Chris Killoy - Chief Executive Officer Kevin Reid - General Counsel Tom Dineen - Chief Financial Officer

Rommel Dionisio - Aegis Brian Rafn - Morgan-Dempsey Capital Chip Saye - AWH Capital

Good morning and welcome to the Sturm, Ruger & Company third quarter 2018 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 third quarter financial results; and then I will discuss the state of the market and update you on our operations; then we'll get to your questions.

Kevin, let's get started.

Sure, 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 Form 10-Q for the fiscal quarter ended September 29, 2018.

Copies of these documents may be obtained by contacting the company or the SEC, or on the company website at ruger.com/corporate, or of course the SEC website at 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 our Form 10-Q for the quarter ended September 29, 2018, which are also posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements.

Chris?

Thanks, Kevin. Now, Tom will provide a financial summary of the third quarter.

Tom?

Thanks, Chris. For the third quarter of 2018, net sales were $114.9 million and diluted earnings were $0.52 per share.

For the comparable prior year period, net sales were $104.8 million and diluted earnings were $0.53 per share. In the third quarter of 2018, earnings per share benefited by the following.

One, the adoption of the new revenue recognition standard, known as ASC 606, which increased EPS by $0.01. Two, the reduced federal income tax rate in 2018 from 35% to 21%, which increased EPS by $0.07.

And three, the repurchase of 1.3 million shares of common stock in 2017, which increased EPS by $0.04. The comparison of earnings per share for the third quarter of 2018 to the third quarter of 2017 was adversely impacted by $0.16, due to improved manufacturing efficiencies and favorable leveraging in the current quarter.

This reduced the carrying cost of inventory and increased cost of sales in the current quarter by $900,000. Conversely, unfavorable deleveraging in the prior year increased the carrying cost of inventory and decreased cost of sales by $2.1 million in the third quarter of 2017.

Our improved efficiencies adversely impacted our Q3 results, but will benefit us going forward. In October 2018, we issued a safety bulletin announcing that some Ruger American Pistols chambered in 9mm may exhibit premature wear of the locking surfaces between the slide and barrel.

We are offering a free retrofit to customers of affected pistols and therefore recorded a $1 million expense in the third quarter of 2018, which is the expected total cost of the safety bulletin. For the first nine months of 2018, net sales were $374.5 million and diluted earnings were $2.19 per share.

For the corresponding period in 2017, net sales were $404 million and diluted earnings were $2.32 per share. For the third quarter of 2018, our EBITDA was $20.5 million or 18% of sales, compared to $20.8 million or 20% of sales in the third quarter of 2017.

The balance sheet, at September 29, 2018, our cash totaled $137.8 million. Our current ratio is 3.5 to 1, and we have no debt.

At September 29, 2018, stockholders’ equity totaled $254.2 million, which equates to a book value of $14.34 per share. Cash flows.

In the first nine months of 2018, we generated $95.6 million of cash from operations. Cash returned to shareholders.

In the first nine months of 2018, the company returned $15.5 million to its shareholders through the payment of dividends. Our Board of Directors declared a $0.21 per share quarterly dividend for stockholders of record as of November 16, 2018, payable on November 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 the third quarter.

Chris?

Thanks, Tom. We are pleased with the third quarter financial results and our financial condition as we enter the fourth quarter of the year.

In mid-2017, we strategically lowered production as we gradually reduced our workforce. As a result, in past year, which is by and large a period of relatively soft demand, we were able to: Number one, achieve solid financial results; two, strengthen our balance sheet, by reducing our inventory; and three, reduce inventories at the independent distributors.

And most importantly, we achieved all this without over extending ourselves with promotions and discounts or hindering the sell-through of our products from the distributors to retailers. Demand, the estimated unit sell-through of our products from the independent distributors to retailers in the third quarter of 2018 increased 7% from the comparable prior year period.

For the same period, the National Instant Criminal Background Check System background checks, or NICS checks, decreased 8%. The estimated unit sell-through of our products from the independent distributors to retailers increased 1% in the first nine months of 2018 from the comparable prior year period.

For the same period, NICS checks decreased 5%. We believe our outperformance of NICS in both the third quarter and the first nine months of 2018 is attributable to the strong reception of our recently introduced products.

These include the Pistol Caliber Carbine, commonly referred to as PCC, the Mark IV pistol line, the LCP II pistol, the EC9s pistol, the Security-9 pistol, and the Precision Rimfire Rifle. New product sales represented $112.7 million, or 30% of firearm sales, in the first nine months of 2018.

