Good day, ladies and gentlemen, and welcome to the Q2 2012 Sturm, Ruger Earnings Conference Call. My name is Darcell, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Michael Fifer. Please proceed.

Good morning. Welcome to the Sturm, Ruger & Company Second Quarter 2012 Conference Call. I would like to start with a reading of the caution on forward-looking statements by Kevin Reid, our General Counsel, and then I will give you a quick overview of the second quarter and we can get right into your questions.

Thanks, Mike. 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, 2011, and Forms 10-Q for the first and second quarters of 2012. 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, of course, the SEC website at www.sec.gov. Furthermore, the company disclaims all responsibility to update forward-looking statements. Mike?

Thank you, Kevin. Financial results. For the second quarter of 2012, net sales were $119.6 million and fully diluted earnings were $0.91 per share. For the corresponding period in 2011, net sales were $79.6 million and fully diluted earnings were $0.56 per share. This represents year-over-year sales growth for the quarter of 50% and earnings growth of 63%. For the first half of 2012, net sales were $231.9 million and fully diluted earnings were $1.71 per share. For the corresponding period in 2011, net sales were $155.1 million and fully diluted earnings were $0.99 per share. This represents sales growth for the first half of 2012 of 50%, and earnings growth of 73%. In both the second quarter and the first half of 2012, our earnings growth exceeded our sales growth, and we're very proud of that. New products. New product introductions remained a strong driver of demand and were $87.8 million or 38% of sales in the first half of 2012. 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 or additional calibers. The major new products introduced in the first half of 2012 include the 10/22 Takedown rifle, the Ruger American Rifle, the SR22 pistol and the 22/45 Lite pistol. To reiterate, more than 1/3 of our year-to-date sales were products that did not exist 2 years ago. This is a great achievement for our engineers and another testament to the importance of new product development. Sell-through. The demand for Ruger products in the first half of 2012 is very strong as evidenced by the 59% growth in estimated sell-through of Ruger products from the independent wholesale distributors to retailers. We believe that some of this demand…

Your first question comes from the line of Scott Hamann with KeyBanc Capital Markets.

Just in terms of your capacity where we sit now, I mean the 10% sequential increase in production was certainly impressive going to the second quarter. Do you have any flexibility to increase that further? Or have you allocated any additional capital to capacity expansion for the balance of the year?

I certainly think it's possible that the capacity could continue to increase because the money we've been spending, whether it's on new products, that's new capacity, or whether it's on existing products, that's also new capacity. Some of it is just being turned on now and just starting to produce parts.

Okay. And just in terms of the backlog, I know you don't breakout the product sales by segment. But can we get a feel for where your rifle versus pistol and then the composition of the backlog? I mean are these orders coming in kind of consistent with your historical product mix? Or how should we think about that?

I don't actually want to go into a breakdown because I think that's competitive information that can help the other guys. So I'd rather not answer that. But let's just say that it would -- the backlog we have would certainly support the mix we've been shipping.

Okay. And then just a question for Tom. On G&A, a little bit higher than I think we were expecting. I know there were some investments that are being made. Should that continue to trend higher? Or what's kind of driving that going forward?

Well, as you know, Scott, we don't talk about future earnings or expenses. But as we said in the Q, we've had some additional expenses for the ERP implementation that we've been -- we had underway for a while. So going forward, with anything -- well, let me stop there until we had some hefty expenses related to the ERP and we also mentioned some equity compensation increase due to the results for this quarter.

Would you say the increase kind of year-over-year was evenly split between those or?

I don't want to break that out into any more detail, but those are the main drivers.

[Operator Instructions] Your next question comes from the line of Brian Rafn with Sparta Capital.

A question for you. The [indiscernible] to see you guys, I believe you guys had 3 or 4 of your minimills, your foundry kind of up and running. What's kind of the progress into the second quarter? And how you see those minimill volumes coming online through the balance of the year?

We only have one minimill running, and we now have run it very successfully on both the first and second shift. It is substantially more labor-efficient, but it is less efficient in material because it, at least at this point, is requiring all virgin material. So when you think of your gates and runners, which are the waste out of each pore, we can't reuse those in the minimill. We are currently reusing those in the old mill. So I would say like for the moment, I'm hesitant to launch subsequent minimills until we can figure out a way to effectively and efficiently test the quality of the metal on each of the pores on the minimill so that we can reuse the gates and runners, make sure they're at the right chemistry. But until I can do that, while I'm stuck using just virgin material, then again the material costs offset the labor costs. It's a great concept, but we still need more development work to get that process to where I want it to be, then we'll go ahead and launch subsequent minimills. So I would say you're at least a 4 year away from another minimill.

Okay, okay. Because I think at one time, Mike, you had said that you have been looking at -- well, maybe it was just 4 pant plants were reported to spike 6 to 8 minimills, is that relative still to the main integrated mill?

Yes, I think I could get rid of the main mill if I could have 4 or 5 minimills. But again, only if I can reuse all my gates and runners or other scrap material.

Okay. Anything on -- from a standpoint of raw material feedstocks, anything pricing, inflation, deflation, plateau-ing? Are you guys seeing any pressure or reduction perhaps in pricing pressure on any of your metallurgical feedstocks?

There is pricing pressure. Of more concern to us has really been lead time pressure as well. As I'm growing capacity and production output so fast, say 50% year-over-year that we've just achieved, that's hard to reconcile with mills telling me they need a 14-month lead time on capacity changes. So the challenge really is staying ahead of metal availability rather than just the modest price increase pressure we're seeing.

Okay. I was kind of stuck in the queue getting online and I didn't hear your opening comments, Mike, so I apologize if this is repetitive. When you guys brought on, I believe you said May 31 or whatever, when you began accepting orders back from your wholesale distributor channels, did you see any pent-up demand? Was there a surge? Or when you began accepting those orders, was it back to kind of the same even orderly flow paced?

Let's just say that there was a lot of coaching at the distributors not to act foolish or rambunctious and they were encouraged to only present to us responsible orders.

Okay, okay. Anything this year from the standpoint, Mike, on development or launch of the shotgun launch?

It's too early to talk about the next shotgun.

Okay. And then I'll just get back in line one more. Maybe, guys, given the 52% increase in production, have you add -- have you had to add at all to any headcount, labor, engineering, staffing either at Newport or Prescott?

Well, absolutely. Not proportionate, though. Our labor cost, as a percent of the sales value of production we produce, continues to decline.

Your next question comes from the line of Mike Greene with The Benchmark Company.

Since the LC9 introduction last year, have you seen that product cannibalize the LCP sales at all? Or have you given both the concealed carry guns with different target end customers?

Okay. Mike, you were breaking up a little bit there, but I think you asked was does the LC -- has the LC9 cannibalize the LCP, is that correct?

That's correct. I apologize.

Okay. Not in the slightest.

Great, great. And then the CapEx spend in the quarter, you spend about $9 million, it looks like. Did that spend impact this quarter's run rate in terms of production? Or is that spend, would be the impact from a bit later down the road?

Well, the important thing to know about the capital expenditures as I described is that we recognize them when they are placed in service. Which is -- so it's when I order it, not when I put a deposit on machinery, not when the machinery arrives, not even when I just get the tools up, but when I actually start producing parts. So the fact that I recognize $9 million in the quarter, it means I had a lot of equipment start producing parts in the quarter.

Great, that's really helpful. And then on the magazine sales, what percentage of your statutory revenue comes from magazine sales? Is that a significant portion or a smaller bit? And have seen any recent uptick in ordering by distributors in light of end both legislation?

I won't answer the first part on what percentage it is, but I will say that I have not seen any change in behavior on the orders.

