Sturm, Ruger & Company, Inc. (RGR) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Sturm Ruger Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Chris Killoy, President and Chief Executive Officer. Please go ahead.

Thank you. Good morning, and welcome to the Sturm, Ruger & Company second quarter 2017 conference call. I'd like to ask Kevin Reid our General Counsel to read the caution on forward-looking statements. Then Tom Dineen our Chief Financial Officer will give an overview of the second quarter financial results. And then I will share my thoughts on the strength [ph] of market, discussion our operations and provide an update on our organization transition. And then we'll get to your questions. Kevin, let's get started.

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 is contained from time-to-time in the company's SEC filings including, but not limited to, the company's reports on our Form 10-K for the year ended December 31, 2016 and Form 10-Q for the fiscal quarter ended July 1, 2017. Copies of these documents may be obtained by contacting the company or the SEC or on the company website at ruger.com/corporate or SEC website at 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, 2016 and of course our Form 10-Q for the quarter ended July 1, 2017, which also are posted on our website. Furthermore, the company disclaims all responsibility to update the forward-looking statements. Chris?

Thank you, Kevin. Now Tom will provide a financial summary of the second quarter.

Thanks, Chris. For the second quarter of 2017, net sales were $131.9 million, and diluted earnings were $0.57 per share. For the comparable prior year period, net sales were $167.9 million and diluted earnings of $1.22 per share. For the first half of 2017, net sales were $299.2 million and diluted earnings were $1.79 per share. For the corresponding period in 2016, net sales were $341.1 million and diluted earnings were $2.44 per share. For the second quarter of 2017 our EBITDA was $25 million, or 19% of sales, compared to $45.1 million, or 27% of sales in the second quarter of 2016. At July 1, 2017, our cash and cash equivalents totaled $44 million. Our current ratio is 2.7 to 1 and we have no debt. At July 1, 2017, stockholders' equity totaled $227.6 million, which equates to a book value of $12.89 per share. In the first half of 2017, we generated $39.9 million of cash from operations. We reinvested $10.9 million of that back into the company in the form of capital expenditures. We estimate that capital expenditures in 2017 will be approximately $35 million. Our primary focus for investment will continue to be new product development. In the first half of 2017, the company returned $69.8 million to its shareholders through the payment of $16.3 million of dividends and the repurchase of 1,074,000 shares of our common stock at an average price of $49.73 per share for a total of $53.5 million. Since November 2016, we have repurchased 1,358,000 shares or 7.2% of the outstanding shares. Given our practice of paying 40% of our net income as dividends, the reduction in outstanding shares will not only benefit our earnings per share it will also benefit our dividends per share. At July 1, 2017, $100 million remained authorized for future stock repurchases. Our Board of Directors declared a $0.23 per share quarterly dividend for shareholders of record as of August 15, 2017 payable on August 31, 2017. As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter-to-quarter. That's the financial update for the second quarter. Chris?

