Specialty chemicals might not prove so special during the coronavirus pandemic. Although Albemarle (NYSE: ALB) manufactures high-value products that generate healthy margins, those products serve markets such as electric vehicle manufacturing, petroleum refining, and building materials that have each been sharply affected by the global health crisis.
Luckily, the business had been expecting 2020 to be a transition year before the pandemic struck. Albemarle planned to scale down capital investments, navigate poor market fundamentals for lithium materials, and graduate to positive free cash flow generation in 2021. Those plans have now been accelerated -- and progress toward the new targets remain the key focus investors when second-quarter 2020 operating results are reported after the market closes on Aug. 5.
Here's what investors need to watch for the dividend stock.
Financial progress and market updates
In the first quarter of 2020, Albemarle generated an operating margin of 16.7%, compared to 18.6% in the year-ago period. The slump was caused by the early effects of the coronavirus pandemic in China and Europe and pre-existing market conditions for lithium materials. Although margins are expected to decline further in the second quarter, the business should remain comfortably profitable.
The company has ample liquidity, too. Albemarle ended March with $1.7 billion in total liquidity comprising $553 million in cash, $715 million in a revolving credit facility, $200 million in term debt, and $190 million in other credit. If the business can generate cash from operations, then it will be well-positioned to weather the downturn. Indeed, the company intends to maintain dividend payments, which have increased for 26 consecutive years.
But the specialty chemicals manufacturer is still moving to corral financial factors within its control. A previously announced cost management project set a target of saving $100 million per year by the end of 2021. That remains the minimum goal, although management is executing on an accelerated timeline. Albemarle now expects to realize $50 million to $70 million in annualized cost savings in 2020 -- an increase of $10 million to $20 million over initial expectations.
The company has also moved to save $25 million to $40 million per quarter through temporary cash management decisions and has reduced full-year 2020 capital expenditures by $150 million from initial projections. All of these actions will help to preserve investment-grade credit ratings, maintain dividend payments, and build trust with shareholders.
Investors will obviously be closely watching external factors, too. The most important business segment, lithium, is expected to suffer from lower market prices (because of trends in place before the pandemic) and disrupted manufacturing of electric vehicles (because of the pandemic). However, the International Energy Agency expects electric vehicle sales to grow in 2020 as overall car sales slump 15%. The Chinese market will be key, especially for Albemarle.
Similarly, investors will want to know how global petroleum refineries performed in the first half of 2020. Early indications suggest demand for low-sulfur diesel fuels remained relatively robust, which could help the company's catalyst segment limp to better-than-expected results (although even that might not be pretty).
Meanwhile, over half of the company's bromine products are used in fire prevention applications, including building materials and electronics equipment. Could the latter drive better-than-expected (or worse-than-expected, for that matter) consumption trends?
Well-positioned for the long run
Despite the headwinds facing the business, it's important for investors to realize Albemarle remains comfortably profitable and the long-term growth prospects remain firmly intact. There are risks that the impact of the coronavirus pandemic will delay internal financial targets originally planned for 2021, although the more relevant risks at this point reside in the markets served by the company.
Management usually does a solid job setting expectations for investors, so expect a detailed discussion of the first-half performance and projections for the second half of the year when results are reported.
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