Consumables
Orient Paper, Inc. Reports Fourth Quarter and Full Year 2012 Results
Tuesday 19. March 2013 - Orient Paper, Inc. (NYSE MKT: ONP) ("Orient Paper" or the "Company"), a leading manufacturer and distributor of diversified paper products in North China, today announced audited financial results for the fourth quarter and full year 2012 ended December 31, 2012.
Key Highlights for Fourth Quarter 2012:
— Record quarterly revenue of $43.5 million, driven by accelerating
ramp-up of new 360,000 tonnes-per-year Corrugating Medium Paper (“CMP”)
production line (PM6)(1) with sales volume up by 154% YoY.
— Profitability affected by continuing weak product prices and a $2.8
million, one-time impairment loss due to the planned renewal of legacy
line (PM1)(1).
— Excluding the non-cash charge related to the impairment loss, non-GAAP
operating income was $5.7 million, and non-GAAP net income was $4.7
million.
— Progress in tissue paper business expansion to capture higher value and
high growth market
Key Highlights for Full Year 2012:
— Total revenue of $151.1 million driven by CMP sales volume increasing
135% YoY to 254,500 tonnes, of which 69% were from the new production
line launched in December 2011.
— Excluding the non-cash charge related to the impairment loss, non-GAAP
operating income was $23.6 million, and non-GAAP net income was $17.3
million.
— Cash position significantly improved to $13 million supported by strong
cash flow from operations.
— Board implemented regular dividend payout after its first quarterly cash
dividend of $0.0125 per share in the second quarter of 2012.
Mr. Zhenyong Liu, Chairman and Chief Executive Officer of Orient Paper, commented, “2012 has been a difficult year for the paper industry in China and product prices have been weak for the most part. As we disclosed to the market in previous quarters, there were also operational disruptions back in the second and early third quarters that have all been resolved. Nevertheless, we were able to record the highest quarterly revenue ever in the fourth quarter for $43.5 million and also successfully began the ramp-up of our new CMP production line PM6, which boosted our sales volume by 154% in the fourth quarter. We will continue to accelerate this ramp up for 2013.
“As China continues to develop, we see a sustainable long term growth demand for paper, and prospects remain bright for Orient Paper, particularly in North China, where we have strengthened our cost-leadership position. With CMP as our core business, we have just begun the renovation of our legacy 150,000 tonnes-per-year production line PM1 in anticipation of increased regulatory concerns on energy efficiencies and to further upgrade the quality of our CMP products. The renewal program will provide us with an increased annual capacity of 250,000 tonnes for PM1 upon completion next year. As a result, the Company has made a provision of a one-off impairment loss of US$2.8 million for 2012 in anticipation of this renovation,” continued Mr. Liu.
Mr. Liu added, “Furthermore, we are pleased that our cash position has improved significantly, supported by strong recurring cash flows from operations that will give us the necessary fuel to fund our business expansion plans. In the last quarter, Orient Paper also made head-start progress in our tissue business expansion where we are aiming to capture the growing demand in the underpenetrated market especially here in North China.”
Financial Review:
Quarter ended December 2012 Financial Results compared with quarter ended December 2011
Changes in revenues, sales volumes, and Average Selling Prices (“ASPs”) for 4Q 2012 are presented as follows:
Sales Volumes (Tonnes) YOY Change Revenue YOY Change ASP YOY Change
(US$ millions)
(US$)
—-
Corrugating
Medium Paper 83,769 153.6% 30.9 125.4% 369 -11.1%
Offset
Printing
Paper 16,823 -42.2% 11.7 -49.7% 697 -13.0%
Digital Photo
Paper 237 -49.5% 0.9 -52.9% 3,720 -6.7%
Revenue
Total Revenue in the fourth quarter of 2012 was $43.5 million, increased 11.9% from $38.9 million.
Corrugating Medium Paper (“CMP”)
— Revenue from CMP in the quarter increased 125.4% to $30.9 million,
representing 71.0% of total revenue. The increase was a direct outcome
of the ramp up of the new production line PM6.
— Volumes sold during the fourth quarter were up 153.6% to 83,769 tonnes,
of which 63,689 tonnes, or 76.0%, of total CMP sold in the fourth
quarter of 2012 were produced by PM6.
— ASP decreased 11.1% year-over-year to $369/tonne in the fourth quarter
of 2012, due to the prevailing economic slowdown in China, and the
Chinese government’s efforts to cool off domestic construction
activities.
Offset Printing Paper
— Revenue from offset printing paper in the quarter decreased 49.7% to
$11.7 million, representing 27.0% of total revenue.
— Volumes sold during the quarter were down 42.2% to 16,823 tonnes. In the
fourth quarter of 2011, 5,884 tonnes was sold from the trading
activities, while none were sold in the fourth quarter of 2012, due to
the suspension of all trading activities of offset printing paper since
the first quarter of 2012, since the lower ASP affected trading margins
severely.