Thanks, Tom. As the financial summary illustrated the second quarter was a challenging one for us. Demand in the second quarter slowed considerably from the prior year. The estimated unit sell through of our products from the independent distributors to retailers decreased 13% in the first half of 2017 from the comparable prior year period. For the same period, the National Instant Criminal Background Check System background checks or NICS decreased 7%. We believe there are three primary reasons for the slowdown in estimated sell through of our products from the independent distributors to retailers. Number one, the industry experienced strong demand that lasted almost the entirely of 2016. This demand was likely bolstered by the political campaigns in advance of the November 2016 elections and fell off sharply by mid-November. Remember, 2016 was a second highest year for Ruger for both sales and earnings. This surge in demand likely pulled some 2017 sales back into 2016. Number two, many retailers reduced their purchases in the second quarter in an effort to manage their inventories and generate cash as they head into what was expected to be a very slow summer season. While this is a healthy behavior for the industry in the long-term and we believe that retailer inventories are in better shape now than they were early in the second quarter it negatively impacted our second quarter results. Number three, retailers and consumers likely focused on the aggressive price discounting and lucrative consumer rebase offered by many of our competitors. While we offer more promotions that were moderately more aggressive than last year, we do not chase our competitors' offering to achieve better short-term results. And unlike some of our competitors we do not offer any extended payment terms to our customers, which likely would have increased our second quarter sales. Our payment terms remain 2% 30 days net 40 days. We will continue to take a measured and thoughtful approach to sales promotions and rebate opportunities considering both the short-term benefits and potential long-term implications both financial and reputational. New products remain a key driver of our demand. New products represented $84.9 million or 29% of firearm sales in the first half of 2017. New product sales include only major new products that were introduced in the past two years. In 2017, new products include the Mark IV pistols, Precision Rifle and LCP II pistol. During Q2, we launched the LCRX 8 shot 22 caliber revolver, the LCP II viridian laser, the Silent SR1022 Takedown, the SP101 Mach Champion and the SR1911 in 10 millimeter. We have some exciting projects underway that I hope to discuss with you later this year in addition of what we've recently launched. We review the estimated sell-through the independent distributors to retailers, as well as inventory levels at the independent distributors and in our warehouses semi-monthly so that we can plan production levels and manage inventory levels. These reviews resulted in a decrease of total unit production of 7% for the first half of 2017 from the first half of 2016. The reduced production levels allowed our finished goods inventory to increase only 10,000 units in the first half of 2017. Distributing the retailers in our products increased by 57,000 units during the same period. The current level of distributor inventories is not excessive or out of line. Remember unlike most of our competitors effectively all of our domestic firearm sales go through our network of 18 distributors. We will continue to manage our production to moderate inventory growth during the second half of 2017. In June, the company discovered that Mark IV pistols manufactured prior to June 1, 2017 have the potential to discharge unintentionally if the safety is not utilized correctly. Although only a small percentage of Mark IV pistols appear to be affected and we are not aware of any injuries, we recalled all Mark IV pistols and recorded a $2.5 million expense in the second quarter, which is the expected total cost of the recall. While we did resume production of Mark IV pistols with the enhanced parts in the later part of June, our second quarter results were further impaired by the significant reduction of Mark IV production, which reduce sales by approximately $5 million. We would like to thank everyone who was already signed up to have their pistol retrofitted and we encourage all other Mark IV owners to visit the Mark IV recall website at ruger.com/markivrecall, to look at the serial number of their Mark IV pistol and determine if it is subject to the recall, if it is to sign up for the recall. We are able to retrofit approximately 1,000 pistols per day and we are working through the backlog of folks that have already signed up. We thank our loyal customers for their continued loyalty to Ruger and for their patience. As most of you know I was appointed Chief Executive Officer on May 9, upon the retirement of Mike Fifer. I’d like to take this opportunity to thank Mike for his 10 years of dedicated service to Ruger and I look forward to continuing the work with Mike in his new role as Vice Chairman of the Board of Directors. We have made a few organizational changes since May, we strengthened our senior management team by promoting three new vice presidents, Mickey Wilson who was promoted the Vice President of Mayodan Operations; Sarah Colbert was promoted the Vice President of Administration; and Robert Werkmeister was promoted the Vice President of Marketing. All three of these folks have proved themselves to be tremendous assets and their contributions to Ruger’s success will only strengthen in their new roles. We also promoted Tom Sullivan the Senior Vice President of Operations. In his new role Tom will be responsible for all of the manufacturing, engineering and product development activities of the company. Before his promotion Tom have been responsible for manufacturing and engineering at our New Hampshire and North Carolina divisions. I am confident that Tom’s knowledge and passion for lean principles and his natural leadership will help drive manufacturing efficiencies and enhance our product development processes throughout the company. Tom Dineen was promoted to Senior Vice President of Finance, I look forward to continuing the work with Tom, who continues to serve as our Treasurer and Chief Financial Officer. Operator, may we have the first question.

[Operator Instructions] Our first question comes from the line of Rommel Dionisio from EGIF [ph]. Your question please.

Yes thanks very much for taking my question. And [Technical Difficulty] that pending legislation should have passed? Thank you.

Thanks Rommel. The introduction of the 10.2 Integrally Suppressed Barrel at the NRA show was very well received, we are very excited about the reception, decent number of orders came in from our distributors as you likely know in the current environment it’s a long process to move that product from distributor to retail base on the Federal forms with the silencer being part of the covered by the NFA National Firearms Act regulations. So with that it’s taken a while for those first product to ship out to distributors and then subsequently on to retailers, like I said great reaction to it, but it’s a little early to tell and I think right now like the entire category of silencers it’s probably being hampered a little bit by the fact that many potential customers are sitting on a side lines waiting to see if the Hearing Protection Act moves forward in congress and is actually sign into law. If it is it would be a significant boost not only to Ruger’s efforts, but obviously to that entire silencer market. But right now we do note a lot of customers maybe sitting on the fence that otherwise would have begun their paper work and paid their $200 tax stamp. So right now I’d say it's too early to tell, but we're excited not only by this product, but we got some other ones in the pipeline as well that we think the silencer category long-term is going to be a good move for us.

Chris as a follow-up to that, do you get the sense that the people sitting in the sidelines that can also impact the firearm segment itself? Would obviously fire and sort of compatible suppressors and could potentially be temporarily depressing sales is that not really that much of an issue currently?

