Paragon Care Limited (PGC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Paragon Care Financial Year 2025 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Chief Executive Officer, Carmen Riley. Please go ahead.

Good morning, everybody. My name is Carmen Riley. I'm Chief Executive Officer of Paragon Care. I've been in the company for about 15 years, prior to taking over the role on the first of July, I was Chief Operating Officer; and obviously, I'm a Director of this company. So just to touch on our strategic overview. We've never actually changed our strategy of what we want to do and being a leading distributor across health care. We've now just expanded that out into the Asia region by joining with Paragon Care Group. So bringing the businesses together, we're very excited about the opportunity of continuing our growth across that region. Just on to the next slide, I thought I'd touch on introducing the Board, just a brief introduction to our Board members, David Collins, Managing Director. David will stay Managing Director until June next year. At that point in time, I will take over the role as Managing Director and CEO of the company; Peter Lacaze is the Chairman, major shareholder, John Walstab, Non-Executive Director; and this year, we welcomed Peter Egglestone, a Non-Executive Director, but also Chairman of the Audit and Risk Committee. Okay. Just on to the next slide. So underlying financials, which we'll go into a positive $3.6 billion in revenue, underlying EBITDA of $95.2 million, return on invested capital, a little soft at 13.3 and free operating cash of negative $11 million. As you can see from this slide, our business is very vast and quite complex with a very broad customer and supplier base. So what I'd like to do is actually take you through how we've restructured that business over the last 12 months and that's by regrouping our channels to market. So we've put these into 4 channels to market, which are now wholesale, medical technology, contract logistics, and clinical manufacturing. When you lift the hood on that, you can see underneath it is quite complex and quite diverse. We have a number of sales streams and that is supported by dedicated people in each 1 of those streams, and we remain having a shared service structure. Just on the next slide, I thought I would touch on some of our key highlights of the year and our key achievements. So whilst we've been going through a very complicated and difficult year in terms of transition because we have been bringing our 3 businesses together, which has been the [ Oborne ] business. then the merger of CH2 with Paragon, and that's what launched our 321 strategy, which was 3 businesses, 2 years to complete all in 1 team. But during that time, even though it's been incredibly busy, we have managed to sign new agencies such as CMR and Classys. We've signed our first contract manufacturing agreement at the Mt Waverley site. We've signed a large contract logistics customer through Owens & Minor, which is a great partnership to have. We've launched business units in aesthetics, robotics and dental in Australia and New Zealand. We've continued to expand aesthetics throughout all of Asia. We've continued to expand all our distribution partners across our whole network. We've commissioned our new site in Brisbane, so that's expected to be opened in FY '26 at Willawong. We've consolidated 6 sites within our network. We've acquired a small business in New Zealand called Image Space. We've also acquired a small dental business in Australia, AHP Dental. Small note on integrating the amount of Paragon businesses onto our JDE platform. And we've also completed our new debt facility with ScotPac. I'll just take you through the top level of key financials before I hand over to Marcus. But with the FY '25 results, just to be clear, for FY '25 in these figures, both the underlying and statutory financials for the group are presented each reflecting a full 12 months of trading for the Paragon Care, CH2 and Oborne businesses. So I'm really pleased with the result because as I've stepped you through, we've had such a complicated year that the teams have been fabulous in bringing together result to deliver to our shareholders, $3.6 billion in revenue, $95.2 million in EBITDA and $31.2 million in net profit after tax, which is a great result. Our statutory result $3.6 billion, $88.5 million EBITDA and $20.6 million in net profit after tax. I'll hand you over a in a moment to Marcus Crowe, and he's going to take you through more detailed analysis of the P&L and the balance sheet. But as you can see, I think this is a terrific result for a business that has gone through a difficult transition, difficult economic conditions in some of our markets and really to bring this together to complete a good, solid first year of our combined businesses. So over to you, Marcus.

