Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2017 Sturm Ruger Earnings Conference Call. At this time, all participants are in a listen-only-mode to prevent background noise. [Operator Instructions] And as a reminder, this conference is being recorded. Now I would like to turn the call to Mr. Chris Killoy, President and CEO. You may begin.

Thank you. Good morning, and welcome to the Sturm, Ruger & Company third quarter 2017 conference call. I'd like to ask Patricia Shepard, our Assistant General Counsel to read the caution on forward-looking statements. Then Tom Dineen our Chief Financial Officer will give an overview of the third quarter financial results. And then I will share my thoughts on the state of the market and discuss our operations, and then we’ll get to your questions. Patricia, let’s get started.

Thanks, Chris. We just 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 September 30, 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 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, 2016 and of course our Form 10-Q for the quarter ended September 30, 2017, which also are posted on our website. Furthermore, the Company disclaims all responsibility to update the forward-looking statements. Chris?

Thank you, Patricia. Now Tom will provide a financial summary of the third quarter.

Thanks Chris. For the third quarter of 2017, net sales were $104.8 million, and diluted earnings were $0.53 per share. For the comparable prior year period, net sales were $161.4 million and diluted earnings of $1.03 per share. For the first nine months of 2017, net sales were $404 million and diluted earnings were $2.32 per share. For the corresponding period in 2016, net sales were $502.5 million and diluted earnings were $3.48 per share. For the third quarter of 2017 our EBITDA was $20.8 million, or 20% of sales, compared to $39.1 million, or 24% of sales in the third quarter of 2016. At September 30, 2017, our cash totaled $45.4 million. Our current ratio was 2.8 to 1 and we have no debt. At September 30, 2017, stockholders' equity totaled $222.5 million, which equates to a book value of $12.77 per share. In the first nine months of 2017, we generated $59 million of cash from operations. We reinvested $13.2 million of that back into the Company in the form of capital expenditures. We estimate that capital expenditures for 2017 will total approximately $30 million, as we anticipate fourth quarter capital expenditures of $17 million. Since most of this machine are in equipment has already been acquired, we do not anticipate any significant cash out flow for CapEx in the fourth quarter. Our primary focus for investment will continue to be new product development. In the first nine months of 2017, the Company returned $85 million to its shareholders through the payment of $20 million of dividends and the repurchase of 1.3 million shares of our common stock at an average price of $49.10 per share for a total of $65 million. Since November 2016, we have repurchased 1.6 million shares of our stock or 8.4% 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 increase our dividends per share. At September 30, 2017, $89 million remained authorized for future stock repurchases. Our Board of Directors declared a $0.21 per share quarterly dividend for shareholders of record as of November 15, 2017 payable on November 30, 2017. As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter-to-quarter. That's the financial update. Chris?

Thanks, Tom. As the financial summary illustrated the third quarter was a challenging one for us. Demand in the third quarter slowed considerably from the prior year. The estimated unit sell through of the Company’s products from the independent distributors to retailers decreased 25% and 16% in the three and nine months ended September 30, 2017 from the comparable prior year. For the same period, the National Instant Criminal Background Check System or NICS background checks as adjusted by the NSSF decreased 16% and 10%. The decreases in estimated sell through of the Company’s products from the independent distributors through retailers, is attributable to a few factors. Number one, decreased overall consumer demand in 2017 due to stronger than normal demand to our most of 2016, likely bolstered by the political campaigns for the November 2016 elections. Two, reduced purchasing by retailers in an effort to reduce their inventories and generate cash. Three, aggressive price discounting and lucrative consumer rebates offered by many of our competitors. And four, increased industry manufacture and capacity which exacerbated the above factors. We offer more promotions that were moderately more aggressive than last year, but we did not chase our competitors' offerings to achieve better short-term results. Nor we offer any extended payment terms to our customers. 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 the potential longer term implications both financial and reputational. In the area of new product development, new products are key driver of demand. New products represented $118.8 million or 30% of firearm sales in the first nine months of 2017. New product sales include only major new products that were introduced in the past two…

Thank you. [Operator Instructions] And our first question is from the line of Brian Rafn with Morgan Dempsey Capital Management. Your line is open.

Good morning, Chris and Tom.

Hi Brian.

Good morning.

Hey, to give you a sense of kind of the flow of business kind of July, August, September, obviously it’s summer, we’ve always certainly been looking with the, after the Obama administration and the potential of Hilary getting in, in the anti-gun. But just to kind of the cadence, was it erratic or was it a – was it kind of a weak sell off just, you know, month-to-month what would did you guys see in trends?

