Sturm, Ruger & Co. Management Discusses Q2 2012 Results - Earnings Call Transcript

Sturm, Ruger & Co. (RGR)

Q2 2012 Earnings Call

August 02, 2012 9:00 am ET

Executives

Michael O. Fifer - Chief Executive Officer, President and Director

Kevin B. Reid - Vice President and General Counsel

Thomas A. Dineen - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Analysts

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Mike Greene - The Benchmark Company, LLC, Research Division

James Barrett - CL King & Associates, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Sturm, Ruger Earnings Conference Call. My name is Darcell, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Michael Fifer. Please proceed.

Michael O. Fifer

Good morning. Welcome to the Sturm, Ruger & Company Second Quarter 2012 Conference Call. I would like to start with a reading of the caution on forward-looking statements by Kevin Reid, our General Counsel, and then I will give you a quick overview of the second quarter and we can get right into your questions.

Kevin B. Reid

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, 2011, and Forms 10-Q for the first and second quarters of 2012. Copies of these 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. Furthermore, the company disclaims all responsibility to update forward-looking statements. Mike?

Michael O. Fifer

Thank you, Kevin.

Financial results. For the second quarter of 2012, net sales were $119.6 million and fully diluted earnings were $0.91 per share. For the corresponding period in 2011, net sales were $79.6 million and fully diluted earnings were $0.56 per share. This represents year-over-year sales growth for the quarter of 50% and earnings growth of 63%.

For the first half of 2012, net sales were $231.9 million and fully diluted earnings were $1.71 per share. For the corresponding period in 2011, net sales were $155.1 million and fully diluted earnings were $0.99 per share. This represents sales growth for the first half of 2012 of 50%, and earnings growth of 73%. In both the second quarter and the first half of 2012, our earnings growth exceeded our sales growth, and we're very proud of that.

New products. New product introductions remained a strong driver of demand and were $87.8 million or 38% of sales in the first half of 2012. As a reminder, we define new products as only those that were introduced in the past 2 years, and we include only major new products and not minor line extensions or additional calibers. The major new products introduced in the first half of 2012 include the 10/22 Takedown rifle, the Ruger American Rifle, the SR22 pistol and the 22/45 Lite pistol. To reiterate, more than 1/3 of our year-to-date sales were products that did not exist 2 years ago. This is a great achievement for our engineers and another testament to the importance of new product development.

Sell-through. The demand for Ruger products in the first half of 2012 is very strong as evidenced by the 59% growth in estimated sell-through of Ruger products from the independent wholesale distributors to retailers. We believe that some of this demand was attributable to political and economic factors that favorably impacted the entire firearms industry as evidenced by the 21% increase in the National Instant Criminal Background Check System background checks, which we call NICS. We believe that this -- our growth substantially outpaced the growth in NICS checks because of the popularity of our new products.

Inventory and production. In response to the strong demand and the new products that were added in the first half of 2012, we increased our unit production by 52% from the first half of 2011. This increase in production would not have been possible without our investment of $27 million in capital expenditures in the past 4 quarters. These capital expenditures exceeded depreciation by approximately $13 million during this period, which represented a 7% increase to our capital equipment base. Our commitment to continuous improvement through the implementation of lean business practices enabled us to leverage this investment to achieve the 52% increase in unit production. Despite the significant increase in production, our finished goods inventory decreased slightly during the first half of 2012.

Our independent wholesale distributors' inventory were reduced by 50% or 68,000 units during the same period as retailer demand pulled Ruger product through the channel. We believe that both Ruger and our independent distributors would benefit by having more finished goods in inventory to allow for a rapid fulfillment of demand. Our goal is to replenish -- let me say this, our long-term goal is to replenish our finished goods inventory in future periods to levels that would better serve our customers. This replenishment could increase the value of finished goods inventory by as much as $15 million from the current level, but try as we might, I don't think it will happen too soon.

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