Zhenyong Liu - Chairman & CEO Jing Hao - CFO

Hello, ladies and gentlemen. And welcome to participate in Orient Paper's Third Quarter 2017 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. 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 third 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 third quarter of 2017, 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 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 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 would now like to hand 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 third quarter 2017 earnings conference call. Our third quarter revenue decreased by 10.6% year-on-year to $33.5 million, mainly due to decrease in sales volume across our product categories, despite increase in blended ASP. Total sales volume decreased by 36.2% to 61,903 tonnes, primarily related to production suspension in September as we removed our coal burning boilers and started to replace them with gas boilers in compliance with the latest government regulation. Overall, gross margin improved by 2 percentage points to 21.6% in third quarter, as a result of increasing ASPs for regular CMP and light-weight CMP. Looking ahead, as the government continues to promulgate and fully implement rules and regulations on environmental protections, outdated productions in the paper industry are accelerating to phase out. We believe large-scale enterprises like us will benefit from industry consolidation as a result of the phasing out of outdated productions. We expect the overall pricing and market demand will show an upward trend in the near future and the company's operations will continue to improve." Now, I would turn the call over to our CFO Ms. Jing Hao, who will review and comment on the third 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 third quarter of 2017. 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 though, the numbering system for our production lines is provided in our earnings press release and on slide 17 its earnings call presentation. Now let's look at our financial performance for the third quarter of 2017. Please turn to slide number 7. For the third quarter of 2017, total revenue decreased to 10.6% to $33.5 million due to a decrease in sales volumes across our products partly and partially offset by increase in blended average selling prices. Turning to slide 8. For the third quarter of 2017, the CMP segment, including both regular CMP and light-weight CMP generated revenue of $27.4 million, representing 81.8% of total revenues. $22.4 million of revenue was from our regular CMP products and $5 million was from light-weight CMP. Revenue for CMP segment decreased by 34.1% to 53,375 tonnes, of which 43,202 tonnes was regular CMP and 10,173 tonnes was light-weight CMP. Average selling price, or ASP, for regular CMP increased by 59.4%to $518 per tonne, while ASP for light-weight CMP increased to 47.9% to $491 tonne. Turning to slide 9. For the third quarter of 2017, our offset printing paper segment generated revenue of $5.5 million, representing 13.3% of the total revenue. We shipped 8,035 tonnes offset printing paper in the third quarter, decreased to 43.9% from the same period of last year. ASP for offset printing paper increased slightly by 5.9% to $679 per tonne. Turning to slide 10. For the third quarter of 2017, tissue paper segment generated sales of $0.7 million, down 59.5% from the same period last year. We shipped 493 tonnes tissue paper during the third quarter, decreased to 62.8% from the same period last year. ASP was $1,339 per tonne, which was 9.1% higher than the same period last year. We had no revenue from digital photo paper for the third quarter of 2017, compared to $0.06 resulting from sales of 38 tonnes at an ASP of 1,702 per tonne in the same period of last year. In September 2016, we suspended the production of digital photo paper due to low market demand for our products and are now upgrading the production line to produce more competitive photo paper products here in digital printing, medical ultrasound and photographic studios. We expected to complete the upgrade of production line and commence the trial production in the near future. Slide number 11 summarizes the changes in our revenue mix. For the third quarter of 2017, total cost of sales decreased by $3.8 million to $26.3 million, leading to total gross profit of $7.2 million from $7.3 million for the same period last year, and overall gross margin of 21.6% increased by 2 percentage points from the last year. For the third quarter of 2017, SG&A expenses slightly increased by 1.2% to $2.8 million. For the third quarter of 2017, income from operations were at $2.7 million compared to $4.7 million for the same period of last year. Operating margin was 8.1% compared to 12.6% for the same period of last year. For the third quarter of 2017, net income was $1.6 million or $0.07 per basic and diluted share. This compared to net income of $3 million or $0.14 per basic and diluted share for the same period of last year. For the third quarter of 2017, EBITDA decreased by $2 million to $6.5 million from $8.5 million for the same period of last year. Now shift gear to year-to-date financial results. For nine months ending September 30, 2017, total revenue decreased to 21.1% to $81.6 million, exactly by the decreased sales volumes across all products categories and partially offset by increase in blended average selling price. The restrictions on our production volume by the Chinese government remained in place during the first nine month in 2017. For the nine months ending September 30, 2017, the CMP segment including both regular CMP and the light-weight CMP generated revenue of $66.2 million, representing 81.1% of total revenue. $55.7 million of revenue was from our regular CMP products and $10.4 million was from light-weight CMP. Volume for CMP segment decreased by 29.5% to 153,384 tonnes, of which 128,988 tonnes was regular CMP and 24,396 tonnes was light-weight CMP. ASP for regular CMP increased by 32.7% to $432 per tonne, while ASP for light-weight CMP also increased by 28.9% to $128 per tonne. For the nine months ending September 30, 2017, our offset printing paper segment generated revenue of $30.3 million, representing 15.3% of the total revenue. We shipped 20,098 tonnes offset printing paper for the nine months ending September 30, 2017, decreased to 51.5% from the same period of last year. ASP for offset printing paper increased slightly by 1.9% to $652 per tonne. For the nine months ending September 30, 2017, tissue paper segment generated sales of $2.1 million, decreased from $4.7 million or 35.7% for the same period last year. Volume of tissue paper was 1,619 tonnes and ASP was $1,289 per tonne compared to 3,788 tonnes at an ASP of $1,245 per tonne in the same period last year. We had no revenue from digital photo paper for the first nine months of 2017 compared to $0.7 million, resulting from sales of 372 tonnes at an ASP of $1,786 tonne in the same period of last year. For the nine months ending September 30, 2017, total cost of sales decreased by $20.1 million to $55.2 million, leading to total gross profit of $16.3 million, decreased by 9.2% from last year, and overall gross margin of 29% increased by 2.6 percentage points from last year. For the nine months ended September 30, 2017, SG&A expenses was $8.3 million compared to $9.6 million for the same period of last year. For the nine months ended September 30, 2017, income from operations decreased by 23.6% to $6.4 million. Operating margin was 7.8% compared to 8% for the same period of last year. For the nine months ended September 30, 2017, net income was $3.3 million, or $0.15 per basic and diluted share, compared to net income of $4.2 million or $0.20 basic and diluted share for the same period of last year. For the nine months ended June 30, 2017, EBITDA decreased by $2.7 million to $17.3 million from $20.1 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 September 30, 2017, the company had cash and cash equivalents, short-term debt including related party loan and capital lease obligations not payable in the long-term debt, including related party loans of $6.5 million, $14.1 million, $0 million, $6.0 million and $14.2 million, respectively, compared to $2.3 million, $5.1 million, $8.8 million, $2.2 million and $14.9 million, respectively, at the end of 2016. Net accounts receivable was $0.1 million and net inventory was $9.6 million as of September 30, 2017, compared to $3.9 million and $5.6 million respectively at the end of 2016. As of September 30, 2017, the Company had a net working capital deficit of $1 million, compared to $6.1 million at the end of 2016. Net cash provided by operating activities was $16.8 million for the first nine months of 2017, compared to net cash used in operating activities of $8.6 million for the same period of last year. Net cash used in investing activities was $7.6 million for the first nine months of 2017, compared to $7.7 million for the same period of last year. Net cash used by financing activities was $5.4 million for the nine months of 2017, compared to net cash used in financing activities of $2.2 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. End of Q&A: Thank you for attending Orient Paper's third quarter 2017 earnings conference call. This concludes our call today, and we thank you all for listening in. Goodbye.