Nov 2, 2016
Executives
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Kevin B. Reid - Sturm, Ruger & Co., Inc.
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Analysts
Brian Gary Rafn - Morgan Dempsey Capital Management LLC Aaron Smith - CNNMoney
Operator
Good day, ladies and gentlemen, and welcome to the Sturm, Ruger Third Quarter 2016 Earnings Conference Call. As a reminder, this conference call is being recorded.
And I would now like to introduce your host for today's conference, Mr. Michael Fifer, Chief Executive Officer.
Mr. Fifer, you may begin.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Good morning. Welcome to the Sturm, Ruger & Company third quarter 2016 conference call.
We will start today by having Kevin Reid, our General Counsel, give the caution on forward-looking statements. Following this, Chris Killoy, our President and Chief Operating Officer, will give an overview of the third quarter.
And then, Chris and I will answer your questions. Kevin, please start us off with the caution.
Kevin B. Reid - Sturm, Ruger & Co., Inc.
Thanks, Mike. We want to remind everyone that statements made in the course of this call 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 Forms 10-Q for the first, second and third quarters of 2016.
Copies of these documents may be obtained by contacting the company or the SEC or the company website at www.ruger.com or, of course, the SEC website at www.sec.gov. We 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, 2015 and our Forms 10-Q for the first three quarters of 2016, which also are posted to our website. Furthermore, the company disclaims all responsibility to update the forward-looking statements.
Mike?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Thank you, Kevin. Chris will now discuss the company's operations in the third quarter.
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Thanks, Mike. Financial results.
For the third quarter of 2016, net sales were $161.4 million, and diluted earnings were $1.03 per share. For the corresponding period in 2015, net sales were $120.9 million, and diluted earnings were $0.62 per share.
For the first nine months of 2016, net sales were $502.5 million and diluted earnings were $3.48 per share. For the corresponding period in 2015, net sales were $398.7 million and diluted earnings were $2.33 per share.
Our third quarter 2016 EBITDA was $39 million or 24% of sales, a 44% increase compared to our third quarter 2015 EBITDA of $27 million or 22% of sales. EBITDA for the first nine months of 2016 was $129 million or 26% of sales compared to $96 million or 24% of sales in the comparable period in 2015.
Demand. 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 21% in the third quarter of 2016 and 19% in the first nine months of 2016 from the comparable prior-year periods.
We believe the increase in estimated sell-through of the company's products from the independent wholesale distributors to retailers is attributable to stronger than normal seasonal industry demand, likely bolstered by the political campaigns for next week's elections; strong demand for certain new products; greater availability of rimfire ammunition, which spurred demand for our 10/22 rifle and other rimfire firearms late in the third quarter; and increased production of several products in strong demand. The increased sell-through of our products in 2016 compares favorably to the corresponding increases in the adjusted NICS checks of 15% in the third quarter of 2016 and 16% in the first nine months of 2016.
As a reminder, the adjusted NICS checks or 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. We also look at the inventory levels at the independent wholesale distributors and the company by product family.
These reviews, coupled with capacity expansion for products and strong demand, resulted in increased unit production of 20% in the first nine months of 2016 compared to the comparable period in 2015. During the third quarter, our finished goods inventories increased approximately 20,000 units and the inventory of Ruger firearms at the independent wholesale distributors increased approximately 54,000 units.
This inventory growth is typical of our inventory strategy at this time of year. However, inventory growth of certain products at distributors may have been amplified in anticipation of a possible post-election surge in demand.
New product development. In September, we launched three new products that were very well received: the Mark IV pistols, similar in design to the classic Mark III designs, but with a greatly simplified one-button takedown; the LCP II pistol, a major re-design of the popular LCP pistol that was introduced in 2008; and the American Compact pistols, an expansion of the American pistol family that we launched in 2015.
New products represented $161 million or 32% of firearm sales in the first nine months of 2016. New product sales include only major new products that were introduced in the past two years.
In addition to the three firearms that were launched this quarter, new product sales include the American pistol, the Precision Rifle, the AR-556 modern sporting rifle and the LC9s pistol. The new product sales percentage is likely to decrease next quarter, as sales of the AR-556 and the LC9s will no longer be included among the new products.
Balance sheet. At October 1, 2016, our cash and cash equivalents totaled $101 million, an increase of $32 million from December 31, 2015.
Our current ratio was 2.7:1, and we have no debt. At October 1, 2016, stockholders' equity was $266 million, which equates to a book value of $14 and $0.02 per share.
Cash flows. In the first nine months of 2016, we generated $85 million of cash from operations.
We reinvested $23 million of that back into the company in the form of capital expenditures. We estimate that 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 nine months of 2016, the company returned $25 million to its shareholders through the payment of dividends. Our board of directors has declared a $0.41 per share quarterly dividend for shareholders of record as of November 18, 2016, payable on November 25, 2016.