New products sales include only major new products that were introduced in the past two years, like the six that I just mentioned. Derivatives and line extensions are not included in the new product sales calculation.

The Custom Shop, earlier this month, we proudly announced the Ruger Custom Shop along with our first two Custom Shop offerings. One, was the Doug Koenig competition 1911 pistol, and we also announced a competition 1022 rifle.

We’re off to a great start as both of the products have been very well received by the market. While Ruger products have long been recognized for their quality and innovative features.

The Custom Shop guns will embody the pinnacle of style, performance, and design, and will excite all of our loyal Ruger customers from hunters to competitive shooters to collectors. Production and inventory, we base our production and manage our inventory levels, primarily through semi-monthly reviews of the estimated sell-through of our products from the independent distributors to retailers.

We also review our inventory and the independent distributors' inventories. Our total unit production for the first months of 2018 was 6% below the first nine months of last year.

Our reduced production levels, allow for significant decreases in inventory in both our warehouses and that of the independent distributors. In fact, that combined inventory decreased over 150,000 units since last September.

Nonetheless, during the third quarter, we accelerated production in targeted product families to strategically build additional finished goods inventories in those products. The healthy well-balanced inventories have us very well-positioned to succeed regardless of which direction our perennially cyclical market turns.

Capital expenditures, capital expenditures in the first nine months of the year were $4.9 million, which is very low for us. However, as we mentioned last quarter, this is not indicative of a lack of new product development activity nor does it signal a change in our commitment to new products.

Rather, it can be attributed to two key factors. The first is timing.

Our capital expenditures in the fourth quarter of 2017 totaled $20 million, which is uncommonly high. This was attributable to the four major new products that were introduced last December.

If one or two of those products lagged into 2018, our year-to-date 2018 capital expenditures would have been significantly greater. The second reason is the repurposing and relocation of machinery and equipment already on site.

We built 2.1 million units in 2016. As I mentioned a few minutes ago, our reduced production levels have freed up some capital equipment.

This has allowed us to create and expand some manufacturing sales, while foregoing significant cash outlays. Cash, as Tom mentioned a few minutes ago, our cash generation in the first nine months of the year was very strong.

The key contributors were our solid operating performance, the cash generation of which was bolstered by the reduced federal income tax rate; the $13 million inventory reduction, another positive outcome of our reduced production, continued solid accounts receivable collections, despite some headwinds in the industry; and the relatively low level of capital expenditures, which we just covered. Our cash balance of $138 million is more than we need to support our normal daily operations.

Nevertheless, our capital allocation philosophy has not changed. Our primary responsibility is the stewardship of our shareholders' assets and the creation of shareholder value.

We are constantly looking for opportunities to generate strong returns with our capital. If we get to a point where we decide that we will not be able to employ our capital, we will return that cash to our shareholders in the form of dividends.

One final note, the National Association of Sporting Goods Wholesalers held its 45th Annual Meeting in Pittsburgh in mid-October. The NASGW honored Ruger as the firearms manufacture of the year for the 12th year in a row, and firearms innovator of the year for the third time.

We were very honored to be recognized by our customers and we accepted the award on behalf of the 1,800 hardworking Ruger employees that make our company run. Operator, may we have the first question please.

Thanks very much. Chris, I wonder if you could just comment a little bit on the state of the overall firearms market?

It seems overall returns have been soft, as obviously gaining a lot of market share, which is very impressive performance, but maybe if you could just talk about that a little bit. Thanks.

Thanks, Rommel. Well as you noted, things have been somewhat soft when you look at the NICS checks.

There is still a lot of promotional activity out there. There are deals that are being cut by some of our competitors.

And so, we face that in the marketplace every day. New products are the best ways to overcome that.

Although, we do participate in promotional offerings with our distributors, we work through our distributors to benefit our retailers. We think that will continue for the near-term.

We think at the end of the day, there is still a lot of capacity at both manufacturer level, distributor level, and even retail level, and that may take a while to work through the process. We think the inventory situation by and large is in much better share, certainly at Ruger and with our wholesalers.

We think overall, that inventory has probably stabilized throughout the market, compared to last year, but there is still a lot of capacity out there.

Thanks, Chris. I asked this question last year, but can we just get a follow-up comment on the impact of tariffs and rising raw material prices?

Thanks.

