DCC : Final Results – 31 March 2024 Transcript

DCC Final Results - 31 March 2024

Tuesday, 14th May 2024

Introduction

Donal Murphy

Chief Executive, DCC plc

Good morning and welcome to DCC's Results Presentation for the year ended 31 March 2024. Thank you all for joining us this morning on our webcast.

Here is our standard disclaimer. Thankfully I do not have to read it out.

I am delighted to be joined today by four members of our leadership team: Kevin Lucey, Group CFO, Kevin has been our Group CFO since July 2020; Fabian Ziegler, CEO of DCC Energy, Fabian joined the Group as CEO of DCC Energy in November 2022; Conor Costigan, CEO of DCC Healthcare, Conor has been CEO of DCC Healthcare since July 2006; and Clive Fitzharris, CEO of DCC Technology, Clive has been CEO of DCC Technology since September 2022.

Agenda

On our agenda for today I will cover off the highlights of the year, which was another period of good growth and development activity for the Group. Kevin will take you through the performance review. Fabian, Conor and Clive will give you an update on the strategic progress across each of our divisions. We will finish with our outlook statement and a summary, before opening up our session for your questions.

Growth, Development and Strategic Momentum in Our 30th Year as a Public Company

So let us get started with the highlights of the year. This is DCC's 30th year as a public company and it has been another year of good growth and development, and indeed a year of excellent strategic momentum for the Group.

Growth

On our financial performance, we delivered good growth. We were pleased with this performance given the ongoing challenges in the macroeconomic environment. Group adjusted operating profit increased by 5.3% on a constant currency basis to £682.8 million, driven by the very strong growth in DCC Energy. We delivered excellent cash generation, with free cash flow of 100%.

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From a development perspective, we made really good progress in delivering on our strategy. Since our results in May 2023, DCC has committed approximately £490 million to new acquisitions, predominantly in DCC Energy. We significantly strengthened our scale and capabilities in energy management services and strengthened our liquid gas business in Germany and in the US. The board proposes to increase the dividend for the year by 5% to 196.57 pence per share. This will be DCC's 30th consecutive year of dividend growth.

The performance of the Group during the year yet again demonstrates the resilience in DCC's business model, the benefit of our diverse sectors of Energy, Healthcare and Technology, our strong market positions and, most importantly, that we invest in what the world needs every day. I would like to say a big thank you to my 16,600 colleagues whose capability, agility and commitment yet again delivered for DCC. Crucially, it has been a year of excellent strategic momentum for the Group.

Progress

In the Energy sector, there is a real need for progress to cleaner energy solutions that are secure, affordable and sustainable. In DCC Energy, we are ahead of our 2030 target to double our profits following a year of great progress in delivering on our strategy. The share of our energy profits coming from our services, renewables and other activities increased to 35% in FY24, up from 28% in the prior year and 22% in FY22. We accelerated the expansion of our multi-energy offering through nine acquisitions in France, the UK, Ireland, the Benelux and Austria. After a period of reduced market demand, we are pleased that our healthcare business returned to organic growth in the second half of the year. We also passed a material strategic milestone, with 52% of our Group profits now coming from non-fossil sources. Finally, we announced in November that for the first time in our history DCC has been issued with a public credit rating from Standard and Poor's Global Rating and Fitch. We have been rated BBB, a solid investment grade rating.

A Strategy Fit for the Future

DCC has always focused on building a growing, sustainable and cash-generative business which consistently produces returns on capital employed well in excess of our cost of capital. This has been successful over our 30 years as a public company because we always look to the future for growth opportunities.

We seek out the growth potential in our sectors, we operate our businesses well and help them to grow and progress, and we allocate capital prudently across our sectors to improve and scale our businesses. We invest and reinvest in essential solutions, solutions the world needs today and into the future, which underpins our sustainable growth and supports our purpose to enable people and businesses to grow and progress. We invest to grow our businesses organically, we invest in our sectors through M&A, which strengthens and scales our businesses, and we invest in our people to enable them to grow and progress. We operate and invest in sectors where we can see a very clear purpose, solving real needs with macro trends that provide us with growth opportunities.