This will return an additional $8 million to our shareholders. As a reminder, our quarterly dividend is approximately 40% of net income.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Thank you, Chris. Those were the highlights for the third quarter of 2016.
Operator, may we please have the first question?
Operator
Absolutely. Our first question comes from the line of Brian Rafn with Morgan Dempsey Capital Management.
Your line is open.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Good morning, guys. Fabulous quarter.
Can you give us a sense of October into November, if the pace of sell-through and demand was on par with summer, if you can give us any kind of any forward visibility?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Brian, you know it's our policy not to do that.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
I'd tell you, If you look back at what happened eight years ago, there was, in my opinion, a surprising number of people who are actually surprised by the outcome at the last minute and then scrambled through November to try to get any product. And one of the interesting things about this is that the – it's a terrible time to be a small retailer once there's a surge because pretty much only the big established independent retailers and the chains will get product and the little retailers will get starved.
So, we always hope and we, through our sales force, try to encourage as many of the little retailers as possible to load up early through the summer. And I think, if you look at the Q3 sell-through numbers, somebody was stocking up.
We're not sure who. But hopefully, the little guys did because the big guys will get plenty of inventory going forward.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yes – no, I appreciate that color, Mike. In the last, I'd say, five, six, seven years, the holiday, Black Friday, has become a big deal in the gun area and I'm just wondering if you guys are doing anything or planning anything, packaging any special offers for the wholesalers?
Or is that really more of a retail concept?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Well, it's retail, and we have folks who work directly with retailers, our field sales force and then a couple of key account guys. And we will go out of our way to get an unfair market share of (10:28)
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. All right.
All right. As you looked at the very strong summer surge, are you able to look through and see if there was a decent sell-through in stock up (10:42) for the hunting season, primarily long rifles?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Yes. Brian, what we saw was a -- we kept waiting for the hunting season to kick in.
And really, the hunting season this year was fairly weak across the board. Bolt action rifles, of course, are most impacted in the case of Ruger.
But we thought that the hunting season never really materialized as most people thought it would. A lot of consumers are spending their discretionary income dollars on concealed carry products and modern sporting rifles.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
All right. With that point, Chris, do you see – and it would be your anecdotal guess as well as anybody else's.
Do you see perhaps that the hunting season may now, for an infield hunter, capture more of the modern sporting rifle versus the old-fashioned long rifle?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Well, we're definitely seeing more hunters go with the modern sporting rifle category products. We recently launched a .450 Bushmaster version of our – one of our bolt action rifles, particularly for use in states like Michigan, where straight-walled cartridges are needed.
But we're also seeing the MSRs being used in hunting seasons, where they're permitted throughout the country. But I think it's just a question that the hunting season this year just was a little softer than most people anticipated it might be.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. Okay.
And then, I'll just ask one more and get back in line. Anything feedstock, raw materials inflation, steels, alloys, some of your different woods the walnut maple, bead ceramic glaze clays, wax or do you see anything pricing inflation in the raw materials?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Not really in terms of pricing. High-quality walnut always remains tough to get, and that's always a challenge for some of our higher end products like number ones, but are not seeing any material impact from a pricing standpoint.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
All right. Thanks, guys.
Operator
Thank you Our next question comes from the line of Aaron Smith with CNNMoney. Your line is open.
Aaron Smith - CNNMoney
Hi, Mr. Killoy.
Thanks for taking my call. I had a question for you about the political campaign, which you were just talking about as being something that has bolstered sales.
And of course, that's a story that's been going on with all gun manufacturers for quite some time. Do you – does your company have any kind of sales projections based upon which candidate will win next week?
If Clinton wins, are you projecting more sales than if Trump wins?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Mr. Smith, this is Mike Fifer.
As you heard...
Aaron Smith - CNNMoney
Hi, Mr. Fifer.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
As you heard my first answer to Brian Rafn, we don't offer any forward-looking guidance. We don't make guesses about the future or anything else.
To our shareholders, I would tell you that we have done extensive contingency planning. And so, sort of, for any combination of who wins the White House, who wins the Senate, who wins the House, we have a plan in place and we will act decisively and accordingly.
Aaron Smith - CNNMoney
Thank you, Mr. Fifer.
Operator
Thank you. And we do have a follow-up question from Brian Rafn with Morgan Dempsey Capital Management.
Your line is open.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. A question for, I don't know, either Mike or Chris.
Under Reagan, Ronald Reagan made it a policy to run kind of sequential budget deficits and we've been running it ever since. Obama kind of put in the executive order.
And I'm wondering, from a strategy standpoint, without maybe detailing some of the thought, whether you guys are kind of prepared with your legal counsel or discussions with the NRA-ILA or manufacturing trade associations, how you might combat universal liability or some executive order to just blanketly ban modern sporting rifles?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Well, Brian, there's a couple of things going on in that arena. If you're familiar what's happened in Massachusetts, the Attorney General of Massachusetts has been very aggressive, basically stopping the sale of modern sporting rifles in the state.
