Redox Limited (RDX) Earnings Call Transcript & Summary

Good morning, and welcome to our half year 2026 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 passing to Kim to take you through the financials. I'll then come back and ask -- add some comments on our strategy and outlook. We'll then be happy to finish by taking some Q&A. Turning straight to Slide 4. Against a subdued global demand backdrop, Redox delivered sales growth of 6.6% to $674 million against PCP, driven by recently acquired businesses and particularly strong outcomes in our Industrial and Food segments, as well as North America. Pleasingly, our gross profit increased 5.9% to $145 million, while gross profit margins remained resilient at 21.5%, which demonstrates the strength of our operating model and cost discipline. Once again, we've included our conversion margin in this highlights package. This metric is widely used across the industry to demonstrate the impact of cost growth on the financial result. Our 1H '26 conversion margin of 44.7% benchmarks well against our global industry peers, confirming our competitive cost structure. Meanwhile, the business continued to generate excellent cash flows and overall, our net cash position at the end of the half was a healthy $145 million with 0 net debt. This position provides us with significant capital to take advantage of strategic M&A opportunities decisively. On behalf of our shareholders, we produced pro forma earnings per share of 8.3%, up 8.9% against PCP and an after-tax ROIC of 14% on H '26, which increased 0.5 percentage points against PCP. The Board was comfortable declaring an interim dividend of $0.065 per share, which equates to a payout ratio of 78% of NPAT within our 60% to 80% target payout range. Moving to Slide 5. Slide 5 provides a more granular look at the drivers of sales revenue during the half and associated impact on gross profit and margins. Sales outcomes were consistent with what we would expect in the current environment with acquisitions and market share gains offsetting softer underlying demand. It is worth noting, however, as you look at the charts on the right of the slide, that sales and profit trends remain strongly positive. In terms of some individual sales segments, industrial sales were particularly strong in the half. The 29% increase in sales was largely due to the strong contribution made by Molekulis, our distributor of transformer oils to the power generation and transmission industry and some significant customer wins in North America, while food sales also increased on the back of some new customer conversions and share of wallet wins. Our Human Health & Nutrition segment declined in the half as demand softened in New Zealand. We were pleased with the resilient margin in the half and expanding sales in North America, and product mix being the principal drivers. Importantly, pricing remained broadly stable, so growth was driven by volume, mix and acquisitions rather than inflation. Turning straight to Slide 6. I've included Slide 6 this half just to remind everyone of the breadth of the Redox portfolio. As sales from our recent acquisitions continue to grow, the size and contribution from each segment has shifted slightly from what we provided in FY '25. I anticipate that segments will continue to evolve over time as we grow organically and by acquisition, in turn, expanding our SKUs and product range. This breadth is particularly valuable in periods of uneven demand as softness in one segment is often offset by strength elsewhere. I'll now pass over to Kim, who will take you through the financials.

Thank you, Raimond, and good morning, everyone. Turning to Slide 8. This slide sets out some of the key P&L numbers for 1H '26, comparing them to the performance of the business in 1H '25. I will walk through some of the key highlights. As Raimond has already noted, top line revenue increased 6.6% in the first half despite subdued demand. Sales growth in North America and our acquired businesses helped to drive growth as product mix improved. Gross profit rose 5.9% to $145 million. Underlying EBITDAFX increased 4.7% to $65 million, with cost growth remained well controlled relative to revenue growth. EPS of $0.083 per share reflected a 8.9% increase on PCP. And the return on invested capital increased 0.5 percentage points to 14% as we deployed more of our cash to fund acquisition. Moving to Slide 9. Slide 9 shows the revenue and gross profit in more detail. As we have done previously, we split our total revenue regionally. Australia and New Zealand sales in 1H '26 were 5% higher than PCP, a solid result given the softer demand conditions in certain segments, particularly within the New Zealand Human Health. Meanwhile, growth momentum in North America improved sharply in 1H '26, driven by expansion in the new industry sectors and additional active products. Turning to Slide 10. Slide 10 shows the operating costs in more details. Underlying operating expenses increased $6 million in 1H '26 to $85.8 million, spread put in volume-driven expenses and increase in administration costs, which were primarily staff related. The increase in administration costs include $2.4 million of other expenses driven by additional lease amortization and higher tax and climate reporting and compliance costs. Importantly, when we look at our cost structure relative to our industry peers, we are comfortable that our commercial margin of 44.7% benchmarked well. Moving to Slide 11. Slide 11 demonstrates the strength and the financial flexibility of Redox. Cash flow from operations was strong in the first half, increasing $50.2 million to $62.2 million. Due to the timing of incoming shipments will result in lower inventory, the free cash flow conversion percentage improved to 91.4%, up from 19.7% in 1H '25. While this level of conversion is above our normal range due to timing, it demonstrates the inherent cash-generative nature of the business. Moving to Slide 12. Radox finished the half with a great net cash position of $145 million. This put Radox in an enviable position of having the capacity to grow strongly, both organically and by acquisitions. Moving to Slide 13. As Raimond discussed earlier, our Board has declared an interim dividend of -- for FY '26 dividend of $0.065, up from $0.06 per share in 1H '25 and represents a payout of 78% of net PAT, within our stated target policy range of 60% to 80%. The interim dividend will be paid on March 25. I now pass back to Raimond to cover our strategy and outlook.