Your next question comes from the line of Doshinin Sorayorin [ph] with CL King & Associates. James Barrett - CL King & Associates, Inc.: It's Jim Barrett. Just a quick question on in terms of the average price. You guys relatively able to pick up around [ph] 1% in the first half as well. Is that a reflection of the seasonality? Or is there a brand equity that you'll be able to exploit?

I don't think there was anything that's any material change in what happened there. The average sales price does vary a little from quarter-to-quarter. It often has more to do with introduction of new products than anything else. So for example, I introduced a -- in March, at the very end of Q1, I introduced the 10/22 Takedown and shipped x thousand units of it. And so that affected the price a little bit. A launch of a big product like Ruger American Rifle would affect it. Back when we launched the 1911 and accepted lot of orders far more than we could ship of the 1911, that's a very high-priced item. So that threw off average sales price of the orders accepted. So it has mainly more to do with new product introductions. Nothing material happened. James Barrett - CL King & Associates, Inc.: Okay. And in terms of the improvement in operating margins, is that -- how we do think about that? Is that something to go forward or is that a consistent rate that we can think about?

Perhaps we haven't spoken before. My belief is that companies that manufacture in the U.S., particularly what I would call heavy manufacturing, who're melting metal, who're cutting metal, who're cutting wood, who're assembling, who're fairly vertically integrated. If a company like that can maintain 15% pretax over a long, many-year period, they've done an outstanding job.

Your next question comes from the line of Ed Park with Ingram Micro.

I'm an individual investor. And I had a question regarding pending legislation in the California area that could restrict the sale of AR stealth rifles. And what that could mean for increased Mini-14 sales? That's the end of my question.

I honestly have no idea because I haven't seen the legislation and I'm not familiar with it.

Your next question comes from the line of Paul Vette [ph] with Investors.

The recent capital investment effort, can you give us a little color what that is? Where you spent the money? And what's the basic strategy here?

The basic strategy of the company is to drive demand with new products and innovation and then to support that increased demand through our lean business practices which free up capital, people, space, equipment. But we're not so good at lean that we can do that fast enough to meet all the demands, so I also spend money to buy more equipment. And I hope that answers your question.

But the areas that you invested in, was that in the casting business or otherwise?

No, no. It's been a while since I've invested in a casting business because if you follow the script for a while here, we put a lot of money into the new minimill and then it took us a while to get it running on 1 shift and then a while to get it running on 2 shifts. And then I just described how the current roadblock, the further investment on that is figuring out how to do basically continuous in-line metallurgy testing and because milder minimill does small batches. In the old mill, when I get huge batches, I could take a sample of metal and have time to go to a metallurgist, analyze it, everything was in huge batches. And the little mill is running at almost like single-piece flow, that's a lot harder to do. So I haven't invested in the foundry in quite a while. What we have said repeatedly in our disclosures is that probably 2/3 of our investment is to support the launch of new products, and the remaining 1/3 is split between additional capacity for mature products or replacing equipment that's worn out on mature products or keeping the roof from leaking over everybody's heads.

And your next question comes from the line on Scott Hamann with KeyBanc Capital Markets.

Mike, just a couple of follow-ups. In terms of the backlog, is -- are those firm orders or are those typically cancelable until they're shipped?

No, no. We only take firm orders and we remind the guys about it a lot. And because I thought they had gotten overly enthusiastic and because I want to maintain the discipline of firm non-cancelable orders, that is why I temporarily suspended accepting any more orders. And that's why when I turn the order back on, we first spent the 2 weeks prior to that like in -- I'm not sure how to phrase this, "beating them with a 2-by-4 upside the head" so that they would put in responsible orders that reflected product they really could ship themselves if we ship it to them. And I don't want -- I mean some of my competitors have cancelable orders. And I don't think that serves anybody in the trade. I don't know what to build or not build if I have cancelable orders, they don't have any commitment to what they've ordered, so they don't know whether they're available to purchase, has been consumed properly or not. We prefer a lot of discipline in pricing. We have probably the best discipline in pricing I've ever seen in my career in any industry I've ever worked in. And we have a lot of discipline in the orders coming in. And they may not cancel their orders and we hold them accountable. But at the same time, I'm not going to stop and flood the channel with products that doesn't need. So I try to strike a balance there between what I will accept and what they submit to us.