I don't think it's an issue, I mean because again they can buy their firearm with threaded barrel in most states. There are few states that restrict the sale of pistols and revolvers with threaded barrels. However I'm not really hearing that or seeing that at least anecdotally that's having any negative impact on that I think people are acquiring the firearm as they normally would and then may be sitting on the sidelines to the sideways they go forward with the current paper work for the silencer product or wait for the Hearing Protection Act. Would rather they get the process rolling now and jump into the market and enjoy some of the great products out there particularly the 10/22 Integrally Suppressed Barrel is very cool and I think provides our customers a lot of fun at the range.

Perfect, thanks very much.

Thank you. Our next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management. Your question please.

Good morning Chris, good morning Tom.

Hi, Brian.

Hey, Brian.

Let me just ask how did we kind of the quarter play out maybe in demand kind of shipments that type of thing in the second quarter, kind of timing wise or was it just pretty soft the entire quarter?

Well, I would say Brian as you know we have the -- if you look at the historical trends of NICS checks throughout any given year, we have a pretty repeatable fine ways and April, started out strong April and May and then finishing up with June, the summer months are typically tough. And what we saw this year was a return to a much more seasonal pattern, with the summer month's slowdown considerably from the spring and no doubt about it, Q2 was a tough quarter. There was decreased overall market demand, plentiful inventories at all levels of distribution some very aggressive promotions and consumer rebates and we had a tough comparable quarter from last year. But our strategy is I think you know anticipate this type of downturn in the market and it's a volatile inventory. It's not all gloom and doom to their credit retailers are healthier than they were a few months ago, many had increased inventories in anticipation of a surge in demand following the elections last November. When that surge being materialized it’s understandable they took a deep breath let their inventories decrease and traveler pull their cash flow. And many retailers took advantage of promotions that were offered last -- offered recently and have a relatively lower cost of inventory compared to last year. But throughout that we did generate $21 million in cash from operations during the quarter. So we certainly would have like to have sold more guns, but we're not panicking, we're taking a long view in this market.

No, it's awesome. Can you give me a sense competitive wise maybe anecdotally what you see discounts from MSRP or terms of credit just kind of a range maybe?

It's really when -- we just did a review of the rebates that are out there now there’s a lot of consumer rebates that impact the seller price at the counter. Additionally there are programs, frankly like Ruger offers where we incentivize a retailer to say buy 10 get one free and those are fulfilled by our distributors. But they benefit the retailer have the effect of netting down the retailers acquisition cost as well as the selling price. And then the other thing we see is what I'll say is probably behavior long-term with some discounts being offered directly to wholesalers and some of the bigger retailers, where certain manufacturers are offering not only discounted pricing, but also extended payment terms in some cases going out 90 days or longer. We don't participate in that type of behavior, all of our payment terms remain 2%, 30 net 40 and we're 99% current with all of our receivables. So that part of that discipline as we navigate through this market is something we're going to stick with, we're going to go out there and try to do the best we can with great new products, exciting promotions, but we're not going to do things like go to 90 and 120 receivables.

Yes, I anticipate the answer that’s awesome. I think you've -- you list in the K 140 guys in R&D and Mike talked about in the past of five or six men engineering teams you guys have design teams. I'm looking at because you’ve really driven your sale revenue growth on new product quality and like you said not on gimmicks and credit terms in that. When you go into a period and we all know what's going to be a little softer after the tremendous build-up over the Obama years. Do you guys -- from a strategic standpoint do you prioritize or allocate, you’ve got all these engineers designing new products and that. Are there -- there are different products like you come out with the precision rifle, which is a brand new frame, a very wanted type gun, it’s a very demanded versus something maybe a new product that might be just be a calibration. Is there a strategic control to all these engineering groups collectively or do they just kind of percolate for meant on their own?

Good question Brian. I mean we have a pretty disciplined process to review new products and we do that on a regular basis in a structured meeting and we ground ourselves in gross margin dollars per day, which is something works -- it's a measurement that our engineers can kind get behind as they look at their cost coming through on a project, work with the sales department to get a viable forecast, where that fits with the competition. And then say that if we hit those marks what is the likely pay off in terms of gross margin dollars per day, annualize that number and that's how we prioritize what we're working on. There are a lot of projects thought that do come up from those teams some of which can be quick hits and very good payoff. So it's not always a top down structure. I mean the precision rifle really had its roots in a small group of engineers in Newport factory it really put their heads together. They love precision long range rifle shooting and they really kind of built the rifle that they always wanted to have. And so that was as much bottoms up as anything much more so than cop down whereas some of the other projects like say need for the Mark VI pistols with a quick disconnect take down system that was more of a project that we said, if we do that we know we got a lot of voice with the customer. We know there was a frustration with a lot of the Mark III users and so that was more of a structured top down project versus the bottoms up like the precision riffle.

