Consumables

Orient Paper, Inc. Reports Third Quarter 2012 Results

Friday 09. November 2012 - Orient Paper, Inc. (AMEX: ONP) ("Orient Paper" or the "Company"), a leading manufacturer and distributor of diversified paper products in northern China, today announced financial results for the third quarter ended September 30, 2012.

Key Highlights for Third Quarter 2012:
— Reduced profitability amidst continuing weak pricing environment
— Corrugating Medium Paper sales volume up 157.6% YoY as ramp-up of new
production line (360,000 tonnes) accelerates
— Plan upgrade production facilities and phase out legacy line to
reinforce cost-leadership position in North China
— Seek future expansion to capture higher value and high growth tissue
paper business
— Board implements regular dividend payout on top of quarterly cash
dividend of $0.0125 per share declared in September 2012
— Downward revision of FY2012 guidance in view of current headwinds
Mr. Zhenyong Liu, Chairman and Chief Executive Officer of Orient Paper, commented, “In the third quarter, the paper industry continued to suffer from a weak pricing environment, which affected the margins of all our products. Coupled with the production disruptions that occurred from the second quarter to early part of the third quarter that have impacted our revenues in August particularly, our results have declined and fallen short of expectations. In view of this, we have revised down our full year guidance.
“However, we are pleased to have resolved all these operational interruptions, and to be able to ramp up the new production line to achieve of over 72% utilization in September. The Company will continue to focus on enhancing our operational efficiency together with maintaining our position as the cost leader in Northern China with our stringent cost management discipline.
“Looking ahead, we will expand our business further to higher value products including tissue paper which potentially offer high gross margins and will be a key future growth driver to the Company. With the rise of growing consumerism in China, the currently low penetration of tissue paper in rural areas of North China offers us tremendous potential for growth.”
Commenting further on the future of the Company, Mr. Liu said, “Orient Paper is still in the investment stage but we have confidence in its future prospects riding on our unique market position as the cost leader in North China, demonstrated by our industry leading margins and strong cash flow. On behalf of the board of directors, I reiterate that there are no plans for privatization and in fact, the Board is pleased to approve the payout of dividends to shareholders on a regular basis.”
Corrugating Medium Paper
— Revenue from corrugating medium paper in the quarter increased 125.1% to
$24.3 million, representing 64.5% of total revenue. The increase was a
direct outcome of the ramp up of the new production line.
— Volumes sold during the third quarter were up 157.6% to 66,956 tonnes,
of which 47,091 tonnes, or 70.3%, of total corrugating medium paper sold
in the third quarter of 2012 were produced by the new production line.
— The ASP for corrugating medium paper decreased 12.1% year-over-year to
$363/tonne in the third quarter of 2012. The decline in ASP was mainly
attributable to overall contraction of the manufacturing sector in China
due to the sovereign debt crisis in Europe, as well as the Chinese
government’s effort to cool off domestic construction activities.
Offset Printing Paper
— Revenue from offset printing paper in the quarter decreased 52.8% to
$11.5 million, representing 30.6% of total revenue.
— Volumes sold during the quarter were down 45.1% to 16,295 tonnes.
— The ASP for offset printing paper decreased 14.0% year-over-year to
$706/tonne in the third quarter of 2012.
— The decrease in revenue from offset printing paper was mainly due to
softening demand for printing paper in the North China region, and
production interruption in the month of August 2012 due to the
installation and official inspection of the new boiler. In view of the
very low ASPs that would have squeezed the margins substantially, the
Company have suspended trading activities of offset printing paper since
the first quarter this year.
Digital Photo Paper
— Revenue from digital photo paper in the quarter decreased 5.9% to $1.9
million, representing 4.9% of total revenue.
— Volumes sold during the quarter were down 3.2% to 480 tonnes.
— The ASP for digital photo paper decreased 2.8% year-over-year to
$3,865/tonne in the third quarter of 2012. The decline was mainly due to
softening customer demand resulting from the weakening economy.
