Orient Paper, Inc. Reports Third Quarter 2014 Results

BAODING, China, November 14, 2014 /PRNewswire/ -- Orient Paper, Inc. (NYSE MKT: ONP) ("Orient Paper" or the "Company"), a leading manufacturer and distributor of diversified paper products in North China, today announced unaudited financial results for the third quarter ended September 30, 2014.

Financial Highlights:

Key Highlights for Third Quarter 2014:

• Monthly utilization rate of PM6 production line remained stable throughout Q3 at approximately 76%
• Total CMP Revenue increased 20% YoY as ONP ramped up production of light-weight corrugating medium paper based packaging paper ("Light-Weight CMP") on the recently completed PM1 production line
• Gross profit down due to declining average sales price and higher cost of sales
• Digital photo paper production lines disassembled and relocated to the new workshop at Xushui Mill Annex

Mr. Zhenyong Liu, Chairman and Chief Executive Officer of Orient Paper, commented, "Our strategy to continue adding production capacity to meet growing customer demand in North China resulted in higher revenue and shipment volume in the quarter. We continue to manage through soft pricing conditions. Although our volume and revenue were higher in the quarter, margins and net income were down due to higher raw material cost."

"A key focus is to expand into new, higher margin products. Light-Weight CMP is such a product, and we have shipped over 13,000 tonnes this quarter, at a price per tonne higher than our Regular CMP. We look forward to richening our mix in the months ahead as we build out production capacity for tissue paper and other products."

Mr. Liu concluded, "We remain optimistic about our prospects into 2015 and beyond, but caution that we must still manage through current industry challenges. Notably, the government mandated halt to industrial production across Hebei province in November, in preparation for the APEC Summit in Beijing, which will impact our results in the fourth quarter. We will lose two weeks of production due to this production halt and one week of production due to the Chinese National Holiday in the beginning of October, unfortunately. Because of the uncertainty around this impact combined with current market conditions, we are withdrawing our 2014 guidance at this time. We intend to resume offering guidance once our business visibility is sufficient to make the guidance reasonably accurate and effective."

Financial Review:

Quarter ended September 2014 Financial Results compared with quarter ended September 2013

Changes in revenues, sales volumes, and Average Selling Prices ("ASPs") for 3Q 2014 are presented as follows:

Revenue

Total Revenue in the third quarter of 2014 was $40.8 million, representing an increase of 8.1% from $37.7 million in the prior year period.

Corrugating Medium Paper ("CMP")

• Revenue from CMP increased 20.3% year over year to $29.3 million, representing 72.0% of total revenue.
• Of the total CMP sales, $4.9 million was generated by Light-Weight CMP and $24.4 million was generated by Regular CMP.
• Total volumes sold were up 23.7% year over year to 82,217 tonnes. Volumes sold for Regular CMP were up 3.6% year over year to 68,876 tonnes and volumes sold for the new Light-Weight CMP totaled 13,341 tonnes.
• Regular CMP ASP decreased 3.3% to $355/tonne.
• Light-Weight CMP ASP was $369/tonne.

Offset Printing Paper

• Revenue from offset printing paper decreased 7.4% year over year to $10.8 million, representing 26.6% of total revenue. The decrease is mainly attributable to the decline in volume sold.
• Volumes sold were down 8.5% year over year to 15,791 tonnes.
• ASP increased 1.2% year over year to $687/tonne.

Digital Photo Paper

• Revenue from digital photo paper decreased 64.1% to $0.6 million, representing 1.4% of total revenue.
• Volumes sold dropped 64.1% to 146 tonnes, due to our having to relocate our digital photo paper production facilities.
• ASP increased slightly by 0.1% year over year to $3,908/tonne.

Cost of Sales

Cost of Sales in the third quarter of 2014 was $34.3 million, up 17.4% year over year, primarily due to the increase of sales volumes and increases in raw material cost during the quarter. Costs per tonne for CMP went up by 5.2% to $302, due to the increase in purchase costs of domestic recycled paper board during the period. Costs per tonne for offset printing paper went up by 8.2% to $565.

Gross Profit

Gross profit in the third quarter of 2014 was $6.4 million, down 24.0% from the third quarter of 2013.

