Orchids Paper Products Company Reports Second Quarter 2014 Earnings

July 23, 2014 - Orchids Paper Products Company (NYSE MKT: TIS) today reported second quarter 2014 financial results.

Executive Summary:

  • Net sales totaled $29.2 million, which were flat compared to the second quarter of 2013. Converted product sales were essentially flat at $27.7 million.
  • Adjusted EBITDA was $5.8 million in the second quarter of 2014, a decrease of $825,000, or 12%, compared to $6.6 million in 2013. EBITDA for 2014 included approximately $742,000 of additional non-cash expenses related to stock options granted to management during 2014 and $1.5 million of costs related to the Fabrica transaction, resulting in EBITDA of $3.3 million in 2014, a decrease of $3.0 million, or 48%, compared to $6.4 million in 2013.
  • Excluding stock compensation and transaction costs, net income was $2.2 million, a decrease of $1.1 million, or 33%, compared with $3.3 million of net income in the same period of 2013.
  • Excluding stock compensation and transaction costs, diluted net income per share for the second quarter 2014 was $0.27 per diluted share compared with $0.42 per diluted share in the same period in 2013.
  • The strategic alliance with Fabrica de Papel San Francisco, S.A de C.V. ("Fabrica") was completed and immediately increased EBITDA for the quarter. The long-term, accretive financial benefits of the acquisition are expected to substantially exceed the significant deal-related expenses recorded in the quarter, as noted above and in the financial statements.
  • The previously announced $30.4 million of capital projects to improve our manufacturing flexibility and lower our cost structure are progressing as planned and are expected to increase EBITDA beginning in the second quarter of 2015.

Mr. Jeff Schoen, President and Chief Executive Officer, stated, "Despite a challenging sales environment in the first half of 2014 due to increased promotions on branded products affecting private label sales, and inventory reductions at our customers, our focus on product development, new distribution, operational efficiencies, and the Fabrica partnership has positioned us well for future growth and profitability. We believe that the second quarter performance was an anomaly and a strong base of business has been established for the rest of the year that we expect will deliver record results in both sales and earnings for the second half of 2014. Moreover, the Fabrica strategic partnership and the on-going capital projects will increase our ability to produce higher quality grades of value and premium tier products to drive future sales, supporting our vision of being recognized as a national supplier of high quality consumer tissue products in the value, premium, and ultra-premium tier product categories."

"The first half of 2014 was a transition period for Orchids. We completed our strategic partnership with Fabrica in June, which should allow Orchids to effectively and efficiently service new and existing customers in the western United States. Operationally, we were able to confirm that increased efficiencies with existing assets could make available an additional one million cases of capacity over 2013 capacity levels. This capacity gain, combined with our cost management programs, has improved variable margin capacity for future sales. We scaled back production of converted products during the second quarter in order to reduce costs, match sales volume requirements, and reduce the number of weeks of inventory we keep on hand to support sales, while maintaining high customer service levels. The reduced production of finished goods inventory during the second quarter also allowed us to economically build parent roll inventory for consumption during the construction phase of our new paper machine project. Strategically, the previously announced $30.4 million of capital projects are progressing as planned and are expected to significantly increase our capacity to prepare for future growth, improve our manufacturing flexibility and lower our cost structure."

Three-month period ended June 30, 2014

Net sales in the quarter ended June 30, 2014 were $29.2 million, which were flat compared to $29.2 million in the same period of 2013. Net sales of converted product were $27.7 million in the 2014 quarter, essentially flat when compared to the $27.8 million of net sales in the same quarter last year. Net sales of parent rolls were also essentially flat at $1.5 million in the second quarter of 2014 compared with $1.4 million in the same quarter last year. Both tonnage shipped and net selling price per ton were essentially flat with the prior year quarter.

During the second quarter of 2014, we incurred $742,000 in additional non-cash expenses related to stock options granted to management in addition to $1.5 million of expenses related to the Fabrica transaction. As such, earnings before interest, taxes, depreciation and amortization adjusted for these expenses (Adjusted EBITDA) was $5.8 million, or 19.9% of net sales, in the second quarter of 2014, compared to $6.6 million, or 22.7% of net sales for the same period in the prior year.

Gross profit for the second quarter of 2014 was $5.5 million, a decrease of $1.5 million, or 22%, when compared with a gross profit of $7.0 million in the prior year quarter. Gross profit as a percent of net sales was 18.8% in the second quarter of 2014 compared to 23.9% for the same period in 2013. During the quarter, converted product production was purposely reduced in order to reduce inventory, which will result in lower outside warehouse costs. The effort resulted in higher short-term production costs, which negatively affected results by approximately $800,000. As a percent of net sales, gross profit decreased primarily due to the higher overhead costs in our converting and paper production operations and lower parent roll selling prices.

Selling, general and administrative expenses in the second quarter of 2014 totaled $4.4 million, an increase of $1.9 million, or 75%, compared to the same period in the prior year. The increase was primarily due to $1.5 million of expenses related to the Fabrica transaction and increased non-cash expenses related to stock options granted to management in 2014, which were partially offset by lower commission expense due to the reduced level of converted product shipments and lower product packing and artwork expenses. Adjusted for the acquisition related costs and non-cash compensation expense, selling, general and administrative expenses were $250,000 lower in the current year quarter compared to the prior year quarter. Selling, general and administrative expenses as a percent of net sales in the 2014 quarter were 15.1% compared to 8.6% for the prior year quarter.

Interest expense for the second quarter of 2014 totaled $112,000 compared to interest expense of $95,000 in the same period in 2013. Interest expense for 2014 excludes $37,000 of interest capitalized on significant projects during the quarter. The higher level of interest expense resulted from writing off $38,000 of deferred debt costs when we refinanced our debt with a new creditor.

As of June 30, 2014, the estimated effective tax rate for the full year is 32.0%, as compared to the 31.1% effective tax rate estimated as the end of the first quarter of 2014. The increase in the forecasted effective tax rate is a result of the forecasted additional taxable income from the acquired Fabrica U.S. business, which is not eligible for Section 199 deduction. Primarily as a result of the change in the estimated rate, the actual effective tax rate for the second quarter was 37.2%.

Orchids Paper Products Company is an integrated manufacturer of tissue paper products serving the at home private label consumer market. To learn more visit: www.orchidspaper.com.

SOURCE: Orchids Paper Products Company