14 November 2017

DCC Reports Strong First Half of Performance and Development

DCC, the leading international sales, marketing and support services group, today announced its results for the six months ended 30 September 2017.

·    Strong first half performance with Group adjusted operating profit on continuing activities increasing by 14.4% (up 9.7% on a constant currency basis) to £122.5 million, with all divisions recording growth on the prior year.

·     Adjusted earnings per share on continuing activities up 16.1% (11.5% ahead on a constant currency basis) to 95.5 pence.

·     Interim dividend increased by 10.0% to 40.89 pence per share.

·    The Group continues to be very active from a development perspective. Recently, DCC Retail & Oil completed the acquisition of Esso Retail Norway and DCC Technology completed the acquisition of MTR. DCC LPG remains on schedule to complete the acquisition of Shell Hong Kong & Macau before the end of the financial year.

·    In addition, on 7 November 2017, DCC LPG announced its agreement to acquire Retail West from NGL Energy Partners, for an enterprise value of $200 million (£152 million). This will be DCC LPG's first step into the very large US LPG market and is DCC's first substantial acquisition in North America.

·    Reflecting the announced acquisition activity to date, the Group's cash spend on acquisitions in the current financial year will be approximately £550 million.

·    The Group reiterates its belief that the year ending 31 March 2018 will be another year of profit growth and development.

1    1 tonne of LPG equivalent to 1,969 litres of oil

2    Continuing operations exclude DCC Environmental which was disposed of in May 2017
3    Excluding net exceptionals and amortisation of intangible assets  

Commenting on the results, Donal Murphy, Chief Executive, said:

"I am pleased to report that the first half of the year has been another very active and successful period for DCC. The business has performed strongly, with each of our divisions recording good growth, albeit in the seasonally less significant first half of the year.

DCC continues to be very active on the development front. The recent completion of the acquisitions of Esso Retail Norway and MTR demonstrate the continuing opportunity for DCC to redeploy the organic cash flow of the business into attractive acquisition opportunities in each of its chosen sectors. In addition, the recent announcement of the acquisition of Retail West marks another important milestone for the Group and will provide DCC with a substantial, high-quality, LPG footprint in the very large North American LPG market.

The Group continues to have the ambition and capacity for further development and, importantly, as DCC increases in scale and geographic reach, also has the opportunity to build substantial market positions in its chosen sectors.

The Group reiterates its belief that the year ending 31 March 2018 will be another year of profit growth and development."

Presentation of results and dial-in / webcast facility

There will be a presentation of these results to analysts and fund managers at 9.00 am today in the London Stock Exchange.  The slides for this presentation can be downloaded from DCC's website, www.dcc.ie.

There will also be audio conference access to, and a live webcast of, the presentation.  The access details for the presentation are:

Ireland:                                1800 937 656

UK / International:            +44 (0) 20 3427 1907

Passcode:                            3489165

Webcast Link:                   https://edge.media-server.com/m6/p/do8jgz5d 

This report, the webcast of the presentation and further information on DCC is available at www.dcc.ie.

For reference, please contact:

Group Results

A summary of the Group's results for the six months ended 30 September 2017 is as follows:

Overall, Group revenue increased by 17.1% (13.2% ahead on a constant currency basis) to £6.4 billion.

Volumes in DCC LPG increased by 16.2% to 645,600 tonnes, driven principally by the acquisition of Gaz Européen which completed during the prior year. On a like-for-like basis, volumes were modestly ahead of the prior year, with good growth in Britain and Ireland. Reflecting acquisitions and the increased cost of product, DCC LPG's revenue increased by 36.5% (up 28.7% on a constant currency basis).

DCC Retail & Oil volumes increased by 7.7% to 6.0 billion litres, benefiting from the acquisition of Dansk Fuels which completed in November 2016. Organic volumes were in line with the prior year. Reflecting higher oil prices, DCC Retail & Oil's revenue increased by 15.5% (up 11.5% on a constant currency basis).

Revenue excluding DCC LPG and DCC Retail & Oil increased by 16.4% (up 13.7% on a constant currency basis) to £1.6 billion.  

