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Orient Paper, Inc. (NYSEMKT:ONP)

Q1 2014 Results Earnings Conference Call

May 16, 2014, 08:30 PM ET

Executives

Zhenyong Liu - CEO

Winston C. Yen - CFO

Analysts

Operator

Good morning and good evening, ladies and gentlemen. Welcome to the First Quarter 2014 Orient’s Paper Incorporated 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’s Paper’s Chairman and Chief Executive Officer and Mr. Winston Yen, the company’s Chief Financial Officer.

Orient Paper has announced its first quarter 2014 financial results through a press release earlier and is available on the company’s website at orientspaperinc.com. Mr. Liu will brief you on the company’s key highlights operational and corporate developments over the first 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 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 and potential competitors; the company’s ability to introduce new products; the company’s ability to implement the planned capacity expansion or 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; the 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, estimations 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 the 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 prepared remarks that is now available for download from the company’s website at www.orientpaperinc.com. Please note that there will be a discussion 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 U.S. dollar 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.

Zhenyong Liu

Good morning to our investors calling in for our first quarter 2014 earnings presentation. We are pleased to report that our first quarter results have shown significant improvement on our top line and bottom line figures. In addition we are pleased to report a successful ramp up of PM6 as we achieved a utilization rate of 80% this March after our seasonally slow month due to the Chinese New Year break and scheduled annual equipment maintenance. This has contributed to the increase of corrugating medium paper sales volume in the quarter compared to the same period in 2013.

We have also completed PM1 installation and have been conducting test runs in the past weeks. In fact we have just started in Baoding today our trial production. And you can see the latest photos we took on slide 15. After we have completed the trial production phase I believe we can quickly start actual commercial production of Insulation liner paper.

Furthermore we are very pleased to report that through our continued efforts to optimize the operational schedules at our digital photo paper facility we have seen an increase in production with a 76% growth in sales volume for quarter one of this year.

Later on in our presentation we will share progress photographs at our Wei County development. And I will now invite our CFO, Mr. Winston Yen to take you through the financial and business reviews as well as our outlook and guidance before my interpreter returns to give you my closing remarks.

Winston C. Yen

All right. Thank you, Mr. Liu. Please be reminded that all numbers are in U.S. dollars and all comparisons refer to year-over-year comparisons unless otherwise stated. The numbering system of production lines is provided in our earnings press release in slide 25 of this presentation.

First let's look at the overall financial performance of Q1 of 2014. Please turn to slide seven. Total revenue for Q1 was $25.8 million, up 30%. This was due to the interruption of production for the County Wei government environment inspection at our Xushui Paper Mill in Q1 of last year.

Gross profit rose to $4.7 million, up 187%. Gross margin rose from 8% to 18%. We benefited from the cheaper raw material unit cost and resulting lower cost of sale relatives to the very slight drop in product ASPs. Consequently the income from operations for Q1 increased over four times to $3.8 million with operating margin at about 15%. Net income for Q1 was $2.5 million, a more than seven fold increase. Net margin increased from 2% to 10%. This translates to basic and dilutive earnings per share of $0.14.

Moving on to slide eight cash position, as of March 31, 2014, our cash and cash equivalents crept up to $5.8 million compared to $3.1 million at the end of 2013. This improvement in cash position was attributable to significant increase in cash flow from operating activities, an increase of 79%.

Now taking a close look at our production segments, starting from CMP on slide nine, in Q1 we generated $17 million up by 36% for this business segment taking out 66% of total revenue. Sales volumes reached 45,335 tonnes and ASP was $377 per tonne, slightly down by 1%.

Turning to slide 10, and our offset printing paper segment, in Q3 revenue generated was $7 million, up14% representing 29% of total revenue. Sales volumes were 10,860 tonnes, up 31%, ASPs was $678 per tonne.

Slide 11, provides a chart of our revenue mix with CMP now representing 66% of company’s revenues.

And we will now move on to discuss our operational and business updates. Please turn to slide 13 for an update of PM6. We are please report a successful ramp-up of PM6 with a utilization rate of 50% for Q1, 2014 after our seasonal slower month of January and February due to the Chinese New Year break and scheduled annual equipment maintenance. We have achieved a total sales volume of 45,335 tonnes for the quarter, an increase of 36%. As mentioned in our previous earnings call, in 2014 we will continue to ramp-up and our targeting to produce 220,000 to 240,000 tonnes of CMP in 2014.

