Sturm, Ruger & Company, Inc. (RGR) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 Sturm Ruger 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, this call is being recorded. I would now like to introduce President and Chief Executive Officer, Mr. Chris Killoy. Please go ahead sir.

Good morning, and welcome to the Sturm, Ruger & Company yearend 2017 conference call. I would 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 fourth quarter and 2017 financial results. And then I will ask – I will discuss our operations and the state of the market and then we’ll go to your questions. Kevin?

Thanks, Chris. We want to remind everyone that statements made in the course of this meeting that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time-to-time in the Company's SEC filings including, but not limited to, the Company's reports on Form 10-K for the year ended December 31, 2017 and of course on the Forms 10-Q for the first, second and third quarters of 2017. Copies of these documents may be obtained by contacting the Company or the SEC or on the Company website at www.ruger.com/corporate or the SEC website at www.sec.gov. We do reference non-GAAP EBITDA. Please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2017 and of our Forms 10-Q for the first three quarters of 2017, which are also posted to our website. Furthermore, the Company disclaims all responsibility to update forward-looking statements. Chris?

Thank you, Kevin. Tom will now discuss the company’s 2017 results.

Thanks Chris. For 2017, net sales were $522.3 million, and diluted earnings were $2.91 per share. For 2016, net sales were $664.3 million and diluted earnings were $4.59 per share. For the fourth quarter of 2017, net sales were $118.2 million and diluted earnings were $0.59 per share. The recently enacted Tax Cuts and Jobs Act positively impacted earnings by $0.03 per share. For the corresponding period in 2016, net sales were $161.8 million and diluted earnings were $1.10 per share. Our 2017 EBITDA was $112 million, or 21% of sales, and our 2016 EBITDA was $171.4 million, or 26% of sales. For the fourth quarter of 2017, our EBITDA was $22.6 million or 19% of sales, compared to our fourth quarter 2016 EBITDA of $42.5 million or 26% of sales. The balance sheet. At December 31, 2017, our cash totaled $63 million. Our current ratio was 3.2 to 1 and we had no debt. At December 31, 2017, stockholders' equity was $230.1 million, which equates to a book value of $13.21 per share, of which $3.64 per share was cash. Cash flows. In 2017, we generated $101 million of cash from operations. We reinvested $34 million of that back into the Company in the form of capital expenditures. We estimate that capital expenditures in 2018 will be approximately $15 million. Our primary focus for investment will continue to be new product developments. Cash return to shareholders. In 2017, the Company returned $89 million to its shareholders through the payment of $24 million of dividends and a 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. At December 31, 2017, $31 million remain authorized for future stock repurchases. Since November 2016, we have repurchased 1.6 million shares or 8.4% of the outstanding shares. Given our practice of paying 40% of our net income as dividend, the reduction in outstanding shares will not only benefit our earnings per share, it will also directly benefit our dividends per share. Our Board of Directors declared a $0.23 per share quarterly dividend for shareholders of record as of March 15, 2018 payable on March 30, 2018. As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter-to-quarter. That's the financial update for 2017. Chris?

