DCC : Final Results – 31 March 2023 Transcript

DCC Final Results - 31 March 2023

Tuesday, 16th May 2023

Introduction

Kevin Lucey

CFO, DCC

Welcome

Good morning, everybody, and welcome to our results presentation today for the year-ended 31 March 2023. We are delighted to be here, the DCC team, in front of everybody in-person for the first time, well, since 2019 was the last time we did an in-person results announcement. So for the last three years, we have been doing virtual presentations. This is a lot more engaging. Thank you to everybody who has come along today to be in the room. And obviously, welcome also to everybody who is joining us online today. We have quite a few people online.

I guess a lot has changed over DCC in the last three years, but a lot remains the same. And so I think what you will hear today is a lot about the continued resilience of DCC and how we have continued to manage to grow and progress over the last three years, and in particular, again, in the most recent financial year ended.

You all know this already, but Donal, unfortunately is not with us here this morning. And so we send Donal our best wishes, and we very much look forward to having him back full time in the business in advance of our AGM in July.

Introduction

I am Kevin Lucey, the CFO of DCC, and I am joined here this morning by my three divisional colleagues. So Fabian Ziegler, CEO, DCC Energy; Conor Costigan, CEO, DCC Healthcare; and Clive Fitzharris, CEO, DCC Technology. And I think most of you might know Conor Costigan, who has been here with us before. Fabian joined the Group last year as CEO, DCC Energy, and he will introduce himself later on. And indeed, Clive similarly has been with the Group for quite some time, 13 years now, I think, 14 years, and has done lots of senior roles around the Group and stepped up to be CEO, DCC technology during the last financial year.

Obviously, today is all about results, but we are going to use the opportunity to talk about maybe a little bit of the longer-term picture in DCC. And also, just to draw everyone's attention to the fact that this morning, we did launch a new website, which hopefully we will provide people with good additional colour and insight into the DCC business and what makes DCC a great place to work and indeed to invest in.

DCC Final Results 31 March 2023

Tuesday, 16th May 2023

We have significantly refreshed our preliminary announcement this morning, and there is a lot of additional disclosure in there for investors and analysts. And again, hopefully, people will find that welcome.

And then finally, in the appendix to our results presentation this morning, again, you will find an awful lot more transparency and disclosure about our business. And hopefully, again, that will make things easier for people to understand DCC.

Agenda

There is three sections to what we want to talk to you about this morning. Firstly, we will spend a good chunk of today talking about the highlights of FY 2023 and indeed then delving into a little bit more detail of the performance during the year. Well then, if you will bear with us, take a little bit of a step up and out of the FY 2023 performance to talk a little bit more about the medium-term picture in DCC and what we are trying to do at a Group level, and indeed, then what each of the three divisions are trying to do, and we will talk a little bit about the growth platforms we have in the Group.

And then finally, we will finish with outlook and a bit of a wrap up before we open to Q&A.

Highlights FY23

Okay. Let's begin with getting into FY 2023. I guess the first thing to say is, we are very pleased and happy to report that FY 2023 was another year of very strong growth in DCC. I guess that strong financial performance, again, demonstrates perhaps the benefit we get from the diversity we have in the Group, demonstrates the resilience of DCC.

We have made good progress on our development agenda over the course of the year. We will talk a little bit about that in more detail. And indeed, it has been a good year again of strategic execution in terms of what we have been doing on the energy side and some of the capital we have deployed during the year, and we will talk about that in more detail.

And again, we are very proud of the performance in terms of sustainability across the Group during FY 2023. And again, we will talk a little bit more about that in some detail.

Financial Performance

So firstly, say, from a financial performance perspective, adjusted operating profit up 11.3% to just about £656 million in the year, strong performance. The free cash flow generation of the Group remains very strong. With free cash flow conversion of 87% in the year. And again, keeping that progressive dividend approach that we have had over very, very many years in DCC with a 6.5% increase in our dividends.