In the Energy sector, we believe there is a real need for progress to cleaner energy solutions that are secure, affordable and sustainable. In Healthcare, we see the world's necessity for people to live longer

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and healthier lives. And in Technology we bring to market the products and services to make a progressive world a reality.

We are making really good progress against these objectives, and to demonstrate this I would like to pick out a number of developments from the year. We have built an AI platform in primary care within our Healthcare division, focused on enhancing revenue and increasing customer longevity. We have invested in new product formats in our health and beauty business, including gummies and multi-stick packs. We have created market leadership positions in HVO, an ultra-low carbon substitute product for diesel. We have scaled our Pro AV business into a global leadership position. We have developed our people processes, focused on creating a culture of continuous learning and development across the Group. By investing in targeted training programmes, personalised coaching and active career management, we are building a highly skilled and adaptable workforce that is equipped to tackle current challenges and propel our future growth.

We are ahead of our schedule in implementing our energy strategy. During the year, we made great progress on our energy management services development and service offerings. Since our results in May 2023, we have committed approximately £490 million to acquisitions, the majority of which is dedicated to adding services for the decarbonisation of our customers. These acquisitions not only expand our technological and service capabilities, but also strengthen our team with entrepreneurial people, enriching our Group with their expertise and commitment to excellence.

We have also strengthened our liquid gas business in Germany through the acquisition of Progas. The picture on the right is our new team from Next Energy, an acquisition announced this morning which transforms our offer to domestic customers in the UK market. Fabian will talk more about our energy developments a little later.

Three Decades of Excellence as a Public Company

DCC has a proven business model that has consistently delivered high growth and high returns over our 30 years as a public company. Our Group strategy has been consistent since we went public in 1994. Over our 30 years as a public company, we have grown our operating profits by 14% CAGR, had free cash flow conversion of 99%, delivered unbroken dividend growth to our shareholders of 13% CAGR, all while maintaining high returns on capital employed. If you invested £100,000 in DCC plc when we floated 30 years ago, your investment would be worth £6.4 million today. After 30 years as a public company, I believe we are only starting on our journey.

Our Investment Case: Double Group Profits by 2030 at High Returns

And finally from me, I would like to summarise our investment case. Our ambition is to double our profits by 2030, while maintaining high returns on capital. We will deliver this growth by leveraging our strong platforms in growth markets, our devolved and empowered management teams, and we will continue to innovate and develop to deliver on growth opportunities. By doing all this, we aim to compound profits for shareholders by at least 10% per annum on average.

We are strong operators. Our first priority is to deliver, on average, between 3% and 4% organic profit growth per annum. We are prudent capital allocators. We will consolidate our fragmented markets, leveraging our excellent M&A capability. We believe that, on average, this will deliver between 6% and

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8% additional growth per annum, and our target is to deliver mid-teen returns on capital employed. We also believe that this growth will be self-funded, given the strength of our balance sheet and the very strong free cash flow generation of the Group.

I will now hand you over to Kevin, who will take you through the performance review of the year. Kevin.

Performance Review FY24

Kevin Lucey

CFO, DCC plc

Financial Highlights for the Year Ended 31 March 2024

Thanks Donal. So, Donal has covered the key highlights, and now we are going to look at the trading performance in more detail. So, you will see here, on the slide, we recorded revenue of £19.9 billion. We had a significant increase in the prior year when the wholesale cost of energy products increased, and we saw that unwind in the current year leading to a decline in DCC Energy revenue and that driving the Group reduction. In line with our expectations, Group adjusted operating profit was £682.8 million, an increase of 4.1% or 5.3% on a constant currency basis. Adjusted EPS growth was very modestly behind the prior year, or 0.9% ahead of the prior year on a constant currency basis. As expected, our effective tax rate increased, but, more materially, the higher interest rate environment relative to prior year increased the cost of the floating element of the Group's debt. As we guided, higher interest costs have been a headwind for earnings over the last two years. Our specific guidance on interest and tax and other items is included in the appendix as usual, but given where Central Bank policy is at the moment, we do not expect interest costs to be a material headwind into FY25.