Group adjusted operating profit - continuing operations

Group adjusted operating profit from continuing operations increased by 14.4% to £122.5 million (9.7% ahead on a constant currency basis), in the seasonally less significant first half. The average sterling/euro translation rate for the six months ended 30 September 2017 of 1.1391 was 7.9% weaker than the average of 1.2364 in the comparative period. Substantially all of the constant currency operating profit growth was organic.

Operating profit in DCC LPG was 19.2% ahead of the prior year (11.5% ahead on a constant currency basis), despite the headwind of an increasing cost of product and colder weather conditions in the early part of the prior year, with strong profit growth in France and good performances in Britain, Ireland and Scandinavia.   

Operating profit in DCC Retail & Oil was 8.0% ahead of the prior year (2.9% ahead on a constant currency basis), reflecting good organic profit growth from the oil distribution businesses in Denmark and Austria, and the retail and fuel card businesses also performing in line with expectations.

Operating profit in DCC Healthcare was 11.6% ahead of the prior year (10.9% ahead on a constant currency basis) and approximately one third of the constant currency growth was organic. DCC Vital benefited from a good performance in medical devices and also from the acquisition of Medisource, which completed in January 2017. DCC Health & Beauty Solutions again recorded very strong growth in nutritional products.

Operating profit in DCC Technology increased by 25.8% (24.9% ahead on a constant currency basis) in the seasonally less significant first half. The UK and Ireland business performed in line with expectations and benefited from the acquisition of Hammer, which completed in December 2016, and also benefited modestly from the acquisition of MTR in July 2017.

Finance costs (net)

Net finance costs decreased to £15.6 million (2016: £16.3 million), benefiting modestly from positive currency translation. The underlying finance costs of the Group are largely driven by the level of the Group's gross private placement debt, which was broadly in line with the prior year during the first half. In September 2017, the Group successfully completed the drawdown of a new £450 million private placement debt issuance which will result in an increase in the Group's gross debt for the second half of the year. Average net debt during the first half was £313 million compared to £262 million during the six months ended 30 September 2016.

Profit before net exceptional items, amortisation of intangible assets and tax

Profit before net exceptional items, amortisation of intangible assets and tax increased by 17.8% (13.0% ahead on a constant currency basis) to £106.9 million. 

Net exceptional items and amortisation of intangible assets

The Group recorded a net exceptional gain before tax and non-controlling interests of £16.6 million in the first six months of the year.

The net gain principally reflects the exceptional gain of approximately £30 million recorded on the sale of DCC's environmental division which completed on 31 May 2017, offset by acquisition and restructuring costs.  

Acquisition costs include the professional fees and tax costs (such as stamp duty) relating to the evaluation and completion of acquisition opportunities and amounted to £3.5 million. Restructuring costs amounted to £9.7 million and were principally incurred in the restructuring and integration work following the acquisition of Dansk Fuels and also the commissioning of the new national distribution centre in DCC Technology's UK business.

The charge for the amortisation of acquisition related intangible assets increased to £20.5 million from £18.2 million in the prior year, with the increase principally reflecting acquisitions completed in the prior year.

Profit before tax

Profit before tax increased by 46.9% to £103.0 million.

Taxation

The effective tax rate for the Group in the first half of the year of 18.0% is based on the anticipated mix of profits for the full year. This rate compares to a full year effective tax rate in the prior year of 17.5%. The increase is primarily due to an increase in the proportion of profits generated in Continental Europe.   

Discontinued operations

The Group's discontinued operations represent the activities of DCC Environmental which was disposed of in May 2017.

Adjusted earnings per share

Adjusted earnings per share on a continuing basis increased by 16.1% (11.5% ahead on a constant currency basis) to 95.5 pence.

Total adjusted earnings per share increased by 4.6% (0.6% ahead on a constant currency basis) to 96.4 pence.

Dividend

The Board has decided to pay an interim dividend of 40.89 pence per share, which represents a 10% increase on the prior year interim dividend of 37.17 pence per share. This dividend will be paid on 11 December 2017 to shareholders on the register at the close of business on 24 November 2017.