Development activity

I mentioned earlier that we believe it has been a good year from a strategic execution perspective. We have made quite a bit of progress in our Energy division, and we have deployed £360 million of new capital into new platforms of growth for the Group during the year.

I think the notable acquisition during the year, the largest one was the expansion of DCC Vital's medical device operations into Europe for the first time through the acquisition of Medi-Globe, but we completed 19 acquisitions over the course of the year and that is £360 million spend. And by number, a lot of them in the energy business, the largest one of those was the PVO solar distribution acquisition that we bought earlier this year. But we have deployed capital

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into at least 10 acquisitions over the course of the year that expand our capability in newer energy areas. So again, we will talk about some of the progress we are making in that later in the presentation.

The world needs progress for all

And related to some of that capital allocation, particularly on the energy side, it has been a very good year for us from a sustainability perspective. I think a notable feature of our results this morning is that our Scope 3 carbon emissions have reduced further by 5% over the course of the year. That is also contributed to the fact that our services and renewables profits in DCC Energy have grown from 22% of our profits to 28% of our profits over the course of the year. So again, you can see that, that drive for sustainability progress is manifesting itself also in increased profits for the Group.

I think when we look at our own operations, which again is very, very important to us, we have had a very substantial reduction in the year in our Scope 1 and 2 carbon emissions, so over 9% reduction there. And we remain well on track to meet our 50% reduction target against our 2019 baseline by 2030. So again, good progress there.

And finally, on the people front, we have been running engagement surveys across the Group now for a number of years. And again, pleased to report that even on the people side, we managed to create opportunities for people, some of which you see in front of us, myself and Clive and others included, who have grown their careers in DCC and we have improved our engagement scores again across the Group, demonstrating that DCC remains a very good place to work.

Performance Review FY23 - Financial Highlights

For the year ended 31 March 2023

If we get into performance in a little bit more detail, we do not talk too much about revenue in DCC, but revenues were up very substantially over the course of the year, up 25%. And really, that was driven by the increased wholesale cost of energy products over the course of the year. So that is driven predominantly by DCC Energy and, in DCC Energy, predominantly by the fact that the higher wholesale cost of energies were reflected in our revenues.

You do not see the same growth in profits, because as you know, our energy business, the profits are not particularly correlated to the volume of energy or to the revenue that we produce, but more to the volumetric measurements.

Group adjusted operating profit, £655.7 million, up 11.3% and 7.8% constant currency. Adjusted EPS, 456.3p, up 6.1%, a little bit lower growth than on the Group adjusted operating profit line, principally driven by a higher tax rate and higher funding costs over the course of the year. And again, we would see those continuing to be a modest headwind for us as we enter FY 2024.

From a free cash flow perspective, very strong free cash flow generation in the year already talked about that, but over £570 million free cash flow generated or 87% conversion. From a dividend perspective, we are pleased to be proposing another increase in our dividend, our 29th year of consecutive dividend growth for DCC.

And then in talking about return on capital, return on capital remaining strong at 15.1%, reducing a little bit on the prior year, principally reflecting the very substantial acquisition spend

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we have had across the last two years. So, we have deployed over £1 billion in the last two years, and that really is the primary driver of that. It is also impacted a little bit in the current year by organic headwinds in health care and technology.

From a net debt perspective, balance sheet remains very strong. So, the £767 million of net debt that you see there reflects approximately 0.9x pro forma net debt to EBITDA. And if you were to look forward on an FY24 basis, that would approximate to about 0.6 or 0.7 times net debt EBITDA, assuming we were not deploying capital on acquisitions, but we do not expect that to be the case.

So that is it from a financial highlights perspective.

Divisional Results

For the year ended 31 March 2023

Just to talk a little bit about the divisional shape of the results over the course of the year. Obviously, as you can see, DCC Energy increased its profits by 12.4% and 10% constant currency. DCC Healthcare declined by 8.6% or 11.1% constant currency. DCC Technology is £106 million, an increase of almost 30% year-on-year and 20% constant currency.

