Jing Hao - CFO Zhenyong Liu - Chairman & CEO

Ladies and gentlemen, welcome to participate in Orient Paper's Second Quarter of 2017 Earnings Conference Call. [Operator Instructions] Joining us today are Mr. Zhenyong Liu, Orient Paper's Chairman and Chief Executive Officer; and Ms. Jing Hao, the company's Chief Financial Officer. Remarks from both Mr. Liu and Ms. Hao would be delivered in English by interpreters. Orient Paper announced its second quarter of 2017 financial results via press release yesterday, which can be found on the company's website at www.orientpaperinc.com. First, Mr. Liu will brief you on the company's key operational highlights over the second quarter of 2017, and then Ms. Hao will review the company's financial results. Before we start, I'd 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 this 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 the forward-looking statements to reflect subsequent or current events or circumstances or to changes in its expectation 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 these expectations will turn out to be correct, and investors are cautioned that our actual results may differ materially from the anticipated results. There is a presentation document featuring management's prepared remarks, and it's now available for download from the company's website at www.orientpaperinc.com. Please note that there will be discussion 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 kind 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 will now like to turn the call over to Mr. Liu. His comments will be delivered in English by Tony Tian from Weitian Investor Relations. Mr. Tian, please go ahead.

Thank you, operator, and good morning, everyone. Thanks for joining our second quarter 2017 earnings conference call. Our second quarter results largely reflected the impact of government-mandated temporary restriction on production that has been in place since November 2016. Total sales volume decreased by 42.5% to 55,069 tonnes, the lowest level since the first quarter of 2013, leading to a 40% decrease in total revenue in the second quarter. Our margins also deteriorated as a result of increases in unit costs of recycled paper board, recycled white scrap paper and coal. That increased by 34%, 17.5% and 56.9% year-over-year, respectively. Looking ahead, we expect that the prices for our major products to remain relatively stable at current levels and the temporary government-mandated production restrictions or suspension from time to time to continue to pose risks and uncertainties to our business. 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 Wong. Janice, please go ahead.

