Sturm, Ruger & Company, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[C. Michael Jacobi:]

Okay. Good morning. Well, the meeting comes to order. I'd like to start by welcoming all of you to Prescott with wonderful weather this morning. This is the second time we've had an Annual Meeting here in Prescott where we have a beautiful facility with 400 wonderful employees. So, we're very happy to be here. I am Mike Jacobi, the Chairman of the board of Sturm, Ruger & Company, Inc. and it is my pleasure on behalf of the directors and officers of Sturm, Ruger & Company, Inc. to welcome those present, including those attending the meeting through our webcast to the 2018 Annual Meeting of Stockholders. As a reminder, please silence your cell phone during the meeting. All questions should be held to the end of the meeting after the presentation by our Chief Executive Officer, Chris Killoy. When you do have a meeting or a question, please identify yourself, come up to the mics and the questions will be limited to two minutes. As of this time, I would like to introduce the company's other directors. First, John A. Cosentino, he was not able to attend. He is our lead Director and Vice Chairman and he's listening in to the webcast. Michael O. Fifer, who's also a Vice Chairman; Sandra S. Froman; Christopher J. Killoy, who is our President and CEO; Terrence G. O'Connor; Amir P. Rosenthal; Ronald C. Whitaker; and Phillip C. Widman. I would like to also introduce our company officers, Thomas A. Dineen, Senior Vice President, Treasurer and Chief Financial Officer. Thomas P. Sullivan, Senior Vice President of Operations; Kevin B. Reid, Sr., Vice President & General Counsel and Corporate Secretary; Shawn C. Leska, Vice President of Sales; Sarah F. Colbert, Vice President of Administration; Robert J. Werkmeister, Jr., Vice President of Marketing; and Michael W. Wilson, Vice President of Mayodan Operations. I would also like to introduce Jeff LaGueux and Craig Dent, outside counsel from Patterson Belknap Webb & Tyler. Andy Warren and Brian DiPaola, our independent auditors from RSM US LLP who are available after the meeting to answer any appropriate questions you may have, and Philip Meyer, our Stock Transfer Agent from Computershare Investor Services. In fairness to all stockholders attending the meeting or listening to the webcast and in the interest of having a fair, informative, orderly and constructive meeting, the following rules of conduct and procedure will apply. All stockholders, proxy holders and other authorized representatives must register at the reception desk before entering the room for the meeting. The use of cameras, sound recording equipment, communication devices or any other similar equipment is prohibited without the express written permission of the company. Only stockholders of record of the company's common stock as of March 15, 2018 or other proxy holders are entitled to vote at the meeting. Similarly, only stockholders of record or their proxy holders may address the floor during the question-and-answer period when the Chairman indicates the floor is open for discussion or questions. Stockholder questions or remarks must be relevant to the meeting, pertinent to matters properly before the meeting, and briefly stated within the maximum time limit of two minutes. The meeting is not to be used as a forum to present general economic, political or other views that are not directly related to the business of the company. The views and comments of all stockholders are welcome. However, the purpose of the meeting will be observed, and the Chairman will stop discussions that are irrelevant to the business of the company or the conduct of its operations, related to pending or threatened litigation, derogatory references that are not in good taste, longer than two minutes substantially repetitious of statements made by other stockholders or related to personal grievances. If there is any matter that is of personal concern to a stockholder and it is not an appropriate subject matter for general discussion, please defer discussion of such matter until after the meeting. At that time, or some other mutually convenient time, an officer of the company will be available to meet with stockholders to discuss such matters. You may also contact the company following the stockholder meeting by calling 203-259-7843 and selecting the Investor Relations option. The Chairman of the meeting shall have the authority necessary to preside over the meeting and make any and all determinations with respect to the conduct of the meeting and procedures to be followed during the meeting. The Chairman will consider the violation of these rules cause for expulsion from the meeting. In the event of disorder, the Chairman may immediately conclude the meeting and declare the polls open for such period of time as he may determine to receive votes by proxy or ballot on items of business properly before the meeting. Thank you for your cooperation. We will now conduct regular business of the meeting followed by Chris Killoy's presentation to the stockholders and a question-and-answer period. Our agenda for the formal matters to be brought before the stockholders today will be as follows

