Redox Limited (AE0.F) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Redox Limited Full Year 2025 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Raimond Coneliano, CEO. Please go ahead.

Good morning, and welcome to Redox Limited's Full Year 2025 Results Briefing. I'm Raimond Coneliano, CEO and Managing Director of Redox. And presenting with me today is our Chief Financial Officer, Kim Yap. Moving to Slide 2. Slide 2 outlines the agenda for today. I will open the briefing with our FY '25 performance highlights before providing you with thoughts on key issues that have impacted the operating environment and which have underscored this year's results. I will then pass to Kim to take you through the financials before I come back and add some comments on our strategy and outlook. We'll then be happy to finish with Q&A. Turning straight to Slide 4. While customer demand was weaker in 2025 due to a subdued operating environment, Redox’s volume growth was strong. Sales revenue increased 9.4% from the previous corresponding period, which was a good result and in line with its historical average. Gross profit margins were steady in the second half of the year at 21.6% Again, this was a solid result, falling within the long-term historical average range of between 20% to 22%. Overall margins were 1.8 basis points lower in 2025 than PCP, impacted by higher volume, lower-margin commodity business and lower-margin acquisitions made during the year. Gross profit increased by 1% to $269 million in FY '25. As discussed in the 1H results briefing, we've included a key industry metric, conversion margin on this slide. The metric measures the gross profit to EBITDA FX and is used across the industry to demonstrate the impact of cost growth on the financial result. Our FY '25 conversion margin of 45.3% is consistent with what our largest competitors have recently reported, which suggests that our current cost structure lines up fairly against peers. Meanwhile, the business continued to generate strong cash flows and overall, our net cash position at the end of the year was a healthy $124 million. We continue to carry 0 net debt, which provides us with significant capacity for investment and M&A as and when opportunities arise. This strategy was clearly evident in the 3 strong acquisitions we completed in FY '25. On behalf of our shareholders, the Board has declared a dividend of $0.065 per share. This takes the total FY '25 dividend to $0.125 per share and equates to a payout ratio of 85% of NPAT, just outside our 60% to 80% target payout ratio range. In declaring the final dividend, the Board considered a number of factors, including the group's strong cash balance. Moving to Slide 5. FY '25 was a challenging year for the global chemical distribution sector, and Slide 5 provides some key factors that impacted the industry and underscored our results. Although prices were relatively stable throughout FY '25, they were slightly below the levels seen in FY '24, presenting a headwind. Longer-term trends are for inflation in commodity prices, which usually provides a tailwind. Margins industry-wide were above their long-term averages during FY '24 and as predicted, moderated during the period for Redox returns within its historical range. With geopolitical and economic uncertainty as a backdrop, demand was subdued, particularly in the United States, where a rapidly changing tariff environment led to customer hesitancy and a falling confidence. Although the company exercises close control of human resource expenses, it had to meet the market and ensure that Redox remains competitive in the war for talent in a relatively hot job market. This led to wage inflation of 5%, which is above the typical rate seen by the company of around 3%. Storage rates and distribution costs also experienced inflation due to economy-wide pressures. The company expects conditions to improve, although accept that some uncertainty remains. Turning to Slide 6. Slide 6 provides a more granular look at the drivers of sales revenue in FY '25. As I noted earlier, sales revenue increased by 9.4% over PCP, which we think is a good result in a subdued demand environment. Pleasingly, our recent acquisitions have now started to contribute to sales growth. However, most of the uplift this year has been generated organically. Driving growth with strong Crop Production & Protection sales, which recovered from a weak 2024, while Surface Coatings sales were also solid, in part helped by the acquisition of Auschem in Q2. Meanwhile, our Food division experienced lower sales, impacted by the uncertainty caused by tariffs in the U.S. and a larger deflation effect in the period. You'll see that the pie chart on the right of the slide looks a little different to what we printed previously. Some of the segments continued to grow. It became clear to me we needed to restructure some of the industry groups to a more manageable size. This pie represents how we view the various industry segments internally. As mentioned, prices were relatively stable throughout the year, although slightly lower than FY '24, particularly in Q1. As I noted in Slide 5, we are hoping for a more favorable inflation tailwind in FY '26, consistent with longer-term trends. Moving to Slide 7. Slide 7 outlines the 3 acquisitions we completed in FY '25, Oleum, Auschem and Molekulis. Oleum specializes in surfactants and specialty chemicals. The sale was completed and fully integrated into Redox in July 2024. And to date, the business has demonstrated good growth, particularly boosting sales in our Crop Protection segment. Auschem is a distributor of solvents and specialty chemicals. Auschem also provides Redox with unique bulk storage facilities and blending capabilities, including a distribution deal with Viva Energy Australia. This acquisition was completed and fully integrated in November 2024 and has already provided a meaningful contribution to sales in the surface coatings, industrial and mining segments. Our most recent acquisition, Molekulis, is a distributor of transformer and specialty oils. The acquisition was completed in May 2025 and will be integrated into our CRM/ERP system, Redebiz later this calendar year. We've also seen good sales from this business already, but it is early days, and we expect still better to come. All acquisitions are in line with our stated acquisition strategy and have added new products, customers, suppliers, expertise and capabilities to Redox, which we believe will drive stronger growth in the future. We continue to review several strategic acquisition opportunities, particularly in North America. Turning to Slide 8. While we're excited by our acquisitions, Slide 8 reminds us that it is the organic business that fundamentally continues strong growth. We continue to invest in the business regardless of short-term challenges, and this continues to reward us. In FY '25, we increased the size of our sales team 7.2% to 194 members. This team, which is the business growth engine, is spread across APAC and coast-to-coast across the U.S. Along with our U.S. expansion, we also established our Canadian entity, which will enable Redox to service clients with operations north of the U.S. border as we already do south into Mexico. We are also particularly excited about our new distribution agreements, including Dow and Viva Energy, which we expect to grow strongly in the years to come. As we expand into specialties, we've also added expertise in the former technical staff to enhance our value add and position. I'll now pass over to Kim, who will take you through the financials.