Well Brian, two, three, you know, I think we saw return to a more normal seasonality. The third quarter is historically been a pretty weak quarter as you know, it was decreased overall market demand, plenty of inventory at all levels of distribution and some very aggressive promotions, consumer rebates, and it is a tough comp from last year. We also saw some of our competitors providing extending payment terms in some cases going on 90 and 120 days. So, it was a – the summer we saw again a much more seasonal nature in our business, July very tough, August improving a little bit and then September, you know, as you get close to the hunting season starting to do a little bit better through the quarter.

Okay, okay. What – just out of it may to, you know, maybe anecdotally, what are you seeing kind of, you know, levels of discounts of MSRP, are you seeing 30 off, 40 off, how deep have you seen it?

Some of them Brian when you combine with some of the rebates out there were pretty significant. They vary by manufacture, we – at Ruger, we have our promotions that we work to benefit retailers and wholesalers without devaluating our inventory. So we’ll do a promotion, our promotions are typically buy 10 of something get one free things of that nature. We did not participate in the consumer rebates and you’d combine the consumer rebates with some of the deals that we’re being offered, some of them published, some of them unpublished by some of our competitors, it may for a pretty challenging environment. And that rings all the way down to some things that I’m sure not many people were making money on and I’m sure results in a devalued inventories for the wholesalers.

Got you, got you. What, is you guys trying to get into the hunting season and that? And obviously the last several years Good Friday is been a big seasonal selling day. How much does that hunting season and Good Friday or the day after Thanksgiving at Good Friday the thanksgiving shopping day. How much is that promotion in a weaker environment take precedent, is it significantly more important or is it just kind of standard for you guys?

Well, it’s really a standard part of our planning process with especially the national accounts, a Black Friday I know is what you’re referring to.

Yeah, Black Friday.

And that is a – that’s become a bigger and bigger deal of late with our consumers. And you see some of the flyers that are out there for the national accounts, some of the big independents, it really is a buyer’s market out there right now, we expect some significant deals to be out there for consumers. We like that as you know, combat it with new products, first and foremost you’ll see some of the great new products from Ruger or some of the flyers. You’ll see things like the Precision Rifle I just saw in the Cabela's flyer just the other day, the 7.62x39 American Standard Fire rifle. And then even though the hunting season seems to be okay, we’re seeing some real bright spots with some both actions products. They were a little bit atypical, things like the 450 Bushmaster in the both the number one and the American Standard Fire, 7.62x39 as I mentioned, and then also the 6.5 Predator on an American Standard Fire chassis. So a little bit non-standard calibers, but that’s really what gets people off the couch and into the store to see what’s new.

Yeah, let me ask you just of the hunting question and then I’ll get back in line. As you enter the hunting season, how much capture has the modern sporting rifle taken from what used to be kind of the legacy bolt action or the scope?

Yeah, that’s a good question Brian. I think last year we definitely saw that. Last year we saw, people with the discretionary dollar spending that on modern sporting rifle category, and they maybe passing over their bolt actions. This year, like I said, we’ve seen a decent amount of bolt action sales particularly in some of those non-standard calibers, and then even in the MSR category, we were very pleased with the results we launch the Ruger MPR, the multiple purpose rifle. It’s an addition to the AR-556 family, and we got really good traction in what’s been a very soft sector of the market right now. And it really had all the right features on it, you know, it had the things that people are looking for, things like Magpul Furniture, rifle and gas tube, the M-LOK accessory slots, things like that that really made a good value for consumers. So, I think we’re seeing, as long as you come out with something new and that excites consumers, even like a category like the MSRs, you can still get their attention and you can get some of those discretionary dollars.

All right, Chris. I’ll just get back in the line. Thanks.

Thank you. And our next question comes from the line of Rommel Dionisio with Aegis. Your line is open.

Yeah, good morning, gentlemen. The first question to – it’s been a fairly warm start to the hunting season, it’s just still early but could you make talk to what you’re seeing in terms of maybe retail sell-through and the potential impact of warmer than usual weather in the Northeast and Midwest?

Rommel, this is Chris here. I think right now like I was just saying, the traditional hunting bolt-action calibers, we haven’t seen as much activity as maybe we’d like and things like 30 at 6, 270 etcetera. But in terms like the 450 in the American Standard Fire, the 6.5 Predator and the ranch rifle that we did in 7.62x39, again those have been, we’ve been very pleased with those results, and in fact we actually had the increase some of our plan production rates on our bolt-action line. So we were very happy with that. And again, I think even though we’ve seen some of that warmer weather, I think retailers are still optimistic that they were going to get a decent, maybe not dramatically improved hunting season, but a decent hunting season and one, where people who may be put off that hunting rifle purchase last year are coming back into the store willing to spend their money.

Okay, and just one quick follow-up. I haven’t seen the NICS number come out yet for October but, if anything you could comment on if there was any sort of fall – industry fallout from the, some of the incidents, you know, Las Vegas specifically I’m referring to, I know we’ve seen some demand spikes after sunburn and Orlando a year ago and if you guys are hearing about anything in the channel in the last few weeks?

Really we haven’t seen anything significant. Obviously a very tragic event, but certainly nothing that we’ve seen any impact on, you know, again we haven’t seen those results either but we haven’t seen that reported from our sales force or from our internal channel checks.

Okay, fair enough. Thank you Chris.

Thank you. And our next question comes from the line of Bill Ledley with Cowen & Company. Your line is open.

Hi, good morning. Thanks for taking my questions. Just to start, the inventory at distributors fell a little bit in Q3 versus Q2, can you just talk about what’s going on there and where you expect that number to go for Q4 and beyond?

Well, I mean inventories you saw was down I think about 12,800 units from Q2 which was good to see. Not sure where we’re going to finish at the end of Q4, I would tell you that we just finished up our meetings with our wholesalers at the NASTW show in San Antonia two weeks ago. And one of the things we remind them is that unlike the vast majority of our competitors, all of our domestic commercial business goes to two step distribution. We don’t sell in the big boxes direct and we don’t sell the buying groups as far as the retail is direct. So, we’ve made – we’ve taken our production down, if you look back at our production numbers in Q1, we’re down about 38% over the course of the year into where we finish Q3. So we’ve managed our productions, we worked with our distributors and again, we think that – we remind our distributors that the inventory of Ruger product is safe inventory. And we don’t devalue it by selling around them and we don’t discount without considering their inventory. So, I think we’re comfortable with that where it is now, certainly we’d like to see them get their turns up, but they understand where we are and we understand their concerns as well.

Okay. And then you mentioned there are lot of pricing pressure and a lot of discounting. Where are you seeing the most pressure, is it on – is it in the MSR category or is it in handguns or could you just give me some color about what’s going on there?

Yeah, I’d say in the Q1 and Q2 it was really the MSR category that hit pretty hardly, I mean or pretty heavily. There was a lot of discounting. You saw prices out there for, some of the off brand ARs going down to 399 and it was some very, very heavy discounting. And again part of that is attributed to manufacturers who only compete in one category. And if all you make is the MSR platform, then really the only thing you can do if you try and not – you’re trying to avoid cutting production is to cut price. And so we saw a lot of that go on through Q2. Then in the summer months we saw it in the center fire pistols in particular. 9 millimeter center fire pistols was very bloody this summer, lot of discounting, lot of rebates, and that’s where we saw a lot of margin erosions I’d say across the industry.

Okay, thanks. And then, just one last one for me. You've highlighted now for a couple of quarters the increased industry capacity as being the exacerbating the industry issue that. At what point do you see that capacity coming out of the industry given the weakness if at all?

Well, unless this consolidation or some of our competitors go out of business, I think most of them have tried to cut production. But again if you're a single category player, you have a harder time with that, and we're seeing some of that play out particularly in the MSR category or again kick places where all they make is one particular type of center fire pistols. There's not much they can do other than cut price if they're going to try to maintain their facilities and maintain their workforce. So unless – until we see some more consolidation and people going away, I think we're going to see that that excess capacity.

Thanks, Chris. Sorry, and if I could just follow up on that. Are your distribution customers aware of those issues, then are they a little bit more worried to order from these competitors of yours that might be a rationale or could not be around in the next three years just given industry pressure?

I definitely would like to think that. I mean our distributors that we've known most of these folks have done business with for 30 years, 40 plus years. So, these are not and this a small group, there is 18 independent wholesalers throughout the country. So, it's a small group of folks, we talk to them on a very regular basis. They know where their risk is, they know their Ruger inventory is something that they – they don't worry about in terms of being discounted and devalued. But there are others that they go into their eyes wide open as far as wondering whether this is the best deal or is it going to be a better deal down the street next week. So, I think they are wise to that. They've been – it's not their first rodeo as they say. So, I think by and large, our distributors are pretty savvy buyers and whole managers of inventory.

Understood. Thank you, sir.

Thank you. And our next question is from the line of Jonathan Mueller with Invesco. Your line is open.

Hey guys, thanks for the time. Maybe just a couple of follow-ups from a few questions that were asked earlier, but just any more color on the comment that you feel like your distributor inventories, I think you said were not excessive or out of line. Just how are you sort of gauging that or what metrics are you looking at to come to that conclusion right now?

Well, typically we'd like to see our distributors at six turns or better and they're slightly below that now. But again that's, what we reminded them is that the Ruger inventory is healthy. They're paying their bills on time. As Tom commented, we're 98% current. Their mix of inventory is good, there is not a lot of dogs out there in terms of their Ruger category, maybe in some other brands, but by and large they're comfortable where they are from an inventory standpoint. And they know that if, for Ruger to stay two-step distribution and not sell the buying groups or sell the national accounts direct, they need to be a partner with us and sometimes they need to maybe sacrifice some of those higher turns in order to help us manage through this softer market.

Got you. And so, I guess that comment on the Sturm, you're saying that Ruger specific, if you look at their overall inventory that could be a different story based on other brands they have that they’re wholesalers as well, is that correct?

Yes, there's no other way. If you're a retailer, whether it's one of the big national chains or an independent or a mom-and-pop, there's no other way to get Ruger product than to one of our 18 wholesalers. So, we're not going to sell anybody direct and…

No, no actually what I'm saying is, is the distributors total inventory outside of Ruger, any thoughts on the quality of that inventory that they're carrying?

Okay. Yeah. We don't give total visibility into their inventory. We have good candid conversations about their financial health. Obviously, we're reviewing financial statements and things like that. But right now, there are some concerns that they may have with some of the other brands, but nothing specific that we could comment on.

Okay. And then someone else earlier, but you mentioned in the press release increased manufacturing capacity. So just to clarify, are you seeing actually like – when we say capacity increase relative to demand like this that we're not seeing capacity decrease in spite of demand going down or are we actually seeing absolute increases in capacity in the field? And if so, what's – what do we see in that given environment?

Yeah. I think the people of that will had capacity expansion plans in place have largely either delayed or stopped those projects. I don't see people actively going out and breaking ground on new facilities right now. I see throttling back. I think the increase was there from the 2013 to 2016 time period. And I think a lot of people right now are trying to put the brakes on maybe plant expansion products that they have. I know at Ruger, our folks at the operations side have done a fantastic job of redeploying capital and we have some exciting new products coming down the line. A lot of that is we've repurposed and repositioned machinery that may, maybe moved within one of our facilities or maybe moved cross facility, we move something from one of our factories to the other one to avoid a CapEx expense to allow us to take advantage with some new niches that are out there.

Okay. Got you. And then when you're talking to your distributors maybe just what, what kind of color are they given to you about sort of the overall inventory in the retail channel and sort of where that stands, you know, in general?

Well, I think our sales force is pretty in touch with our key retailers. We do both formal surveying of those as well as the informal day-to-day contact that we have with our key retailers. And a lot of us on the senior management side all work retail promotions, where we go out and work the counter with one of our better retailers to help them on a particular Ruger days weekend, and it really gives us a good flavor for what's going on. I would tell you that the retailers this time around, I think we're pretty wise in our buying patterns and we don't see a lot of over inventory positions, particularly the independent retailers. They know their distributors have inventory, they know their manufacturers have inventory and they’re certainly lot smarter than maybe some other times we've been through some of these cycles, and I think inventory retail is actually in fairly, fairly good shape.

Okay. That's good to hear. And then maybe, just a couple other – this is more longer-term, but obviously 2017 a tough year for the industry in general, but maybe just as the company sits here today, maybe speak about how you're thinking about 2018 in longer, longer-term for the company?

Well, the -- you look at some of the metrics that Tom cited in terms of our capital structure, I mean, we're in very good shape. We've got – we ended the quarter with $45 million of cash on hand. During the first three quarters, we repurchased $65 million of our stock, and reduced our outstanding shares by more than 7%. We've got accounts receivable at 98% current. We don't – we haven't offered anybody the extended terms that we see some of our competitors doing. And we generate cash from the operations. In the third quarter, we generated $19 million in cash from operations, year-to-date we generated $59 million. We pay a variable dividend. So our capital structure is going to support our ability to, really achieve our single biggest strategic goal, which is exciting new products to the market. The new products are what's going to drive our business in the future and certainly in 2018. And one thing as you may have picked up from Tom's comments, we've spent or you've seen our CapEx number currently at $13 million and we plan to spend $30 million for the year, and what that means is, we've got $17 million that's already been spent, equipment bought and paid for that we hope to bring in a service with – in the fourth quarter. And that's not guaranteed, but that's our plan. So we've got some exciting things still to come from Ruger.

Got you. And what about just sort of, position the company in sort of your inventory levels, distributor inventory levels, assumingly we work through sort of the excess demand from 2016 and sort of absorb that in 2017. I mean, do we – are we positioned to return the growth at 2018 and then maybe just longer term, maybe any high level metrics that the company would like to be operating at sort of in a more normalized environment?

Well, I mean, the long term trends for our industry are very solid. I mean we've got a recent poll that were cited by the American Rifleman by Chris Cox in one of his articles, show that households are - 48% of them are now gun owners, that's the highest since that particular poll was started in 1999. And so, we think we've got a very solid runway ahead of us. We've got great firearms ownership. We've got more new customers, younger customers, a more diverse customer base. And so, we think there is a lot of good signs out there for us. We have to manage our way through this tough market we're in right now, but with the new products that we have teed up and some of the things that are still on the drawing board, I like our chances better than the competition to be honest with you.

Okay. Great. And then last question for me, just obviously bought back a lot of stock. Just maybe from your perspective thinking about, opportunistically buying back stock and pretty aggressive here in the year-to-date, but relative to pretty choppy fundamentals and trends that you see out there. Maybe just thoughts on strategically, why you think buying at 49-ish whatever that much the company buying back and the company was, is the right thing to do versus being a little more opportunistic?

Well, as you would probably know, we – Ruger as the company is buying back stock, we only do it through a 10b5-1 plan, which tip of there put in place in advance – well in advance of the actual purchase of the stock. And we're trying to make sure that we're buying back, we think we're undervalued, we're going to buy stock back. And if we think we're fairly valued, then our goal is not to buy the stock back. So, you know we think that at some of those levels and again the 10b5-1 by definition are not disclosed what those particular levels are. But you still got I believe $88 million still open on our last authorization. So, that remains part of our plan going forward.

Okay. Well, maybe then the follow-up would be so, when you said you're buying back the stock when you think it's undervalued. So maybe just, as we sit here today, the company saying that $49, we think that the company is undervalued. Maybe just - how are you trying to value the company or look at the long-term value of this company then?

Well, we went back through and did some pretty specific modeling of historical trends on where we were with stock price, where we were with EBITDA levels, and that's what we based it on. We based it on historical look back, and we also with an eye to the future. And you know, at this point, I'm not sure it's a specific one right answer. I mean whether it's an EBITDA multiple or a historic trend model, we've used both of them and that's what we're trying to work through, and obviously what's in the 10b5-1 is, we don't disclose that, but that's what we try to look at. And we do things like we don't necessarily commit to a specific dollar amount with all those resources, we may have that tiered and those were the type of things we look at in the 10b5-1 plan.

Okay. So, if I understood that correctly, just different analyses come out to some ideas of what you think the long-term sort of intrinsic value of the company is, and then compare that to where the stock price currently is and that's what drives the decision of the pace of buyback?

Pretty much. Yeah. Yeah.

Okay. Thanks a lot, guys. Appreciate it.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Austin Hopper with AWH Capital. Your line is open.

Yes. This is Chip Saye for Austin. Thanks for taking my questions. First, I just had a housekeeping question. It looks like the tax rate was around 30.3% versus 35% in Q2 and then 35% a year ago, that's a $0.04 benefit. Can you – can Tom, can you talk about that and what caused that change?

Sure. Chip, the reduction in the effective tax rate for this quarter is primarily attributable to a new accounting standard related to equity-based comp, equity-based compensation that went to effect this year. And just to cut to the chase under the new standard, all excess tax benefits the liabilities that the company receives on these awards are now recognized through the P&L, through the current tax provision before the standard going into effect those benefits and liabilities were recorded directly to additional paid and capital on the balance sheet. And that was the primary driver, we did get some of the benefits – some of those benefits this year and so that's where you're seeing the drop in the current quarter. And again, the current quarter being a little lighter from a earnings perspective had same amount of adjustment, had a kind of a higher, a greater impact on our rate.

Okay. Second question is, there is – you’ve talked a little bit about your MSRs and challenges with the capacity in AR business. This is a question, like what percentage of your business would be represented by ARs or that type of platform like you said earlier sporting rifles that maybe look like ARs even though there aren’t. What percentage your business is represented by those type of rifles?

Well, that's you know one of those things that we don't disclose or comment on. But I would tell you, it's not as big a percentage of our business as maybe some of the other diversified manufacturers. We've got a pretty broad base of products. When you look at our revolvers or our Centerfire pistols, Rimfire pistols like the Mark IV and then particularly our Bolt-Action rifles everything up to the Mini-14. Our MSRs are certainly an important part of our product line but they're not the dominant part of our product line by any means.

Yeah. I mean, I get it, because when I think of Ruger, I think of the 10/22 that you know that we had 20 years ago, or whatnot. But I'm just wondering like, is it 5% of your business or is it more like 50% of business, because how much of a driver in 2015, 2016 was that AR or MSR platform to Ruger, when I'm trying to look at what a normalized sales number will be going forward? So, can you talk to that like how much of a driver was ARs and MSRs tied to your business?

I mean, throughout that time period, I mean to be honest it is closer to 5% than it was 50%. And I certainly wouldn't say a particular number, but I would tell you that throughout -- as we were getting into the MSR business, we were chasing that business largely trying to increase capacity. So, we're trying to increase capacity as that market was expanding. And frankly, we didn't get as far as we'd hoped. We have a lot of equipment that has already been started to be redeployed on other lines where we need additional capacity. So, our folks are pretty, pretty flexible, when it comes to that. So, while the MSRs remain a very solid part of our business, I commented before on the MPR, the Multi-Purpose Rifle, it's part of the AR-556 family. That's something that we see that as a solid part of the market going forward, but it's still pretty bloody out there with the discounting from some of our competitors has started pretty much back in Q1, Q2 last earlier this year.

Okay. So yeah, when you mentioned in the commentary, in the press release and then a lot of people have talked about today. The increased industry manufacturing capacity that seems to be you're referring mostly to this segment of your business. And it's a challenging environment for that part of the business. What do you – what do you think in terms of capacity at Ruger? Is this - I know you took a week or so off a couple of foundries this summer. Do you need to do that additionally and like a holiday, one-week holiday in December, January, or are you going to handle it with rebates, because I know you haven't done that yet, but how long are we looking at this being a challenging part of the business?

Yeah. Well, as the price off in the numbers are – our inventory is down slightly, distributors inventory is down slightly, we did take a summer shutdown which traditionally we have done over the years, we didn't do it in some of our plants over the last couple of years where we're chasing demand. But I don't anticipate holiday shutdown or Christmas shutdown or anything like that. I do know some of our manufacturers – other manufacturers in the industry are planning furloughs and things of that nature. We've managed our production rates pretty closely. As I mentioned, we're taking our production down since Q1 about 38% to where we finished in Q3 and with that, we look at that every two weeks. Every two weeks, we're looking at the SKU level of our distributor inventory, the sell through by our distributors and managing our production and trying to match that as close as possible, manage that with our work force and then dovetailing the new product or plan new products, what's going to be cannibalized on our line, where we think we can ramp to. And so, it's a very dynamic process you know we call it SIOP process, sales, inventory, operations, planning. And so, I don't foresee at least at this time a need for any type of holiday for a lower thing like – things like that.

Okay. I was just looking at the inventory units, the tables you included in the queue and I'm no firearms specialist, but it just looks like the units produced are still outstripping units ordered. And I just wonder your commentary about the excess manufacturing capacity, how long are we looking at that continue?

Well, you know from a pure capacity until some competitors either get consolidated or go away completely, you're going to have that capacity. I don't see too many people jumping into the business right now, but we also don't pay a lot of attention. If you listen to our calls in the past, we don't pay a lot of attention to units ordered. We don't run the business based on incoming order rates, we run it really on what our distributors are selling. And frankly, if we needed to get orders from distributors, we could do that because we're trying to really match what they're selling not what they're ordering. And so, sometimes you’ll see – when we launch a new product for example, you’ll see some irrational behavior, the order rate will shoot up in maybe 5x or 10x what we can deliver. So, in good times and in bad, we don't pay a lot of attention to the incoming order rate. So, what we do watch is distributor sales, their sell through and of course their inventory and our retailers' inventory, which we don't have – you know we don't have a as good to handle on that as we do it on a wholesale level, but we – anecdotally with our sales force, they are in major independence and the chains every week getting a feel for where we need to be for our production, what's happened with the competitive standpoint. And so, again I think from an industry capacity standpoint, it's going to be there until some people go away completely or get consolidated by acquisition.

Okay. I appreciate the answers. Thank you.

Thank you.

Thank you. And our next question is from the line of Brian Rafn with Morgan Dempsey Capital Management. Your line is open.

Yeah. Chris, let me ask you, now that things are settling down a little bit from the break neck levels. When you go in your and you guys did a great job certainly of 30% new product content and trailing 12-month. The design concept prototyping, one of the things that Mike you say was, it was really tough to always look at kind of your launch day inventory and you just mentioned kind of a 5x, 10x irrational orders. When things are a little less than the fever pitched, does that allow you guys to when you have new product launches to maybe build a little more inventory early on to get that launch when things are a little softer in the industry?

Good question, Brian. I mean, it does when you're depending on the cycle of the year. When you've got that opportunity to put several thousand guns in inventory to get ready for a launch, so that we can make sure we actually take care of the demand that's generated, that's always a good thing. The challenge we have is some of the seasonality of our business, particularly the distributor shows in January. That's a big deal with new products to be out in front of those distributors – excuse me the retailers when you're writing you are writing orders. Shot show is also in January, but more critical to us is the distributor shows and kind of getting out there in front of the open a buy for our retailers. And so, that's a offense that we can't move, we can move launch dates to accumulate extra inventory, to get about there, in most parts of the year. But that's one where, sometimes we just want to hit that January launch to make sure we're out there in front of all those retailers if the distributor shows. So, when they come buy our booth, we're writing orders and showing that new product and not missing out on it.

Yeah. Okay.

So, that's, that's the one exception.

Okay. All right, I appreciate the color. Let me ask you on new product design, when you look at designs that are more of a top down consumer trend like a lot of these little self-defense palm guns. What is your new product kind of going forward, what you kind of see the mix maybe between that kind of top down consumer trend versus something that's more like a bottoms up engineering design like you guys did with your Precision Rifle where you had some guys up in Newport that were range guys and they came up with this. How important maybe is that bottoms up component to new product development?

