Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sturm, Ruger & Co. (NYSE:RGR)

Q2 2013 Earnings Call

August 01, 2013 9:00 am ET

Executives

Michael O. Fifer - Chief Executive Officer, President and Director

Sarah F. DePanfilis

Analysts

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Peter Goodson

Terrence O'Connor

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

Andrea James - Dougherty & Company LLC, Research Division

Operator

Good morning, and welcome to the Q2 2013 Strum, Ruger Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, August 1, 2013.

I would now like to turn the call over to Michael Fifer, President and CEO. Over to you, Michael.

Michael O. Fifer

Thank you. Welcome to the Strum, Ruger & Co. second quarter 2013 conference call. There will be at least 2 blatantly forward-looking statements that I'll make this morning, and I would like to ask Sarah DePanfilis, our Associate General Counsel, to read the caution on forward-looking statements, which will be followed by a quick overview of the second quarter. And then we can go right into your questions. Sarah?

Sarah F. DePanfilis

Thank you, Mike. Statements made in the course of this presentation that state the company's or managements' intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained, from time to time, in the company's SEC filings, including, but not limited to, the company's reports on Form 10-K for the year-ended December 31, 2012, and Form 10-Q for the first and second quarters of 2013.

Copies of these documents may be obtained from the SEC or through the company's website at www.ruger.com. Furthermore, management disclaims all responsibility to update forward-looking statements.

Michael O. Fifer

Thank you, Sarah. Before we get into the second quarter financial results, I want to take a minute and provide an update on the damage to the roof at our Prescott, Arizona manufacturing facility. During the severe thunderstorm last Thursday, heavy precipitation caused a small portion of the roof to collapse. Thankfully, no one was injured. Nonetheless, a significant amount of water entered the building, and we had to shut down production. Thanks to the hard work and dedication of our Prescott employees, temporary repairs were completed over the weekend, signed off by the structural engineers and production resumed on Monday. We expect the cost of the repairs to the building and equipment, plus the value of lost production, to be less than $5 million.

For the second quarter of 2013, net sales were $179.5 million and fully-diluted earnings were $1.63 per share. For the corresponding period in 2012, net sales were $119.6 million and fully-diluted earnings were $0.91 per share. This represents year-over-year sales growth for the quarter of 50% and earnings growth of 79%.

For the first half of 2013, net sales were $335.4 million, and fully-diluted earnings were $2.83 per share. For the corresponding period in 2012, net sales were $231.9 million and fully-diluted earnings were $1.71 per share. This represents year-over-year sales growth for the first half of 45% and earnings growth of 67%.

One of the strong earnings contributors in the second quarter was the unusually high level of sales of firearms accessories, including magazines. This spike in demand started in the fourth quarter of 2012, remained unusually strong through the second quarter of 2013 and is now finally settling down to more historical levels. Our accessories are high margin and, on a year-over-year incremental basis, contributed approximately $0.20 per share in the quarter.

New product introductions remained a strong driver of demand and we're $102.7 million or 31% of firearm sales in the first half of 2013. As a reminder, we define new products as only those that were introduced in the past 2 years and we include only major new products and not minor line extensions.

New product introductions in the first half of 2013, include the LC380 pistol and the SR45 pistol. Demand for Ruger products in the second quarter of 2013 remained very strong, as evidenced by the 37% growth and estimated sell-through of Ruger products from the independent distributors to retailers.

National Instant Criminal Background Check System, otherwise known as NICS, background checks, increased 16% during this period. We believe the strong demand for our products was due to the anti-gun political environment at both national and state levels, the company's continued practice of introducing innovative and exciting new products, new shooters joining the ranks of gun owners and increased manufacturing capacity and greater product availability for certain products and strong demand.

Total unit production for the first half of 2013 increased 35% from the first half of 2012. This increase in unit production resulted from investment and incremental capacity for new product introductions and from the utilization of Lean methodologies for continuous improvement in our operations. Our increasing production was facilitated by $34 million of capital expenditures during the trailing-12 months ended June 29, 2013. These capital expenditures exceeded depreciation by approximately $16 million during this period, which represented an approximate 8% increase to our capital equipment base.

We believe that both Ruger and our independent distributors would benefit by having more finished goods and inventory to allow for rapid fulfillment of demand. Our observation of retailers and anecdotal reports from industry sources also indicate that retailer shelves have less than normal amounts of inventory. Our goal is to replenish finished goods inventory throughout the channel to levels that will better serve the consumers. This includes building finished goods inventory at the company, which could increase the value of the company's finished goods inventory by as much as $15 million from their current level.