Thank you, Carmen, good morning, everyone. It's a pleasure to present the FY '25 results. Before I commence, I'd like to outline the basis of the financial information that will be presented today. For FY '25, both underlying and statutory financials for the group have presented each reflecting a full 12-month trading for the Paragon Care, CH2 and the Oborne businesses. A brief refresher to provide some context around the FY '24 numbers while still a private company, CH2 acquired Oborne health supplies on the 28th of February 2024. Subsequently, on the 3rd of June 2024, Paragon Care acquired 100% of the shares of CH2. This latter acquisition was accounted for as a reverse acquisition, whereby CH2 is classed as the accounting parent. So resultingly, the reported financials for the comparative 2024 financial year are presented in 2 separate formats. Firstly, the statutory results, which include 12 months from CH2, 4 months contribution from Oborne and 1 single month from Paragon Care; Secondly, the pro forma results, which reflect the full 12 months trading from CH2 Paragon Care and Oborne as if all 3 businesses had operated for the full FY '24 year together. The presentation of the pro forma results remains consistent with the disclosures in the original merger notice of meeting and explanatory memorandum and we believe represents the best like-for-like comparison when assessing the performance of the business. And moving on to the next slide. So as Carmen's just outlined, underpinning the result was an 8.3% increase in total revenue to $3.6 billion for the year. Underlying EBITDA of $95.2 million was achieved. This was up $2.8 million or about 3% on the prior year. This is primarily driven by a $25 million increase in GM dollars up to $324 million, an 8% increase. Margin rates were relatively consistent across the channels to market year-on-year. Expenses of $229 million were up $10 million on the prior year. We observed some easing on inflationary pressures, however, increased insurance, freight due to volume and wage pressure continues. Completion of the reverse acquisition should also -- for professional services moving forward. The underlying result excludes one-off impacts of $3.9 million where the group could not apply hedge accounting to historical CH2 hedges and $2.8 million associated with integration costs. And despite these integration costs, which comparatively were $5.5 million in FY '24, the group still recognize its target of $5 million in P&L synergies. We remain confident of achieving our internal target of $12 million in FY '26. Finalization of purchase price accounting for both Oborne and the reverse acquisition resulted in $109 million in separately identified or intangible assets being recognized the opening FY '24 balance sheet, which will amortize over the next 20 years. So the noncash amortization cost of these intangibles in FY '25 was $5.6 million which is excluded from underlying but evident in the table below within the statutory result. Whilst we've executed a favorable refinancing, which we'll talk to in a moment, finance costs were up year-on-year due to higher interim up debt levels as we invested in stock way during transition. We experienced an increase in debtor days, which I'll discuss further shortly. Within interest costs, $22.8 million related to interest on debt with 8.4% our average cost of funds. Now go to the next slide. Moving to balance sheet, which is presented in the statutory format, the opening FY '24 balances incorporate the completion of PPA accounting for both Oborne and the reverse acquisition. So working capital increased to $125.6 million and was significantly impacted by $57 million owing by a group of 103 pharmacies. We've entered into a subsequent payment arrangement with the group. And despite the drag on cash flow, we expect to recover all money . Stock levels remain slightly elevated, but expected to moderate, whilst payables have partly offset the increase in total working capital. From FY '24, $358 million of goodwill and intangibles were recognized, including $249 million in goodwill alone. Moving on to debt. In June 2025, the group executed a refinancing with ScotPac is primary finance year resulting in a total $400 million financial covenant-free facilities secured only by Australian assets. So this change not only increased our local borrowing capacity by a further $70 million but also encompass reduced rates, low line fees and is expected to deliver in interest savings year-on-year. The new facility also provides us with funding optionality for both organic and inorganic growth, both in Australia and overseas moving forward. And of the $400 million facility limit a mandatory $200 million minimum drawdown at all times. To point, closing debt of $215 million was up $38 million to last year, and average net debt the year is $251 million. Moving along to the next slide. Finally, from a statutory cash flow perspective, net cash from operating activities of minus $11 million significantly impacted by the pharmacy group receivable of $57 million. We do expect this to normalize in FY '26. Finance costs reflect the full year of the merged group. And as previously mentioned, $22.8 million of this cost relates to borrowings at an average cost of funds of 8.4%. And Available funds from debt facilities and cash at year-end was a healthy $209 million. CapEx spend was predominantly weighted towards our investment in the new Brisbane site and a continuing investment into IT infrastructure supporting the merged group. With that said, I'll now hand back to Carmen.

