Interpipe EBITDA plunges 44% qoq in 3Q21

EBITDA at Ukraine’s largest pipe and railway wheel producer
Interpipe (INTHOL) plunged 44% qoq to USD 40 mln in 3Q21,
according to the company’s 9M21 financial statements published on Dec. 17.

 

The plunge in EBITDA (before reallocation from its steel
segment) was driven by qoq drops in segment EBITDA for pipes, to negative USD
26 mln in 3Q21 (negative USD 4 mln in 2Q21) and for steel, to positive USD 62
mln (13% less qoq). EBITDA of the railway product segment inched up to USD 3
mln in 3Q21 (from USD 1 mln in 2Q21).

 

After reallocation from the steel segment, Interpipe’s
EBITDA fell 43% qoq to USD 22 mln for its pipe segment and plunged 49% qoq for
its railway product segment to USD 14 mln.

 

The qoq drop in pipe segment EBITDA was in part due to
a positive USD 15 mln contribution to the 2Q21 EBITDA from the release of
provisions (much smaller contribution in 3Q21).

 

Interpipe’s revenue added 14% qoq to USD 296 mln in
3Q21, driven by a 15% increase for its pipe segment to USD 205 mln. The increase
in pipe segment revenue was driven by seamless pipes (a 6% qoq increase in
volumes and an 8% qoq rise in prices).

 

The company’s CapEx inched up 4% qoq to USD 14 mln and
its free cash flow plunged to negative USD 29 mln in 3Q21 from positive USD 1
mln in 2Q21. One of the reasons for the negative 3Q21 free cash flow was a USD
44 mln investment into working capital.

 

Total debt was stable qoq at USD 411 mln at
end-September while net debt surged 51% qoq to USD 301 mln as cash and cash
equivalents plunged 48% qoq to USD 110 mln. In addition to experiencing
negative free cash flow, Interpipe paid USD 40 mln in dividends and invested
USD 34 mln into financial assets (a portfolio of low-risk marketable securities
under the discretionary management of a reputable investment bank) in 3Q21. The
motivation for the investment into financial assets was to set off some of the
interest costs Interpipe pays on its Eurobonds.

 

For 9M21, Interpipe’s revenue added
15% yoy to USD 757 mln as a 28% yoy plunge in railway product segment revenue
(to USD 201 mln) was more than compensated by a 45% yoy jump in pipe segment
revenue (to USD 507 mln).

 

Its EBITDA (before reallocation from its steel
segment) dropped 30% yoy to USD 151 mln in 9M21 due to an 89% yoy plunge in
railway product segment EBITDA (to USD 15 mln) and a drop in pipe segment
EBITDA to negative USD 36 mln (from positive USD 10 mln a year ago), in large
part set off by a 2.6x yoy surge in steel segment EBITDA (to USD 169 mln).

 

After reallocation from the steel segment, Interpipe’s
EBITDA plunged 60% yoy to USD 65 mln for its railway product segment in 9M21,
but jumped 54% yoy to USD 75 mln for its pipe segment.

 

Interpipe’s CapEx jumped 65% yoy to USD 45 mln in
9M21, including USD 25 mln for development (up 3.1x yoy) and USD 20 mln for
maintenance (up 5% yoy). Its free cash flow amounted to negative USD 24 mln
(positive USD 94 mln in 9M20) and dividends paid were USD 230 mln (zero a year
ago).

 

At aconference call with
investors on Dec. 17, the management stated that Interpipe’s CapEx for 2021
will amount to around USD 80 mln. In 2022, Interpipe’s CapEx might amount to
USD 100 mln and its working capital investment needs might be USD 30 mln. The
company has a target minimum cash level of USD 80 mln (with the absolute
minimum of USD 20-30 mln) and aims to pay dividends only after meeting all of
its other needs (debt service, working capital investments, CapEx, and
maintaining minimum cash levels), its management said on the call, adding that
dividends will plunge significantly yoy in 2022 (no dividends will be paid in
4Q21).

 

The qoq EBITDA drop in 3Q21 was driven in large part
by cost increases, particularly the jumps in prices of steel scrap (+20% qoq
and +79% yoy for 9M21) and natural gas (+65% and +127%, respectively),
Interpipe said in its presentation released on the same date. However, steel
scrap prices in Ukraine dropped to around USD 300/t in September after peaking
at USD 360/t in summer. Furthermore, Interpipe was successful in passing some
of the cost pressures on to its customers.

 

In 4Q21, Interpipe has been enjoying the continuing
growth in OCTG demand worldwide, which has enabled it to set off the negative
effects of cost increases and trade barriers, the presentation said. Moreover,
starting from Dec. 9, the duty for exports of steel scrap from Ukraine was
increased by Ukraine’s parliament to EUR 180/t (from EUR 58/t), which will
protect  domestic prices from external shocks, Interpipe said. However,
the company remains fully exposed to the skyrocketing appreciation of natural
gas in Europe.

 

The company also wound up its joint venture with
Vallourec, which will have a positive effect on the profitability of its line
pipe sales to Europe starting from 4Q21.

 

Interpipe anticipates no problems with collecting its
accounts receivable following its investments into working capital, its
management said.

 

Dmytro Khoroshun: We continue
to expect Interpipe’s EBITDA to drop by about 30-40% yoy in 2021 to USD 165-190
mln.

 

However, from 2022 we expect a substantial, up to USD 100 mln per year, or up to
USD 125 per ton of its seamless pipes and railway products, increase in
Interpipe’s pre-tax profits due to the recent hike in steel scrap export duty
in Ukraine. But this effect is unlikely to materialize in 4Q21, because the
duty became applicable only on Dec. 9, and as of Dec. 10 the steel scrap prices
in Ukraine were USD 336/t after having rebounded to USD 370/t in mid-November
from the USD 315 level at the end of September, according to Metal Expert, an
industry consultancy.

 

On the other hand, Interpipe will likely continue to
experience elevated natural gas and electricity prices throughout 2022.

 

Interpipe’s CapEx plans (USD 35 mln in 4Q21 and USD
100 mln in 2022) seem high to us, and we do not exclude that the actual values
will be smaller.