IT Tech Packaging Inc (ITP) 2014 Q3 法說會逐字稿

Hello, ladies and gentlemen, and welcome to Orient's Paper Inc third 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 listen-only mode.

With us today are Mr. Zhenyong Liu, Orient Paper Chairman and Chief Executive Officer, and Ms Jing Hao, the Company's Chief Financial Officer. Mr. Liu will be speaking through an interpreter, while Ms Hao's interpreter will speak on her behalf.

Orient Paper announced its third quarter 2014 financial results via a press release yesterday, which is available on the Company's website at orientpaperinc.com.

First, Mr. Liu will brief you on the Company's key operational highlights and corporate developments over the third quarter of 2014 and then Ms Hao's interpreter will walk you through the Company's financial and business review. After that we will conclude the earnings conference call. Any investors who have questions are welcome to contact Company's via email at ir@orientpaperinc.com

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 announcements 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 product,; 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 expectations, 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 these expectations 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 is now available for download from the Company's website at www.orientpaperinc.com. Please note that there will be discussions on non-GAAP financial measures or EBITDA or earnings before interest, taxes, depreciations and amortizations. 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 dollar and all comparisons refer to year-over-year comparisons, unless otherwise stated.

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

(Interpreted). Good morning, everyone. And thank you for calling in for our third quarter 2014 earnings presentation. Our revenue was up 8.1% year over year during the third quarter on increased volume as we committed to the strategy of increasing our capacity to meet growing customer demand.

We maintained a high monthly utilization rate of approximately 76% throughout the period for our regular high-strength CMP and an 18% rise in production volumes for the first three quarters of 2014. Meanwhile, our PM1 line contributed its first full quarter of revenue with total volume exceeding 13,000 tonnes during the quarter.

Soft pricing conditions and higher raw material costs continue to pressure our margins and our net income was down as a result.

We continue to maintain 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.

While we remain confident about our prospects going into 2015 and beyond, we caution that current industry challenges have affected our fourth quarter operations, notably the government-mandated halt in production for the APEC Summit in Beijing. Unfortunately, we will lose two weeks of production for the mandated halt and one week for the Chinese National Holiday.

Due to the uncertainty in current market conditions and the loss in production we are withdrawing our 2014 guidance at this time, and intend to resume offering guidance once we have better visibility and are able to offer an accurate and effective guidance.

Now I will invite our CFO's interpreter to review our financials and our business developments. Please proceed.

(Interpreted). 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 line is provided in our earnings press release and on slide number 27 of the earnings presentation.

Now let's look at our financial performance for the third quarter of 2014. Please turn to slide number 7. Total revenue was up 8.1% to $40.8m as a result of the ramp-up of our regular CMP production and our lightweight CMP production which had its first full quarter of revenue contribution.

Gross profit was $6.4m compared to $8.4m in the prior year, while gross margin was 15.7%, down from 22.4%. The decline was due to the higher cost of sales resulting from increased material costs.

Income from operations was $4.9m and operating margin was 12.1%, down from 20.1% a year ago. Net income was $3.4m and net income margin was 8.3%, down from 14.7%. Basic and diluted earnings per share were $0.18 compared to $0.30 for the corresponding period of 2013.

Moving to slide 8 on our cash position, as of September 30, 2014, our cash and cash equivalent were up 121% to $6.9m compared to $3.1m at the end of 2013. Operating cash flow, during the first three quarters of 2014, were up 96.8% to $75.8m (sic - see slide 8 "$35.8") from $18.2m in the prior year period.

Now let's take a closer look at our product segments, starting with CMP on slide 9. This segment includes both our regular CMP from PM6 and our light-weight CMP from PM1.

In Q3 we generated $29.3m for this business segment representing 70% (sic - see slide 9 "72%") of total revenue. Sales volumes were up 24% to 82,217 tonnes. ASP for regular CMP decreased 3.3% to $355 per tonne due to lower customer demand. Our ASP for light-weight CMP was $369 per tonne. Utilization rate was 76% compared to 75% for PM6 in Q2 of 2014.

