Orchids Paper Product's (TIS) CEO Jeff Schoenon Q1 2016 Results - Earnings Call Transcript

| About: Orchids Paper (TIS)

Orchids Paper Products Company (NYSEMKT:TIS)

Q1 2016 Earnings Conference Call

April 21, 2016 10:00 AM ET

Executives

Jeff Schoen - CEO

Keith Schroeder - CFO

Analysts

Ian Zaffino - Oppenheimer

Louie Toma - Craig-Hallum Capital Group

Marco Rodriguez - Stonegate Capital Markets

John Nobile - Taglich Brothers

Michael Taglich - Taglich Brothers

Operator

Good morning and welcome to the Orchids Paper Products First Quarter 2016 Earnings Conference Call.

On the call today are Jeff Schoen, President and Chief Executive Officer; and Keith Schroeder, Chief Financial Officer. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the call over to Keith Schroeder.

Keith Schroeder

Thank you, Operator. Good morning and thank you to everyone for attending our 2016 first quarter earnings call. The agenda for our call today will begin with my review of the first quarter results. Jeff, will then provide his perspective on our results and on our business environment. We will conclude with a question-and-answer session.

I would like to remind you that certain statements made during this conference call are forward-looking statements within the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change and actual results may differ materially from the forward-looking statements.

Factors that could cause actual results to differ materially from those risk and uncertainties described from time-to-time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2015, as well as our earnings release and any supplemental information.

Any forward-looking statements are made only as of this date, and the Company assumes no obligation to update any forward-looking statements. I would like to point out that during my remarks, I’ll be making reference to both GAAP and non-GAAP or adjusted results. The adjusted results exclude certain charges that we believe are not indicative of our core operating performance and the reconciliation between GAAP and non-GAAP measures is included in our earnings release which is available on our Web site.

For the first quarter of 2016 those adjustments to EBITDA include $149,000 of non-cash stock compensation and for the 2015 quarter include $267,000 of non-cash stock compensation expense. Adjustments to net income for the 2016 and 2015 quarters sale of $346,000 and $422,000 respectively on a tax effected basis. Those tax effect adjustments included just mentioned non-cash stock compensation expense of $98,000 and $175,000 respectively and intangibles amortization of $248,000 and $247,000.

Due to the material amount of our intangibles amortization we began using that expense as a net income adjustment beginning this quarter, so with that I’ll come to the highlight. We’re quite pleased to announce that we established record sales in earnings result from the quarters. We established records in total net sales, converted product mix sales, adjusted EBITDA and adjusted EPS of $47.7 million, $45.3 million, $11.6 million and $0.56 per share respectively.

Additionally, our adjusted EBITDA margin is 24.4% our best quarter ever and now for some details. Net sales for the quarter are $47.7 million were comprised of $45.3 million of converted product sales and $2.5 million of general sales. Demand for our converted products was strong in the quarter resulting in an increase in sales of 21% over the prior year quarter and 13% increase on a sequential quarter basis.

Converted product on each ship [ph] in the quarter totaled 23,400 tons, an increase of 24% over the prior year quarter and an increase of 13% when compared to the fourth quarter of 2015. Our net storing prices per ton lower about -- by about 3% compared to the prior year and flat on a sequential quarter basis. Our parent roll sales totaled $2.5 million and were limited by the demands of our converting operations in Oklahoma and South Carolinian.

Adjusted EBITDA for the quarter was $11.6 million, an increase of $6.8 million or 141% over the prior year quarter. As a reminder as discussed in previous conference call our first quarter of 2015 results were negatively affected by the Paper Machine project in Oklahoma. On a sequential quarter basis adjusted EBITDA increased $2.7 million or 13%, our adjusted EBITDA margin for the quarter was a very solid 24.4% compared with 12.9% in the first quarter of 2015 and 21.4% in the fourth quarter of 2015.

Our first quarter margin was delivered due to several factors, primarily strong demand for our converted products, solid operating performance improvements in the Oklahoma converting facility, favorable fiber pricing and solid earnings under the supply agreement. Our results for the quarter do not include any income from the business interruption claim discussed last quarter. That claim is in process and we expect to settle it over the next two quarters.

Now for some detail on the margin improvement. Operating performance rates in our Oklahoma converting plant improved by about 24% in the first quarter 2016 compared to our performance during 2015. This had the effect of reducing per unit production cost due to the increased absorption and other factors. Our fiber prices were favorable in the quarter on both a year-over-year and a sequential quarter basis by approximately $800,000 and $550,000 respectively. Margins on the supply agreement were favorably affected on both year-over-year basis and sequential basis due to the favorable U.S. dollars to peso exchange rate and lower overall operating cost at the Mexicali site.