Good. Good. I'll ask one more question and get back in line. I asked in the past given the kind of the cyclical volatility we've seen we’re seeing a little bit of normalization in softening and I think by my -- your numbers in the K you've gone. I think you had a peak in late 2013 of about 615,800 units produce down at 214. So, obviously your moderating production given that that scenario I ask this again and I will ask it this quarter. Are there opportunities with a little softer product, little less breakneck for furnace maintenance, cellular line movements, safety stock buildings and maybe describe some of the things that you might be doing versus anticipating doing from last quarter?

Well, one of the first things Brian is re-looking when we go to put in a new product line as volumes come down it freezed up not only keep little bit of freeze up equipment in floor space. So we'll reconfigure sales based on the amount of equipment that's needed, free up equipment, so we’ve actually got some pretty excited new projects in the works that good percentage of the equipment that’s currently in our sell being fine-tuned to get ready to launch, came from other lines where we decreased production. So there's a lot more attention to moving equipment back and forth even between factories. As we’ll move things from Prescott to Newport or Maiden as oppose to just another CapEx request to go ahead and bring in additional equipment. So that's one, the other one is as you said the maintenance we did take for the first time in a long time we took a two week shut down in Newport. So during that shutdown period that does allow our maintenance folks to refit and retool. We also had a shutdown for one week in Prescott and Maiden allow them to do the same thing. And that was in the month of July actually. So that wouldn’t impact Q2 but that was in the first week or so of July.

Okay. I'll get back in line. Thanks.

Thank you. Our next question comes from the line of Jonathan Mueller from Invesco. Your question please.

Hey guys, thanks for the time. Want to see if you could give us a little more color on the distributor inventory levels? I think you said they're not excessive or out of line, but just maybe remind us how you look at that and why you feel good about the levels they are today?

Well, I mean one thing is we always a little bit different than some of our major competitors. 100% of the retail commercial sales channel is supplied through our network of 18 independent wholesalers. So whether it's a mom and pop store or big box store like a Abel's [ph] or BassPro it goes through our wholesalers. As oppose to some of our competitors sell those big chains direct, they also sell through the buying groups that we have in our industry where they're selling retailers direct. And so a couple of things, one is that inventory is needed to support the entire channel. Our distributors know that Ruger inventories are safe investment. We don't be value their inventory whatever we had a price adjustment, we make them whole. We don't sell directed our customers so when their telemarketers get on the phone and call up a retailer, they don't have to worry that we just sold that customer direct. They know they're competing with their other distributors, but not with Ruger poaching their business. We also don't cut deals so again that protect their inventory. So we expect them to hold sufficient amount of inventory and normally we'd like to see them at the 6 to 8 turns per year. We're slightly below that now in terms of levels of turns based on their inventory, but not excessive. I mean it's about based end of Q2 it's about 5.5 turns. So again, we expect a lot from our distributors but in turn they'd come to expect a lot from Ruger, so it's really a two way street. So again, that's why I say the inventory level at distributor even though it's going up our inventory we’d like to think is a little bit different than some of our competitors' inventory.

But you actually saying that on a turns basis, it's gone down a little bit since last quarter, is that right?

Yes. It's down I'd say ballpark about 5.5 and maybe just slightly above that maybe just around I have to check the numbers and maybe we're around 6 at the end of the quarter.

And how do you calculate the -- how do you calculate is that a trailing 12 months sort of units that you look at to figure out the turn calculation.

We actually look at their sell-through. Not what we're selling to them, we look at their unit, we talk about estimated unit sold from distributors to retailer if you look at the data in our queue.

So you're taking like the trailing 12 month sale through or the last three months and annualizing that or how are you…

Trialing 12.

Trailing 12?

Yes.

Okay. And then maybe any color or thoughts on actual -- the retail inventory levels of Ruger inventory, any visibility of what your distributor telling you there?

Well I think one thing I'd say retailers have been pretty savvy in managing their inventory over the last couple of months. The good ones have taken advantage of the buying opportunities that are there from both manufacturers and distributors in some cases. And anecdotally we think their inventory levels are down from where they were maybe coming out of the election cycle. They've managed that well, they're waiting for buying opportunities, they know as they see some of these deals that certain manufacturers are putting out there. And gotten to the point where rather than invest in inventory they're going to stand on sidelines and see how good the deal gets. They also used -- number of our retailers also been through this before. They see the normal seasonality in the summer months. And so again as I said before, this year in particular, unlike certainly last year that seasonality kicked in, in large measure whereas last year we went through Q2 right in the Q3 with some really a typical strength in the marketplace.