Thanks, Tom. First I want to talk about demand. 2017 was a challenging year for the firearms industry. For 2017, the estimated sell-through of our products in the independent wholesale distributors to retailers decreased 17% from 2016. During this period, the National Instant Criminal Background Check System or background checks as adjusted by the National Shooting Sports Foundation and commonly referred to as adjusted NICS checks decreased 11%. The decrease in estimated sell-through of the company’s products from the independent distributors to retailers is attributable to one, decreased overall consumer demand in 2017 due to stronger than normal demand during most of 2016, likely bolstered by the political campaigns for the November 2016 election; Two, reduced purchasing by retailers in an effect 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 manufacturing capacity, which exacerbated the above factors. New product developments. We believe that the new products are the key driver of demand. New products represented $137.8 million or 27% of firearm sales in 2017, compared to $192.6 million or 29% of firearm sales in 2016. In 2017, new products included the Precision Rifle, the Mark IV pistols, the LCP II pistol, and the American Pistol. In December 2017, the company introduced the pistol-caliber carbine, the Security-9 Pistol, the EC9s Pistol and the Rimfire Precision rifle. Due to the timing of these launches, these new products had only a minimal impact on the 2017 results. In 2017, we shipped over 800 unique models in over 40 major product families. Keep in mind; we only have approximately 380 catalog models. So more than half of the models that we shipped last year were non-catalog models. These were derivatives of existing models featuring a different caliber, barrel length or finish. Some of the distributor exclusives have been offered for many years due to the continuing strong demand, while others were new in 2017. Regardless, these derivatives are not included in our new products sales total, because we only include major new products that were introduced in the past two years. It’s a pretty tough standard, but helps us focus on significant breakthrough new products. Production and inventory. We review the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and in our warehouses semi-monthly to plan production levels and manage inventory levels. These reviews which we refer to as SIOP sessions, sales, inventory and operations planning, result in a decrease in total – resulted in a decrease in total unit production of 24% in 2017 compared to 2016. This allowed our finished goods inventory to decrease by 54,500 units and distributor inventories of our products to stay essentially flat during 2017. Our total inventory decreased by $12 million or 12% in 2017. We expect to manage our production to moderate inventory growth and capitalize on opportunities that present themselves in 2018. Workforce actions. While we reduced production in 2017, we were mindful of the impact that would have on our people, operations and profitability. However, we had to make some difficult decisions. We developed a strategic plan focusing on not selling positions vacated through attrition and the reduction of overtime while carefully monitoring our headcount. In the second half of the year, we ended all temporary work assignments and in January 2018, we consolidated and eliminated approximately 60 indirect labor positions. These reductions were made in all of our locations and cut across all disciplines. From January 1, 2017, to January 31, 2018, which is a 13 month period, our headcount decreased by approximately 700 people or 28%. As a result, Ruger is better positioned to succeed in 2018. The review of our workforce and our business needs occurs every couple of weeks at our semi-monthly SIOP meetings. These are the highlights of 2017. Before we take questions, I want to take a moment and reflect upon the recent tragic events in Florida. Although this call is intended to focus on our business, like all Americans, we also struggle with the shock and sadness of these horrible events. We will continue to stand by our model as arms makers for responsible citizens but we are people too and are impacted when tragedies like this occur in our communities. Operator, may we please have the first question?

[Operator Instructions] Our first question comes from the line of Brian Rafn with Morgan Dempsey. Your line is now open.

Good morning, guys.

Good morning, Brian.

Good morning, Brian.

Yes. Give me a sense as the fourth quarter played off from the hunting season, maybe you moved October to November into December, maybe Black Friday sales, holiday sales, how did the quarter progressed?

Brian, as I think, you know from some of the new stories about NICS checks, Black Friday was very strong. What we saw this fall in the hunting season was – frankly we did much better on some of the non-standard calibers, things like the 450 Bushmaster, bolt-action American rifle, as well as the 6.5 Creedmoors and things of that nature, rather than the traditional calibers like 30.6s and 270s. So, it was a very good – good for Ruger in terms of bolt-action sales in the hunting season, but it’s a little atypical in terms of which products were moving through.

Yes. It’s been the last couple of hunting seasons a kind of a cannibalization of Modern Sporting Rifles taking over from some of the Bolt-Action Scoped Rifle that you normally see regardless to caliber, is that continuing or has that subsided a little?

I think that’s probably stabilized. I don’t think we have any real data on that to confirm one way or the other, but like I said, it was – the fall season, the hunting season for us was good, but again it was dominated more by those non-standard and newer calibers like the 6.5 and the 450 Bushmaster in particular which we found somewhat surprising but it was good for Ruger given the amount of SKUs that we committed to those categories.

Okay. Give me a sense, when you guys talk, you really anchor growth on organic pipeline engineering team designing. If you look at, I am going to kind of frame it three different ways, but do you look at like the new products that are more of a breakthrough high-end, like the Precision Rifle versus the product pipeline or a product development like this is a new frame, a new frame platform versus the third area the derivative kind of the iteration, the caliber, the finish, the grip. When you guys are looking at this type of a little more of a malaise, a little more normalized market, you guys stage or give priority to maybe more new product frames or maybe more breakthrough designs, like the Precision Rifle, versus just having the derivative iteration type caliber and finish and grip type products or is it really projects just run their kind of order and you don’t really give a preference?