Our balance sheet at June 29, 2013, was strong. Our cash totaled $65 million, an increase of $34 million from December 31, 2012. Our current ratio was 1.8:1 and we have no debt.

At June 29, 2013, stockholders' equity was $136 million, which equates to a book value of $7.02 per share, of which $3.35 per share was cash and equivalents.

In the first half of 2013, we generated $70 million of cash from operations. We reinvested $19 million of that back into the company in the form of capital expenditures. These capital investments allowed us to realize a 35% increase in production year-over-year.

Currently, we estimate that capital expenditures for the full-year 2013 will approximate $35 million. In the first half of 2013, we returned $17 million to our shareholders for the payment of dividends, an additional $12.6 million in dividends will be paid to shareholders on August 30, 2013, as our Board of Directors recently declared a $0.65 per share quarterly dividend.

As a reminder, our quarterly dividend approximates 40% of net income. On July 8, 2013, the company announced that it plans to open a third manufacturing facility in Mayodan, North Carolina. This will be the company's first major expansion in over 25 years, and the acquisition of the facility is expected to be finalized in the third quarter of 2013. We hope to start production in the first quarter of 2014. If everything goes as planned, we expect Mayodan to impact earnings by less than $0.05 per share in the second half of 2013 and to contribute positively for 2014.

Those were the highlights of the second quarter. Now I'd like to respond to your questions related to these results. Operator, can we please have the first question?

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question from the line of Brian Rafn of Morgan Dempsey Capital.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Mike, could you give us -- I missed your first opening comments. Can you give us kind of a recap on the damage to Prescott and kind of what the -- I think your press release talked about thunderstorm and collapsed roof, was machinery damaged? Was inventory damaged? Give us kind of a recap.

Michael O. Fifer

There was quite a thunderstorm, and we had some issues where there's a lot of hail first which plugged a drain and then it rained very quickly. And so a 20 x 40 section of the roof collapsed. We figured it had 1 foot of water on it, plus it rained to other parts of the roof as well. So a lot of water came in very rapidly and some machinery was pushed around. Fortunately, that all the machinery that appears to have been affected was machinery that was being brought in for new product lines and did not affect machinery for current production lines. It may take us a little while to figure out just how much machines were affected or how easy or hard it will be to recover. Because, as you know, water damage inside machines can take a while to manifest itself. But we've run a lot of checks on the machines. We've temporarily repaired the roof. There were, I think, half a dozen other areas that were weakened that we've put up appropriate shoring. And at 3:30 in the morning, on Monday, the guys got back in production, and they've done an outstanding job. I'm very proud of them.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Okay, Mike. Was -- obviously, the machinery, that stuff is covered by insurance or catastrophic property casualty? Or...

Michael O. Fifer

We think the total cost to Ruger, when all is said and done, will be under $5 million.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Okay. What -- any plans to what's going to be produced at Mayodan, North Carolina? And what -- specifically, are there any physical manufacturing changes or things that you have to do to the building, prep work, before you, guys, take over?

Michael O. Fifer

Well there are things we have to do with the building to get it ready for us. The 2 significant ones being to install heat treating and a blowing line. But other than that, it's -- the building is in great shape, it's ideally suited for what we want to do. And more importantly, there's a phenomenal workforce in the area. We've had 2 job fairs, the response has been tremendous and the caliber of the potential employees is really impressive. So I think we'll be in good shape that way. As far as product lines, it will be -- some of our new products that have not yet been announced will be moved down there, so I really can't discuss them.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. And what size of the building layout kind of -- maybe acreage around that real estate?

Michael O. Fifer

It's roughly, I think, 225,000 square feet. It's a typical industrial rectangle with high ceilings and widely spaced posts. And there's plenty of acreage should we ever want to expand.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Okay. And then up to the Newport. Mike, anything relative to bringing on new mini mills in addition to the integrated mill furnace?

Michael O. Fifer

Well, Phase 1 was the first mini mill, which has really exceeded our expectation. It's performing extremely well. Phase 2 was to try to see if we could include reverb, because initially the first mini mill was just virgin material. And that was fairly successful. Phase 3 was to try to take some of the new techniques from the mini mill and apply them to the main mill, which we've also done. And Phase 4 will be the second mini mill and the component parts are on order.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Okay. What are you, guys -- plant-wise, what are you, guys, running shift-wise?

Michael O. Fifer

There's a lot of overtime. Guys are working very, very hard.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

So 3 shifts and record overtime? Or can you put a number on that by chance?