I mean the bottoms-up is very important. We've got some things that are like you said the top down, the big projects that are heavily resourced and staffed and that's certainly a big part of our new product development efforts. But those bottoms up homegrown things from each of the major facilities, Prescott Arizona, Newport New Hampshire and Mayodan, North Carolina. Just this quarter, they've given us things like up in Newport, you've got four different models of the LCRx. You've got a 9 millimeter at 327 Federal mag, a 22 Magnum and then a 3-inch version of the LCRx and 22 mag and then a 3-inch version of the LCRx and 22 mag, 9 millimeter SP101 that came up with a – the 50th anniversary in 308 of the model 1A, the number one rifle. And so, those are very important to us and that's one of the things I remind our engineers in our product planning meetings is that just because you're not on a big one big project, big team, it doesn't mean your efforts are critical to the health of the company. And these smaller clean singles are very, very important in this environment. So, that's where our engineering folks at the plant level do a great job for us. And the other aspect of that is a special make-ups. The special make-ups that we do with a lot of our distributors have proven to be very, very successful for us and for them because it gives them an opportunity to have a model or an SKU that they don't have to discount out of the gate. They've got something special, it may not be a brand new precision rifle, but it might be a precision rifle that's got a Cerakote coating, different accessory rail, different sites, whatever it might be that then lets them go to market and preserve some of that margin and not duke it out right out of the gate from a price standpoint.

Hey, you read minds, I was going to ask you about distributor exclusives, and so you're very sharp on that. Is there anything with distributor exclusives or make-ups, special make-ups, that has a seasonality component, hunting season or Black Friday or is that just kind of, is that more of a fill, how does that kind of fit in to your promotional plan throughout the year, the distributor exclusives?

Well, the Black Friday is very big of course with the national accounts, people like Cabela's Bass Pro, Academy. And honestly we saw Gander Mountain last year, which was a couple of our distributors, but those guys really focus on those Black Friday Flyers, and sometimes that can be very effective. If you've got the right special make-up that you can get in there with those folks, even though we're selling through two-step distribution that's a big part of their – that strategy. The other one of course is, as you come into the – in the fourth quarter holiday buying, not just Black Friday, but throughout the battle for November and December, some of those affordable things like 10/22s, SR22s, that we just did some nice camel patterns on SR22s, as distributor specials. We did 10/22s, we've got a variety of those out, did a nice special with DICK'S Sporting Goods on the 10/22, that I think people are really going to enjoy. And so, that that is part of that plan. We try to work cooperatively with our distributors to make sure some extra value or enough differentiations in the base model. Again, that they can make a decent margin and not have to compete head-to-head on the same skew with everybody else in the marketplace.

Okay. Well, let me ask you. And I've asked in the past about accessorizing again with the SR and AR platforms, whether it's laser scopes or stocks or clips or – I mean there's a lot of things you can do to trick that out. But if and it's an area that I've asked in the past about making acquisitions in that area. But you mentioned something on the MPR. Can you also look at more maybe joint partnerships or alliances with some of these, the CCH is the Magpul, so we were people that might build something that's, that's – as you said, when you launch the MPR, you kind of came tricked out of the box with some of these aftermarket things and it seems to me you're doing a little more of that. Is that also important to the new product design?

It is, I mean there's always a balance between selecting those cool accessories like Magpul accessories on the MPR, a very cool and what the consumer is looking for and there is a balance with when you're when you're looking to choose an optics for example, you have to be careful, you don't over-niche the product and pick make a choice for your consumer that they might prefer to make on their own. And then we're also sensitive to making sure that we're not taking accessory or aftermarket sale away from a retailer. So it's kind of a balancing act. You know, and that's where things like the MPR with the M-LOK rails, provides an opportunity for it's got – it's got the right chassis for retailers to add on – add on those sales and certainly we'd like to maybe have consumers buy those from our shop Ruger site online, but we're just as happy to see that business go to retailers, so they can get some of those higher margin accessory products on top of our guns, as their go-to-market strategy.

Yeah. Okay. Okay. You know, I'm assuming given where we're at, but you're still running the legacy furnace and the two mini foundries up at Newport that nothing's changed there?

Well, the two mini foundries are both doing very well, up at Pine Tree. Right now, we're in the process of finishing qualifying all of our parts to transition into those two mini foundries. Even though they're up and running, the different part geometry can present a challenge, when you're casting those parts, you have to make sure everyone is up to snuff from a quality and dimensional standards. So that's part of the legwork we're going through right now is to be able to transition those parts and we are still running the legacy foundry right now for things like the revert material, which comes off of the runners that kind of the waste byproduct that we then re-melt to use as runners and things like that in the process. But that's pretty much proceeding as planned at this point in time with current run rates, we don't anticipate putting in the third mini foundry at least at this point in time.

