MEDICAL Disposables and Supplies Limited (MDS) is looking to complete the integration of Cornwall Enterprises Limited by the end of its 2023 financial year in March as it also plans to expand its presence in the western end of the island.

The distributor of medical supplies and various consumer products acquired 60 per cent of Cornwall Enterprises in March 2021. Cornwall is the vehicle which was used to acquire Cornwall Medical and Dental Supplies Limited, which had a similar distribution profile like MDS along with three pharmacies under the Corn-Med Pharmacy brand. MDS has spent the last year focused on integration of the business and culture of the new subsidiary.

“We would have hoped to integrate our software system quite sooner because what comes with that is new equipment. It has to come on stream, so it’s unavoidable. In addition to that, we also own a distribution facility in Montego Bay where we should be moving our current office to a more efficient space with more storage,” said MDS Chief Executive Officer Kurt Boothe at the company’s annual general meeting held at its head office on October 13.

When asked if the company would consider additional acquisition opportunities in the space, Boothe responded, “At this stage of the business cycle I think it’s a clear strategy to look at inorganic growth opportunities. The addition of our subsidiary was not the first organisation we looked at and it wasn’t the second. It was the one that passed through our filters and, from time to time, we filter other opportunities.”

The company’s profitability grew by more than 1,000 per cent for its most recent financial year, from $7.53 million to $84.26 million, arising from a 17 per cent increase in revenue to $2.83 billion. For the broader group, consolidated net profit moved past $105 million on $3.42 billion in revenue.

Despite the positive headwinds in prior times Boothe cautioned shareholders due to the current logistics challenges which continue to impact the group. He cited an example of a good that was ordered with a three-month window, scheduled for arrival in September, but isn’t expected to reach until November.

“As we move on we’re not out of the woods as yet; we’re still experiencing some logistics challenges. Unfortunately, this has also contributed to some targets not being achieved but, we’re only at half time in the year and we have another half to claim,” Boothe related in his presentation.

While shipping rates from China have come down from the astronomical levels of around US$20,000 to stable prices of US$3,000, Boothe explained that there still remain difficulties surrounding the ability to adjust prices upwards to account for inflation. This he puts down to competition and the disruptions caused by the zero-COVID-19 policy in China. He gave an example of the company only increasing the cost of a product in October when they had wanted to adjust it from January.

“Up to last night I was on a call with a manufacturer in Europe. This product line was manufactured in China and they’re actually setting up manufacturing facilities in north Florida. As a matter of fact, we can place an order but we can’t receive the goods before February or March of next year — and this is just because of the shipping costs from the far East,” Boothe explained on the nearshoring which is occurring by some manufacturers that still face difficulties in providing products to their clients.

In order to combat this issue, MDS’s consolidated inventory profile is up 46 per cent year over year to a historic $1.33 billion, up to June 30. This has been a general trend facing many listed manufacturers and distributors who have cited the need to keep additional months of inventory on hand to account for these disruptions.

“I think this is evidence that shipping costs are still high, but what it also shows is that we’re looking at all ways to reduce costs, we’re looking at alternatives. We are actually looking at manufacturers from this hemisphere right now,” said Boothe.

However, while this action has been to the benefit of the company’s growth and ability to supply the market, it has put pressure on its working capital. The group’s increased inventory spend resulted in a cash outflow from operations of $34.67 million. The group borrowed $233.02 million and repaid $255.19 million in the first quarter, which represents the company using external financing to support working capital. Financing costs for the group increased 40 per cent year over year to $24.12 million.

“Other external factors that are out of our control that we have experienced this year is the increase in interest rates. I think this is the single greatest factor that has actually affected us thus far, especially when we’re managing our working capital. So this has affected us in an increase in working capital and, very soon, an increase in capital expenditure. As a matter of fact, there are some capex projects that have been put on hold this year. Obviously, this leads to increased finance costs which has trickled down to our bottom line thus far. However, I can assure you that, as we speak, we are reviewing mitigation strategies and once our feasibility review comes out favourable, believe me, you will be informed,” Boothe assured on the increase in interest rates.

The Bank of Jamaica has increased its policy rate from 0.5 per cent to 6.5 per cent in the last year.

When the Jamaica Observer’s Sunday Finance queried about the group needing to seek additional financing and its current debt make-up, Boothe replied, “I would say it’s quite the opposite. It’s quite the strain to keep the door closed from the bankers that keep knocking. I think we’re in an enviable position.”

The company is currently focusing on expanding its reach into the fast-moving consumer goods (FMCG) segment where it currently distributes products under the Simply, True Natural and Discin brands. It is slated to announce a new partnership in short order as it continues to find complementary products to distribute not only to pharmacies, but other businesses in Jamaica. Boothe noted that the company is very selective about which brands it adds for its consumer and medical divisions as it tries to ensure that the quality standard remains of the highest degree.

MDS’s consolidated total assets are up 17 per cent year over year to $2.89 billion with cash standing at $86.61 million. Total liabilities are up 24 per cent to $1.77 billion as the group’s interest-bearing debt and payables went up during the quarter, with equity attributable to shareholders up seven per cent to $987.88 million.

MDS’s stock price closed at $5.78 which leaves it down 11 per cent year to date with a market capitalisation of $1.52 billion. With a trailing twelve months’ earnings of $0.36, the price to earnings ratio is at 16 times.

“We really want to get maximum returns for our shareholders and we have to grow the company. We’re not a small business anymore but we’re not that gigantic enterprise. We’re now faced with [the] largest companies in Jamaica as our competitors,” Boothe closed on the group’s transition into a larger distribution business over the years.