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Edited Transcript of TIS earnings conference call or presentation 1-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Orchids Paper Products Co Earnings Call

Pryor May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Orchids Paper Products Co earnings conference call or presentation Monday, May 1, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey S. Schoen

Orchids Paper Products Company - CEO, President and Director

* Rodney D. Gloss

Orchids Paper Products Company - CFO

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Conference Call Participants

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* John Nobile

Taglich Brothers, Inc., Research Division - Senior Equity Analyst

* Louie M. Toma

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Philip H. Ng

Jefferies LLC, Research Division - Equity Analyst

* Robert Schwartz

Cooper Creek Partners Management LLC - Founder, CEO, Managing Member, and Portfolio Manager

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Presentation

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Operator [1]

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Welcome to the Orchids Paper Q1 2017 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Rod Gloss. Mr. Gloss, please go ahead.

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Rodney D. Gloss, Orchids Paper Products Company - CFO [2]

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Thank you, Austin. Good morning, and thank you for attending Orchids' first quarter 2017 earnings call. I will begin with the standard notices and then review the first quarter's results. Jeff will then provide us perspective on results and on our business. We'll conclude with a question-and-answer session.

Please remember that certain statements made during this conference 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 include those risks and uncertainties described in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2016 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 statement. During our remarks, we'll make reference to both GAAP and non-GAAP measures. The reconciliation between GAAP and non-GAAP measures is included in the earnings press release, which is available on our website.

For the first quarter of 2017, those adjustments to net income to [derive] adjusted EBITDA include interest expense of $500,000, income tax benefit of $400,000, depreciation and amortization of $3.5 million, a foreign exchange gain of $22,000, stock compensation and relocation expense of $92,000. I will also be making a distinction between operating cash flows attributable to changes in working capital and other operating sources and uses of cash. Management believes the changes in working capital provides an indication of cash invested in or provided by changes in such operating assets and liabilities, and therefore may indicate trends in operating performance and may identify a significant source or use of cash.

Operating cash flow, exclusive of changes in working capital, is believed to provide an estimate of the cash generated from all operating activities, prior to investments and/or liquidations of such operating assets and liabilities. I'll now compare the first quarter of 2017 to the first quarter of 2016, noting financial highlights and explaining selected metrics.

Net sales decreased $12.4 million or 26%, primarily due to heavy promotional activity by branded competitors and other competitive pressures, as noted in previous quarters. Parent roll sales were $2.5 million in both quarters; and converted product sales decreased $12.4 million to $32 point million -- I'm sorry, $32.9 million. $10.2 million of the decrease in revenue was attributable to the decreased numbers of tons sold, and $2.2 million was attributable to a decline in the average price per ton that reflects the changing mix of customers buying a changing mix of products rather than outright price decreases.

Cost of sales, exclusive of depreciation, decreased $3.6 million or 11%. Tons sold decreased by 20%, leading to a decrease of $7 million in cost of sales. However, the average cost per unit increased 9%, offsetting $3.4 million of this decrease. The addition of labor, overhead and start-up costs for Barnwell, not yet been fully offset by production and absorption, account for the largest portion of the relative cost increase. The decline in production volumes drove decreased absorption and unfavorable efficiency variances, to which we attribute roughly $4.4 million of the change in costs. Increases in repairs and maintenance, about $500,000, direct labor increases of about $400,000 and other cost increases were more than offset by savings, principally from lower fiber costs and from decreased freight costs.

Interest expense increased $300,000 or 97% to -- principally to an increased debt level. Our interest rate is also variable and dependent upon our financial leverage. Most interest incurred continues to be capitalized at Barnwell, South Carolina capital project, pending its completion. A tax benefit of $400,000 -- yes, $400,000 was recognized in the first quarter of 2017 compared to tax expense of $2.8 million in the first quarter of 2016, reflecting both the decline in the pretax earnings and the company's recognition of tax credits. The effect of combined tax rate estimate in the first quarter of 2017 is 30%. As a result of the foregoing factors, a net loss of $900,000 or $0.08 per basic share was recognized in the first quarter of 2017 compared to net income of $5.4 million or $0.53 per basic share in the first quarter of 2016.