Great. Thanks, Kim. Turning to Slide 14. So I hope you can see that despite the relative soft environment, Redox remains in very good shape. Slide 15. Slide 15 provides a familiar snapshot of some key metrics of our business. As you may have seen Slide 15 previously, I won't dwell too long here. But you'll note that we're a large successful company with over 8,000 active customers, selling over 5,000 SKUs, partnering with more than 1,000 of the globe's finest manufacturers. We are constantly looking for ways to expand our product portfolio and technical expertise and expect these to grow these formidable numbers in years to come. Of course, we're always looking to refine and improve our CRM ERP system, Redebiz, that, in large part, has underpinned the growth and success of Redox. Along with our amazing 200-strong sales team, Redebiz is a real key competitive differentiator that underpins our scalability and consistency. Turning to Slide 16. While market conditions remain dynamic, Redox's diversified platform, strong balance sheet, asset-light model, and disciplined approach to M&A position the company to act decisively as opportunities arise. On that note, I would like to thank you for your interest in Redox. Kim and I will now be happy to answer questions.

Our first question comes from Vignesh Nair with UBS.

Can you hear me?

Yes, we can, Vignesh. Nice to hear from you.

Awesome. Likewise. So just a key question on the U.S. business, obviously, a standout in terms of the segment here. Are you able to sort of dive a little bit in terms of the industry segments of the customers that you've won and also perhaps talk about the repeatability of this performance into the second half?

Yes, great question. Look, I think something that we've said to investors over the years is that our U.S. business is growing. It's growing solidly. It's growing well. It grows in fits and spurts sometimes. That means because it's less mature, you may have periods of fast growth and then more subdued growth. It's nothing to sort of celebrate or commiserate about when it goes one way or the other. We've seen a lot of great work being done in the industrial area in the U.S. personal care, food; it's really broad. And the business as it matures will be more predictable. But look, I'm seeing no reason to see that the business is going to keep growing strongly. And especially if we can execute some of the M&A opportunities that we're working on, that will help that business mature even faster and become even more strong and solid into the future.

So is it safe to say the last sort of 6 weeks of trading suggest that the trends from the first half in the U.S. are sort of continuing in the second half?

I'm not going to talk about the last 6 weeks. But look, just suffice to say that we see a lot of opportunity in the U.S. What we've got is something really compelling and customers there are flabbergasted with the sort of products and the access we've got to manufacturers that have never even heard of. One example is a product that gets used to de-ice airplanes. And we had a very large proportion of the Australian market and New Zealand market, but it was a relatively small one. And we've found a huge market in the U.S. for it. Just a few phone calls, a few discussions, very quick contract negotiation, and we had a huge, huge customer win. And that can happen quickly, and it keeps happening. So look, it's an exciting market. I know why everyone is interested in it, so am I. I think there's more big things to come.

Awesome. The second one was just around the M&A comments you made as well. It's been a bit of time since the last one. I suppose two questions. Firstly, what kind of industry segment are you potentially targeting for the next acquisition? And sort of secondly, can we expect something in the next couple of months, or should I say in the first half of the calendar year?

Vignesh, if only I knew exactly, these things -- we have long conversations with owners. In a way, really successful M&A requires us, the buyer, to really get to know the culture of a business and really deeply understand its value add and its positioning. And that takes time. And we want sellers to become really comfortable with Redox as well. So we don't rush things, and that gives us really good results, I think. We've got many -- we've got a very full pipeline in the U.S. of M&A, but we're working through them diligently, carefully in a disciplined way. We're hoping to execute something in the next 12 months, but that's the best I can; let's see. You never know how these things go.

There are no further phone questions at this time. I will now turn the call over to Howard Marks for any questions from our webcast audience.

I do have a few questions. One -- first from John Lawlor from Ord Minnett. While prices remain broadly stable in the first half of '26, is there likely to be any increase in the second half as inflation continues to run relatively high rates in most market geographies?

