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Edited Transcript of TIS earnings conference call or presentation 13-Aug-18 2:00pm GMT

Q2 2018 Orchids Paper Products Co Earnings Call

Pryor Aug 29, 2018 (Thomson StreetEvents) -- Edited Transcript of Orchids Paper Products Co earnings conference call or presentation Monday, August 13, 2018 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 & Director

* Melinda Smith Bartel

Orchids Paper Products Company - CFO

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Conference Call Participants

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* Eric Anthony Des Lauriers

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

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Presentation

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Operator [1]

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Good morning, and welcome to the Orchids Paper Products Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. On the call today are Jeff Schoen, President and Chief Executive Officer; and Mindy Bartel, Chief Financial Officer.

I will now turn the call over to Ms. Bartel. Please go ahead.

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Melinda Smith Bartel, Orchids Paper Products Company - CFO [2]

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Good morning, and thank you for joining Orchids Paper's Second Quarter 2018 Earnings Conference Call. Jeff will also provide an update on the overall state of the business and future plans. We will conclude with a limited question-and-answer session.

Before I begin, I draw your attention to the safe harbor statement issued in last week's press release. Please remember 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 those 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 and Form 10-Q for recent periods as well as in our earnings release and 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 will also make reference to both GAAP and non-GAAP measurements. The reconciliation of non-GAAP measures is included in our earnings press release, which is also available on our website. Non-GAAP measures we use include EBITDA, adjusted EBITDA, a distinction between operating cash flows attributable to changes in working capital and cash flows attributable to other operating sources and uses of cash and earnings exclusive of items that we do not believe are indicative of our core operating performance.

Management believes that these non-GAAP measures provide incremental information useful in understanding the cash flows and operating performance of the company. The EBITDA measurements are also required and evaluated by our lenders. The non-GAAP measures should not be construed as alternative or better metrics than the GAAP measures.

Now to begin our remarks on the second quarter's results. During the second quarter, we achieved positive sales growth compared to the year-ago period as Orchids generated total revenues of $46 million. This represents an increase of 19% over the second quarter of 2017. Converted tissue sales grew 17%, and parent roll sales grew 38% over the prior year period.

Revenue growth in 2018 has been driven by increases in our premium and ultra-premium businesses as well as increased parent roll sales. Second quarter revenues were down 5% from the first quarter, driven by lower converted product sales, which were down 7% sequentially. This decline was the result of competitive bids and a shortage in freight supply that pushed volume into the third quarter. The decline in converted product sales were partially offset by strong parent roll sales, which were up 13% over the first quarter.

Gross profit was $600,000 in the second quarter compared to $1.5 million in the year-ago quarter and $2.9 million in the first quarter of 2018. Gross profit margin in the second quarter was 1.3% compared to 3.9% in the year-ago quarter and 6% sequentially. The year-over-year compression in gross profit margin is due to the unfavorable impact of a higher cost structure, which includes increased overhead cost from our Barnwell, South Carolina facility that are not fully absorbed by production and sales.

Costs associated with Barnwell start-up activities have increased year-over-year. Additionally, gross profit margins remained under pressure from challenging industry-wide conditions as input costs including fiber and freight continue to rise. These negative impacts were partially offset by the favorable impact of higher average selling prices, reflecting a change in the mix of products sold due to the ramp of the ultra-premium retail business combined with increased sales volume.

Selling, general and administrative expenses increased to $5.7 million in the second quarter, up from $3.3 million in the year-ago quarter and $3.6 million in the first quarter of 2018. The increase in selling, general and administrative expenses in the second quarter was due to professional and consulting fees, including those associated with our initiative to review strategic alternatives and our debt refinancing efforts.

We had a second quarter operating loss of $5.3 million compared to an operating loss of $2 million in the year-ago period and $1 million for the first quarter. The changes in operating loss are reflective of the compression in gross profit margin combined with the higher SG&A expenses.

Adjusted EBITDA in the second quarter of 2018 was $3.2 million. Second quarter adjusted EBITDA was up from $2.3 million in the year-ago period and down from $5.3 million in the first quarter. The year-over-year improvement in adjusted EBITDA is due to the favorable impact of the higher average selling price combined with increased sales volume. On a sequential quarter basis, the decrease in adjusted EBITDA is largely due to higher production costs, as increasing input costs outpaced the improvement in average selling prices and sales volume.

The company had a net loss of $6.9 million or $0.65 per share in the second quarter versus a net loss of $2 million or $0.08 per share in the year-ago period. Adjusted net loss was $4.5 million or $0.42 per share in the second quarter versus a net loss of $1.6 million or $0.15 per share in the year-ago period. Adjustments include items that we do not believe are indicative of our core operating performance, including startup costs for Barnwell and professional and consulting fees associated with our initiatives to review strategic alternatives and our debt refinancing efforts.

Adjusted net loss for the second quarter includes higher interest expense, which totaled $4.5 million or $0.28 per share compared to interest expense of $600,000 or $0.03 per share in the year-ago period. Our weighted average interest rate was 9.9% at the end of this quarter compared to 5.1% at the same time last year. Additionally, capitalization of interest expense attributable to financing the construction of the Barnwell facility ended with the completion of the project in the fourth quarter of 2017. As we improved the cost structure of Barnwell and improved absorption with higher sales volume, the overall profitability of the company will improve.

Now turning to the balance sheet. Cash at the end of the second quarter was $8 million versus $2.8 million in the first quarter. Debt at the end of the quarter was $184 million, up from $172 million in the prior quarter as we drew on our credit line to fund interest payments and changes in working capital that were primarily due to an increase in inventory related to the volume and timing of sales. Cash flow from operations in the second quarter was negative $5.9 million versus positive $1.5 million in the second quarter of 2017 and negative $2.5 million in the first quarter of 2018.