So thanks, Marcus, for going through that detail. I thought I would finish off by going through our 2 business segments, Australia and New Zealand overview, which was a solid result, revenue growing to $3.5 billion this year, up 8%. Gross margin in line with expectations growing to $277.9 million, up 5% and growth in Australia and New Zealand has been solid in pharmacy, even though hospital pharmacy has been fairly flat in the market. Capital and services some headwinds, particularly with government pulling back on their spending, you'll see this heavily in New Zealand, but underlying a terrific result from that team to go through those challenges. Orthopedics struggled because they had the loss of the Avanos business being withdrawn from the market. Vision had a mixed year, but I think that's steadied now and we should have some opportunity for future growth. Clinical manufacturing was exciting because they signed their first contract manufacturing agreement this year. Strong complementary medicines growth, which is on the back of the Oborne acquisition, of course, but that has continued to perform very well. And then as I touched on earlier, we've launched the new dental business units in the last quarter. but we've coupled that with the acquisition of AHP Dental, and that was on the 1st of July. So we should see the benefits of that in FY '26. To go over the Asian overview, they've had a fantastic year as well, going from $84.2 million in revenue to $101 million, up 20% on last year, which is incredible. The gross margin, $46.1 million, up on last year by 30%. Most of that revenue has had strong growth out of Thailand, which continued to do exceptionally well in aesthetics division. However, we've pushed that out through Vietnam as well. The imaging business was solid. Again, some headwinds in that market but still continues to perform well. By country, Japan, Thailand, Vietnam, good solid growth. Korea, they had the doctor strike and that's had some challenges for them, but they've continued to be okay. And the Philippines modest growth because that's got some declining contracts there predominantly based around the service revenues. However, from an upside perspective, we see some opportunities in all of those markets. One thing I will touch on here and we'll talk about further is that we have an absolute razor focus on growing the Asian markets. And you'll hear more about that as we get closer to the AGM. Just on the synergy slide, I won't go through all the details with you all. but we did achieve our annualized synergies of $5 million in FY '25, and we're fully on track to achieve $12 million in synergies in FY '26. We have gone from putting our businesses onto 1 platform into JDE, and we're most of the way through that in Australia. We've closed sites. We've got the new site, as I mentioned earlier, we've gone on to ISO 14001 on all of our sites, still ISO 9001 accredited. We're working on GMP accreditation on the Mt Waverley facility, and we plan to execute the balance of the sites during FY '26 on to JDE and we'll continue to monitor and expand on our IT platform throughout the year. And to round off the presentation, our key outlook for FY '26. So without a doubt, we're focusing on our 321 strategy because that is the final year on bringing the teams together so that everybody is very clear on our future and our vision around Paragon Care. We're investing into our people and we'll continue to execute our integration strategy. While we're doing that, we have a very strong focus on organic growth through our strong sales team, investing into our people and our sales team and also investing into new business opportunities, which we've done in dental, robotics, aesthetics and other OEM opportunities. For the merger and acquisitions, we have a very strong pipeline and particularly emphasizing around our growth in Asia and our opportunities around our growth in Asia. We want to ensure that we've got a strong proactive focus on this. Operational efficiencies. So if we're going through our lean way of doing business, we've always operated the business in that way, and we will continue to do that through a shared service structure to support our sales team. Our systems and infrastructure is critical to us and so is our data analytics, and we'll continue to invest into that space, and we'll continue to focus on simplifying our business structure. Revenue and profit for the year ahead is expected to remain positive in terms of growth. Profitability is expected to improve as we realize our full synergies and look for other opportunities. And last but not least, I'm pleased to say that the directors are committed to revisiting our dividend policy in FY '26 as well. Thank you, everyone, for your time this morning. So I'll open up the session now for a bit of Q&A if anyone has any questions.

[Operator Instructions] Our first question comes from the line of Tom Godfrey from Ord Minnett.

Maybe if I can just start on the outlook commentary, just around revenue and profit for next year, just the line that revenue is expected to remain at FY '25 trend rates. Do we take that as sort of the 8% revenue growth you've reported this year is sort of a reasonable assumption for 2016?

I wouldn't take it as the exact trend rate. It's more of a positive rate. I think it would be more around your single mid-digit rates.

Got it. Okay. No, no, that's helpful. And maybe just tacking on to that, I mean, you guys had a really strong retail pharmacy growth rate for '25. Can you just any comments around the competitive landscape there and sort of expectations into '26?

The competitive landscape, well, over the last few years, it's been difficult to actually push out and predict that because, as you can see, the market has evolved immensely with the particularly the Sigma Chemist Warehouse merger and what's falling out of that. Obviously, we've seen upside ourselves in that from the other wholesalers, and we hope to continue to trend that way. But Yes, we'll have to measure it over the next quarter or so.

Got it. And maybe just 1 on sort of the underlying EBITDA and cost base Am I reading that slide correctly that there is $2.8 million of integration costs sitting in that underlying OpEx number.

Tom, yes, you are.

Right. Okay. So we can sort of stripping out integration costs, we sort of bump up the EBITDA up around 98% to 25%.

So apologies. It's sitting within the statutory, it's not sitting within the underlying, it's been carved out.

Okay. Got it. No, that's helpful, Marcus. I mean, just -- last 1 for me. Just wanted to touch on the commentary around the M&A pipeline, just in the context of your current sort of net debt-to-EBITDA ratio, where would you guys be happy taking that up to and sort of how imminent is the pipeline are active is the pipeline at the moment?

We'll take it up as far as the opportunities allow us to, that's for sure. Look, over the next couple of months, we'll give some more color around that. But as I said, we're very focused on the outcome of that up in Asia at the moment. So let me take that as -- that's what I'm trying to say without actually saying it. But yes, we're using debt for it. That's for sure.

Right. Okay. No, I really appreciate you taking my questions. Congrats on the solid FY '25.

Our next question comes from the line of James Tracey with Blue Ocean Equities.

The first question is on the synergy number, the $12 million of synergies. Is that incremental synergies above and beyond to 5. And then I also wanted to clarify around this $2 million of cost savings on the debt refinancing, is that additional to the $12 million? Or is it included in the 12%?

Yes, no problem. Thanks, James. So -- what we're saying is we've achieved net synergies this year of $5 million. So that's inclusive of the $2.8 million one-off. So in other words, that would gross out to $7.8 million. And what we're saying is that next year, we expect the total synergistic benefit to increase to $12 million on a net basis. From a borrowing perspective. So we -- the facilities that we've transitioned away from this year and rolled into ScotPac, come at a lower cost of debt moving forward than we hold at the moment. So the rates reduced by it's almost 1%. And we also have no line fees on the total facility moving forward. So it just allows us a little bit more flexibility to pivot up and down based on our cash flow requirements.