These stable results were more than offset the effects of start-up cost in Barnwell. Looking at these factors on a sequential quarter basis, lower converting cost increased margin by about 290 basis point, fiber was positive by about 120 basis points, and a supply agreement contributed about 30 basis points. The Barnwell start-up costs were a drag on the margin, about 120 points.

Now I'll turn to fiber forecast. Current forecast recovered fiber relatively flat pricing till the end of 2016. Forecast for virgin fiber indicate downward pressure for eucalyptus till the end of 2016 and some minor increases in NBSK.

Our SG&A expenses in first quarter of 2016 were fairly flat with the prior year quarter at $2.7 million or 5.7% of net sales, compared with $2.5 million or 6.7% of net sales in the prior year quarter.

And now turning to taxes. Our effective tax rate for the full-year is estimated at 34.2%, this estimate includes the effects of the Indian Employment Credit which was extended to the 2016 tax year.

Now turning to the balance sheet and cash flow, cash flow from operations in the quarter was $8.9 million. Cash flow from operations was positively affected by cash earnings and an increase in accrued liability. These factors were partially offset by increased accounts receivable due to the increase sale. Capital expenditures in the quarter were $25.6 million including $21.3 million of expenditures on the Barnwell project. We utilized $4.8 million of restricted cash related to our new market tax credit transaction to fund a portion of the Barnwell expansion and incurred volumes of about $18 million on a delayed draw term loan and our operating revolver.

During the quarter we also received $1.9 million on state level incentives for our Barnwell expansion project. $3.6 million of cash was returned to shareholders in the quarter. A new accounting standard requires a classification of unamortized credit issuance cost as the contra to long-term debt on the balance sheet.

I hold [ph] these debt levels at a gross level. In other words with the debt issuance cost added back in this call and in future calls.

Our total debt outstanding was $92.2 million as of March 31, 2016. Our total debt includes about $48 million in borrowings related to Barnwell project. Unrestricted cash stood at $8 million resulted in net debt outstanding as 84.9. Our funded debt to EBITDA ratio was 2.37 times at quarter-end and our fixed charge coverage ratio stood at 3.59 times.

Now turning to our outlook for 2016. Jeff will discuss our business outlook in more detail, however I'll provide a bit of color now. In light of our strong sales performance this quarter and a review of our sales estimates for the remainder of the year. We are raising our full-year net sales guidance range to $190 million to $200 million. We expressed a great quarter from the adjusted EBITDA margin perceptive in Q1 at 24.4%. Our current adjusted EBITDA margin estimates for the full year are in the 20% to 22% range. This is taking into account the series of headwinds related to the Barnwell project. We expect margin headwinds in the second quarter due to lower margins under the supply agreement. We exceeded the 20,000 tonne limit under the agreement in late March and we have two months of margin sharing under the agreement, which will effectively reduce our earnings by approximately $1 million in the second quarter compared to the first quarter.

The tonnage limit we set by June 1, now returns to normal margin. We also expect the exchange rate to be a bit less favorable moving forward in 2016 as it exceeded 18 pesos to the dollar in Q1. There are some further ongoing headwinds, as discussed in our fourth quarter earnings call and includes requirement to purchase parent rolls to support the Barnwell start-up as we move through the year and additional for Barnwell start-up cost related to the second converting line during Q2 and Q3, and the Paper Machine we’re getting in Q4. The significant operating performance improvements in our Oklahoma converting facility along with continuing cost reduction efforts will help, mitigate some of these headwinds. Cash flow from operations is expected to range between $9 million and $10 million for quarter for the reminder 2016. We will experience some cash flow tailwinds and we settle the property damage and the business interruption claims discussed in our fourth quarter call as well as the effects of the income tax receivable on our books at the end of 2015.

On the plus side we expect this during headwinds [ph], confirm from some inventory bills related to the environmental start up. For 2016 our capital expenditure expectations are crossing $94 million, including $85 million from Barnwell and $9 for our facility in Oklahoma.

I’ll now the call over to Jeff.