As you will know, we place great emphasis in DCC on cash generation and we were really pleased to deliver a very strong cash flow performance in the year, with over £680 million of free cash flow generated, up £110 million on prior year and an excellent 100% free cash flow conversion. Donal mentioned earlier the proposed increase in the dividend, our 30th year of unbroken dividend growth since IPO.

On returns, return on capital employed remains strong at 14.3%, albeit lower than prior year. The lower return on capital employed reflects the organic decline this year in our health and beauty business and DCC Technology and the substantial capital deployment in recent years in DCC Healthcare and DCC Technology. If we finish the year at 0.9x net debt to EBITDA pre-IFRS 16 leases, the net debt position reflects the acquisition of Progas and eEnergy just prior to year-end without much profit contribution, so the metric looks a little better again on a pro forma basis.

The balance sheet remains very strong. Looking forward, given the cash generation in the Group and allowing for the acquisitions announced today, we would expect that we will be at approximately 0.7x net debt/EBITDA by end of year if we announce no further acquisition spend.

Divisional Results for the Year Ended 31 March 2024

So, looking at the high-level results by division, you can see that DCC Energy increased its profits by 9.9% to £503 million, 10.8% growth on a constant currency basis. DCC Healthcare profits were back by 4% to

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£88.1 million, down 3.6% constant currency, and DCC Technology profits declined 13.6% to £91.7 million, back 10.7% constant currency.

On the right-hand side of the slide you will see 74% of the Group's profits came from DCC Energy during the year, 26% from DCC Technology and DCC Healthcare. In terms of the geographic mix, you can see Continental Europe accounted for 43% of profits, UK and Ireland 36% of profits, and the rest of the world, which is principally North America, 21% of profits.

DCC Energy Performance Summary

Very strong performance, excellent strategic progress

We will go through the trading in each of the divisions in a bit more detail now. So, DCC Energy delivered very strong performance during the year and made excellent progress in further delivering on our 'Cleaner Energy in Your Power' strategy. The growth in the year was driven by the Energy Solutions business, with the Mobility business, as expected, broadly in line with the prior year on a constant currency basis.

Overall, we recorded 10.8% constant currency profit growth; organic profit growth was more than half of this at 5.9%. We delivered very strong growth at strong returns. We saw our share of operating profits in the division from services, renewable products and services, rise to 35% from 28% in the prior year and 22% the year before that. Again, the detail is in the appendix, but in the year from a product and service standpoint, 35% of our profits, as I have mentioned, came from SRO products, 46% from our lower carbon products such as liquid gas, and then 19% of profits from our traditional products.

We reduced our Scope 3 customer carbon emissions by 3%, which meant we also lowered the carbon intensity of our profits again this year. Volumes were modestly behind the prior year, reflecting warmer winter weather conditions and weaker retail transport volumes in France.

So, as mentioned, our Energy Solutions business had a very strong year, profits were up 15% constant currency. We had good growth across all regions, bar the US where very mild weather was a particular headwind for our business there, given the customer base is largely domestic-heating related. We had very strong growth in Continental Europe and in the Nordic region, where we saw good demand across our energy management services businesses, including solar, and from commercial and industrial liquid gas customers, particularly in the Nordic region. We also had a very strong performance in the gas and power business in France, as we also did in Ireland too, actually, where we saw a recovery as wholesale energy costs decreased relative to the prior year. In the UK and Ireland we also had good growth. We benefitted here from the acquisition of leading commercial and industrial solar business Centreco particularly, and we also delivered continued growth in our liquid gas business. We continued to invest in converting commercial and industrial customers to liquid gas, and also completed our liquid gas storage facility in Avonmouth.

We made acquisitions across each region in Energy Solutions and Fabian will talk about that in more detail later. The acquisitions completed during the year performed well and accounted for almost half of the divisional growth, with further benefit to come from these and the new acquisitions announced this morning in FY25 and beyond.