Our trade association, the National Shooting Sports Foundation, is active in putting some litigation together with some Massachusetts retailers and we rely heavily in the NSSF to help us navigate some of those waters.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay, okay. All right.
Good. Your bank revolver of $40 million LIBOR plus 200 bps, I think, expires on June 15, 2017.
With the possibility – obviously, you (15:30) generate a lot of internal cash flow. Are you going to expand that, roll that over or what's – where is that going?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Brian, its Mike. I would expect that we would just renew that as usual.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay, okay. You talked in the past, Mike, about getting – you're trying to get some discipline in some relation (15:52) with your wholesalers that you can't run the business with 30 turns, and I think your number was 6 or 8.
Are your discussions having some validity here? Or as we kind of ramp up with, again, stronger markets like we had in 2011, 2012 and 2013, how are those discussions going with your wholesale distributors?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Well, Brian, we just returned last week from the meetings we hold annually with our distributors at the National Association of Sporting Goods Wholesalers Expo. We were in Kansas City for the week.
And we had meetings with all of our key customers at the wholesale level. All of them understand the need to maintain inventory.
And as a reminder, Ruger is one of the very few that is truly two-step in terms of manufacturers within our channel. Since we only work with wholesale distributors, we don't sell the buying groups or the big-box stores direct.
So, they understand that our inventory is something that they need to stock, and they have, by and large, stepped up in the six to eight turns understanding an execution. So, we were pretty pleased with their performance.
And just as on the side, at the Expo last week, we received I think for the 10th year in a row the Manufacturer of The Year from our wholesalers and also the Innovator of the Year Award. And then, also, Mike Fifer earned the Chairman's Award with some personal recognition, which is also nice to see.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. Awesome.
Now, you guys certainly do a great job in that. Any – Chris, any additional lines?
I think I asked last quarter about put a launch as sales (17:34) installed in Mayodan.
Christopher John Killoy - Sturm, Ruger & Co., Inc.
We've got a couple of things going on with Mayodan that are in transition. For example, right now, we're making the American Centerfire Bolt-Action Rifles in both plants and that's been very successful as far as the folks in Mayodan being able to add that to their facility.
And over time, we will be shifting some of that – some more of that production down to Mayodan.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. With the strong line you guys have in the modern sporting rifle, the SR-556 SR-762, the AR-556, the takedown, are you seeing any more incremental sales with police SWAT teams?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Brian, I think we're getting the most interest. We have some – we have done some law enforcement sales on the AR-556 because it hits a very attractive price point as great quality product.
But we're also seeing interest on the precision rifle, the Ruger precision rifle as we've got TNE samples out with several law enforcement agency and that seems to really have resonated with the LA community as well as our consumers.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Does that precision rifle have any traction with the Special Forces?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Not that we've seen on the official side, we've had inquiries from quite a few folks in the special ops community that have bought them personally and take an interest in the gun. So, we know we're making some inroads – surprisingly long-term inroads there as well.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Out of the $101,363 you guys have in cash, where is that invested?
What are you doing short term?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Yeah. Brian, we just have to invest the cash.
Very conservative, not too many things special with it.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Are we – Chris, are you still running two mini-foundries with the main integrated?
And then, are there any thoughts of maybe someday putting a mini-foundry down into the Mayodan or Prescott?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Brian, right now, we're about 90% operational on the second mini-foundry in Newport. Just a few more things to take care of there, but that's working out very well for us.
But at least, at this point, we've made the decision to keep the legacy foundry intact and work on some efficiencies that we hope to gain there, one, from a capacity standpoint; and, two, it allows us some good leverage long term. So, we'll stay with the two mini-foundries.
I don't think we'll be putting any foundries in any other factors at this point time, but that could change down the road.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. And then, the PolyCase ARX Ammunition, I'm just wondering how – what's been kind of the sell-through or the potential there or how has that been selling?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Brian, its Mike. It's gaining a lot of attention.
It's got a number of magazine articles and things and a number of retailers are starting to carry it. It's probably more expensive than your average practice ammo.
It's a good carry ammo. And so, that, by definition, is a smaller segment of the market.
So, it's kind of meeting our expectations, but I would say that it's not material at this point.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. And then, on that point, Mike, are you continuing to push these kind of joint ventures like with the Columbia River Knife's and the Ammunition?
Is that something you're always doing, or is that kind of episodic hits and starts? (21:06)
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Well, Brian, we're always looking for – if we can find the right licensing partner like we did with Columbia River Knife & Tools, we recently had a very small run, you may have seen, of commemorative ammo with Hornady. It was a one-time deal with commemorating the 100th anniversary of our founder, William B.
Ruger, Sr. And so, that's – some of those things will be short in and out activities like that, and some will be longer-term relationships like we have with CRKT on the knives and Umarex on the airgun products.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. And then, just one more, Chris.
I think, in 2015 fourth quarter, we saw a nice order booking number. I think it was like 646,000 or something.
Are you seeing more of a – from booking standpoint more of spreading bookings out over the year versus having that giant pole shot (21:59) lump sum in the first quarter, or do you think you're always going to see that big first quarter?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Brian, when I joined the company in September of 2006, I went to my first wholesalers meeting the next month and discovered that we are accepting orders for the whole year all at once. And so, ever since then, the last 10 years has been a continual education process that we don't do that, that it's not good to place silly large orders and much better to order once a week, what you need and we'll ship it to you once a week and it's a much better system.
Nonetheless, that's a continuing education process because people have been in the business for a while. Remember that, if you wanted one, you order 10 from four different suppliers and hopefully you got the one you wanted.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Right.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
And it's a very hard, hard thing to break. We've been working on it.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Well, you've done a great job, Mike.
So, I appreciate it. Good job, guys.
Thanks.
Operator
Thank you. And we have a follow-up from the line of Aaron Smith with CNNMoney.
Your line is open.
Aaron Smith - CNNMoney
Thanks again. Just wanted to ask about the AR-556, still listed as a new product for this last quarter, and it looks like that contributed to the rise in sales, that being one of the new products that contributed to the rise in sales along with a couple of, I think, it was the LC9 and a couple of compact pistols, which are used in concealed carry.
Do you have any projections regarding the trend of either AR-15 or concealed carry pistols going forward in this political climate that we're in right now? Both of those products have done very well for a lot of manufacturers and retailers over the last couple of years.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
As I said earlier, Aaron, we don't have -- we don't offer any projections. If you go back and look at historical numbers in the industry, you'll find that those products that are most at risk from political fix are the ones that have the greatest volatility when the volume level of the politics increases, their sales skyrocket.
And when it tapers off, those sales plummet. And a product that's likely never to be affected by the politics, for example, a bolt action rifle, an old cowboy single action revolver, they're pretty steady.
They hardly move up or down. And so, knowing that, you can make your own predictions.
Aaron Smith - CNNMoney
All right. Thank you, Mike.
Operator
Thank you. And we have an additional follow-up from the line of Brian Rafn with Morgan Dempsey Capital Management.
Your line is open.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. Chris, Mike said in the past he's talked about a margin of safety kind of a $15 million safety stock in inventory at Ruger.
I think you guys are at 118,500 units. Are you about where you want to be relative to that safety stock or given where we are in the political cycle that you can never have enough guns?
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Brian, it's Mike. The actual number we used to put in the MD&A through the period of, I would say, 2011, 2012, 2013, even the beginning of 2014, was that if we could get in finished goods inventory to a level we are comfortable with, it would probably consume another $10 million to $15 million of cash.
That was where that number came from. That wasn't a total inventory that was from where we are to where we want it – to get to.
And of course, during the slowdown in the back half 2014 and too much of 2015, we did exactly that. And this year has followed a much more normal seasonal trend.
And so, we probably got plenty of inventory, but you can never have exactly what you want.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yes – no, I appreciate that. Chris, in the last conference call last quarter, you – I had asked you about how your design teams participate on concept to prototype and then you talked about early production.
Do those design teams work on a single product or are they dually working on multiple products?
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Brian, it depends on the scope of the project. For example, when we developed the Precision Rifle, up in Newport, we had a dedicated product team and that's all they were focused on.
And they worked with the guys we're going to be – and gals where we're going to be setting up the production line as well as sourcing product to vendors and that's all they focused on until that product was up and running. On the other hand, we have smaller launches where we'll have one engineer that may be working on two or three different things.
It's more of the line extensions. But the big projects are typically a dedicated team, and they stay focused on that through the launch
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. And then, any budget -- I guess, going through your annual budget process, I'm looking for what you think CapEx is going to be maybe for next year if you're willing to talk about it.
Christopher John Killoy - Sturm, Ruger & Co., Inc.
Brian, we haven't gone through that process yet.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Thank you, guys.
Appreciate it.
Operator
Thank you. I'm showing no further questions in queue at this time.
I would now like to turn the call back over to Michael Fifer for any closing comments.
Michael O. Fifer - Sturm, Ruger & Co., Inc.
Thank you. In closing, I'd like to thank you for your continued interest in Ruger, and I'd like to thank our 2,300-plus dedicated folks on the Ruger team who work hard every day to deliver these products to our loyal customers.
And finally, I'd like to encourage all of our customers and all Americans to have their voice heard and to vote in this week's election. There's a lot at stake.
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may now disconnect.
Everyone, have a great day.