Operating cash flows, excluding change in working capital, decreased $1.3 million compared to the first quarter of 2016, primarily reflecting the decrease in net income, net of changes and deferred taxes. Changes in working capital used $3.8 million of operating cash flows in the first quarter of 2017 compared to $200,000 of operating cash flows in the first quarter of 2016. Increased borrowings in both periods were used to finance investments in Barnwell facility.

In 2016, the company received $12 million of restricted cash from financings, of which $4.8 million was used in first quarter 2016 for Barnwell facility. The company paid dividends of $3.6 million in the first quarter of 2016, while dividends declared in the first quarter of 2017 were paid early in the second quarter. We already knew that competitive pressures had caused a significant decline in sales and production starting in the second quarter of 2016, so you're probably wondering what changed in the first quarter of 2017 relative to the fourth quarter of 2016. So I'll now compare those 2 quarters. Net sales decreased $2.4 million or 6%, as customers tended to work off high inventory levels following heavy promotional activity by brand competitors and other competitive pressures in prior quarters. Parent roll sales remained similar between the quarters, declining less than $100,000, while converted product sales decreased $2.3 million. A decline in the number of tons sold resulted in $2.7 million decrease in net sales, while a higher average selling price per tons increased net sales by $300,000. Cost of sales, exclusive of depreciation, increased $1.2 million or 4%. Tons sold decreased by 7%, leading to a decrease in cost of sales of $2 million. However, cost increases of $3.2 million or 11% more than offset the decrease. The decline in production volumes drove decreased absorption and unfavorable efficiency variances, to which we attribute $1.3 million of the unfavorable change in cost. Additionally, approximately $1 million of unfavorable changes in cost of sales resulted from seasonal fluctuations and surging costs that are not expected to be reoccurring.

These impacts included unfavorable variances, and purchasing rebates increased freight cost for shipments of parent rolls from prior to Barnwell, seasonal and social security expenses, Barnwell's mill labor and training and other unfavorable variances related to employee benefits.

Mexicali's costs increased approximately $300,000 due principally to increased fiber cost in the West Coast and increased local electricity rates, while Pryor benefited from $200,000 of cost-savings from its mix of fiber. In the fourth quarter, Barnwell had a favorable inventory adjustment of approximately $400,000, which was not replicated in the first quarter. Repairs and maintenance freight cost for shipments to the West Coast and other overhead costs increased to net approximately $400,000. Realize, I'm quoting quite a few details, and it's rather convoluted, but a lot of different impacts were felt in the first quarter.

As a result of the foregoing factors, a net loss of $900,000 was recognized in the first quarter of 2017 compared to net income of $2.6 million in the fourth quarter of 2016. I'll continue perhaps in a more summary fashion by trying to summarize the change in EBITDA. EBITDA of $6 million was generated in the fourth quarter of 2016 and EBITDA of $2.7 million was generated in the first quarter of 2017. Average selling prices increased, contributing $300,000. Sales volumes declined, reducing the standard gross margin by $700,000. Sorry, strike the word "standard." That was gross margin change only. A reduction of approximately $1.3 million is attributable to unfavorable absorption and manufacturing variances, in turn attributable to decreased production volumes and significant operating leverage. One of the changes in ramp-up costs -- I'm sorry, one-off changes in ramp-up costs of $900,000 were incurred. For example, these included labor incurred during training of new employees in Barnwell, timing of recognition of rebates and other factors noted in the discussion cost of sales. A reduction of $300,000 is attributable to changes in inventory adjustments at Barnwell and to increased repairs and maintenance at Barnwell that may or may not be reoccurring. Net favorable cost adjustments of approximately $300,000 in the fourth quarter were not reoccurring in the first quarter.