I mentioned already that our Mobility business performed in line with our expectations. The performance reflected a very competitive market in France, which impacted volumes and margins, particularly in Q3.

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We had good growth across the other parts of the business, with continued growth in our digital service offerings and in convenience. So, in summary, we are very pleased with the performance in the Energy division for the year, continuing on for a number of years of strong performance.

DCC Healthcare Performance Summary

Return to organic growth in H2

DCC Healthcare returned to organic growth in the second half of the year following 18 months of difficult market conditions for DCC Health & Beauty Solutions. For the division as a whole, operating profits were back 4%, or 3.6% constant currency, and 11.3% organically.

DCC Vital delivered good growth and benefited from the acquisition of Medi-Globe in the prior year. We performed well across most regions in DCC Vital, particularly so in Ireland, Germany and France. The UK was weak across both primary care and medical devices, reflecting a weak demand environment, with the NHS experiencing a number of challenges which curtailed patient care during the year. From a product perspective, we saw good performances across the gastro and urology categories.

As reported previously, DCC Health & Beauty had a difficult first half on the back of a difficult prior year also, but we saw demand begin to improve over the second half and we began to lap weaker comparatives. We have seen Europe recover a little sooner than the US market, but we saw order books weaken initially in Europe before the US. Given the demand environment, we focused on new business development and on efficiency during the year, and we consolidated our smallest US facility into our larger Florida facility. It is pleasing to see the business recover off its lows and return to organic growth. Conor will talk a little about the market outlook and longer-term demand perspective later.

DCC Technology Performance Summary

Focus on efficiency, maintaining market share

In DCC Technology, as expected revenues were back almost 8% constant currency, reflecting the weaker demand environment for consumer technology that we have seen for just over 12 months now. Operating profits were back 10.7% constant currency, reflecting modest negative operating leverage.

Whilst clearly the market has been challenged, the team have been working very hard to ensure we deliver the best profit result possible, with costs flat on a like-for-like basis despite the significant inflation we have seen. The weakest areas from a profitability perspective were all in the consumer-focused areas, in particular in Info Tech in Continental Europe and Life Tech in the US. B2B demand was more robust.

Notwithstanding the revenue decline in our Info Tech UK operations, we delivered good profit growth, with efficiency and optimisation efforts paying off, and we also performed well in Ireland. Clive will talk a little later on how these efforts will continue into FY25 and beyond as we seek to drive profits and returns from the division.

Adjusted Operating Profit Bridge FY23 to FY24 and Free Cash Flow Generation for the Year Ended 31

March 2024

So, this slide looks at it all from a Group level. So, in the waterfall you can see the overall growth in profits, up to £683 million. Sterling strengthened relative to the prior year against a number of currencies, so as we guided throughout the year we saw an FX translation headwind of 1.2%. M&A contributed 4.5%,

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principally Medi-Globe in DCC Healthcare and Centreco in DCC Energy. It is worth pointing out that a lot of the acquisition activity during the year completed later in the year, including Progas, eEnergy and obviously more recent acquisitions such as Next Energy, so these are not fully reflected in the current year results.

Finally, organic growth was 0.8%. We achieved this organic growth despite the significant headwinds we had organically in DCC Healthcare and DCC Technology. I have mentioned it already, but we had excellent free cash flow conversion of 100%.

We continued to invest in the business organically during the year. The notable CapEx investments were investments in new customer installations in our Energy Solutions business and upgrading our retail site network in Mobility, improving our EV and convenience capability, which in turn helps with our SRO profitability. We also invested materially in our health and beauty manufacturing facilities to add new capability and capacity in what will be a long-term growth market for us. We recorded an inflow in working capital, driven by a strong performance in DCC Energy and also a good performance in DCC Technology.

So, to finish, just to mention the consistency of performance and the consistency of cash flow generation we have had, so regardless of what period you look at across our 30-year history in the public markets. You will see in the appendix to this presentation we have a cash flow. We have our cash flow this year set against our 30-year cash flow. You will see that the 100% cash flow conversion this year mirrors what we have done across our history. So, whilst plenty has changed and progressed and grown over our 30 years as a public company, we have continued that consistent cash generation, which is a hallmark of DCC and one which enables us to look forward with confidence.