Jeff Schoen

Good morning, as I stated in the press release we were very pleased with the overall performance of the Company in the first quarter, because the result reflect a lot of work coming to fruition both by our sales to develop strong relationship with the customers and category management and product positioning and also by operations to improve its ability to develop, produce and deliver high quality low cost products. As I stated in our Q4 earnings call in January demand was strong and demand continued to be strong throughout the quarter.

Our Q1 margins were 24% reflecting a verity of factors that Keith discussed, but the most significant towards the overall productivity improvements which I expect to continue as we move further into 2016. These improvements will help offset the margin loss we will see due to the South Carolinian start up and sell out. As Keith mention though even with the Barnwell headwinds we expect to still attain 20% to 22% margin for the overall business.

The Barnwell start up is on plant and we’re currently loading the plant up as the productivity improved. We have added new business to the site and will continue to add new business as we improve our overall case rate. The second converting line will be up and running in late Q2, the Paper Machine is on schedule to start up in Q1 in 2017. In 2016 we expect to sell approximately 13.6 million cases or 20% more cases that in 2015, as a reference point in Q1 we sold 3.4 million cases.

Looking forward to comparator landscape is strong reflecting higher branded and promotional activity as well as other competitive threats. Orchids has a strategic plan it is executing in Q2 that will help Milligate the effect of these threats and help continue our growth rate which will show results in Q3 and Q4. We’re also currently working with Fasta to develop a new supply agreement that continues to source new growth on the West Cost over the 20,000 tons we currently owned as we look forward to develop a longer term plan that provides Orchids the capacity it needs to grow at 20 plus percent sustainable margins.

Keep in mind that the agreement we have that is in June will not impact Orchids until we exceed 20,000 tons, recognizing that the clock turns to zero in June. Historically, we’ve reached 20,000 tons in Q2 of the following year. So we have time to work out in agreement with Fasta that supports both companies’ long term goals. I’m confident that we’ll develop a plan that ensures Orchids West Coast growth continues.

Finally, I need to pause here to say thank you to all of the Orchids employees as well as our suppliers and customers for supporting Orchids growth. We’re committed to adding value in the market in a way that differentiates us from our competitors.

With that I’ll now turn the call back to the Operator for questions.

Question-and-Answer Session

Operator

We’ll now begin the question and answer session. [Operator Instruction]. Our first question comes from Ian Zaffino of Oppenheimer. Please go ahead.

Ian Zaffino

The question would be on the just the cadence of the profitability or I guess the EBITDA. I mention million dollar headwind going into the second quarter, do you have enough going on in the rest of the business, I guess from ramping up the facility to offset that or are we looking at a down sequentially EBITDA number? Thanks.

Keith Schroeder

That’s a hard question to answer right now because you know as I mention, the second quarter typically, since I’ve got here is a time when a lot of competitive activity is occurring. Last year one of the brand started dropping price and doing a lot of promotional activity. That continued through second quarter the retailers reacted to that in a way frankly that helped to grow their business and help grow our business in the fourth quarter and the first quarter of this year.

So that’s going on right now, this is also a period at Orchids were do our cold mill outages. So we tend to take time to do work in the second quarter to prepare us for the second half. Having said that though our business is still -- we’re adding new business, we’ve new business to add we can put into Barnwell right now, but the limiter is the productivity of the plant. We’re probably moving in that business into Pryor while we transition Barnwell up, so there's a lot of activity going on. Those are the key points I think for you to consider at this point, but we're not trying to think about the second quarter as an island, we're looking at the whole year as we do, which is why Keith gave guidance for the year.

Operator

Our next question comes from Phil Ng of Jefferies, please go ahead.

Unidentified Analyst

Good morning Jeff and Keith, and congratulations on a good quarter. This is actually Alfred [ph] on for Phil. First question is on the operational improvements, can you talk about what kind of the big surprises were versus kind of where you guys were thinking about it coming into the first quarter because obviously you had really strong margins and very good cost performance, so what were the big surprises?

Jeff Schoen

Well I think you know one of the reasons I came to Orchids was I believe there is a lot of opportunity in the operations part of our business to make improvements. We’ve spent time rebuilding this team from the ground up, putting systems in place and I think you know I call it melting ice because there is a lot of energy going into these things, but you don't see the temperature rise. The temperature started rising in the first quarter. We came out of our incident, we've done a very good job of executing projects which previously was an issue. And I think our teams have changed the way they think about our business, our skill sets have gotten better and both our operators and amazing people and it kind of all clicked.