Moving now to slide 14 to provide an update on our PM1 modernization; we announced back in March that the company is looking to an early completion of this project and right now as Mr. Liu has just announced we have just finished test runs and trial productions on the renovated PM1. Once the trial production is completed commercial production of insulation liner paper is expected to start in Q2.

We estimate that total rebuilding cost will most likely be less than half of the initial budget. The insulation liner paper which uses recycled paper board as a primary raw material is use to sandwich in insulation materials as a construction material for walls and floors. With an annual production capacity of 50,000 tonnes the new PM1 will bring in additional revenue in the range of $7 million to $9 million in 2014.

Next let us look at slide 16 for our tissue business expansion project. We target to grow our production of tissue paper in the second half of 2015. Planning of PM9 our second tissue paper production lines are also underway. If cash flow permits installation will begin in the second half of 2014 and completion for the second half of 2015. We have also included the latest progress photographs from our Wei County site in slide 17 and slide 18 for your reference.

Now with this I would like to turn to slide 20 now. In terms of outlook industry analysts expect market demand to remain around the same pace as the last quarter while continued action by government to eliminate outdated capacity would help to create curb capacity in churn sectors and the Chinese paper industries. And as such our guidance for the full year 2014 remains unchanged and details are shown in the slide.

Mr. Liu will give us his closing remarks as he will speak through his interpreter. Please turn to slide 21.

Zhenyong Liu

Thank you, Winston. Looking ahead the company intends to maintain strong operating cash flows, seek opportunities to restructure our short-term liabilities and to best utilize our available cash to support investments and expansions. We believe our future growth lies very much in our new business expansion and we would strive to complete the installation and launch of PM8 by the end of the year with our available resources.

Much of the global media have focused on the slowing growth of China’s economy. However urbanization of China is progressing at a relentless pace particularly in Tier 3 and Tier 4 cities which are amongst our target markets. Acceleration of rising affluence and adoption of mobile consumer activity would further drive demand for CMP, tissue paper and related products. For this purpose we believe that Orient Paper has great potential for growth and we remain committed to executing our business plan and delivering consistently good results quarter-by-quarter.

This ends our prepared remarks. We would now like to open the call to your questions. Operator please?

Question-and-Answer Session

Operator

Thank you, Ma'am. This concludes the managements prepared remarks. We will now open the floor for questions in order to save time and for better proceedings please limit your questions to two per person per time. Thank you. And for the benefit of our English speaking participants please make sure you raise all your questions in English only. We will begin to start the Q&A session now. (Operator Instructions). We have the first question from the line of [John Tumazos]. Please ask your question.

Unidentified Analyst

Good morning, thank you. If we were to assume that everything goes smoothly over the course of 2014 and ’15 in terms of the new capacity being well accepted by customers and generating revenues and profits as expected, what would be your strategy for 2016 and ’17? Would you retain cash? Would you repay debt? Would you invest in other new machines and expansions et cetera?

Winston C. Yen

Yes thank you very much for your question John. Definitely we will try to stabilize all of these new production lines there that we're bringing to our full capacity during 2015. Of course by the end of this year we will probably put on a lot of debt and based on the terms of these new loans we may have to have a period of stable operation to generate cash to start pay down these liabilities and make sure that we are a better ground to launch for the next production boost.

But we do have plans to expand production capacities in Wei County Industrial Park. When I see the pipeline right now even though we don't have a concrete plan but the initial thought is after the stabilization of PM8 and PM9 that the two tissue paper production line, we want to perhaps lay in a new packaging paper production line for at least 300,000 or 400,000 tonnes. Because we still see a need in the packaging paper market in North China.

In order to do that the capital expenditure will probably be around $50 million based on very preliminary estimate but then if that's the case we will be able to accomplish not only the goal to grab more market share but also be able to better utilize the infrastructure investment that we are putting in to Wei County right now.

A part of CapEx plan and I would say a significant part of the CapEx plan right now is actually building out infrastructures in the industrial, not only the office warehouse, the landscaping and everything we will also have the steam generation equipment, the power substation and water treatment pipeline.

So all of these we intend to have a better utilization or a recovery of cost by more production capacities. And I think perhaps a large capacity in packaging paper will help us to accomplish that goal.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). We have the next question from the line of [Camila Compleman] Please ask your question.

Unidentified Analyst

Hello hey it's me. Congratulations again on another great quarter. And I do have a couple of questions. I wondered if you could just give a little color on the government involvement in the Wei County project, It is my understanding that the PRC government has kind of a vested interest in the success of the project and the waste water treatment plant is partly being built with kind of hand-in-hand with the local government. I wondered if you could give us a little color on that.