Okay. And then just -- there was some commentary around promotional expenses in the Q and it seems kind of like you don't really need to promote a whole lot in the current environment. Some I'm just curious what types of programs that would include to better understand that?

Well, the first quarter is the time when most of the promotions for the year happen, and that's because of the distributor show season. And we had truly extraordinary results at this year's distributor show. We can't show you directly. That's the orders that retailers placed on the distributors. But the consequence of that was all the orders that distributors placed on Ruger, and we did show you those, they got out of hand so we've put a stop to them for a while. But what I would normally fulfill most of those orders resulting from the shows in the first and second quarter, I actually wasn't able to do that this year. This year, I will be shipping a lot of what we call the free goods in the third quarter. So for example a promotion might be "buy 10 rifles, get 1 free." So the promotional expense you see accrued on our book is the cost of that get-one-free rifle. But I haven't actually shipped it yet because I haven't been able to even make it yet. And I don't ship that 11th free gun until I've already -- we've already shipped the first 10 guns, okay? So actually I would tell you a material amount of our shipments in the third quarter perhaps approaching as much as 10% of our shipments will be in fulfillment of those promotions. Now that won't hit the P&L as an expense because I already accrued it in the Q4 of last year and the first 2 quarters of this year, as we sell up the volumes were we kept accruing. But where it will affect us potentially is that 90% of my -- let's say hypothetically, it's about 10% of shipments. It actually should be less but just a ballpark. That would imply that 90% of my shipments will go out at full margin, the 10% of my shipments will go out with no margin because they're free goods. They won't hit the P&L as an expense but neither will they contribute margin and earnings other than sort of the usual absorption of factory overhead.

Okay. So you think that this typically winds up -- I mean you'll be down with that in the fourth quarter, so we should have 100% of product at full margin in the fourth quarter?

Oh, yes. Yes. No, we'll get it done in the third quarter here. And it's unusual. This is the first time that it has spilled over the third quarter in any material amount. Occasionally, let's say there's 25 products that we offer on various specials and you're in the distributors shows, there might be one that doesn't get fulfilled in the first 2 quarters and there's few lingering items. But it's never amounted to anything. And this time, it really has amounted to a lot. And it's a testament to just how strong the demand was for Ruger products and has contributed to the kind of results you've enjoyed here in the first 2 quarters.

Okay. So just to clarify that there were really no 0-margin products that were shipped in the second quarter?

Oh, yes, there were some.

But not as much as you expect in the third quarter?

Correct.

[Operator Instructions] Your next question comes from the line of Brian Rafn with Sparta Capital.

Yes, Mike, let me ask you from the standpoint of when you guys go from design concept to prototyping, to building sort of initial inventory and then product line launch, are you getting more comfortable with the speed of that cycle building up stocks for new guns and then launching as you're having what you think is a decent inventory versus where you were maybe 2 or 3 years ago?

Yes, absolutely.

Are you adding at all -- given the tremendous demand in units in the firearms industry, are you adding at all to the number of new design teams that you're putting together?

I'm trying. I'm trying really hard. We're always looking for good mechanical engineers who happen to love guns.

Okay, okay. The recent acquisition that -- again, you've talked about I think in the past, Mike, about having something that's a needle mover in some of the different areas. Are you at all expanding the boundaries of that general sporting goods? Or are you going to stay primarily strictly in the focus firearms business?

We have not made any serious effort to search outside of our core business. We have been approached with various offering memorandums, generally companies being sold by say a private equity owner. The prices tend to be in the stratosphere. They're really not sustainable for a company that wants to buy and hold. They might make sense for another private equity firm and actually that's usually who ends up buying them. So we have been approached. We've taken some sort of cursory looks when people have solicited us at the companies outside of firearms, but I haven't found anything that looked affordable and attractive.