Well, Brian, the major new product initiatives, they typically involve teams of engineers and support folks and really from the purchasing disciplines and manufacturing engineers, tooling specialists et cetera. So those teams are pretty solid and stay together for the duration of the project. Examples of that would be things like the Pistol-Caliber Carbine that we recently launched out of the Newport facility, the Precision Rimfire out of North Carolina and the Security 9 Pistol out of Prescott, Arizona. So, all of those involves some substantial commitments both in terms of people and time and so those folks stay tied up and committed on those projects while we have other engineers and other folks that are working on those distributor exclusives. So both are really happening throughout the year and sometimes, frankly we are opportunistic when we see something like the – like a 450 Bushmaster as the caliber get popular, we’ll do additional special make-ups or derivatives with different distributors that may involve camel patterns. You might have scope combinations on a 1022, things of that nature that allow a little differentiation, but don’t detract from the major new product initiatives.

Yes, no, I got you on that. When you say the distributor exclusive specials, what kind of a lifespan, if you get 800 different models versus 380 in the catalog, do these things run multi-year or – and/or are they batch run – are they run production runs that are in the hundreds or thousands and do they run multi-year? I am just curious.

We – some that are in the thousands and then some that do run multiyear and some distributors will have a reputation for certain categories, say Single Actions and retailers know they should seek them out for those particular special make-ups that we have a lot of them that will be smaller categories that are kind of short time in duration, maybe 500 units and then move on to the next thing. So it’s really a combination. It depends on market reaction and acceptance when that’s launched by the distributor into their retailers. And if it’s strong, they’ll typically come back for a reorder. The only exception would be of course, if there is a limited edition that we said one of a thousand or something like that, then obviously we will stick with that preordained number.

Got you. And I’ll just ask one more and get back in line. The status of the Ruger Mark IV, the safety recall, I think you booked about 2.5 million. Is that finished for 2017, that’s a done deal?

Well, recall is going to go on for potentially years in the future. The big expenses are out of the way. I mean, what you’ve got is, now you got a lot of leg work and detective work on the part of our customer service folks following up and tracking down the individual customers who may have one of those models. We are approximately 60% through all of our – the units shipped on the Mark IV that are affected by that recall. And frankly, that’s very good. It will be a while as we go forward tracking those individual serial numbers down at customers. But, by and large the big expenses are all behind us.

All right. I’ll get in line. Thanks.

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

Thanks, good morning. So, given the recent junction of the industry, I know there is extensive talks in the financial press about the financial health of some distributors, specifically Jerry’s and Ellett Brothers. I wonder if you could just talk about if that’s going to have any – do you foresee any impact on the business? Is there any receivables risk in the financial side and if you could just address that? Thanks.

Well, Rommel, thanks for asking. Frankly, we monitor all of our distributors. We only have 19 distributors. We have another network of export customers that largely pay in advance. So we have a small number of loan portion customers, but our primary commercial distributors are all current at this time and we’re 99% to 100% current on all of our receivables. We do monitor their balances. Each one of them has a credit limit if you will and we use a combination of letters of credit and credit insurance to mitigate that risk. So, we are comfortable with where all of our distributors are at this point in time, but that’s not to say we don’t watch all of our distributors very closely.

Okay. Just a quick follow-up. Since SHOT Show, I wonder if you could just share with us anything you are seeing in the channel whether promotions and discounts becomes alleviated somewhat here in these last few weeks since that major tradeshow? Thanks.

Well, since the SHOT Show for Ruger, it’s been very positive as far as our new product launches. I mentioned some of the things that came out of all three factories along in addition to those three big projects. The Security 9, the Rimfire Precision and the Pistol Caliber Carbine. We also had the EC9s Pistol out of Prescott. All four of those have been very solid and we’ve had very strong demand from our distributors and retailers. A lot of consumers looking to get those products. So that’s been very positive for us. Right now, we are in a process of following-up and closing out our winter show programs. If you recall, we launched those programs earlier than normal. We launched those in December this year and those programs as far as the ability for retailers to write orders under those programs ends at the end of February and then we’ll continue to deliver on those programs through the end of May. And so far, we are right in that cycle right now. So it’s a little bit of a – as typically happens a little bit of a sprint to the finish for dealers to get additional orders written under those program terms before the end of February.

