Sturm, Ruger & Company, Inc. (RGR)

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Sturm, Ruger & Co. (RGR)

Q4 2012 Earnings Call

February 28, 2013 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

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

James Barrett - CL King & Associates, Inc., Research Division

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

Raymond Asmar

William Chester Waller - M3F, Inc

Chris Harrell

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the 2012 Sturm, Ruger Earnings Conference Call. My name is Lacey, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Michael Fifer, President and CEO. Please proceed.

Michael O. Fifer

Welcome to the Sturm, Ruger & Company Year-End 2012 Conference Call. Although this is obviously a call to discuss financial results, I want to take a moment to mention Sandy Hook. All of us at Ruger are deeply saddened by the horrible criminal events that took place in Newtown, Connecticut. Newtown is only a short distance from our headquarters, and we have employees who live around Newtown who have family, friends and acquaintances that were affected. Our thoughts and prayers go out to those families and to the victims of this terrible tragedy.

Next, I'd like to ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements, which will be followed by a quick overview of 2012, including the fourth quarter, and then we can get right into your questions. Kevin?

Kevin B. Reid

Thanks, Mike. We want to remind everyone that statements made in the course of this presentation 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, 2012, and Forms 10-Q for the first, second and third quarters of 2012. Copies of these documents may be obtained from the SEC or through the company's website at www.ruger.com. Furthermore, management disclaims all responsibility to update forward-looking statements. Mike?

Michael O. Fifer

Okay. Well, starting with our financial results. For 2012, net sales were $491.8 million, and fully diluted earnings were $3.60 per share. For the corresponding period in 2011, net sales were $328.8 million, and fully diluted earnings were $2.09 per share. This represents year-over-year sales growth of 50% and earnings growth of 77%.

For the fourth quarter of 2012, net sales were $141.8 million, and fully diluted earnings were $1 per share. For the corresponding period in 2011, net sales were $93.2 million, and fully diluted earnings were $0.54 per share. This represents year-over-year sales growth for the fourth quarter of 52%, and earnings growth of 88%.

Next, we'll talk about new products. Our new product introductions remained a strong driver of demand and were $182 million or 38% of firearm sales in 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 product introductions and not minor line extensions. The major new products introduced in 2012 included: the Ruger American Rifle, the 10/22 Takedown rifle, the SR22 pistol, the 22/45 Lite pistol and the Single-Nine revolver. In addition to these new products, at the end of December 2012, we launched the SR45 pistol and the LC380 pistol.

Next, we'll talk about sell-through. Demand for Ruger products in 2012 remained very strong as evidenced by the 63% growth in estimated sell-through of Ruger products from the independent wholesale distributors to retailers. We believe that the strong demand for our products was due to our continued practice of introducing innovative and exciting new products, our increased manufacturing capacity and greater product availability and the overall increase in the firearms industry, which was largely attributable to new shooters joining the ranks of nonowners and the current political environment.

The 28% increase in National Instant Criminal Background Check System, or NICS, background checks as adjusted by the National Shooting Sports Foundation is indicative of this overall growth. 2012 was the fifth consecutive year that our growth and estimated sell-through from our independent distributors to retailers outpaced the growth in adjusted NICS checks.

Next, we'll talk about inventory and production. In response to the strong demand and the new products that were launched in 2012, we increased our unit production by 52% from 2011. To achieve this increase in production in 2012, we reinvested $27 million, approximately 1/3 of the cash generated by operations, back into the company in the form of capital expenditures. These capital expenditures exceeded depreciation by approximately $13 million during the year, 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.

The company's finished goods inventory decreased slightly in 2012. Our efforts to rebuild safety stock have again been outstripped by increased demand. Despite the increased shipments, our distributors' inventories also decreased by 76,000 units in 2012. This is a compelling indication of a strong retail demand for our products.

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