Interpipe EBITDA rises 19% in 1H20

EBITDA at Ukraine’s largest pipe and railway wheel
producer Interpipe (INTHOL) rose 19% yoy to USD 149.0 mln in 1H20, according to
the company’s financial statement and accompanying presentation published on
Sept. 22. Net profit amounted to USD 115.5 mln in 1H20, compared with a USD
25.4 mln loss for 1H19.

 

Interpipe’s revenue dropped 16% yoy to USD 468.3 mln
in 1H20, driven by a 36% drop in its pipe segment revenue to USD 231.3 mln.
Revenue from its railway product segment jumped 23% yoy to USD 216.0 mln.

 

EBITDA (before reallocation from its steel segment) of
Interpipe’s railway product segment jumped 84% yoy to USD 110.9 mln in 1H20.
EBITDA of its pipe segment was negative USD 2.2 mln in 1H20, compared with
positive USD 44.5 mln in 1H19. EBITDA of Interpipe’s steel segment surged 98%
yoy to USD 39.6 mln in 1H20.

 

For 2Q20, Interpipe’s railway product segment EBITDA
plunged 41% qoq to USD 41.3 mln, driven by a 20% drop in sales volumes and a
13% drop in prices. Its pipe segment EBITDA rebounded to positive USD 2.5 mln
in 2Q20 from negative USD 4.7 mln in 1Q20, despite a 5% qoq drop in prices for
both seamless and welded pipes.

 

The company’s net operating cash flow dropped 24% yoy
USD 69.3 mln in 1H20, while its CapEx decreased 23% yoy to USD 18.8 mln in
1H20. Free cash flow was USD 51.6 mln in 1H20, down 24% yoy.

 

At end-June, Interpipe’s gross debt amounted to USD
215 mln (gross debt / L12M EBITDA 0.76x) and its net debt amounted to USD 28 mln
(net debt/EBITDA 0.1x). In August, Interpipe redeemed USD 97 mln of its notes,
bringing their amount outstanding to USD 113.7 mln on Aug. 31. Interpipe had
USD 187 mln in cash at the end of June, a 27% drop YTD.

 

During a Sept. 22 conference call with investors,
Interpipe management disclosed that the company’s cash on the day of the call
amounted to USD 85 mln. The company recognizes that the relatively small amount
outstanding of its notes creates liquidity concerns and is not sustainable in
the long term. Therefore, Interpipe might consider refinancing its notes,
possibly by issuing new notes, depending on the market conditions, the
management said.

 

Dmytro Khoroshun: The
profitability of Interpipe’s railway product segment is shrinking fast (the 41%
qoq plunge in its EBITDA for 2Q20 was only slightly better than the 45% drop we expected), and 3Q20 might involve further qoq worsening.

 

The idea of refinancing its notes that was voiced by
management on the conference call – with one of the reasons being the
illiquidity of the current notes outstanding – raises concerns. This idea
implies that Interpipe would issue new notes in an amount substantially larger
than USD 113.7 mln currently outstanding. Taking on large new debt would
reverse at least in part the redemption of USD 195.5 mln that Interpipe
performed so far in 2020 and increase the company’s gross debt burden. While
the new notes might have lower interest rates, it is unclear what Interpipe
would do with the money raised in such a scenario (paying out dividends is a
possibility with negative implications for future creditors).

 

In any case, as of now Interpipe’s financial
situation remains strong. Its leverage is very low and the company should be
able to service its debt and remain within its covenant limits during the next
few quarters, at least.