Turning to Slide 9. Thank you, Raimond, and good morning, everyone. Moving straight to Slide 10. This slide sets out the -- some of the key P&L numbers for FY '25, comparing them to the performance of the business in FY '24. We are pleased to announce a top line revenue increase of 9.4% in FY '25, driven by our strategic investment in the capacity and acquisitions and despite the subdued and challenging demand environment. Gross profit rose 1% to $269 million, impacted as anticipated by gross margin easing to 21.6% in FY '25. Margins were consistent half-on-half and within the historical average range of 20% to 22% as the company captured higher volumes, lower-margin commodity sales. After-tax ROIC, while strong, fell 4.3 percentage points to 14.8%. The uncertain operating environment has delayed the deployment of cash, and we expect to see this improve progressively. Turning to Slide 11. Slide 11 shows the revenue and gross profit in more detail. As we have done previously, we split our total revenue growth by regionally. Australia and New Zealand sales in excess of $1.1 billion were 10.2% higher versus PCP. This was a good result, reflecting the strong turnaround in Crop Protection and Production as well as a positive contribution from our 3 acquisitions. Meanwhile, growth momentum in North America slowed in FY '25 as the business has been impacted by tariff uncertainty and weaker global demand this past year. We remain very confident of the U.S. business and believe it will contribute strongly to earnings and margin as conditions improve. Moving to Slide 12, operating costs. In a normal operating environment, we will expect the expenses to grow below the revenue -- below the rate of revenue sales growth. Over the longer term, we expect a productivity growth of around 1%. In FY '25, total underlying expenses increased by 16.3% to $157 million, illustrating the cost challenges. Breaking this down, the $10 million increased administration costs in the period split between wage inflation and increase in headcount as we expand the business and higher incentive payments. Distribution and storage costs rose $8 million in FY '25, which can be split between volume growth and cost inflation. Importantly, when we look at our cost structure relative to our industry peers, we are comfortable that our commercial margin of 14.3% bend much well – [ bend ] extremely well. Turning to Slide 13. Slide 13 demonstrates the strength and financial flexibility of Redox. The business generated $48 million in cash from operations in FY '25. This was well down from FY '24, but represented at higher inventory levels, receivables and the timing of tax payments. Higher inventory and receivables were the result of growth and influence of the acquired businesses. Net working capital increased $57 million to $407 million in FY '25, equating to 32.7% of revenue -- sales revenue, which is above our normal historical range of between 30% to 32%. We expect this to return to within our longer-term range in FY '26. Even after our 3 acquisitions in FY '25, our net cash position remained very strong at $124 million in FY '25. With 0 net debt on our balance sheet, we have the flexibility to take advantage of organic and inorganic growth opportunities as they arise. Moving to Slide 14. As Raimond has noted earlier, our Board has declared a final dividend of $0.065 per share. This takes the full year dividend to $0.125 per share, which represents a payout ratio of 85% of NPAT, which is just above our stated target policy of 60% to 80%. The Redox Board considered a number of factors when declaring its final dividend, including the current strong cash balance. The final dividend will be paid on the 23rd of September 2025. I will now pass back to Raimond to cover our outlook and strategy.

