward.

[Ryan Hamilton:]

Sure. That’s good. Thank you. When I’m looking at – you touched on the loss of a few smaller distributors. When a distributor falls out of the market, do you see that volume soaked up by other distributors? And what kind of time lag does it take for them to absorb all of that?

[Christopher Killoy:]

That’s a good question. What typically happens, depending on how that distributor winds up their business, if it’s handled in an orderly manner, sometimes that inventory is sold off to another wholesale distributor. Obviously, we hope it’s a Ruger distributor. And then other times, if it’s somewhat less measured and a little bit more chaotic, as we saw in some of the earlier bankruptcies, then it creates some disruption in the marketplace as far as discounting, as product is liquidated, et cetera. But the biggest challenge in transitioning that business to other distributors is really opening up lines of credit. The one thing that we forget sometimes with distributors is they are more than just warehouses and salespeople, they also put their working capital at risk into the marketplace to provide payment terms for our independent retailers and in Ruger’s case, our national accounts, our big box stores as well. So that’s an important function for distributors, and that sometimes takes more time than we would like to transition that from a distributor who goes out of business to the remaining distribution base.

[Ryan Hamilton:]

Sure. That’s a good point. I ask a lot on headcount. You touched on your staffing. Could you just give us a feel if there – you’re having any challenges filling any specific roles?

[Christopher Killoy:]

Well, right now, frankly, we’ve got the help on and sign out at each one of our facilities for folks to help us with production. We’re also actively looking for additional engineering talent. We’re always on the lookout for good manufacturing engineers as well as design engineers. So that – again, we have those on our website, and that can be a good indication of where the business is going.

[Ryan Hamilton:]

Great. And I just have one more on raw material inputs, any inflation of note?

[Christopher Killoy:]

No, we really haven’t seen that, I think, things have settled down on the steel side of things. We saw earlier in the year as tariffs entered the equation, again, we buy all our steel domestically, but we did see a tightening of supply earlier in the year as domestic sources were perhaps had more customers than they were used to. But at this point, we haven’t really seen an inflation from a pricing standpoint or restriction of supply. So I think we’re in pretty good shape.

[Ryan Hamilton:]

So it’s good. Where is the Annual Shareholder Day at this year? Do you guys have that figured out here?

[Christopher Killoy:]

This year it’s going to be in Mayodan, North Carolina, and that information – yeah, it’s going to be in Mayodan, North Carolina on Wednesday, May 13. We’ll have a tour for analysts at the factory and the actual meeting itself will be in Greensboro.

[Ryan Hamilton:]

Perfect. Thank you very much.

[Christopher Killoy:]

Thanks, Ryan.

[Operator:]

[Operator Instructions] And I’m showing no further questions. So with that, I’ll turn the call back over to CEO and President, Christopher Killoy, for any further remarks.

[Christopher Killoy:]

In closing, I’d like to thank you for your continued interest in Ruger, and I would like to thank our loyal customers and the 1,600 hardworking members of the Ruger team, who design and manufacture rugged and reliable firearms every day in our Ruger American factories. I look forward to seeing many of you at our 2020 Annual Meeting on Wednesday, May 13, in Greensboro, North Carolina.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect.