Thank you for standing by and welcome to this Sturm, Ruger Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Chris Killoy, president and CEO. Please go ahead, sir.

Thank you. Good morning and welcome to the Sturm, Ruger & Company year-end 2023 conference call. I'd like to ask Kevin Reid, our general counsel to read the caution on forward-looking statements; Tom Dineen, our Chief financial Officer, will then give an overview of the fourth quarter and 2023 financial results, and then I'll discuss our operations in the state of the market. After that, we'll get to your questions. Kevin?

Thanks, Chris. 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 as 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 31st, 2023 and of course, the forms 10-Q for the first, second and third orders of 2023. Copies of these documents may be obtained by contacting the company or the SEC, or on the company website at ruger.com/corporate, or of course, 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 31st, 2023 and our forms 10-Q for the first three quarters of 2023, which also are posted on our website. Furthermore, the company just makes all responsibility to update forward-looking statements. Chris?

thank you, Kevin. Now, Tom will discuss the company's 2023 results.

Thanks, Chris. For 2023, net sales were $544 million and diluted earnings were $2.71 per share. For 2022, net sales were $596 million and diluted earnings were $4.96 per share. For the fourth quarter of 2023, net sales were $131 million and diluted earnings were $0.58 per share. for the corresponding period in 2022, net sales were $149 million and diluted earnings were $1.06 per share. Our profitability declined in 2023 from 2022 as our gross margin decreased from 30% to 25%. The lower margin was driven by unfavorable deleveraging of fixed costs, resulting from decreased production in sales, inflationary cost increases in materials, commodities, services, wages, energy, fuel and transportation. Our product mix shift toward products with relatively lower margins that remain in stronger demand and increased promotional costs. Our continued focus on financial discipline and the cultivation of long-term shareholder value is evident in our strong debt-free balance sheet. at December 31st, 2023, our cash and short-term investments totaled $118 million. Our short-term investments are invested in United States Treasury bills and in a money market fund that invest exclusively in the United States Treasury instruments, which mature within one year. At December 31st, 2023, our current ratio was 4.3 to 1 and we had no debt. Stockholders' equity was $332 million, which equates to a book value of $19 per share, of which $6.74 was cash and short-term investments. In 2023, we generated $34 million of cash from operations. We reinvested $16 million of that back into the company in the form of capital expenditures related to new product introductions and upgrades to our manufacturing equipment and facilities. We expect our 2024 capital expenditures to total approximately $15 million. In 2023, we returned $123 million to our shareholders through the payment of $111 million of dividends, which included $88 million in the form of a $5 per share, special dividend paid in January 2023 and the repurchase of more than 264,000 shares of our common stock in the open market at an average price of $44.71 per share, for a total of $12 million. at December 31st, 2023, approximately $75 million still remain authorized for share repurchases. Our board of directors declared a $0.23 per share quarterly dividend for shareholders of record as of March 15th, 2024, payable on March 28th, 2024. As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter to quarter. That's the financial update for 2023. Chris?

thanks, Tom. Consumer demand remains soft throughout most of 2023, likely dampened by inflationary pressure and rising interest rates leading to a 9% reduction in sales from the prior year. The estimated unit sell-through of our products from the independent distributors to retailers in 2023, decreased 7% compared to 2023, excuse me, compared to 2022. In 2023, NICS background checks, as adjusted by the National Shooting Sports Foundation, decreased 4%. Nevertheless, we remained disciplined and continued to focus on the long term. Reducing production levels were appropriate and offering only modest promotions on select product families, resisting the temptation to enhance short-term results at the expense of our long-term strategy. As a result, inventory of our products at the independent distributors decreased 39,000 units in 2023 despite the decreased demand. we are encouraged by our increased quarterly sales and profitability in the fourth quarter, and we enter 2024 with a strong debt-free balance sheet, reduced distributor inventories and a full pipeline of new products recently launched into the market, and others still under development. 2024 is an exciting year for Ruger as we are celebrating our 75th anniversary. To honor our proud heritage, we are offering commemorative firearms that will only be available this year, all of which are engraved with our 75th anniversary logo. A Mark IV target pistol featuring a fully adjustable rear site and undercut Patridge front sight and a heavy, tapered barrel. a pair of 10/22 sporter rimfire carbines, each featuring a stainless steel barrel, silver-finished receiver, polished bolt and a match-sanded butt pad, and an LCP MAX double-stack, ten-round pistol chambered in 380 Auto, featuring a stainless steel slide and a silveranodized aluminum trigger. Also, several limited at production, additions of other products will be released throughout the year. The first of these is a…

[Operator Instructions] And our first question comes from the line of Mark Smith from Lake Street. Your question, please.

Hi, guys. First question from me is just looking at the quarter here, mix impact during the quarter and maybe any impact that that had on ASP?

Hi, mark, Chris here. Yes, I think when you look at our average selling price in the quarter, kind of two things stand up. The backlog actually went up in Q4, largely based on some of the higher price models that were introduced i.e. additional Marlin Centerfire lever-actions and additional orders for the SFAR Rifle. However, the average sales price of orders received, when you look at that, went down slightly from say Q1 level and Q2, up from Q3. And that's really, because we're selling a lot of products like the repositioned LCP Max, the original LCP that we had repositioned that price. And so all that combined resulted in good unit sales, but the lower average sales price of those guns going out.

Okay. And I thought the orders looked strong here during the quarter. Is there any risk or should we be looking at, do you feel like you pulled maybe some forward from Q1, which is typically a really strong order or quarter?

Not really. We have a lot of new products launched in Q4, particularly the American Rifle Gen II and some additional Marlin SKUs that really impacted that order rate. So, the order rate was strong, but it was all things that we expect to fulfill going forward, as we go out into 2024. So, I definitely don't think there was anything pulled forward. It was really had to do with the new product launches that went out in Q4.

Okay. and then inventory, your own as well as distributor inventory went down, one of the better quarters this year and the last couple years. What's kind of your comfort level? How do you feel about where the kind of channel inventory is today?

I think we're feeling pretty good about that. Like you said, distributor inventory over the course of the year was down about 30,000. We were up about the same amount, but overall pretty balanced. And we like to target our distributors around six turns. And so right now, they're right about in that strike zone and we feel pretty good about that. We don't see any source spots in their inventory. Some of the items that we repositioned through the course of 2023 were intended to help distributors move some of their problematic inventory, where they're a little higher in certain categories than they'd like to be. and we think we were effective in doing that.

Okay. And then just looking at the expense side of things, operating expenses were a little higher than we'd expected. Anything going on there, do you feel like there's places maybe to cut going forward, or is this kind of a buildup coming into what could be a good year in '24, any insight into kind of where your expenses were and maybe anything in the outlook for 2024 would be great?

A good question. I think we saw a slight uptick from 2022, we're about where we were in 2021, if I recall on the operating expenses. A lot of that has to do with 2022. We had still for example, had not gone to the SHOT show. We had a couple expenses that were not in there versus 2023. We have a full complement of tradeshows, but there are certainly scenarios we need to look at in terms of making sure we have our expenses under control, cut some of those expenses, where we can and try to boost our profitability. That's an active effort that's underway as we speak.

Okay. And the last one, Chris, just kind of big picture as we look at historically going into an election year, we would look for pretty solid demand. As you look into your crystal ball, any thoughts on kind of where the consumer's at and demand for firearms this year?

Well, that's a good question. and when we grapple with and when we look to plan the year out. At least right now, we're seeing things fairly stable and we're not seeing any outsized demand in any particular product categories other than our new products. We're seeing things like at the recent shows at the Great American Outdoor Show in Harrisburg, Pennsylvania, Western Hunting & Conservation Expo in Salt Lake City, tremendous demand for some of our new products. So, that's very positive. But given the election year coming up, I think if there's any impact there, it'll probably be in the back half of the year. We're not seeing anything right now and I just don't know beyond that what we may see this year. Historically, some things, whether it's say we're rattling about additional regulatory impact or firearm or gun control may drive sales, but I just don't know at this point. We're not seeing anything yet.

Okay. That's fair. Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Ryan Hamilton from Morgan Dempsey. Your question, please.

Hey. good morning, everyone. Thank you for taking my calls and my questions. Could you walk me through the cadence for 2023 regarding inflation maybe – and what you're seeing in 2024?

Thanks. So…

Like I said, is it picking up? Is it – maybe where you're at or is it picking up, slowing down, maybe where you're at?

I think, we're seeing persistent price increases. We didn't see things decrease in price in our commodities and things of that nature. but we're not seeing the same level of increases as we did in the beginning of the year. So, I'd say it's fair to say it's certainly tapered off and probably stable where we are right now. Now things certainly…

How you were?

I'm more sticky than others in certain categories, certain commodities, wages and things of that nature.

And where are you being pinched? I mean, you just brought up wages as far as commodities go, where are you still being pinched the most?

Well, I think some of it's availability, some of it's in our – when we look at steel, aluminum even wood for example, the quality of the ability to get quality walnut for some of our rifles is one of those commodities that not many other manufacturers are concerned about. But that's one that to try to get quality walnut at a reasonable price is something that negatively impacts profitability or impacts the price of the firearm going out the door.

So, you're not having a hard time getting it, you're just having to pay more for it?

There are a few things we're having a hard time getting. And like I said, the wood in particular, getting good quality highly configured walnut when you're looking for it for a number one rifle or an M77 Wood Stock rifle. those are things that are harder and harder to find. And so our buyer buyers are always constantly looking for new sources and trying to make sure we're getting the best quality product we can. Because we have our own wood shops. So, we're turning those wood blanks up in Newport, New Hampshire and then putting it on our products at our factories, both in New Hampshire and North Carolina.

Got it. When looking at Marlin, it appears that you aren't fully meeting the demand that's out there. Could you get a comment a little bit on that and what you – what levers you guys can pull to maybe either get more rifles to market?

Well, as you may know this year, we turned on the 1894 line. So, the 1894 line really doubles our capacity in total marlin production. We have one line; we call a round bolt line that makes the 1895s and 336s. The other line makes the 1894s. 1894s are the 44 magnums and 357 Magnum rifles, which receiving tremendous demand, just like the originals that we launched in the 4570. That's the good news. And it's been a continuing challenge to get those ramped up to try to meet demand. The team down in Maiden is doing an awesome job. We still have room to grow and we're chasing that demand hard. We're trying to be conscious of the fact that we have to maintain quality first as we chase the demand. I mean these are quality rifles. Our customers expect them to be quality-made. And I think we're delivering on that commitment, but we've got to be careful to make sure we don't try to go too fast and deliver rifles that are not up to snuff to what our Ruger and Marlin customers are expecting.

Right. that is great news. Thanks for the color on that. And then, as I usually ask on these calls, could you touch a little bit on the accessories business and what you're seeing there?

Well, the accessories business is profitable segment for us, for sure, particularly out of our ShopRuger segment, particularly when it comes to things that we make, like our magazines, our BX-1 magazines, our BX-25 magazines et cetera. And we ran a promotion in, at the beginning of Q4 that included ShopRuger. It provided if a consumer bought a American Rifle Generation I, they were able to redeem it for $100, ShopRuger a gift card. And that helped drive both sales of the Generation Gen I American rifles before the launch of the Gen IIs. And it also helped increase sales at on our ShopRuger segment and drive traffic there, and frankly, got us a lot of new customers in the ShopRuger. So, we're very pleased with the results of that promo.

Excellent. Thanks for the time, guys and congrats on the 75 years.

Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Rommel Dionisio from Aegis Capital. Your question, please.

Good morning. Thank you. Yes, I know in your prepared comments, you talked about product mix shift in 2023 being somewhat adverse. I wonder if you could just maybe give us a feel for the strong orders you've gotten fourth quarter and the new products that you've launched, how we should think about product mix going into 2024. And as a follow-up to that I know you guys have done a great job over the years, really engineering cost out of the product line. And I wonder if you could just talk about some of the initiatives there to better position your gross margins. Thanks.

Thanks, Rommel. I wouldn't call it an adverse product mix as much as we had some lines that like you take our original LCP, the 3701 was model number. When we started to look at where the market was, where the competition was, we looked at that and said, we need to reposition a price. We have a gray gun market leading position with that gun, but we know we can get our volume back up when we reposition that model. So that's part of the actions we took on the that original LCP. We also did it with the MAX-9 and the Security-9 pistols. So that between that and then doing some things like ramping up some of the lines that we neglected during COVID when we were pushing hard on certain other segments, things like the single-action revolvers, our team up in Newport has done a great job getting that back up and running to kind of our historical levels. And so those lines while they're in a lot of demand, they're also hard to make. And they're not as high in margin as we'd like, but I would tell you that the folks are working every week we've got new kaizens going on in all factories to take costs out, reduce manufacturing costs, make the line safer for the folks working it. And so I'm optimistic that those kaizens will continue to yield results for us.

Great. That's very helpful. Thanks so much. Thanks, Rommel.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Chris Killoy, president and CEO for any further remarks.

Thank you. In closing, I'd like to start by thanking all of you for attending our call this morning and for our shareholders for their continued investment in our company. And I would like to thank our loyal customers and the 1,800 hardworking members of the Ruger team, who design, manufacture and sell rugged, reliable firearms every day in our American factories. I hope you'll be able to join us at our virtual 2024 Annual Meeting on Thursday, May 30th. Further details will become available in April. Thank you.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.