Yeah. Is it possible that you might see a mini-foundry either at Prescott or Mayodan or maybe down at MIM?

We've talked about that, we've looked at that. I mean the foundries still consume a lot of resources and we have our MIM facility in Earth City, Missouri right now, they're doing a great job for us, particularly on prototyping things and reducing lead time on new products. We have talked about adding MIM capability, but at this point the jury is still out on that.

Okay, all right. And then did you – in the quarter, did you guys move any or shipped any production between plants or add any sell lines or just normal?

No, we did move some between you know between – actually moved some from Newport down to Mayodan, some of our Centerfire American rifle production and also moved some LCP production from Prescott to Mayodan. So, you will see LCPs, the original LCP I, you will see those marked as made in North Carolina and you will see more and more of the American rifles marked as Mayodan rather than Newport.

Okay. What would your floor space usage, we were down there back probably now two years ago. What might you have in floor space build out in Mayodan?

We're probably ballpark three quarters full.

Okay.

And then we've got some things going on there that are really cool, some new things coming there. Some of that is you know when you – again, when you look at what we plan, we hope to get out in fourth quarter. It's tied up in some of that CapEx that hasn't come over yet and that $17 million that we hope to have in service. That's really at all three plants, we've got some of that going on.

Okay, okay. Anything – again, in the past you guys have, you know, during weaker times you guys had the Callaway Golf clubs and Stilettos, hammers and you had some stuff casting with impellers. Are you looking at doing any fill or are you just going to continue to concentrate just on the gun business, and stay out of some of that ancillary casting stuff?

Yeah. That was -- and also back with the Callaway, where we had the titanium capability...

Right.

... out in Prescott. Yeah, that's long since been shut down. But at this point in time, we're not – we don't actively pursue a lot of that non-gun business. We're primarily interested in taking care of our factories in-house. So, we do have some good outside customers. We'll continue to work with them, but that's not a real heavy emphasis as far as from chasing new business outside.

All right. Let me ask you one more, Chris kind of a forward. As you guys are cash rich, I mean most people would love to have your net margin in a tough market, in a peak market. So, you guys you know are certainly very solid no debt, stellar reporters' balance sheet. As you see the weakness in the markets, are there potential targets that you might see that, that might not have you know they might be fairly poorly capitalized? Are there – are there opportunities that may present themselves with you know, if we have like continuation into 2018 of, kind of a general weakness in gun sales?

Yeah, a good question Brian. And that's one of the things, we've got some – some of our powder, we keep dry to be a little bit opportunistic. We know we could borrow money, if we need to. And we do think there might be some opportunities coming down the road. Right now, we haven't seen those, it makes sense for us. And a lot of the things with in some of the categories, particularly on firearms, we always look at, can we do it in-house, is that a better investment in ourselves and our teams, rather than paying maybe a higher multiple than we'd like to pay. You know, given where our stock is valued at versus what some of the people are still looking for in terms of multiples for their businesses, yeah that's where we've got to be realistic, and we're not going to – we're not going to make any bad decisions in terms of acquisitions, but we will continue to be opportunistic, both from a financial standpoint, and where we could add some value, because we've got some great engineering resources and great mean manufacturing resources. And that's part of it too, when people talk about synergies and such, we need to be mindful what we bring to the party and a lot of that is really in the blocking and tackling of running the business, and that's part of our analysis, can we add value to that, and really get one plus one making equaling more than two.

Yeah. Again with production being down, you talked about being down 38%. If I went back and look that if you guys are at 598,300 units in Q1, 2014. So, again a very different market. Does the softening generally, does that give you on the new design team? So, Mike used to talk about having some design engineers, maybe a couple of production engineers. Can you pull any production engineers off the floor, with a little softer manufacturing volume and move those guys to new product development, or if those new product development teams pretty much static that they don't – you don't really move people around much?

Yeah. We actually do move quite a bit, and especially you coming off in the – mechanical engineers coming off of the – off of the shop floor, bringing with them tremendous experience in terms of what the part needs to do within the factory setting. And so, a lot of our best product engineers, new product engineers really have come through that rotation, and that's part of their development where, we like to see those folks, spend some time on the shop floor, rotate in through and really then by the time they're designing product, they know exactly what the challenges are on a factory floor, both from a human factor standpoint as well as the machining standpoint.

Thank you. And our next question is from the line of Bill Ledley with Cowen & Company. Your line is open. Bill, your line is open. All right, ladies and gentlemen, I would like to turn the call back to Chris Killoy for his final remarks.

Thank you, operator. I would like to thank you for your continued interest in Ruger. We will remain committed to our strategy of focusing on developing exciting new products and driving continuous improvement in all facets of our operations. In closing, I would like to thank all our loyal customers and our dedicated employees who design and manufacture the rugged and reliable firearms that we use every day in our American factories. Thank you very much.

And ladies and gentleman, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.