Now it clicked to a point where on relative basis we made a lot of improvements. However from my perspective it’s a new platform that we can now build off of and we expect further improvements, further momentum if you will based on the work that the operations team has done. I guess you know, surprises isn’t the right word for me, I expected it to happen. The timing turned out to be perfect because we had a strong sales and we were sold out which also helps lines run better when they're consistently filled up.

Unidentified Analyst

Got it, so when you say things clicked, does that imply that these things are sustainable that these are you know permanent improvements that you guys have in place or was there some sort of one off stuff that's going on?

Jeff Schoen

We saw a step change in productivity that we believe is sustainable. I mean we saw in January, continued in February, continued in March, so I mean we believe it's sustainable and it's, I believe it’s sustainable because I know what changes we've made that have caused this to happen. This isn't something that was just luck.

Unidentified Analyst

Got it, and then in terms of the capacity, in May I think we're going be coming up on year from the new converting line you added in Pryor and then obviously you recently added something in Barnwell and there's another line coming on. Can you talk about how each of those three lines are sold out, what percentage of capacity you have spoken for at this point?

Jeff Schoen

I think rather than trying to split hairs on that stuff I think what's important is we expect 13.6 million cases for the year. The reason I say that is because we've got excess capacity at Pryor, we’ve got excess capacity at Barnwell, we're going to be moving things back and forth to optimize the operations. But on a net change year-over-year we expect to grow our business again by about 20%.

Unidentified Analyst

Got it, and does that 20% growth number, I guess it's -- does that carry over to tonnage as well the 20% tonnage?

Jeff Schoen

Yes.

Unidentified Analyst

Got it.

Jeff Schoen

The question this year is really you know, we're out of capacity on Carolinian [ph] obviously so that's the issue in terms of sourcing both you know from sites with parent rolls to make up for the excess tonnage that we will sell, but from a converting standpoint, we've got the capacity to sell more tonnage and what we can produce.

Unidentified Analyst

Got it, and then just lastly from me the new capacity at Barnwell, how is that ramp going relative to your expectations, have there been any new lessons that you guys have learned that are applicable to the new converting line that's going on and have you made any progress I guess hiring someone on the sales front down there?

Jeff Schoen

We have a person on the East Coast who sells for us right now. We're looking for more people but the startup [ph] at Barnwell is going on as planned. Obviously in a brand new facility with brand new people, brand new management, those startup curves are going to be longer than for instance the one we had when we started our new line at Pryor. But we are on curve now, the learnings that you obtained because of the first line will be applied to the second line, which means that startup curve should be much shorter and my VP of operations just clenched when I said much shorter, it's a question of how much shorter.

But yes, I mean as we learn we expect to ramp up. What we've done in this company and this is in Pryor, we put in a lot of systems, you know a lot of standardization if you will. So a lot of the work that we’ve done at Pryor we're just applying to Barnwell as we ramp it up, which will help us ramp up a lot more efficiently than we might have a few years ago.

Unidentified Analyst

Got it, and actually just one more, I noticed that in the CapEx guidance I think you said 85 for Barnwell I think that was previously 90, can you about what changed?

Jeff Schoen

This on any change in the timing of the startup it is just to as we look at things how those come in and et cetera. So there isn’t now math to be a reflection on a change in the startup, it's just basically when the cash will flows.

Unidentified Analyst

Got it, so that should be right up and carry over into 2017 then?

Jeff Schoen

Yes.

Unidentified Analyst

Understood. Congratulations again on a great quarter and thanks and good luck.

Operator

Our next question comes from Louie Toma of Craig-Hallum Capital Group. Please go ahead.

Louie Toma

I just have one question that I want to get a little bit of insight into. You said that in Q1 Barnwell had a drag about a 120 basis points you guys have a lot of stuff going on this year with line one and line two and the Paper Machine. Can you give us some color on what your expectations are in terms of drag for the next couple of quarters?

Jeff Schoen

No. We are not going to get into the detail of that on our quarter-by-quarter basis, obviously we expect that the drag would be a bit less in the second quarter as the ramp up curve improves. So we also have this businesses in second line that will be -- second converting line that will be starting up in that quarter as well. So you expect the drag to be a bit less on the startup cost as you get into Q3 and then getting to Q4 you have the Paper Machines startup cost and then of course when we get into Q3 and Q4 based upon our current sales forecast we will be buying parent roll. So that will be a drag not only due to the startup per say, but those are costs that we will and incur over and above the time when we have business, new machine and running. So hope that helps, but we are not get in the quarter-by-quarter story.