Thanks, Kim. Turning to Slide 15. So I hope you can see that despite a challenging year, the business remains in good shape. Turning to Slide 16. Slide 16 provides a snapshot of some key metrics for our business. As you've seen Slide 16 previously, I won't dwell too long here, but you'll note that we're a large and successful company with over 8,000 active customers, selling over 5,000 SKUs and utilizing 1,000-plus supplier relationships. We are Australia's leading distributor of chemicals, ingredients and raw materials, however, only currently have a small share of the large market. As Slide 17 describes the chemical distribution industry remains highly attractive despite the challenges it has endured over the past year. Redox has a strong, sustainable business model, which has endured for 60 years and which is underpinned by in-house developed ERP/CRM, IT platform, Redebiz. Turning to Slide 18. Our strategy remains clear and consistent. We are constantly looking to expand our product portfolio. While we currently have over 5,000 SKUs, there's no reason why this cannot be much larger in the future. We have the customer and supplier relationships and most importantly, the people, underpinned by leading-edge technology to drive this harder. As we expand our product reach and explore new industries and geographies, we will continue to develop our technical expertise in order to provide excellent service and value for our clients and margin to our bottom line. We have already employed a large range of technical experts, and we'll continue to do this as opportunities arise. Our ERP/CRM system Redebiz is constantly being refined and upgraded by our in-house IT team. This provides insight and information that is used by our 190-plus salespeople to meet and exceed their customers' expectations. Finally, we will continue to make strategically sensible acquisitions in ANZ and the U.S. as opportunities arise to speed up future growth. With respect to the outlook, while we expect macroeconomic and geopolitical headwinds to present a challenge, we believe that Redox has the financial strength and operational flexibility to navigate these challenging conditions and capture future growth. The sector remains highly attractive. On that note, I would like to thank you for your interest in Redox. Kim and I would now be happy to answer your questions.

[Operator Instructions] Your first question today on the phone comes from Tim Piper with UBS.

First one just around your comments around sort of the macro post-tariff type environment that we've seen play out over the last few months. Maybe just some comments around what you've seen in terms of customer ordering activity and patterns in recent months, maybe with respect to kind of volume growth. And then as we've headed into the first half of '26, are those conditions largely unchanged? Or are you starting to see an improvement again flow through your volume numbers?

Thanks for the question, Tim. Good morning. Yes. So I think the way you've got to think about the tariff impact is if implemented at certain times, some of these tariffs would have caused huge price increases and the uncertainty and the changes and the daily fluctuations between the policy settings there in the U.S. leads people to be hesitant and uncertain about the future. So you do have some people sitting on the sidelines or saying, well, I don't want to buy with these huge tariffs as a threat. I'll just wait. And so what we've seen, and I believe others have also is customers sort of waiting for clarity. And it's the uncertainty, not the tariffs themselves, which pose the biggest problem, especially for companies like Redox. And we have seen slowly, progressively over the last month even more certainty and more clarity. So that gives us a lot of confidence that the end is in sight. Let's hope that's the case. And we will certainly improve, I think, customer sentiment and Redox’s results into FY '26.