Now, I will hand you over to Fabian.

DCC Energy 2030 Vision

Fabian Ziegler

CEO, DCC Energy

The World Needs Cleaner Energy for Everyone

Our 2030 vision - double profit and half carbon

Thanks Kevin. We are proud of our strong profit growth and progress with strategy execution. This slide is a reminder of 'Cleaner Energy in Your Power' launched last May and presented deeper at our investors event in Paris. This strategy is our constant and we are delivering it ahead of schedule.

We act as trusted partner to our 1.7 million customers, supporting them through the energy trilemma. We provide decentralised energy solutions, combining molecules in blue and electrons in green. In our internal change, we reduced the carbon intensity of our liquid fuels business by ramping up HVO and second-generation biofuels to replace diesel and heating oils by maximising our liquid gas position as a lower carbon alternative, and we drive more renewable liquid gas offers. In our more external change, we have made huge progress building the leading European energy management services business, the green box on the right-hand side. We are ahead of our 2030 target.

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We cross-sell energy management options into our liquid fuels and gas customer base. We develop multi- energy solutions in many markets. We also progress in our Mobility business. We just won the Best EV Hub in the World award for our Mandal site in Norway. We now have HVO pumps on 90 mobility sites across our network in Europe. In Ireland, we launched HVO on forecourts this year and we ran a campaign with Škoda that was high profile. Our strategy is about winning with our customers, growing customer footprint and share of wallet.

The World Needs Cleaner Energy for Everyone

Strong conviction based on our recent success

Three key messages on this slide here. You know our metric SRO, which measures the proportion of profits from services and renewables, essentially no carbon formats. We have grown this to 35% from 28% last year and 22% two years ago. The bulk of the growth is coming from solar installation and renewable electricity.

We are one of the few companies that manages to decarbonise by growing and retaining high returns. In the middle of the chart you can see that we keep seeing returns from our almost 20 renewable acquisitions that are aligned with our traditional fossil returns. The left-hand side shows the return at the time of acquisition, and on the right-hand side you can see the up-to-date return. Let me add that the 15% is an underestimate as our only solar distribution business was affected by the drop in panel prices during the year. Excluding this, ROCE increases to 18%.

Most important is that we consistently grow our renewable customer sales and marketing capabilities. We re-expose our energy business to fast-growing segments of the energy sector and we gain customers and share of wallet. We strengthen our renewable energy marketing capability; we have become the leading marketer of HVO across Europe. We reached 150 megawatts of solar installation capacity across Europe. We launched the Wewise brand in France and that is a Europe-wide umbrella for international customers. In the UK, we have reached a state where we can offer a full suite of decentralised energy management offerings, including engineering and digital solutions.

We cement and deepen existing key customer relations, as well as gaining access to new customers. We replicate with multisite customers, such as the French hypermarkets. We gain with blue-chip customers, building our international accounts capability, for instance with AWS or DHL, and we made really nice HVO customer gains. This all gives us confidence that we will manage to accelerate our organic growth, gain market share and grow our lifetime customer value.

DCC Energy 2024 Progress Exceeds Rate Set Out in 2030 Vision

Which leads me to the last chart, which shows that we are ahead of schedule to reach our 2030 long-term ambition to double profits with half the carbon. The acquisition boxes for liquid gas and for EMS are pro forma full-year '24 numbers, whereas the organic growth is actual. For lower carbon liquid gas, following our deal for Progas in Germany this year we are very confident that we will reach or exceed our targeted growth to 2030. We are 40% of the way to our EMS acquisition target after only two years, and as part of that today we are announcing the deal for Next Energy. We have been consistent in saying that we see the bigger immediate opportunity with C&I customers, who will move more quickly than domestic customers. The biggest opportunity today within domestic is the government-backed retrofit market. We

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have acquired the market leader in the UK, Next Energy, which has an addressable government-backed market of 16 million homes out of the UK's 28 million housing stock. The business provides retrofit services, such as insulation, heat pumps and solar, and this business will lead our domestic multi-energy offering in the UK.