In terms of the shape of the Group, Energy, similar to last year, reflecting about 70% of the profits of the Group. And from a geographic perspective, again, the internationalisation, I guess, of DCC continues. So many of you will have been following us for a long time and know that our heritage really has been here in the UK and in Ireland, but obviously, the greater diversity in the Group, the amount of cash flow we now generate in Continental Europe and North America is really quite substantial.

So you see Continental Europe representing approximately 40% of the Group; UK and Ireland, approximately one-third; and then the balance is 26%, principally in North America.

DCC Energy

Performance Summary

We will look at each of the divisions now in a little bit more detail. As you can see in the slide, we have had an excellent performance in DCC Energy over the course of the year. And really, that has been strong right across the division. We have had good performances from our Energy Solutions business and also from our Energy Mobility business over the course of the year.

The organic profit growth at 8.3%, I think, again, was particularly strong in the year. We experienced pretty robust demand in what was a volatile environment. So, notwithstanding the volumes are reduced modestly. That was, I guess, a little bit to be expected.

Energy prices were very high during the year. And we had a lot of efforts, particularly in Continental Europe from governments to try and economise and reduce energy consumption over the course of the year, which is understandable. But notwithstanding that, we saw good demand for our products, particularly on the lower carbon and renewable side of our business over the course of the year. And there was good demand across each of our regions. So we had good profit growth in North America, in the Nordics, in Continental Europe and in UK and Ireland, so I say, a pretty strong performance all around.

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And similarly, on the mobility side, very strong performance from our fleet business, our digital, where we provide a lot of digital services to large fleets and also on the retail side, where in France and the UK in particular, we performed well.

I think one of the notable things that I referred to it already, is that you begin to see the strategy in action here that DCC has been investing quite significantly over the last number of years in growing the proportion of our profits that come from services and renewables in DCC Energy. So from a high single-digit percentage four or five years ago to now approximately 28% of our profits in the Energy business coming from products or services where we have effectively zero or very close to zero Scope 3 carbon emissions.

The acquisition activity over the course of the year supported some of that. We have been deploying capital into this area, but it was also as a result of very good organic developments. And again, Fabian will talk a lot about that a little bit later. We completed a lot of acquisitions over the course of the year in DCC Energy. Many of them small, modest acquisitions bolting into our operations, but all of them adding new capability to DCC and particularly in the newer energy areas.

And then finally, and you will hear more about this later on, but obviously, Fabian joined us over the course of the year. But we have established a new regionalised management structure. So quite a lot of new energy across our management team as we have kind of reorganized and repositioned the team to enable us to grow towards 2030, and Fabian, as I say, will talk about that a little later.

DCC Healthcare

Performance Summary

In DCC Healthcare, obviously, after a couple of record years in DCC Healthcare, where we had exceptionally strong organic growth. Last year was a more challenging year for DCC Healthcare. But notwithstanding that, we continue to make good strategic progress and invested in the business to ensure that we are well positioned into the future.

Operating profit declined by 8.6% or 11% constant currency. And organically, that was down 18.7%, really driven by weak demand in DCC Health & Beauty Solutions, and I will talk about that in a second.

In DCC Vital, trading was good and performed well in line with expectations, in fact, modestly ahead of our expectations. And that really reflected good performances from our Medical Devices business here in the UK and also our primary care business here in the UK and in Germany. The Medi-Globe acquisition, which we completed during the year continued to perform well.

On the Health & Beauty side, we began the year 12 months ago, if we were standing here, we would have been talking about record levels of demand and a very strong order book. But over the course of the year, we saw that demand weaken as our customers began to try to reduce the amount of inventory that they had and indeed mirroring, I guess, what they were seeing from their customers in retail stores and consumers.

We have had a period over the second half of the year, in particular, where there has been a large amount of destocking going on in the supply chain. And I guess, that has been reasonably painful for our business. However, I guess, the important point is that we have not reduced

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