Sturm, Ruger & Co. (RGR) Michael O. Fifer on Q2 2016 Results - Earnings Call Transcript

| About: Sturm, Ruger (RGR)

Sturm, Ruger & Co., Inc. (NYSE:RGR)

Q2 2016 Earnings Call

August 03, 2016 9:00 am ET

Executives

Michael O. Fifer - Chief Executive Officer & Director

Unverified Participant

Christopher John Killoy - President, Chief Operating Officer & Director

Analysts

Brian Gary Rafn - Morgan Dempsey Capital Management LLC

Aaron Smith - CNNMoney.com

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 - Chief Executive Officer & Director

Good morning, and welcome to the Sturm, Ruger & Company second quarter 2016 conference call. I would like Patricia Shepherd (00:37), our Assistant General Counsel, to read the caution on forward-looking statements, which will be followed by an overview of the second quarter and our recent news, and then we will answer questions. Patricia (00:49)?

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 - Chief Executive Officer & Director

Thank you, Patricia (02:01). The Ruger Take Action campaign. On Tuesday we announced the Ruger Take Action campaign, which includes a $5 million challenge grant to benefit the NRA's Institute for Legislative Action, the NRA-ILA.

We hope this call-to-action inspires our customers and all freedom-loving Americans to take action in support of the Second Amendment, especially in the month leading up to the November election. Our call-to-action includes campaigns to encourage our customers to contact their senators, representatives and other influential politicians to support the NRA by purchasing a Ruger firearm as we extended our promise to donate $2 to the NRA-ILA for every gun sold through the November elections, and to make a financial contribution to the NRA.

This is where our challenge grant comes into effect. Ruger will match contributions to the NRA-ILA dollar for dollar up to $5 million in the aggregate, between now and the November elections. And perhaps, most importantly, we are encouraging our customers and all Americans to have their voice heard and to vote in the November elections.

I've no doubt about it, the makeup of the Supreme Court is on the ballot this November and, therefore, the Second Amendment is also firmly on the ballot. We think the NRA, through its Institute for Legislative Action, is best positioned to support the key races in the upcoming elections that will affect our firearm rights for decades to come.

Succession plan; last night, we formally announced our CEO succession plan that has been in the work for a few years. On May 9, 2017, the date of our next Annual Meeting of Shareholders, I will retire, and Chris Killoy will succeed me as CEO.

I have worked closely with Chris for 10 years, and he is well-qualified to become Ruger's fourth CEO. He's been very successful in his 27 years in the firearms industry, and has justifiably earned a great reputation. Our employees, customers and shareholders will be in good hands. And post-retirement, I look forward to supporting Chris and the rest of the team, when I assume new responsibilities on the board of directors.

Let me turn this over to Chris now, and he will discuss the company's operations in the second quarter.

Christopher John Killoy - President, Chief Operating Officer & Director

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: one, the increase in overall industry demand, fuelled in part by the current political climate; two, strong demand for certain new Ruger products; and three, increased production of several products and strong demand.

The increased sell-through of our products in 2016 compares favorably to corresponding increases in the adjusted NICS checks of 15% in the second quarter of 2016, and 16% in the first half of 2016. As a reminder, the adjusted NICS checks are the National Instant Criminal background Check System background checks, as adjusted by the National Shooting Sports Foundation, and are often used as a proxy for retail demand.

Production and inventory. Twice a month, we review the estimated sell-through of our products from the independent wholesale distributors to retailers, and look at the inventory levels at the independent wholesale distributors and the company by product family. These reviews, coupled with some capacity expansion for products and strong demand, resulted in increased total unit production of 21% in the first half of 2016 compared to the first half of 2015.

During the second quarter, our finished goods inventory increased 26,000 units, and the inventory of Ruger firearms at the independent wholesale distributors increased 50,000 units. This inventory growth was principally in seasonal products that will be in greater demand during the latter half of the year and is typical of our inventory strategy at this time of the year.

During the third quarter, we also hope to build inventory of products that we believe will be in strong demand after the November elections. We are working hard to increase manufacturing capacity for these products, but successfully building that inventory may be challenging, as current demand apparently continues to exceed our capacity, even as we work to increase it.

New product development. New products represented $103 million or 30% of firearm sales in the first half of 2016. New product sales include only major new products that were introduced in the past two years, including the American Pistol, the Precision Rifle, the AR-556 modern sporting rifle, and the LC9s pistol. New product development remains a top priority. We recently launched the Ruger SR1911 Lightweight Commander-Style pistol and 9-millimeter, and the Ruger 10/22 Takedown Lite rifle. We look forward to more launches in the second half of 2016.

Balance sheet. At July 2, 2016, our cash and cash equivalents totaled $103 million, an increase of $34 million from December 31, 2015. Our current ratio was 2.8 to 1, and we have no debt. At July 2, 2016, stockholders' equity was $255 million, which equates to a book value of $13.27 per share.

Cash flows. In the first six months of 2016, we generated $66 million of cash from operations. We reinvested $11 million of that back into the company in the form of capital expenditures. We estimate the capital expenditures in 2016 will be approximately $30 million. Our primary focus for investment will be new product development.

Cash returned to shareholders. In the first half of 2016, the company returned $16 million to its shareholders through the payment of dividends. Our board of directors has declared a $0.49 per share quarterly dividend for shareholders of record as of August 12, 2016, payable on August 26, 2016. This will return an additional $9 million to our shareholders. As a reminder, our quarterly dividend is approximately 40% of net income.

Those were the highlights for the second quarter of 2016. Operator, may we please have the first question?

Question-and-Answer Session

Operator

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

Brian Gary Rafn - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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

Christopher John Killoy - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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

Brian Gary Rafn - Morgan Dempsey Capital Management LLC

Okay. Thanks.

Operator

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

Aaron Smith - CNNMoney.com

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 - Chief Executive Officer & Director

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 - CNNMoney.com

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

Michael O. Fifer - Chief Executive Officer & Director

The lawful commerce in arms.

Aaron Smith - CNNMoney.com

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 - Chief Executive Officer & Director

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 - CNNMoney.com

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 - Chief Executive Officer & Director

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 - CNNMoney.com

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

Ammunition?

Christopher John Killoy - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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

Christopher John Killoy - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 (20:21), and that would allow us some greater flexibility for things like use of revert, the recycling of metal that we process through our cut-off – cut-out procedures, and so we think that might be the approach rather than a third true mini-foundry.

Brian Gary Rafn - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - Morgan Dempsey Capital Management LLC

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

Christopher John Killoy - President, Chief Operating Officer & Director

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

Brian Gary Rafn - Morgan Dempsey Capital Management LLC

Okay. And primarily for new product development?

Christopher John Killoy - President, Chief Operating Officer & Director

Yes, sir.

Brian Gary Rafn - Morgan Dempsey Capital Management LLC

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

Christopher John Killoy - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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 - President, Chief Operating Officer & Director

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 - Morgan Dempsey Capital Management LLC

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

Christopher John Killoy - President, Chief Operating Officer & Director

Thanks, Brian.

Operator

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

Aaron Smith - CNNMoney.com

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 - Chief Executive Officer & Director

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

Aaron Smith - CNNMoney.com

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 - Chief Executive Officer & Director

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.

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