IT Tech Packaging Inc (ITP) 2014 Q2 法說會逐字稿

Good morning and good evening, ladies and gentlemen. Welcome to the second quarter 2014 Orient Paper Inc. earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. With us today are Mr. Zhenyong Liu, Orient Paper's Chairman and Chief Executive Officer who will speak through his interpreter and Mr. Winston Yen, the Company's Chief Financial Officer.

Orient Paper has announced its second quarter 2014 financial results through a press release earlier and it's available on the Company's website at orientspaperinc.com. Mr. Liu's interpreter will brief you on the Company's key highlights operational and corporate developments over the second quarter of 2014 and Mr. Yen will walk you through the Company's financial and business review as well as the Company's outlook and guidance. After that there will be a question-and-answer session.

Before we begin I would like to draw your attention to our Safe Harbor statement.

This announcement contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in its announcement are forward-looking statements, including but not limited to anticipated revenues from the digital photo paper business segment;, the actions and initiatives of current and potential competitors, the Company's ability to introduce new products, the Company's ability to implement planned capacity expansion of corrugating medium paper, market acceptance of new products, general economic and business conditions, the ability to attract or retain qualified senior management personnel and research and development staff, and other risks detailed in the Company's filings with the Securities and Exchange Commission.

These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the Company and the industry.

The Company undertakes no obligation to update forward-looking statements to reflect subsequent or current events or circumstances or to changes in its expectation except as may be required by law. Although the Company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that this expectation will turn out to be correct and investors are cautioned that actual results may differ materially from the anticipated results.

There is a presentation document featuring management's prepared remarks and it's now available for download from the Company's website at www.orientpaperinc.com.

Please note that there will be discussions on non-GAAP financial measure, or EBITDA, or earnings before interest, taxes, depreciation and amortization. Please refer to our press release for a complete reconciliation of EBITDA to net income.

As a kind reminder, all numbers in our presentation are quoted in US dollars and all comparisons refer to year-over-year comparisons unless otherwise stated.

I will now like to turn the call over to Mr. Liu, who will again speak through his interpreter. Please proceed.

(Interpreted) Good morning to our investors calling in for our second quarter 2014 earnings presentation.

We are pleased to report strong growth in our revenue thanks to the successful ramp-up of our PM6 with a monthly utilization rate of approximately 75% throughout the period, resulting in a 23% rise in production volumes of our regular high-strength CMP or corrugating medium paper. The 75% utilization has better absorbed our fixed facility cost and alleviated the effect of a modestly lower average selling price, or ASP, for regular CMP experienced in this quarter.

In addition we are pleased with the performance of the newly launched PM1 after an early completion of our modernization program. We produced over 4,000 tons of Light-Weight CMP in just more than a month after we started commercial production.

Despite challenges in optimizing the working capital needs, we have maintained our debt to asset ratio at a level well below the industry average. And we will continue to make efforts to execute our expansion plan while carefully managing our liquidity to ensure the financial viability of the Company.

With the mild recovery, our regular CMP prices and the ramp-up of our production lines, we reiterate our commitment to meeting our full-year 2014 guidance. Later in this presentation we will share updated progress photos at our Wei County development.

Now I will invite our CFO, Mr. Winston Yen, to discuss the financial and business review as well as our outlook and guidance before my interpreter returns to give you my closing remarks. Winston, please.

Thank you. Please be reminded that all numbers are in US dollars and all comparisons refer to year-over-year comparisons unless otherwise stated.

The numbering system for our production lines is provided in our earnings press release in slide number 27 of this presentation.

So first let's look at the overall financial performance over Q2 of 2014. Please turn to slide number 7.

Total revenue was $37.8m, up 14.5% due to the ramp-up of regular CMP production at PM6 throughout the second quarter of 2014 and commencement of commercial production of the newly renovated PM1.

Gross profit was $6.1m, about the same level of last year while gross margin was 16.2% down from 18.5%. This is due to the lower ASP of regular CMP that has affected our profitability. Hence, income from operations was $5.1m and operating margin was 13.6%, down from 15.8% a year ago.

Likewise, net income was $3.6m and that margin was 9.6% -- 9.4%, down from 11.1%. This translates to a basic and diluted earnings per share of $0.019.

Moving to slide 8 on our cash position. As of June 30th, 2014 our cash and cash equivalents went up 32% to $4.1m compared to $3.1m at end of 2013. Operating cash flow which includes $8m from proceeds of bank notes payable went up 129% to $20.9m.

We now take a closer look at our product segments starting from CMP on slide 9. This includes both of our regular CMP from PM6 and the Light-Weight CMP from our new PM1.

In Q2, we generated $25.8m for this business segment taking up 68.1% of total revenue. Sales volumes were 71,988 tonnes up by 30.8%.