[Kevin B. Reid, Sr.:]

Mr. Chairman, the proxies received by the company in connection with the 2018 Annual Meeting of Stockholders of the company have been examined and have been found to be in proper form, and there are present at the meeting in person or by proxy, at least 15,653,742 or 89.7% of the shares outstanding of the company which are entitled to vote, and such shares constitute quorum for the transaction of business at the meeting.

[C. Michael Jacobi:]

Thank you. Because a quorum is present, this meeting will proceed. Mr. Reid, were there any additional stockholder nominations or proposals for the business for this meeting properly filed with you as Corporate Secretary in accordance with the advance notice requirements of the company's by-laws other than those already mentioned?

[Kevin B. Reid, Sr.:]

No, Mr. Chairman, there were not.

[C. Michael Jacobi:]

As a result, the business of this meeting is limited to the matters set forth on the agenda. Detailed information on each of the proposals is included in the Proxy Statement, copies of which are available in the back of the room. The first order of business is to elect directors for the ensuing year. As indicated in the company's Proxy Statement, nine directors will be elected at today's meeting. Those directors receiving the highest number of votes, or a plurality of votes, of shares present in person or by proxy at this meeting will be elected as directors of the company to serve until the 2019 Annual Meeting of Stockholders and until their successors are duly elected and qualified. As indicated in the company's Proxy Statement, the Board of Directors has nominated the following persons to serve as Directors

[Phillip C. Widman:]

Mr. Chairman, I move that the action of the Board of Directors in selecting RSM US LLP as the independent registered public accounting firm for the company's 2018 fiscal year be ratified and approved.

[C. Michael Jacobi:]

Are there any remarks on the selection of the independent auditors? The third order of business on the agenda is an advisory vote to approve the compensation of the companies named executive officers as described in the 2018 proxy statement, otherwise known as the say-on-pay vote. While the vote is not binding on the board or the company, we will review the voting results and take them into consideration when making future decisions regarding the compensation of our named executive officers. The affirmative vote of at least the majority of the shares entitled to vote and represented in person or by proxy at this meeting is required to approve on an advisory basis the say-on-pay vote. At this time, I call upon Sandra S. Froman, a member of the Compensation Committee for the Compensation Committee's recommendation.

[Sandra S. Froman:]

Mr. Chairman, I move that the compensation of the company's named executive officers as described in the 2018 proxy statement be approved by advisory vote of the stockholders of record of the company as of March 15, 2018.

[C. Michael Jacobi:]

Are there any remarks on the motion to approve the compensation of the company's named executive officers by advisory vote? The fourth order of business is a shareholder proposal, which, if passed, would require a report on the company's activities related to safety measures and mitigation of harm associated with company products. The shareholder proposal, the supporting statement of the proponent of the proposal, and the board's recommendation and response to that proposal are contained in their entirety in the proxy statement. The affirmative vote of at least the majority of shares entitled to vote and represented in person or by proxy at this meeting as required to approve the shareholder approval. At this time, I call upon the proponent, our qualified representative of the proponent to move the proposal.

[Colleen Scanlon:]

Thank you. Good morning. I'm Colleen Scanlon of Catholic Health Initiatives. And I'm here on behalf of my organization and behalf of the Sisters of the Holy Names and at 10 additional faith-based shareholders to present proposal for. I move that the board issue a report to shareholders by February of 2019 at reasonable expense and excluding proprietary information on the company's activities related to gun safety measures and the mitigation of harm associated with gun products including the following. Evidence of monitoring of violent events associated with products produced by the company, efforts underway to research and produce safer guns and gun products, an assessment of the corporates reputational and financial risks associated with gun violence in the United States. Thank you.

[C. Michael Jacobi:]

Are there any remarks on the shareholder proposal?

