Redox Limited (RDX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Redox Limited First Half FY '25 Results Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Raimond Coneliano, CEO. Please go ahead.

Thank you. Good morning, and welcome to Redox Limited Half 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 presentation with some performance highlights before talking through some current issues that have impacted the operating environment this half. I'll then pass to Kim to take you through the financials before I come back and add some comments on our strategy and outlook. We will then be happy to finish with Q&A. Turning straight to Slide 4. While demand in the first half of 2025 was generally subdued due to the operating environment, Redox's volume was robust and sales revenue increased 8.6% from the prior corresponding period. This was a good result. In line with expectations, gross profit margins eased to 21.6%, settling within its long-term historical average range of between 20% and 22%. Importantly, our gross profit increased by 1.7% to $137 million for the half. I've included a new measure that some of you may recognize, the conversion margin, being the gross profit to EBITDA FX, which was 45.8% in the first half. This metric demonstrates the impact of cost growth on our results and the outcome is consistent with what our largest competitors are reporting. Meanwhile, the business continues to generate strong cash flows, and overall, our net cash position at the end of the half was a healthy $138 million. This provides us with significant capital for M&A as and when opportunities arise. Pleasingly, we also signed 2 new channel partner agreements in the half being Dow and Viva Energy. These partnerships provide us with access to new markets, products, and customers, and I'm confident they will be positive for future growth. So for our shareholders, we produced pro forma earnings per share of $0.077 and an after-tax ROIC of 14.8% in 1H '25. The Board has declared an interim dividend of $0.06 per share, which equates to a payout ratio of 78% of NPAT within our 60% to 80% target payout ratio range. Moving to Slide 5. Slide 5 provides a more granular look at the drivers of sales revenue during the half and the associated impact on gross profit. As I said earlier, sales revenue increased by 8.6% over PCP, which we think is a good result. Pleasingly, our recent acquisitions have now started to contribute to sales growth. However, most of the uplift this half has been generated organically. Driving sales growth in the half was a strong contribution from Crop Production and Protection, which has recovered from a weak 1H '24, and Water Care sales, which benefited from portfolio addition, share of wallet initiatives, and customer acquisition. Of the sectors that were weaker, mining and explosive sales declined due to lower cyclical demand in various subsectors such as nickel. From a geographic perspective, APAC sales grew by almost 10%, while U.S. sales fell around 8%. Given that the U.S. is still in its early stages of development, we expect business to be lumpy period-to-period, but we remain confident in its long-term potential and prospects. Indeed, despite the decline in sales, the U.S. business grew active customers and invoices during the period. Overall, commodity prices were broadly stable in 1H '25 despite lapping higher comps in the first quarter. So while volumes were considerably stronger than their historical average, sales revenue was impacted. As anticipated, with the rebound in large volume, low-margin agricultural sales during the half, plus the contribution of lower-margin acquired businesses, gross profit margins declined by 1.5 basis to 21.6%, which now sits within its average historical range. Turning to Slide 6. As you know, the vast majority of Redox's products are imported with containerized freight rates being a key driver of price for our customers. As you can see from the chart on Slide 6, the China containerized freight index has remained relatively elevated as geopolitical events impact availability, costs, and shipping times. These higher costs will flow through to customers while we assist them in smoothing out the impact of any delays. During the half, we completed 2 acquisitions, Oleum and Auschem. Oleum specializes in surfactants and specialty chemicals. The sale was completed and fully integrated into Redox in July 2024. Auschem is a distributor of solvents and specialty chemicals and also provides Redox with bulk storage facilities and blending capabilities, including a distribution deal with Viva Energy Australia, of which we see great potential. This acquisition was completed and fully integrated in November 2024, again, made possible by leveraging our CRM ERP system, Redebiz. 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 in APAC and North America. I will now pass over to Kim, who will take you through the financials.