Right. So if we sit here today you say distributor level inventories are at 5.5 times so at the lower end of your range. You feel like retailer inventories are in pretty good shape. But it sounds like a lot of that maybe big bulge in inventory that was out in the retail and distribution, you feel like that sort have been worked through here in the first half of the year is that fair comment?

I think there was a big hangover coming out of the election cycle for sure that had to be worked off. The other thing you’re saying is you got a lot of capacity that was build up over the past couple of years no doubt about it. So you’ve got a lot of companies running and trying to maintain production rates as we noted before we have taken our production down since Q4 to Q2 about 24% reduction in units produced. And so it’s a balancing act you want to take production down of course when we do that factories are more efficient and more profitable when they were running at high levels and most of our margin decline was based on that decrease in that volume, where we deleverage fixed cost. So, I think that’s part of it. Not only existing capacity it’s lot of competitors trying to maintain those higher production levels and maybe demanded is warranted by.

Got it, okay. Appreciate thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Chip Seng [ph] from AWH Capital. Your question please.

Yes. Thanks for taking my call. I want to start off it sounds like you do have a different relationship with the distributors than the other manufacturers and given that you are not going to probably change your terms you are going to stay 2 and 30 and then net 40. Will you start to offer rebates and discounts in the second half? And if so can you talk about the decisions that go into -- the thoughts that go into making that decision?

Good question. We’ve promoted more and had more series of what we would call programs during this year and most of our programs are running on the retailers. Where say if they buy five LC9s get one free, netting down our acquisition cost and their ability to sell that. We processed that through our distributors and back fill into their inventory. And the decisions -- the way we come about those decisions is we look at each major product line based on our strength in the market, the competitive situation and also our contribution margin for each of those lines to see what make sense and what doesn’t. And sometimes the deals are so rich and the price points are so low that doesn’t make sense to chase it all way down. So we might sit out on certain categories. In other cases we’ve got the margin, we got the product strength and we are after it very aggressively to make sure we are maintaining our position in the market and particularly shelf space and flyer space with our big box partners. So, we’ve got, we do have some plans that aren’t announced yet and I wouldn’t want to telegraph those too early, but we do have some promotional plans in place for both Q3 and Q4. The rebate themselves again I don’t think you will see Ruger chasing $115 and $200 rebates and things of that nature and you certainly won’t see us offering 90 day comps or more just to make a quarter or make a mark.

Right, I appreciate that. My second question would be, you have talked a little bit about seasonality and if you look at the background checks for May and there were up months year-over-year and that’s the only up months that we’ve really had. How much of that you think is attributed to the Gander Mountain starting their liquidation and Cabela’s may be offering memorable day sale.

Hard to say, I would say the Gander Mountain liquidation certainly had some impact on a regional level. I mean if you were near Gander Mountain store that was discounting liquidating their firearms inventory. You could find some pretty good deals and that was disruptive for a short period of time. I think we’re through most of that that could have been part of it to be sure and again the good solid promotional efforts by lots of the big chains and lots of the independence, the good independence that are aggressively promotion and advertising will continue to drive business. And would be up in [indiscernible] at one of our strong retailers this week-end for his promotion, he is got to heavily advertise to his existing customers and some new customers. And I think the smart business people at all levels are still going to -- they are used to this summer down turn, they are used to the slowdown, but they are going to continue to profit versus some of their competitors that are just may be haven’t seen a seasonal down turn over the last two years and may be sitting on the side lines wondering what happened. So I think the smart business people are out there promoting and they drive that business and again specifically as it relates to May I had hard time saying whether that was attributable to the Gander Stores or the specific promotions by big box stores.

Okay, I appreciate that too. And I just the next was you had -- you have been in the business quite a while and Ruger had a tremendous success and listen to NSSF call last week and they were talking about what the new normal to be without -- with the change in the administration. Where do you think that the reset is, do we go back to 2015 and bounce off that in terms of NICS background checks in sales or is it potentially going back further?