[Unverified Participant:]

Yes. My name is Mike Solberg (16

[C. Michael Jacobi:]

Can I just say that a response to that question, I'd like to hold that response until after Mr. Killoy's presentation. So he'll address that when he finishes later today – later this morning. This concludes discussion on all formal matters to be brought before the shareholders, and we will commence to vote on these matters. The polls are open as (18

[Kevin B. Reid, Sr.:]

The polls are open as of 9

[C. Michael Jacobi:]

The time has come to vote on the matters properly before the meeting. Ballots will be passed out to any stockholder who desires to vote by ballot. There is no need for anyone to vote by ballot if he or she has already voted by proxy.

[Kevin B. Reid, Sr.:]

Is there anyone here who wishes to vote by ballot? The polls – seeing no one, the polls for all voting matters are now closed at 9

[C. Michael Jacobi:]

The voting is complete. Accordingly, I will now ask Inspector of Elections for a report on each vote.

[Kevin B. Reid, Sr.:]

Mr. Chairman, we have completed the tabulation of votes with the following results. On the first proposal, the election of directors, I report that the following nominees have been elected as directors of the company to serve until the next Annual Meeting of Stockholders

[C. Michael Jacobi:]

Thank you, Mr. Reid. The chair declares that all of the nominees for director named in the proxy statement have been elected and three proposals have passed. I now direct that Mr. Reid prepare a written report for the results of the election to be incorporated into the minutes of this meeting and included in a Form 8-K. This concludes the formal business of the meeting. At this time, I would like to introduce our CEO, Chris Killoy, and just note that this is Chris's one year anniversary as the CEO. He's been with us for many years and I just want to comment that Chris has done a very skillful job in navigating through a difficult market through the past year. He will make his presentation now.

[Christopher John Killoy:]

Thank you, Mike.

[C. Michael Jacobi:]

I just want to -- at this time, I would like Kevin Reid, our Vice President & General Counsel to read any cautionary statement after which, our President and Chief Executive Officer, Chris Killoy, will report on the company's business to the stockholders, followed by a short question-and-answer period for those present.

[Kevin B. Reid, Sr.:]

So we just want to remind everyone that statements made in the course of this meeting that state the company's or management's intentions, hopes, believes, 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 March 31, 2018. Copies of these documents may be obtained by contacting the company or the SEC or on the company's website at www.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 March 31, 2018, which also are posted on our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Chris?

[Christopher John Killoy:]

Thanks, Kevin. Thanks, Mike. As you know, the shareholder proposal that was presented today passed. That proposal has received a lot of media attention and I'm confident that its passage will as well, but I want to be really clear about what this proposal represents and what it does not. The proposal requires Ruger to prepare a report, that's it, a report. The shareholders have spoken and we will follow through on our obligation to prepare that report in due course. What the proposal does not and cannot do is to force us to change our business, which is lawful and constitutionally protected. What it does not do and cannot do is force us to adopt misguided principles created by groups, who do not own guns, know nothing about our business and frankly would rather see us out of business. The proposal also cannot change what Ruger is about and what we stand for. So, let's talk about that for a few minutes. I'd like to show you a brief video, that'll be followed by some PowerPoint slides and then we'll go to questions and answers. [Video Presentation] (24

[Kevin B. Reid, Sr.:]

Yes. At this time, we will open the floor to questions from members of the audience who are here in person. Anyone wishing to ask a question should stand up and come up to the microphone. After being recognized, please identify yourself through the chair, your questions will be addressed by Mr. Killoy. As I noted at the beginning of the meeting, please limit your questions to corporate business and make them no longer than two minutes to allow us time to address all questions. Are there any questions?