Okay. Thanks very much, Chris.

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

Hi, good morning. Thanks for taking my question. Wanted to dig into the inventory levels a bit, at the end of Q4 they were pretty strong, I would say especially at Ruger and at the distributor level, the distributors were flat year-over-year. Could you just talk about how you see inventory playing out next year and just broadly inventory in the channel versus the reported goods inventory level on the ammo side, I am wondering what it’s like on the firearm side.

Well, as you saw the distributor level, the inventory is basically flat year-over-year. We, as a target internally, we try to keep our distributor inventory between six and eight turns is kind of what we deal with an ideal level for a wholesale distributor in our business. We are close to the six. We are slightly over and more inventory than we’d like compared to that six turns levels, but not by much. And frankly, we are pretty pleased with where we are from an inventory standpoint down 50 some odd thousand units from last year. So, the other point I’d make is that, our Raw & WIP inventory levels are also down about 12% in total. So, we’ve been pleased with, when a small factory is down it’s very difficult to manage inventory going out in the field as well as what you are working with in the company and still be profitable frankly. And that was a challenge we’re facing in 2017 as we show up at all three of our factories down to meet what we felt was realistic demand in 2017.

And what about just broad industry level inventories? What are your customers saying? How do you view that?

We all really had good visibility into other manufacturers’ specific inventory levels, but by and large, I think, retailers navigated 2017 for the most part pretty well. They watch their inventories. Some of them frankly were looking for deals that materialize largely from some of our other competitors and so they were – retailers were – did a much better job than we’ve seen in previous downturns in terms of managing their inventory levels and engaging in smart buying practices. So I think they are probably fairly well positioned for the year depending on how things shake out going forward.

Okay. And then, just on orders – the order trends are quite good in Q4 especially relative to Q1, Q3 in 2017. What drove that? Is that the restocking of the channel? Is it new products? Is it Ruger outperforming peers? What drove kind of the large step-up in orders for Q4?

I think you may know, we don’t spend a lot of time paying attention to our incoming orders. But in our Q4, we had several things going on. Normally, our – what we call show programs or winter programs that we run beginning January 1, this year we started them on December 1. So some of those orders that we might normally see in January, we saw those in December. And then the other thing is new product launches of those four big major platforms, the EC9s, Rimfire Precision, Pistol Caliber Carbine and the Security 9 Pistol. So, all positive from that standpoint.

Okay. And then, if I could just squeeze in one more. You’ve mentioned excess industry capacity for a few quarters. What do you think happens to that capacity? Do you think it goes offline or how do you view that capacity going forward if level of gun demand will be lower?

Well, it’s tough to say. I think it varies by company and what their plans are. I mean, the challenge for some companies are depending on how broad they are if they only cover one or two categories that maybe suffering it from a downturn then obviously they are faced with either continuing to build the current rates and discount to move the product or to cut production. In Ruger’s case, we’ve got over 40 product families. So it allows us to be pretty diverse in terms of what we build and how we repurpose our equipment. And so we’ve redeployed equipment throughout all three of our factories and move things in between factories to try to balance our production and as far as other competitors, I mean, again difficult for me to say, at this point it seems like most have cut their production, but not all. Some are continuing to build and ship and potentially discount more than we’d like to see out there.

Great. Thank you. And our next question comes from the line of Max [Indiscernible] with Max Financial Services. Your line is now open.

Hey, good morning guys. Thanks for taking the question. Just let me squeeze in a couple of questions. The first, is there any color that you can provide of possible into the product mix that’s currently the distributors, so there is new versus older product or more importantly the mix is substantially different today than it was, say a year or so ago?

Max, we do monitor down at the SKU level, the individual stock-keeping unit. But, to be candid, we don’t disclose that. I will tell you, it’s pretty balanced. We don’t see any eyesores in terms of Ruger products. Not sure of other manufacturers, but by and large, we are pretty comfortable with the mix of inventory that our distributors have.

Awesome, terrific. The second question, obviously Ruger has been doing the right thing and you’ve stayed away from direct-to-consumer rebates and promotions even though your competitors have. Do you see that changing in 2018, especially as some of your peers continue to offering such deals? Whether they need to get rid of inventories or they just want to start up demand. Do you see anything changing for you guys to respond?

