Paragon Care (ASX:PGC) Presentation, FNN Online Investor Event, March 2021

Company Presentations

Paragon Care Limited (ASX:PGC) CEO Phil Nicholl provides an overview of the company, discussing the company's diversified portfolio, its competitive advantages, the market opportunity, and its new growth phase.

Good afternoon, everyone, and thanks for your time. Thank you for the opportunity, Clive.

To start with, I'd like to share a bit about Paragon Care (ASX:PGC) and who we are and what we actually do. Paragon is a leading provider of medical supplies and equipment across Australia and New Zealand. The majority of our business is representing manufacturers who don't have a presence in Australia and New Zealand. But that being said, we do have two manufacturing businesses within our pool of companies. We actively look to source technology from all over the world through our existing supplier networks and through expanding those, and quite regularly, almost daily, we have manufacturers and OEMs approaching us to represent them across Australia and New Zealand, and more often than not, we don't, but it's a two-way street. We also go to look to source product that we think has a need, whether that be through our own hunting, or through recommendations from some of our key customers.

We have scale and relevance, which is really important in what's a very fragmented distribution market. We have over 400 staff across our teams. So, we have a full function of sales, marketing, regulatory, logistics, warehousing, which is attractive for any overseas manufacturer wanting to get in. That's not an easy thing to do, and it means they can get up and running pretty much straightaway, versus what could often take years. Next slide please, Clive.

So, we represent either 100 well-known brands across Australia and New Zealand. And we do that through a suite of companies that Paragon has acquired over the years. So, companies like Lovell, Surgical Specialties, Scanmedics, Designs For Vision, Immulab have all become under the Paragon umbrella over the years. And I'm an example of that. So, with that, that's the heart and soul of the company, the company that has been acquired, and with that comes some very longstanding relationships. So, for example, myself, I came in with the Surgical Specialties business. I've been in that space for 25-odd years. So, a lot of our key customers that we're talking to now I've known from when I first came into the industry when they were training, and they're now professors or heads of departments. And that helps give us access to the key decision-makers and also opens doors for the more junior people in our teams. And that could be said and be true for of all the businesses within the Paragon families, so Design For Visions, Immulab, etc. Next slide please, Clive.

These portfolio of companies have been organized into four different pillars, and we've been very conscious of being diversified. So, we have what we call the devices pillar. Within that pillar are hips and knees and intraocular lenses. We have the diagnostics pillar, which is blood-testing equipment and COVID-testing equipment. We have our capital and consumables business, which is ultrasound, lithotripsy-type equipment and then with that goes an ongoing stream of consumables. And then we have our service and technology pillar, and within that pillar, we have 60-odd engineers across the country who maintain and service the equipment we sell. But we also provide service capabilities for those companies that don’t have a service function themselves. Also within that pillar we have a business called Total Communications, which provides patient monitoring to the aged care facilities. Across all these pillars, both front and back office, we have over 400 staff across Australia and New Zealand. Next slide please, Clive.

So, we see that as a clear competitive advantage. We have scale, we have relevance, and we have diversity. So, we don't have all our eggs in one basket, but our products do complement one another. And the customer is very much at the centre of our focus. So, in some instances, we will go and source product in partnership with a customer who's looking to bring technology into the country that isn't available. And they may see that at an industry event. And in some instance, we manufacture our own product, like within our Immulab business, but also more recently, we've seized an opportunity for COVID test kits. So, nasal swabs and saliva test kits through COVID, we've been able to cross-sell that across and create an opportunity within our business, which is also a key focus for us. And now there's talk of that becoming an export opportunity. So, we offer a very broad range of supplies to a very broad customer base. Next slide please, Clive.

Within that space, we see the market opportunity is in the order of $4.5 billion, and we've got a very relatively small market share, and the tailwinds within that sector are also in our favor. So, there's an aging population and increasing chronic disease. So, there's a great opportunity in the space that we provide, given we are only in low-single digit share. So, we see that as a big opportunity for us to grow. Next slide please, Clive.

