Valhi, Inc. (NYSE: VHI) - A Diversified Conglomerate Navigating Challenging Conditions

Published on September 24, 2024 | Ticker: VHI

Valhi, Inc. (NYSE: VHI) is a diversified holding company with operations spanning the chemicals, component products, and real estate management and development sectors. Despite facing headwinds in certain business segments, the company has demonstrated resilience and is positioning itself for potential future growth.

Business Overview

Valhi operates through its wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International Inc., Tremont LLC, Basic Management, Inc. (BMI), and The LandWell Company (LandWell). These subsidiaries are leaders in their respective industries, providing a diverse range of products and services.

Chemicals Segment

Valhi's Chemicals Segment is operated through its majority control of Kronos Worldwide, Inc. (NYSE: KRO), a leading global producer and marketer of value-added titanium dioxide (TiO2) pigments. TiO2 is a critical component used in a wide variety of products, including paints, plastics, paper, fibers, and ceramics. Kronos' operations span the United States, Europe, and Canada.

Component Products Segment

Valhi's Component Products Segment is operated through its majority control of CompX International Inc. (NYSE American: CIX). CompX is a leading manufacturer of security products used in the postal, recreational transportation, office and institutional furniture, cabinetry, tool storage, and healthcare industries, as well as a manufacturer of wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs, and related hardware and accessories for the recreational marine industry.

Real Estate Management and Development Segment

Valhi's Real Estate Management and Development Segment consists of BMI and LandWell. BMI and LandWell own real property in Henderson, Nevada, and LandWell is actively engaged in efforts to develop certain real estate in Henderson, including approximately 2,100 acres zoned for residential/planned community purposes.

Financials

In the fiscal year 2023, Valhi reported annual net income of -$12.1 million, annual revenue of $1.92 billion, annual operating cash flow of $3.9 million, and annual free cash flow of -$44.6 million. These financial results reflect the challenges faced by the company's various business segments.

Quarterly Performance

For the first quarter of 2024, Valhi reported net income attributable to Valhi stockholders of $7.8 million, or $0.27 per diluted share, compared to a net loss of $4.9 million, or $0.17 per diluted share, in the first quarter of 2023. This improvement was primarily driven by higher operating income from the Chemicals Segment, partially offset by lower operating income from the Component Products Segment and the Real Estate Management and Development Segment.

Chemicals Segment Performance

Valhi's Chemicals Segment, operated through Kronos Worldwide, experienced an extended period of reduced demand across all major markets in 2023, which was reflected in its sales volumes. However, demand has improved in the first quarter of 2024 in all major markets. Kronos' net sales in the first quarter of 2024 increased 12% compared to the first quarter of 2023, primarily due to a 28% increase in sales volumes, partially offset by an 11% decrease in average TiO2 selling prices.

Kronos' cost of sales increased 3% in the first quarter of 2024 compared to the first quarter of 2023, due to the increase in sales volumes, a 15% increase in production volumes, and lower production costs. Kronos' gross margin as a percentage of net sales increased to 15% in the first quarter of 2024, compared to 7% in the first quarter of 2023, primarily due to the favorable effects of lower production costs and higher production and sales volumes, partially offset by lower average TiO2 selling prices.

Kronos recognized an operating income of $22.8 million in the first quarter of 2024, compared to an operating loss of $15.1 million in the first quarter of 2023, as a result of the factors impacting gross margin. Kronos' operating income in the first quarter of 2023 included a gain of $1.7 million related to a business interruption insurance claim.

Component Products Segment Performance

Valhi's Component Products Segment, operated through CompX International, experienced a decrease in operating income in the first quarter of 2024 compared to the first quarter of 2023, primarily due to lower marine components sales and gross margin. CompX's net sales decreased 8% in the first quarter of 2024 compared to the first quarter of 2023, due to lower marine components sales, partially offset by higher security products sales.

CompX's cost of sales as a percentage of net sales increased 6% in the first quarter of 2024 compared to the first quarter of 2023, resulting in a decrease in gross margin as a percentage of net sales. The decrease in gross margin was primarily due to lower gross margin percentages at both the security products and marine components reporting units.

Real Estate Management and Development Segment Performance

Valhi's Real Estate Management and Development Segment, consisting of BMI and LandWell, recognized $13.7 million in revenues on land sales during the first quarter of 2024, compared to $24.9 million in the first quarter of 2023. The decrease in land sales revenue was due to the decreased pace of development activity for previously sold parcels within the residential/planned community in Henderson, Nevada.

Cost of sales related to land sales revenues was $8.0 million in the first quarter of 2024, compared to $14.1 million in the first quarter of 2023. The segment's operating income decreased to $5.0 million in the first quarter of 2024, compared to $10.6 million in the first quarter of 2023, primarily due to the lower land sales revenue.

Liquidity

As of March 31, 2024, Valhi had an aggregate of $436.8 million in restricted and unrestricted cash, cash equivalents, and marketable securities, including $69.9 million held by its non-U.S. subsidiaries. The company's primary sources of liquidity are its cash flows from operating activities and borrowings under various lines of credit and notes.

Valhi's consolidated indebtedness at March 31, 2024, was comprised of $72.8 million outstanding on its credit facility with Contran, $292.3 million in Kronos' 9.50% Senior Secured Notes due 2029, $80.9 million in Kronos' 3.75% Senior Secured Notes due 2025, $53.7 million in Kronos' subordinated, unsecured term loan from Contran, and $12.2 million on LandWell's bank loan. Kronos had no outstanding borrowings on its $225 million global revolving credit facility at March 31, 2024.

Outlook

Valhi's Chemicals Segment, operated through Kronos, expects to report higher operating results for the full year of 2024 compared to 2023, due to expected improved demand, higher selling prices, and lower production costs, including lower unabsorbed fixed costs. Kronos believes the production curtailments and other necessary actions it took during 2023 to preserve liquidity while maintaining its global market share have positioned it to capitalize on the increase in demand in 2024.

Valhi's Component Products Segment expects security products sales in 2024 to be lower than 2023, as the sluggishness experienced across various markets has continued through the first quarter of 2024. The segment also expects its marine components reporting unit's net sales for the full year of 2024 to be lower compared to 2023, as it believes demand in the towboat market will further decline.

Valhi's Real Estate Management and Development Segment expects to continue its land development activities in Henderson, Nevada, over the next three to four years to fulfill its contractual obligations with builders. The segment expects to collect the maximum reimbursement amount of $209 million under its Owner Participation Agreement with the City of Henderson over the next 7 to 10 years.

Risks and Challenges

Valhi and its subsidiaries face various risks and challenges, including global market disruptions, supply chain issues, economic conditions, and geopolitical events that could impact their operations and customer demand. The company also faces risks related to environmental matters, litigation, and potential changes in government regulations.

Conclusion

Valhi, with its diversified business model, is navigating a challenging operating environment. While the company's Chemicals Segment has seen improved demand and the Real Estate Management and Development Segment continues its land development activities, the Component Products Segment faces headwinds. Valhi's management is taking steps to align resources and optimize operations to position the company for potential future growth. Investors should closely monitor the company's progress in addressing these challenges and capitalizing on opportunities across its various business segments.

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