Rommel, we’ve not been impacted directly by the tariffs because we source the vast majority of our raw materials domestically. However, the tariffs have impacted us somewhat indirectly.

Take steel for example, we’ve been sourcing our steel domestically for decades, and the tariffs have made domestic steel more attractive, so demand has risen as manufacturers who have been getting their steel from overseas look to find domestic sources. This has led to some price increases and some shortages in raw materials.

Our purchasing folks have worked very closely with our suppliers. Frankly, we’re price protected through the balance of this year.

Next year, we do expect to see some pricing pressure on steel and raw material. However, our biggest concern remains availability.

So, we watch that very closely and given the strength of our balance sheet, we don't mind bringing in things like steel and raw materials when we need to, to make sure we’re out in front of any shortages that the market may be facing.

Great. Thanks, very much.

Good morning guys.

Hi Brian.

Hi Brian.

Give me a sense that kind of cadence that tempo of business, summer is seasonally a slower period layered into a market that’s a little bit tempered, how did July, August, September play out, pre-hunting season?

Frankly Brian, one of our sales reps captured it probably best that summer seemed to start later, but it lasted longer. And in terms of that slowdown effect, things in July were actually not as bad as sometimes they are seasonally, but it took a while through September.

We think hunting season kicked in a little later than normal, traffic at retail seems to be off, but for those retailers who are willing to advertise and promote, we saw some very good results. So, I think it’s – we’re back to that normal seasonality of that slower summer period and then into a stronger fall on fourth quarter period.

Yes. Any, on the kind of the deer hunting season, any shifts in bolt action rifles, kind of the standard bolt action to modern supporting rifles are back.

We have seen that the last couple of years, any trends – caliber trends or anything that’s – for the deer hunting season is looking to have some descent sell-through?

Well, Brian you may recall the strength of the 450 Bushmaster Calibers and 6.5 Creedmoor in the American Rifle Series, we’ve seen very good success this past year with that, particularly in states that have opened up their – changed their hunting regulations to adopt straight-wall cartridges and previously those rifles were restricted. So, in places like Michigan and Ohio, in particular, we’ve seen a nice uptick with people moving to the 450 Bushmaster.

We also recently introduced 450 Bushmaster in our AR-556 platform. So, we think that will have a potential impact as well.

And 450 Bushmaster has seen a nice resurgence both with hunting community and people who just want to change things up with some existing platforms.

Got you. You [indiscernible] from a question, we seemed to see some of that heavier caliber, you mentioned the AR-556 or the Bushmaster, you also launched, I think the 338 Lapua Magnum in the precision rifle.

Is there a trend toward larger calibers or is it more range hunting or what you kind of seeing? You mentioned certainly the 6.5 Creedmoor.

Well, in the precision rifle, the Ruger Precision Rifle that we launched a couple of years ago, we kind of reset that category, and I think we attracted a lot of new participants in the precision long-range shooting. And so, as they were out there starting to feel comfortable with those thousand plus ranges that they might be hitting targets at, they now, you know a lot of those folks were interested, and we got a lot of request for a 338 Lapua and a 300 Win Mag, and it took us a while to get there because we had to increase the size of the receiver on that precision rifle.

And as a result, it may have taken us a little while to get there, but the results have been fantastic. That 338 Lapua in particular, we’ve got people in certain ranges and locations where they can shoot that far, hitting targets out to 2,500 meters, which is just crazy, and both those rifles are just staggering.

So, I would say, it’s a more precision rifle shooting events and disciplines than it is long-range hunting for sure.

Yes. Now, as you look at that trend Chris, is that something that migrates up to a 50-caliber Barrett, or is that a completely different market for more special forces guys?

Good question. We get a lot of requests.

You know, we have a spot on our website called, Email the CEO, and we get a lot of request for other calibers in those big bores. So, that’s something we’ll take a look at, but right now we're just trying to keep up with the 338 and the 300 Win Mag and that 338 Lapua is, as you likely know has been adopted by many Special Forces units and SWAT teams around the country, and so I think we're going to have good success with that caliber.

Although it is – at those ranges we’re somewhat limited by customers who can find a place to shoot that far.

Yes, right. Sure, got you.

Let me ask with the crazy polarization and politics and, you know we’re seeing a lot of frenzy with the mid-term elections, if the Democrats were to re-take the house and you hear the MPs, the President, and obviously gun-control comes roaring back, given the reduction in headcount, you don't – I don't believe you have any temporary employees anymore, how quickly have things turned back up fast? Can your SIOP plan bring back up production for what you have or is it basically having to go out and actually do some hiring?