Paragon's growth, up until recently, so between '15 and '18, came very rapidly through a series of acquisitions. There was 17 different companies that were brought into the Paragon family in a relatively short period of time. And, through that, the focus was around... the growth was through acquisition. The last couple of years, there's been more of a focus on integrating those companies, and that came with some teething problems, ERP platform being one of them, but of recent times in the last 18 months or so, we really feel we've made a big progress in that area. And so a lot of the issues that we were facing, we're now very well-progressed through. So, now the mandate is very much on focusing on growth and that's revenue growth, but also improved profitability through operating more efficiently in some of the programs that were put in place there, like lean, focusing on our freight costs, looking at our inventory management, and cross-selling amongst the divisions to leverage the opportunity that we have. Next slide please, Clive.

We've got a very experienced board. We go back to our founder. He was with the company from the beginning, our chairman, and then up till more recent times, we've had Paul Li join the board. Paul's also a major shareholder through his company, China Pioneer. Next slide, please.

I came into the role in December 2019, along with my CFO, Stephen Munday, and our market cap is around $82 million and our enterprise value is $159 million. Next slide please, Clive.

Now we're going to get on to the financials, and we had a very good first half. One of the things you'll see across this is where... some of the feedback is we've been more transparent. So you'll see, we are being more transparent here. We were able to maintain our revenue, more or less, during a COVID environment. And that's very much a function of the diverse portfolio that we had. We were hit in our aged care and our elective surgery-weighted businesses, but we were able to offset that through the other businesses. So, the portfolio effect really kicked in, and we were able to maintain our revenue. We grew our EBITDA by 63 per cent through the efficiencies, and that's now business as usual. So, some of the cost savings that we've been able to extract are now business as usual, and we've reduced our net debt. Next slide please, Clive.

More detail on revenue and margin growth and our cost savings are provided through more transparency. So, for example, we, over and above the benefit we received from JobKeeper, we've been able to extract $2 million in savings and employment costs, and our net profit after taxes came in at 271 per cent up on prior year. So, a lot of the things that we're doing, we're very pleased are flowing through into our profitability. Next slide please, Clive.

We've been worked on improving our balance sheet, and this is how we've been managing our capital, so our debt is lower, our inventory's lower, and at the same time we've maintained our creditor balances. We reduced our working capital cycle from 161 days through to 133 days. Next slide please, Clive.

Cash flow's also been a key focus for us. So, I'm pleased to say in the first half we've achieved a $24 million improvement on prior year. So, we came in at $15 million positive as opposed to $8 million negative last year. And, at the same time, we've been able to pay out $15 million in vendor payments, all funded through our operating cashflow, and that's the end of those. So there are, now, there are no more vendor payments payable. Next slide please, Clive.

This gives you an indication of the portfolio and how that kicked in over the COVID period particularly. So, you can see ups and downs. And as I mentioned earlier, our service and technology business got hit particularly hard, but that being said, we were able to offset that through our diagnostics and our devices pillar. So, once again, the portfolio effect put us in good shape during that time. Next slide please, Clive.

We delivered $7 million in annualised savings, and you can see where we were able to extract that. And again, we're being more transparent of what we're doing and how we're achieving these savings. But for an example, as we have acquired all these businesses, with those come facilities. So, we were able to, combined with our transition to a pillar structure, close down our two biggest facilities and absorb those back into the facilities within the pillars, so that alone minimised duplication, it acquired savings for us and it also helps us become more efficient. Next slide please, Clive.

We increased our EBITDA by 63 per cent, as I say, and again, we're showing you where all that's coming from. As you can see, the big ticket items and a general trend of better expense management across the board. I won't go into the detail, but you can see where that comes from. Next slide please, Clive.

So, in terms of our outlook, our strategic priorities are very much focused on organic growth and increased market share across our businesses. We're leveraging our existing sales footprint to both Australia and New Zealand for cross-selling, we're looking at expanding our new agencies, and continuing to increase our profitability through becoming more efficient. So, lean processes in our operations, much better focus on our inventory management, and also just leveraging our buying power. With freight alone, we expect to extract 10 per cent out of our freight just through leveraging our buying power and centralising our contractual arrangements there. Next slide please, Clive.

So, we believe all of this has set us up with a very solid foundation for the future. We're very much through a lot of the teething issues that we faced through the integration, so our focus is very much now on leveraging the assets that Paragon has acquired. And we think our revenue will be in line with prior year and then focus shifting towards growth in the following year. We continue to improve our margin. We're looking to get back to 15 per cent EBITDA margin over time. And the board is very focused on reinstating our dividends as and when we're in a position to do so. That is a key focus for the board.

So, I might wind it up there. Thanks Clive, and thanks very much again for your time this afternoon.