Cash flow

As with its operating profit, the Group's operating cash flow is significantly weighted towards the second half of the year. The cash flow of the Group for the six months ended 30 September 2017 can be summarised as follows:

Operating cash flow in the six months ended 30 September 2017 of £84.0 million compares to £141.0 million in the prior year.  Working capital increased by £79.8 million over the six month period from 31 March 2017, reflecting seasonal requirements, although on a like-for-like basis the value of working capital at 30 September 2017 at negative £70 million was broadly similar to that at 30 September 2016. Overall working capital days at 30 September 2017 increased to negative 1.7 days sales from negative 2.9 days sales in the prior year, reflecting the acquisitions completed in the second half of the prior year of Gaz Européen, Dansk Fuels and Hammer, each of which have a positive working capital days profile.

Committed acquisitions, disposal and capital expenditure

Committed acquisition and continuing capital expenditure in the current period amounted to £248.0 million as follows:

Acquisition activity

Committed acquisition expenditure amounted to £180.2 million and included:  

DCC LPG

Retail West

On 7 November 2017, DCC LPG announced that it had reached agreement with NGL Energy Partners LP ("NGL") to acquire its Retail West LPG division, Hicksgas LLC ("Retail West" or "the business"), based on an enterprise value of US$200 million (c. £152 million). 

The acquisition represents DCC LPG's entry into the US market and is a further significant step in DCC's strategy to build a global LPG business over time.  The US is one of the world's largest LPG markets and is an attractive and growing market. It is also highly fragmented, with over 4,000 LPG distribution businesses operating in the market. The acquisition of Retail West will provide DCC with a substantial, high-quality presence in the US with leading market positions in a number of states. The business has an excellent customer base, a strong and well-invested operational infrastructure and an experienced management team.

The transaction is expected to complete on 31 March 2018, following receipt of customary regulatory consents and separation from NGL.

Headquartered in Illinois, Retail West has been in business for over 70 years and currently employs 390 people. It sells approximately 130,000 tonnes⁴ of LPG annually from 43 customer service locations and 58 satellite facilities.  The business trades under three prominent regional brands, Hicksgas, Pacer Propane and Propane Central, and a number of smaller, local brands.  Retail West has leading market positions in Illinois, Indiana and Kansas and also operates in seven other states across the Mid-West and North-West regions.

The business has a long-established and loyal base of 65,000 customers. Approximately two thirds of annual volume is sold to residential customers, predominantly for heating purposes, with the balance sold to commercial and agricultural customers in both small and large bulk format.

Retail West has a well-invested asset base of approximately 100 bulk storage facilities and a company-owned distribution fleet of over 150 vehicles. Retail West also owns the majority of tanks on customer premises. 

The business has an experienced and long-serving management team who have a strong track record of delivering both organic and acquisition growth.  It has operated as a standalone division within NGL and will continue to operate and develop under the leadership of its existing management team, post completion of the acquisition.

Retail West is expected to initially deliver an annual EBITDA of approximately $28⁵ million (£21 million) and EBITA of $20⁵ million (£15 million). The acquisition will be earnings accretive from completion and the after tax cash payback will be approximately 10 years. The business is very well placed to continue its track record of profitable organic growth and also provides a base for synergistic acquisition activity, both of which would further enhance returns.  

4, 5     Assuming normal winter weather conditions

DCC Technology

MTR

In July 2017, DCC Technology acquired MTR Group Ltd ("MTR"), a fast growing UK based provider of second lifecycle solutions for mobile and tablet devices.

Based in Harlow, Essex and employing 60 people, MTR provides a broad range of services to retailers, mobile handset manufacturers and insurance companies to source and refurbish mobile phones and tablets for resale to customers in the UK and abroad. In the year ended 30 November 2016, MTR generated service revenues of £11 million. The acquisition of MTR advances the DCC Technology strategy of expanding its service proposition to vendors and customers and provides access to the high growth second lifecycle solutions market. 