ASP for regular CMP decreased 4.3% to $358 per tonne due to lower customer demand. ASP for Light-Weight CMP was $362 per tonne for the consumption period ended June 30, 2014.

Utilization rate was 75% compared to 50.4% for PM6 in Q1 of 2014.

Now turning to slide number 10 on our offset printing paper segment. In Q2 revenue was $11m representing 29.1% of total revenue. Sales volumes were 16,013 tonnes and ASP was $687 per tonne, almost the same level one year ago.

Slide number 11 provides a chart for our revenue mix, which shows CMP increasing its contribution chart quarter-by-quarter representing 68% for Q2 revenues and digital photo paper decreasing to only 3% in the second quarter.

We will now move on to discuss our operational and business updates. Please turn to slide 13 for an update of our PM6 ramp up. The average utilization rate in the second quarter was 75.3% compared to 50.4% in the previous quarter. We're pleased to have achieved 77%, 76% and 74% for the three months, which shows our success in the ramp up of the line.

The Company will continue to focus on the ramp up of PM6 in the second half of 2014 to achieve the goal of an annual production of 220,000 to 250,000 tonnes for the full fiscal 2014.

We now move on to slide 14 for an update of PM1 modernization. As announced previously, we have recently commenced commercial production of the newly renovated PM1 producing Light-Weight CMP with specification of 60 gram per square meter. PM1 has successfully ramped up production achieving 4,215 tonnes of paper in the period since it started production.

Light-Weight CMP based packaging paper products has a wide range of commercial applications. Examples include the encapsulation of certain insulating materials as a construction material for wall and floor insulation using manufacturing moisture-proof packaging materials for transportation of books and magazines or as a corrugating medium in cardboard for light-weight packaging solutions.

With a desired annual production capacity of 50,000 to 60,000 tonnes, the new PM1 is expected to bring in additional revenue in the range of $9m to $11 in 2014. We have also included the latest photographs of PM1 on slide 15 and slide 16 for your reference.

Next, let's look at slide 17 for our tissue paper expansion project. The construction of office building, factories and warehouses in Wei County site is in final stages. The tissue paper packaging equipments are being installed. Due to budget funding delays experienced in the last few months, the Company now estimates completion date of PM8 to be in the second half of 2015.

We do not expect a delay of PM8 completion to cause any financial impact on the Company's 2014 annual earnings as no significant revenue or net earnings contribution from PM8 was originally budgeted for the year of 2014.

On slide 18 there are some photographs from our Wei County site here for our reference. As you can see, we are in the process of installing the processing line in the tissue paper packaging section of the workshop. When the installation is completed, the processing line in the packaging section can function independently from the tissue paper machine section and can process commercially marketable tissue paper products using base paper sourced from third parties.

Now we will like move to slide 19 to update you on the relocation of PM4 and PM5.

As announced last year, in recent years there have been more residential buildings and residents living in the surrounding areas of our headquarter compound, so we're forced to move because of the county government's rezoning policy and we had to sell our headquarter compound to -- the land of our headquarter compound to comply with the rezoning mandate.

We have made a decision to relocate the digital photo paper production lines PM4 and PM5 as well as related equipment from the workshops currently located in headquarter compound to a new location that is right across the street from the Company's Xushui Paper Mill which we named Xushui Mill Annex.

The new location Xushui Mill Annex is beneficial for Orient Paper as we will be able to enjoy a greater convenience and synergies by having all of our current operation lines more or less within the same neighborhood.

PM4 and PM5 will be temporarily shut down in the fourth quarter of 2014 for relocation with a new workshop since facilities are ready. The operations are expected to resume in the second half of 2015 when the relocation is completed.

Next, let's look at slide number 20 for an update of our financing and debt restructure.

Firstly, we will like to stress that the Company has no problem in getting financing in China. However, due to the tightening credit policy of the Chinese government, local banks were unable to grant loans for a longer-term than we will prefer.

In fact, we have been able to secure financing and recently in July we just entered into a series of bank acceptance note financing agreements with a different bank for a total amount of approximately $11.4m with terms less than or equal to 12 months. We see the new credit facility with the new bank as a testament to our financial strength.

Our debt asset ratio as of June 30, 2014 was 25.93%, which is well below industry average at 53.06% for the 20 largest paper mills that are publicly listed in China. The debt asset ratio of the top six companies have all exceeded 60%.

Regarding outlook and guidance, please turn to slide 22.

For the market demand, seasonal demand for container board is expected to pick up in the second half of the year and peaks in October or November as the production and shipment for goods for Christmas and Chinese New Year peaks.