Overall gross margin in the third quarter of 2014 was 15.7%, down from 22.4% for the third quarter of 2013. Gross profit margins for Regular CMP, Light-Weight CMP, offset printing paper and digital photo paper for the third quarter of 2014 were 12.2%, 30.3%, 17.8% and 1.6%, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") were $1.0 million for the third quarter of 2014, up 4.0% year over year from $0.96 million for the third quarter of 2013. The increase was mainly due to an increase in salaries and wages to new management and staff members to prepare for the launch of our tissue paper operations at the Wei County Industrial Park, which was offset by decreases in legal fees, building depreciation, and consulting fees, when compared with the third quarter of 2013.

Income from Operations & Operating Margin

Income from operations was $4.9 million for the third quarter of 2014, down 34.8% from $7.6 million in the third quarter of 2013, due to a decrease in overall gross profit and a $0.7 million loss from the disposal of certain equipment related to the relocation of our digital photo paper production lines.

EBITDA

Excluding the impact of net interest expenses, income tax expenses, depreciation and amortization, EBITDA, a non-GAAP measurement, was $6.9 million, down from $9.8 million in the third quarter of 2013. See Note 2 hereto for a reconciliation of Net Income to EBITDA.

Net Income

Net income was $3.4 million, down 39.1% from $5.5 million in the third quarter of 2013. Basic and diluted earnings per share for the third quarter of 2014 were $0.18, compared to $0.30 for the corresponding period of 2013.

Cash, Liquidity and Financial Position

As of September 30, 2014, cash and cash equivalents were $6.9 million, compared to $3.1 million at the end of 2013. Orient Paper generated net cash flows from operating activities of $35.8 million for the nine months ended September 30, 2014, representing an increase of 96.8%, from $18.2 million for the corresponding period of 2013.

The net working capital deficit was $12.4 million at the end of September 30, 2014, with $30.3 million of current assets and $42.7 million of current liabilities. The Company believes it can successfully secure financing to meet all working capital and capital expenditure needs for the next twelve months. However, there can be no guarantee that the Company will succeed in raising additional financing. Therefore, the working capital deficit raises a substantial doubt about the ability of the Company to continue as going concern.

As of September 30, 2014, short-term debt was $29.3 million, including notes payable for $21.1 million. Long-term debt was $25.4 million, of which $8.2 million are current obligations under capital leases and $0.1 million are the current portion of long-term loans from a credit union. Stockholders' equity totaled $171.8 million, compared to $161.1 million at the end of 2013.

As of September 30, 2014, debt-asset ratio was 25.82%, which the Company believes is within a normal range for the domestic paper industry.

Operations and Business Updates

Focus on Efficient Production

The average utilization rate for Regular CMP production in the third quarter of 2014 was 76.6%, compared to 74.9% in the prior year period. The Company continues to focus on efficiently producing Regular CMP (on its PM6 production line) in the fourth quarter.

Light-Weight CMP Production Ramps Successfully

The Company launched commercial production on its PM1 production line in the second quarter, producing initial volumes of light-weight corrugating medium paper based packaging paper ("Light-Weight CMP") with specification of 40 to 80 grams per square meter ("g/s/m"). PM1 is now near full daily capacity, and produced 13,336 tonnes in the third quarter of 2014. The Company is optimistic about the prospects for Light-Weight CMP, given its wide range of commercial applications, which include: the encapsulation of certain insulating materials as a construction material for wall and floor insulation; use in manufacturing moisture-proof packaging materials for transportation of books and magazines; or as the corrugating medium in cardboard for light-weight packaging solutions. Light-Weight CMP is considered a niche product in the packaging paper market and enjoys a higher margin than conventional CMP. The Company anticipates steady demand from end-users since the supply of this specialty CMP is relatively limited.

At this time the Company's Light-Weight CMP is being used mainly for packaging paper. The Company anticipates that it will have material sales of its Light-Weight CMP for other applications, such as insulation liner. The Company will develop new applications based on customer demand and market conditions, such as expected supply and pricing. The annual production capacity of PM1 is expected to increase from approximately 50,000 tonnes to approximately 60,000 tonnes in 2015.

Expansion into Tissue Paper Market

The Company is building production facilities in the Wei County Industrial Park in Hebei Province for tissue paper production. Progress is satisfactory on construction of the factory and the associated infrastructure. The Company expects to complete PM8 production line in the second half of 2015, later than originally expected due to more restricted capital expenditure funding. The probable delay in the completion of PM8 should not cause any material financial impact to the Company's 2014 annual earnings.