The following acquisition, announced in the prior year, was completed after the balance sheet date:

DCC Retail & Oil

Esso Retail Norway

On 25 October 2017, DCC Retail & Oil completed the acquisition of Esso Retail Norway. The acquisition is another significant step for DCC in building its retail petrol station business in Europe. The national network sells c. 600 million litres of fuel annually and is the third largest in Norway with approximately 20% of retail volumes. It comprises 142 company-operated sites (127 retail service stations and 15 unmanned stations) and has contracts to supply 108 Esso-branded dealer owned stations. The total consideration was approximately NOK 2.43 billion (c. £235 million), plus the value of stock in tank at the date of acquisition, and was paid in cash on completion. The acquired business, which is substantially asset backed, is expected to generate a return on invested capital employed of approximately 15% in the first full year of ownership.

Full details of the acquisition were set out in DCC's Stock Exchange announcement of 7 February 2017.

Total cash spend on acquisitions in the six months ended 30 September 2017

The total cash spend on acquisitions in the six months ended 30 September 2017 was £56.3 million. This included the payment of deferred and contingent acquisition consideration previously provided of £12.0 million, pre-completion deposits in respect of both Esso Norway and Shell Hong Kong & Macau, the acquisition of MTR and the completion of a number of small acquisitions.

Disposal

DCC Environmental

On 31 May 2017, DCC completed the disposal of its Environmental division for an enterprise value of £219 million, on a debt-free, cash-free basis. The Environmental division, which is active in the treatment and recycling of non-hazardous and hazardous waste in Britain and Ireland, comprises the British businesses, William Tracey Group, Oakwood Fuels and Wastecycle, and Enva in Ireland.

Full details of the disposal were set out in DCC's Stock Exchange announcement of 5 April 2017.

Capital expenditure

Net capital expenditure for the six months of £69.1 million (2016: £59.8 million) compares to a depreciation charge of £44.3 million (2016: £42.9 million). Net capital expenditure on a continuing basis was £67.8 million.

The increase in net capital expenditure over the prior year principally reflects the increased scale of the Group and also increased investment by DCC Retail & Oil in the organic development of its retail site footprint and upgrading of its existing network.

The construction of DCC Technology's new, purpose built, 450,000 sq.ft. UK national distribution centre in the north of England is now complete. The facility has been commissioned and the relocation from the existing warehouses, which is taking place on a staged basis, has begun, with a number of the existing facilities now closed. The relocation will be completed during the next financial year. The related upgrade of the business' technology platform is ongoing and is being completed on a phased basis.

Financial strength

An integral part of the Group's strategy is the maintenance of a strong and liquid balance sheet to enable it to take advantage of development opportunities as they arise. At 30 September 2017, the Group had net debt of £112 million, total equity of £1.6 billion, cash resources, net of overdrafts, of £1.4 billion and a further £400 million of undrawn committed debt facilities. The Group's outstanding term debt at 30 September 2017 had an average maturity of 6.8 years. Substantially all of the Group's debt has been raised in the US private placement market with an average credit margin of 1.61% over floating Euribor/Libor.

Management and organisational changes

As set out in DCC's Stock Exchange announcement of 5 April 2017, Donal Murphy was appointed as Chief Executive of the Group on 14 July 2017.

DCC is now reporting its LPG and Retail & Oil businesses as separate divisions, consistent with the revised management and organisational structure of the Group. Henry Cubbon, who previously led DCC's LPG business, continues to lead the business as Divisional Managing Director. Eddie O'Brien, previously Managing Director of DCC's Retail and Fuelcard activities, has assumed responsibility for all Retail & Oil activities. The four divisional Managing Directors, of LPG, Retail & Oil, Healthcare and Technology, report to the Chief Executive.

Outlook

The Group reiterates its belief that the year ending 31 March 2018 will be another year of profit growth and development.

Performance Review - Divisional Analysis

DCC LPG delivered strong organic growth in the first half of the year with operating profit increasing by 19.2% to £44.1 million (11.5% ahead on a constant currency basis), modestly ahead of expectations. 

DCC LPG sold 645,600 tonnes of product, an increase of 16.2% over the prior year, largely driven by the acquisition of Gaz Européen in the second half of the prior year. On a like-for-like basis, volumes were modestly ahead of the prior year. During the first half of the year, DCC LPG grew its operations in the natural gas sector, as evidenced by the recent launch of a consumer natural gas offering in France, and continues to invest in oil to LPG conversions across industrial and commercial customer sectors.

