Sturm, Ruger & Company, Inc.
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sturm, Ruger Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instruction will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Michael Fifer, Chief Executive Officer. Please go ahead.

[Michael O. Fifer:]

Good morning, and welcome to the Sturm, Ruger & Company second quarter 2016 conference call. I would like Patricia Shepherd (00

[Unverified Participant:]

Thanks, Mike. 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, 2015 and Form 10-Q for the quarter ended July 2, 2016. Copies of the documents may be obtained by contacting the company or the SEC or on the company website at www.ruger.com/corporate or, of course, the SEC website at www.sec.gov. We reference non-GAAP EBITDA. Please note the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2015, and of course, our Form 10-Q for the quarter ended July 2, 2016, which are also posted on our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Mike?

[Michael O. Fifer:]

Thank you, Patricia (02

[Christopher John Killoy:]

Thank you, Mike. Financial results. For the second quarter of 2016, net sales were $167.9 million, and fully diluted earnings were $1.22 per share. For the corresponding period in 2015, net sales were $140.9 million, and fully diluted earnings were $0.91 per share. For the first half of 2016, net sales were $341.1 million and fully diluted earnings were $2.44 per share. For the corresponding period in 2015, net sales were $277.8 million and fully diluted earnings were $1.71 per share. Our second quarter 2016 EBITDA was $45.1 million or 27% of sales, compared to our second quarter 2015 EBITDA of $36.2 million or 26% of sales. Demand; demand remained strong in the second quarter. The estimated sell-through of the company's products from the independent wholesale distributors to retailers, which we believe to be the best available measure of demand, increased 20% in the second quarter of 2016 and 18% in the first half of 2016 from the comparable prior year period. We believe the increase in estimated sell-through of the company's products from the independent wholesale distributors to retailers is attributable to

[Operator:]

Our first question comes from Brian Rafn with Morgan Dempsey. Your line is open.

[Brian Gary Rafn:]

Good morning, guys. Just a thought, Mike, fabulous job on your tenure, and congratulations to you, Chris, on the promotion. You kind of jumped my first question, it sounds like robust demand is continuing and exceeding capacity. If you guys look at product development, given what you guys have launched previously with the American Pistol, the Precision Rifle, the AR556 Takedown, how robust would you say your pipeline is in the near-term for new products?

[Christopher John Killoy:]

Brian, this is Chris. As you know, we don't discuss the specifics of our new products, but suffice it to say, we do have some great new products coming down the road, and our engineers are working very hard to get those out in the near-term and next year as well.

[Brian Gary Rafn:]

Yeah. Okay. My thought being is, sometimes, when you clean out the farm team, and you move them up to the major league level, you've got to kind of reload, but you still have stuff to be – moving through the pipeline. Let me ask you, on your product development teams, do they work on a specific product, kind of, alpha to omega, or do they handle multiple product designs?

[Christopher John Killoy:]

Brian, typically what they do is, they work on the core product associated with the new product launch, and then, stay with it for the initial round of derivatives, as we start to expand either calibers, things, like barrel links and things like that, and then after that, they will wind that team down and that moves further into the production stream, they will move on to other projects.

[Brian Gary Rafn:]

Okay. Since your Analyst Day, have you added anymore product line sales at Mayodan?

[Christopher John Killoy:]

I don't believe we have, Brian. I think what you saw down at the Analyst Day was pretty much, where we are and the folks are continuing to work on expanding capacity, but we haven't added additional sales at this point.

[Brian Gary Rafn:]

Okay. I will ask just one more and get back in line. Any cost, feedstock materials, wood grades for stocks or metal alloys, wax, greensand, anything on the cost of goods sold, inflation-wise?

[Christopher John Killoy:]

No, nothing out of the ordinary that we've seen. Nothing that would come to mind that would be significant.

[Brian Gary Rafn:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Aaron Smith with CNNMoney. Your line is open.

[Aaron Smith:]

Thank you for taking my call. Hello, Mr. Killoy, I just had a two-part question for you. You mentioned something about the current political climate, you also mentioned about being unable to keep up with the strong demand for various firearms. How much of an impact is Hillary Clinton and the mass shootings having on gun sales? And do you have any plans to expand manufacturing in order to meet demand?