I don’t see us go in the route of consumer rebates to be honest with you. We may do some consumer promotions like we’ve done in the past that we try to be creative and not take value away from the product or the – anybody in the distribution channel. But I don’t see us going in the rebate route. For us, we continue to try to focus on new product innovations and I think that’s what we are going to do going forward and like we said earlier, the significant cuts to our production and realignment of our factories, I think position us well for 2018. So, we are comfortable with where we are and I think as you know, we monitor distributor sales much more closely than we ever do, incoming order rates or even inventory. Inventory, we want to look at and certainly make sure there is no problems out there, but what our distributor is selling into retailers and ideally the anecdotal data that we get from our sales force and from major retailers on how they are doing. That’s what really drives our production levels and our production mix.

Awesome, thank you. And the third question, final one, any thoughts on Remington’s bankruptcy? Whether it’s going to have any impact or possibly open up some opportunities for you?

Well, to be honest with you, we are watching that closely. I mean, Remington is a great company. It’s been around since 1816. They’ve got some great brands and great products. We obviously were – going through that process, we are going to monitor and see if there maybe some opportunities down the road, we think given our strategy and our capital structure, with no debt and $63 million of cash on hand may provide some opportunities down the road if they present themselves.

Awesome, thank you.

Thank you. And our next question comes from the line of Chip Saye with AWH Capital. Your line is now open.

Thanks for taking my questions. I have a few on CapEx. CapEx, it looks like you spend around $20 million in Q4. Can you talk about what you spent that all?

Well, frankly, Chip, most of that was – we’ve always spent the cash sometime before Q4. But it was placing in the service of the three big projects, the Security 9 Pistol in Prescott, Rimfire Precision in Mayodan, the Pistol Caliber Carbine in Newport. All those three went into service in Q4. We started producing guns, shipping guns in Q4, frankly in late December. And so, that’s why the big hit in Q4. It wasn’t a cash outflow. It was one of those products that went into service.

Okay. And then on that same front, your CapEx guidance for 2018 was a little lower than I anticipated. Can you talk about that, because in recent years, this averaged around $38 million a year and as high as $54 million and now this is a dramatic drop? What is the reason for that and what does that say about your business?

Well, number one, it’s redeploying of existing equipment. We’ve got a lot of CNC machine tools throughout all three factories that can be redeployed for new products. So, certain new products need – they all need fixtures, tools and gauges that are capital expenses. But those are typically dwarfed by the big CNC machine tools that we would normally need to procure. So, in a year like this, when we bought a lot of those machines and frankly have a lot of those machines, and we’ve cut production 25% since last year, we have those machines available. So, that’s not to say if we see an opportunity that we won’t double down and reinvest and buy more equipment. But right now, we think those existing CNC machine tools will likely support what we need to do. And a lot of that CapEx you see there in that $15 million will be the fixtures, tools and gauges to still make new products, but not have to buy brand new machines to make them on.

Okay. So, the new product development can continue, but with less CapEx, is that what I hear?

Absolutely, I mean, we are going full steam ahead with new product teams in all three facilities and no slowdown in that whatsoever.

Okay. And I – when I listen to your commentary about the workforce reductions and you are making the decisions you can to try to control what you can control, but when you slow factories down, you have a fixed cost absorption in your new products such as the carbine, the S9, are you having the same margin on those products as you did prior, say in, 2016 and 2017?

Well, as you know, we don’t disclose product-line level margins. But anything within the factory four walls is going to be impacted by the ability to absorb those fixed costs. So, I think, as volume picks up, which you would like to see it do, I mean that would obviously improve those margins. But that’s what you are facing is all products within those four walls are going to be impacted by that deleveraging of fixed cost from say, prior quarters or prior years.

Okay. And just a couple more if you don’t mind. The question earlier about discounting and you being creative, what do you see in terms of – maybe not just Ruger, but in terms of the environment, do you see that discounting continuing, I know M&P ran the lot of discounts last year and rebates. What do you see for the retail environment in the next say, six to nine months?