Michael O. Fifer

Frankly, we try to avoid what other companies might call record overtime because you'll end up with a potential for injuries, which we don't want. And so we try to keep it somewhat reasonable. What -- the employees would like to have a minimum of 45 hours a week and I'm sure most of them are doing a good bit more than that, but we're trying to avoid overworking anybody. They actually changed, frankly, over the last year. They've been full out the whole time.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. And I'll just ask one more and get back in the line. Mike, with the addition of Mayodan, North Carolina, the manufacturing things and set-ups, like does that, at all, inhibit your launch of new product development which you've been so good at?

Michael O. Fifer

No, I think it's going to enhance it. Problem is I was running out of space. We didn't have any more room and we weren't getting the cannibalization, so new products required, new equipment, new space and new people. This will really, lubricate that process rather than hinder it.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. And the machine tools in that and all the tooling, machinery is that all going to be brand-new or are you going to be moving stuff from Newport and Prescott?

Michael O. Fifer

It's all brand-new. It's all on order.

Operator

[Operator Instructions] And we have our next audio question from the line of Peter Goodson of Eminence Capital.

Peter Goodson

I had a question with -- the NICS seems like it's been slowing down a little bit, 16% NICS growth, obviously less than your shipment growth, seems like some of that inventory is starting to get restocked a little bit. Are you seeing anything out there about the underlying market starting to slow? Or do you feel like market demand is still strong as you've seen?

Michael O. Fifer

Let me split that into sort of 2 questions for you. One, if our sell-through exceeds NICS, does that mean they're merely restocking or does that mean we're getting market share? It could be one of the other and, frankly, you can't tell from the numbers but we have a long-term pattern of exceeding the NICS checks. So they can't restock forever. So at some point it is gaining market share. And then the second part of your question, do we see any slowing? We have not seen any slowing in demand for Ruger, but we have heard, anecdotally, that a normal seasonal slowdown has started and everyone kind of expects some element of that to be the sort of normal summer when consumers go outside rather than go into -- inside to the gun stores. But we all kind of expect that some of it will be kind of a reset from the huge surge that started last -- in Q4.

Peter Goodson

Okay. And then on the margins, 28% this quarter, truly exceptional levels. Are you -- I mean, are you still thinking that in the long-term 15% is admirable margins for this type of business? Or is some of the -- some of what you've been doing lately may be leading you to believe longer term you could achieve higher margins on a sustainable basis?

Michael O. Fifer

I think I'm cautiously optimistic that what we're doing, particularly with new product development with the intent of making the products manufacturable, as well as our very strong Lean efforts throughout the company, maybe the new long-term normal is higher than 15%.

Operator

And we have our next question from the line of Terrence O'Connor of Highrise Partners.

Terrence O'Connor

Mike, I'm just wondering, could you take a little bit about the long gun market? Has there been a decent recovery in that market? I know it's been primarily handguns for quite a long time.

Michael O. Fifer

The long gun market actually has been very strong for us. For example, we have 2 major product lines, the Hawkeye bolt action rifles and the Ruger American Rifle. And the Hawkeye has been at record levels now ever since we introduced the Gunsite Scout Rifle. And then we thought that would taper off when we introduced the Ruger American Rifle, and it didn't, it's just as strong as ever. And yet, the Ruger American Rifle has really taken off. I mean it substantially exceeded our expectations and we've put in place the equipment to double the capacity for that. So we're -- we've been very, very pleased in that regard.

Terrence O'Connor

And the next question is from the line of Scott Hamann.

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

In terms of the accessories stuff, is there any sense what the impact was in the fourth quarter -- in the first quarter on either sales and/or earnings?

Michael O. Fifer

I don't remember what those numbers were. We analyzed them at that time and I just don't remember.

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

But I mean it's probably not the quite the same impact as, maybe, you saw in the second quarter?

Michael O. Fifer

I would -- my recollection, which doesn't have too many decimal places on the end of it, is that it was less than the 20% year-over-year we experienced in the second quarter. And that's primarily because I've put additional capacity in place to take advantage of the demand. And that additional capacity yielded great results in the second quarter and maybe a little bit in the first quarter. I just don't remember the numbers.

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

Okay. And then why -- what's your -- why is your sense that it's slowing in the third quarter?

