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Orient Paper, Inc. (NYSEMKT:ONP)

Q1 2013 Results Earnings Call

May 16, 2013 8:30 AM ET

Executives

Zhen Liu - Chairman and CEO

Winston Yen - Chief Financial Officer

Analysts

John Tumazos - Very Independent Research

Operator

Good morning and good evening, ladies and gentlemen. Welcome to the First Quarter 2013 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. Zhen Liu, Orient Paper’s Chairman and Chief Executive Officer; and Mr. Winston Yen, the company’s Chief Financial Officer.

Orient Paper announces its first quarter 2013 financial results through a press release earlier and it is available on the company’s website at orientpaperinc.com. Mr. Liu will brief you on the company’s key highlights, operational and corporate developments over the first quarter 2013, 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 Q&A 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 this 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 potential competitors, the company’s ability to introduce new products, the company’s ability to implement the planned capacity expansion of corrugate 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, uncertainties and are based on current exceptions, assumptions, estimates, and projections about the companies and the industry.

The company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances or to change in its expectations except as maybe required by law.

Although, the company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that its expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.

This is a presentation document featuring management’s prepared remarks and is now available for download from the company’s website at orientpaperinc.com.

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

As a kind reminder, all numbers in our presentations are quoted in U.S. 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. Please proceed.

Zhen Liu

Good morning to our investors calling in today for our first quarter 2013 earnings presentation. I trust that everyone have had a chance to read our press release earlier. I would now like to discuss the highlights for our first quarter 2013. Please turn to slide five.

At our last earnings call held in March this year, we updated the market on the country-wide environment inspection conducted by the government. We are very pleased that our facilities have passed the rigorous inspection as Orient Paper is already committed to a business model that comprise with the government initiative of building an environment friendly incorporation.

The financial impact to our first quarter results from the inspection coupled with a seasonal Chinese New Year break were therefore largely within our expectation. Despite the challenges in the period, we are pleased that our cash position has continued to improve further. This is a largely supported by our company’s ability to generate cash consistently and maintain a competitive cost structure…

In addition, the company has initiated four quarterly cash dividend since the second quarter of 2012, and a dividend for the first quarter 2013 was paid on April 30th.

In the first quarter, we have also achieved solid progress in our tissue business expansion with the construction of the factory in the Wei County Industrial Park of Hebei Province. Later on in our presentation slides you can view some progress also at this site.

Now, I would invite our CFO, Winston Yen, to take it through the financial and business review, and our business outlook, before my interpreter return to give you my closing remarks.

Winston Yen

Okay. Thank you, Mr. Liu. As a reminder, all numbers are in U.S. dollars and all comparisons refer to year-over-year comparisons, unless otherwise stated. We have also assigned a numbering system for our production line for easy reference and the table of this is provided in our earnings press release, and in the appendix of this presentation on slide 24.

So, first, let’s look at the financial performance over Q1 of 2013. Please turn to slide seven. Total revenue was $19.7 million and gross profit was $1.6 million, gross margin was 8%.

Income from operations was $0.7 million and operating margin was 4%. Net income was $300,000 and net margin was 1.5%. This translates to basic and diluted earnings per share of $0.02.

As explained, this decline was largely due to production suspension of both Corrugating Medium Paper and Offset Printing Paper caused by the government environmental inspection for 20 days between February 26th and March 17, 2013, coupled with the Chinese New Year holidays. In addition, we had also suspended PM1 for renovation since the end of 2012.

Now moving on to slide eight on our cash position, as Mr. Liu pointed out earlier, our cash position is higher. As of March 31, 2013, our cash and cash equivalents have now gone up to $16.6 million, compared to $13.1 million at the end of 2012.

Although, there was a decrease of 53% in net cash flow from operating activities, we also had a slowdown of investment in cash flow.

I wish to emphasize that maintaining our cash flow is paramount as it allows the company to fund our execution initiatives and business expansion in a credit tight environment.

We now take a closer look at our product segments starting from CNP on slide nine. In Q1, we generated $13 million from this business segment, taking up 64% of total revenue. Sales volume was 33,000 tons and ASP was $381 per ton, a decline of 9% compared to one year ago, but a slight increase of 3.3% from the previous quarter.

During this quarter, new production line PM6 contributed for all the CMP sold, since PM1 has been suspended for renovation since the end of 2012.

Turning to slide 10, on our Offset Printing Paper segment, in Q1, revenue was $6 million, representing 33% of total revenue. Sales volume was 9,500 tons and ASP declined by 12% to $681 per ton.