Thank you, Raimond, and good morning, everyone. Moving to Slide 8. This slide sets out some of the key P&L numbers for the first half. Comparing them to the performance of the business in the first half of 2024, I will talk about some of the key highlights. We are pleased to announce the top-line revenue increase of 8.6% in the first half despite the subdued demand environment and price deflation in the first quarter. Gross profit rose 1.7% to $137 million. As anticipated, the gross margin eased to 21.6% in the first half and is within the historical average margin of 20% to 22% as the company captured higher volumes, lower-margin commodity sales, which impacted the ratio. The earnings per share of 7.7% reflected a 1.7% increase on a PCP basis and the return on invested capital, while down from the first half of last year, remained strong at 14.8%. Turning to Slide 9, revenue and gross profit. As we have done previously, we have split our total revenue by region. Australia and New Zealand account for $592 million, which is about 10% higher against PCP. This was a good result and reflected product portfolio expansion, some customer wins, and a turnaround in the Crop and Protection segment. We also witnessed a positive contribution from the acquired business, as Raimond mentioned earlier, much of the growth is derived organically. Meanwhile, growth momentum in North America slowed during the first half. This should not be a surprise because the business in the U.S. is in its early stages of development and will naturally be lumpy from period to period. Growth will also be particularly strong in the first half of 2024, reflecting a higher base for the first half of '25 comparison. Moving to Slide 10, operating costs. Slide 10 shows the operating costs in more detail. Total underlying operating expenses increased by $12 million in the first half to $79 million. Breaking this down, there was a $6 million increase in admin costs in the period equally spread between the salary inflation, increase in head count as we expand and invest in the business, and higher incentive payments on the improved volumes. Distribution and storage costs increased by $5 million in the first half. $4 million of them were due to volume growth and $1 million was due to inflationary forces. Turning to Slide 11, cash flow. Slide 11 is the money side, which you will see the strong position that Redox is in. In the first half, we generated $12 million in cash from operations. This was down materially from the first half in 2024 but represented an uplift in inventory principally related to longer shipping times and the timing of Lunar New Year shipments. Net working capital increased by $50 million to $387 million in the first half, equating to 30.7% of revenue, which is within our normal historical range of 30% to 32%. The increase of 1.7 percentage point from PCP was due to higher inventories. Even after acquisitions, the net cash position remained very strong at $138 million at the end of the first half. And with zero net debt on our balance sheet, we have the flexibility to take advantage of organic and inorganic growth opportunities. Slide 12, dividend and dividend policies. As Raimond noted earlier, our Board has declared an interim dividend of $0.06 in the first half of 2025. This represents a payout ratio of 78% of the net profit after tax and within our stated target policy range of 60% to 80%. The interim dividend will be paid on the 25th of March. I now pass back to Raimond to cover our outlook and strategy.

Turning to Slide 13. Thank you, Kim. So I can see that the business remains in good shape. Moving to Slide 14. Slide 14 outlines the key elements of our strategy. They are clear and unambiguous and importantly, consistent with what we've previously discussed. We're consistently looking for ways to expand our product portfolio. Currently, we have more than 1,100 active products and around 5,000 SKUs. I believe we can grow these significantly in years to come. We will also explore new sectors, new geographies if they make sense for our customers. We're always consistently adding technical experts to our team who are specifically tasked with supporting our customers to innovate, utilizing our ever-expanding product suite. For example, we have recently added an experienced metallurgist to our WA team to assist us to grow and develop our mining business. Of course, we're always looking to refine and improve our internal CRM and ERP system readiness. That, in large part, has underpinned the growth and success of Redox, and we'll continue to make strategic acquisitions, which encourages faster growth. With respect to the outlook, we expect the challenging macroeconomic environment to remain in 2H '25. However, we believe that Redox remains well-positioned to take advantage of recovery with strong fundamentals and volumes will continue to grow above the historical average. With gross margins now back within their historical average range, we also do not expect much change for the remainder of FY '25. For 2H '25, operating costs are expected to be similar to 1H '25. Turning to Slide 15. So to finish up before we move to Q&A, a brief summary. Redox operates in a large and attractive sector, which has traditionally grown faster than GDP. The company has much scope and opportunity to grow across various industries, geographies, and products. Redox retains a strong and flexible balance sheet with zero net debt. And with the fragmentation of the industry, the company has ample opportunity to grow strategically. Despite various challenges in the first half of 2025, we were proud to report an interim dividend of $0.06 per share in the first half. On that note, I would like to thank you for your interest in Redox. Kim and I will be happy to now answer questions.