Relocation of Digital Photo Paper Production

The Company is relocating its digital photo paper production lines (PM4 and PM5) and related equipment from its Headquarters Compound to a new location across the street from the Company's Xushui Paper Mill (the "Xushui Mill Annex"). As of September 30, 2014, PM4 and PM5 were disassembled and being transferred to the Xushui Mill Annex for installation. Digital photo paper production is expected to resume in the second half of 2015. The cost of the relocation is estimated to total approximately $7.5 million, including construction costs of new workshops and other buildings at the Xushui Mill Annex. As of September 30, 2014, the Company had contracted $5.9 million of work related to the relocation.

Central Government Continues to Mandate Paper Industry Consolidation

The Chinese Ministry of Industry and Information Technology ("MIIT") announced on July 24, 2014 that 3.97 million tonnes of obsolete paper production capacity will be mandated to be shut down across the country. Hebei province is mandated to close 500,000 tonnes of capacity. On August 18, 2014, MIIT announced another list of outdated paper facilities that are required to be closed by the end of 2014. The August 18, 2014 list shut down 0.66 million tonnes paper manufacturing capacity, including 5,000 tonnes in Hebei Province. Orient Paper has aggressively upgraded its production capacity in recent years, and believes that it is an industry leader in efficiency and environmental stewardship. The Company believes that this reduction in capacity will ensure a healthy industry, with stable pricing and reduced environmental impacts.

Conference Call

The Company will host a conference call at 8:30 am US Eastern Time (5:30 am US Pacific Time/9:30 pm Beijing Time) on Friday, November 14, 2014, to discuss its quarterly results and recent business, operational and corporate activities.

To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time:

A replay of this conference call will be available by dialing:

The replay will be archived for fourteen days following the earnings announcement until November 28, 2014.

This conference call will be broadcast live over the Internet and can be accessed by all interested parties by clicking on http://www.orientpaperinc.com/. Please access the link at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software. A replay will be archived for one year shortly after the call by accessing the same link.

About Orient Paper, Inc.

Orient Paper, Inc. ("Orient Paper") is a leading paper manufacturer in North China. Using recycled paper as its primary raw material, Orient Paper produces and distributes three categories of paper products: packaging paper (corrugating medium paper-based), offset printing paper, and other paper products, including digital photo paper and household/tissue paper that the Company is currently expanding into.

With production operations based in Baoding in North China's Hebei Province, Orient Paper is located strategically close to the Beijing and Tianjin region, home to a growing base of industrial and manufacturing activities and one of the largest markets for paper products consumption in the country.

Orient Paper's production facilities are controlled and operated by its wholly owned subsidiary Shengde Holdings Inc, which in turn controls and operates Baoding Shengde Paper Co., Ltd., and Hebei Baoding Orient Paper Milling Co., Ltd for manufacturing digital photo, printing and packaging paper.

Founded in 1996, Orient Paper has been listed on the NYSE MKT with the ticker symbol "ONP" since December 2009. (Please visit http://www.orientpaperinc.com)

Note 1: Production Facilities of Orient Paper

Note 2:

In addition to our U.S. GAAP results, this press release also includes a discussion of EBITDA, a non-GAAP financial measure as defined by the SEC. The Company defines EBITDA as net income before interest, income taxes, depreciation and amortization. EBITDA is a key measure used by management to evaluate our results and make strategic decisions. Management believes this measure is useful to investors because it is an indicator of operational performance. Because not all companies use identical calculations, the Company's presentation of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not have any standardized meaning prescribed by U.S. GAAP and therefore is unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as an alternative to measures of financial performance or changes in cash flows calculated in accordance with U.S. GAAP.

Safe Harbor Statement

This announcement contains 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 fact in this announcement are forward-looking statements, including but not limited to, anticipated revenues from the digital photo paper business segment; the actions and initiatives of current and potential competitors; the Company's ability to introduce new products; the Company's ability to implement the planned capacity expansion of corrugate medium paper; market acceptance of new products; general economic and business conditions; the ability to attract 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 companies and the industry. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, it cannot assure you that its expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.