As for our digital photo paper on slide 11, as mentioned before, since Q4 2012, our life time operations has been curtailed by the increasing restrictions from government urban planning officials due to the growing presence of residential buildings in our neighborhood. And as a result, revenue generated was $700,000 in Q1 and sales volume declined to 185 tons. ASP was down 5% to $3,778 per ton.

Slide 12 provides a chart of our revenue mix, which has been shifting towards CMP, now representing 64% for Q1 revenues and a similar level for our full year figure for 2012.

Moving to our operational and business updates. Please turn to slide 14 for an update of our PM6 ramp up. PM6 is our new corrugating medium paper production line, which has a designed annual capacity of 360,000 tonnes. According to management’s original estimates at the beginning of the year, PM6 was expected to produce up to 50,000 tonnes in the first quarter. However, the ramp-up was affected by the Chinese New Year holidays and subsequent government inspection for 20 days.

You can see this effect very clearly in the chart on the slides for the month of February and March as the average utilization rates drop to 36.8% in the first quarter from 69% in the previous quarter. For the year of 2013, we will be working hard to ramp up PM6 to produce between 220,000 tonnes to 240,000 tonnes of CMP in 2013.

Next slide 14 on our tissues business expansion projects. Orient Paper has started building the factory and other infrastructures for the household and tissue paper production facilities located in Wei County, economic development zone in Hebei Province since February 2013 after the Chinese New Year.

Now, the building is scheduled to be completed by the end of this year. Installation of PM8, the first 15,000 tonnes per year production line will commence in the third quarter of this year for the production lines to be completed by the end of the second quarter of 2014.

We turn to slide 15. You can see some of the privates photos of our construction sites. We’re building paper mill workshops, warehouses, office, cafeteria and other supporting facilities. In the meantime, we’re continuing to form our team for the operation as we prepare for our expansion into this new business.

We now move to slide 16 to update you on our proposed relocation plan of our headquarters compound. The company’s headquarter compound at Juli Road, Baoding is still undergoing appraisal process by the independent appraisal firms designated by the government. This is taking place together with the other three manufacturers in the affected zone.

Meanwhile, our Audit Committee is in the process of screening international reputable and independent appraisal firms to express a second opinion on the value of the property. As announced previously, Orient Paper will continue negotiations with respect to potential sale on an on an arm’s length basis with Hebei Fangsheng. And we’re only consummated the sale on churns that would be not less advantageous to the company than as if Hebei Fangsheng was an independent and affiliated party.

We would only enter into legally binding agreements with Hebei Fangsheng in connection with potential sale upon appraisals by independent appraisal firms and the finding by our audit committee that these conditions have been met.

Now, turning to slide 19 for other updates. As announced earlier, operations of PM1 has been suspended since the end of 2012 in preparations for the voluntary evaluation in 2013. We’re now carrying evaluation and technical assessment on the sites for renovation. Separately, on dividend, we have announced a quarterly dividend of $1.25 last month through shareholders with a record date on April 16, 2013. And the payment was made at the end of April last month.

For investor communications, we attended an investor conference in March 28. I’m planning to attend another one this year. We’re also planning to conduct a feedback survey with investors to evaluate our investor relations program and start the production of a new corporate video.

Last but not least, we will continue updating you on the company’s development and our business activities.

Moving onto slide 19, we would like to discuss our outlook and financial 2013 guidance. Looking ahead, we’re cautiously optimistic on the prospects of the paper manufacturing industry in North China. There are early signs that the market for packaging paper is improving from the last two quarters and raw material costs for CMP are expected to stabilize downwards due to market traction.

Therefore the company is maintaining its guidance on most of the financial benchmarks including net income and earnings per share for the full year of 2013. So revenues for the full year are now expected to be in the range of between $125 million and $138 million.

Our 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 are expected to be between $0.51 and $0.56.

Now, Mr. Liu will give us his concluding remarks for our presentation and he will speak through his interpreter.

Zhen Liu

Thank you, Winston. Let us now move on to slide 20. In closing, I would like to share my perspective and plans for Orient Paper. As we have mentioned two months ago, the overall economic situation has not moved significantly.

However, the industry is expanding increase in its stricter enforcement and environment protection requirements by the government, and the ongoing mandatory closure of outdated capacities by the government is widely expected to continue. This will give rise to further consolidation and tightening of supply while moving necessary for manufacturers to continue to invest to modernize and upgrade their facilities to stay ahead of the game.

For Orient Paper, we are still focused on our strategic imperatives for 2013. We will continue to ramp up the utilization of our new CMP line and are targeting annual production of 220,000 to 240,000 tons for fiscal 2013.