I mean as you know, we don't really give forward-looking guidance, but still it's very hard to predict, I mean if I have that candidly if I knew what our new normal was and was confident enough to just sit on that, I couldn't disclose it but honestly I don't know where that new normal is going to shake out at. We see some good long-term trends that we haven't seen maybe in the past. I mean I've been in this business for almost 30 years and we look back on the last 25 year-over-year changes and one year versus the prior year. And 15 of those were year-over-year increases, 10 of those were year-over-year decreases. But if you go back to the last -- one of the last significant events way back in history, the 1994 saw weapons build and you look at what happen in ‘94 and ‘95, that was a different marketplace that we had. We didn't have the same level of new shooters, we didn't have the same level of diversity in our customer base, we have now a lot more women shooters. And so -- and we also have continue carry one way or the other in all 50 states. That was a totally different phenomena that we had back in that ‘94 transition and ‘95 and ‘96. So, I'm much more optimistic given our customer base, I think it's a question now of yes, 2016 was maybe a little supper charged due to some political events going on and the election. But by and large we are not hearing anything negative from our customer base, we're just seeing they maybe take a little bit of a breather. The good news is we have plentiful ammunition, we backed in good supplies of 22 long rifle, 556, 9 millimeter, a lot of the really solid plinking and range round are in good supply and we just have to encourage our customer base to get back up in the range, burn up and enjoy the sport and get back into the store and remember how much fun it is to start buying a few more guns for fun, not just because you think they might be banned in the future.

I appreciate that too. Last question this is mostly housekeeping of the roughly $25 million in CapEx for the second half, what would that be spend on? And thanks for taking my questions.

Yes, I mean that's one of those things that cash is largely been spend, I mentioned a couple of new product initiatives that are in the works. That would be -- that would come over to the CapEx side, once we put those machines into service. So, there will be more of a putting them into service and beginning depreciation and it would be actually expenditures of cash.

Got it, thank you.

And it would be primarily on new products, not things like maintenance and sustainment.

Okay, new CapEx. I appreciate it.

Thank you. Our next question comes from the line of Gavin Riche [ph] from RRC Capital Management. Your question please.

Thanks for taking my questions. So it seems like there is strategy has been more to try to hold pricing. Have you guys looked at what's your margin profile would have been, had you just matched competitors and been able to hold volumes higher more inline with mix, is that something you guys look at or you don't even bother with the math?

Yes, we look at that math very closely when we are putting together say a draft promotion if we were going to promote 10/22s we focus on contribution margin not just gross margin, we look at like where we could be, where we need to be and we absolutely drill down over that math. And again sometimes we'll go at it very aggressively. One other thing, if you look at the beginning of Q2, we did very well at the end of the Q1 and the beginning of Q2 with the AR556 program. Where based on the promotion, we had there we netted the price down from kind of the average street price from 599 down to 499. And that had a very measurable impact at retail, in fact the federal excise tax data that we just received on Tuesday of this week show that we likely gained some market share in Q1 in both long guns and handguns and part of that was due to as promotional efforts. But they were measured promotional efforts and we didn’t do anything to hurt ourselves down the road with the extended terms and a typical discounting.

Do you think you would have had so short-term this quarter, would you have had a higher margin that you dismatched [ph] or do you think the drop in the contribution from discounting and or increased promotion to the channel would have driven margins lower than you reported?

Hard to say I mean I know if we had -- I mean we certainly could have increased sales if I wanted to give 90 day payment terms, in June to make the quarter a little stronger, we can certainly do that, but those chickens come home to roast at the end of the 90 days and it’s tough to sustain that model. So, again we pay a lot of attention on contribution margins so when we look at our sales promotion, we are looking at things like if our retail promotion like rebates it would involve things like what’s the breakage or slippage on a redemption rate. And what’s i.e. the likelihood of it being fulfilled as well as contribution margin you have to figure out our total costs and what the margin impact is. But we also look at the impact on our future quarters, how much are we leveraging and bringing in for the future just for that short-term gain and maybe even stuffing the channel and especially if it’s something it does unnatural acts do things to beat value of the inventory at distributor level, we try to avoid those little costs.

Fantastic, thank you.

Thank you. Our next question is a follow-up from the line of Brian Rafn from Morgan Dempsey. Your question please.

In this a bit of a weaker and also seasonal with summer. Going forward how important are the wholesale dealer specials where you are designing specific guns with maybe a grip or maybe a specific model iteration for that one wholesale dealer, how important is that in kind of supporting that two step process?

Brian it’s a very good question. As you know we do a lot of what we call special make-ups or distributor exclusives. And those like you said maybe real simple changes like grips, color maybe the camel pattern those are very important to us distributors to give them something a little bit different when their telemarketers are making a call out to a retailer tell them I have something exciting different than the standard model or standard SKU. Also given them a chance to maybe hang to a little -- a few extra margin points at their level both the distributor and retail. And it provides a reason for us to talk directly to the consumer get them off the couch and into retailer store and we have some really good distributor partners that are very active in that process. The other thing it does it of course keeps our production lines moving and I’d like to think that that’s one real strength through those special make-ups and distributor exclusives. So that is a big part of how we try to work with our distributors and retailers on that we have actually got some things that we worked with larger retailers that were exclusive to them and that’s proven to be very successful as well.

Okay. And then backup at Newport, just and I asked the question as maintenance. You have got the main integrator furnace you are running I think too many foundries number one and number two and at one point Mike was talking about shifting to the mini foundries versus the integrated. Any change on that given this kind of juncture?

Well that still a direction we’re proceeding in Brian, we are just up in Newport we had a fantastic presentation from the folks at pantry casting updating us on the progress. A lot of challenges because they have got some real cutting edge processes and really new technologies that are incorporating in those well over furnaces, the mini furnaces as we call them. And I think that the long-term plan is still to migrate to those we would likely retain the legacy furnace just for the rework or the remelting of some of the runners and things like that that we want to put in the process. So we would at current production levels the two rollover mini furnaces are probably what we need and we are working through that now and that’s still our long-term plan is to have virtually all of our cast components go through those new rollover furnaces.

Is there any plan to maybe have a satellite furnace either at Maiden or Prescott?

Possibly. That might be more likely for the MIM products. As you know we have a small -- we have a MIM company Ruger Precision Metals just outside of St. Louis. They've been doing a great job for us not only from a cost standpoint but also really rapid prototyping key components we need for our new products. And that's a smaller footprint and that might be something easier to export out to the divisions, but right now we don't have plans for but that’s something we look it.

I got you. Would you say over the next few years that you're going to see more rapid prototyping for MIM more vertical kind a parts manufacture or is it steady state?

No, I mean the rapid prototyping has been a key part of new product development, I mean both MIM and actually from the casting process, we've got a 3D wax printer, I mean a lot of people talk about 3D parts. We have a wax 3D printer that we used to prototype parts from pine tree. So we can go very quickly to prototype metal parts in either MIM or cast. And that's really helped with a couple of key projects that are under development now, that's really helped short circuit some on the long lead times that we would have been facing if we’re using outside vendors.

Let me ask now that you have a little more -- you're not again break net production. Does the lifecycle between engineering concept prototyping actually getting to production at one point, I'm thinking conversations back in the '90s with Bill Ruger it was a four year design to get a new product out, and you guys I think Mike had said, you're maybe a couple of years. Is there a potential over the next few years, five years maybe to continue to compress that kind of lifecycle between engineering concept and actually having inventory production? Or as Mike said it depends on the products and it's all over the map?

Well certainly some products are going to be longer than others. But as you probably heard Tom Sullivan recently inherited all the operational responsibility and new product development within the company. And one of the things that Tom and I are moving forward on is a single Ruger business system incorporating best practices throughout the company in all divisions. And one of the things I think you'll see is a much greater sharing of knowledge and sharing of engineering resources between divisions. For example, as we opened up Maiden some of our best engineers came from Prescott and Newport facilities. They have some great experience in some of the products they used to work on. So for example if we got a great revolver engineer in either Arizona or North Carolina, we're going to find a way to leverage that with technology to share that and be part of design teams in Newport. So I think that's one thing you'll see more from us is being able to leverage our engineering talent across company divisions and hopefully increase time to market pace.

Let me ask it's a good point Chris is the engineering teams are those guys physicality wise in the same location, or do you have teams that remote engineer?

We have some that are remote engineering, we have some that out of the small office, we have an NPO Connecticut, we have some that are across division, we're working on an exciting project down Maiden right now that has engineers from both Newport and Prescott involved. And so that's you will see more and more that from us but it will -- we like to have them together on near the factory floor where the action is done. But if we got an engineer that's got the right skill set to be on a team, he resides in one of the factories. We'll use technology and get him on that team and maybe come up for once a month or to be physically there. But to take advantage of that skill set just he resides at another division.

Yeah, okay. And you mentioned in your Q the marketing I'm going to get some marketing consultant Symbolic. What do they help you with?

Symbolic actually is our Symbolic being with us almost 13 years. They were outside agency initially for of web development and then became our outside marketing agency. And that's really they were such an integral part of Ruger that rather continue with the traditional agency relationship. We that’s where Rob Werkmeister who we recently named as Vice President of Marketing. Rob had been President of that agency, we hired Rob and several members of the staff to come in-house and be our in-house marketing department and that's really what it is same people, same names, but growing from an outside agency relationship to an employee relationship.

Okay all right. And then on the inflation side cost of materials, have you seen anything stainless steels, woods, you guys do like walnut, maple, birch, beech, oil lubricants, resins, wax, ceramic anything price hikes, inflation any kind of patterns that you're seeing.

Not really. We just reviewed this the other day up in our meeting up in New Hampshire and we're not really seeing anything from the raw material side. We're constantly looking on the I will say some of the component side, as you see softness in the marketplace for example AR category our folks are constantly looking at reevaluating their make buy strategy to make sure it still make sense to produce something in-house. If you got a supplier who's maybe seeing his volume and his order support cut from other vendor -- or from other manufacturers, we challenge ourselves to make sure it's really more cost effective to make it rather than buy that from an outside source.

Yes. Let me ask you is there anything like you did with MIM, is there any ability for you guys to vertically integrate in that production. It's been soft a little bit where you might strategically look at making an acquisition not in another gun company but in some of the units make parts?

Possibly, I mean we make as you know we’re pretty vertically integrated now with our GFM process making barrels. We machine from build it aluminum we got the casting facility, the MIM facility, we got our wood shop. So we're pretty vertically integrated now. We have gone back and brought in-house a couple of parts that we were having made on the outside, just in a standpoint of as we freed up machines or maybe we were paying a little bit more to having to done on the outside. We can do it more cost effectively on the inside now. So we're really looking at potentially in sourcing some of those components. I don’t really see as buying any additional capacity or capabilities on the -- to further vertically integrate.

Yeah, let me ask you too from the standpoint of casting. One point, you did Callaway golf club heads and I think you did impellers and there were Stiletto hammers and some real different things that used your investment casting. Are there any efforts or is really the focus in staying more on the traditional gun side instead of trying to diversify the casting?

We've got some outside casting business, but not a lot. It’s important to us, but the main reason is obviously it supports the gun division. On the metal injection molding side we do have some very solid outside customers that we work very well with. So it's probable a little bit more on the outside on the MIM front than there is on the investment casting front. I think that's probably likely to stay that way, we want to keep those in-house -- we want to keep those customers and keep them happy and we want to go out maybe get some of that additional business when it make sense. But we've been through some ups and downs specifically on the casting side, where we have had to fire some of those customers that we've brought in on investment casting as the firearms business ramped backed up. So we’re mindful of the past patterns and we'll probably focus primarily on supporting the gun divisions.

Yes, that makes sense. And then anything on from the standpoint of we've asked on the mergers and acquisition side, I don't see you guys going out buying a gun company or anything, but is there a market to use kind of ancillary things I am looking at again the whole industry of Magpul and CCH, and Weaver and Leopold and whether there would be laser sides or grips or stocks, is that of interest to you, like specially on your SR and AR platforms. I mean, you can double MSRP of the gun by just tricking it out with all kinds of spec up stuffs. So I'm just wondering if there is an interest for you guys to look at some of that accessories business.

Well, I mean we do look at that Brian our approach to M&A really hasn't changed. We're constantly keeping our eyes open and continue to try to be opportunistic. If a company is a good fit becomes available we look forward to trying to evaluate it and conduct due diligence which we’ve done several times over recent years, but we want to make sure it’s a good fit and not just we're buying it because we are a banker and we have a strong cash position. We want to make sure that it’s a good fit and we can add value to it not only a quick hit, but down the roads. So far we haven’t found that that perfect match for Ruger but it may happen, it did with the MIM house, RPM, Ruger Precision Metals out in East St. Louis but we are continuing to keep our eyes open on that. You are right on the accessorization there is a lot of cool things that you can add on to an AR or Precision Rifle, but again we want to make sure that we don’t overpay for those opportunities.

Yeah, okay. Let me just as a close on the Mark IV I think you talked about 1,000 units per day that you could retrofit, what is on the $2.5 million, what is the unit volume universe that you are looking at?

It’s approximately I said Brian it’s approximately 80,000 units.

Okay.

Potentially. And then it’s again that’s -- it’s a very too small and expensive parts that we need to change out its quick takes. It’s just that we got a little bit behind in early stage of the recall servicing our customers but we are working very hard to catch up and take care of them.

You got to be pretty proactive on that and seeing that from an engineering standpoint not waiting if to fail when the market and actually doing that proactively. So hats off to you guys.

Thank you.

All right guys thanks. Appreciate.

This time conclude the question-and-answer session of today’s program. I would like to hand the program back to Chris Killoy referring for the remarks.

Thank you. In closing, I would like to thank you for continued interest in Ruger. I am excited about our future. I have been in the firearms industry now for close to 30 years and now firsthand how volatile it can be. Despite the seasonality and short-term fluctuations in the markets, we will continue to run our company with the goal of maximizing long-term shareholder value. We remained committed to our strategy of focusing on developing exciting new products and driving continuous improvement in all facets of our operation. I would also like to thank our loyal customers and 2,000 dedicated employees who design manufacture the rugged and reliable firearms every day in our American factories. And like I said before especially in this market I like our chances better than our competition and I wouldn’t want to be any place else other than Sturm, Ruger & Company.

Thank you. Ladies and gentleman for your participation in today’s conference, this time conclude the program. You may now disconnect.