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Edited Transcript of ONP earnings conference call or presentation 9-Aug-19 12:00pm GMT

Q2 2019 IT Tech Packaging Inc Earnings Call

Baoding Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of IT Tech Packaging Inc earnings conference call or presentation Friday, August 9, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Conference Call Participants

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* Dan McCarron;Weitian Group

* Janice Wang;Weitian Group

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to participate in IT Tech Packaging Second Quarter 2019 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded (Operator Instructions) Joining us today are Mr. Zhenyong Liu, IT Tech Packaging'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.

IT Tech Packaging announced its second quarter 2019 financial results via press release yesterday, which can be found on the company's website at www.itpackaging.cn.

First, Mr. Liu will brief you on the company's key operational highlights over the second quarter 2019, and then Ms. Hao will review the company's financial results.

Before we start, I would like to draw your attention to our safe harbor statement. Management's prepared remarks contain 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 facts in its announcement are forward-looking statements, including but not limited to anticipated revenues from the corrugating medium paper, tissue paper, offset printing paper and digital photo paper business segments; the actions initiatives of current and potential competitors; the company's reactions -- the company's ability to choose new products; the company's ability to implement capacity expansion; market acceptance of new products; general economic and business conditions; the ability to attract and retain 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 expectation expect as may we required by law. Although the company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that this expectation will turn out to be correct, and investors are cautioned that actual results may differ materially from anticipated results.

There is a presentation document featuring management's prepared remarks and is now available for download from the company's website at www.itpackaging.cn.

Please note that there will be discussions on non-G-A-A-P financial measure or E-B-I-T-D-A, or earnings before interest, taxes, depreciation and amortization. Please refer to our press release for a complete reconciliation of E-B-I-T-D-A to net income.

As a kind reminder, all numbers in our presentations are quoted in US dollars and all comparisons refer to year-over-year comparisons unless otherwise stated.

I would like to turn the call over to Mr. Liu. His comments will we delivered in English by Dan McCarron from Weitian Investor Relations. Mr. McCarron, please go ahead.

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Dan McCarron;Weitian Group, [2]

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Thank you, operator and good morning, everyone. Thanks for joining our second quarter 2019 earnings conference call. Our second quarter 2019 results highlighted continued recovery of our business as we managed to grow our top line by 1.4% and made a successful turnaround.

Despite continued downward trend in ASPs that offset the increase in sales volume for both CMP and offset printing paper, our second quarter 2019 recorded sales volume of 70,389 tonnes, an increase of 33% year-over-year, reached the highest level since our first quarter of 2017 thanks to solid combination -- contribution from offset printing paper products and tissue paper products that we commenced production at the end of 2018.

Looking ahead, we expect the market demands and ASPs for our paper products will be stable in the upcoming quarters.

On June 25, 2019, Dongfang Paper, the major operating entity of the company, entered into an acquisition agreement with Hebei Tengsheng Paper Co. Ltd. and Dongfang Paper shall acquire 100% equity interests in Tengsheng Paper and all rights title and interest in and to all assets owned by Tengsheng Paper for a total consideration of approximately $47 million.

Upon the completion of the acquisition, the company's PM8 production line will be transferred to Tengsheng Paper as a wholly-owned subsidiary of Dongfang Paper. And Dongfang Paper will focus on manufacturing and distribution of tissue paper in the future.

We believe Tengsheng Paper will optimize our value chain in the paper industry and this synergy will help the company to reduce cost of sales, improve profit margins and develop more flexible pricing strategies.

The acquisition of Tengsheng Paper shows the company's confidence in the prospect of the Chinese tissue paper market and we believe it paves the way for company to further penetrate into the tissue paper market and improve our market share in the North China region.

Now I will turn the call over to our CFO, Miss Jing Hao, who will review the content of the fourth quarter financial results. The comments will be delivered in English by my colleague. Janice Wang. Janice, please go ahead.

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Janice Wang;Weitian Group, [3]

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Thanks, Dan and thanks to everyone for being on the call.