[Operator Instructions] Your first question comes from Tim Piper from UBS.

First one, just on gross margin. So you've kind of guided to the second half being similar to the first half. I guess you've talked to the fact gross margin was to return to the historical range over the medium term. Maybe that's come around a bit quicker than expected. But as we roll forward, is 21.7% at the upper end of that historical range sort of sustainable? Or should we expect further moderation in the future?

Yes. Thanks for the question, Tim. I think we have to go back to what influences the margin, the GP margin in a business like Redox. The first thing is how much volatility in pricing there is. As prices stabilize, generally, the margin is compressed. Secondly, the size of -- the average size of invoices, the smaller the invoices, the higher margin you can achieve. And then there's product mix. So each type of product or product segment will have a different margin potential, let's say. And so it's really -- it is quite difficult to predict, but that's why I always talk about the long-term. The long-term average of the business is 20% to 22%, 21.6% or it is well in that range and towards the upper end. Can we grow some of those specialty chemicals faster than our commodity business? Perhaps that will increase that GP percent. Can we increase the number of small invoices and that will happen naturally over time as we grow in places like the U.S. and acquire these businesses that we've been buying. And the other thing is, obviously, the business that we've purchased, Oleum and Auschem had slightly lower margins, average GP margins than Redox. And so peppring in that business, at least initially, will negatively affect our GP percent, of GP margin in percentage terms. But over the longer term, we think we can improve and build on those businesses, yielding a much better margin. So hopefully, that answers your question. I think 21.6% is not terribly surprising to me. As I said, 20% to 22% is the range you can expect from Redox. I think last year's number, I pointed out many times was pretty unusual.

And can we just better understand the OpEx numbers that did come in higher than expected, particularly, I guess, the admin cost side of things? Can we just unpack a little bit what kind of head count increases rolled through and if that's to continue through the second half? And then maybe what the incentive payments? Just trying to understand like cost growth kind of been single digits for the last few halves and now has increased significantly to closer to 20%. So is this to continue through the second half? Or has this just been a rebased higher in head count?

In terms of the admin costs because we have added about 19 to 20 people head counts, that -- as we mentioned in there, that accounts for about a $2 million increase in the admin costs. And then in terms of wage inflation, that also accounts for around 5% increase in our wage cost. That also accounts for about around the $2 million mark. In terms of the incentive payments because in certain business units, the manager of the business units are paid based on the gross profit of the business. But the hurdle they had to overcome is they must increase in sales. In FY '24, all the business did not -- most of the business is not increase in sales. That's why there was lower than incentive payment for them. In this first half, there was increase in sales, and that's why they are entitled to the incentive payment. That's why the incentive payment this year was slightly higher than last year.

So wage inflation, 5%, is there some annualization of those added 20 people to roll through in the second half? And then what would your expectations be over the next 12 months in terms of new heads you'll be bringing into the business?

In terms of new heads, I think most of them have been added throughout the whole year. And the growth in the head count will slow down as we try to trade them up to digest them so that they are fully integrated into and understand our rev systems.

Yes. I think what Kim is trying to drive there is some of the head count came from acquired businesses, right? So it really depends on what the acquisition execution looks like in the second half, but also natural growth. As we grow sales, as we grow volume, as we grow the business generally, we want to be adding people to it to expand our potential, to expand our ability to capture the market, increase sales, increase profit. So yes, I don't have a head count prediction for you right at this moment. But we aim to grow head count at around the same sort of roughly margin that we grow sales. So over the long term, we grow 11%, probably a little bit less than that is what you can expect head count to grow year-on-year.