Going on to operating cash flows, excluding changes in working capital, increased $0.6 million compared to fourth quarter of 2016, primarily reflecting changes in deferred income taxes net of the decrease in net income. Changes in working capital used $3.8 million of operating cash flows in the first quarter of 2017 compared to providing $800,000 of operating cash flows in the fourth quarter of 2016. Increased borrowings in both periods were used to finance investments in Barnwell facility, (inaudible) paid dividends of $3.6 million in the fourth quarter of 2016. At March 31, 2017, debt, not having been netted with unamortized deferred debt issuance costs, was $153.6 million. And the adjusted EBITDA leverage ratio, as defined by our bankers, was $6.2 million -- I'm so sorry, 6.2 ratio. The banks waived the leverage ratio covenant for the first and second quarters of 2017, providing the company an opportunity to bridge these quarters and ramp-up operations for new business. The total projected expenditure for the Barnwell facility is $150 million to $155 million, of which approximately $147 million has been expended as of March 31, 2017.

I'll now turn the call over to Mr. Schoen.

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [3]

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Good morning. As Rod has discussed, we expected the first half of 2017 to be a challenging period until the new business awarded started to be produced and shipped. There was a lot of noise in the quarter as we prepared for the new business, including inventory adjustments to work out old product in favor of new. We began shipping part of the new awards in March and expect to continue to ramp up in Q2. Part of the new volume we have started to ship includes ultra-premium product, as this new product segment is starting to develop as an acceptable alternative to high-cost TAD. Rather than run up the inventory, we decided to preserve cash and set the stage for a step-change in results beginning in Q2. Operating cash flows, less changes in working capital, provided $7.4 million in the first quarter of 2017 relative to $6.8 million in the fourth quarter of 2016. We avoided stockpiling inventory and were able to exit some rented warehouse space. Despite spending $18 million on capital projects, we only financed -- we only increased financings by $11.5 million.

Moving on to Barnwell. Ongoing startup costs for the Barnwell project impacted the quarter, as we are in full-on training mode for operators and mechanics. We delayed the expected startup in late Q1 to June of this year to ensure we have an outstanding checkout. I was getting increasingly concerned that we were taking shortcuts to hit an expected date rather than doing what is right to ensure a successful startup. Taking shortcuts during the checkout phase of the capital project is a recipe for major disaster. I believe this action will make the startup curve shorter and help ensure we get into full production much sooner than if we had stayed on the present course. As stated in our press release, production of the new volume that we announced in January, representing 3-plus million cases of new business, has begun, which we expect to be fully implemented by the beginning of the third quarter. The Barnwell and Pryor assets are currently in full production to support this step-change in volume as we ensure a successful launch. We expect the new volume to generate in the area of $15 million to $20 million of EBITDA. I view the conditions in the first quarter as transitory and not a reflection of a permanent drop in EBITDA and EPS.

Regarding the dividend, I'm sure some investors were surprised with the board decision to suspend the dividend, and I'm sorry for that. I think the dividend has played an important part in the growth and income strategy that has been at play for the past 2 years. When we first implemented the dividend in 2009, we believe the stock was illiquid and undervalued. The dividend strategy was successful in increasing shareholder value and liquidity. In 2015, we embarked on a major expansion and believe the dividend played an important role to maintain liquidity and shareholder value while the Barnwell expansion was in development. Now that the Barnwell expansion is essentially complete, the board believes that it is prudent to focus on harvesting the capital we have invested and to decrease our leverage to prepare for future growth.

Looking forward, those investors who have enjoyed the benefit of a high dividend yield while waiting for the Barnwell expansion to be complete, may now look for the growth of the company and subsequent increased enterprise value as we fill up capacity, as the expected benefit.