Well, Brian as you might know, we have been through this type of cycle before. So, we’re pretty aware of what models or what SKUs would likely be impacted by an increased demand, if they were called for additional gun-control and things like that, we have these exact discussions with our distributors at last month's wholesale show in Pittsburgh.

And I think, this is one where we don't give forward-looking guidance, but we’ve been very strategic in the SKUs that we’ve been building to make sure that we do have inventory and where our distributors have inventory, it’s a very saleable product, so I think if there were an uptick in demand, I think, both they and we would be ready to capitalize on it with – to some degree with our inventory. And we are also very mindful of where we’ve, even though we’ve reduced capacity in some regards, we talk about our SIOP rates or our build rates.

We also have a very specific target number for capacity on those lines. So, even though we might not be operating at full capacity on a particular line, we’ve retained the capital infrastructure in a way of machine tools and gauges, so we can move people over there and increase those rates on a fairly quick basis.

So, I think we're ready for and if it changes, if not, like we said, we are ready for – if the market goes up, I think we’ll be ready for it. If market goes down, we’re ready for that as well.

Our balance sheet certainly helps there.

Yes, got you. In the quarter, the level of, kind of your wholesale dealer, your exclusive specials, how important were those in the quarter?

They continue to be very important for us. Unlike some of our competitors, when it comes to those special makeups.

We work with our wholesalers in good times and in bad. So, when things slow down, we tend to do very well on our wholesalers with some of those particular models that individual distributor might buy just for themselves or one of the buying, the collective buying groups like TALO would buy a series of products from us.

In fact, our initial offerings on the Custom Shop are going to go through the TALO distributors, and they’ve been very supportive of that initiative as well.

Yes. The Ruger Custom Shop, is that a concept that you’ve had operating for a couple of years, kind of buried within Sturm, Ruger or is that something as brand-new or how long has that been on a development in that?

Is that a limited production type SKU?

Well, I mean, it has been a goal of us for some time to introduce the Custom Shop or something that would allow us to go after some of those very competitive higher end products. It’s been out there for a while that challenges both people, time, and talent.

And so, we’ve got the right mix, I think in place, one of the things we came about with our modest entry into the competitive shooting world with our Team Ruger shooting team, captained by Doug Koenig, is also gaining access to that expertise from some of those very, very expert shooters, and working closely with our engineering teams. And what’s been exciting is our engineers at all three factories have really – we’ve got some folks in there that have some great ideas that are really coming out of the woodwork.

So, we’ve got people, you know, every time I show up in one of the factories, we’ve got people pulling out a new design, new idea, and so we're very excited about where this can take us.

Got you. Okay.

There’s been I think kind of a build-up from the standpoint of expectations for the Christmas holiday season. Black Friday has been for the last seven or eight years, fairly – the high watermark for sales of guns and firearms.

What from the standpoint of your, you know your national sales efforts your advertising and promotion, are you guys estimating that this is going to be a bigger season or is this kind of running on plan, how do you see the holiday season?

It’s hard to predict and we don't give that forward guidance, but we’re well prepared for it. Our team of national accounts folks on the sales side, have done a very good job of laying in ad schedules, making sure inventory is there to support those ads, both at the retailers and at our distributors, and as you might imagine that planning actually begins in late spring.

We’re looking for those Black Friday ads. So, I think we’re well prepared for it.

I think it’s going to be – we’ve got the right products for it. We’ve got specific products that we’ve got in place for certain retailers.

And I think, they’re excited about the prospects for Black Friday and fourth quarter.

Got you. Is your engineering teams, you guys usually talk – Mike has talked in the past about finding 5 to 6 guys and you’ve had somewhere in the neighborhood of 85 to 90 plus guys, is that engineering team, is that still about – their pool of talent still about the same?

Are you hiring any, have you lost any?

It’s probably around the same. We’re always looking for some – we see some talented folks out there, we’re always looking for that.

We have a good stream of new talent with an intern program for our mechanical engineers out of all three of our factories. We get folks that are working on mechanical engineering degree, bring them in for one or two summers, work on real world projects at Ruger and that provides a good hiring opportunity for us.