Well, hard to predict. Right now, it seems to have stabilized somewhat from, say, it’s not as aggressive. Some of the rebate programs and things of that nature that we saw back in say, the spring and early summer of last year. But there are still plenty of deals out there. And I think the biggest challenge, again, if you are a manufacturer that you are only in one or two product categories, they tend to be the ones that has to get more aggressive than others and that’s where again the diversity of Ruger’s product lines cover over 40 different product families helps us navigate and hopefully not be too reliant on any one single product family to get us through the quarters or get us through the year.

Okay. And lastly, did I read it right, I ran over the K last night, but were there no buybacks in Q4?

That’s correct.

Okay. All right. I appreciate. Thanks for taking the questions.

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

Yes, thanks. Chris, given the shrinkage in inventory in the wholesale channel and the retailers being very, very careful, does that give them anymore appetite for new product line launches that you guys might come out with, because it’s a little less risk that you are not slotting with these inventories?

Absolutely. There is no doubt about it. The new products will get people into the store regardless it also allows distributors to give their sales people something exciting to contact retailers about. So it’s a positive impact throughout the channel and I think, with retailers’ inventories be a little in better shape than they might have been some time ago, it kind of provides a better buying opportunity for them and a better opportunity for us to get those products into their stores.

Yes, okay. Given the moderation that we’ve all talked about the pace of business, are you – you talk a little bit about shifting some CNC tooling around. Have you added anymore – the last time we talked at Mayodan you were maybe 55%, 60% covered on the floor of the shop floor space. What would Mayodan be now and have you moved anymore product lines down there?

We’ve got several product lines down there. We are in the process. We are still building American Centerfire Rifles in both locations. We build the SR22 pistols down there. We build the LCP1 and we also build the Precision Rimfire and all the American Rimfire Bolt-Action Rifles down there. And so, we are probably – we still got some ways to go in Mayodan, but we are probably, certainly more full than when you were last down there, probably more like 75%, 80%, but we still got some room to grow if we can just do.

Got you, got you, got you. Okay. From the standpoint, if you look at kind of remanufacturing, that might get always talked about Six Sigma Kaizen in that. You were a back – way, way back when the Ruger family owned it now, more of a demand pull single piece, what are you guys looking at – if you go forward and looking at incremental changes in lien manufacturers, is it square up? Is it WIP flow? Is it work in process on shop floor? Is it floor space reduction for the super sell? What specific some of the things you can continue to do at this point?

Well, one is obviously taking cost out of the process. Continuous improvement is really the bottom-line. But a lot of a Kaizen maybe small in nature, maybe related to ergonomics at the work center and maybe related to safety improvements. So, when we do that, it provides a benefit, not just financially, but also to our employees in terms of the work conditions, the safety in the shop and all of that is positive. I am always impressed by the daily Kaizens I see, everyday coming out of the all three factories, they do a short report out of each daily Kaizen and some of them can be real blockbusters in terms of cost savings and some of them could be fairly, fairly small, but they are all continuously improving the process or the product and the other aspect to that is you’ve got great employee involvement in that process. That’s where the best ideas are coming from as a shop floor, certainly not from the top down. So…

Got you.

So it’s all been very positive in terms of the ongoing Kaizen efforts.

Yes. When you look at your engineering teams at all, do you guys have anywhere from five to six to seven and eight guys? And I think the number at one time in that a near is about 140 guy. Are you to incrementally add at all, because the focus being so big on driving new product sales or is it just rationalize with what they had found that you have. I am assuming you haven’t had any attrition on that side. Just kind of where are you in that that hiring more relative to engineers, design engineers, metallurgist guys? How important is that to you?

Well, we are not actively recruiting right now for any of those positions. We have, as you might have seen in the K, we have about 70 folks committed to the R&D/New Product Engineering effort and then a lot of those other engineers are involved in sustaining operations and mechanical engineers on the factory floor. All of whom are providing great service to us and we are not – while we are not actively chasing new engineering talent, if we got the opportunity for somebody with a unique set of skills, in particular products that we are pursuing, that’s something we’ll always be opportunistic and potentially find a home for that person.

Got you. You don’t have an age element. Obviously, you guys very, very paternalistic, you don’t have lot of 63 year old engineers. Is there a fairly – I don’t - bell shape curve or how elderly is that engineering design team pool?

