IT Tech Packaging, Inc. (ITP) Q2 2018 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen, and welcome to participate in IT Tech Packaging's Second Quarter of 2018 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] Joining us today are Mr. Zhenyong Liu, IT Tech Packaging's Chairman and Chief Executive Officer; and Ms. Jing Hao, the company's Chief Financial Officer. Remarks from both Mr. Liu and Ms. Hao will be delivered in English by interpreters. Thank you. Please go ahead. Pardon me. The lines are open. Please go ahead.

Operator, can you just go ahead with the safe harbor.

I beg your pardon, ma'am.

Can just go ahead with the safe harbor statement.

Okay. IT Tech Packaging announced its second quarter of 2018 financial results via press release yesterday, which can be found on the company's website at www.itpackaging.cn. First, Mr. Liu will brief you on the company's key operational highlights over the second quarter of 2018, and then Ms. Hao will review the company's financial results. Before we start, I would like to draw your attention to our safe harbor statement. Management's prepared remarks contain 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 facts in its announcement, are forward-looking statements, including, but not limited to, anticipated revenues from the corrugating medium paper, tissue paper, offset printing paper and digital photo paper business segments; the actions and initiatives of current and potential competitors; the company's ability to introduce new products; the company's ability to implement capacity expansion; 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 company and the industry. The company undertakes no obligation to update forward-looking statements to reflect subsequent or current 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 this expectation will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results. This is a presentation document featuring management's prepared remarks, and it is now available for download from the company's website at www.itpackaging.cn. Please note that there will be discussions on non-GAAP financial measure or EBITDA, or earnings before interest, taxes, depreciation and amortization. Please refer to our press release for a complete reconciliation of EBITDA to net income. As a reminder, all numbers in our presentation are quoted in U.S. dollars and all comparisons refer to year-over-year comparisons unless otherwise stated. I would now like to turn the call over to Mr. Liu. His comments will be delivered in English by Dan McCarron from Weitian Investor Relations. Mr. McCarron, please go ahead.

Thank you, operator, and good morning, everyone. Thanks for joining our Second Quarter 2018 Earnings Conference Call. We saw a strong come back in our business during the second quarter, following the suspension of production from late January to mid-March. A government-mandated restriction on the supply of natural gas interrupted our normal business during the first quarter. Our total revenue increased by 45.5% to $33.1 million, benefiting from continuing upticks in average selling prices for both CPM (sic) [ CMP ] and offset printing paper. Looking forward, while a government-mandated restriction continues to pose risks and uncertainties to our business, we expect that prices for our major products to remain relatively stable at the current levels. On July 17, 2018, the company's Board of Directors approved a corporate name change to IT Tech Packaging, Inc. The name change became effective on August 1, 2018. In connection with the name change, the company's common stock began trading under the new ticker symbol, ITP. Now I will turn the call over to our CFO, Ms. Jing Hao, who will review and comment on the second quarter financial results. Her comments will be delivered in English by my colleague, Janice Wang. Janice, please go ahead.

Thanks, Dan, and thanks everyone for being on the call. Next, on behalf of the management team, I will summarize some key financial results for the second quarter of 2018. Also I will occasionally refer to specific production lines associated with various products. I will make clear to which products I am referring to. For reference, the numbering system for our production lines is provided on Slide #17. Now let's look at our financial performance for the second quarter of 2018. Please turn to Slide #7. For the second quarter of 2018, total revenue increased 45.5% to $33.1 million due to an increase in average selling prices for both CMP and offset printing paper and increases in sales volume of CMP, partially offset by a decrease in sales of offset printing paper resulting from a slowdown of market demand. Turning to Slide 8. For the second quarter of 2018, the CMP segment, including both regular CMP and lightweight CMP, generated revenue of $28.9 million, representing 87.2% of total revenue. $23.3 million of revenue was from our regular CMP products and $5.6 million was from lightweight CMP. CMP segment volume increased by 1.9% to 48,084 tonnes, of which 38,541 tonnes were regular CMP and 9,543 tonnes were lightweight CMP. Average selling price, or ASP, for regular CMP increased by 65.3% to $605 per tonne, while ASP for lightweight CMP increased 66.3% to $587 per tonne. Turning to Slide #9. For the second quarter of 2018, our offset printing paper segment generated revenue of $4.2 million, representing 12.8% of total revenue. We shipped 4,911 tonnes offset printing paper in the second quarter, a decrease of 32.8% from the same period last year. ASP for offset printing paper increased 27.7% to $861 per tonne. Turning to Slide 10. We recognized 0 revenue from tissue paper products for the second quarter of 2018 compared to $0.7 million from sales of 568 tonnes at an ASP of $1,275 per tonne for the second quarter of 2017. Production of tissue paper was suspended in September and October 2017 for the replacement of coal boilers. Intermittent production resumed in the following months due to volatility in the price of tissue paper. We expect to resume and increase production of tissue paper products once the market condition becomes more favorable. Revenue generated from digital photo paper was $14,028 for the second quarter of 2018. In June 2016, we suspended the production of digital photo paper due to low market demand for our products, and now are considering renovating the line to produce more competitive products. We expect that our digital photo paper production will remain suspended for the near future. Slide #11 summarizes the changes in our revenue mix. For the second quarter of 2018, total cost of sales increased by $10.8 million to $30.1 million, leading to total gross profit of $3 million, down from $3.5 million for the same period last year, and overall gross margin of 9.1%, decreased by 6.1 percentage points from the last year. For the second quarter of 2018, SG&A expenses increased by 20.7% (sic) [ 12.6% ] to $3 million and losses from operations were $0.01 million compared to income from operations of $0.8 million for the same period last year. Operating loss margin was 0.04% compared to operating profit margin of 3.4% for the same period last year. For the second quarter of 2018, net income was $0.1 million, resulting in net earnings of $0.01 per basic and diluted share. This compared to net income of $0.02 million or net earnings of $0.001 per basic and diluted share for the same period of last year. For the second quarter of 2018, EBITDA decreased by $0.8 million to $3.6 million from $4.4 million for the same period last year. Now shifting gear to year-to-date financial results. For the 6 months ended June 30, 2018, total revenue decreased 27.1% to $35 million as a result of decreases in sales volume of CMP and offset printing paper. This was partially offset by increases in ASP of these products. The weak results for the first quarter reflect the impact of temporary suspension of our production due to the government-mandated restriction on the supply of natural gas that lasted for most of the first quarter. Production at our manufacturing facilities has been back to normal since mid-March. For the 6 months ended June 30, 2018, the CMP segment, including both regular and lightweight CMP, generated revenue of $30.5 million, representing 87% of total revenue, $24.2 million in revenue was from our regular CMP products and $6.3 million was from lightweight CMP. Volume for the CMP segment decreased by 49% to 51,007 tonnes, of which 40,213 tonnes were regular CMP and 10,794 tonnes were lightweight CMP. ASP for regular CMP increased by 54.8% to $602 per tonne, while ASP for lightweight CMP increased by 51.1% to $579 per tonne. For the 6 months ended June 30, 2018, our offset printing paper segment generated revenue of $4.6 million, representing 13% of total revenue. We shipped 5,290 tonnes of offset printing paper for the 6 months ending June 30, 2018, a decrease of 56.1% from the same period last year. ASP for offset printing paper increased by 32.3% to $861 per tonne. For the 6 months ended June 30, 2018, we sold 0 tonnes of tissue paper products as opposed to 1,126 tonnes in the same period of 2017. Production was suspended from late January 2018 to mid-March due to a government-mandated restriction on the natural gas supply and production due to volatility with tissue paper prices. Revenue generated from digital photo paper was $14,028 for the 6 months ended June 30, 2018. For the 6 months ended June 30, 2018, total cost of sales decreased by $6.3 million to $32.7 million, leading to total gross profit of $2.3 million and a decrease of 74.6% from last year. Overall, gross margin of 6.6% reflects a decrease of 20.3 (sic) [ 12.3 ] percentage points from last year. For the 6 months ended June 30, 2018, SG&A expenses were $6.8 million compared to $5.5 million for the same period of last year. For the 6 months ended June 30, 2018, income from operations decreased from $3.6 million to negative $4.5 million. Operating loss margin was 12.9% compared to operating profit margin of 7.6% for the same period last year. For the 6 months ended June 30, 2018, net loss was $4 million or $0.19 loss per basic and diluted share compared to net income of $1.7 million or earnings of $0.08 per basic and diluted share for the same period of last year. For the 6 months ended June 30, 2018, EBITDA decreased from $10.9 million to negative $11.5 million for the same period of last year. Moving to Slide 19 and 20, let's look at the balance sheet and liquidity. As of June 30, 2018, the company had cash and bank balances, short-term debt, including bank loans, current portion of long-term loans from credit union and related party loans, notes payable and long-term debt, including related party loans, of $5.7 million, $20.1 million, $3.8 million and $6 million, respectively, compared to $2.9 million, $13.6 million, $6.1 million and $11.9 million, respectively, at the end of 2017. Net accounts receivable were $2.7 million as of June 30, 2018, compared with $1.8 million as of December 31, 2017. Net inventory was $4.1 million as of June 30, 2018, compared to $8.5 million at the end of 2017. As of June 30, 2018, the company had current assets of $19.2 million and current liabilities of $25.6 million, resulting in a working capital deficit of $6.4 million. This compares to current assets of $20 million, current liabilities of $21.8 million and a working capital deficit of $1.8 million at the end of 2017. Net cash provided by operating activities was $1.1 million for the 6 months ended June 30, 2018, compared to $3.7 million for the same period of the prior year. Net cash used in investing activities was $1.2 million for the 6 months ended June 30, 2018, compared to $5.9 million for the same period of the prior year. Net cash provided by financing activities was $0.8 million for the 6 months ended June 30, 2018, compared to $10.2 million for the same period of the prior year. Now if you have any questions, please contact us through e-mail at IR@itpackaging.cn. Management will response to your question through e-mails as soon as possible. Operator, please go ahead.

Thank you, ma'am. Thank you for attending IT Tech Packaging's Second Quarter 2018 Earnings Conference Call. This concludes our call today. Thank you for listening in. Goodbye, take care.