IT Tech Packaging Inc (ITP) 2014 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the fourth-quarter and full-year 2014 Orient Paper, Inc. earnings conference call. At this time, I would like to inform you that this conference is being recorded, and all participants are in a listen-only mode.

With us today are Mr. Zhenyong Liu, Orient Paper's Chairman and Chief Executive Officer; and Ms. Jing Hao, the Company's Chief Financial Officer. Remarks from both Mr. Liu and Ms. Hao will be delivered in English by interpreters.

Orient Paper announced its fourth-quarter and full-year 2014 financial results via 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 fourth-quarter and full-year 2014. And then Ms. Hao will review the Company's financial results. After that, we will take questions.

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 corrugating medium paper, offset printing paper, and digital photo paper business segment; the actions and initiative of current and potential competitors; the Company's ability to introduce new products; the Company's ability to implement capacity expansion; market acceptance to 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 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 its expectation will turn out to be correct. And investors are cautioned that the 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, or 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 would now like to turn the call over to Mr. Liu. His comments will be delivered in English by Victor Kuo from ICR, the Company's Investor Relations firm. Please proceed.

Hello. I'm Victor Kuo of ICR. I will deliver the English version of Mr. Liu's (technical difficulty).

(interpreted) Good morning, and thank you for attending our earnings (technical difficulty). We are gratified to have reported another year of volume and revenue growth, despite very challenging industry conditions in our region. Revenue increased by 9% from 2013, largely due to solid execution and ramping up our regular CMP production, combined with good market acceptance of our new lightweight CMP product. Volume of regular CMP increased 22% from 2013, while lightweight CMP sold 28,226 tonnes since its launch in mid-year. We achieved this growth despite production interruptions created by various government mandates.

In the third quarter, we ceased production of digital photo paper in order to relocate the production lines at the behest of the local county government. In November, we lost two weeks of production of all products due to mandated suspensions across Hebei due to the APEC Summit held in Beijing. Showing our ability to manage through a tough environment gives us great optimism for the year ahead.

Here are some of the positive influences we foresee in 2015. Number one, we expect CMP pricing to stabilize, or even improve, since more small-scale manufacturers will be forced to shut down obsolete production lines, reducing overall industry capacity.

Number two, we expect our new lightweight CMP to continue to ramp up. Lightweight CMP is a premium product that garners a modestly higher price, and our cost of production is well below that (technical difficulty). As such, the lightweight CMP is an attractive contributor to our profitability.

Number three, we will enter the tissue paper market later in 2015.

Finally, number four, the digital photo paper (technical difficulty) should also be completed later in 2015, restoring an attractive revenue stream.

I want to add more thoughts regarding the first point about industry-mandated closures. For years, we have demonstrated a commitment to sustainability and environmental stewardship while not sacrificing profitability. We use only recycled waste paper for our feedstock, which gives us a cost advantage today compared to regular pulp, and also gives us future opportunities to market our products as green. We are optimistic about 2015, and expect to be in a strong position to capture new growth opportunities.

Now Ms. Hao will review our financial results.

Hello. I'm [Renee Jao] of ICR, the Company's Investor Relations firm. I will deliver the English version of Ms. Hao's prepared remarks.

(interpreted) Thank you, everyone, for being on the call. Before I begin, please remember that all figures are in US dollars, and all comparisons are year-over-year, unless stated otherwise. Also, I will occasionally refer to specific production (technical difficulty) associated with various products. I will make clear to which products I am referring to. For reference, though, the numbering systems of our production lines is provided in our earnings press release, and on slide number 24 of the earnings core presentation.

Now let's look at our financial performance (technical difficulty) fourth quarter of 2014. Please turn to slide number 8. Total revenue was down 7.1% to $32.7 million dollars as a result of the loss in sales due to the relocation of our digital photo paper production facility, and a decline in volume of offset printing paper. CMP sales were up (technical difficulty) this year (technical difficulty) production halt imposed by the central government during the APEC Summit in Beijing.