Just one last quick one, if I can. Just on the outlook for the second half in terms of volume growth. Obviously, your forward order book provides you with some good forward 6-month visibility. So what you're seeing in the order book sort of right now, is that predicting that sort of above historical average volume growth for the second half?

It's a great question, Tim that I think you've asked me 18 different ways since we floated. We're not disclosing our order book. But just suffice to say that we've got high confidence that the current rate of growth is sustainable and volume growth that isn't, so we're comfortable anyway. And we do have a healthy forward order book, of course.

[Operator Instructions]. Your next question comes from Chenny Wang from Morgan Stanley.

Maybe just firstly, unpacking some of that sales growth in the first half. You guys delivered that 9% and kind of talking volumes above historical. And I think you guys previously gave some disclosure that to kind of start the first half, you were running at that, call it, 13% to 14% level. So kind of putting that together, the price still looks to be about a 4% to 5% headwind in the first half of '25. I mean, like is that kind of a fair assumption? And then how much of that would be, I guess, price versus maybe product mix, how should we kind of think about that?

Great question, Chenny. Yes, certainly, as we pointed out in the press and the speech, Q1 FY '25, we're lapping much higher prices, and so there was quite a bit more effect headwind in Q1. That dissipated over the period. So yes, hopefully, that answers your question. Cool.

So does that mean that price in the second quarter was flat versus kind of the PCP? Or is that actually up versus the PCP?

It's flat, up and down within a range. If we're talking about average selling prices per tonne, they go up and down 2%, 3%, maybe 4% on a month-on-month basis. But in that, as you pointed out, Chenny, rightly, there's product mix, which is different month-to-month. And it is a little bit hard to sort of speak to price in any real specific way. But generally speaking, prices have been relatively flat since sort of October last year, something like that.

And then just, I guess, in terms of that color into the second half of '25, and apologies if I remember this incorrectly, but I thought price deflation had a larger impact in the second half of '24 than it did in the first half of '24. So I guess, given some of the price stabilization that you're now seeing into the second half of FY '25, can you kind of help us assess what the potential price tailwinds would look like into this half, if any?

So pricing tailwinds you're asking about, right? So what sort of tailwinds we got pricing? Well, I think if you have a look at the presentation, there's a slide there on freight. Freight costs have been elevated now for quite a little while, although they're coming back some amount recently. But those will higher sea freight will feed into our selling prices with a delay of a few months, maybe longer. So there are some tailwinds from some of those costs that we pass on to customers, of course. I think now there are tailwinds for inflation. I think there's more chance of inflation in some of these products and deflation anymore. It's certainly been flat for the last, like I said, since October. So what the future looks like for pricing, we're not prepared to sort of make any grand statements other than to say it's been fairly flat. And I don't see as much chance of prices falling as I do of prices going up.

And then maybe just on those freight costs. Can you just help us understand the net impact of all of that in the first half? Because it has been kind of volatile over the half. And while you guys do recoup those freight costs, I thought there may have been a lag. And I think you just mentioned that there's a delay of a few months. So yes, I guess just kind of interested, given that freight volatility over the first half, what the net impact to the P&L actually was. And it sounds like you should be getting a bit more of that back in the second half. Like am I interpreting that correctly?

No, I don't think you should be thinking about it that way. I think what you should be thinking about is if the freight prices go up, our selling prices go up. And we have to pass those prices on. There's no real great risk in that because as we book shipments, as we negotiate with customers, we're passing the actual freight rates to them in those prices. So what I was trying to sort of mention before was that the freight cost, sea freight costs have been elevated since sometime in January '24. And so that impact will be seen throughout the year past that in slightly higher pricing because, of course, we pass freights.