For new investors interested in the growth story, this may be the opportune time to become part of a true growth story as we leverage the new product and process capabilities we have created and fill up the new capacity. Of course, the dividend may also become part of a future strategy as we decide what are the best paths to maximize shareholder value. This as well as other options will be considered at the discretion of the board. I view Q1 at the bottom of the parabola. Our goal is to decrease our concentration risk, and the new business awards we achieved in January, are a good first step to accomplishing that objective. Gaining 3-plus million cases of new business is a great achievement for my team, and reflects the work of developing new customer relationships, new product capabilities and new cost structures that, altogether, have made this result possible. Finally, we still expect to attain a run rate of $50 million to $60 million of EBITDA when our new capacity has sold out. That is our ultimate goal and is one that has my full attention.

With that, I will now turn the call back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Philip Ng with Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [2]

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I guess, given that you're still ramping up Barnwell, the facility -- the paper facility during 3Q this year, what gives you confidence you're going to be able to hit that $15 million to $20 million EBITDA target in 3Q? And do you anticipate there could be some startup costs and underutilization that might weigh on 3Q earnings? And obviously, the competitive landscape has been far more intense than I think you had anticipated about a year ago?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [3]

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Mostly, the ramp-up costs will hit us in Q2. The Q3 will have some residual ramp-up costs, but we're -- as Jeff mentioned, we've sort of delayed the startup of the middle of Barnwell, but we expect to ramp it up faster than we did. So we'll hit the bricks running, so to speak, in June and hence, still do most of the ramp-up in the second quarter continuing into the third quarter. Does that answer your question?

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [4]

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Yes, that's -- I guess that's helpful. He called out some destocking the quarter from your customers ahead of the restage, your private label. Can you talk about what's exactly going on? Is that largely behind you? And how should we think about it going forward?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [5]

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Yes. I think some -- a couple of our -- one of our major customers, put it that way, still had a lot of residual inventory that we did not really know about. And they decided to draw it down rather than have -- I mean, you're through a relaunch that includes packaging changes. So you can't keep this inventory and expect to sell it out in any fashion after you do the launch. So they decided to draw it down. It came down heavy. It was unexpected. I'm pretty sure it impacted more than us in terms of their customers. But it is behind us. I'd say 90% of it is behind us. There may be some residual still in the chain. But at this point, we would view it as behind us.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [6]

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Okay, that's helpful. And just one last one for me. Just given the amount of leverage that you guys have, it's prudent that you're suspending the dividend. Other than free cash flow you're generating, are there any other levers you'd look to pull -- look to pull to delever a little more quickly? And what's your longer-term leverage target?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [7]

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We -- I guess, Jeff is waiting for me to answer. The -- we're planning on hitting the bank covenants in Q3 that the bank has set some -- one that's in Q3. The waivers we got were just for Q1 and Q2. So we're aiming for that short-term. Longer-term, we want to get the leverage ratio down to 3 or under. We get a breaking point in interest there. Interest cost rates go -- change with our leverage ratio and we get a break if we can get under 3. Feeling that's also a good benchmark anyway, at least until we undertake some mergers or acquisition strategy or go off in some different route, which is in the perhaps distant future at this point, distant being at least 1 year or 2 years. So that's sort of the thinking on the leverage ratio. In terms of other cash flow management things, we do have some tax returns we're collecting. We are trying to manage inventory closely to not either use or just not to eat up cash unnecessarily. We're delaying some purchases of spare parts. We're doing some other things just managing working capital. But the tax refunds we're waiting on amount to roughly $8 million. So that's one lever that you may not consider significant that is probably more significant than most people imagine. But that's pretty much it.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [8]

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So that 3x leverage target, what's the realistic goal? And do you have to hit that leverage target before you reconsider looking at the dividend longer-term? That's all I have.

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Rodney D. Gloss, Orchids Paper Products Company - CFO [9]

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No, I would say not. The dividend is up to the board. And if they see free cash flow, I'm sure they'll reconsider, but the leverage ratio will not be dictating the dividend consideration.

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Operator [10]

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Our next question is from Louie Toma with Craig-Hallum Capital Group.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Just a couple of questions. What kind of startup costs do you expect in Q2?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [12]

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You're asking about amount or nature or both, Louie?

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Just to help us quantify dollars or margin impact. Just trying to handicap how Q2 might be affected as the plant continues to come online.

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Rodney D. Gloss, Orchids Paper Products Company - CFO [14]

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There's probably another $1.2 million of type of -- in our forecast for Q2 for startup costs at Barnwell. The largest one is buying extra-virgin fiber to make products prior to the recycled facility being fully operational. With this delay in bringing up the mill or starting the mill, we'll probably avoid some of that ramp-up cost, that we'll be able to use more recycled paper from the beginning, just because the timing of the 2 sections of the plant coming up will be more similar now.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Got it, okay. And earlier, you guys were talking about going after other bids and other business that you were looking at. Can you give us an update on that? Any new thing to report on those developments?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [16]

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Well, obviously, we're actively pursuing other business. It's improper for me to talk about where we are with that right now, but except to say that we are investing heavily in brand developments right now. We're looking at the growth channels that are out there, which include club stores, supercenters. And we're putting a high focus on grocery because, even though it's a declining channel, it's still the largest channel. So we have boots on the ground looking at all the different product channels with some potentially positive outcomes here in the next several months.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Got it. And one last question. So if you look at Q1 '16, your gross margin was 23.8%. As we get to the back half of the year, and the new plant is up, Barnwell is up, these 2 that you have right now with start-up and inventory adjustments and things like that, won't be a factor, can you help us talk about the puts and takes that we can compare to that 20% -- that Q1 margin of [22%], [20%] in those quarters to what would make it high, what would make it low? How can we handicap that? And how should we think about gross margin from that perspective?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [18]

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Let me take a shot answering that, Lou. I think it's difficult to do that over the phone. We probably ought to spend some more time on it. But if you just think about selling prices per ton, I do believe that the competitive nature of the market and the new business that we gained will be reflecting lower selling prices per ton. So relative to Q1, I would say the number is going to be lower. However, I would also say that our cost structure for the company, when you include the Barnwell startup, the capabilities that we're building there, the fact that, overhead, adding a plant does not double relative to the existing facility, I think our overall cost structure will mitigate a lot of those decreases in prices. The other thing I think you can expect is the capabilities that we've built include ultra-premium. And ultra-premium is a product that we are very focused on because it sells at a higher selling prices per ton, which will actually raise the -- our average selling price after it is impacted negatively because of getting volume, but it also tends to give us better margins. So from that perspective, sales, I think we can look at those several ways. From a cost structure standpoint, it really comes down to the efficiencies of our assets as we load them up. Now these types of assets run much better when they're running long-run products, fewer changeovers. And the business that we're layering in is basically high-run business. It's not adding 20 different customers, doing changeovers every other hour type stuff. It's long-run. So in that respect, our cost structure should also get better. Over and above that, there are cost management programs that we are working on currently. We've been able to get raw material price reductions based on the new volume that we're adding. So relative to a year ago, we're able to leverage that down for us. And over and above that, we have other cost management programs that we're working out that are not a function of volume, but are a function of other things. So those are the buckets, and we can maybe talk more specifically about how those move as we move forward.

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Rodney D. Gloss, Orchids Paper Products Company - CFO [19]

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Louie, I'll repeat some guidance of sorts we gave last quarter, which is our variable margin, we believe, is still 40% to 50%. So we're highly dependent on the volume of sales, and it reflects a relatively low variable cost structure and having a fixed cost structure. It also reflects inefficiencies and efficiencies, that when we get -- operate with lower volumes, we have inefficiencies that flow through our variable cost margin. And then at high levels, we become more efficient. So you've got this 40% to 50% range on the variable contribution margin. And so it is just very sensitive to volume.

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Operator [20]

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Our next question is from John Nobile with Taglich Brothers.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [21]

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I'd just like to know, how much of the newly won business mentioned earlier in the year might show up in the second quarter? And does it still look like it would be a roughly 35% increase in converted product sales starting in the second half?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [22]

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Yes. We're starting to be shipped -- we'll start shipping the product at the end of May. So consider June a ramp-up period. So I'd say if you took -- looking at all-in, 1/3 of the quarter might be the right way to look at it as being all-in. The -- going into the third quarter, it should be fully implemented if the transitions get executed well by the customer. And then looking forward, the volume of business that we've got is based on current existing sales. And this particular customer has plans, if you will, to grow their shares. So in the event that, that starts happening, you'll see incremental lift in the second half relative to the ramp that we currently have. We expect all those things to happen. So the answer to your question is, yes, we still expect this 35% improvement in volume that we've stated.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [23]

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Okay. So 1/3 of the quarter you'll be all-in, roughly 1/3 to 35%, a little over, whatever, 10% [to expect]. And this is over last year's third quarter, correct? And actually, I'm thinking of it in tonnage of converted product, a 10% boost roughly from this in the second quarter?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [24]

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Yes. I think we have to take a look, honestly, at third quarter, fourth quarter, first quarter performance and come up with what we believe is the right base. So I'd have the pull back on that a little bit, John, because I don't yet -- I think we have to look at some kind of a weighted average between the 3 quarters, to be honest with you.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [25]

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Okay. And could you elaborate on the changing mix of products? It was mentioned in the press release that it was lowering your average price per ton.

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Rodney D. Gloss, Orchids Paper Products Company - CFO [26]

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Relative to the first quarter of 2016, yes, it was actually an increase in average price relative to the fourth quarter of '16. So it depends on the...

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [27]

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Relative to the fourth quarter, it was an average price increase. But [at the end] of the first quarter, it was lower. Correct?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [28]

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Correct. It has to do with a combination of customers buying a mix of bathroom tissue versus towels, a mix of who we're paying freight for, who were not paying freight for, promotional activities during the period, all of those affected. There were no absolute price decreases. We didn't go out and change prices to any customers, at least anything significant. So it isn't reflective of the move by Orchids to decrease the prices. It is just a mix impact, a mix of customers, mix of products.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [29]

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So it shifted from bathroom tissue to towel or from towel the bathroom tissue, the mix?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [30]

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I didn't look at that closely in Q1. In Q4, it was a shift away from towel to -- I'm sorry, the other way. It was a shift to towel. We were selling more towels and less bathroom tissue.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [31]

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Okay. I assume a higher average selling price per ton. Okay. And the capitalization of interest, will this end in the second quarter, being Barnwell should be just about completed? And if so, what should we expect in regard to quarterly interest payments going forward? Because I assume there's going to be -- your debt will peak in the second quarter?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [32]

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Yes. We will finish -- we won't be capitalizing any interest after the Barnwell project is completed. So end of May, end of June, basically when we say we're done and have completed it, we'll stop capitalizing interest. At that point, right now, our interest rate is effectively 5%: 1% 30-day LIBOR plus 4% margin based on our leverage ratio as of 3/31. So we're paying about 5% on the total debt.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [33]

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Okay. So 5%, when it's not capitalized, we should see showing up on the interest payment there?

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Rodney D. Gloss, Orchids Paper Products Company - CFO [34]

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That is correct.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [35]

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What it would be. And actually -- I need to apologize. Just one final question. I wanted to make sure that I understand the total capacity. And this is under assumption of Barnwell's new paper machine up and running by the end of this quarter, and also with the Fabrica included in the mix, the total company current converted capacity, what should we expect after Q2?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [36]

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Our total of converted capacity based on the changes we made is in the range of 18 million cases.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [37]

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And what would that be in tonnage?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [38]

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135,000 tons, approximately, is what we're capable of producing.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [39]

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Okay. So that's converted. And the paper-producing parent roll capacity is what?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [40]

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The parent roll capacity is the number I just stated, 135,000 tons. We actually have more converting capacity than we have parent roll capacity. So we start hitting...

