Trade Resources Industry Views Orchids Paper Products Announces 2016 Third Quarter Results

Orchids Paper Products Announces 2016 Third Quarter Results

Orchids Paper Products Company reported results for the third quarter of 2016.

Third Quarter 2016, relative to Second Quarter 2016

Net sales of converted product decreased 3% primarily due to increased competitive pressures and continued heavy promotional activity on branded products. Net sales of parent rolls increased from $0.1 million to $1.3 million as we began to sell excess inventory.

Gross profit as a percent of net sales decreased 2% and the Adjusted EBITDA margin decreased 3%, both primarily due to the shift in product mix, selling more parent rolls and less converted product. Additionally, $1.1 million of insurance proceeds related to an incident in 2015 decreased cost of sales in second quarter 2016, increasing earnings in the baseline figure.

Third Quarter 2016, relative to Third Quarter 2015

Net sales of converted product decreased 12% primarily due to heavy promotional activity on branded products and increased competitive pressures. Parent roll production, though higher than in 2015, was used in part for the Barnwell, South Carolina start-up and in part to increase finished-goods inventory, thereby foregoing margin we would have received on parent-roll sales in favor of margin we expect to gain when we sell this tonnage as converted product.

Gross profit as a percent of net sales decreased 5% and Adjusted EBITDA margin decreased 5%, both primarily due to spreading fixed and semi-variable costs over a decreased sales volume. Overhead costs related to the Barnwell, South Carolina facility start-up increased from virtually nothing to approximately $1.5 million in the third quarter of 2016.

Nine-month period ended September 30, 2016 compared to same period in 2015

Net sales of converted product increased 2% primarily due to strong first quarter 2016 sales to private label customers and strong sales on the West Coast.

Gross profits increased 9% and Adjusted EBITDA increased 13% primarily due to:

An increase in average price per ton of 3% in 2016 compared to 2015. This is largely related to the product mix sold.Lower fiber costs resulted in approximately a $1.7 million increase in gross profit.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 Supply Agreement. The Supply Agreement limit reset for a new fiscal year on July 1st.Cost reductions in our Oklahoma converting operation. Additionally, we received $1.1 million of business interruption insurance proceeds in the second quarter of 2016 which was applied to cost of sales.Changes in production volumes directly impact the absorption of fixed and semi-variable costs. Increased production in ourOklahoma paper making operation contributed $0.6 million of favorable overhead absorption, however decreased production in converting led to unfavorable overhead absorption of $2.1 million.The unfavorable Barnwell, South Carolina, overhead absorption variance is $3.0 million.

Income Taxes

As of September 30, 2016, our annual effective tax rate is estimated at 32.25%.  This has decreased somewhat from the 34.1% estimated at the end of the second quarter of 2016. The effective rate is less than statutory rates due principally to Oklahoma, South Carolina, Indian Employment, and Foreign tax credits. Year-to-date 2016, Current income taxes provided a benefit of $1.8 million whereas Current income taxes for the year-to-date 2015 period were $5.2 million. The change was driven by accelerated tax depreciation and other timing differences recognized in 2016.

At September 30, 2016, Debt, not having been netted with unamortized deferred debt issuance costs, was $131.5 million and the Adjusted EBITDA leverage ratio reportable to the Bank was 3.7.

Third quarter 2016 relative to second quarter 2016: Operating cash flows less changes in working capital increased 13% principally due to Current income tax benefits. Changes in working capital increased $6.0 million in the third quarter of 2016, versus an increase of $1.2 million in second quarter of 2016, principally due to ramp-up of the Barnwell, South Carolina facility, an overall increase in finished goods inventories, and an increase in raw material inventories. Borrowing largely offset the use of cash for investments in the Barnwellfacility. Dividends of $3.6 million were paid in both quarters, and are included in Financing Activities.

Third quarter 2016 relative to third quarter 2015: Operating cash flows less changes in working capital increased 31%. However, Changes in working capital increased $6.0 million in the third quarter of 2016, versus decreasing $0.7 million in third quarter of 2015, principally due to the start-up at the Barnwell, South Carolina facility and the increase in finished goods inventories. Increased borrowing financed the investments in the Barnwell facility. Dividends of $3.6 million were paid in both quarters, and are included in Financing Activities.

Nine months ended September 30, 2016 relative to the same period in 2015: Operating cash flows less changes in working capital increased 51%. However, Changes in working capital increased $7.0 million in 2016, versus an increase of $4.9 million in 2015, principally due to the start-up at the Barnwell, South Carolina facility and the increase in finished goods inventories. Increased borrowing financed the investments in the Barnwell facility. Dividends of $10.8 million were paid in 2016 and dividends of $10.3 millionwere paid in 2015, both are included in Financing Activities.

Source: http://www.packaging-business-review.com/news/orchids-paper-products-announces-2016-third-quarter-results-5650830
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