Your next question comes from Prasad Patkar from Platypus Asset Management, who asks, Raimond, could you please elaborate on why gross margin falls when selling price stabilizes? Is that just a timing issue for COGS in any other half? Or is that because your selling price and cost price move to different rhythms?

Yes, great question. Now, I think you can characterize it this way is that if you imagine prices being very volatile, price discovery is the point at which a sale happens, right? So our salespeople and our customers are negotiating prices consistently. There's no fixed margin. We sell at the market price and customers buy at the market price. And that's set by the activity of our people and our competitors and our customers. And so when there's a lot of volatility in cost prices or unit prices or our purchasing prices, there will be more volatility in market prices. And less visibility or understanding about pricing generally will lead to some margin expansion. I mean it's not a huge amount, but it is like as you've seen, with the amount of volatility we've seen in 2024, FY '24, there was a margin creep up. And that happens usually when prices are more volatile or have been recently very volatile.

Your next question comes from Christian Angelis from Blue Ocean Equities. Could you speak to pricing during the half and how things are tracking to date?

Well, yes, like I said, the first half, probably Q1, pricing was still a little bit elevated. Our selling prices were a little bit elevated, and they sort of reduced down and have been flat since October roughly then. So not a lot more to add to that other than pricing seems fairly stable and some anecdotal evidence that future pricing may or may not be a bit higher than the current first-half price.

Your next question comes from Jared Grills from Plus, who asks, is there a gross margin level where you wouldn't chase volume?

Of course, yes. Look, we have to have a return on our invested capital. And we carefully consider every piece of business and try to weigh up our options. I think if you'll indulge me for a moment, we have a lot of cash, and we have a lot of options, and we're exploring them all. Acquiring businesses, it's good, and we've been doing that, of course, as you've seen. One other way is to take business at strategic margins to secure them, secure that business ourselves without the long and arduous task of negotiating with business sellers. So look, some of it we'll get our foot in the door with a sharp price, and that's the strategy we use, and we'll continue to do that. I think longer term, of course, you can't do that. It's not sustainable. So we'll do that from time to time to hedge our way into markets, new markets, new products. But yes, certainly, it's not sales at any margin. That's not the case.

Your next question comes from Wayne Jones from Ganes Capital Management. Have you seen an increase in the number of acquisition opportunities since you have listed?

Yes and no. No, I'd probably say no, really. I mean we've got -- it seems like a lot of investment bankers have got our phone number and call regularly, which is lovely, and love taking their calls, and they bring a lot of opportunities to us, which is nice. But to date, all the acquisitions we've made, we've had either our personal relationships with them, with the owners or we've had some help with advisers that we've employed ourselves. So yes, look, it's -- our M&A pipeline is pretty strong. I'm very happy with the way it's been developing as part of our strategy, of course. We've recently put on a U.S. M&A expert adviser, and he's bringing up some really interesting opportunities we wouldn't have found otherwise. But yes, being listed alone is not the panacea to the M&A question. It's a lot of hard work, especially from Kim, myself, and the exec team and directors. So yes.

Your next question comes from Christian Angelis from Blue Ocean Equities. Another from me. Can you just flesh out the dynamic in the U.S. in a bit more detail? Is the weaker result because of the revenue is quite cyclical until you reach a particular level of customer and industry diversification?

Thanks, Christian. Yes. Look, I think just to go back to the fundamentals and what I love about Redox, right, is the diversity of our customers and the industries we're servicing and the amount of products that we're selling here in Australia and New Zealand and other places where we're more developed. The U.S. has less dimensions to it because we're newer. We've got less customers. We've got larger invoice values. And that's necessary. It's part of the evolution. It's expected. And it means that you can have some swings. The things can be the other way, too. And we had a good result in PCP. And so I think it's easy to see this one and be disappointed, but you need to look at the last one and be impressed, I think. anyway, we're very comfortable with the way the business is growing there. We're putting more people on the ground. We're opening -- we just opened an office in Ohio. We've got someone who's going to be working for us in New York, New Jersey. And then I think we'll have pretty good coverage. And we're growing our team as well. We're doing a lot of training. And as we get those people coming online, we'll pick up more medium and small businesses, and that will make us more resilient and less prone to swings between periods.