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [41]

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I mean, Fabrica is obviously a converted product there. So I just wanted to get an idea of your parent roll capacity right now to satisfy what your entire converted capacity should be.

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [42]

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I haven't thought too much about that. I think the -- you're probably looking at 10,000 tons maybe of incremental parent rolls we have to go produce to sell out our capacity.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [43]

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10,000 tons of converted incremental over where you are now?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [44]

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No, once you sell out the parent roll, we'd have to go buy another 10,000 tons to support the incremental excess capacity that's converting.

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John Nobile, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [45]

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Okay. So obviously, you'll be -- all right.

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Operator [46]

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(Operator Instructions) Our next question comes from Rob Schwartz with Cooper Creek.

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Robert Schwartz, Cooper Creek Partners Management LLC - Founder, CEO, Managing Member, and Portfolio Manager [47]

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Just wanted to understand a little bit more about the long-term plan to get to the long-term EBITDA target. It seems like if you're able to execute and get there, there's a great long-term opportunity here. The question is, is the balance sheet now close -- the dividend cut firm enough to get you there? And as I look at the third and fourth quarter when the covenant restrictions come back on, it's unclear to me whether this was enough. And then looking at the balance sheet today, and [a pass] towards the back half, I just wanted to get your comments and sort of your long-term view. And if you think there is -- as you look towards that 3x leverage ratio, just if you think you have enough flexibility to execute the strategy in the back-half?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [48]

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Well, I'll just add on to what Rod said. I mean, we're going to pull all the levers that we can from a cash management, EBITDA growth, et cetera, to drive this down. It does not, however, mean that we won't be opportunistic to look at other things that are possible for us to explore at this time. I think given the story, I think given the growth that we expect, there is an opportunity to do something outside of those areas, which I can't really talk about right now. But there are other things we can look at.

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Robert Schwartz, Cooper Creek Partners Management LLC - Founder, CEO, Managing Member, and Portfolio Manager [49]

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Okay. And I guess, just with the stock at $18.50 right now, would you try as best you could to avoid equity at these levels?

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [50]

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Always try to avoid equity. That's not a question of what it is. I mean, again, we need to take a look at what our long-term view is on the company, the growth, and what's the best way to finance it so that we can continue to increase shareholder value, but not be in the position that we have been over the last several quarters.

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Robert Schwartz, Cooper Creek Partners Management LLC - Founder, CEO, Managing Member, and Portfolio Manager [51]

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Okay. That makes sense.

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Rodney D. Gloss, Orchids Paper Products Company - CFO [52]

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I'm not speaking for the board, but sort of my own thoughts in terms of one of the reasons that it was prudent to cut the dividend was that that's a temporary measure that can be reversed. If we went out and issued stock so that we could've paid the dividend, that's a permanent delusion to solve a temporary problem. So one of the levers we've pulled was the dividend lever.

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Robert Schwartz, Cooper Creek Partners Management LLC - Founder, CEO, Managing Member, and Portfolio Manager [53]

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And I fully understand that, it just seems to me, given the potential squishiness around covenant still now in Q3 and Q4, maybe given the damage to the stock today, would've been -- just wondering if this was the end of the process in terms of firming up the balance sheet for the long-term execution here or there's still more to come, and when will that come and delaying it further, and I'm just sort of thinking about those 2 dynamics, that's all, but I understand that position.

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Operator [54]

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

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Jeffrey S. Schoen, Orchids Paper Products Company - CEO, President and Director [55]

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Well, thank you, everybody, for listening. As I've stated, I believe this really is the bottom of the parabola. The new business awards that we've gained will provide significant growth. I think our new products and process capabilities will make it easier for us to compete for additional new business in other growth channels. And I look forward to speaking with you again in Q3. Take care.

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Operator [56]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.