Turning to slide 9, the CMP segment generated sales of $24.3 million, representing 74% of total revenue. $4 million was in our new lightweight CMP. Volume was up 4.8% to 65,592 tonnes, 10,700 of which was lightweight CMP. Average selling price, or ASP, for regular CMP increased 1.1% to $369 per tonne. ASP for lightweight CMP was $373 per ton.

The offset printing paper segment generated sales of $8.3 million, representing 25.4% of total revenue. Volume was 12,110 tonnes, down 22%, due to the two-week APEC suspension. ASP was $690 per tonne, up 2.1%. There was a bit of digital photo paper sales as we sit out of inventory, but revenues in this segment were basically be nil until we restart production later in 2015.

Slide number 11 summarized the progression of change of our revenue mix. Gross profits was $5.6 million compared to $7.2 million in the prior-year period, while gross margin was 17.1%, down from 20.3%.

The decline in margin was due to higher fixed cost absorption on a per-unit basis from increased material and energy costs. In the fourth quarter, our utilization rate for our regular CMP production line, PM6, was 61% which compares to utilization of 76.6% in the third quarter of 2014. Income from operations was $3.6 million, and operating margin was 11.6%, down from 15.1% a year ago.

Net income was $2.2 million, and net income margin was 6.8%, down from 10%. Basic and diluted earnings per share were $0.11 compared to $0.19 for the corresponding periods of 2013.

Now let's look at other financial performance for the full year of 2014. Please turn to slide number 12.

Total revenue was up 9% to $137 million. As Mr. Liu mentioned, we ramped up the new production line for regular CMP production and had two quarters of contribution from the new lightweight CMP product.

The CMP segment generated sales of $96.5 million, representing 70% of total revenue. Volume was up 22% to 265,132 tonnes, 11% of which was our lightweight CMP. ASP for regular CMP increased 2.7% to $363 per tonne, while ASP for lightweight was $369 per tonne.

Sales of offset printing paper were $37.5 million, representing 27.4% of total revenue. Volume was 54,774 tonnes and ASP was $686 per tonne, up 0.9% from 2013.

Sales of digital photo paper were $3 million, down 40%. Tonnage was 763, also down 41%. Due to the relocation, most sales were in the first half of the year.

Gross profit was $22.8 million compared to $23.3 million in 2013. Gross margin was 16.6%, down from 18.6%. The decline was due to the combined effects of the mandatory production suspension during the APEC Summit, and the relocation of our digital photo paper production line, as well as higher energy costs and lower ASP for our regular CMP product.

For our regular CMP production line, PM6, the full-year utilization rates were 65.8%, which compares to 60.3% in 2013.

Income from (technical difficulty) was $17.4 million, and operating margin was 12.7%, down from 15% a year ago. Net income was $11.7 million, and net income margin was 8.5%, down from 10.4%. Basic and diluted earnings per share were $0.61 compared to $0.71 in 2013.

Moving to slide 15, let's look at the balance sheet and liquidity as of December 31, 2014. Cash and equivalents were up 24.3% to $3.9 million compared to $3.1 million at the end of 2013. The increase in cash was mainly from operating cash flow, which was up 8% to $32.3 million from $29.9 million in 2013.

Short-term debt was $26.1 million, including notes payable of $16.1 million. Long-term debt was $17.9 million. Debt represents 18% of our total capitalization. We believe this is very manageable and is within a normal range for the domestic paper industry.

I want to reemphasize that the Company has no problem securing financing in China. However, due to the tightening credit policy of the Chinese government, local banks are unable to grant loans for longer terms, which we would prefer.

Let me now share some photos of the progress we're making in our key capital projects. Slide 18 has our most recent photos related to the tissue paper expansion project. The construction of the office building, factory, and warehouses at Wei County site remains on track and are in final stages.

Tissue paper packaging equipment is being installed. When 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 [safe] paper sourced from third parties.

As we have previously announced, budget funding delays now lead us to expect first production in the second half of 2015. The delay should not have a material impact on our 2015 financial results.

Slide 19 (technical difficulty) relocation of our digital photo paper production line. (technical difficulty) changes to the Company's government zoning policy, we were forced to move our production lines to a new location right across the street from our Xushui Paper Mill, which we call the Xushui Mill Annex.

