Orchids Paper Products Company (NYSE American: TIS) today reported results for the quarter ended June 30, 2017. The following tables provide selected financial results for second quarter 2017 compared to second quarter 2016 and first quarter 2017.
Jeff Schoen, President and Chief Executive Officer, stated, “As expected, the second quarter was not a good one, financially speaking. Sales volumes continued at relatively low historical levels through May, and then in June the previously announced new business with its resultant revenues kicked-in. The June sales volume equates to an ongoing annualized rate in the $180 million to $190 million range and a case sales rate of 12 million to 13 million cases. Effectively, we recovered the sales volumes lost in 2016 to competitors’ activity. The challenges for Orchids now are to sell out the Company’s newly increased paper capacity, gained through the introduction of the Barnwell, South Carolina, facility and to optimize the Company’s total cost structure. The cost structure will be improved through a combination of increases in capacity utilization, operating efficiencies, reassessments and realignments of costs with production requirements, and specific identified cost reduction projects.”
“The paper machine at Barnwell, SC, was completed in June and remains on its start-up curve and meeting quality expectations. Our cost of sales is too high reflecting, in part, the inefficiencies of starting-up Barnwell; however, we expect, that as sell out all of the Company’s existing capacity, operating costs per ton will decline significantly. In June we saw the average cost per unit produced decrease, however the bottom-line impact of this reduction was offset by a liquidation of older higher-cost inventory. We expect to optimize both quality and cost by the end of 2017, which will increase our competitiveness in the ultra-premium and premium product channels.”
“The new capacity at Barnwell represents about 35,000 tons of ultra-premium and premium tissue paper. Combined with our existing conventional capacity, the total available paper capacity for the Company now represents about 135,000 tons. We continue to engage in new private-label bids, market our new innovative brands, and work toward growing market share in the premium and ultra-premium segments with new customers to broaden and diversify our customer base.”
Second Quarter 2017, Relative to Second Quarter 2016
Net sales decreased $1.0 million, or 2%. Major factors include: parent roll sales volume increased $3.7 million; converted-product sales volumes declined $2.3 million; and there was a decrease of $2.3 million in average converted-product prices, reflecting both the lower prices associated with new bids which became effective in 2017 and the product mix sold to a changing mix of customers.
Cost of sales increased $4.4 million, or 13%. Standard cost of sales for parent rolls increased $2.4 million due to the much higher number of parent-roll tons sold. This leaves a $2.0 million, or 7%, increase in cost of sales that is primarily attributable to converted product sales. Major contributors to this increase include: start-up costs at Barnwell including additional direct labor and overhead, the liquidation of older higher-cost inventory, fiber and other material cost increases, labor usage, and health care cost increases. Additionally, the second quarter of 2016 benefited from the recovery of $1.1 million in business interruption insurance proceeds, which did not reoccur in 2017.
SG&A expenses increased $0.8 million principally due to increased legal and professional fees and the timing of employee medical claims.
Interest expense increased $0.3 million, or 96%, due principally to increased debt levels. Our interest rate is also variable and dependent upon our financial leverage, and was approximately 5.1% at the end of the second quarter of 2017. Most interest was capitalized to the Barnwell, South Carolina, capital project, pending its completion.
A tax benefit of $0.4 million was recognized in the second quarter of 2017 compared to tax expense of $1.3 million in the second quarter of 2016, reflecting both the decline in pre-tax earnings and the Company’s recognition of tax credits. The effective combined tax rate estimated in the second quarter of 2017 is 21%, lower than the statutory rate due principally to Oklahoma tax incentives received that are not proportional to income.
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