Paragon Care: Interview with CEO Phil Nicholl

Paragon Care

We spoke with Phil Nicholl, CEO of Paragon Care (ASX:PGC), about the way in which the company has managed to integrated multiple medical product distribution agencies and is now set for some good growth as the Australian healthcare sector expands. Phil is also looking forward to 15% EBITDA margins in the medium term.

 

Read our most recent article on PGC here

 

Transcription

 

Stuart: Hello, my name is Stuart Roberts, and welcome to “Stocks Down Under.” I’m one of the co-founders of our publication. And with me today on the 22nd of September, 2021 is Mr. Phil Nicholl, who’s CEO of Paragon Care, ASX code PGC. Phil, thanks for taking the time.

Phil: Thank you, Stuart. Great to be here

Stuart: Now, if I wasn’t editing “Stocks Down Under” I would kill to have the job of CEO of Paragon Care right now because you’ve got a pretty strong growth profile ahead of you, $100 million a year revenue business supplying all sorts of medical supplies into the Australian and New Zealand healthcare systems with relationships with a lot of key suppliers, and hospital, and other groups. So long as you execute that effectively you’re a strong growth company. Tell us how Paragon came together. It’s a number of different businesses that have aggregated over time that you’ve now bought under one roof.

Phil: Yeah. And I’ve come from one of those. I was one of the vendors and CEO of a company called Surgical Specialties that was part of the acquisition. So I’ve sort of come from that side, but yeah, our revenue’s actually 236 million for the last reported period.

Stuart: My goodness, you’re growing quickly from 100 million up to 200 million.

Phil: Exactly. Yeah. There was about 14 different acquisitions between ’15 and ’18 on top of what was already there. So there’s a roll-up story and we’ve been working on more how do we get focused on some integration to leverage some of the fantastic assets that Paragon has acquired over that time. And during the last couple of years, we’ve been integrating those into pillars. So we’ve organized the different companies into four different pillars and those pillars are devices, so that’s eyecare and hip and knee and pain business. So that’s one pillar. The others is our diagnostics business, which is our Immulab business, our blood reagent products, our laboratory equipment, that type of gear. We’ve got our capital and consumables business, which is lithotripsy, and ultrasound equipment, and the consumables that go with that. And then we’ve also got our service business, which is a sort of a combination of two businesses. It’s our total communication business, which is our patient monitoring systems and communications within the aged care.

And then we also have a full engineering service, that service is not only the equipment that we sell, but it provides OEM service support for companies that don’t have that capability. So for example, we do work for ResMed servicing their sleep apnea masks across the country. So we’ve got a broad suite of products and we’ve [inaudible 00:02:56] of companies and products within that, that represent over 100 different well-known supply, our brands. And we have two manufacturing facilities, that being our Immulab, which is the blood reagent business, and our Lovell business, which is a surgical pack business. So, we think we’ve got a great group of companies that we represent. And you know, we’re a fairly unique opportunity for companies that want to enter the Australian market that don’t have a direct presence because we have a full capability there.

Stuart: Now, one of the things that would keep you awake at night, I imagine is finding good people. Like, to find someone who can properly represent one of those brands that you work with in order to make sure that the hospitals are regularly ordering that product. They’re not easy to find, right?

Phil: They’re not, but that’s really the essence of what Paragon is. So within the Paragon family, there are some great gems of companies. And with that, the vendors who have built those businesses have typically been in their particular sector for 10, 20 years. And with that comes deep-seated relationships, but also not only with the customers and the decision-makers but also with the suppliers. So they’re very passionate about their businesses, they remain passionate, that’s the makeup of our senior leadership team, form the vendors like myself. And we’ve brought in additional capability as we’ve grown, like operational and people and culture capabilities. So those people are very established within their particular industries. And then with that, they attract good talent and they know who the good talent is within the business. So it’s a great combination. I think that’s one of the real essence of the Paragon story, it’s a collection of really great businesses that make up the Paragon family. My job is to pull ’em all together in an orderly way and allow them to take it to the next level of growth. So Id’s say it’s a really exciting opportunity.

Stuart: Now, to that end, it hasn’t always been easy. You’ve had to go through a remediation period with some of those acquisitions when you bring together intensely people, businesses like that, it sometimes take a bit of work. What strategies did you adopt to work your way through that period, which is now behind you, so you can actually grow?