The two production lines are disassembled, and equipment is being transferred for installation. The relocation remains on schedule. We continue to expect production to resume in the second half of 2015. You will find some photos of our installation progress at the Xushui Mill Annex on slide 20.

Finally, let me offer some comments on general industry conditions that could impact our results in the first half of 2015. Seasonal demand for containerboard normally peaks in the fourth quarter in preparation for the Christmas and Chinese New Year holiday season. First quarter is likely to see a normal sequential reduction in demand.

We view the regulatory environment [unfavorable]. The government is expected to continue pushing for industry efficiency and environmental protection. In 2014, the Ministry of the Industry and Information Technology of China, or MIIT, announced a mandated closure of 4.63 million tonnes of paper manufacturing capacity, including 505,000 tonnes in Hebei Province. We believe that the government will continue to strictly enforce mandatory closure of [out safety] capacity over the next (technical difficulty) years. This should help keep ASPs relatively stable in 2015.

During the fourth quarter, we saw the ASP of our regular CMP product recover to $369 per tonne from $355 per tonne in the third quarter of 2014. We view this as early evidence that the downward price pressure we saw in 2014 may be abating. Looking at raw material cost, we see the possibility that ongoing inflationary pressures and higher demand for recycled paper could lead to an increase in our raw material and production costs. Additionally, we can expect that (technical difficulty) paper increasing in China. Prices (technical difficulty) scrap paper before the increase as well.

We are now ready for question-and-answer session. Operator, please?

(Operator Instructions). Tim Clarkson.

Yes, this is more of a comment. I just wanted to say that I really appreciate the persistence of Orient Paper and the effort of the Chairman to continue to invest in the Company through some difficult times here. And there are people here that do appreciate his hard efforts -- and keep doing it. I think you guys are doing an outstanding job, and I'm looking forward to getting your equipment put in and seeing better results further down the line. So, just a comment; no question. Thanks.

(interpreted) We appreciate that. We appreciate your comments.

(Operator Instructions). John Tumazos.

In the US, the price of scrap containerboard has fallen essentially to 2009 recession levels; around $71 a ton in the domestic market. Is it now optimal for Orient Paper to use a different fiber mix? Is the imported OCC cheaper than other grades of fiber, either imported or locally, that you use? And if you use a higher quality fiber, do the customers pay you more?

Let us translate this question for Chairman Liu, and we'll have a response for you.

(spoken in Chinese)

So, Chairman answers your questions like, the price for the scrap containerboard or for other raw material is fluctuating in China, as well. So domestic market trend is in line with international trends. And from the Company's side, the Company used recycled paper as the green material, and the raw material costs will reflect the market prices of raw material here in China.

Thank you.

(Operator Instructions). Tim Clarkson.

Yes, I was just wondering if there's any additional difficulty in creating tissue paper versus doing your traditional papers that you've already done. Is it more technologically difficult, or is it pretty similar?

All right, let us translate that question.

(interpreted) To answer your question, so for our tissue paper we are now recruiting sales teams. We now have 20 salespeople ready in the Northeast part of China. And we're going to keep building the teams so we can initiate sales of our process -- the first batch of processed tissue paper, and really test the market and cultivate a market there. So that's the first step. And that's around mid-April. And in the second half of 2015, that's when the manufacturing will be ready. And as we cultivate the market, we while bring in our own products.

Thank you.

(Operator Instructions). Seeing no further questions, let me turn the call over to Mr. Liu for closing remarks.

(interpreted) Thank you, operator. To reiterate, 2014 was gratifying year for us, given the challenges we overcame. Our new CMP product is seeing good market acceptance, and we have more new product introductions coming later in 2015. We are approaching the completion of a number of capital projects, and should soon see CapEx declining while revenue ramps. We are optimistic about our prospects in 2015 and beyond.

If you have any additional questions, please contact us. We strive to answer all investor inquiries. I invite you to address your questions to our Investor Relations contact at IR@orientpaperinc.com.

This concludes our call today, and we thank you all for listening in. Goodbye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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.