[Colleen Scanlon:]

Again, I'm Colleen Scanlon from Catholic Health Initiatives, representing my organization and 10 additional faith-based members of the Interface Center on Corporate Responsibility. The fact that a majority of shareholders is asking you to look at gun safety is incredibly significant. You say you're committed in your video to quality, affordable firearms. What about safer firearms? Can you describe what actions Sturm, Ruger is taking to design and manufacture safer guns and gun products? And any other safety measures the company is undertaking to mitigate the reputational and financial risks the company faces as a result of episodes of gun violence? While gun violence is an issue of concern to everyone, the responsibility to market safe guns sold to the public appropriately lies with gun manufacturers and distributors. In response to public pressure, national gun retailers are imposing greater safety restrictions on guns sold to the public insisting on safer products and clearing their shelves of the most dangerous assault style weapons and accessories. Banks, credit card companies, institutional investors, and large asset managers are all assessing their relationships with the industry. Yet we have seen no evidence of our company's efforts to change its practices and policies. The American public will continue to seek solutions to random senseless gun violence from all stakeholders. They will return to gun manufacturers and expect an honest accounting of the efforts they have made to avoid these tragic events. We want to see Sturm, Ruger presenting solutions and we look forward to working with you to pursue any and all efforts to advance gun safety. If new product development, as you said Mr. Killoy, is the lifeblood of Sturm, Ruger, safer guns needs to be on that development agenda. Please share the corporate efforts you are taking to research and produce safer guns. Thank you.

[Christopher John Killoy:]

Thank you. Well, one of the things I would ask all of you if you haven't already is take a look at our letter to shareholders dated March 12. It's on our website, it's filed as an 8-K and so it's available on the website to review, I think we also have some copies in the back of the room if you care to take a look at that. One of the things we talk about gun safety, Ruger has always sought to design safe firearms. In fact, we're the first firearms company to invent a transfer bar safety to prevent accidental discharge in Colt style single action revolvers, many, many years ago. For over 30 years, we've been shipping locks with every firearm we make, whether it's a handgun, rifle or shotgun. To date, that total of locks distributed with our firearms is over 19 million locks. That's not a requirement, that's a voluntary measure we take to ensure the safe storage of our firearms. I can assure you that at every stage of a new product development, we're constantly looking at things like the product's ability to handle a drop test, product's ability to incorporate a manual safety that works reliably when it should and when it shouldn't. And in fact, we've actually had recalls over the years, when we had a problem with that, we discovered there might be something that just wasn't as good as it should be. And we recall those products as necessary. So we do take that very seriously. Again, I would ask to refer to the March 12 letter, and again, we will be reporting as required on February 9, 2019 in compliance with the shareholder proposal.

[Unknown Speaker:]

Again my name is Mike Sohlberg (44

[Christopher John Killoy:]

Thank you, reverend. The short answer is, no, we will not be meeting and the real reason is we don't meet with any of our individual shareholders. We don't do – we don't go meet with the big institutional shareholders, we don't hold meetings with our largest institutional shareholders like BlackRock or Vanguard. First, that could be in violation of Regulation FD or fair disclosure from the SEC that when we disclose information regarding our business to one shareholder, we have to disclose it to all. Consequently, that's why we have a series of 8-K reports on our website when if something that we want all of our shareholders to be aware of.

[Unknown Speaker:]

Well, sir, I'll make sure there are no shareholders in the room and the rest of our people can meet with you.

[Christopher John Killoy:]

Regardless, I don't think those people or even shareholders who advance what I would consider to be activist or well-intentioned proposals have our company's best interest at heart. Our company's best interest is served by meeting the needs of our customers at the wholesale, retailer and consumer level and those customers and we have a – we do share a responsibility to our shareholders to ensure a fair return on their investment in the company and we don't see that people who ask us to stop manufacturing firearms that are perfectly legal and sold throughout the country is in the best interest of our shareholders.

[Unknown Speaker:]

But that's what I want to do. I want to clarify that's not what we're doing, we are not gun control advocates. We are not encouraging you not to make certain weapons. We are encouraging you to take the reputational risks of this issue seriously and engage with those who want to make a difference.

[Christopher John Killoy:]

Well, I can assure you we always -- reputational risks is a big factor and in our 10-K, we outlined key risk factors to our business. And reputational risk can result in either legislation, litigation or decreased demand from our consumers, all of which we outlined as risk factors in our 10-K.

[Unknown Speaker:]

Well, I hope that all of the shareholders listening around the world are listening to this continued policy of non-engagement on an issue that obviously matters to over half of the shareholders of the company.

[Kevin B. Reid, Sr.:]

If I may interrupt, I just want to remind everyone that the purpose of this time is to ask questions, is not intended to be a political forum or an opportunity to air your views. So if you would please limit yourself to questions to remain to the company and the business of hand, I would appreciate it.

[Unknown Speaker:]

I appreciate the company, but I appreciate the comment, but all of my comments have been aimed at the reputational risk of the company, not what you would consider to be political statements.

[C. Michael Jacobi:]

All right. Are there any other any other – okay.

[Unknown Speaker:]

Good morning.

[Christopher John Killoy:]

Good morning.

[Unknown Speaker:]

I am a former Marine and a gunner. My name is Terrell Williams (50

[Christopher John Killoy:]

Thank you.

[Kevin B. Reid, Sr.:]

Well, sir, first thank you for the question. Thank you for your service. As I mentioned before, we will not be meeting with individual shareholders or groups, but I would encourage you to potentially meet with the National Shooting Sports Foundation, which represents multiple manufacturers within the industry. And there -- that may be appropriate first step for that conversation.

[Unknown Speaker:]

Sir, could you help us get that meeting, please?

[Kevin B. Reid, Sr.:]

I can certainly get you their contact information and let -- get (54

[Unknown Speaker:]

I'll take that as a yes.

[Kevin B. Reid, Sr.:]

I will put you in – I will give you their contact information and reach out to them, and let them know you'll be contacted.

[Unknown Speaker:]

We'll appreciate that. Thank you.

[Unknown Speaker:]

Good morning. (54

[Christopher John Killoy:]

We were in our board meeting yesterday. One of the things we talk – we do talk about that, one of the challenges is, some of the firearms brands on the market duplicate quite heavily some of the products that we already are into. If something comes on the market, if there's an opportunity, we're just going to take a look at it. On the ammunition side, that might make sense as well. The challenge with ammunition is, yeah, collectively within Ruger, we have a great management team, a great operations team, very skilled in lean manufacturing, but frankly none of us have ever run an ammunition company. We don't have to worry about hedging our commodities and things like that. So that's one of the things we might take a long hard look at. We have to ground ourselves with the fact that we don't have a lot of experience in that part of the business. But it's certainly on the table, if that – those potential transactions come down the road or come available.

[Unknown Speaker:]

And is our analysis correct that there's not a lot of players that are able to do a big deal. Everybody is pretty hamstrung and of those who could do potentially reasonably sized deals, Ruger would probably be amongst a few?

[Christopher John Killoy:]

I think that's probably a safe assumption. I mean, a lot of the big banks no longer want to be in this space. So you've got the financial buyers that may not be supportive of those transactions and so it maybe strategic buyers that maybe have the better opportunity.

[Unknown Speaker:]

Thank you.

[Colleen Scanlon:]

It's Colleen Scanlon. I'd like to ask one more question, I'm from Catholic Health Initiatives. In your statement of opposition to our shareholder proposal, you state that smart gun technology is not available. I think what the shareholders are asking is, what you can do to change that reality? Will you put that on your agenda so that the same security tracing protections I have on my iPhone will be on guns in the near future so as to protect our society, our communities, the individuals who live in them and particularly our children.

[Christopher John Killoy:]

Thank you. First off, we wouldn't disclose proprietary or confidential information about the – what we're working on or what we're not to look everything down to what's the next caliber in a new firearm to something like individual user technology or smart gun technology, so-called. One of the things to point out though, it goes without saying an iPhone if you drop it a couple of times, it's not going to function like it should. A firearm has an extremely robust operating system and there are a lot of challenges just because you can get your fingerprint recognition on an iPhone doesn't mean that can work on a firearm. But again, we don't comment on anything that we might or might not be looking at. Well, certainly, I believe that was one of the topics in the shareholder proposal. So, we'll certainly report about – report on that as appropriate to the proposal as drafted and approved by the shareholders.

