There's no doubting lithium is the future of Albemarle (ALB 1.43%). Heck, lithium is the largest source of revenue and earnings for the business today. But the company's most resilient business segment during the second quarter of 2020 turned out to be bromine, not lithium or catalysts.
The consumption-sapping effects of the coronavirus pandemic slammed the specialty chemicals manufacturer in the first half of the year, although there will be a couple of quarters of lag before the discrepancies in supply and demand are fully accounted for in operating results. That means investors should prepare for relatively poor results in the second half of 2020, too, but the business is well positioned to endure the economic slowdown. Here's what investors need to know about the latest numbers.
Image source: Getty Images.
By the numbers
Albemarle manufactures specialty materials in lithium, bromine, and catalyst applications. Given the markets served by each segment, it's not difficult to see why the coronavirus pandemic has negatively affected the business.
- Lithium: Energy storage applications accounted for an estimated 60% of second-quarter lithium sales, while specialty applications comprised the remainder. Although global electric-vehicle sales are expected to continue growing in 2020 despite declining overall passenger vehicle sales, factory shutdowns and lower selling prices have impacted the business segment.
- Bromine specialties: Fireproofing applications in electronics and building materials accounted for roughly 50% of second-quarter bromine sales, while oilfield drilling accounted for less than 20% of sales. Consumer spending and oil prices have weighed on the business segment, although surprisingly strong demand in construction materials has helped to offset those weaknesses.
- Catalysts: All sales are derived from petroleum refining applications related to transportation fuels. The coronavirus pandemic has crushed demand for gasoline, diesel, and jet fuels.
Those market-specific factors led to relatively poor year-over-year comparisons. Second-quarter 2020 adjusted EBITDA for lithium, bromine, and catalysts was down 33%, 10%, and 66%, respectively, in the comparison period. Albemarle remains comfortably profitable, but the impact of the economic slowdown is clearly evident in first-half 2020 operating results:
|
Metric |
First Half 2020 |
First Half 2019 |
Change (YoY) |
|---|---|---|---|
|
Lithium revenue |
$520.5 million |
$616.6 million |
(16%) |
|
Bromine revenue |
$464.4 million |
$504.5 million |
(8%) |
|
Catalysts revenue |
$404.3 million |
$517.9 million |
(22%) |
|
Total revenue |
$1.5 billion |
$1.7 billion |
(12%) |
|
Gross profit |
$475.4 million |
$609.4 million |
(22%) |
|
Operating income |
$236.2 million |
$340.9 million |
(31%) |
|
Net income |
$227.4 million |
$326.5 million |
(31%) |
|
Operating cash flow |
$207.9 million |
$199.3 million |
4% |
Data source: SEC filing. YoY = Year over Year.
Operating cash flow grew in the year-over-year period due to a $67 million swing in working capital adjustments and a $51 million swing in other adjustments, which is a sign the company's cash preservation strategy is off to a good start. Continued progress on that front will allow the business to maintain dividend payments, which have increased for 26 consecutive years.
Albemarle is targeting $100 million in cost savings by the end of 2021 as part of a pre-pandemic initiative to generate free cash flow. Those efforts have been accelerated by the economic downturn. At the end of June, the business was on track to achieve annualized cost savings of $50 million to $70 million by the end of 2020.
Looking ahead
As with many other companies, Albemarle withdrew full-year 2020 guidance when the pandemic struck earlier this year. However, it provided third-quarter 2020 guidance to help set expectations for investors, although with the understanding that current market conditions remain in flux.
In the third quarter of 2020, Albemarle expects total revenue of $700 million to $775 million and adjusted EBITDA of about $165 million. The company also expects quarter-over-quarter adjusted EBITDA to decline at least 10% for lithium, decline at least 50% for catalysts, and to remain roughly the same for bromine.
A resilient dividend stock in a tough year
Albemarle is doing relatively well in light of the headwinds facing each business segment. Investors appear to be recognizing that, too, as shares of the specialty chemicals company have gained 18% since the beginning of 2020. It certainly helps to have one of the stock market's most consistent dividends and a management team with an excellent track record.
That said, if the economic downturn lingers longer than expected or takes a turn for the worse, then Albemarle and investors might have to adjust expectations once again. The business should remain profitable aside from a catastrophic economic event, but don't be surprised if the stock treads water in the second half of 2020.