Got it. And just a second one around the cost outlook. Kim, just picking up your comments through the call there that you said ordinarily OpEx shouldn't grow quite as quickly as the top line. But for FY '26, as we look at it, do you expect operating leverage to sort of come through at the margin line through margin expansion? And then just a second question, the OpEx did step down in the second half versus the first half. Was this a bit more of a reaction to the operating conditions that you saw pretty much both admin expense and distribution and storage expenses stepped down half-on-half?

I think -- as you can see, most of the distribution costs grow in line with the volume. The volume growth in the second half was slightly weaker than the first half. So that's why the cost that growth with the volume was slightly lower. In terms of the administration costs, the -- because we had to accrue a lot of the incentive payments from the first half throughout the second half. So all the executive team did not receive any STI that was reversed. Hence, that's why you've got the lower second administration cost in the second half.

Right. Possible to give us a sense on the delta there in the incentive cost first half to second half?

In the first half, we remember that we -- there was a $6 million increase in the administration cost and was split quite evenly. And you can see from the slide, there was no increase in the incentive payments on the PCP from second half to first -- to the second half of FY '25.

Yes. Tim, perhaps I can also add to that. What we expect to see over the long term is sales growth around 10% and profits going around 11%. So that's where that operating leverage comes from, you see. So this is a bit of an unusual year because of the strong upturn in wage inflation, which were not Robinson Crusoe on there and storage costs and distribution costs also quite -- the rate of increase is quite high. But outside of that, we'd like to see -- we do have some fixed costs that we get some operation -- operating leverage on as we grow, and we expect to grow.

[Operator Instructions] There are no further phone questions at this time. I'll hand back to address any webcast questions.

Thank you. I have a number. Raimond, you kind of talked about part of this answer in your first answer, but -- a question in your first answer. We'll go there still. Kim, thanks for taking my questions. Can you talk about the current volume trends to date in quarter 1 FY ’26? Two, can you talk a bit about your visibility over order flow? And three, multiples for your listed peers are trading materially cheaper than in PCP. Are you seeing that translate to private market opportunities, particularly in the U.S.?

Okay. A few questions there. I would say that the volume growth in -- so far in July, maybe that's a good data point. Our sales were up some 13% and volume was up about 13% on PCP on July last year. So you can see that it's not terrible quite above the long-term average. Usually, we sort of see volumes growing at around 8%, sales growing around 10%, the difference being inflation. But as you can see, volumes growing at 13% and sales growing at about 13%, there's little tailwind from inflation at the moment, but we hope and expect to see that as conditions normalize. I won't comment too much on competitive valuations. I would just say that industry has come in and out of fashion and shareholder sentiment about different industries change all the time. We've been in this business 60 years this year. It's a very proud birthday for Redox this year, and we're all excited -- as excited as I was 30 years ago. And it's a great business. And the fundamentals of chemical distribution and the opportunity is enormous. Remember, keeping ahead, the Australian market for our products is some $28 billion in chemicals and $8 billion in ingredients. We're not even $1 billion out of that in Australia. So you've got a huge opportunity and a huge opportunity to consolidate what is a very fragmented market. And that should excite you. If you're excited about selling and making profits. I think that's a really great opportunity we've got. And I think the sales increase and the great acquisitions we've made and the strategic decisions we've made to expand and develop and invest in the U.S. and other places is all to a really great purpose. The future is bright. So I hope that answers your question.

The second question of the webcast. How are the tariffs imposed by Trump affecting our American operations moving forward as a lot of Redox’s business is derived from quality Chinese producers. That's the first bit of the question. Second…

Perhaps I can just ask -- answer that one first. I'll go back to what I said a bit earlier. It really doesn't matter what the tariffs are. The tariffs will be whatever they'll be and product flow from whichever country to the United States will keep happening. And it's just a case of the uncertainty when people aren't sure if the tariff is going up or down or changing or being removed completely, creates people's hesitancy and not wanting to buy and that impacts demand and business hates not knowing, right? So the second thing to note here is that we have a robust team that do source a lot of products from the United States. Actually, United States is our second largest source of products sold in the U.S. So we have great relationships that we're developing with companies in the U.S., and they're seeing Redox as a great partner going forward, which is great. We're developing those every day. But for Redox as a whole, Chinese products are not the majority of our sourcing. We source from all over the world, and we have a lot of optionality there. And so yes, I think the key misconception around Redox, the U.S. and tariffs is that the tariffs themselves are the problem. They're not -- it's just the certainty and uncertainty. We need certainty, business needs to know what they are, and then we can all get back on with the job at hand.