It’s really a balanced mix. We’ve got some great folks that are, maybe a little – if you will, but they are very talented and they’ve been around the block and can help us navigate things. They know firearms design inside and out and as great as it is to have the youngsters coming with great CADD skills and things like that, having the veterans in place that help us with firearms design and understanding the history of firearms is really a benefit to Ruger. So, we’ve got a good mix in that group as we do in all areas of the factory.

Yes, okay. And relative to the SHOT Show and some of your conversations with your wholesale dealers, just getting exempt with the cadence, the pessimism, optimism, guarded optimism, and what was kind of the reception of some of the products that you showed?

I mean, the products were very, very well received. They are very excited about the new product launches. That will be very key. We had a lot of meetings at the SHOT Show not only with our distributors, but with our key independent retailers and key national accounts. And again, as new products that really make the difference and they are very excited about that. I think, when I said before, I think the retailer part of the channel was a little wiser than maybe some portions of the manufacturing and wholesale level and I think the retailers have navigated these waters for the most part pretty well.

Got you, got you. Up at Newport, anything relative to the main integrated foundry versus the two mini foundries that you are running? Any thoughts on that?

The two rollover furnaces or mini foundries are doing great. We still got – the legacy foundry is still there and winding down. We’ve got the primary focus is remanufacturing some of the byproducts, the runners and things like that that are then – that we need to use the main furnace for than to get the material ready for the rollover furnaces. And there is a few parts were still qualifying before they migrate from the legacy foundry into the rollover furnaces. But by and large that’s gone very well and the folks at Pine Tree Castings have done a great job with that and so, I think that’s probably pretty close to steady state in terms of those two mini foundries if you will.

Okay. And is there any caught-ups got in the legacy, the main integrated furnace down or is there – is that – do you guys have kind of had that flexibility and if some nice flexibility?

Yes, it’s been good flexibility in terms of the ability to ramp up. But it’s also, like I said, right now, we still need it to handle some of the byproducts leftover from the mini foundries or rollover furnaces if you will. So that’s still little bit of an open question. We don’t want to shut it down pretty materially and then not be able to go back, but if we do, the cast parts as other foundries that we could always, if we had to in a surge situation, source those outside, but right now we have good flexibility with our – the two rollover furnaces and still having the main foundry in place.

Yes, got you. Anything on commodity raw material feedstock, steel alloys, woods, waxes, resins, sand anything price-wise?

Nothing really significant that we’ve seen. One of the challenges we have is frankly on the wood side not procuring it, but that’s one of the things where our customers really like the highly grained wood on some of the products like the Hawkeye Rifles and the No. 1s. And that remains a challenge getting that highly configured or highly grained wood. But beyond that, we are in pretty good shape in terms of commodities.

Yes. What – I think we saw some discounts, MSRPs upwards of 30%. What might be, as you kind of went through the Christmas season, what might be – the ceiling right now on aggressive discounts?

I don’t know. I mean, I think, a lot depends on the strength of the individual retailer or potentially wholesaler that’s moving that product. When we do our promotional programs in the winter and sometimes in the spring, those are focused on the retailer. So we are not devaluing the inventory at wholesale, but it is making it more advantageous for the retailer to bring additional product in. For example, it might be a buy nine get one free program or a buy ten get one free, whatever the case might be. And so, that benefits the retailers and assists in netting his overall inventory cost down, but doesn’t impact wholesalers. And so, sometimes, you’ll see big retailers and they have the appetite to go in with strong orders from their distributors, maximize the amount of discount, even though the level of discount is all the same, then they have more product on hand and they may have more flexibility to be aggressive in their advertising and their discounting. So, I think that’s primarily where you are seeing at.

Okay. What was your sense on your Black Friday? Maybe your promotions and national advertising, did your efforts in sales kind of match your internal plan or budgets? What was your sense of Black Friday for you guys?

