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The Coronavirus Pandemic Is a Big Headwind for Albemarle

By Maxx Chatsko – May 18, 2020 at 9:48AM

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The most significant effects might not be felt until the second half of 2020, but investors might expect them to weigh on the dividend stock for the foreseeable future.

Specialty chemicals might not be so special during 2020. That might be a tough pill to swallow for shareholders of Albemarle (ALB -0.38%).

On the one hand, the specialty chemicals leader is a profitable, well-run business with an abundance of financial flexibility. Albemarle ended March with $1.7 billion in total liquidity, to be exact, and expects to accelerate cost savings programs this year. Both the strong cash position and cash-management strategy figure to be an advantage during the coming global recession set into motion by the coronavirus pandemic and the efforts to mitigate it.  

On the other hand, all three of the company's primary business segments are likely to experience a slump because of their reliance on commodity markets. How long might they be impacted? What does it mean for the dividend stock?

A yellow arrow opposing many white arrows.

Image source: Getty Images.

By the numbers

Investors were already expecting 2020 would be a transition year for the business for a handful of reasons. An oversupplied lithium market forced Albemarle to curtail near-term production expansion plans (limiting growth opportunities from volume increases) and weighed on selling prices (reducing margins). The slow-and-steady growth of the bromine business was expected to flatten out, while the catalyst segment was expected to ride tailwinds from the world's growing demand for cleaner transportation fuels. A new rule requiring cleaner maritime shipping fuels beginning in 2020 was expected to provide a significant lift. 

While first-quarter 2020 operating results don't compare favorably to the year-ago period, the company actually outperformed its own expectations for the quarter.  

Metric

Q1 2020

Q1 2019

Change (YoY)

Revenue

$738.8 million

$832.0 million

(11%)

Gross profit

$242.0 million

$283.5 million

(15%)

Operating income

$124.0 million

$155.1 million

(20%)

Net income

$123.6 million

$151.5 million

(18%)

Diluted earnings per share (EPS)

$1.01

$1.26

(20%)

Data source: SEC filings. YoY = Year over Year.

Despite outperforming internal expectations, the opening three months of the year didn't go quite according to plan. The lithium and bromine segments performed better than expected, while the catalysts segment -- expected to be the strongest segment in 2020 -- performed worse than expected. Overall, first-quarter 2020 adjusted EBITDA of $196 million was better than expected. 

Metric

Q1 2020

Q1 2019

Change (YoY)

Lithium, revenue

$236.8 million

$291.9 million

(19%)

Bromine specialties, revenue

$231.6 million

$249.0 million

(7%)

Catalysts, revenue

$207.2 million

$251.6 million

(18%)

Total revenue

$738.8 million

$832.0 million

(11%)

Lithium, adjusted EBITDA

$78.6 million

$115.6 million

(32%)

Bromine specialties, adjusted EBITDA

$83.3 million

$78.6 million

6%

Catalysts, adjusted EBITDA

$47.5 million

$60.1 million

(21%)

Total adjusted EBITDA

$196.3 million

$225.9 million

(13%)

Data source: SEC filings. YoY = Year over Year.

Needless to say, the coronavirus pandemic has scrambled Albemarle's outlook for 2020. Although the company cannot control the commodity markets it depends on, management has laid out a plan to focus on various factors within its control and weather the upcoming downturn.

A kid playing with a monocle.

Image source: Getty Images.

What's ahead for Albemarle?

The specialty chemicals company withdrew its original full-year 2020 guidance that called for revenue of at least $3.48 billion and adjusted EBITDA of at least $880 million. The original projections would have represented year-over-year declines of 3% and 15%, respectively. 

Albemarle issued second-quarter 2020 guidance expecting revenue of at least $700 million and adjusted EBITDA of at least $140 million. That doesn't represent a large difference from first-quarter results, but that's primarily because the biggest impacts for each segment are expected to be felt in the second half of 2020.

In lithium, the company has seen strong demand for battery-grade orders in April and early May, although that largely reflects battery manufacturers catching up on backorders. A crushing slowdown for automakers is expected to weigh on the lithium market in the back half of the year. 

Management currently expects much of the same for the bromine segment: relative strength in the second quarter followed by headwinds in the second half of 2020 as the economic effects of regional lockdowns catch up to the market. Bromine chemistries are routinely used as flame retardants in electronics and construction materials and as key components in oil and gas drilling fluids -- all of which will be negatively impacted by global current events. 

Albemarle's catalyst segment might experience the most severe downturn. The company's catalysts are primarily used in petroleum and petrochemical refineries to manufacture cleaner transportation fuels. Considering the world is suffering from a historic glut of crude oil and significantly reduced demand for transportation fuels, the segment could be in for a rough second half of the year.

Despite the headwinds, management laid out plans to conserve cash and manage the balance sheet to position the company to endure a downturn: 

  • Maintain ample liquidity: Albemarle ended March with $553 million in cash and $1.7 billion in total liquidity comprising cash and available credit facilities.
  • Accelerate cost savings: The business was originally targeting $100 million in annual cost savings by 2021, but it now expects to realize between $50 million and $70 million of those savings in 2020.
  • Reduce capital spending: Short-term cash management activities are expected to save up to $40 million per quarter, which would reduce full-year 2020 capital spending by $150 million from previous expectations.
  • Preserve the dividend: Albemarle was recently added to the S&P 500 Dividend Aristocrats Index, which means the dividend payout has increased for 25 consecutive years. Management made clear it has no intention of letting the streak end. 

A tough road ahead for a well-managed business

Investors were already a little frustrated with Albemarle before the coronavirus pandemic struck. Shares of the specialty chemical leader were mired in a three-year slide and are now trading at their lowest level since early 2016. The next year might not be much fun, and a slow economic recovery could lead to a prolonged rut for the business, but investors with a long-term mindset might be a little more forgiving.

Albemarle's bromine segment serves an important market niche that should be relatively resilient to upcoming economic headwinds and recover relatively quickly with consumer spending. The lithium segment is well-positioned for long-term success as the world transitions to electric transportation and renewable energy in the power sector. In fact, the latter trend will accelerate due to the coronavirus pandemic. 

The catalyst segment is a bit trickier for investors to gauge. Petroleum-based transportation fuels will play an important role for decades to come, but there are unprecedented headwinds facing the industry. It's a big part of Albemarle's overall business, so a prolonged downturn could cause a big headache for investors. 

Nonetheless, Albemarle remains a well-managed company with above-average opportunities for earnings and cash flow growth. Investors will simply need to remain vigilant as the company executes against numerous headwinds in 2020.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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