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Orchids Paper Products 3Q Earnings Up on Sales

Oct. 29, 2008 - Orchids Paper Products Company reported net income for the three months ended September 30, 2008 of $1.4 million, or $0.22 per diluted share, a new quarterly record, compared with $1.1 million, or $0.18 per diluted share, in the same period in 2007. Net income was $2.9 million, or $0.45 per diluted share, for the first nine months of 2008, an increase of $1.2 million compared to net income of $1.7 million, or $0.27 per diluted share, reported for the first nine months of 2007.

Three-month period ended September 30, 2008

Net sales for the 2008 quarter were a new quarterly record of $23.3 million, an increase of 21% over the $19.2 million reported for the same quarter of 2007. Net sales of converted product in the third quarter of 2008 were $19.3 million, an increase of 17% compared to the $16.5 million of net sales in the same period in 2007 while net sales of parent rolls increased 47% to $4.0 million compared to $2.7 million in the same quarter over quarter comparison. The increase in converted product net sales was primarily the result of a 21% increase in the net selling price per ton which was slightly offset by lower tonnage shipped. Parent roll sales increased primarily due to a 27% increase in tonnage shipped and a 15% increase in selling prices.

Earnings before interest, taxes, depreciation and amortization (EBITDA) increased $352,000 to $3.0 million in the quarter ended September 30, 2008, a quarterly record, compared to $2.7 million in the prior year quarter. As a percent of net sales, EBITDA was 13.0% in the 2008 quarter compared with 13.9% in the 2007 quarter.

Gross profit for the third quarter of 2008 was $3.8 million, an increase of $573,000, or 18%, when compared with a gross profit of $3.2 million in the comparable prior year quarter. Gross profit as a percent of net sales decreased to 16.3% in the third quarter of 2008 compared to 16.8% for the same period in 2007. Gross profit was negatively affected by higher paper production costs and higher converting production costs. Paper production costs increased primarily due to a 19% increase in waste paper prices and a 34% increase in natural gas prices in the 2008 quarter compared to the 2007 quarter. The higher waste paper prices resulted in increased waste paper costs of approximately $880,000. The increased natural gas costs resulted in higher gas costs of approximately $330,000.

Converting production costs increased in the 2008 quarter compared to the 2007 quarter primarily due to higher maintenance and repair costs of approximately $500,000 and the cost of a productivity consultant of $274,000. The higher maintenance and repair costs, which expenditure includes parts, service technicians and consultants, and the productivity consultant are part of the Company's ongoing efforts to improve productivity in the converting operation. The productivity consultant's engagement, which ended in mid-September, included designing and implementing a management operating system and assisting the Company's management team in implementing a new work schedule and work practices. The management operating system helped identify and confirm the root causes of issues which impair production. The higher maintenance and repair costs primarily resulted from addressing these issues. The Company expects its level of maintenance expenditures to decrease by approximately $250,000 in the fourth quarter of 2008 and by an additional $70,000 for a total reduction of $320,000, beginning in the first quarter of 2009. As a result of these efforts, converting productivity from the beginning of September through late October improved approximately 20% when compared with the run rate experienced in the first eight months of 2008. As a percent of net sales, gross profit decreased primarily due to the higher paper and converting production costs being somewhat offset by higher selling prices and volumes.

Selling, general and administrative expenses in the third quarter of 2008 totaled $1.6 million, an increase of $255,000, or 20%, when compared with selling, general and administrative expenses of $1.3 million in the third quarter of 2007. Higher costs associated with additions to the Company's senior management team accounted for most of the increase. As a percent of net sales, selling, general and administrative expenses declined slightly for the quarter ended September 30, 2008, compared to the prior year quarter.

Interest expense for the third quarter of 2008 totaled $310,000 compared to interest expense of $635,000 in the same period in 2007. Lower LIBOR interest rates, lower LIBOR margins and the absence of interest on our $2.15 million, 12% subordinated debentures, which were retired in December 2007, accounted for most of the decrease.

Orchids Paper Products Company is an integrated manufacturer of tissue paper products serving the private label consumer market. The Company produces a full line of tissue products, including paper towels, bathroom tissue and paper napkins. From its operations in Pryor, Oklahoma, Orchids Paper Products Company uses recycled waste paper to produce finished tissue products that it provides to retail chains throughout the central United States.

SOURCE: Orchids Paper Products Company




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