Thanks, Tony, 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 2017. Also I will occasionally refer to specific production lines associated with various products. Let me be clear to which products I am referring to. For reference though, the numbering system for our production lines provided in our earnings press release and on Slide 17 earnings call presentation. Now let's look at the financial performance for the second quarter of 2017. Please turn to Slide 7. For the second quarter of 2017, total revenue decreased 40% to $22.8 million due to the decrease in overall sales volumes and partially offset by the moderate increase in blended average selling prices. Turning to Slide 8. For the second quarter of 2017, the CMP segment, including both regular CMP and light-weight CMP, generated revenue of $17.1 million, representing 75.2% of total revenues. $13.9 million of revenue was from our regular CMP products and $3.2 million was from light-weight CMP. Volume for CMP segment decreased by 39.9% to 47,194 tonnes, of which 37,994 tonnes was regular CMP and 9,200 tonnes was light-weight CMP. Average selling price, or ASP, for regular CMP increased by 11.9% to $366 per tonne, while ASP for light-weight CMP increased 5.7% to $353 per tonne. Turning to Slide 9. For the second quarter of 2017, our offset printing paper segment generated revenue of $4.9 million, representing 21.6% of the total revenue. We shipped 7,307 tonnes offset printing paper in the second quarter, decreased 54.3% from the same period of last year. ASP for offset printing paper increased slightly by 3.1% to $674 per tonne. Turning to Slide 10. For the second quarter of 2017, tissue paper segment generated sales of $0.7 million, 51.5% from the same period last year. We shipped 568 tonnes tissue paper in the second quarter, decreased 52.4% from the same period last year. ASP was $1,275 per tonne, which was 2% higher than the same period last year. Slide 11 summarizes the changes in our revenue mix. For the second quarter of 2017, total cost of sales decreased by $11.8 million to $19.3 million, leading to total gross profit of $3.5 million from $6.9 million for the same period last year, and overall gross margin of 15.2% decreased by 2.9 percentage points from the same last year - same period last year. For the second quarter of 2017, SG&A expenses slightly decreased by 1.2% to $2.7 million. For the second quarter of 2017, income from operations was $0.8 million compared to $4.2 million for the same period of last year. Operating margin was 3.4% compared to 11% for the same period of last year. For the second quarter of 2017, net income was $15,900 or $0.001 per basic and diluted share. This compared to net income of $2.6 million or $0.12 per basic and diluted share for the same period last year. For the second quarter of 2017, EBITDA decreased by $3.6 million to $4.4 million from $8 million for the same period of last year. Now shift gear to year-to-date financial results. For six months ended June 30, 2017, total revenue decreased to 27.1% to $48.1 million, exactly by the decreased sales volumes across all products categories and partially offset by moderate increase in blended average selling price. Due to heavy haze in North China, the government has temporarily restricted our production volumes since November 2016. For the six months ended June 30, 2017, the CMP segment including both regular CMP and the light-weight CMP generated revenue of $38.8 million, representing 80.7% of total revenue. $33.3 million of revenue was from our regular CMP products and $5.5 million was from light-weight CMP. Volume for CMP segment decreased by 26.7% to 100,009 tonnes, of which 85,786 tonnes was regular CMP and 14,223 tonnes was light-weight CMP. ASP for regular CMP increased by 90.3% to $389 per tonne, while ASP for light-weight CMP also increased by 15% to $383 per tonne. For the six months ending June 30, 2017, our offset printing paper segment generated revenue of $7.9 million, representing 50.3% of the total revenue. We shipped 12,063 tonnes offset printing paper for the six months ending June 30, 2017, decreased to 55.1% from the same period of last year. ASP for offset printing paper decreased slightly by 0.5% to $651 per tonne. For the six months ended June 30, 2017, tissue paper segment generated sales of $1.4 million, decreased from $3.1 million or 53.8% for the same period of last year. Volume of tissue paper was 1,126 tonnes and ASP was $1,268 per tonne compared to 2,461 tonnes at an ASP of $1,254 per tonne in the same period last year. We had no revenue from digital photo paper for the first half of 2017 compared to $0.6 million, resulting from sales of 334 tonnes at an ASP of $1,795 per tonne in the same period of last year. In June 2016, we suspended the production of digital photo paper due to low market demand for our products and are now upgrading the production lines to produce more competitive photo paper products used in digital printing, medical ultrasound and photographic studios. We expected to complete the upgrade of these production lines and commence the trial production in the second half of 2017. For the six months ended June 30, 2017, total cost of sales decreased by $13.3 million - I'm sorry, by $16.3 million to $39 million, leading to total gross profit of $9.1 million, decreased by 40.4% from last year, and overall gross margin of 90% increased by 2.8 percentage points from the last year. For six months ended June 30, 2017, SG&A expenses was $5.5 million compared to $7.1 million for the same period of last year. For the six months ended June 30, 2017, net income was $1.7 million or $0.08 per basic and diluted share compared to net income of $1.2 million or $0.06 per basic and diluted share for the same period of last year. For the six months ended June 30, 2017, EBITDA decreased by $0.7 million to $10.9 million from $11.6 million for the same period of last year. Moving to Slide 19 and 20. Let's look at the balance sheet and the liquidity. As of June 30, 2017, the company had cash and cash equivalents, short-term debt including related party loan and capital lease obligations and the long-term debt, including related party loan of $7 million, $13.2 million, $6.9 million and $17.6 million, respectively, compared to $2.3 million, $5 million, $8.8 million and $14.9 million, respectively, at the end of 2016. Net inventory was $10.4 million as of June 30, 2017 compared to $5.6 million at the end of 2016. As of June 30, 2017, the company had net working capital deficit of $1.9 million compared to $6.1 million at the end of 2016. Net cash provided by operating activities was $3.7 million for the first half of 2017 compared to net cash used in operating activities of $0.8 million for the same period of last year. Net cash used in investing activities was $5.9 million for the first half of 2017 compared to $2.1 million for the same period of last year. Net cash provided by financing activities was $6.6 million for the first half of 2017 compared to $4.4 million for the same period of the prior year. If you have any questions, please contact us through e-mail at ir@orientpaperinc.com. Management will respond to your questions through email as soon as possible. Operator, please go ahead.

Thank you for attending Orient Paper's Second Quarter 2017 Earnings Conference Call. This concludes our call today, and we thank you all for listening in. Goodbye. Q -: