Business Overview

Valhi, Inc. (VHI) is a diversified holding company with a rich history and a diverse portfolio of businesses. Headquartered in Dallas, Texas, Valhi has established itself as a leader in the chemicals industry, with a strong focus on the production and marketing of value-added titanium dioxide pigments. Beyond its Chemicals Segment, Valhi also operates in the component products and real estate management and development industries, showcasing its ability to adapt and thrive across various sectors.

Valhi, Inc. (VHI) is a majority-owned subsidiary of Contran Corporation, which owns approximately 91% of Valhi's outstanding common stock. The company 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). This structure allows Valhi to maintain a diversified portfolio while leveraging synergies across its various business segments.

The company's three core business segments – Chemicals, Component Products, and Real Estate Management and Development – each play a crucial role in Valhi's overall success. The Chemicals Segment, operated through Valhi's majority control of Kronos Worldwide, Inc. (NYSE: KRO), is the company's primary revenue and profit driver. Kronos is a leading global producer and marketer of value-added titanium dioxide pigments, a critical component in a wide range of products, from paints and plastics to paper and cosmetics.

Valhi's Component Products Segment, operated through its majority control of CompX International Inc. (NYSE American: CIX), is a leading manufacturer of security products and marine components, serving a diverse set of industries. The Real Estate Management and Development Segment, encompassing Valhi's majority-owned subsidiaries Basic Management, Inc. (BMI) and The LandWell Company (LandWell), focuses on the development and management of commercial and residential real estate in Henderson, Nevada.

In the early 2020s, Valhi faced significant challenges due to the COVID-19 pandemic, which impacted its operations, particularly in the Chemicals and Component Products segments. The company responded by implementing cost-reduction initiatives, including workforce reductions, to align its operations with the lower demand environment. This adaptability demonstrated Valhi's resilience in the face of unprecedented global challenges.

Financial Snapshot

Valhi's financial performance has been marked by both challenges and successes in recent years. In the fiscal year 2023, the company reported annual revenue of $1.92 billion and a net loss of $12.1 million, or $0.42 per diluted share. Operating cash flow (OCF) was $3.9 million, and free cash flow (FCF) was -$44.6 million. However, the company's Chemicals Segment, which accounts for the majority of its revenue and operations, experienced a decline in profitability due to a combination of factors, including reduced demand and higher manufacturing costs.

In the first nine months of 2024, Valhi reported a significant turnaround, with net income attributable to Valhi stockholders of $85.2 million, or $2.99 per diluted share, compared to a net loss of $14.8 million, or $0.52 per diluted share, in the same period of 2023. This improvement was primarily driven by the strong performance of the Chemicals Segment, which reported higher operating income of $105.9 million in the first nine months of 2024, compared to an operating loss of $39.5 million in the same period of 2023.

The most recent quarter (Q3 2024) showed further improvement, with revenue of $533.6 million, net income of $57.5 million, OCF of $13.5 million, and FCF of $3.9 million. Revenue increased 22% year-over-year due to a 21% increase in sales volumes across all major markets. Net income improved significantly compared to a net loss of $5.8 million in Q3 2023, primarily driven by higher operating income in the Chemicals segment and a non-cash gain from the remeasurement of the investment in the TiO2 manufacturing joint venture.

Liquidity

The company's liquidity position remained stable, with $372.5 million in cash, cash equivalents, and marketable securities as of September 30, 2024. Valhi's debt levels increased during the third quarter of 2024 due to the acquisition of the remaining 50% interest in Louisiana Pigment Company, L.P. (LPC) by its Chemicals Segment, which was financed through a combination of borrowings under its global revolving credit facility and cash on hand.

VHI's debt-to-equity ratio is 0.60. The company has $104.9 million available under its credit facility with Contran and $268 million available under Kronos' global revolving credit facility as of September 30, 2024. The current ratio is 2.79 and the quick ratio is 1.65, indicating a solid short-term liquidity position.

Operational Highlights

Valhi's Chemicals Segment, through its majority-owned subsidiary Kronos, has been at the forefront of the company's recent performance. In the first nine months of 2024, Kronos reported a 26% increase in sales volumes compared to the same period in 2023, driven by improved demand across all major markets. While average TiO2 selling prices decreased by 7% during this period, Kronos was able to significantly reduce its manufacturing costs, resulting in a substantial improvement in gross margins.

The acquisition of the remaining 50% interest in LPC, a joint venture in which Kronos previously held a 50% stake, was a significant strategic move for the Chemicals Segment. This transaction, completed in the third quarter of 2024, is expected to enhance Kronos' ability to serve the North American TiO2 marketplace and generate additional synergies through operational and commercial optimization.

Valhi's Component Products Segment, operated through CompX, faced some challenges in 2024, with a decline in sales and operating income compared to the previous year. The segment's security products and marine components reported lower sales and profitability, primarily due to reduced demand in certain end markets, such as the recreational marine industry.

The Real Estate Management and Development Segment, comprising BMI and LandWell, continued its efforts to develop and sell land holdings in Henderson, Nevada. While land sales revenue decreased in 2024 compared to 2023, the segment benefited from increased infrastructure reimbursement under its development agreement with the City of Henderson.

Geographic Performance

VHI operates globally, with the majority of its Chemicals segment sales coming from Europe (46% in Q3 2024) and North America (37% in Q3 2024). The Component Products segment primarily serves the US market. This geographic diversification helps the company mitigate risks associated with regional economic fluctuations and provides opportunities for growth in various markets.

Segment Performance

Chemicals Segment

During the third quarter of 2024, Kronos' net sales in the Chemicals segment increased 22% to $484.7 million, compared to $396.9 million in the same period of 2023. This was primarily driven by a 21% increase in sales volumes, which increased net sales by approximately $83 million, partially offset by a 1% decrease in average TiO2 selling prices which decreased net sales by $4 million. Kronos' sales volumes increased due to higher overall demand across all major markets.

Kronos' cost of sales in the Chemicals segment increased by 6% in the third quarter of 2024 compared to the prior year period, due to the increase in sales volumes, higher production rates and lower production costs of approximately $24 million related to energy and raw materials. Cost of sales in the third quarter of 2023 included $20 million of unabsorbed fixed production and other manufacturing costs associated with production curtailments as Kronos adjusted production volumes to align with lower demand.

As a result, Kronos' gross margin percentage in the Chemicals segment increased to 21% in the third quarter of 2024, compared to 9% in the same period of 2023. This was primarily due to the favorable effects of lower production costs and higher production volumes, partially offset by lower average TiO2 selling prices.

Operating income for Kronos' Chemicals segment was $42.6 million in the third quarter of 2024, compared to an operating loss of $21.8 million in the prior year period. This improvement was driven by the factors impacting gross margin, as well as an estimated $13 million increase from favorable changes in currency exchange rates.

For the first nine months of 2024, Kronos' Chemicals segment net sales increased 16% to $1.46 billion, compared to $1.27 billion in the same period of 2023. This was due to a 26% increase in sales volumes, partially offset by a 7% decrease in average TiO2 selling prices. Kronos' cost of sales increased by 3% during this period, leading to a gross margin percentage of 19% compared to 9% in the first nine months of 2023. Operating income for the Chemicals segment was $105.9 million in the first nine months of 2024, compared to an operating loss of $39.5 million in the prior year period.

Component Products Segment

In the third quarter of 2024, CompX's net sales in the Component Products segment decreased 17% to $33.6 million, compared to $40.3 million in the same period of 2023. This was primarily due to a 15% decrease in security products sales, related to lower sales to a government security customer, as well as a 21% decrease in marine components sales, mainly to the towboat market.

CompX's cost of sales as a percentage of net sales increased to 72% in the third quarter of 2024, compared to 69% in the prior year quarter. As a result, the gross margin percentage in the Component Products segment decreased to 28% from 31% over the same period. The decline in gross margin was primarily due to lower sales volumes and higher materials and labor costs, resulting in decreased coverage of fixed costs.

Operating income for the Component Products segment was $3.3 million in the third quarter of 2024, compared to $6.6 million in the same period of 2023. The decrease was primarily attributable to the lower sales and gross margin.

For the first nine months of 2024, CompX's Component Products segment net sales decreased 9% to $107.5 million, compared to $118.1 million in the prior year period. This was driven by a 32% decrease in marine components sales, partially offset by relatively flat security products sales. Gross margin percentage declined to 28% from 30% over the same period, leading to a 32% decrease in operating income to $12.1 million.

Real Estate Management and Development Segment

In the third quarter of 2024, net sales from Valhi's Real Estate Management and Development segment were $15.3 million, compared to $31.7 million in the same period of 2023. The decrease was primarily due to lower land sales revenue, as the pace of development activity for previously sold parcels within the residential/planned community slowed, mainly due to delays in receiving city permits and environmental approvals. Cost of sales related to the land sales was $8.8 million in the third quarter of 2024, compared to $17.7 million in the prior year period.

Additionally, Valhi recognized $14.2 million of infrastructure reimbursement income in the third quarter of 2024, compared to $4.8 million in the same period of 2023. This infrastructure reimbursement is related to an Owner Participation Agreement (OPA) between LandWell and the City of Henderson, which provides for the reimbursement of certain public infrastructure costs as LandWell develops the residential/planned community.

As a result of the lower land sales revenue, partially offset by the higher infrastructure reimbursement, operating income for the Real Estate Management and Development segment was $21.8 million in the third quarter of 2024, compared to $17.7 million in the prior year period.

For the first nine months of 2024, net sales from this segment were $52.4 million, down from $84.2 million in the same period of 2023, again due to the decreased pace of development activity. Operating income was $36.0 million in the first nine months of 2024, compared to $38.5 million in the prior year period.

Risks and Challenges

Valhi, like any diversified holding company, faces a variety of risks and challenges that could impact its future performance. The company's Chemicals Segment is subject to the cyclical nature of the TiO2 industry, with demand and pricing volatility influenced by global economic conditions, raw material costs, and industry capacity. The Component Products Segment is also vulnerable to changes in end-market demand, particularly in the recreational marine industry, which has experienced a recent downturn.

Additionally, Valhi's operations are subject to various environmental regulations and legal proceedings, including ongoing litigation related to its former lead pigment and lead-based paint business. These matters could result in significant financial liabilities and operational disruptions, requiring the company to allocate resources to address these challenges.

Outlook and Guidance

Valhi's management has provided a positive outlook for the company's performance in 2024. In the Chemicals Segment, Kronos expects sales volumes to exceed 2023 levels, driven by improved customer demand, while the company continues to focus on cost reduction initiatives and the integration of the LPC acquisition.

The Component Products Segment is expected to face headwinds in 2024, with management anticipating lower sales and profitability in both the security products and marine components businesses. The Real Estate Management and Development Segment is focused on completing its remaining land development obligations in Henderson, Nevada, and continues to explore opportunities to rezone and sell its remaining acreage.

Valhi's overall guidance for 2024 points to higher consolidated operating income compared to 2023, primarily due to the improved performance of the Chemicals Segment and higher expected infrastructure reimbursements in the Real Estate Management and Development Segment. However, the company's results may be impacted by various factors, including global economic conditions, raw material and energy costs, and the successful integration of the LPC acquisition.

Industry Trends

Key industry trends for Valhi include moderate growth in demand for TiO2 pigments, with a long-term compound annual growth rate (CAGR) of 2-3%. The demand for component products varies depending on end markets, with some sectors experiencing growth while others face challenges. The real estate market in Henderson, Nevada, where Valhi's Real Estate Management and Development segment operates, continues to show potential for growth, albeit with some regulatory and environmental approval challenges.

Corporate Governance

There are no known major scandals, short seller reports, or CEO departures for VHI. The company has maintained a stable leadership structure and has not faced any significant corporate governance issues that would materially impact its operations or investor confidence.

Conclusion

Valhi, Inc. (VHI) has demonstrated its ability to navigate through challenging times and capitalize on opportunities in its diverse portfolio of businesses. The company's Chemicals Segment, led by Kronos Worldwide, has been the primary driver of its recent turnaround, with improved demand, cost management, and strategic acquisitions contributing to its enhanced performance.

While the Component Products and Real Estate Management and Development Segments face their own set of challenges, Valhi's management has taken proactive steps to address these issues and position the company for long-term success. The company's geographic diversification and focus on operational efficiency have helped it weather market fluctuations and improve its financial performance.

As Valhi continues to evolve and adapt to market conditions, investors will closely monitor the company's ability to leverage its strengths, mitigate risks, and deliver sustainable growth across its diversified operations. With a solid liquidity position, strategic investments in key segments, and a focus on cost management, Valhi appears well-positioned to capitalize on opportunities in its various markets and drive long-term value for its shareholders.