[Michael O. Fifer:]

Mr. Smith, this is Mike Fifer. I don't think have any way of measuring the political impact or certainly not assigning it to any one politician's comments, but certainly, this is a unique time in our history, because for the very first time ever, we have the nominee of a major political party, one with a very reasonable likelihood of winning the presidency, overtly stating that the Supreme Court got it wrong in the Heller case, and actively campaigning against the lawful commerce in arms. That's unprecedented, and it will be hard for any of us to believe that didn't have some impact, but it can't be measured.

[Aaron Smith:]

Okay. So, you're saying, she's actively campaigning against the – how are you putting that, the lawful...

[Michael O. Fifer:]

The lawful commerce in arms.

[Aaron Smith:]

Okay. Okay. And then, as far as mass shootings like the one in Orlando, which I believe happened during the most recent quarter, how much of an impact do you think that is having on gun sales?

[Michael O. Fifer:]

Again, something we can't measure. It didn't appear to have a material impact. Our distributors, I think, reported to us that they've got some calls the next day, but it quickly died down.

[Aaron Smith:]

And then, just the last part, about manufacturing, this has been going on for several years now, you've seen this intense demand for guns is growing, growing, growing, a lot of gun companies have tried to figure out if it's worth investing and expanding manufacturing, which is very expensive. What are you planning to do with that?

[Michael O. Fifer:]

We don't discuss our future plans, but you can certainly look at all our filings in history, we expanded quite a lot from 2008 through early 2014, and then, we retracted in the second half of 2014 and 2015. And then, as we've just reported, first half of this year, production is up again. We try to flex with demand.

[Aaron Smith:]

Okay. Thank you, Mr. Fifer.

[Operator:]

Thank you. We have a follow-up from Brian Rafn from Morgan Dempsey. Your line is open.

[Brian Gary Rafn:]

Short line. Give me a sense, Chris, if I look back at the 10-K, you list 115 guys in the research and development. Is that your engineering design team or is that like Six Sigma guys or metallurgists?

[Christopher John Killoy:]

Brian, that's everyone. That includes all of them, that's the core engineers that are working in all three factories as well as some of our R&D folks.

[Brian Gary Rafn:]

I thought you had some lab hidden some place or something, some skunk works or what I didn't know about. All right, that's good. What's been your success to sell-through on the Silent-SR suppressor, maybe a little highlight on the ammunition, and then the knives, the CXRT knives or whatever as accessories?

[Christopher John Killoy:]

Okay. I'll try to hit all three there, Brain. On the silencer product line, again, one of the unique things about Class III items is the licensing requirements that go along with that, because we sell through that product through two-step distribution, we've got a long delay as it goes to distributors, then to retailers, and then ultimately to consumers. And in fact, it's probably just in the last week or so that we are seeing the very first product move from the retailer to the ultimate consumer based on the licensing requirements that are required at each step of the way. So gauging demand on that product has been a little tough until we get some more out in the marketplace. The second question, if you would, Brian, was the...

[Brian Gary Rafn:]

Ammunition?

[Christopher John Killoy:]

Oh, ammunition. We're seeing a little better ammunition availability on 22's, but there are still a lot of people chasing that, and it does seem like some of the ammo manufacturers have indeed responded to that demand, but again their lead times to ramp up are long as well.

[Brian Gary Rafn:]

Okay. Last year, correct me, if – well, go ahead – the knives too, yes.

[Christopher John Killoy:]

Yeah, the last one on Columbia River Knife & Tool, they're a great licensing partner of ours, and we do sell some of their product on our ShopRuger website, but that is a licensing arrangement that we have with Columbia River, as we do with several other licensees. And they're doing a great job representing Ruger with the brand and through their own channels, and that so again a licensing relationship rather than something beyond that.

[Brian Gary Rafn:]

Okay. Correct me, if I'm wrong, Chris. Last year, I think you guys had a seasonal marketing, some discount promotions, I think it was 10 rifles, 11th one free for the fall retailers, some of these retailer shows, is that something that you're going to do in 2016?

[Christopher John Killoy:]

Right now, Brian, last year, we actually had two rounds of fall programs in the January, February time period, and again in the summer period. This year, we had the full round in January, February, and we have a modified offering this summer. We really are focusing only on the long guns, our Centerfire Americans, our Rimfire Americans, and our 10/22 product line are the only programs we have in place this summer. And the next year, of course, going into January, we would anticipate a full line of product offerings to retailers.

[Brian Gary Rafn:]

Okay. And then any updates on the mini-foundries up at Newport? I think you guys are running two, any kind of – versus the main integrated mill?

[Christopher John Killoy:]

Brian, we are running two, and they are going very well. We had some great labor efficiencies coming out of there, and the folks at Pine Tree Castings has done a great job with some really exciting new technology, as it comes to wax and shell as well as the drying technologies that they're using. But of late, we think that the right approach rather than a third mini-foundry might impact be a hybrid approach, where we retain the capacity of things like our larger furnaces in the main foundry and introduce some of the technology we've learned from the mini cells (20

[Brian Gary Rafn:]

Got you. Got you. No, I appreciate that. The metal injection molding that you guys have at Earth, down in Missouri, I think. Have you guys incrementally added anymore kind of vertically integrated content and producing parts yourselves from that, since its purchase?

[Christopher John Killoy:]

I'm not sure it's changed our approach to design, because one of the things our engineers are always looking for is the best process for the product we're working on. But when we – they have been very helpful for some rapid prototyping efforts on MIM parts, and so they are one of our suppliers for the MIM parts that we use in many of our product lines.

[Brian Gary Rafn:]

Okay. Any head count additions, hiring? You guys talked about adding capacity, you talked about robust demand exceeding capacity, does that also included head count or are you strictly talking machinery?

[Christopher John Killoy:]

Well, we're certainly going through normal attrition and looking to add folks where it makes sense. We've increased the hours and the overtime for lot of our folks, which is – one of the things, we always work to flex with demand. The other one is our plant at Mayodan, you were down there recently, when you saw on the analysts tour, Mayodan continues to add to their head count. They recently had a hiring fair and did very well with that, so we're getting some great folks applying for the positions at Ruger in all three of the factories.

[Brian Gary Rafn:]

Okay. That's good for me. Thanks, Mike – or thanks, Chris.

[Operator:]

We have a follow-up from Brian Rafn with Morgan Dempsey. Your line is open.

[Brian Gary Rafn:]

I will keep going. Chris, CapEx budget for this year, what your thoughts?

[Christopher John Killoy:]

Brian, we are looking to – estimate right now is about $30 million.

[Brian Gary Rafn:]

Okay. And primarily for new product development?

[Christopher John Killoy:]

Yes, sir.

[Brian Gary Rafn:]

Yeah. How was that – maybe you won't share it, how was that allocated across Newport, Prescott and Mayodan?

[Christopher John Killoy:]

Well, we don't disclose the split by location, but all of our factories have some exciting projects going on. So, there's work going on in all three with new products right now, to be honest.

[Brian Gary Rafn:]

Okay. As you – more of a strategic question, Chris. So, as you guys go forward, Newport, Prescott, Mayodan, are those plants going to take on – like, when I think of Prescott, I think of pistols; when I think of Newport, I think of rifles and revolvers; and then the modern sporting rifle in Mayodan. Are you going to see that type of product line dedication or do you really want a product depending on where your engineers are and where your specialties are in design?

[Christopher John Killoy:]

Yeah. In the old days, it used to be very specific, where it was always rifles and revolvers were in Newport, pistols were always in Prescott. But we've gotten away from that, and we're approaching with the best mix, both from engineering and capacity. And so, we try to balance that out as we go forward. And I think you'll see all three plants having a potentially a more diverse product offering coming out of them. It just depends on where the engineers are, what's on their plate, and what the next project in the hopper is.

[Brian Gary Rafn:]

All right. Hey, best of luck, guys. Thank you so much.

[Christopher John Killoy:]

Thanks, Brian.

[Operator:]

Thank you. We have a follow-up from Aaron Smith with CNNMoney. Your line is open.

[Aaron Smith:]

Thanks guys for taking my call earlier. I just had a follow-up question. I know you've talked a little bit about the kinds of guns that have been very popular, some of the new products that have been selling very well. And could you tell me a little bit about the strength in sales in handguns versus AR-15 style guns, how has that been over the last quarter?

[Michael O. Fifer:]

Aaron, we don't actually disclose those kind of breakdowns.

[Aaron Smith:]

Okay. Thanks anyhow.

[Operator:]

Thank you. I'm showing no further questions. I'd like to turn the call back over to Michael Fifer for closing remarks.

[Michael O. Fifer:]

In closing, I would like to thank all of you for your continued interest in Ruger. And I would like to thank the 2,200 plus dedicated folks on the Ruger team, who work hard every day to deliver American product to our loyal customers. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.