Operator

Our next question comes from Marco Rodriguez of Stonegate Capital Markets. Please go ahead.

Marco Rodriguez

Just real quick here. Wanted to kind of get a little bit better feel on the revenue in this particular quarter. Where there any particular areas of strength that you saw, like additional customer wins or was this perhaps some of that revenue is that you lost because of the line incident last quarter basically got shifted into Q1. Any kind of color you can help me there with?

Jeff Schoen

I think for the most part we saw a shift in private label volume versus branded volume happening. There was a little bit carryover but I we are actually sitting here thinking since when has this carryover end, it never ended. And it was a function frankly of some work that we did with our customers to respond to branded activity last year. And once branded activity stops what typically happens is you see private label start regaining a share and that's kind of the phenomena that goes on every year or overtime. So we think we saw a lot of that in Q1. Now whether that's sustainable is going to be a function of what the brands do and what we do working with our customers?

Marco Rodriguez

That's helpful. And then in terms of the supply agreement and the margin share can you just provide a little more color, I mean where does that going to be impacting you on the P&L? Is that going to be going on a cost of sales side is that -- where exactly are you going to see that first?

Keith Schroeder

The effects what we are seeing in the cost of sales yes, so I assume everywhere.

Marco Rodriguez

Got you. Any expectations is that reverses to on normalize margin in Q3. Is that what I heard?

Jeff Schoen

That first as the margins versus Q1 of this year.

Keith Schroeder

But the margins we set to the good margins if you want to think about it that way on June 1. And then we accumulate tonnes, then once we have over 20,000 tonnes then the shared margin kicks in. And that's not typically till second quarter of following year.

Marco Rodriguez

Got you. Okay, great thanks a lot guys. Appreciated.

Operator

Our next question comes from John Nobile of Taglich Brothers. Please go ahead.

John Nobile

I just wanted to get some clarification on the Fabrica agreement now. I know that the two year spots in June, however I was under the assumption that the annual limit was actually 19,800 tonne and then you had an additional 7,700 tonnes that you can purchase bringing on the total 27,500 tonnes total. So I'm just trying to get an idea now why I'm assuming 20,000 tonne annual limit when the two year period hasn’t ended yet for the year 27,500.

Keith Schroeder

John, first of all I’m averaging the number, so it is 19.8, I just take 20 just to make it easy. The incremental tonnage though, we would had agreed to that we would be able to buy all that for sooner years at a specific model. What changes is the model which we have to renegotiate with Fasta, but the effect of that will not happen until we get over 20,000 tonne. You are going to have the April and May and then the rest of the year it's not going to be a factor. There will be a factor between now [multiple speakers].

John Nobile

It’s exceeded 20,000 tonnes though. If you look at the trailing 12 month going quarter by quarter you have exceeded that 20,000 tonne limit though.

Keith Schroeder

That's right, which is why we're at a shared margins scenario right now. But on June 1st, it all starts over. We start with zero tonnes. So you're going to accumulate 19,800 tonnes at their cost structure and when you hit over 20,000 it's going to be under a different marketing model.

John Nobile

Okay, so at point I think you brought it before in the call that you're going to share, well cost of goods sold will be impacted by about a $1 million I guess in Q2.

Keith Schroeder

In Q2, but not in Q3 and not in Q4.

John Nobile

Okay, Q2 solely, and obviously you're still working on the terms of this so, is the possibility you still might have that additional 7,700 tons option?

Jeff Schoen

We're not going to cut off if you will in terms of our supply. What we're working on is and what margin model that will be and I'm not you know, I don't I think that's not going to be, you know I'm confident we're going to get a model that gives us fair margins, but the reason I haven't done a lot -- I mean I'm working with them now, but I'm also looking broader than that, we're trying to grow our business on the West Coast and I have to think about longer than just how do I source another 5,000 tonnes or 6,000 tonnes. I have to figure out how do I source another 35,000 tonnes. So that work is also going on at the same time, I'm discussing this with Fasta.

John Nobile

Alright, and obviously you had the put out some guidance on the overall margins for the year of 22% which I think is higher than what you had previously and this incorporates also the need that the great possibility that you would be purchasing parent rolls in the secondary market at least in the second half of this year. You could still feel pretty confident in obtaining a 20% to 22% margin for the overall business.

Jeff Schoen

Yes.