I will now turn the call over to Mr. Schoen.

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

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Good morning. Result in the second quarter lagged our expectations given continued competitive pressures and continued increases in materials and freight cost. In addition, a shortage of freight availability late in the second quarter had a negative impact on revenue, pushing some shipments into the third quarter plus the preparation for cold mill outages at Barnwell and Pryor in July suspended some parent roll sales in June.

We are seeing positive signs in the marketplace that the industry is beginning to increase prices to address the rising cost environment. Over the past couple of weeks, there have been significant price increases announced by different competitors in both the branded and the private-label segments of the market. While the consumer tissue market continues to be highly competitive, we expect already announced price increases on our brands and our away-from-home products to alleviate some of the impact of these rising costs in the second half of the year.

Given the recent price announcements by national brands and other competitors, we expect to further increase prices in the overall business in the second half. We were notified at the end of July that one of our major customers has decided to transition a significant portion of premium business to another supplier effective on or around February 1. The reason given was strategic and not related to current service, quality or cost as the company had just received new business that started to ship in June.

We believe, given the 6-month time frame provided, we will be able to sell out a significant portion of that capacity in the form of parent rolls and retail sales with margins comparable to or better than currently achieved. The QRT technology in the Barnwell facility continues to improve from a product and process development perspective. The paper machine is being ramped up as sales dictate to ensure good working capital management, which currently represents about 2,000 tons per month, of which 2/3 is for internal converted production and 1/3 is for external parent roll sales. As we look forward, we have pipeline projects in various stages of development with several new customers interested in QRT products in both the retail and away-from-home markets.

As an aside, on our website located at orchidspaper.com/products/private-label, you will find videos that compare the performance of our QRT ultra products to comparable TAD ultra products. Highlights of the videos currently available on the website include kitchen towel videos that show the absorbent rates and strength relative to comparable basis weight TAD kitchen towel products while maintaining standards for feel. The bath tissue videos highlight the strength and length characteristics of QRT for comparable basis weight TAD bath tissue products while maintaining equivalent softness and feel.

When it comes to the primary performance characteristics consumers care about most for kitchen towel and bath tissue, QRT meets or exceeds their needs relative to comparable competitive products.

Given the recent volatility in the stock, I would like to make some comments regarding the transaction process.

Because we remain in a process, I am limited to the information that I can provide. But I wanted to highlight a couple of important points that are already publicly disclosed. The eighth amended bank agreement that was signed on April 19, 2018, set a timeline in which Orchids will begin a process concluding with the sale or refinance of the company and repay in full the obligations to the banks.

The key dates with this initial timeline were June 15, when proposed letters of intent were due; June 30, when fully executed letters of intent were due; July 31, when the company was to provide the administrative agent with a signed agreement; and August 31, when this process would be concluded with a sale or refinance.

On August 3, amendment number 9 was signed, which extended the date for a signed definitive agreement from July 31 to August 31 as well as extended the required closing of the transaction to October 31 in response to interested financial and strategic parties requesting more time to complete their diligence processes. The latest bank amendment -- excuse me, the latest bank agreement provides the company with increased liquidity and defers future principal and interest payments to October 31.

The ninth amendment shows continued support by our existing lenders for the company and provides additional time and flexibility to continue exploring and executing our strategic alternative process. With $8 million in cash at the beginning of July and additional liquidity from amendment 9, the company believes it has adequate liquidity to support the business to ensure we pay our vendors on time and provide outstanding service to our customers while we finish the process. Historically, throughout this process, the company has paid its vendors substantially on time and complete as well as maintained outstanding customer service.

With that, I will turn the call back to the operator for limited questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Eric Des Lauriers from Craig-Hallum Capital Group.

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Eric Anthony Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [2]

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I was wondering if we could just get some insight into how potential buyers are looking at valuing the company, specifically whether that's based on tonnage or whether they're looking at stock price. Just overall, any insight into how you specifically value the company as well would be helpful.

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

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Okay. I cannot discuss how people are valuing the company in terms of this process. All I can do is point you to information that's publicly available. I do think that Orchids has invested in good capacity for the company, and the potential EBITDA of this company is high assuming we can sell out the business. But if you look at public transactions that are out there, for instance, in October of 2015, SCA acquired Wausau Paper's 214,000 tons of capacity for about $500 million -- $513 million, I think. That equates to $2,400 a ton for the capacity that they purchased for that company. In November of 2015, Resolute acquired Atlas Paper's 65,000 tons of capacity for $156 million, which equates to $2,400 per ton. One of our competitors is currently in the process of building an ultra-premium machine -- structured tissue machine, where they have stated they expect to achieve 70,000 tons of capacity for $300 million or about $4,300 a ton.

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Eric Anthony Des Lauriers, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [4]

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Okay, that's helpful.

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

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Let me just keep going, the Atlas was purchased for $156 million by Resolute with 65,000 tons. That equates to $2,400 a ton. Orchids has about 130,000 to 135,000 tons of capacity, of which 35,000 is ultra-premium. So that's where I'm going to stop. I'm not going to do people's evaluations for them. You can come to your own conclusions.

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Operator [6]

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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 & Director [7]

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I have no major closing remarks, except thank you for all of the folks at Orchids who are spending a lot of time working through this process while also trying to harvest the investments that we made over the last several years. I appreciate everybody's time and effort. Thank you.

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Operator [8]

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