Orchids Paper Products Company reported results for the second quarter of 2016.
Jeff Schoen, President and Chief Executive Officer, stated, "I am encouraged by Orchids year-to-date 2016 performance, as converted product sales have increased 10% and Adjusted EBITDA margin has increased 6% over the same period last year. After a very strong performance in the first quarter of 2016, our second quarter results were negatively affected by: (i) increased promotions on branded products that affected private label sales, (ii) inventory reductions at our largest customer, (iii) expected start-up costs related to our South Carolina facility, and (iv) shared margins under the supply agreement with Fabrica, as we exceeded our annual limit under the agreement, which gives us access to up to 19,800 tons of converted product from June through May during each year of its term. Furthermore, we made a strategic decision in the second quarter of 2016 to ship excess parent rolls to our South Carolina facility to support Barnwell start-up and finished goods inventory build, thereby foregoing margin we would have received on those parent roll sales in favor of margin we expect to gain when we sell this tonnage as converted product."
Mr. Schoen continued, "As we ramp up our South Carolina facility, we have realized additional distribution with current customers and continue to work toward adding volume with new and existing customers. The first converting line is progressing on its start-up curve as projected, while the second converting line is scheduled to come on-line in August 2016. Construction of the paper machine is underway and on schedule to start up in the first quarter of 2017. Overall, we remain optimistic about our ability to achieve our long-term goal to grow Orchids' annual Adjusted EBITDA to approximately $60 million and earnings per share to approximately $2.50 to $3.40."
Three-month period ended June 30, 2016
Net sales of converted product decreased 1% primarily due to:
decreased shipments due primarily to increased promotional activity on branded products and inventory reductions by our largest customer.
Net sales of parent rolls decreased 97% due primarily to:
Management's decision to utilize parent rolls produced in Oklahoma in the Company's South Carolina facility until the South Carolina paper mill is operational. We believe this will eliminate costs of purchasing equivalent parent rolls on the open market in the last half of 2016 and provide additional margin when the tonnage is sold as converted product.
Gross profit as a percent of net sales decreased 0.9% primarily due to:
higher production costs in our Oklahoma operation, primarily due to a $1.2 million increase in repair and maintenance costs, resulting in part from the planned annual cold mill outage.
a 33% increase in depreciation expense due to assets placed in service since the second quarter of 2015, including $36.6 million of assets at our South Carolina facility.
lost margins on parent roll sales. As noted above, the Company decided not to sell parent rolls in order to save costs at our South Carolina facility in the last half of 2016.
approximately $150,000 of relocation expense and $150,000 of other start-up costs associated with our South Carolina facility.
these costs were partially offset by $1.1 million of proceeds related to the business interruption insurance claim for the incident that occurred in the Company's converting operation in the fourth quarter of 2015.
Six-month period ended June 30, 2016
Net sales of converted product increased 10% primarily due to:
increased shipments from all locations, primarily due to higher shipments with existing private label customers (including shipments from South Carolina in 2016) and strong West Coast shipments related to both branded and private label premium-tier products.
Gross profit as a percent of net sales increased 5.2% primarily due to:
lower per unit production costs in our Oklahoma converting operation. Production increased 14% in 2016, primarily due to increased operating efficiencies across the operation and the addition of a new converting line late in the second quarter of 2016, which increased absorption of fixed and semi-variable costs. Additionally, we received $1.1 million of business interruption insurance proceeds in the second quarter of 2016, as noted above.
higher margins under the Supply Agreement with Fabrica, resulting from a strong US dollar exchange rate with the Mexican peso, SKU optimization and price increases, partially offset by higher costs in the second quarter of 2016 when we reached our annual tonnage limit under the agreement.
increased production in our Oklahoma paper making operation. Production increased 23% in 2016, primarily due to the start-up of a new paper machine in March 2015. This increase in production resulted in increased absorption of fixed costs.
lower fiber costs. The combination of price changes and mix of fiber consumed in 2016 resulted in an approximate $600,000 increase in gross profit.
Income Taxes
As of June 30, 2016, our effective tax rate is estimated at 34.1%. This is comparable to the 34.2% estimated at the end of the first quarter of 2016. The estimated effective tax rate differs from the statutory tax rate primarily due to foreign taxes, state investment tax credits, manufacturing deductions and Indian Employment Tax Credits.
Cash provided by operating activities in the second quarter of 2016 was primarily affected by:
a decrease in accounts receivable and an increase in deferred income taxes, which was partially offset by an increase in inventories.
Cash used in investing activities in the second quarter of 2016 includes:
$20.6 million of capital expenditures, offset by the release of $2.3 million of restricted cash in connection with capital expenditures incurred for our South Carolina facility.
Cash provided by financing activities in the second quarter of 2016 was primarily impacted by:
$12.7 million of borrowings under our revolving credit lines, including our delayed draw facility.
$3.6 million of dividends paid to stockholders.
Total long-term debt outstanding as of June 30, 2016 was $104.6 million and unrestricted cash totaled$6.2 million. As a result, Net Debt outstanding as of June 30, 2016 was $98.4 million.
