Interpipe EBITDA jumped 75% qoq in 2Q21

EBITDA at Ukraine’s largest pipe and railway wheel
producer Interpipe (INTHOL) jumped 75% qoq to USD 71 mln in 2Q21, according to
the company’s 1H21 financial statements published on Sept. 13.

 

The jump in EBITDA (before reallocation from its steel
segment) was driven by a qoq doubling of the steel segment’s EBITDA to USD 72
mln and the increase of the pipe segment’s EBITDA to negative USD 4 mln in 2Q21
from negative USD 7 mln in 1Q21, partially set off by an 88% qoq plunge in the
railway product segment EBITDA to USD 1 mln.

 

Interpipe’s revenue added 29% qoq to USD 260 mln in
2Q21, driven by a 45% jump for its pipe segment to USD 179 mln and a 17%
increase for its railway product segment to USD 70 mln.

 

The increase in pipe segment revenue was driven by a
45% qoq increase in sales volumes to 152 kt due to a 50% qoq jump in line pipe
sales to 90 kt and a 63% qoq surge in OCTG sales to 44 kt. The 11% qoq increase
in railway product sales was the main reason for the rise in that segment’s
revenue.

 

The company’s CapEx dropped 20% qoq to USD 14 mln and
its free cash flow plunged 78% qoq to USD 1 mln in 2Q21. Total debt skyrocketed
3.7x qoq to USD 410 mln at end-June due to the placement of USD 300 mln in Eurobonds
in May. Interpipe’s net debt surged 3.7x qoq to USD 199 mln at end-June, mainly
due to a USD 150 mln dividend payment in 2Q21. Its net leverage ratio rose to
0.9x at end-June from 0.2x a quarter ago.

 

For 1H21, Interpipe’s revenue slid 2% yoy to USD 460
mln as a 40% yoy plunge in railway product segment revenue (to USD 129 mln) was
mostly set off by a 31% yoy jump in pipe revenue (to USD 302 mln). Its EBITDA
dropped 25% yoy to USD 111 mln due to an 88% yoy plunge in railway product
segment EBITDA (to USD 13 mln), partially set off by a 2.7x yoy surge in steel
segment EBITDA (to USD 107 mln). Interpipe’s CapEx jumped 66% yoy to USD 31 mln
in 1H21, including USD 21 mln for development (up 3.5x yoy) and USD 10 mln for
maintenance (down 23% yoy).

 

Interpipe’s CapEx for 2021 will amount to around USD
75 mln, including USD 55 mln for development and USD 20 mln for maintenance,
according to the company’s management statements at a conference call with
investors on Sept. 13. The working capital investment needs in 2H21 might
amount to USD 20 mln.

 

The company does not see the recent rise in
anti-dumping duties for its pipe exports into the US (around 15% of its total
pipe sales) as prohibitive, but rather sees their effects as creating barriers
for volume increases and decreasing margins on the existing sales.

 

Interpipe might consider buying back its performance
securities at prices below the company’s balance sheet valuation of these
instruments, which at end-June stood at USD 68 mln, the management said at the
conference call. 3,054 units of performance securities were issued in 2019, and
their total number is limited to 3,550.

 

Interpipe expects to maintain its railway product
monthly sales at about 15 kt (14.7 kt in 2Q21).

 

The company’s cash balance surged 3.8x qoq to USD 206
mln at end-June due to the Eurobond issuance, and Interpipe considers this
liquidity buffer as sufficient for full financing of its 2021-2022 CapEx
program.

 

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

 

We note that the USD 111 mln EBITDA in 1H21 likely
included around USD 30-35 mln of positive contributions from the release of
provisions, as the net movement in provisions reported for 1H21 was USD 33.9
mln. About 90% of these EBITDA gains were attributable to the pipe segment, the
management said at the conference call. At end-2020 Interpipe had USD 32.2 mln
of provisions for customers’ and other claims on its balance sheet, meaning
that at end-June this item was likely close to zero. Therefore, we think that
in 2H21, the company’s EBITDA will have much lower contributions from the
release of provisions than in 1H21.

 

Nevertheless, we note that the performance of
Interpipe’s pipe segment apparently improved qoq in 2Q21, as was expected by the management a
quarter ago. Namely, the pipe segment’s EBITDA after reallocation from its
steel segment amounted to USD 38 mln in 2Q21, and considering for the possible
USD 20 mln contribution from the release of provisions we arrive at USD 18 mln
of 2Q21 EBITDA (adjusted for provisions) for this segment. This compares
favorably with zero EBITDA (adjusted for provisions)
in 1Q21.

 

As the company noted in its earnings release and on
the conference call, and as is manifested in its 1H21 steel segment EBITDA of
USD 107 mln, it benefits substantially from its vertical integration into scrap
collection and steel production, and we expect these benefits to continue in
2H21. Interpipe should also benefit from 2H21 sequential decreases in prices of
raw materials such as scrap (some of which Interpipe purchases from third
parties) and HRC (the main material for its production of welded pipes).

 

Nevertheless, Interpipe is currently experiencing cost
pressure from the increases in electricity tariffs and natural gas prices, its
management acknowledged on the call.

 

Considering the above, USD 55-80 mln of EBITDA
(adjusted for provisions) in 2H21 is realistic for Interpipe, we think.

 

As Interpipe has only USD 10 mln of debt (excluding
performance securities) to repay in 2021-2022, its liquidity situation is
adequate at the moment, even considering the likely USD 40 mln in further
dividends in 2H21 and the possible spending on performance security buybacks,
we conclude.