Michael O. Fifer

Why? I think you have to look at the bigger broader questions about the politics and what's going on to answer that one. I can't answer that for you. But if you look back at historical patterns, back in late '08, early '09, you saw a huge spike in accessory sales, which then tapered off. And then we saw it again, with the really tragic events at Sandy Hook, that started again, as soon as the politicians started talking about restricting legal gun use. And that dialogue has tapered off a little bit. And so, therefore, you'd expect demand to taper off a little bit. The underlying trend if I'd draw a straight line through the curve over the past few years, has been on a very strong growth, but you do get these spikes on top of that line. And we saw one in late '08, early '09. And then we saw one in late '12, early '13. And we think it's going to return back to the, sort of, what I would call more normalized growth rates.

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

Okay. And then secondly, on the new product contribution, the percentage has been kind of declining as a percent of the total the last several quarters. Is that just a function of maybe products coming in and out of that? Or what's your sense on what's driving that?

Michael O. Fifer

I think that, actually, the new product sales have been truly outstanding. We look at them in absolute dollars. It's staggering how much that we're getting in good results from our new product introductions. And as a percentage of sales, I think it's pretty healthy too. And our internal goal is to try to produce 1/3 of revenue from new product sales and I'd say we've met that and, in many quarters, widely exceeded it. But some of our blockbuster products, while we're only reporting them for 8 quarters, they're still really strong in the 9th quarter, the 10th quarter and so on, but I can't report them anymore. We have a self-imposed discipline that you get 8 quarters and that's it. And it better be a major product. We're not doing caliber extensions or new stocks or other cosmetic features, it has to be a product that require very substantial engineering to produce, otherwise, it doesn't make the list. So I think another company might have a much looser definition and show higher percentages for longer period of times, but we don't do that.

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

Understood. And then just, finally, I know the backlog has been kind of a squishy number. But just in terms of your recent thoughts around the backlog, I mean is the quality still in question and therefore your focus continues to be more on the sell-through of products versus what you have in backlog now?

Michael O. Fifer

We learned some years ago that the sell-through was a far more important metric. And we identified that to the investor community and have continued to publish those results religiously and there's been no change in that. I really don't pay that much attention to the backlog.

Operator

Next question is from the line of Brian Rafn of Morgan Dempsey Capital.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Mike, your CapEx to D&A has been running almost 2:1 for the last few years. As you kind of look out adding Mayodan or whatever, do see that continuing on that kind of a capital funding ratio? I mean it's truly superb in the American industry.

Michael O. Fifer

I think, Brian, you have to look at the underlying elements of the CapEx. And it's unusual to have a quarter or a period when more than 1/3 of it or even 1/3 is for maintenance and repairs and keeping our ongoing base. And literally, the other 2/3 have been pretty much tied to new products. And as long as our marketing group can keep coming up with the new products and we can staff them with good engineers and they're not cannibalizing our old product line, then I would continue to see high levels of capital spending. If for whatever reason it slows down a little bit, we would immediately pull back on that because we just don't need that much to maintain the base, especially when you think of how much new equipment we've added over the last 5 years.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Right, exactly, exactly. Leads to my next question, Mike. The challenge in finding and sourcing and recruiting engineering headcount, especially for your design engineers still difficult and are you making some progress now, obviously, with Mayodan, are you going to be expanding your level of design groups that you guys have as it allows?

Michael O. Fifer

We're making good progress. And being down to Mayodan opens up a whole new area that's attractive. We're only 20 minutes -- or 20 miles or so from Greensboro, not far from some very good universities down there, with excellent engineering programs. So I think it will get easier for us to attract good engineers. And, of course, as Ruger does better and better and kind of stands out in the industry, it makes it all that much easier to attract good people.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes. Being in the, what we refer to as the furniture triangle down the Greensboro and High Point, and the -- do you un-employ furniture guys? Because certainly your long guns have be it walnut or whatever that -- is there a wood component to that, that you can source from that furniture belt?

Michael O. Fifer

I hadn't thought that far ahead. What we have observed is that when we're out looking for folks with substantial Lean experience, so they understand the language, they understand the goals and the methodologies, we're finding a wonderful base of people to choose from.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Let me ask you relative to -- and you've done certainly a fabulous job relative to the amount of -- as you talked new product launches and the percentage of that relative to your sales revenue base. When you look internally, Mike, and I know you don't comment on specific numbers, but when you look at launches of products in those first 8 quarters, is the unit volume, the sales and the duration of those, that surge of new product by -- say, by product line, does it meet plan or you're finding that the new products are actually exceeding your internal budgets?

Michael O. Fifer

Pretty much all of them have wildly exceeded our expectations. And often, the volume that they're producing out beyond 2 years is higher than they're producing during any period of the first 8 quarters and it's because we get stunned by how much demand there is for it and we keep adding capacity for them. And so, literally, the run rate is substantially higher in the third or fourth year than it is during the first 2.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Okay. And are you seeing incrementally with those new products, maybe by caliber or be it pistol versus revolver, do you see them crowd out, at all, any of your older legacy products, which might be kind of a corollary like a 45 to a 45?

Michael O. Fifer

We haven't. And which has actually been one of the challenges we faced, we kept expecting cannibalization. We had made plans based on harvesting machinery and people from more mature product lines and what we've seen instead is that introducing the new products spurs overall interest in Ruger, and the more mature products get a spike each we launch a new one.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Anything 2013, 2014, Mike, for shotguns?

Michael O. Fifer

Can't comment.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Can't comment, okay. As you launch and focus your efforts, Mike, on a third plant, Mayodan, is -- does that at all limit or change your posture relative to looking for acquisitions?

Michael O. Fifer

Our single best return on investment is new products. If an acquisition comes along, that somehow I can be convinced is going to be as attractive, we'll take a hard look at it. But historically, they've all been grossly overpriced for what they could deliver. And it makes more sense to try to keep growing 30% to 50% a year organically.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Okay. The 225,000 square feet in Mayodan, Mike, is that filled up initially? Or are you going to build out the usage of that space?

Michael O. Fifer

A sort of crude thumb rule is that each super cell for a new product line takes about 25,000 square feet. So I think we can build quite a few new product lines in that new building.

Operator

Next question is from the line of Andrea James of the Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

Can you just talk about the decision about the plan to add capacity? It sounds like you're expecting cannibalization and you didn't see it, which is wonderful. What's going on in the mind of the consumer? And then also NICS is trending down a little bit. I mean if things return to more normalized levels, I'm just wondering sort of what your thoughts there, and -- yes.

Michael O. Fifer

I think you've asked several questions there. First off, I can't tell you what's in the mind of the consumer. I only know one consumer, one good data point, and that's myself. And I get excited by the new products and I can't wait to buy them when they come out. And perhaps there's a few others like me. As far as the NICS, I would caution everyone to step back a little and look closer. We say NICS are trending down, well they're not. NICS, still, in the quarter grew 16%, that's on top of a record year the year before and a record year the year before that. There isn't an industry in America that wouldn't be thrilled and delighted to see their underlying demand grow 16% in the quarter. So just because it didn't grow 24% like the year before, we shouldn't start tearing our hair out and getting depressed, it's actually fantastic news that it grew 16%.

Andrea James - Dougherty & Company LLC, Research Division

Very fair. And with the new product launches are you targeting sort of a higher-margin type product with them? Or -- yes, can you talk about sort of the thoughts on the margin going forward with new products?

Michael O. Fifer

We have, over the years, found new products to be higher margin than the more mature products. But what that really relates to is how they're designed from the beginning. We design all our products now with a team of people. We'll -- each design engineers is matched up with at least one manufacturing engineer and a supply chain guy, and we'll put a team of 6 or 7 of these men and women together and they'll work together for a year to design a product that is really manufacturable. And it wasn't done that way in the old days. Though Ruger was a genius at designing guns, and he designed them so they're manufacturable according to the kind of equipment and the way things were done in those days. For example, the double-action revolver that was designed in the 1950s or '60s, they anticipated that you would have a gunsmith on the end of the line, custom fitting all the parts to assemble that product. And there are very few of those people left anymore. And so you can't design a gun that way. And in fact, we've learned over the years that it's much better to frankly design it with interchangeable parts, and that's what we do now. So it's not so much that we've got a new pricing scheme, we're actually doing market-based pricing, not cost-based pricing. It's not that there is -- we've inherently taken out any material or other things. These are actually, in many cases -- or most cases, really superior products but designed in a much different way than they were in the old days when it was really just Bill Ruger and some draftsmen. Now, we've got an engineering department, which I think has probably got about 100 people in it. And they're really skilled, they work together really well. And what comes out of that are very manufacturable products and, therefore, higher margins.

Operator

Next question is from the line of Scott Hamann.

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

Mike, just in terms of your commentary on the retail channel, it sounds like inventory level is still below where you think they should be, but at least it looks like they're being replenished to a certain extent. And the distributors seem like they've had a pretty easygoing here at the last several quarters by just kind of passing stuff through. What do you think appetite is for the distributors to take inventory? And where do you think kind of a normal level is relative to maybe where you've been historically with the distributor inventory levels?