Cost of Sales
Cost of Sales in the third quarter of 2012 was $30.8 million, up 6%, primarily due to the increase in sales and revenue of corrugating medium paper in the quarter, while costs per tonne for corrugating medium paper edged down by 1.7% to $294, as a result of increased economies of scale derived from the ramp-up of the new production line.
Gross Profit
Gross profit in the third quarter of 2012 was $6.8 million, down 14.7% from $8.0 million. The decline was mainly due to the falling average selling prices of the offset printing paper and corrugating medium paper.
Overall gross margin in the third quarter of 2012 was 18.1%, down from 21.6%. Gross profit margins for corrugating medium paper, offset printing paper and digital photo paper for the third quarter of 2012 were 18.9%, 15.3% and 24.8% respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $0.7 million for the third quarter of 2012, up 52.6% from $0.5 million. The increase was mainly due to the currency exchange gain/loss between inter-company transactions and increase in depreciation of properties and land use rights amortization, and the increase in wages and salary in the third quarter 2012.
Income from Operations & Operating Margin
Income from operations was $6.2 million for the third quarter of 2012, down 18.2% from $7.5 million, primarily due to weakened demand, lowered ASPs and sales. Despite the difficult operating environment, the Company achieved a respectable operating margin of 16.4%, compared to 20.3% a year ago, which continues to lead the industry, reaffirming its cost-competitive edge in this sector.
EBITDA
Excluding the impact of interest expenses, income tax expenses, depreciation and amortization, EBITDA, a non-GAAP measurement, was $8.3 million, down 3.7% from $8.7 million. *(Refer to Table 1 for a discussion of non-GAAP financial measures, including the reconciliation EBITDA to net income.)
Net Income
Net income was $4.4 million, down 19.4% from $5.4 million. Basic and diluted earnings per share for the third quarter of 2012 were $0.24 compared to $0.3 for the corresponding period of 2011. Weighted average shares used in the calculation of diluted earnings per share were 18,459,775 in the third quarter of 2012 compared to 18,350,186 in the corresponding period of 2011.
Cash, Liquidity and Financial Position
The Company is now better capitalized and highly liquid with strong cash flows from its operating activities compared to the financial position at the end of 2011, and its cash position has reverted to normal levels after the construction of the new production line.
As of September 30, 2012, cash and cash equivalents were $13.2 million, compared to $4.2 million at the end of 2011. Working capital was $14.4 million at the end of September 30, 2012. Short-term debt was $4.3 million, and long term debt was $1.6 million. As of September 30, 2012, shareholders’ equity totaled $140.6 million, compared to $127.5 million at the end of 2011.
In the first nine months of 2012,Orient Paper generated net cash flow from operating activities of $19.6 million, representing a decrease of 9.8%, from $21.7 million for the corresponding period of 2011. The Company incurred $11.4 million in cash expenditures for the construction of employee dormitories, ancillary facilities of the new 360,000 tonnes-per-year production line, facilities to house the new 75-tonne boiler, and additional power substation equipment.
Recent Developments
Operation Updates
Production Line Ramp Up
Orient Paper has resolved all operational issues involving its boiler and water treatment and has successfully completed installation of its new 75 tonnes/hour boiler in August 2012, which is expected to accelerate production speed of corrugating medium paper significantly. For the month of September and October 2012, the new 360,000 tonnes/year production line installed in December 2011 achieved an operational run rate of 72.5% and 73.7% of the monthly design capacity. Ramping up further, the Company estimates annual production output for the new line to reach 178,000 to 179,000 tonnes for the year of 2012.
Renew Production Lines – Phase out old line and Rebuild new line
In anticipation of increasing regulatory concerns on energy efficiencies and to further upgrade the strength and quality of its corrugating medium products, Orient Paper has taken the strategic decision to voluntarily phase out the 150,000 tonnes/year corrugating medium paper line, which was built back in 2000. At the current stage, Orient Paper plans to submit a renovation scheme to the Chinese government to the phased out line, which includes the building of a new 250,000 tonnes/year production line on the same foundation in Q1 2013. The Company estimates total renovation cost to be up to $20-$25 million, which is expected to be funded by a leasing company and cash flows generated from its own operations, as well as certain government subsidies.
Business Updates
Expansion into tissue paper segment
To take advantage of the rapid industry consolidation as well as the upside potential of the tissue paper sector on the back of rising affordability, penetration, urbanization and lifestyle changes in China, Orient Paper is seeking to build new production capacities, which will allow the Company to enter the tissue paper businesses. China’s tissue paper consumption volume per capita has increased substantially in the last few years to 3.9 kg in 2011 but penetration is still very low compared to other regions in the world (10 kg for Hong Kong, Taiwan and Macau, 15 kg for Japan and western Europe, and 25 kg for North America) and hence represent a key driver for future growth of the Company.
Orient Paper intends to enter into a long-term industrial-use land lease of 250 mu (approximately 16.7 hectares) in a new location with an unrelated third party, which will allow the Company to build two 15,000 tonne-per-year production lines and infrastructures for tissue paper over the next two years respectively. Total estimated cost of the project is up to $43.5 million, which would be financed by a mixture of cash flow from operating activities and debt financing. Orient Paper will announce further details when all agreements are finalized.
Regular Dividend Policy
On September 4, 2012, the Company announced another quarterly dividend of $0.0125 per share, with record date on September 14, 2012. The dividends were paid on October 1, 2012. Considering the earnings, strong cash position and confidence in the future prospects of the Company, the Board of Directors also approved that quarterly dividend of $0.0125 per share will also be paid in the next two quarters on such dates as the Board of Directors shall determine.
Litigation updates
On June 21, 2012, the Company reached a proposed settlement of the securities class action lawsuit with the plaintiffs. The terms of the proposed settlement call for dismissal of all the defendants from the action in exchange for a $2 million payment from the Company’s insurer. The Court granted preliminary approval of the settlement on November 5, 2012, and the Company expects final settlement approval by the court during the first Quarter of 2013. The management believes that the proposed settlement, if approved, should have no material impact on the Company’s consolidated financial statements.
Regarding a separate complaint filed by Tribank Capital Investments, Inc. (“Tribank”) initially on March 30, 2011 against the Company and its Chairman and CEO Mr. Zhenyong Liu (the “Tribank Matter”), Tribank subsequently filed a notice of appeal with the court on August 5, 2011 and filed an opening brief with the U.S. Court of Appeals for the Ninth Circuit, to which the Company filed an answering brief on August 31, 2012. The Company continues to believe that the complaint has no merit and intends to vigorously defend the lawsuit. While certain legal defense costs may be later reimbursed by the Company’s insurance carrier, no reasonable estimate of any impact of the outcome of the litigation or related legal fees on the financial statements can be made as of date of this statement.
Investor Communications Initiatives
The Company has also appointed Fleishman-Hillard as its investor relations firm to strengthen its investor communications. Together with the firm, Orient Paper will be conducting a revamp of all its communication vehicles, such as IR website, presentations, frequently asked questions, factsheet, in the coming six months to enhance further investor understanding and communications of the Company and its businesses.
Business Outlook
The overall outlook for the paper industry remains soft with slowdown of China’s economy, coupled with the correction of the construction and real estate market in North China. Pressure on prices will remain low with continuing weakened demand and structural overcapacity, which the Company believes, will lead to further consolidation within the industry in the coming 12 months.
While the combined effect of increased sales and production volume, as well as increasing economies of scale generated from the ramp-up of the new production line can partially offset the downward pressure on prices, the Company has prudently revised down its full fiscal 2012 guidance in view of the current headwinds. Revenues are now expected to be in the range of between $146 million and $148 million, gross profit to be between $26 million and $28 million, net income to be between $15 million and $17 million, and basic and diluted earnings per share to be between $0.90 and $0.92.