The focus, now, is on really driving organic growth. We are well-positioned here, with strong supply partnerships and growing customer demand in HVO. We increased our biofuel supply by more than three times this year, from just under 60 million litres to over 150 million. In EMS we have a unique, EU-wide installation capacity and work to assemble our acquired capabilities to offer differentiated customer value propositions. As we continue to integrate our multi-energy offering, we will continue to win with our customers, grow profits and enhance returns.

Thank you. I hand over to my colleague, Conor.

DCC Healthcare

Conor Costigan

CEO, DCC Healthcare

Thank you very much, Fabian, and good morning everyone. I am delighted to have the opportunity to update on the strong strategic progress we are making in DCC Healthcare.

The World Needs Lifelong Health

We are set for 5%+ growth - we have invested in healthcare and H&B market has now bottomed

The healthcare market has been and continues to be a long-term growth market, averaging mid-single- digit growth rates across our sectors. The fundamentals remain attractive; favourable demographics, healthcare policies and consumer trends. The health and beauty market challenges over the last couple of years have now bottomed out. As you heard earlier, we are back in growth in H2 of this year and we expect to generate good growth in FY25.

Strategic progress

Kevin described earlier that trading conditions were challenging throughout most of FY24. However, we are continuing to make strong strategic progress. We are strengthening our divisional and business leadership teams, enhancing our org structure to increase our agility, and improving the quality and robustness of our three international growth platforms in medical devices, primary care supplies and contract manufacturing of nutritional products. Each of these platforms has the potential to scale significantly at a global level.

International growth platforms

In medical devices, following the acquisition and integration of Medi-Globe we are now a leading player in Europe; across Ireland, Britain, France and Germany. We have particular strength in gastroenterology and urology, higher growth segments of the healthcare market, and we are making good progress with the launch of the Medi-Globe gastroenterology range in the UK, leveraging our existing market access

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infrastructure. We are also expanding and accelerating the development of our own-brand product pipeline.

In primary care supplies, we have leadership positions in Britain, Germany and Switzerland, and we have ambitious plans for further geographic expansion. We are continuing our strategic investment in our primary care technology platform across ERP, digital sales and AI; an exciting project which Donal referred to earlier. This provides an enhanced platform for growth, improved customer experience and efficiency. To date, the investment in technology has been primarily focused on the UK market, but the rollout to our German business is now also underway. Primary care is a fragmented sector across Europe, and through building strong foundations in technology and distribution infrastructure this will allow us to augment our organic growth with synergistic plug and play bolt-on acquisitions.

In health and beauty we are a leading contract manufacturer of nutritional products in both the US and Europe. As you know, the market has been tough for all CMOs over the last two years, but we believe we have weathered the storm better than most of our competitors. We have been operating successfully in this sector for more than 25 years. The market has been a long-term growth market, underpinned by positive long-term trends, increasing consumer interest in health and wellness and proactive healthcare, increasing regulation of the nutritional supplements market, which favours well-resourced CMOs like DCC Health & Beauty Solutions.

The market is projected to return to consistent mid-single-digit growth over the coming years, and we are confident of the long-term outlook for the market and that our businesses will generate good growth and increasing returns. We have invested with that positive future outlook in mind.

We completed two gummy manufacturing lines during the last 12 months, serving the US and European markets. We are enhancing our capability in stick packs for the US market, a key packaging format for the growing powder nutrition category.

We have enhanced our sustainability credentials with investment in renewable energy generation at our facilities, and we are also enhancing our leadership and demand creation teams to leverage our new product format capability and to better exploit the cross-selling opportunities across our customer network.

In conclusion, we are excited about the prospects for DCC Healthcare driving organic growth and return on capital employed improvement in FY25 and beyond. As we see the benefit of the investments in our health and beauty facilities, onboarding new business and driving capacity utilisation, the investment in our primary care technology platform, and accelerating synergies from the recent European acquisitions in medical devices and primary care.

Now I will hand over to Clive.

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