Michael O. Fifer

I'm not sure there has been a normal in the last 5 years. I try to encourage the distributors to think in terms of 6 to 8 inventory turns. I think that in theory they're okay with that, in reality, they'd probably rather see higher inventory turns, say, 12 or something like that. And so we have kind of a good tension between us as we push back and forth on that number. Now, I haven't been able to supply them enough product to get them down to 6 or 8, so it's been sort of an academic question this past few years. And we'll all see what happens when and if I can get capacity enough -- high enough to get them down to 6 to 8, we'll see what happens. But till then, who knows?

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

Okay. And just a question on capital allocation. Obviously, you focus on the new product spend but in terms of the buyback that you have in place, you haven't executed on that in a while. One of your competitors has been pretty aggressive in buying their own stock. I'm just curious on your thoughts with respect to kind of getting the best return on some of that investment.

Michael O. Fifer

Well if you remember, 2 annual meetings ago. I went into a detailed explanation of the math behind stock buybacks. And if you put your first priority on the shareholder that's there before the buyback, that wants to stay through the buyback and remain a shareholder, and you run the math as to what -- when a stock buyback will benefit that shareholder, the one and only circumstance under which it will benefit that shareholder is if you expect the earnings multiple to go up. And if you look at the case of Smith & Wesson, which you just identified, their earnings multiple was awful. They've done a wonderful job turning the company around and have pretty strong earnings and they weren't being rewarded for it. So perhaps it made great sense in their case. And then you look at our case, I think the only public analyst left anymore is yourself and you're constantly saying the world is ending. And so that's not really a scenario in which I would expect our earnings multiple to suddenly jump. So it wouldn't make that much sense for us to run out and buy stock back.

Operator

[Operator Instructions] And we have our next question from the line of Brian Rafn.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Mike, as you open Mayodan, North Carolina and you staff up more engineers, I always ask, your cycle time between concept, rapid prototyping and getting actual production, do you think you have a real ability to continue to compress that with now 3 plants?

Michael O. Fifer

I don't think the number of plants is really the issue there. The issue often boils down to metals behaving in ways that the computer doesn't anticipate and forecast. And so that all the best finite element analysis in the world doesn't always tell you what that metal is going to do when you have a very, very short duration explosion going on inside it. In other words, the ignition of ammunition inside the gun. And so we designed to the best of our ability, we built the prototypes, and then sometimes the testing only takes a few months and you're thrilled with the results. And sometimes, it takes you a year longer than you thought it would take to figure out what it's doing and build a really rugged, reliable firearm, for which Ruger is well known.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. All right. Anything on the cost side of the business relative to materials? And then what are you guys seeing relative to kind of wage and salary pressure? Everybody's got a kind of an open-ended opinion on health care costs, but maybe kind of split the difference between metals cost, that type of thing, versus, maybe, payroll and that what you're seeing for wage inflation?

Michael O. Fifer

We've had, for a number of years now, substantial effort in cost reduction. And during the height of the Great Recession, we were particularly successful. What we see now though, as economies are starting to rebound a little bit, is that we're seeing some upward pressure on metals cost, not dramatic, but we are seeing some upward pressure. But we're continuing to do well on our overall cost reduction, but where -- it was all one sided before and nobody was trying to raise prices on us. We do see a little bit of pressure on the metal and we see some longer lead times on the metal. But everything else is very, very favorable and we are getting more savings than we are observing cost pressures.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. Anything on the wage and salary side, what are you, guys, seeing? Payroll?

Michael O. Fifer

About 1/3 of our total compensation for all employees, including the most junior hourly, if you look at the entire wage base for the company, about 1/3 of that is variable. And so when we do extremely well, and when you see those dividends climb for the shareholders, that variable pay is also climbing for all the employees of the company. And should that course reverse at some time, you'll see a quick contraction of that variable pay. So I'm not worried about it.

Operator

And now let's turn the call back over to Michael for closing comments. Thank you.

Michael O. Fifer

All right. I hope you all were pleased with the second quarter results. I know I'm extremely proud of our staff and what they've managed to pull off here. And it's very simply driven by the introduction of new products, by the implementation of Lean to all our processes to free up cash base, equipment, people, and it works. And I think these results are evidence of that. And we'll just continue to do it going forward. And I look forward to talking to you at the end of the next quarter. Thank you.

Operator

Thank you very much. Ladies and gentlemen, that now concludes your conference call for today, and you may now disconnect. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sturm, Ruger & Co. Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts