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

    I founded TFB in 2007 and over 10 years worked tirelessly, with the help of my team, to build it up into the largest gun blog online. I retired as Editor in Chief in 2017. During my decade at TFB I was fortunate to work with the most amazing talented writers and genuinely good people!


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