Is Redox looking to open operations in any other countries in the next 2 to 3 years?

Look, we've got a lot of a big job to do in North America. I would say it wasn't mentioned much here, but our Mexican business is growing very well with no people actually just doing it all from the U.S. We've established an entity now in Canada, doing very well there. A lot of exciting opportunities we're working on. Similarly, in Singapore, quite small amount of business, but growing well handled by our Malaysian office. So I think that will keep us well entertained for a while, along with a great opportunity here in Australia, as you can see, even a small increase in Australia. We've got the synergy benefits of a big team of people here, a lot of customers that we talk to. So I think the U.S. and Australia will be our primary focus.

I'll just ask one more before we go back to the phones. If you make an acquisition in the U.S., what area of chemicals are you looking at? Are you looking at small bolt-on acquisitions or larger? If it is larger, are you happy to have debt on the balance sheet?

Yes. Well, we've got a range of companies we've been looking at that we've shortlisted. We've got a good portfolio, a good pipeline of acquisitions we're looking at. I would say, without giving too much away here that we've got a pretty broad focus. We like specialty chemicals. We recognize the advantages of expanding our specialty chemicals footprint, but we're not afraid of commodities either. We're happily looking at a broad range of companies. I think what we look for is a great strategic fit, good metrics, good quality and -- and yes, the size, look, could be as low as tens of millions and as large as maybe [ $150 million ] max. And we're not afraid of debt. I think what we want to be is very cautious, especially in uncertain times. I think people who look at our balance sheet see it's a bit lately. I think you have to understand that in uncertain times, we have to be diligent and careful and thoughtful, and we'll continue to do that. But there are some really great opportunities, and it could be a really great time to make acquisitions as a previous questioner asked, while it's a bit out of favor, maybe that's an advantage to Redox.

We have another phone question registered. This is from [ Nicole Penny with Rimor Equity Research ].

Just to follow up and elaborate more on the U.S. commentary. What do you see Redox's key unique competitive advantage there? Would you attribute it more to specialty product mix, the breadth of the customer base? Or are there any other factors that you believe would give you an edge as you scale, please?

Yes. Great question. Thank you. I think it's about all the things that make Redox great here in Australia or in New Zealand or in Malaysia, equally can make us great in the U.S. If you think about it this way, we've got -- the key enabler for our business is Redebiz. It's a unique internally developed IT platform that really helps us understand markets, leverage opportunities, leverage our supplier relationships. We have a very long 60-year history of dealing with suppliers from around the world. We can also -- and we are doing that, talking to our friends who we deal with and maybe their biggest partner in the region in APAC. They're excited and interested to work with us in the U.S. as well. So we can leverage those relationships, even customer relationships that we have, great Australian companies are telling their U.S. counterparts about us. And so it's really the same things that make us great here, great service, a different way of doing things, perhaps, different mentality, different strategy. We have a number of strategic decisions that we make. For instance, we hire mostly graduates. I think our competitors hire mostly very senior people. And we think there's some advantages to bringing graduates in, teaching them the Redox way and not inheriting bad habits of others. So look, it's not a very simple straightforward answer, but it's what makes us great in Australia and makes us great there too.

And then just a follow-up question on the Australia end market. Which of these end markets do you see most upside and opportunity over the next 2 to 3 years, please?

