Savage Arms Forcasted To Make $25 – 28 Million Profit in 2014

ATK's Share Price

It is not often we get to peer into the accounts of a gun company. Up until recently there were only two publicly listed firearm makers in the USA, Ruger and Smith & Wesson, but they both produce a huge range of firearms, teasing out the financials from a particular category of firearms is difficult. Earlier this year the public company ATK purchased Savage Arms for a cool $315 million. In the earnings call today Mark W. DeYoung, CEO of ATK, revealed that they expect Savage Arms to have sales in the range of  $180 million to $190 million and will have operating profit in the range of $25 million to $28 million. Not bad for a company that almost exclusively sells bolt action rifles! It looks like ATK purchased Savage for about 10-12x operating profit, which is reasonable.

One analyst asked the CEO what risks there were to being in the firearm market. DeYoung responded that there is little risk because Savage guns are not likely to be banned in any states.

(I have paraphrased some of the questions and answers)

 

Carter Copeland – Barclays Capital, Research Division

I wondered if you’d comment on the move into the arms market versus ammo and the potential risks there if you continue to move down or move further into that marketplace given how fragmented it is. There’s a lot of providers, lots of different product choices. You made it sound like you want to build on your success you’ve had with the big-box guys and in the ammo market, but how do you think about the risks of venturing out into that marketplace?

Mark W. DeYoung – Chief Executive Officer, President and Director

Savage is another step which we’ve now taken, which has added a new set of products to our portfolio. Those products that Savage manufacturers are legal to buy by legal purchases in all 50 states, so they make a great product line with almost 0 exposure to most of the regulatory risk that is in the market today. So we think that’s another reason why they’re very attractive for us. The products they make are largely long guns, sporting arms. It’s a perfect fit for us with very little exposure. And so, I think those are a couple of steps we’ve taken. Just to remind you, this is the 2 steps so far in just the last 3 years with Blackhawk, the first step; Savage, the second. I think the other things that you pointed out in terms of a fragmented market, in terms of a variety of products available in the market and a variety of companies that do business in that side, we think that’s not a risk, but a great advantage. So we think that segmented market made up of a lot of small players who lack some of the capabilities that ATK has is helpful for us from a competitive perspective. We believe that with a full product line portfolio, that we continue to grow and continue to build as we expand our leadership position. We’ve become a one-stop shop, which creates efficiency improvements for our customers. It creates supply chain efficiency improvements. And we’ll continue to look for those opportunities to grow this business and deliver those kinds of efficiencies to the consumer, who’ll get some more competitively priced products through the wholesaler, distributor and retailer, who gets a fully capable supplier. And that’s how we view that space, and that’s what our strategy centers around.

DeYoung also said their ammunition factories (Federal, CCI are ATK brands) and Savage are working multiple shifts 7 days a week  …

William R. Loomis – Stifel, Nicolaus & Co., Inc., Research Division

Just going back to Sporting Group. What would you say the utilization on that is? In other words, if you’re running near 100%, excluding the addition of Savage, will bring incrementally, could we expect sequentially meaningful change, or are you running pretty hard on commercial ammunition?

Mark W. DeYoung – Chief Executive Officer, President and Director

Well, we’ve clearly been running pretty hard, no doubt about that. We’re running our facilities on multiple shifts 7 days a week, for the most part, in our sporting business. Savage also is running multiple shifts continuously as well in their business to meet demand. We did invest capital in excess — and to bring in some excess capacity. We invested that capital about a year ago. That equipment comes online here in a couple of months. In fact, it’s beginning to show up now. That will drive some additional capacity for us in our pistol ammunition line, so we do see upside there. The other opportunity we have, which Jay Tibbets is working on with his team, is to continue to focus on the in-factory efficiency improvement opportunities as we continue to drive lean initiatives into all of our factories. Lean initiatives in our PES system, which we use, our Performance Enterprise System is based on continuous improvement, so we are never through. We are never done. We’ve never achieved the maximum output. We are always looking for opportunities to increase production. An example of that, like Citi increased their production in the quarter year-over-year by 17% on some of the same equipment simply by applying these lean tools in a continuous improvement model. So I believe, and Jay Tibbets and Mike Kahn, who runs our defense business, and Blake Larson, we’re all believers in this system. We all believe we have opportunity to continue to drive efficiency and capacity out of our assets. And in the Sporting Group, I believe there still remains capacity upside, equipment utilization, improvement upside and throughput and output upside. So in addition to the capital we’ve invested and the additional capacity we’re bringing online, we’ll be working closely with ammunition and Savage to get more out of the assets we have, and I’m confident we’ll do that.

Reading between the lines, I think ATK will be looking to purchase additional firearm companies in the future.

 





Steve Johnson

Founder and Dictator-In-Chief of TFB. A passionate gun owner, a shooting enthusiast and totally tacti-uncool. Favorite first date location: any gun range. Steve can be contacted here.


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  • RocketScientist

    While a lot of this sounds like good news, I gotta say I’m worried. I am hearing/reading a lot of the same corporate double-speak that shows a real disconnect between those running these companies and the products they manufacture/the customers who buy them. We don’t hear about how Savage makes a good product with features XYZ and they’re planning on adding features ABC. We hear about supply chain efficiencies, lean initiatives and Performance Enterprise Systems and ‘continuous improvement’ efforts. I work for a large company obsessed with these sorts of things, to their detriment. Management looks at the large initial gains from rolling out these programs, and fails to realize they come as a result of picking the ‘low hanging fruit’, and can’t be replicated yer after year. They then get obsessed with these programs and focus on them way too much. It’s impossible to improve production 17% every year just by applying lean manufacturing techniques. Eventually there is no more blood to squeeze from the stone. As one of the techs in my building put it recently (after spending a whole week organizing hardware as part of a Six Sigma push at our facility, even though this resulted in missed delivery dates) “This place is gonna be so clean and organized when we go outta business!”

    • Paul Epstein

      If it’s negatively impacting business, then the people implementing it have no clue what they’re doing. You don’t improve things for the sake of improving it, you do so in order to spend less money, making more of your products, faster than before. The entire reason LEAN *exists* is because companies were spending huge amounts of money improving things that didn’t need improving and were going out of business as a result.

      • RocketScientist

        I’m not disagreeing with you, just sharing my experience with my current employer (a very large multi-national corporation). I don’t want to share their name, but they were one of the early adopters of six-sigma and lean philosophies, and are big proponents/advocates. I myself am a 6-sig Blackbelt (feel like an idiot even saying it) so understand how these tools should and can work. I have also seen how corporate management can lose sight of their actual product and become obsessed with chasing the bottom line and tracking all these program’s metrics and forget that they are a GUN company (for example). As an example, above they reference how they are hoping to see repeated increases of 17% annually, just by chasing manufacturing efficiencies, without changing manufacturing equipment. This is simply not possible. Law of diminishing returns applies, and eventually you reach your max efficiency. Maybe management is out of touch with the realities of their production processes, or manufacturing in general. All I know is I have seen it happen before where the passion and innovation that made a company’s name gets put by the wayside by corporate leadership who don’t know/care about the realities of the plant floor and see everything as a number on a powerpoint slide.

        • The one huge factor is one that’s been mentioned and that’s the disconnect between those in charge and the products and management who are intimately familiar with the product line.
          The key really is having enough sense to know you aren’t an expert on the products and consult or have a person who does know stick close to those who make the decisions.

    • Brandon

      Agreed. Corporate America is often run by self proclaimed ‘masters of the universe’ with MBA degrees who don’t know much about the products.
      The people who do know make Powerpoint slideshows for the MBA’s.

  • K

    Good for Savage. Sadly, none of that profit will be coming from me! Buwahahahahahahahahaha!!!!!

  • tincankilla

    these guys are really benefiting from govt imposed import restrictions.

  • ireadgud

    Forcast? Spell check. How does it work?

    • Is there a question in there somewhere:-)

      • ireadgud

        Just giving the author a little good-natured grief about the misspelling of ‘forecasted’ in the title.

  • Aaron E

    Savage is in a prime position under current conditions – high demand for reasonably priced firearms, and market struggling to supply. They make well made and accurate rifles, many of which would be considered in the bargain range of pricing. I’ve seen Model 111 combinations (with scope) for about $400 in some large sporting goods stores. That’s about $100-150 lower than a Remington 700.

    I think that is why you see Remington releasing the 783 and Ruger releasing the American rifle. A strong market demand for quality rifles that don’t break the bank.

    The Savage “Accu-trigger” is now being copied by other manufacturers. Their Model 10 FCP’s, Model 10 BA, have made some inroads in the law enforcement sniper market. I’ve seen a Model 10 BA place some very tight groups, that would compete with almost any custom sniper rifle. At about $2200 that comes in lighter than several competitors.

    • I tell you from my experience that a Savage 10FP out of the box is a better rifle than a Remington model 70. Wonderful trigger and excellent barrels and overall workmanship make them a fine bargain.

  • Clint Notestine

    they ought to send Obama a check

  • Zius Patagus

    Savage is an iconic name in the firearms world. I am glad ATK is keeping it alive. They make a good product at a reasonable price. The only thing I would like to see from them is a decent out of the box semi auto .22 rifle set up as a “Liberty Training Rifle” for Appleseed.