Yes. What -- when you use -- give us maybe a sense kind of a multiple on EBITDA, what do you see -- what stratosphere? Are you talking about stuff in the teens? Or how high are you seeing price-wise?

Well, if it's trading at a higher multiple than I am, I'm not going to buy it.

Okay, okay. All right, that's fair enough. Anything -- demand or your interest in the military or police area?

No. I hope for our country's sake that the wars are winding down and the cops still don't have any money.

Okay. All right. That's good. I'll have one more, Mike. You guys historically have had -- I don't know if you guys measure much, but when you buy a pistol or rifle revolver, you have these product registrations. Are you at all able to track the end customer? And I guess I'd be a little interested the kind of the concentration of sales if you'd at all do anything with that data, whether it's the people buying multiple guns or if it's single purchases of guns, and if you can use that product registration at all to get a sense as to who your end-user customers?

I'm not sure about the actual specific line which is a privacy promise we make to people. But as a practice, we treat it with extraordinary care and good gloves and do not analyze that data. Only one information like that, we actually run a separate survey and we did run one not long ago, where we go out and solicit people to tell as those kinds of answers, and we get a reasonable response and we sort of draw some marketing conclusions from that. But we just did one and we did one maybe 3 years ago, I forget exactly when. And the only notable result I saw was that the average age of our consumers is coming down, which we are glad to see.

And your next question comes from the line of Doshinin Sorayorin [ph] with CL King & Associates. James Barrett - CL King & Associates, Inc.: This is actually Jim Barrett of CL King. Mike, could you tell us, if you can, how many new products are in the pipeline to be introduced at shop or around the shop show this year or 2013?

I wish I could, but I actually can't because I've never had engineer deliver product on time. All my engineers are fully employed. I've got some great projects that are in a holding pen waiting to march out onto the field. And when as soon as the engineers finish something, but if an engineer says, "I'll get it done in October." I laugh and ask, "What year?" James Barrett - CL King & Associates, Inc.: Okay. Can you tell us how many new engineers you hired in the quarter, if any?

I can off-hand, but I -- we're doing a lot now of bring them in as manufacturing engineers, have them run in manufacturing for at least a couple of years, and the ones that show a particular promise, then we'll move them over to design engineering. And that whole program has kind of picked up steam the past few years. We just -- I know we just promoted a couple of the young MEs up in the design, and they're really sharp. We're very, very happy to have them on board, and we backfilled with more manufacturing engineers. That's the program we're expanding because it's just really hard at this point for me to steal another senior engineer from a competitor and get them to move to Arizona or New Hampshire. And a lot of times, because they can't sell their house, they just don't -- nobody wants to move anymore. James Barrett - CL King & Associates, Inc.: Understood. Speaking of Arizona and thinking back to the plant tour you held back at the beginning of May, if Prescott were to get to the -- when Prescott gets the same level of productivity in terms of lean that Newport has had, how much would the overall capacity of the company improve by? Or am I looking at that the right way?

Well, I think the product mix and the complexity of the product manufacturing processes are so different in the 2 plants that I haven't even looked at it that way. I haven't measured it that way. There are certain processes in Prescott that are way ahead of Newport, New Hampshire and the offset is exactly true as well. There are many processes in Newport that are way ahead on the lean scale from Prescott. But each plant is focusing where they see the biggest economic opportunity in lean. There's no grabbing that low-hanging fruit first, and then work on their way up. And we're also -- we would expect -- if nothing changes between now and the next Annual Meeting, we'll hold that out in Arizona and do a plant tour there as well.

I would now like to turn the call over to Mr. Michael Fifer for closing remarks.

Well, thanks, everybody, and we look forward to doing this again in another 90 days or so. Take care.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.