The business in France performed strongly during the first half of the year, delivering modest organic volume growth. Despite the headwind of a rising cost of product and the anticipated seasonal impact of natural gas storage and transmission costs, the business generated strong operating profit growth due to good procurement and operational cost control. Gaz Européen, which provides natural gas to energy management companies, collective housing and public and service sector customers, and was acquired in January 2017, performed in line with expectations. The French business has also recently launched a consumer natural gas and electricity business, utilising Gaz Européen's operating platform and leveraging the strength of Butagaz's leading gas brand position. 

Both the British and Irish businesses performed in line with expectations during the first half and delivered good organic volume growth.  In Ireland, the business has continued to develop its natural gas and electricity offering. In Britain, the business benefited from its continuing focus on the conversion of industrial and commercial users of oil to LPG. Although more modest, the business in Scandinavia also achieved good operating profit growth.

Since the announcement of the agreement to acquire Shell's LPG business in Hong Kong & Macau in April 2017, the carve-out, integration planning and completion process has been progressing to plan. The acquisition is expected to complete by the end of the current financial year.

On 7 November 2017, DCC LPG announced its agreement to acquire Retail West, a substantial LPG business operating in the Mid-West and North-West states of the US. The business has an excellent customer base and operational infrastructure and will provide DCC LPG with a material footprint in the very large US energy market. The acquisition is expected to complete on 31 March 2018.

Following the completion of the acquisitions of Shell Hong Kong & Macau and Retail West, DCC LPG will operate in nine countries and is well positioned to continue its expansion in both current and new geographies.

6     1 tonne of LPG equivalent to 1,969 litres of oil

DCC Retail & Oil recorded a good performance in the first half of the financial year, generating profit growth of 8.0% (2.9% ahead on a constant currency basis), in what was a very active development period for the business. DCC Retail & Oil completed both the acquisition and integration of Esso Retail Norway and also completed the restructuring and full integration of Dansk Fuels into its existing operations.

The volume growth of 7.7% was driven by the acquisition of Dansk Fuels, which completed in November 2016. Organically, volumes were in line with the prior year, notwithstanding the relatively colder weather conditions that prevailed in the prior year.  

In Britain, the business performed well, with good growth in commercial volumes offsetting lower heating volume demand. In the oil distribution market, the business continues to make good progress in expanding its activities into adjacent areas, such as lubricants and aviation.  The business has ambitions to develop a substantial unmanned retail network and continues this investment, opening eight new sites during the first half of the year, with a pipeline of further sites under consideration.  The Fuel Card business continued to perform strongly and grow its market share.

In Continental Europe, the Danish business delivered strong profit growth. Following the acquisition of Dansk Fuels in November 2016, the business has now been fully integrated into DCC Retail & Oil's existing operations in Denmark and Drogheda, Ireland. The Danish business now has leading market positions across the domestic, agricultural, commercial and aviation markets, in addition to operating 148 retail sites under the Shell brand.  In France, where DCC operates approximately 320 retail sites under the Esso brand, the business continued to invest in upgrading its sites and customer proposition and performed well in a more competitive market. Although more modest, both the Swedish and Austrian businesses performed strongly during the first half, delivering volume and profit growth.

In February 2017, DCC announced its agreement to acquire Esso's retail petrol station network in Norway. The national network sells c. 600 million litres of fuel annually and is the third largest in Norway with approximately 20% of retail volumes. It comprises 142 company-operated sites (127 retail service stations and 15 unmanned stations) and has contracts to supply 108 Esso-branded dealer owned stations. With the completion of the integration required to carve the network out of Exxon's global retail infrastructure, the transaction completed, ahead of schedule, in October 2017. 

Following the acquisition of Esso Retail Norway, DCC Retail & Oil now has substantial market positions across eight countries in Europe. In addition to its oil distribution and fuel card activities, DCC Retail & Oil has grown its retail footprint substantially in recent years and now operates a network of approximately 1,000 retail sites and supplies an additional 2,000 dealer-owned stations.

DCC Healthcare recorded a strong performance in the first half of the year generating operating profit growth of 11.6% (10.9% ahead on a constant currency basis), with approximately one third of the constant currency operating profit growth being organic. The business benefited from the acquisition of Medisource in the prior year and continued its track record of strong organic profit growth in the medical device and nutrition sectors. 

DCC Vital, which is focused on the sales and marketing of medical devices and pharmaceuticals to healthcare providers in Britain and Ireland, achieved strong growth in operating profit.  In Ireland, the business generated strong growth in the supply of medical devices to the Irish hospital and community care sectors and also benefited from the acquisition of Medisource in January 2017, which has further expanded DCC Vital's product and service offering in Ireland. In Britain, the business generated good growth in the sales of medical consumables to the primary care sector although the trading environment for DCC Vital's pharma activities in Britain remains competitive, exacerbated by the fall in the value of sterling in the prior year.

DCC Health & Beauty Solutions, which provides outsourced solutions to international nutrition and beauty brand owners, again recorded excellent organic growth in the nutrition sector. The business delivered strong growth in sales to nutritional customers, particularly soft gels, as it continued to benefit from its focus on more complex product formulations and from increasing end-user demand in Britain, Continental Europe and Asia. In the beauty sector, the overall performance was held back somewhat by an unfavourable sales mix and some destocking by customers, although the business generated excellent growth in sachet filling, including into the US market.

DCC Health & Beauty Solutions is progressing a number of investment projects across its manufacturing activities which will add new capacity and product capability over the second half of this financial year and into next year, enhancing its ability to meet the growing market demand for its services. 

DCC Technology achieved very strong operating profit growth of 25.8% (24.9% ahead on a constant currency basis), in the seasonally less significant first half of the year. The very strong performance was primarily driven by acquisitions completed in both the current and prior years. 

The UK and Ireland business performed very strongly and benefited from good growth in key product areas, such as smart home, enterprise and components, and from recent acquisitions.  Hammer, acquired in December 2016, has performed well since acquisition and has significantly strengthened DCC Technology's presence in the server, storage and related services markets.  The UK business has also enhanced its position in the audio visual market through both the acquisition of Medium, completed in December 2016, and the organic development of its vendor and product portfolio, particularly in the education sector. The business in Ireland achieved strong organic growth, driven by good business development in the mobile and retail sectors and growth in the sales of networking and security products.

DCC Technology continues to expand its service offering to customers and vendors and the acquisition of MTR Group, completed in July 2017, has significantly expanded the UK business' mobile device refurbishment and managed services capability and the business has performed well since acquisition. The new UK national distribution centre in Lancashire, a further enabler of the expansion in service offering, is now operational. The related upgrade of the business' technology platform is ongoing and is being completed on a phased basis.

In Continental Europe, the business in the Nordics generated good organic growth, driven by continued growth in IT, audio visual and entertainment products. In France, the French consumer products business remains challenging, but the business addressing the reseller and electrician markets performed well and is investing in its audio visual proposition.

The Supply Chain Services business continues to invest in its global service offering and achieved good organic profit growth as it benefited from new contract wins and effective cost control. 

Forward-looking statements

This announcement contains some forward-looking statements that represent DCC's expectations for its business, based on current expectations about future events, which by their nature involve risk and uncertainty.  DCC believes that its expectations and assumptions with respect to these forward-looking statements are reasonable; however, because they involve risk and uncertainty as to future circumstances, which are in many cases beyond DCC's control, actual results or performance may differ materially from those expressed in or implied by such forward-looking statements.

Principal risks and uncertainties

The Board of DCC is responsible for the Group's risk management and internal control systems, which are designed to identify, manage and mitigate potential material risks to the achievement of the Group's strategic and business objectives. The Board has approved a Risk Management Policy which sets out delegated responsibilities and procedures for the management of risk across the Group.

The principal risks and uncertainties facing the Group in the short to medium term, as set out on pages 15 to 17 of the 2017 Annual Report (together with the principal mitigation measures), continue to be the principal risks and uncertainties facing the Group for the remaining six months of the financial year.

This is not an exhaustive statement of all relevant risks and uncertainties. Matters which are not currently known to the Board or events which the Board considers to be of low likelihood could emerge and give rise to material consequences. The mitigation measures that are maintained in relation to these risks are designed to provide a reasonable and not an absolute level of protection against the impact of the events in question