Next, on behalf of the management team, I will summarize some key financial results for the second quarter of 2019. Also, I will occasionally refer to specific production lines associated with various products. I will make clear which products I'm referring to. For reference, the numbering system for our production lines provided on Slide #17. Now let's look at our financial performance for the second quarter '19 -- of 2019.

Please turn to Slide #7. For the second quarter 2019, total revenue increased 1.4% to $33.6 million due to the increase in sales volume of CMP products, offset printing paper and tissue paper products, partially offset by the decrease in ASP of both CMP products and offset printing paper.

Turning to Slide 8. For the second quarter of 2019, the CMP segment, including both regular CMP and lightweight CMP, generated a revenue of $26.2 million, representing 77.9% of total revenue. $20.9 million of revenue was from our regular CMP products and the $5.3 million from lightweight CMP.

CMP segment volume increased by 26% to 60,576 tonnes, of which 47,994 tonnes were regular CMP and 20,582 tonnes were lightweight CMP.

Average selling price, or ASP, for regular CMP decreased by 28% to $435 per tonne, and ASP for lightweight CMP decreased 28.1% to $422 per tonne.

Turning to Slide 9. For the second quarter 2019, our offset printing paper segment generated revenue of $6.2 million, representing 18.6% of the total revenue. Offset printing paper segment volume increased by 74.3% to 8,559 tonnes.

Average selling price, or ASP, for offset printing paper decreased by 15.4% to $729 per tonne compared to 4,911 tonnes at an ASP of $861 per tonne in the same period last year.

We resumed production of offset printing paper this April and expect a continued revenue stream from this segment in the third quarter of 2019.

Turning to slide 10. We recognized the revenue of $1.2 million from tissue paper products for second quarter 2019, resulting from sales of 1,254 tonnes at an ASP of $948 per tonne. We expect to generate continued sales of tissue paper products this year.

Slide #11 summarizes the changes in our revenue mix. For the second quarter of 2019, total cost of sales increased by $0.6 million to $30.7 million, leading to total gross profit of $2.9 million, slightly down from gross profit of $3 million from the same period last year and overall gross margin of 8.7%.

For the second quarter of 2019, SG&A expenses decreased by 20.5% to $2.4 million, and income from operations were $0.5 million compared to loss from operations of $0.01 million for the same period last year. Operating margin was 1.6% compared to operating loss margin of 0.04% for the same period last year.

For the second quarter 2019, net income was $0.1 million, resulting in $0.02 per basic and diluted share. This compared to a net income of $0.1 million or $0.01 per basic and diluted share for the same period last year.

For the second quarter of 2019, EBITDA increased by $1 million to $4.6 million from $3.6 million for the same period of last year.

Now shifting gear to year-to-date financial results. For 6 months ended June 30, 2019, total revenue increased 45.8% to $51.1 million as a result of the increases in sales volume across all product categories. This was partially offset by decreases in ASP of CMP and offset printing paper.

For 6 months ended June 30, 2019, the CMP segment, including both regular and lightweight CMP generated a revenue of $41.8 million, representing 81.8% of total revenue. $33.1 million in revenue was from our regular CMP products and $8.7 million was from lightweight CMP.

Volume for the CMP segment increased by 84.9% to 94,294 tonnes, of which 74,287 tonnes were regular CMP and 20,007 tonnes were lightweight CMP. ASP for regular CMP decreased by 26% to $446 per tonne, while ASP for lightweight CMP decreased by 25.1% to $434 per tonne.

For the 6 months ended June 30, 2019, our offset printing paper segment generated a revenue of $6.2 million, representing 12.2% of total revenue.

We shipped 8,559 tonnes of offset printing paper for the 6 months ending June 30, 2019, an increase of 61.8% from the same period last year.

ASP for offset printing paper decreased by 15.4% to $726 per tonne.

For the 6 months ended June 30, 2019, we recognized the revenue of $3 million from tissue paper products, resulting from sales of 2,857 tonnes at an ASP of $1,067 per tonne.