Winston C. Yen

Sure, thank you very much. The local Wei County government has been very supportive for our project. And you are absolutely right the water treatment facility for the entire industrial part is I guess being built with some government subsidies from Wei County. And but of course you know Wei County also like many local governments are very mindful of the environmental protection issues. So of course we’re treated very nicely by the government and their policies but on the other hand we will also have to deal with requirements from the county government with respect to the standard that we have to meet for environmental protection.

My understanding for example is that the boilers that we are going to build this year for PM8 and PM9 will be substantially larger than the boilers that we have at our Xushui County Mill. And of course one of the reasons is because Wei County has requested that we have to attain a certain energy efficiency with respect to the boiler. So we expect that the County government will probably provide with some future policy that will help our -- would help us to smoothly launch our production.

But on the other hand, I would expect the County government to be a very strict in reinforcing some of these environmental policies that they have set for only us but all of the constituents in the industrial park.

Unidentified Analyst

With their involvement they have a pretty vested interest in the success of the project. Would you say that’s true?

Winston C. Yen

That is true. Wei County relatively speaking within our province of Hebei is an area that is I would almost want to say under employed and I believe there has been -- and it’s considered a core neighborhood in our province. So the county government officials have every incentive to make sure the success of this project and make sure that we can create jobs and provide more benefits to local people who come to work in our factory. So I have no doubt that the government will co-operate with us and provide assistance to us in getting everything ready for production hopefully by the end of this year.

Unidentified Analyst

Thank you. And then my second question is just on your debt restructuring. We know you have a kind of agreement with CNFTFL. I’m wondering if the debt restructuring will be through them of if you are looking at other avenues for that debt restructuring?

Winston C. Yen

Yeah, that’s a very good question. We, I believe we also want to discuss with CNFTFL and see if they any leeway to restructure the term. Currently the term is three years so we essentially borrow the $24 million CNFTFL and the entire $24 million plus interest would have to be paid within three years and repayment of principal of that lease application has put a pretty heavy burden on our financial operation.

So if we will be able to negotiate with CNFTFL perhaps with a longer-term or with a -- or a better way for us to repay the principal that would certainly be great. But right now our effort is not only with the leasing company we’re also talking to other commercial banks in China and also our local credit union and see if any one of them could provide us with a larger long-term loan. And right now I am happy to report that at least one of these banks that we're talking to is considering this possibility right now.

So and we're also trying to see if we could do more capital lease or similar deals as we have done in 2013 with CNFTFL where we may have another leasing company coming into to take maybe 70% of the construction cost of let's say PM9 and then for us to repay that loan in the form of lease payment in the next three to five years. So I think all of those efforts are being made right now. And once we have any agreement signed, or major milestone obtained we will definitely contact report to our investors.

Unidentified Analyst

Thank you. And then I guess I just have one more question that is probably on the mind of all the shareholders is really the disparity between the book value, the earnings and the share price and any initiatives or ideas of what ONP might do in this year to improve the share price.

Winston C. Yen

Definitely I personally believe that still the priority is to execute our business plan. We're at a very exciting time at this point where we have like Mr. Liu have announced PM1, a new renovated PM1. It's in trial production stage at this point. We have shown a picture of our product in the presentation in our earnings presentation.

So and of course PM8 and PM9 are being built if we will be able to start producing, tissue paper in 2014 I believe we will certainly be able to attract more attention from the investing communities and hopefully that would help to restore some value to our company valuation. And on the other hand we do want to step up our efforts to reach our new investors now.

We may have announced or discussed with some investors in the last two years and we’re putting our focus away from the U.S. investors and we're trying to see if we could talk to more investors in other parts of the world like Asia and Europe. While we are still doing that I think this might be the time for us to come back to spend more time and effort with U.S. investors who have not heard our story.

So I am pretty sure for example this year you will see management doing more U.S. road shows or making more presentations at U.S. based investor conferences. So I hope that that will also help to bring the visibility of Orient Paper and to get our story heard by more people. So that's our plan.

Unidentified Analyst

Thank you so much and again congratulations on a great quarter.

Winston C. Yen

Thank you very much.

Operator

(Operator Instructions). At this time there are no further questions in the queue. So I would like to hand the call back to Mr. Winston Yen, the CFO for closing remarks.

Winston C. Yen

All right. Thank you very much for joining our conference call. We invite investors to contact us if you have further questions. Please feel free to contact our IR team at irhorientpaperinc.com. We wish everyone a good day. Thank you.

Operator

Ladies and gentlemen that does conclude our presentation. Thank you for your participation. You may disconnect now. Have a good day.

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