[Kevin B. Reid, Sr.:]

Are there any other questions?

[Unknown Speaker:]

Good morning, Mr. Killoy.

[Christopher John Killoy:]

Good morning.

[Unknown Speaker:]

I'm Maria Cristina, Penguin Island (58

[Christopher John Killoy:]

I believe we have a copy of the RFI, Kevin.

[Kevin B. Reid, Sr.:]

Yeah. We have it. Yes.

[Christopher John Killoy:]

So let me take a look at that when I get back to the office, and I'll take a look at it.

[Unknown Speaker:]

Thank you.

[Christopher John Killoy:]

And consider that. We do not plan, as I said, to do individual shareholder meetings. And again, I would tell you that Ruger is very concerned about – and always has been about our business practices. We work closely with the ATF. We work closely with federal, state and local law enforcement on enforcement of existing firearms laws, every fire – every Ruger firearm by the time it gets to the background check that takes place at retail with a federal Form 4473 has already gone from a fact – one of Ruger factories where we undergo periodic ATF inspections and for the last five years or six years we've had zero violations from the ATF inspections. So it goes from our federal firearms license to a wholesaler, also federally licensed, then to a retailer also federally licensed. And then before the consumer can buy it, it goes through a federal background check based on the individual states, those are somewhat different, that's how they're handled. But all of them get that federal background check at retail. So we're proud to work with that system. We're proud to continue to support that, enhance it. We supported the NSSF's, our industry trade associations, FixNICS campaigns to better improve that background check process, it improved the state of mental health records in the FBI database. And we've been supportive of that since 2013. So – but I will take a look at that RFI when I get back. I think Mr. Reid has a copy, and take a look at it.

[Unknown Speaker:]

Thank you. I just respectfully ask when might we respect a response just so that we can have our eyes and ears open.

[Christopher John Killoy:]

Take a look at it and, Kevin, when we get back and we can – in the next 30 days, we can.

[Unknown Speaker:]

Next 30 days.

[Christopher John Killoy:]

No, that doesn't mean I'm going to respond in something that you're going to necessarily appreciate or like, but we'll – I'll take a look at it. I'll read every point and I'll get back to you on it.

[Unknown Speaker:]

Thank you.

[Christopher John Killoy:]

Okay.

[Unknown Speaker:]

I'm sure I've taken my two minutes; Mike Sohlberg (63

[Kevin B. Reid, Sr.:]

Those will get filed with the 10-K. That information will become available.

[Unknown Speaker:]

You're not able to (63

[Kevin B. Reid, Sr.:]

No. Not right now.

[C. Michael Jacobi:]

Are there any other questions? Okay. There will be no other business to come before the meeting. I'll ask for a motion to adjourn.

[Michael O. Fifer:]

Mr. Chairman, I move that the 2018 Annual Meeting of Stockholders of the company be adjourned.

[C. Michael Jacobi:]

May I have a voice vote on the motion all in favor, signify by saying aye?

[Unverified Participant:]

Aye.

[Unverified Participant:]

Aye.

[C. Michael Jacobi:]

The 2018 Annual Meeting of the Stockholders of the company is hereby adjourned. On behalf of the Board of Directors, I would like to thank you for attending the meeting and for your continued support of the company. Thank you.

[Kevin B. Reid, Sr.:]

And one final statement as all of you head home today. Ruger like all companies is a collection of people. In our case, we are Americans who work together to produce rugged, reliable, innovative and affordable firearms for responsible citizens. We are staunch supporters of the Second Amendment, not because we make firearms, but because we cherish the rights conferred by it. We understand the importance of those rights and as importantly we recognize that allowing our constitutionally protected freedoms to be eroded for the sake of political expediency is a wrong approach for our company, for our industry, for our customers and for our country. We are arms makers for responsible citizens and I want to assure our long-term shareholders and loyal customers that we have no intention of changing that. Thank you.