We will also continue the execution of our tissue business expansion plans and the renewal of our legacy CMP line within pressure and time. At all times and in all aspects of our operations and environments, we will need to upgrade and enhance our processes and systems to maintain competitiveness and reinforce our leadership position.

And finally, we will continue to do what we do best in. We will continue our stringent cost discipline and improve our competitive cost base and maintain strong cash flows to support our investment.

Despite the short-term headwinds, we are seeing how the regional economy in North China continues to develop, innovated together with ever increase of urbanization of improvement of living standards. Always there is significant demand growth potential that will benefit Orient Paper.

Finally, I would like to thank all our staff and our loyal shareholders for their continued support in the company and our future prospects. We would now like to open the call to your questions. Operator, please? Hello, Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Tumazos.

John Tumazos - Very Independent Research

To supply your customers during the production interruption and how much inventory were you left with, presumably the cash flows because you liquidated inventory?

Winston Yen

I’m sorry, John. I didn’t hear the first part of your question.

John Tumazos - Very Independent Research

When the safety -- when the government inspection occurred prior to the inspection, how many days did you expected would be? You probably didn’t guess 20 exactly right. And how did you staged inventory and how many tons of inventory were liquidated et cetera?

Winston Yen

Well, we actually knew that the inspection will be a long period of interruption for our production because this is -- we actually factored that the notice on a government order, they delivered the order in writing to us and to every affected business in the county. And the government’s plan was to spend the entire month of March going through three or four different stages to conduct the inspection and we were warned before hand that this inspection could take a lot of time. And that was why we believe it was prudent for us to put out a press release to give a heads up to our investors.

Now, of course during the inspection period, there was no production. So we had to just keep selling the inventory that we have on hand prior the start up of the inspection. On a normal basis, we only have about three days of inventory in our warehouse and you have to understand that this is after -- this is right after the Chinese New Year.

So when the inspection began, we had very little inventory in the warehouse just because, we have liquidated a lot of inventory before the Chinese New Year break. I, of course don’t have the exact numbers with me right now, but my impression is that we were not left with a lot of inventory during the inspection.

John Tumazos - Very Independent Research

Thank you.

Operator

And your next question comes from the line of [Camilla Chappelman].

Unidentified Analyst

Hi. I just have a couple of quick questions. It looks like there is a new office building being constructed at the site for the new tissue paper line, and is that going to be big enough to house operations from the HQ, that have to moved? And then also I’m wondering there was a specialty paper line that was renovated and when will that paper line go into production?

Winston Yen

Yeah. Thank you for the questions, [Camilla]. The first question about the new office building in the Wei County industrial development zone, that office building is probably big enough to house all of the staff that we currently have in the headquarter. However, to make the decision to relocate the entire headquarter operation from the county -- from the city of Baoding to Wei County is not as easy as it appears, because Wei County is about two hours drive on highway from Xushui County, our current headquarter. And we’re talking about relocating more than a 100 people from one city to another city that is two hours way from the current site.

So, when we decided to build that new office, we didn’t have the expectation for that building to house all of the staff that are now working at the headquarter office at Baoding. However, that office building should be large enough to accommodate everyone who will be working from that industrial park in the next four to five years.

So, right now, I don’t have any answer as to whether we will make that new office building our new headquarter after the renovation. So we’re continuing to assess the situation. And I’m sorry, I forgot about your second question.

Unidentified Analyst

Just wondering, you have also renovated, there was another line ….

Winston Yen

Yeah. The other -- right, right, we are still preparing for the launch of that renovated production line. And of course, we hope that we will be able to launch it but because the product that will be produced from that production line is a specialty paper. So we have to make sure that we have all the technical staff including engineers, managers and skilled workers to come on board before we’ll be able to officially launch that operation.

We hope that maybe in the second half of the year, we will be able to get everything done. But at this moment, I don’t have a clear cut deadline for the start of that production line.

Unidentified Analyst

Thank you.

Operator

At this time, there are no further questions in queue. So, I’d like to hand the call back over to Mr. Winston Yen, CFO for closing remarks.

Winston Yen

We want to thank all of our investors for their continued support for Orient Paper. We had to deal with a lot of unexpected (inaudible) productions in the first quarter. So going forward, we believe that we will be able to successfully ramp up the PM6 production line to be our cash cow. And we will like to thank you all for joining this conference call. If you have any further questions, please feel free to contact our IR team at ir@orientpaperinc.com. I wish everyone a good day. Thank you.

Operator

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

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