Good question, John. I think you've got to think about those basic principles of supply and demand. And our products are no different to any other. At the moment, you've got a lot of capacity being closed down. So month by month is reducing supply to meet the more subdued demand. And you've seen a lot of plant closures in Europe, especially, but many in Southeast Asia and North Asia as well. So I think that will catch up. Certainly, with prices being stable for this long, I still firmly believe the only way is up for pricing. I don't believe there's a way for prices to go down lower. So yes, look, I would say there's more pricing pressure upwards from manufacturers than there is pricing pressure downwards.

Next question from Christian Angelis from Blue Ocean Equities. Congratulations on the solid result. I see you have added a number of new salespeople since the AGM, could you touch on where you have allocated that headcount?

Yes. Well, some came through acquisitions, some through natural growth and they're spread throughout the company in the U.S., in Australia, elsewhere. Yes, I don't have the numbers in front of me, but we're always looking to add people to our team. It's a real growth driver to have people out there telling customers about your company, its products, explaining the technical advantages of using those items in their manufacturing process. And honestly, nothing will replace that. It's a really important thing we're doing. So there's more people, but they're very useful and they're all over the company from Australia to the U.S., and everywhere in between.

Thank you. Another one -- another question from an investor. With such a strong balance sheet, why have no recent acquisitions taken place? Is it you haven't found the right business or are prices too high? And there's a second prong from that. Have tariffs been an issue in the U.S.A.? What costs have you seen?

On the first question, I think I kind of answered a little bit before, but what I think -- where an M&A strategy goes array is when people are undisciplined, they don't think about sustainability of earnings. They don't see through the sellers start dancing and very nice presentations. And I think we're really careful and diligent, and we can make no apologies for that. I think we have to make sure that the culture of the business we're buying will gel with ours and that there's a good strategic fit that there's not value destruction from an overlapping products or customer point of view, especially for the U.S. That's less of a problem. But certainly, the other issue is, yes, the tariffs have made that harder to do, harder to decipher. So you have to do quite a lot of work to work out the competitive positioning of targets in the U.S., but not impossible, but you just want to be that extra bit careful. And our approach there is to spend a lot of time, a lot of time talking and understanding a business first. So tariffs generally have been changing a lot, and we would have all seen the news on tariffs. India got this tariff and they changed it. And that's all unhelpful. It's not the end of the world. As you can see, our U.S. business is growing through those difficulties. We're growing despite that. But it makes the job harder because customers are more careful about their ordering when they think that maybe if they wait a little longer, the tariffs will fall or maybe they should try to get around them by buying some product from somewhere this place, that place. It's just unhelpful. We just hope they've settled. I think customers and the business community at large would like some surety so they can get on with investing and being more sure about the future. So yes, tariffs unhelpful. Let's see them calm down, be put in place, be a bit more solid going forward. That would be nice.

I have another question from Tim McArthur at Asymmetric. Could you discuss what is working well and areas for improvement within the North American business? I've got two more. Did you expand in the North American regions during the half? And the third one, was the North American growth driven by new customer wins or growing volumes from existing customers?

Okay. A lot of questions. Okay. Well, Tim, first, what's working well? I think what's working well is where we have done things a little bit differently. Like, for example, we've hired a local sourcing expert in the U.S., put that person on our team domestically over there. And she's really doing a great job in talking to all the local domestic manufacturers, and that's giving us another opportunity to sort of ingrain ourselves in the local domestic chemical manufacturing and distribution market, which is great. I think what's also working well is transferring wins between different geographies. For example, a customer who we deal with here in Australia, leveraging that into the U.S., and that can happen vice versa as well. Also, looking at our product range and the products we're very strong in, in Australia and saying, well, what are some uses that may not exist in Australia and New Zealand for those products, but they do exist in North America. I was talking about the deicing airplanes. You'll -- no one will be surprised to hear there's not much deicing of airplanes in Australia, but there is in the U.S., and that product gets used in a different application here in Australia. So recognizing that we may have strength in products where we've used up most of the available market here and concentrating on taking those profitable products and selling them into a new market, that's a great way to use our strength. Expanding geographically, I expect you're mentioning there. We've last had -- our last new office was in New Jersey. That's still the last office that we've established. I think that's what you were talking about there. And our wins, whether they're new customers or share of wallet, the answer is a little bit of both. I don't have the exact split. But yes, it would be a very strong increase in both of those.

Thank you. A question from [ Mark Younger ]. How much of the Australian revenue growth of 6% was from acquisitions?

Of the total growth, it's about 60:40 organic to inorganic. So the vast majority well, the majority was organic. I think Molekulis during the half may have contributed $17 million or something like that.

That's all the questions I have online. Anything back on the phone?

No further questions at this time.

All right. Well, thank you, everyone, for joining us. We'll talk to you soon.

Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.