DESPITE the continued growth in its top line, Medical Disposables & Supplies Limited (MDS) is seeing new headwinds as it fights what it describes as “price wars” against other distribution companies for market share.

MDS’s consolidated revenue grew 10 per cent to $3.77 billion for its 2023 financial year (FY) ending March 31, but faced some compression in its gross profit margin from 27.40 per cent to 26.88 per cent. The gross profit margin represents what amount a company retains from the sale of inventory and other direct costs to incur that revenue.

Apart from the extra costs that would have been incurred from supply chain disruptions and other inflationary events during the FY, MDS is apparently facing new battles in the pharmaceutical and medical disposable distribution market from its competitors.

“Our gross margins remain relatively steady even though we fight and battle many, many challenges – especially involving competition and price wars that have hit us. I could inject here that I don’t know if we should take it as flattering or an extra challenge, or maybe a mixture of both, but MDS has now become a target for larger players in the marketplace,” said MDS Chief Executive Officer Kurt Boothe in his presentation to shareholders at the company’s tenth annual general meeting held on Thursday at its 83 Hagley Park Road head office.

The price war comes at a time when Trinidadian firm Agostini’s Limited acquired Health Brands Limited in August, and when more distribution firms are looking to different funding sources for growth.

Boothe highlighted that some competitors are going as far as giving 50 per cent discounts to customers, just to compete with the company. He noted that this has required the company to respond with the addition of new talent and restructuring where necessary to become more efficient in dealing with this new threat of resources.

MDS’s prior Chief Financial Officer (CFO) Raymond Ernandez vacated office on May 31 while Haile Hinds-Bedward joined as the new CFO on August 2. Hinds-Bedward has more than 20 years of finance, accounting and logistics experience, with part of it spent at another major distribution company, and her prior role at a St Catherine manufacturing outfit.

“I can state that there are certain instances where we have taken over market share where, a few years ago, we were new entrants into a particular segment and where we would have taken over as the leader of that segment. There are certain distribution contracts that we share that we have achieved up to 75 per cent of the market share over the past year. As a result, companies are clawing back and attacking us so that definitely does pose a great to challenge to managing our gross profit and expenses as well,” Boothe added in his remarks.

The gross margin compression was more pronounced on its 2023 standalone company financials wherein the gross profit margin fell from 26.16 per cent to 24.87 per cent relative to the eight per cent jump in gross profit from $739.92 million to $798.86 million. Thus, while revenue increased 14 per cent to $3.21 billion, the slight increase in operating expenses, along with the lower gross margins, translated to a nine per cent drop in operating profit to $156.02 million.

With a plan to further buffer itself, MDS has committed to cutting its inventory by $500 million as it focuses on reducing the opportunity cost associated with holding it, thus giving itself capital to reduce financing costs. MDS’s inventory balance swelled from $571.60 million in the 2020 FY to $1.21 billion at the end of 2023. After accounting for its 60 per cent subsidiary Cornwall Enterprises Limited, this figure jumped to $1.49 billion in 2023.

“In a number of cases, in representing our multinational manufacturers, we are required to keep a certain level of inventory on hand – this is up to even four months inventory at a time. If you want to play in the big leagues there are certain things that come with the territory, and this happens to be one of them,” Boothe explained on the company’s inventory.

During the first quarter ending June 30, MDS’s consolidated revenue grew four per cent to $925.51 million due to stability in supply chains and growth from all three divisions, including the consumer segment. However, the gross profit margin dipped again from 25.71 per cent to 25.36 per cent despite gross profits rising from $229.45 million to $234.67 million. When coupled with a 12 per cent jump in operating expenses to $209.23 million, operating profit decreased 39 per cent to $25.44 million.

However, due to the higher financing costs related to its debt pile, the company swung from a consolidated net profit of $16.54 million to a net loss of $1.50 million. After removing the non-controlling interest it dropped from a net profit of $14.58 million to a $1.41-million net loss. MDS’s tax remission ends on December 24, which will mean being taxed at the 25 per cent rate.

MDS’s total debt stands at $1.22 billion compared to equity of $1.20 billion. It borrowed an additional $258.92 million in the quarter due to the $283.60 million operating cash outflow related largely to payables.

“It’s not necessarily the best time for the market at this point but I think we continue to keep our eyes peeled, and strategise accordingly, and looking at what we can possibly do in terms of any type of corporate action – as far as the market is concerned – to address our debt to equity mix at this point in time,” Boothe stated in his presentation to shareholders.

In addition, he explained, “What I can say without reservation is that we absolutely have that under our microscope of analysis to go back to market – but that remains an in-house strategic decision. Going to market is something that has to be properly timed, and the whole market right about now is depressed. We would rather have a particularly slated opportunity or a better-timed approach right about now.”

Despite these hurdles, Boothe is focused on building out Cornwall Enterprises further, with November 30 set as the date to complete the centralisation of the information technology systems. Once certain changes are complete, Cornwall might be prepared for expansion again following the $20.16 million in net profit earned in 2023.

It is also building more distribution partnerships in its consumer division, with the Scotch Boyz product being the latest addition.

“In moving into our consumer division, we had an opportunity to build strategically as we wanted to expand as a distribution company and not being limited or capped as just a health-care distributor. The strategic move into fast-moving consumer goods opens us up widely to distribute just almost anything. There are one or two items that we’re looking at that we have in the works that we’ve never distributed before – that is in itself an opportunity,” the CEO discussed.

MDS’s stock price is down 20 per cent year to date at $3.80, which leaves it with a market capitalisation of $1 billion, just slightly below equity attributable to shareholders of $1.06 billion. Total assets and liabilities were $2.91 billion and $1.71 billion, respectively.

“Regardless of all those challenges that we face, our mounting costs of battling, and the issues that I’ve highlighted, one particular item of note is that we continue to grow our sales. We have to look at ways and possibilities of pivoting, continuing to innovate, and exploring new areas of product offerings. We have looked at more technical areas of health care – typically because the more technical you get, the more barriers to entry, and not necessarily someone with a suitcase can come in and compete against you,” Boothe closed as he spoke to new opportunities ahead.