Phil: Basically to engage the fantastic capability and talent that Paragon had acquired. And, you know, one of the things that I inherited when we came was a poorly executed ERP plan, so there was an aggressive timeline to bring all the different companies onto one system, one ABN, one bank account in a fairly unrealistic timeframe, which was a real distraction to the business. And, you know, it took people away from what they really, you know, do best. So when we came in, we sort of put that on ice, went back to the systems that were serving us very well, put a tool across the top of that. And now the team and the vendors are very much focused on, you know, the customer, the suppliers, and doing what…you know, the more fun side of the business. So really my job was just to remove those barriers, but also reengage those key people within the business that now form the backbone of our leadership team. And having been through that journey myself on the other side of the fence, you know, I sort of knew where, you know, the low hanging fruit was to go and tackle that. And we just did it in a very pragmatic way. And a lot of it was just common sense really.

Stuart: Right. And what you were saying before was there’s more growth where that came from. Australia is an economy more than a trillion dollars in size, I think. That then offers an opportunity for a lot of people to sell into an advanced healthcare system, possibly brands that have yet to arrive in this market. And I imagine you have business development people talking vigorously to some of the new alliance that you wanna bring in here. What can we expect to see in the next couple of years?

Phil: Yeah, that’s exactly right. A lot of these businesses that make up Paragon, that’s how they’ve developed over time. So, we have our general managers and the sales managers, you know, looking for new technology all the time, but equally so because we’re a national footprint across Australia and New Zealand with full capabilities of, you know, regulatory service, sales, engineering, logistics, all those marketing, all those functions. If you want to get into the market, it’s very easy for someone to get in there quickly through an established distribution channel, as opposed to trying to figure out themselves and go through all that. So, you know, our focus is expanding our portfolio through the, you know, existing relationships. And then we also have customers coming to us saying, “Look, I saw this technology in whatever market,” you know, whether it be the U.S., or Europe, or wherever, and say, “Look, I’d really like to get it. Can you see if you can source that for us?” So that’s the other opportunity that we tap into and, you know, the beauty of what we have is if we’re not beholden to one master manufacturer. So if we see technology that we wanna bring into the market that’s not here, we can go and approach that company, or they approach us. And if it makes sense and we can work with them, then we bring it in. So, you know, we’ve got the best of both worlds if you like.

Stuart: Sure. So if I’m a medical device entrepreneur in Minneapolis with a new product, I can just pick up the phone and call Phil Nicholl and he takes it from there, basically?

Phil: Absolutely. And typically what I do, depending on where it is, I’d introduce that to one of our team that sits in that area. I mean, obviously, we’ve got our four pillars, so they’re certain areas that we feel we’re, you know, we can add the most value and if we can add value to them and they’re attracted to us, then we figure out a plan and likewise, a lot of them that we don’t because we know what we’re good at. And, you know, we build upon that and, you know, if it works for them, it works for us. And, you know, we try to build value both sides, and that’s really… You know, a lot of our opportunities come through referrals from our existing suppliers.

Stuart: Sure. Now two things that have had people worried about Paragon and one is the debt level. You finished financially year ’21 with about 100 million in debt. Pause that during 2021 where you went to speak to your bankers. Now, I understand they’re being very nice to you right now. And you in turn are handling that level quite comfortably.

Phil: That’s right. We, you know, one of the first things, you know, I did or we did when I was put in the roles we went and met with the bank. We were very transparent in where we were at as a business, and equally what we were gonna do about it. We’ve been very upfront with them all along the way. You know, as I said earlier, COVID hit after that, but we still pressed on and we’ve gradually, you know, we’ve basically done everything we said we were gonna do. We came to a point where we had to renegotiate and they were very supportive through that journey. And so much so that we’ve renegotiated a three-year deal with the bank, and they’re very happy with us and we’re very happy and appreciative of the support they’ve given us through the journey.

So it’s worked out well. We’ve got a plan to get that debt down. Our net debt at the moment is 69 million. The plan we’ve just paid another 4 million down in July as part of that plan, which we worked on with them on the pace. And we have a little bit more to pay out the balance of the year, but not to the same, you know, not 4 million. I think it’s another, you know, 2 million to go or something over the course of the year, but, you know, very manageable from our point of view. And it’s a good, good relationship, and appreciative of their support.

Stuart: Now, the other thing I think that people have misunderstood about your business is that COVID is bad for business. Now, there were certain products that you weren’t selling as much of while elective surgery was suspended as it is here in New South Wales at the moment. I suspect Victoria’s the same, but really that’s just revenue deferred. Elective surgery will eventually come back. In fact, there’ll be more of it because it’s been deferred. So it’s fair to say that COVID is really not an issue for you if you look forward a year or so?

Phil: In the longer term, we don’t. I mean, it certainly wasn’t helpful in the past year but that’s where our portfolio effect kicked in very nicely for us. So whilst elective surgery was put on hold that mainly affected our devices business. So things like hip replacement, knee replacement, some of the lens procedures, you know, they were deferred, but they don’t go away. I mean, if you need a hip, or a knee, or a lens, then you need it. So it’s really just deferred, but by the same token, some of our other businesses were under effect, you know, or actually did better. But, you know, it’s a good story and validates the whole premise of a diversified portfolio across a diversified geography. So yeah, we’re well placed. There were some opportunities that came through our network.

So one of the things that we are doing at the moment is supplying the swab kits for the testing, you know, the nasal swab. And then that also created an opportunity through the…you know, what we’re looking at, cross-divisional selling. So one of the bottlenecks with those swab kits was the actual medium that the swab goes into. They couldn’t make that fast enough and the business unit, which was Lovell said, “Well, actually our Immulab business could do that for you. Why don’t you talk to them?” And sure enough, we could. So that created another opportunity. And as we bring the groups together, that cross-divisional sales and our sales teams working together, actually, you know, is a great opportunity for us. And we’re starting to see the early, early benefits of that, but that’s, you know, there’ll be more to come from that.

Stuart: Yeah. Much as I’m a fan of your business, I hope to use that product for swabs as little as possible.

Phil: Exactly right. Me too. Me too. So we’re also looking at rapid testing, so we think that will evolve. So that rapid antigen testing, I think is a natural group progression. So that’s one of the new opportunities we’re exploring. There’s a bit of a flood of those in the market, but we’ve got some pretty capable people looking at that technology. And if there’s some that makes sense, we’ll certainly be looking at that as well.

Stuart: And one final question, I was very intrigued by this. You flagged it for FY22, you’re hoping to get back to it, a normal 15% EBITDA margin. Now, people who don’t know the healthcare system might be surprised that EBITDA can be as high as 15%. Now, I tell those people, look, it’s a specialty business. You don’t bring together the sort of talent that works for Phil easily. And therefore it’s not so competitive that you have to drive that down. How confident are you that FY22 will see that sort of margin restoration?

Phil: Yeah. Just we’re looking to get there over time. So that’s, you know, the board and our team aspiration would like to get to that. That’ll be over, you know, I don’t think we’ll get there this year. It’ll be more, you know, in the foreseeable, you know, two to three year period, but there’s a lot of things that we are doing both from the margin of the products that we sell, but also the operational efficiency that we’re working on in parallel. So we’re tackling that at multiple levels and there’s plenty of opportunity for us to improve on what we are doing. We’ve broken the back of our cost base over the last, you know, 12 to 18 months. So now the agenda is more around growth. So with scale comes improved operating efficiency and bringing capabilities around, you know, our supply chain management, you know, rationalizing our facilities at a pace that makes sensors. There’s lots of different levers that we’ve got to pull to help keep improving in that, you know, margin.

Stuart: Well, Phil Nicholl, well done on what you’ve achieved. A bit of a baptism of fire taking the CEO’s role and suddenly COVID hits and you’ve gotta negotiate your way through that and talk to a lot of friendly bankers. It can’t have been easy. In fact, I wonder if your hair would be as gray as mine coming through that period. Well done on what you’ve achieved, riding the ship and taking it forward into bigger and better things.

Phil: Yeah. Thank you very much, Stuart. Yeah, we’ve got a great team, so, you know, it’s certainly a team effort and, you know, we’re very passionate and excited about what we do and that’s flowing through in our results. So may that continue.

Stuart: All right. Well done. Keep up the good work.

Phil: Appreciate your time, Stuart. Thank you.