Now let's turn to slide number 10 on our offset printing paper segment, in Q3 revenue was $10.8m representing 26.6% of total revenue. Sales volume was 15,791 tonnes and ASP was $687 per tonne which was up 1.2% from the prior year period.

Slide number 11 provides a chart showing our revenue mix, which shows CMP increasing its contribution [chart] quarter by quarter. It represented 72% of total revenues in Q3 while digital photo paper decreased to only 1.4%.

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 third quarter was 76.6% compared to 74.9% in the previous quarter. The Company will continue to focus on the ramp up of PM6 in the fourth quarter.

Now let's move on to slide 14 for an update of PM1 modernization. As previously announced, we commenced commercial production of the newly renovated PM1, producing light-weight CMP in the second quarter. We have successfully ramped up our PM1 production achieving 13,336 tonnes of paper in its first full quarter of production. The annual production capacity of PM1 is expected to increase from approximately 50,000 tonnes to approximately 60,000 tonnes in 2015.

Next, let's look at slide 17 for our tissue paper expansion project. The construction of the office building, factories and warehouses at the Wei County site is in final stages. The tissue paper packaging equipment are being installed. As we previously announced, [asset] funding delay during the first half of the year lead us to expect completion date of PM8 to be in the second half of 2015.

On slide 18 there are some photographs of our Wei County site here for your 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 instillation 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 let's move to slide 19 to update you on the relocation of PM4 and PM5. As previously announced, we have been forced to move this production line because of the county government's rezoning policy. And we are required to sell the land for -- of our compound headquarter to comply with the rezoning mandate.

We have begun relocating the PM4 and PM5 digital photo paper production line as well as related equipment from the workshop that were located in the headquarters compound to a new location right across the street from the Company's Xushui Paper Mill, which we named Xushui Mill Annex.

The new location, Xushui Mill Annex will benefit Orient Paper, as a result of its proximity to all of our other current operation lines, which are more or less within the same neighborhood.

PM4 and PM5 have been shut down as of September 30, 2014 for relocation. And we have begun moving equipment and making other preparations for the new workshop and facilities. The operations are expected to resume in the second half of 2015 when the relocation is complete.

Next let's look at slide number 21 for an update of our financing and debt restructure. Firstly, we would 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 would prefer.

As we previously announced, we were able to secure financing in July as we 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 September 30, 2014 was 25.82% which is well below industry average at 53.06% for the 20 largest paper mills 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 23. For market demand, we expect to see the demand for containerboard to peak in the fourth quarter in preparation for the Christmas and Chinese New Year holiday season.

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 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.

On August 18, 2014 another list of outdated paper facilities required for closure by the end of 2014, was announced. The list includes 0.66m tonnes paper manufacturing capacity, including 5,000 tonnes in Hebei Province. We believe that the reduction in capacity will ensure a healthy industry with stable pricing and reduced environmental impact.

As a result of difficult market conditions and the uncertainty surrounding, the impact of the government-mandated halt of our production facility for the APEC Summit and the National Holiday closure, we have withdrawn our previous fiscal 2014 guidance at this time.

As Mr. Lieu mentioned, we will offer guidance once we are able to gain greater visibility and offer a meaningful and accurate guidance.

Now, Mr. Liu's interpreter gives us his closing remarks. Please turn to slide 24.

(Interpreted). Thank you. Going into the final quarter of the year we will continue to focus on maintaining a high utilization rate for PM6 and for the ramp up of PM1 line to continue capitalizing on the growing demand for our light-weight CMP and light-weight packaging applications.

Meanwhile, we remain committed to securing the necessary financing to strengthening liquidity and to manage our financial position carefully to balance our expansion with our working capital needs.

This ends our prepared remarks. As previously announced, we recently made a transition to a new CFO. As a result of this ongoing transition, we have decided to suspend the Q&A session for today's call. However, we are still interested in all investor inquires and invite you address your questions to our investor relations contact at ir@orientpaperinc.com. And we will be sure to address any questions or concerns.

This concludes our call today. And we think you all for listening in. Operator?

Thank you, ladies and gentlemen. That does conclude our conference for today. You may now disconnect your lines.

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.