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DCC plc (OTCPK:DCCPF) Q3 2023 Earnings Conference Call
November 14, 2023 4:00 AM ET
Company Participants
- Donal Murphy – Chief Executive
- Kevin Lucey – Chief Financial Officer
Conference Call Participants
- Annelies Vermeulen – Morgan Stanley
- Colin Grant – Davy
- David Brockton – Numis
- Rory McKenzie – UBS
Good morning, and welcome to DCC’s Interim Results Presentation for the Six Months Ended 30 of September 2023. I’m Donal Murphy, Chief Executive of DCC and I’m delighted to be joined by Kevin Lucey, our Chief Financial Officer. Here’s our standard disclaimer. Thankfully, I don’t have to read it. It’s there for your notice. Our agenda for today, I’ll cover off the highlights of the first half of the year which was another period of strong growth and development activity for the group. Kevin will take you through the performance review. I’ll give you an update on our strategy and our development activity and we’ll finish with our outlook statement and a summary before we open up the session for questions. So let’s get started with the highlights for H1 FY 2024. It was an excellent start to the year strong growth in operating profit for the group and an excellent period of acquisition activity. On our financial performance, we delivered strong growth in the seasonally less significant first half of our financial year to the 30 of September, 2023. We were really pleased with the performance given the ongoing challenges in the macroeconomic environment. Group adjusted operating profit increased by 12% to ₤247.6 million driven by an excellent performance in DCC Energy and partially offset as anticipated by a decline in both DCC Healthcare and DCC Technology. We were particularly pleased with our organic growth of 4.4% during the period. The Board proposes to increase the interim dividend by 5% to 63.04p per share. The strong performance of the group during the period yet again demonstrates the resilience in DCC’s business model the benefit of our diverse sectors of energy, healthcare and technology and our strong market positions and most importantly that we invest in what the world needs every day. From a development perspective, we made really good progress in delivering on our strategy. Since our results in May 2023, DCC has committed approximately ₤310 million to new acquisitions in DCC Energy, including as announced separately this morning the synergistic acquisition of Progas for ₤140 million a nationwide distributor of LPG in Germany, Europe’s largest energy market. The acquisition is subject to competition clearance. And the acquisition of five energy management services businesses further expanding our offering in this high-growth sector. These acquisitions demonstrate the progress we are making on the execution of our Cleaner Energy in Your Power strategy and more about this later. We enable people and businesses to grow and progress and we are future focused. We are embedding our strategic and sustainability agendas across the group. At our Energy Insights event on the 6th of September we publicly set our ambition to reduce our Scope three emissions by 50% by 2030 and to net zero across Scope 1, 2 and 3 by 2050 or sooner and we are well on track to achieving these goals. We announced today that for the first time in our history DCC has been issued with a credit rating by S&P Global Ratings and Fitch. We have been rated BBB a solid investment-grade rating. Finally, our preparations are well in hand for CSRD. I’ll hand you over to Kevin now who will take you through the performance review. Kevin. Kevin Lucey Thanks, Donal and good morning, everybody. So I’ll run through the first half performance at a group and a divisional level. So as Donal mentioned the first half in DCC is seasonally less significant from an activity and profitability perspective typically accounting for about 35% of our profits on an annual basis. Notwithstanding that it’s good to be reporting strong growth in first half operating profits and in line with our expectations overall. So revenue was £9.6 billion in the first half. And as you all know revenue is not always the most relevant metric for DCC given the operating model in our Energy division. I’ll talk through the divisional metrics in a few moments. But at a group level the revenue delta the prior year was substantially driven by the lower cost of energy commodities during the first half. And you’ll remember that the comparative periods so really elevated prices due to the energy security concerns at the time. So as Donal mentioned group adjusted operating profit was £247.6 million, 12% ahead of the prior year and a modest constant currency headwind so 12.2% ahead on a constant currency basis. We’ll come back and talk about the divisional contributions to that. But with a strong organic performance in Energy operating profit was organically up 4.4%. Adjusted EPS growth was 1.9% with the delta to operating profit growth being driven by a modestly higher effective tax rate of 20.3%. This reflects our expectation for the full year and is a little higher than prior year as the group grows internationally. And obviously we’ve also seen a number of jurisdictions increased corporation tax rates over the last 12 months. And as expected our increased interest costs accounted for the majority of the delta. Clearly the interest rate environment has changed materially versus the first half of the prior year and we saw that come through very much in H2 last year and so H1 this year has also seen it. Interest costs were modestly higher than H2 of the prior year. The Board has increased the interim dividend by 5%, which again will hopefully be welcomed by shareholders this morning. In terms of balance sheet and cash flow, working capital was in line with expectations in the prior year at ₤440 million. So we saw our typical seasonal outflow in working capital. On a like-for-like basis, the utilization of supply chain financing in DCC Technology was lower than the prior year by about $35 million. So we’re pleased with the performance from a working capital perspective generally. And on a rolling 12-month basis, the free cash flow conversion of the group remains very strong at 86%. Net debt excluding leases was approximately ₤1 billion. The increase in prior year is really all due to acquisition activity. Most of the prior year acquisition activity from a cash flow perspective was in the second half of the year. We spent ₤300 million in H2 of the prior year with ₤150 million in H1 this year. So ₤450 million in acquisition spend since this point last year. A couple of other quick points on the balance sheet. So I suppose we set out a number of years ago to improve the efficiency of the balance sheet and to also add to our funding options over time. During H1, we repaid ₤235 million in private placement notes from cash resources. We’re holding about 50% less cash relative to our EBITDA than we did three years ago. Just under 60% of our debt is now at fixed rates. This has increased from about 30% four years ago. We’ve had great support from the private debt market since 1996 and we continue to enjoy their support today. Strong investment grade credit ratings from S&P and Fitch that Donal mentioned earlier provides us with further optionality in terms of group financing into the future. We would expect the acquisition of Progas to close before the end of the financial year following the competition process, but we expect that to be late in the financial year. So we’re not expecting much if any of a profit contribution until FY 2025. And we’d expect to finish the year on the basis of the announced acquisition activity today with about one times net debt to EBITDA pretty similar to prior year. I won’t dwell on this slide for too long as we get into the detail of each division in a moment. But as you can see on the right-hand side, DCC Energy accounted for 69% of operating profit in H1 with DCC Technology and DCC Healthcare together accounting for 31%. Looking to the table on the left, you will see that at a group level we had a very modest constant currency headwind of just 0.2% with reported growth of 12%. And…
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