— ASP decreased 13.0% year-over-year to $697/tonne in the fourth quarter
of 2012.
— The decrease in revenue was mainly due to softening demand for printing
paper in the North China region and lower ASP.
Digital Photo Paper
— Revenue from digital photo paper in the quarter decreased 52.9% to $0.9
million, representing 2.0% of total revenue.
— Volumes sold during the quarter dropped 49.5% to 237 tonnes, resulting
from the suspension of night-time operations due to intensifying
restrictions from government urban planning officials and pressure from
the residential community, owing to the increasing presence of
residential buildings in the neighborhood.
— ASP decreased 6.7% year-over-year to $3,720/tonne in the fourth quarter
of 2012.
Cost of Sales
Cost of Sales in the fourth quarter of 2012 was $36.8 million, up 20.6%, primarily due to the increase in sales and revenue of CMP in the quarter, while costs per tonne for CMP moved slightly up by 2.6% to $312, as prices for the CMP raw material went up sharply by 25.3% by the end of the fourth quarter as compared to the end of the third quarter.
Gross Profit
Gross profit in the fourth quarter of 2012 was $6.7 million, down 20.0% from $8.4 million for the fourth quarter of 2011. The decline was mainly due to the falling average selling prices of the offset printing paper and CMP.
Overall gross margin in the fourth quarter of 2012 was 15.4%, down from 21.5% for the fourth quarter of 2011. Gross profit margins for CMP, offset printing paper and digital photo paper for the fourth quarter of 2012 were 15.4%, 15.7% and 10.6%, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) were $0.9 million for the fourth quarter of 2012, increased from $0.5 million for the fourth quarter of 2011. The increase was mainly due to the currency exchange gain/loss between intercompany transactions and increase in depreciation of properties and land use rights amortization, and the increase in wages and salary in the fourth quarter 2012.
Income from Operations & Operating Margin
Income from operations was $3.0 million for the fourth quarter of 2012, down 60.7% from $7.6 million for the fourth quarter of 2011, primarily due to weakened demand, and a provision of a one-off impairment loss of US$2.8 million for the renovation of the CMP production line PM1. Operating margin was subsequently lower at 6.9%, compared to 19.7% a year ago. Excluding the one off impairment loss, operating margin was 15.7%.
EBITDA
Excluding the impact of interest expenses, income tax expenses, depreciation and amortization, EBITDA, a non-GAAP measurement, was $5.2 million, down 40.9% from $8.7 million. Excluding the one-off impairment loss, EBITDA was $8 million, (refer to Note 2 for a discussion of non-GAAP financial measures, including the reconciliation EBITDA to net income), mainly because of the $2.8 million one-off impairment loss charge for the PM1 renovation project.
Net Income
Net income was $2.0 million, down 63.6% from $5.5 million. Basic and diluted earnings per share for the fourth quarter of 2012 were $0.11 compared to $0.30 for the corresponding period of 2011.
Cash, Liquidity and Financial Position
The Company is now better capitalized and liquid with increased free cash flow and solid cash flows from its operating activities compared to the financial position at the end of 2011, with its cash position has recovered to normal levels after the construction of the new 360,000 tonnes-per-year CMP production line PM6.
As of December 31, 2012, cash and cash equivalents were $13.1 million, compared to $4.2 million at the end of 2011. Working capital was $21.9 million at the end of December 31, 2012. Short-term debt was $4.0 million, and long term debt was $3.9 million. As of December 31, 2012, shareholders’ equity totaled $142.7 million, compared to $127.5 million at the end of 2011.
In the full year of 2012,Orient Paper generated net cash flow from operating activities of $22.1 million, representing an increase of 18.7%, from $18.6 million for the corresponding period of 2011. The Company incurred $14.8 million in cash expenditures for the construction of ancillary facilities of the new PM6 production line, as well as facilities to house the new 75-tonne boiler, and additional power substation equipment.
Recent Developments
Operation Updates
Relocation plan and proposed sale of Headquarters estate
The Company has been notified of a recent Xushui County urban redevelopment plan mandate affecting the current site of our headquarters compound and Digital Photo Paper facility and the neighboring area, which will be re-zoned for residential use only. This mandate would require manufacturers, including Orient Paper, to eventually cease all operations currently conducted within this area.
To comply with this government mandate, the Company has initiated the process of relocating our offices and facilities to a new site. For this purpose, we have received a proposal from Hebei Fangsheng Real Estate Development Co. Ltd. (“Fangsheng”), a real estate development company recently formed by Mr. Zhenyong Liu, our Chairman and Chief Executive Officer, and have entered into negotiations concerning the potential sale of this property.
While we intend to continue negotiations with Fangsheng on an arm’s length basis, we are having the asset appraised by the independent appraisal firm designated by the government, and it is the intention of the Audit Committee to engage a second independent appraisal firm as well.
Environmental Inspection Update and First Quarter 2013 Earnings Alert
As announced earlier, the county-wide environmental inspection mandated by the government covering a wide range of manufacturers including the Company’s production facilities, was conducted recently in early March. The inspection proceeded smoothly for Orient Paper and the government made recommendations for further enhancement to our environmental protection measures, which include some improvement works to the sewage conduit. The improvement works were started immediately and completed on March 17, and all of our production activities have resumed as normal.
While the cost of the sewage works is estimated to be within $100,000, the three-week suspension due to the inspections has negatively impacted our earnings. We do not currently have an accurate estimate of the financial impact for the first quarter of 2013, but are expecting a significant decrease in the first quarter earnings.
Production Line Ramp Up
Orient Paper continued to ramp up its new 360,000 tonnes-per-year CMP line PM6 for the fourth quarter 2012, and the new production line has increased the average utilization rate to 69.0%, from 52.0% in the previous quarter. Ramping up further, the Company estimates annual production output for the new line to reach from 245,000 to 271,000 tonnes for the year of 2013.
Renew Production Lines – Phase out old line and Rebuild new line
As announced earlier, Orient Paper will renovate its 150,000 tonnes-per-year CMP line PM1 in anticipation of increased regulatory concerns on energy efficiencies and to further upgrade the quality of its CMP products. Preparation for the renovation has started in March 2013 and is expected to be completed before the end of 2014, and during that time, production for this line will be suspended. The Company expects that once the renovated line comes online, it will have an increased capacity of 250,000 tonnes per year, or an estimated annual gross revenue of approximately $71.2 million (based on our current ASP) when utilization reaches 75%.
During this renovation, Orient Paper expects revenue impact to be limited as the Company plans to continue to ramp up utilization of its new CMP production line PM6.
As a result of the PM1 renovation, the Company made a provision of a one-off impairment loss of US$2.8 million for the fiscal year ended December 31, 2012 in anticipation of this renovation.
Business Updates
Tissue paper expansion
As announced in January 2013, Orient Paper has secured the land lease for a 49.4 acres of land (approximately 200,000 square meters) in the Wei County Economic Development Zone in Hebei for the lease payment of RMB3.6 million (US$580,000) per annum, for its new household/tissue paper production facilities.
In addition, the Company has signed the construction and installation contract for the first paper machine of its two household/tissue paper production lines, each having a designed capacity of 15,000 tonnes-per-year in these facilities. The consideration for the first tissue paper machine, designated as PM8, under the contract is RMB31 million (US$5.0 million), funded by the Company’s cash on hand, with installation targeted for completion by the end of the second quarter of 2014. The total estimated cost of the two tissue paper production lines and related facilities will be approximately US$43.5 million. We estimate future annual revenue from PM8 to be $18.7 million starting from fiscal 2015.
Fourth Quarter Dividend
In line with its earlier announced decision on a regular dividend payout, the Company announced on December 6, 2012, another quarterly dividend of $0.0125 per share, with the record date on December 17, 2012. The dividends were paid on December 31, 2012.
Business Outlook
While the overall economic situation has yet to see significant improvements, the industry is expecting further consolidation and tightening of supply with strict reinforcement of environment protection requirements by the Chinese government. It is also widely expected that the ongoing mandatory closure of outdated capacities by the government will be continued in 2013. Furthermore, as there is a strong growing public demand for a clean and healthy environment, it is expected that all levels of the Chinese governments will elevate their reinforcement of environmental protection guidelines to protect the quality of air and water. Although our production has been affected by environmental inspections in the last few fiscal quarters, we place the environmental issues at top priority and are confident that our environmental protection measures and practices can withstand any public scrutiny.
Our gross profit margins have been squeezed by resistance over efforts to raise paper product ASPs, as well as rising raw material costs since the fourth quarter of 2012. However, due to the increasingly stringent environmental policy reinforcement efforts on paper mills, particularly the smaller operators, it is widely expected that paper supply will be noticeably suppressed in 2013 and may help push the ASP higher. We are cautiously optimistic about the mid-to-long term prospect of the Chinese paper market but will closely monitor our pricing policy and continue to improve the production efficiency in year 2013.
Looking ahead, Orient Paper will continue to focus relentlessly on business execution: increasing the ramp up of the new production line PM6 to increase sales volume and extract greater synergies and cost efficiencies in all aspects of its operations, while undertaking the renewal program of its legacy line. The Company will also speed ahead as planned with the building of its new tissue paper machines, which will start operating its first production line in mid-2014, while maintaining strong cash flows to support our investments.
2013 Guidance
In view of the production disruption for the government’s environment inspection in March, the Company expects revenues to be lower for the first quarter of 2013, compared to the corresponding period in 2012. Coupled with the suspension of the renovated legacy line PM1 and the prevailing low ASP rates, we believe 2013 will continue to be a challenging year in terms of earnings growth.
Revenues for the full year are expected to be in the range of between $144 million and $159 million, gross profit to be between $17 million and $19 million, net income to be between $9 million and $10 million, and basic and diluted earnings per share to be between $0.51 and $0.56.