In terms of the regulatory environment, the government is expected to continue pushing for industry efficiency and environmental protection. The Ministry of the Industry and Information Technology of China has announced on July 24, 2014 that 3.97m tonnes of paper and pulp manufacturing capacities, including 500,000 tonnes in Hebei Province will be mandatorily retired by the end of year 2014. Therefore, the ASPs for CMP and other packaging paper are largely expected to make a mild recovery from the second quarter which is already happening now and would remain stable in the next few quarters.

For the second half of 2014 we are maintaining our guidance on most of the financial KPI or metrics including net income and their earnings per share for the full year of 2014.

Revenues for the full year are expected to be in the range of between $146m and $161m. Gross profit between $27m and $30m. Net income between $15m and $17. Our basic and diluted earnings per share to be between $0.81 and $0.90.

All right, so now Mr. Liu will give us his closing remarks. He will speak through his interpreter. Please turn to slide 23.

(Interpreted) Thank you Winston. Orient Paper remains committed to establishing a track record for solid financial performance and we will focus on the ramp up of both PM6 and PM1 to generate strong cash flow from our operations. At the same time, we will continue to carefully monitor our financial position and strategically manage the pace of our new business expansion and execution of other capital expenditure items while balancing our working capital needs and watching for market development.

Furthermore, we would be making all efforts to secure financing to strengthen our short-term liquidity as well as maintaining our competitive cost base.

Thanks to the explosive growth of online shopping in China, there has been a rising demand for lighter weight packaging in the market. Orient Paper is expected to benefit from this trend with our new product Light-Weight CMP from the modernized CM1.

As the leading player in the fragmented North China packaging segment, we are committed to both efficiency and environmental conservation and we are positioned to take advantage of the industry consolidation and prevailing market opportunities to increase our market share and further establish our leadership position.

This ends our prepared remarks and the call is now open to address your questions. Operator, please.

(Operator instructions). Howard Flinker, Flinker & Company.

I notice that the Chinese government -- hi, I notice that the Chinese government approved an increase in the price of natural gas, I don't know a few days ago. One, will you be able to pass that on, and two, will you be able to pass that on plus a markup?

Sure. Now, I have not seen that report. But currently we have not been using natural gas as our energy source even though there has been rumors from local government at the Wei County Industrial Park that several years after we start operation there might be a mandate to push everyone to use natural gas rather than coal as the major source of energy.

So, I think right now that the question and any answer could only be hypothetical. We of course will hope that if we have to be forced to switch to a much more expensive source of energy, we will have to pass that additional cost to our customers and I think it will just trickle down to everything in the industry.

So, right now it's kind of unimaginable but we are not terribly concerned about that because I am pretty sure that we will probably not be the only business that will be affected by this in the future.

I'll tell you the source, I found it in Shinhwa English and --

Okay. Yes, I will definitely check it out.

It is maybe this week. And second, just last night I was speaking to another Chinese company, a company that uses a great deal of coal. In this second quarter or first quarter, they were already -- they are in Fujian, they were already told to use natural gas instead of coal, so they've been switching already. So it's under way. And we know the reason. It's an environmental reason. So it will probably affect every paper company as well in as much as your price has hardly changed so far this year. They went down a little bit. Might this be a reason why all the competitors have to raise price?

I have not heard anything from within the paper industry about switching to natural gas.

Not yet.

Not yet. At least not to my knowledge. But this is true. We of course are building new production lines in this location called Wei County Industrial Park and just within that industrial park, PetroChina is building a natural gas station. We don't know when that construction will be ready yet and we don't know when it will begin operation. But I think the intention was to -- for that natural gas station to be able to provide natural gas to all of the constituents in Wei County. So -- but you know --

Weixian

Yes, Weixian.

Yes, okay.

So, it's difficult for us to measure the impact at this point. Even though we know that if we have to buy natural gas from somewhere right now, that the cost of natural gas is probably more than double or even three times of the price that we pay for coal. Especially, we used to pay RMB600 per tonne for coal and right now I think we're paying less than RMB500 for coal. This is probably a historical low for the last five or seven years. So, if --

Would you happen to know the price of natural gas as it is in China?

I don't. But my impression is that it's got to be more than twice the price that we pay for coal or even three times. So --

When does [Jimbo Yoshi] and PetroChina, when does it have to -- when will it finish that natural gas facility in Weixian?

I don't have any answer right now. But I can check it out and get back to you.

Yes. I am just kind of curious. Okay. Those are my questions. Thanks.

Thank you Howard.

(Operator instructions). At this time there are no further questions in the queue so, I'd like to hand the call back to Mr. Winston Yen, CFO, for closing remarks. Thank you.

Thank you operator. We would like to thank you for your joining this conference call. We invite investors to contact us if you have further questions. Please feel free to contact our IR team at ir@orientpaperinc.com. And we wish everyone a good day. Thank you.

Ladies and gentlemen, this concludes our presentation. Thank you for your participation. You may now disconnect. Have a great day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.