So, we’ve got, you know, one of the things that’s a little bit different now is, we’ve got some more use of our cross functional teams communicating between our three major factories. So regardless of where that product may ultimately be built, we likely have engineers working on it from both New Hampshire, Arizona and North Carolina.

Even though that particular product might be built in one or two of those places, but it doesn't matter where it’s going to be built, we’re much more adaptable and flexible in terms of using our own in-house engineering talent between our facilities.

Okay. You mentioned too about repurposing, you know some of your machine tools, assembly lines.

Have you moved tooling between plants or is it more or less just on the floor space within the plants?

Well, we start-out within the four walls of the plant. We look for freed-up equipment, and then we move to looking between plans.

So, we’ve done a lot this year. Moving equipment between the factories as things free-up as one line.

SIOP rate may get cut. We are looking to increase another place.

Our engineers and our manufacturing engineers on the floor have done a phenomenal job, looking first within their four walls and then going out to the other divisions to see what can be freed up, something that’s coming up next month that I can put that into my plans rather than a new purchase order for a new CNC equipment.

Okay. Is the furnace, the integrated, many furnaces, I think you’re running two up in Newport, and then you have the main furnace, is that still operating about the same?

Has there been any changes in that?

We’re down to just a very small amount of items running through the legacy furnace. Certain products need to be qualified in the new process.

We’ve got a handful of those products and we’ve got the revert material that still runs through the old furnace, but we’re pretty close to be able to winddown that legacy furnace.

Okay. And are you still running two of the minis up at Newport?

Yes, sir. They are both running very well.

The Pine Tree Castings folks have done a great job on that and they’re running pretty efficiently in addition to our metal injection molding facility that we have in Missouri. Both of those folks have done a great job supporting our new product initiatives.

Okay. And given the current, Chris, the current production, does that – is two of the minis still sufficient or are we going to be looking at staging number three, either at Newport or at another plant?

It’s actually something we looked at Brian. We’ve got the plans in place forward.

We just haven't pulled the trigger on it. You know from that standpoint because that’s one of the things that we can, depending on the new products coming down the pike, you know in the old days, anything we made used to be with investment casting technology.

Today, a lot depends on what that gun is, and what are the major parts? Is it, we’re using forged components?

Are we using MIM components, investment casting? So, part depends on where we go with the new product strategy, and what’s coming down the pike, as well as making sure that we don't overextend ourselves from having too much capacity on the rollover furnaces.

Okay. And then, I’ll just ask one more, and get back in line.

Your kind of vertical integration on the NIM, I think at Earth City, are you seeing more content from these plastic injection-molded parts within the more usage, more maybe part SKUs used in your operations as the years go on?

I think it’s more of the benefit of having the Ruger Precision Metals operation out in our city is really timed to market. I mean, we still do quite a bit of our metal injection-molding parts.

Our source from outside suppliers, on top of what we do in-house with our own capability, but the benefit of having that captive provider both on investment casting side and the metal injection-molding is our time to market on both prototypes, and rapid tooling development. So, we can be either prototype, upon three different ways to look at how it behaves, or be in production in very, very short order, and that’s been a big benefit to our new product time cycles.

Alright. I’ll get back in-line.

Thanks.

Yes, good morning and thank you for taking my questions. I have a couple of them.

Looks like, based on your commentary that the discounting and promotion, it appeared there for a while, it seemed like it was abating as people worked-off inventory in the last year or so, but your commentary today made it sound like it may be back. And I know Brian asked around it, but can you just talk about that where you are seeing that promotion if you are seated at retail, seated at distribution both and how it’s manifesting, what is it appearing as?

Well, I don't think it ever went away completely. We did run fewer promotions this year than we did last year, and I think what you will see is a normal seasonal promotional window within our industry remains that January show period if you will.

So, in January is when distributors or wholesalers typically have, shows. Some of them physical shows, some of them more electronic in nature, but that window is going to be there.

Again, it’s just a question of how rich are those promotions are in it towards retailers. For example, if it’s a very, if the market is softer than we expect then you might see those promotions get a little richer as we go to market to compete with the other folks that are out there, but I don't think it’s gone away completely, and I certainly don't expect it to go away in 2019.

I think, we will continue to see some level of promotions and that always puts pressure on margins and puts at the time we’re seeing rising prices on steel on such that you know we’ve got take all into account to try to keep our margins going in the right direction.

Okay. That is kind of for industrywide, but what about you guys?

Will you hold the line this fall? I mean, this holiday season or do you think promotion for Ruger will be up the same or down, like what’s your plan?

I think our plan is likely to be very similar to what we’ve seen the last year. We’ve got typically, if Ruger is going to take a price increase we do that on or about January 1.

We typically let the trade know that ahead of time in December. So, they can respond to it, and if they so desire to bring inventory in and advance of that pricing increase because when we do a price increase, it affects everything on order.

We don't price protect unless it’s a law enforcement or military order. And so, when that happens that’s part of our normal cycle, and I would expect we would hear that same normal cycle and we would have those promotional offerings announced to the trade, either late November or early December, just like we did last year.

And the question is, just how rich are they or aren't they? And that depends on what’s going on post-mid-term election, post-demand than what we see in demand at retail, just how we want to balance our promotional efforts versus some of our competitors.

Got it. I appreciate that.

My next question is, you mentioned the perennially cyclical industry and I think that’s kind of a good reminder to us and others as we look at the adjusted NICS and I think that’s the best number to look at, it is a little harder to get to, but I think that’s the one that you and the industry uses, but the numbers that came in the last few months where a little lower than – I mean, I think the September number was going back to like 2012 or 2011, was the last time we saw it adjusted NICS number at that level? And you mentioned the excess capacity in the industry and at all levels.

And I just wondered, you don't have a crystal ball, but how do you see that excess capacity kind of working its way out and what time frame?

Well, I would say that, as I said in my earlier comments, the good news is the inventory has largely to some degree worked its way out. In Ruger's case, we're very happy with our inventory position in-house, as well as the inventory position of our distributors, but that capacity still exists, and both at Ruger and other manufacturers.

And I think frankly, there are some may be some smaller third tier manufacturers get into the AR platform business or MSRs, modern sporting rifle, they get into that business. Over the past couple of years, a few of them have gone away, a couple of them are still hanging on, and there may be some shake out there.

That business does not increase or maybe some further shakeout in that category, you know, so I think the challenge is we went through a couple of years period where everybody ramped up, and everybody still has – largely still has that capacity. They may not have the same headcount.

They may not be making those same number of firearms, but they still could if they need to. And so, I think that’s the biggest challenge as we’re all chasing that piece of the pie at the retail counter, and it’s pretty competitive.

You're looking at the pricing and the value that a customer gets at the retail counter today it is pretty strong. I mean, when you look at the value that they get in the bolt action rifle, for example whether it’s a Ruger or one of our competitors, they’ve got some real value there.

And those prices have come down from the days of, even our own Hawkeye, which is still part of our product line, but the vast majority of our bolt action rifle sales have shifted to our American Center Fire line at those lower price points away from the higher Hawkeye, polished blue steel, nice highly grained wood price points that really made up of the bulk of the Ruger line 10 years ago. So, I would expect that trend to continue that those price points particularly at retail are going to be key for us to be at.

Okay. So, it’s going to take a while and you may have some capacity and the AR capacity go out.

It sounds like, and then, you may anticipate lower ASPs in 2019 in the industry you think, is that what I’m hearing, just…?

I don't necessarily think, in the industry, I don't know. I mean, a lot depends on whether there is an uptick in demand.

I mean, we’re already either way, I mean, like I said, we design our lines, we put our lines in, we design a target max rate and a target daily rate. And so, we can flex up or down pretty quickly, within a given facility.

And so, I don't think we’re necessarily or trying to say this is necessarily going to be a lower average selling price next year. I don't think that’s necessarily the case.

I certainly don't know that, but we like to think of ourselves as putting a lot of value into the products and we can respond if necessary to make sure we’re keeping up both our market share and our margins where they need to be.

Alright. I appreciate it.

Thank you.

Yes, Chris just a follow-up on capacity. It’s amazing when you look at the BATF reports how many little tiny machine tool shops are in there producing 10, 12, 40, 50 guns a year, is that where you are kind of seeing, you think the fall out in capacity production versus maybe some of your larger OEMs?

Well, I think the larger OEMs have cut back their production, but probably like us, they’ve moved machines around and people around to take advantages of where they could or reduced headcount in some cases. And yes, on the small producers, those folks in those ATF reports that are under a thousand guns a year, under 500 like you said, even 10 or 20, a lot of those folks have probably may not be in business as we go forward, in the not too distant future.

Yes. The commodity feed stock inflation, if you look at, you talked a little bit about steel, are you seeing anything in woods or woods or resins, green sand wax, aluminum, gun oil lubricants, anything across the full spectrum?