Yes, I would say, at the micro level, they did. I mean, the national account world, all retail in that world has been challenged for some of those customers. I mean, you saw the Gander Mountain bankruptcy. I think that was maybe last year, were probably beyond 12 months now. You see the acquisition of Cabela’s by the folks at Bass Pro. So that certainly injected a level of additional excitement at that retail level and for us selling through two-step distributions, on one hand, we are insulated from a credit standpoint when there is a bankruptcy like when Gander went out, but on the other hand, when there is an acquisition like with the Bass Pro and Cabela’s we are working hard with both staffs to make sure that the assortment at the store level is strong in every Cabela’s store and every Bass Pro store.

Yes, okay. Let me ask, kind of a little bit of a legacy question. You guys at one time were in the shot gun market, I think my comment was, there an issue of quality levels versus kind of – it was an $800 to $1400 price point. Any – and again, it’s a new product. So I could get that, but any thoughts on the future of Ruger with either a one hundred side-by-side shot gun?

Well, Brian, you hit the nail on the head there on the side-by-side market for the Red Label. I mean, that was one where we just felt we couldn’t deliver the right product at the right cost. It was our costs were much higher than we would like on that product and if we raise the price up to the level we thought would be necessary to make a fair profit margin. We just wouldn’t be competitive with the market. So that’s why we pulled the plug on the Red Label couple of years back. Not that we wouldn’t like to be there again. So, I wouldn’t say never, but as you know, we don’t talk about new products. So that one I can tell you off the table.

Yes, okay, okay. Let me ask, in some of your derivative products, you guys had some kind of unique calibers, the 454 casull, the 10-millimeter, the 6.5 Creedmoor, 460 Ruger, how successful that some of those additional line extensions in calibers been for you guys?

Well, some of them very strong. Like I mentioned before, the 450 Bushmaster, and the Centerfire American has really exceeded our expectations. 6.5 Creedmoor has been very strong. Other ones like the 6-millimeter Creedmoor for example is a little slower start. So they kind of vary and some of the legacy calibers like I say, a 204 Ruger, as the Varmint Caliber have been very steady over the years. Things like a 460 Ruger and the Super Redhawk line, again, kind of a niche product, don’t see a big hit, one way or the other. But I think it varies. A lot of those things like I said the 450 Bushmaster really caught me by surprise as far as just how strong it was. Part of that was driven by the laws in certain states allowing for straight-wall cartridges to be used during what was previously a slug or a shotgun season. And so, some are driven by changes in hunting laws at the state level. Others are just driven by what catches on with the consumer and I think the 450 kind of struck the core on both those notes.

Got you, got you. Any – like we’ve had on the Precision Rifle, any product that’s on limited allocation or whether it’s more demand right now than there is supply?

Right now for sure, the Pistol Caliber Carbine in 9-millimeter is done very well. And that one is one that I think is on allocation. We get a lot of dealers looking for where they can get product. We’ve been shipping it every day since the end of December. However, there is lot of – I’ll say some frustration out there like we saw with the Ruger Precision Rifle that people are chasing that and trying to find available product. It’s out there. I would tell them, keep looking, go to your independent retailer or look online because we are shipping those guns every day and the folks at Newport are ramping up. But where frankly the demand is outstripping supply on that gun right now and we have a lot of request for other calibers. People looking for 40 S&W, people looking for a 10-millimeter or 45 ACP, all in that Pistol Caliber Carbine platform. So that’s been very, very successful for us.

Thank you. And our next question comes from the line of Gavin Richie [Ph] with RCM. Your line is now open.

Hey guys. Just one really quick question. You mentioned your balance sheet. What level of debt would you take on for the right deal either in terms of EBITDA multiples or actually dollars?

Yes, it’s something I wouldn’t – pass it again to speculate on. I mean, as you know, with no debt, we like our balance sheet now, I think, we think it gives us a lot of opportunity in the future. But, we don’t really have any preordained limit that the right opportunity came along, I think we would be able to get financing either with debt or equity as needed if it made sense for us.

Thanks.

And that is all the time we have for our question and answer session for today. So with that said, I would like to turn the call back over to President and CEO, Mr. Chris Killoy for closing remarks.

Thank you. In closing, I would like to thank you for your interest in Ruger and I would like to thank our loyal customers and the 1800 hard working members of the Ruger team who design and manufacture rugged reliable firearms every day in our American factories. I look forward to seeing many of you at our 2018 Annual Meeting on Wednesday, May 9 in Prescott Arizona.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.