Orchids Paper Products Company (NYSE American: TIS) today reported results for the quarter ended September 30, 2017. The following tables provide selected financial results for third quarter 2017 compared to third quarter 2016 and second quarter 2017.
Jeff Schoen, President and Chief Executive Officer, stated, “Sales in third quarter experienced strong growth due to incremental volume from new business that started shipping in June. In August, we announced the addition of a significant new customer in a new distribution channel for new ultra-premium products to be manufactured in the Barnwell, South Carolina facility. We are on track to begin shipments for this new customer late in the fourth quarter of 2017, with full implementation expected by second quarter 2018. We expect to ship at 50% of the final run rate in December and ramp to full production in the first quarter of 2018. When this new business is fully implemented, total Company sales are expected to be between $220 and $240 million annually.”
“We are on track to complete the start-up of the Barnwell facility by the end of 2017, as we stated previously. The paper machine has met all start-up expectations and is fully capable of delivering the product quality and capacity to support the new business.”
“In third quarter 2017, our margins were negatively impacted by higher fiber costs due in part to a slower than expected ramp-up of Barnwell’s fiber preparation and fiber recovery systems and in part due to an escalation of the market prices paid for virgin fiber. The fiber preparation and recovery systems are fully ramped and operational at the time of this release, and we anticipate this will drive an improvement in future margins.”
Third Quarter 2017 Relative to Third Quarter 2016
Net sales increased $5.5 million, or 14%, in the third quarter of 2017 compared to the same period in the prior year. Converted product sales increased $3.7 million as a result of the continuing ramp-up of previously announced new private-label business. Net sales of converted product benefitted approximately $4.2 million from increased volume, while a lower average selling price per ton had a negative impact of approximately $0.5 million. Parent roll sales increased $1.8 million, resulting from ramping-up capacity at the new mill in Barnwell, South Carolina. We generally endeavor to run our paper-making mills at capacity, and production that is not needed to support converted product sales is sold as parent rolls.
Cost of sales increased $9.0 million, or 27%. Standard cost of sales increased $4.4 million, or 15%, consistent with the change in sales. Major contributors to the remaining $4.6 million increase in cost of sales include: approximately $1.4 million of increased freight cost based on changes in customer and geographic distributions; approximately $1.7 million of increased material costs, principally for virgin fiber; approximately $1.9 million of increased overhead costs not covered by production and sales; and other factors such as inventory obsolescence resulting from changes in customers’ product lines, certain manufacturing efficiency variances, and increased fiber and utility costs in the Mexicali operations. Partially offsetting these noted changes in costs were approximately $1.3 million of capitalized variances that were directly attributable to preproduction test runs necessary to get Barnwell’s new equipment ready for its intended use.
SG&A expenses increased $0.5 million principally due to contributions of excess inventory to support hurricane relief efforts and due to increased legal and professional fees.
Third Quarter 2017 Relative to Second Quarter 2017
Net sales increased $6.7 million, or 18%, in the third quarter of 2017 compared to the second quarter of 2017. The increase in net sales principally reflects the continuing ramp-up of new business, which began to be produced and shipped late in the second quarter of 2017. Converted product net sales increased $7.2 million, with $6.9 million of the increase attributable to increased volume and $0.3 million due to an increase in the average selling price. Parent roll sales decreased $0.5 million, reflecting the utilization of increasing mill capacities to service new converted-product business.
Cost of sales increased $5.5 million, or 15%. Standard cost of sales increased $4.2 million, or 15%, consistent with the change in sales. Major contributors to the remaining $1.3 million increase in cost of sales include: approximately $0.9 million of increased freight cost based on changes in customer and geographic distributions; approximately $1.0 million of increased material costs, principally for virgin fiber; approximately $1.2 million of increased overhead costs not yet covered by production and sales at the new Barnwell, South Carolina facility; and other factors such as inventory obsolescence resulting from changes in customers’ product lines and certain manufacturing efficiency variances. Partially offsetting these noted changes in costs were: approximately $1.3 million of variances were capitalized that were directly attributable to preproduction test runs necessary to get Barnwell’s new equipment ready for its intended use, and Pryor’s absorption variance improved by approximately $0.6 million.
SG&A expenses decreased $0.3 million, reflecting lower expenses resulting from the timing of employee medical claims, the timing of stock option expense for annual awards granted to the Board of Directors, and a reduction in anticipated bonus payouts. The benefit of these reductions to SG&A expense is partially offset by the previously mentioned contributions of excess inventory to support hurricane relief efforts in the third quarter.
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