I think, obviously with petroleum-based products like some of the injection-molded products, we're going to see some pricing pressure there. There’s plenty of capacity that’s something we don't do ourselves where there is plenty of sources for those components out there.

For example, our rifle stocks that we use, either glass-filled nylon or polymer stocks, those may have some impact related to some of the commodity pricing, but the biggest one that we keep an eye on right now is steel. I think, wood is pretty stable.

And frankly, we use less would in – at Ruger than we used to, but that’s something that again we're pretty opportunistic in terms when it comes to buying wood or laminates. We can bring those in with our balance sheet and bring those in when we need them and to make sure we’re always ready to build those products.

Yes. What are you seeing without may be mentioning specific deals on the – kind of the merger acquisition front.

You know, either by ammunition or accessories and is that kind of viable for you, kind of going forward or would we be seeing more deals like the Columbia River Knife, where it is more of a cobranded type product?

Well, if the right opportunity where there, we wouldn’t hesitate to use our capital for a strategic acquisition. We have seen a couple of accessory manufacturers on the market to date.

They haven't really made sense for us, because I think the only thing we would be bringing to the party would be our cash and not necessarily something that we could leverage, and do a better job than they’re doing with it. So, we’re a little hesitant on some of the things that are too far outside our core competency, and it’s going to be at the right price.

You know, given our multiples that we trade at, you know we’re very conscious of wanting to make sure we’re buying something at the right price, and don't feel a pressure to necessarily just spend our money because we have it.

Yes. Now that you’ve had for a short period, Doug Koenig's Ruger Shooting Team up, how has that kind of integrated with you?

You talked a little bit about design, may be some field-testing prototyping, you mentioned like these brand loyalty ambassador type guys. How has that shooting team provided insight to your operations?

Well, we're really just getting rolling on the impact that they can have with our engineers. I will tell you when we have somebody like Doug show up at our product planning sessions at one of the factories, and we do those sessions every month, we rotate them around the three factories.

The engineers are just like a sponge. They want to pick his brain, they want to show him what they have been working on, and so it’s really been fun to see that, and we’ve got a lot of competitive shooters amongst our engineering ranks.

They may not be at the level of our – some of the pro-shooters that are out there, but they like to spend their weekends either in the deer stand or on the competitive range. So, they bring that knowledge right back into the engineering room.

Got you. The safety recall on the Ruger American Pistol, is that a fairly short-term that something that can be retrofitted, you know several months, is that going to be a couple of years, I know you’ve taken the charge, but how long does that take you guys to execute that?

Well to actually make the refit – and the safety bulletin that we put out there. What we really do is, the first thing we do is, we get a gun and this a very high round count guns, typically over 10,000 rounds, which is for somebody, the average customer that’s probably a couple of lifetimes.

But just to be doubly sure, we will take a look at that, that firearm, look at the slide, if we see any abnormalities, I will replace that slide, but realistically what we're going to do is, we replace the barrel. And the barrel seems to be the offending party in that relationship, but once we replace the barrel the problem pretty much solves itself and goes away.

So, it’s largely a barrel change for those firearms that exhibit any excess wear and then beyond that, the reason they take a long time for these things to wind down is just – it’s not because it takes a long time to repair the guns, it takes a long time to make sure our customers are notified and somebody may be a second owner. He may buy that downstream from a, maybe the third purchase, maybe the first time somebody realizes there was a safety bulletin on the gun, and so they come back in.

So, it does take a while. So, even though we took that $1 million charge that you referenced, it takes a while, many years typically for us to either go through it or use that up if you will.

Yes. Maybe a question and for Tommy, what are you seeing on, maybe salary and wage inflation, and then obviously the healthcare inflation?

Yes, more or less business as usual. That’s something we are looking at constantly with our HR folks, but nothing out of the norm and we as you can imagine, we’re a pretty small fish in the overall medical insurance pool.

So, what you're seeing in terms of national trends they hit us, like they hit anybody else. So, it’s a battle that we constantly fight, we want to provide good healthcare to our employees.

And I think we do that, but it’s a balancing act. It’s not inexpensive, but it’s a benefit they appreciate and a benefit frankly we need to provide to keep.

We’ve got great employees, and to keep those great employees, we have to provide, we have to provide real good benefits. That’s what we plan to keep doing.

Okay. If you look at the different plans, Prescott, Mayodan, and Newport, what are you guys running labor shifts?

And maybe that plus what you might be seeing in over time?

Brian, it varies, as you would expect by product line. It’s probably, it’s – some product lines it’s one shift, on others it’s two.

So, net-net is probably somewhere in that 1.5, but some lines were two and somethings we do in like a four-day shift. So, we can free-up machines to use on odd cycles.

So, it really varies depending on what the product line is, and depending what the capacity there, and what we try to do on most of our lines is lay them out to be fully functional for a two-shift operation. So, a new product line would have, you know we may start-out with one shift and expand it to two, but we try to be – lay those out smartly, so that we can run at to shifts in good order and that’s where we look at and we’re putting our super sales in place.

Got you. How many lines, it’s been in a couple of years since I’ve been down to Mayodan.

What might be the floor space build out [ph]? I mean, I think when we were there, it was like 50%, what would you be seeing now, in North Carolina?

We’re probably at, I’d say, 70%, 75% Brian and we’ve added a couple of things down there. We’ve got.

We’ll be making American Centerfire Rifles for example in bulk plans this past year, but next year we’ll probably be making most of those, if not all of them down at Mayodan. So, I mean that’s an area that they’ve done a great job integrating existing lines, as well as developing their own homegrown lands like the Precision Rimfire, which evolved out of the Rimfire American to the Precision Rimfire line, and we’ve just expanded that and really split those lines in half because the demand for both the standard product and the Precision Rimfire product.

Yes. You talked a little earlier Chris about discounting, everybody is asking at, obviously 2017, you know we saw maybe we’ve seen in late 2016, we saw some really aggressive 30, 35, 40 they were just bleeding, hemorrhaging the discounts.

Has that abated in dollar terms? I know you guys don't do that, it’s more or less 11 guns for the price of 10.

You do more of a unit volume type thing, but if you look at the overall kind of discounting pricing that still prevails heading into the hunting and holidays here in 2018, we're just seeing that that number is down from the standpoint of what you might see discounts to MSRP across the industry?

I think, it’s down a little. It certainly hasn't gone away.

If you go to the counter at any of the big box stores, you will see plenty of rebate counter cards out there with the tear-off coupons from a lot of our competitors. We typically don't participate in the rebate at the consumer level for promotional standpoint, but there’s still a lot out there.

In fact, you will know in a couple of months, I think the time will tell on this one, and we are seeing as a real competitive pricing pressures on some related categories like ammo for example. There’s a lot of discounting on ammo and that can impact not us directly, but that can certainly impact our retailers and our wholesalers if they are seeing their inventory either devalued or they are seeing a shift in their product mix caused by a discounting in the ammo world.

Got you. How is the ammo that you guys helped develop – I'm trying to think of what the actual name of it was, you launched it may be a year or two ago, how was that little niche product going?

Brian, I think you’re probably referring to – we had a licensing arrangement with a company called PolyCase. And while it's a cool technology we’re no longer involved in that licensing arrangement.

Okay. Alright.

That’s good for me. Thanks guys.

I appreciate it.

Thanks.

Hi, thanks for taking the follow-up. Brian meant, and I think there was some discussion of potential opportunities that you guys may be looking at in terms of acquisitions or just opportunities out there, are those distressed sales or those will be just businesses, business units may be for sale and what multiples are you seeing in the industry right now?

Thank you.

Well, I wouldn't necessarily call them the stress sales, it probably depends whether you are buying or selling the company, but there are some companies that we could be a good strategic fit for Ruger, well beyond just the fact that we have a strong balance sheet, and so that’s why we try to make sure there is something that will fit well with the Ruger that we could add value to. There is others that are not quite as good as strategic fit, and even though they may be either on the marker or near the market, people say you should buy so-and-so.

I say, well, are we going to add something other than our balance sheet to it? And at our multiples that we typically trade at, I am not sure those deals would necessarily be accretive to Ruger.

So, that’s what we have to watch as well. We're not seeing.

We're not seeing really deep discounting in our category at this point-in-time. As I said, primarily some of the accessory manufacturers that – some very unique accessories that are actually pretty cool, but again, I’m not sure that the Ruger will bring anything to the party with that, and I'm not sure they are at anywhere near the multiple we would be willing to pay.

Okay. Thank you.

In closing, I’d like to thank all of you for your continued interest in Ruger, and I look forward to speaking with you at our fourth quarter earnings call in February. Thank you very much.