Your next question comes from James Gouldson from Koda Capital. How may the Trump administration's policy approach to tariffs impact your U.S. operations?

Well, yes, tariffs are a thing that Redox has always lived within the U.S. as well as other places. I would say just a general comment on this is that tariffs are one tool that can give pain, but everyone is exposed to the same thing. So I think some of our largest products we sell in the U.S. are actually made in the United States, and we're very proud of that, being able to source locally and sell locally in the U.S. Of course, any kind of change will upend our competitors who more often than not have the business currently. Redox is a newcomer to the U.S. We're a little upstart. And so every time a tariff comes and dislodges maybe the current supplier, Redox has the opportunity to come in there and say, look, if your Chinese product, you've been buying off competitor X isn't competitive anymore. We have an Italian product or a Spanish product or a Mexican product or a product from somewhere else. So actually, I think it's a bit of an opportunity. That's my view.

We have another question on the phone from Rushil Paiva from Ord Minnett.

Most have been covered off. I might just ask a couple on the U.S., if that's all right. Maybe just a little bit more on M&A. You did mention that you've recently added a U.S. M&A adviser and that brings some interesting opportunities. Can you maybe just elaborate on, I guess, what your targets are there? I know you've talked in the past about effectively trying to add a distributor that has the relationship. It's a bit different to the Auschem strategy. But that still the case or are there any particular parts of the U.S. market you're targeting? And I guess just from a multiples perspective, is that the biggest, I guess, hurdle that you faced up to now? And where are asking prices or asking multiples for potential acquisitions in the U.S.?

Yes. So there's a few questions there. I guess, first off, what are we looking for? It hasn't materially changed. I mean we're looking for a business like ours with lots of relationships in the U.S. I think we're sort of open to -- if you want to think about the size of business we're looking, $30 million is about the low end and $150 million might be the top end of revenue, but we're open to a lot of different sectors. I guess we want something that's a bit diverse with a diverse range of industries that it sells to. We don't want it to be all in on oilfield, for example, or all in on one sector, unless that sector is very, very resilient. And yes, but look, I think the reason we haven't executed on an acquisition in the U.S. until now, yes, a few years ago, I think it was more about prices. But I'd say more recently, we've probably been a little bit pickier about the quality screen that we use for businesses. And I think we've learned a lot from the acquisitions we've made, what works and what doesn't, and what things to look out for. And so we're always thinking ahead to the integration, the synergies, what sort of uplift can we give it. And so I've always said I'm not going to apologize for taking our time. I know that's high on everyone's generally pooling wine. But I think we want to be careful. We want to be measured. And we're open to businesses there in different sectors. I think the business that we do here in personal care, in food, in animal feed, those are all really high on our agenda, too, in the U.S. and we've done some good work. I'd love for the acquisition to be in that area. But geographically, look, we're open to wherever in the U.S., I think would be pretty hard to throw a dart at the U.S. map and think it's a bad place to have a business at the moment.

And sort of, I guess, following on from the question regarding tariffs. But just looking at your inventory position has increased a little bit. It's still very much in line with historical levels. But just in light of, I guess, some of the geopolitical tensions or aspects at the moment, how do you foresee that inventory position and I guess, your net working capital going on from here?

Kim, we are saying the net working capital ratio will be in line -- will continue to be in line with our historical range. As the business grows, the net working capital will grow, but it's still within the 30% and 32% of our net of the sales revenue.

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

Great. So thanks, everyone, for joining us today. I'm very proud of what we've been able to achieve. I think the business is in a really good position. I want you to be confident in the company. We're going from strength to strength. And yes, I look forward to speaking to you at the full year with some more good news. Thank you.

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