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Orchids Paper Strategy to Maintain Growth

|Includes: Orchids Paper Products Company (TIS)

On the morning of August 21, 2009, Orchids Paper Products announced the pricing of 750,000 common shares at $18.50.  This represents an increase of 12% in Orchid's outstanding shares .

Normally, the Street might react negatively to this type of news. In this case, the market has seemed to embrace the move.  The GeoTeam® is speculating that investors are initially agreeable to Orchid's intended use of the proceeds, believing the Company could dramatically improve the its growth profile.

Use of proceeds:

  • Construction of a warehouse
  • The purchase and installation of a new converting line
  • General corporate purposes

This is in line with the company's previously stated goals:

"We currently are reviewing our logistics operations and our strategy of employing a third-party warehouse. The results of this study may indicate a need to expand our current warehouse facility and eliminate the use of the third-party warehouse. We are also studying a project to purchase a new converting line to aid in our strategy to increase sales and profitability and to consume all of our paper making production in our converting operation."

The most significant use of proceeds is the addition of an another converting line. The GeoTeam® has participated in Orchids Paper Products conference calls and attended investor presentation meetings where investors expressed an eagerness for the Company to expand its converting division.

"We are currently approaching full capacity utilization of our converting operations."

This fact is reflected in 2010 estimates that portray earnings per share growing only 5% from 2009 forecasted levels. 

Benefits Orchids Paper hopes to gain from the construction of a warehouse and the purchase and installation of a new converting line.  This sentiment is touched upon in management commentary:

  • We plan to increase our converting capacity by approximately 4.0 million cases annually with the installation of a new converting line and construction of a warehouse.  The Company's current 300,000 square-foot converting facility has the potential capacity to produce approximately 7.7 million cases of at-home tissue products a year.  This represent a 48% increase in annual capacity.
  • Additional capacity will enable us to both increase sales of existing products and to provide the flexibility to manufacture higher tier products for sales to our core customer base and into new retail channel
  • We believe with additional capacity from our new converting line, we will be able to significantly increase the addressable customer base of our business.
  • We believe that having the additional capacity to provide both value and mid-tier product lines will enable us to meet a larger percentage of our customers' total tissue needs.
  • Our planned warehouse expansion and new converting line project, which we expect to be completed in 2010, should further improve our manufacturing efficiency and lower costs.
  • Source: 424b5, August 21, 2009

The GeoTeam® will monitor any revisions to analyst estimates.  It is likely that 2009 EPS estimates may come down by 12%, but may increase in 2010 when the estimate will be dependent on the completion date of the new conversion line.


Disclosure: Long TIS