For 6 months ended June 30, 2019, total cost of sales increased by $15.5 million to $48.4 million, leading to total gross profit of $2.7 million and an increase of 17% from last year. Overall gross margin of 5.3% reflects a decrease of 1.3 percentage points from last year.

From the 6 months ending June 30, 2019, SG&A expenses were $5.4 million compared to $6.8 million from the same period last year.

For the 6 months ending June 30, 2019, loss from operations decreased from $4.5 million to $2.6 million. Operating loss margin was 5.2% compared to operating loss margin of 12.9% from the same period last year.

For the 6 months ending June 30, 2019, net loss was $2.3 million or $0.10 loss per basic and diluted share compared to net loss of $4 million or net loss of $0.19 per basic and diluted share for the same period last year.

For the 6 months ended June 30, 2019, EBITDA increased from $3.2 million to $4.5 million for the same period last year.

Moving to Slide 20, 19 and 12, let's look at the balance sheet and the liquidity. As of June 30, 2019, the company had cash and bank balances, short-term debt, including bank loans, current portion of long-term loans from credit union and related party loans, notes payable and the long-term debt, including related party loans of $1.1 million, $6.90 million, $0 million and $9.1 million, respectively compared to $8.5 million, $14.3 million, $3.6 million and the $6.9 million respectively, at the end of 2018.

Net accounts receivable was $3.2 million as of June 30, 2019 compared to $2.9 million as of December 31, 2018.

Net inventory was $5.8 million as of June 30, 2019, compared to $2.9 million at the end of 2018.

As of June 30, 2019, the company had current assets of $16.3 million and current liabilities of $62.5 million, resulting in a working capital deficit of $46.1 million. This compared to current assets of $24.2 million, current liabilities of $29.6 million and the working capital deficit of $5.5 million at the end of 2018.

Net cash used in operating activities was $0.8 million for the 6 months ended June 30, 2019 compared to net cash provided by operating activities of $1.1 million for the same period last year.

Net cash used in investing activities was $5 million for the 6 months ending June 30, 2019 compared to $1.2 million for the same period of last year.

Net cash used in financing activities was $5.3 million for the 6 months ended June 30, 2019 compared to net cash provided by financing activities of $0.8 million for the same period last year.

We've received several questions about our second quarter results from our investors. Now the management is answering these question as follows.

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Questions and Answers

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Janice Wang;Weitian Group, [1]

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Number one. What was the thinking behind the acquisition of the Tengsheng Paper in this June?

And in response to this question, the management advise you that the delayed Tengsheng Paper will optimize our value chain in the paper industry and this synergy will help the company to reduce cost of sales, improve profit margin and develop more flexible pricing strategies. The acquisition of Tengsheng Paper shows the company's confidence in prospect of the Chinese tissue paper industry and markets, and we also believe it paves the way for the company to further penetrate into the tissue paper market, especially to improve our marketing share in the China region.

Number two. We noted in the news that some cities in China started emphasizing sorting and recycling. Do management think this new trend could eventually lead to lower scrap paper cost for the ITP?

In response to this question, the management advise you that we anticipate the recently implemented a new rule that emphasize sorting and recycling in a few Tier 1 cities. So we will have limited impact on our raw materials cost in the future as we purchase most of recycled paper board from some special waste recycling companies, which have been stable for part of our raw materials.

Number three. How much revenue does the company expect from Tengsheng Paper?

In response to this question, the management advise you that Tengsheng Paper, as a major operating entity of our company, contributed almost 80% of our total revenue for second quarter of 2019. And we also expect Tengsheng Paper will generate revenue of approximately USD 21 million in the next 12 months after merged into Tengsheng Paper.

Now if you have any questions, please contact us through e-mail at ir@itpackaging.cn. Management will respond to your questions through e-mail as soon as possible. Operator, please go ahead.

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Operator [2]

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Thank you for attending IT Tech Packaging Second Quarter 2019 Earnings Conference Call. This concludes our call today, and we thank you all for listening in. Goodbye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]