Stock reduction plan
Post-pandemic stock-ups and supply chain challenges have put a damper on performance at distribution company Medical Disposables & Supplies Limited, MDS.
The company’s operating cash flows remain deeply in the red, a deficit that it has been covering through borrowings, which has so far amounted to around half-billion dollars in the current financial year.
With one quarter left to go in its current financial year, MDS’ net cash, after accounting for its operations, capital expenditures, investments, debt repayments and new borrowings, was in deficit at $121 million, even worse than the negative flows of $89 million in the comparative December 2021 period, but mimicking the company’s position in the apex year of the pandemic, 2020.
Medical Disposables is currently carrying an inventory of $1.53 billion, up from $1.17 billion a year ago.
CEO Kurt Boothe is vowing to work down the inventory levels given the depressed cash flows, high inventory and anaemic third quarter performance. But as a sign of the challenges faced by the business, there are areas in which Medical Disposables is still facing stock shortages.
Boothe told the Financial Gleaner that supply chain challenges affected the MDS’ medical division, which had a knock-on effect of the bottom line, since items in the medical division carry high margins.
He cited difficulties in procuring vaccines and cancer drugs, but declined to name the specific drugs and suppliers.
In its earnings report, Medical Disposables said its “own internal estimates have tracked over $100 million in lost sales due to the shortages”.
Citing the issue, Boothe said the risk of unavailability of stock has justified the company’s decision to diversify its revenue base.
The company recently acquired a rival operation in Montego Bay called Cornwall Enterprises Limited, a pharmacy operator and distributor of dental supplies, and is in the process of consolidating its operations into the MDS group. The acquisition opened up new lines of business for the group.
“It is for reasons like this that you can see a continued long-term thrust for diversification across the business” in that the overall impact on the group will be lessened when any one area is faced with challenges, he said.
For the third quarter ended December 2022, MDS recorded a slight uptick in profit from $29 million to $32 million, but over the more expansive nine-month period, April to December, its earnings slid from $76 million to $68 million.
“The uptick in the third quarter is a sign of good results going forward. However, the continued effect of the COVID-19 pandemic certainly affected our first six months and the nine month cumulatively, but the improvements have started,” Boothe said.
In the middle of the pandemic, companies in Jamaica and other markets began switching from just-in-time inventory systems to a new strategy dubbed just-in-case, where companies bulked up on stock in the face of worldwide shipping delays and rising freight costs in order to service their customers without disruption.
Medical Disposables’ carrying inventory is nearly one-third more than a year ago.
Coming out of the pandemic, Boothe said the company took the hard decision to run up inventory in the consumer and medical divisions to avoid a situation where goods may not have been readily available to their customers.
“One of the reasons for tying up that stock is that we want to continue servicing our client?le. If we didn’t then our competitors would’ve been only too happy to help us out. We had to choose the lesser of two evils,” he said, adding that the increase in revenues was vindication for the decision, but it carried a price in the form of higher cost of sales.
Revenue over nine months increased to $2.76 billion from $2.49 billion.
“The increase in sales means it was not too bad a decision, but it does cost. There is a cost either way, but you have to choose which cost you can live with best,” he added.
The stock-up decision dealt a blow to the company’s cash flow, but in defence of the strategy, Boothe reiterated that not having goods to sell to MDS clients would have been bad for the business. He expects the situation to improve in the company’s new financial year.
“We have been implementing a stock-reduction strategy, which over the course of the upcoming financial year will become more apparent,” Boothe said.
Pressed about the possibility that goods might expire, Boothe said this is not a problem for MDS since the inventory concerned has a long shelf-life.
Boothe said the ongoing diversification programme at MDS where the company acquired Cornwall Enterprises, extending its business lines to dental supplies and managing three pharmacies is paying off so far, since the company has been getting a steady stream of income from the acquisition.
Regarding the possibility that MDS might have to approach the capital market to help improve the company’s cash situation, Boothe said the company has been utilising lines of credit for working capital purposes. It leaves Medical Disposables with fund-raising options in the future, such as a rights issue or preferential shares, among others, he said.