John Nobile

Okay, well that's good. Just a couple more, and regards to Barnwell, I wanted to see if I could get some specific from the tonnage in the quota I know you just started shipping from Barnwell late in the quarter, but do have that number, how many tons you did shift from Barnwell in the quarter and also, as we stand now as of the date of this call what do you believe is the current run rate from that converting line in Barnwell.

Jeff Schoen

John, I really don’t want to get into those specifics, I don't think it’s relevant when you look at what's happening over the year, as I said we're in a ramp up. We have new business we're loading in, we're moving between Pryor and Barnwell as we have a new business and you know right now we're on plan relative to what we told the street.

John Nobile

Okay, and if I could just poke Barnwell in one more direction here. Now assuming both lines in Barnwell are running at full capacity, you have them the way you need hopefully by the end of this year. How many tonnes do you believe are going to be needed to satisfy your current existing customer base in this area? And I know there should be some cannibalization because you aren't servicing that area even before you went into Barnwell, so I'm just curious as to what is going to be existing and how many tonnes do you believe will be shipped to new customers that hopefully you can generate in that area.

Keith Schroeder

John, that's not a number that I can give you right now, we'd have to think about that some more and do some calculations.

John Nobile

Okay, but you do have customers in that Southeast area, I know like you're anticipating --.

Keith Schroeder

We have new distribution in the Southeast, it’s not just moving product from Pryor to Barnwell.

John Nobile

Okay, but you do, you did have existing customer, I just wanted to get an idea of -- because obviously if you're looking in that area of say 30,000 tonnes plus, how many of that is going to be satisfying current, customers that you did have in whatever radius you can look at in that area, that's what I just want to get a handle on.

Jeff Schoen

John, I think the best way to answer that question it's really going to depend on the [indiscernible] new customer business as we can in there and then the rest of the capacity will fill with business that perhaps we currently have or new business with existing customers that are best shipped out of that site. So that's not ongoing process, so it’s very hard to answer that question right now.

Keith Schroeder

It’s kind of like pushing the rope too, because you know whatever business we had in Pryor we put in Barnwell, we’ll create capacity in Pryor which we expect to sell out. So on a net basis you know at the end of the day a year from now we can talk about what the margin differences are between Pryor and Barnwell, but that would be the only thing that I would be thinking about relative to your question.

John Nobile

Okay, fair enough, alright, well that's all I have thank you.

Operator

Our next question comes from Michael Taglich of Taglich Brothers, please go ahead.

Michael Taglich

Two thing, first off all awesome quarter, congratulations guys, I'm really proud of what you're doing. Basically with Barnwell you're thinking -- you're hoping to make around $25 million in EBITDA out of that when we get that turned on within six months of it getting turned on right?

Jeff Schoen

That's a good estimate. [Multiple Speakers].

Keith Schroeder

I would say by the end of Q7.

Michael Taglich

You are at that kind of run rate?

Jeff Schoen

Yes.

Michael Taglich

Alright, you are going to be selling paper at the rate you need to get there at Barnwell from a converting operation standpoint by one year?

Jeff Schoen

I want to say till 2017.

Michael Taglich

Okay so at the end of 2017 on the sell side and then obviously the parent rolls you are filling in starting. What’s your schedule -- your scheduled date is in Q1 of next year correct?

Jeff Schoen

Correct.

Michael Taglich

And you should get the machine delivered when this year.

Jeff Schoen

Started installing it in the fourth quarter.

Michael Taglich

Okay. Is there on the boat yet or no. [Multiple Speakers] Is the machine on the boat yet?

Jeff Schoen

No. I think the first equipment starts arriving in July.

Michael Taglich

That's pretty exciting. Alright so we’re in this for $65 million EBITDA run rate by the end of the next year or so?

Jeff Schoen

That's what we’re shooting for, yes. I would hedging myself and say to 218, but if everything --.

Michael Taglich

The run rate?

Jeff Schoen

Yes

Michael Taglich

Terrific well, keep up the good work. [Multiple Speakers]. Sorry Jeff I talked over you.

Jeff Schoen

I would say that will have full value for that in 2018.

Michael Taglich

That's great. Alright, my other questions are answered. You are doing a great job as the CEO, Keith great job as the CFO. Keep it coming, thanks.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Jeff Schoen for any closing remarks.

Jeff Schoen

Well, I have further comments as I said were very excited about what's happened in the last couple of years at Orchids and we will continue to look at growing our business in the most efficient and effective way that we can. So with that we look forward to talking to you again in the second quarter earnings call.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.

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