Yes. Look, I think we've been relatively underweight in mining. I would say there's a huge opportunity there. We're investing in -- we just recently brought in a metallurgist to help us spearhead more sales in that area. I would say there's still a lot to do in most industries really. I mean, the opportunities there in each one. But personal care, for instance, we grew that business 20% this year over last year. Personal care is a really interesting specialty chemical space that we're expanding our operations into. There's a lot of opportunity there. Food, Animal Health and Nutrition, they're all areas that we see with a lot of room for growth.

There are no further phone questions. I'll hand back to address any further webcast questions.

Thank you. The normalization of the gross profit margin has been well flagged since IPO and now sits in the long-term range. Looking at Slide 12, operating costs, how much flex is there in the conversion margin?

I guess the question being flex, meaning what do we expect it to be? I mean, I think it's here or hereabouts between 45% to 50%. Kim, do you agree with that?

Yes, definitely. But as we have flagged earlier, whatever -- there might be some short-term market like the cost inflation, which should not be in our control. But over the longer term, we expect there will be a long-term 1% improvement in terms of the cost over the sales growth.

Who do you consider to be your main competitors regarding the conversion margin calculation? Who do you benchmark yourself against?

I think if you look at IMCD, Azelis, they've got similar conversion margins. Brenntag are quite a ways behind us. But yes, look, again, I don't want to talk too much about our competitors. They're great businesses in different markets and have a lot of empathy and understanding for what they're going through as well.

Have you invested ahead of expected growth in storage and headcount? And do you expect some fixed cost leverage in operating costs?

Well, we're always investing in the future. I mean, always increasing the size of our sales team. Just in the U.S., we've hired many, many new young people. We've opened offices in Ohio and New Jersey. We've repositioned someone from Seattle to Florida. So you do those things as an investment in the future. It takes time. I mean, the guy who we've got there in New Jersey, a very accomplished guy from our Australian business. It's going to take them some time to make connections and make friendships and impress customers. And you don't -- that doesn't happen overnight. So people have to understand that -- that investment comes before the benefit, of course. And it is an investment. And so we'll continue to do that. In the latter part of your question about costs, about 50% of our product goes through our own sites and 50% goes through third-party logistics. So we had a mark-to-market on our leases for 8 of our operated sites last year, and that won't come around again for 5 years. But we are exploring ways to minimize costs, including leasing other facilities and putting in place [ installment ] and that can provide some cost benefit.

Thank you. Are you planning on keeping inventories at high levels? Or should we see the cash flow improve next half?

I think inventory days has already come down quite a lot in July. And I think July sales, which I mentioned before, were up 13-point-something percent on PCP. So that inventory number is -- should be growing because sales are growing. Receivables grow because you've sold things. So that's -- everything is within the long-term average. Maybe just a slight tick over, yes, in inventory, but I'm not concerned, and there's nothing for shareholders to be concerned about either. I think it's a sign of growth.

Okay. You previously said that July volumes were up 13%, how much is organic and how much is from acquisitions?

I don't have that number to hand. But I think if you look at last year's sales, there was -- the organic growth was about 60% of that growth and 40% was acquired growth. It was a relatively subdued demand environment, and we're hoping things will get better as this year unfolds. So yes, but we only acquired Molekulis a few months ago. So there will be that to flow into the results this year, which is great, a really wonderful business.

Can you please talk about the reasons for the ROIC decline and potential future outlook?

Yes. I think it's -- it reflects the drop in profit, obviously. But it's about the delay that we've got. At the moment, we've got a huge cash -- net cash position, which is in term deposits mostly. And you can only get sort of such a certain return on that. We're working really hard to put that money to work, to put it into stock that we sell, put it into receivables because we've sold something to someone and use it to make acquisitions and expand the business and invest in the future. So the quicker we can deploy that cash in useful ways, and that's our challenge and one we're quite comfortable with. I think longer term, ROIC, ROIC, you should think about 18% -- 17%, 18% is sort of the long-term kind of average that I would expect.

Nothing more from the webcast. I'll hand over to the phones.

Thank you. There are no further phone questions at this time. I'll now hand back to Mr. Coneliano for closing remarks.

Well, thank you very much, everyone, for calling in and sending your messages. I've had a wonderful time talking to you and look forward to meeting investors at the AGM.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.