DCC : Group update and acquisition of Almo transcript

Group update and acquisition of Almo transcript

Wednesday, 15th December 2021

DONAL MURPHY, CHIEF EXECUTIVE, DCC PLC

INTRODUCTION

• Good morning and Welcome
• I'm Donal Murphy, Chief Executive of DCC and I'm joined on the call this morning by a number of my colleagues
• Here with me in DCC House is Kevin Lucey, our CFO
• from the UK Tim Griffin, MD of our Technology Division
• And from a very early morning in Philadelphia, Clive Fitzharris MD of our International Technology businesses
• Thank you for joining us this morning on this very exciting day for DCC as we announce the significant expansion of DCC Technology in North America through the acquisition of Almo Corporation. This is DCC's largest acquisition to date. We also want to take the opportunity this morning to update you on our Group Strategy and our capital allocation framework which we believe will create significant shareholder value over the short, medium and long term.
• Thankfully I don't have to read the disclaimer
• I'll give you an update on the Group Strategy and our value creation model
• I'll take you through our growth to date in North America to demonstrate our strategy in action
• Tim will update you on the DCC Technology Strategy and our growth in North America
• Clive will take you through the highlights of the Almo acquisition and why we see it as a really exciting opportunity and a very important step in the further development of our business in North America
• Kevin will then give you an update on our capital allocation framework, our priorities for capital deployment and our growth agenda
• And I'll wrap up and open up for Q&A

GROUP UPDATE: OUR BUSINESS MODEL FOR GROWTH

• DCC is a purpose led organisation and we are focussed on the value we create for all our stakeholders. Our Purpose "enabling people and businesses to grow and progress" really came to life throughout the pandemic as DCC delivered the essential products and services that people and businesses required while also delivering a strong financial performance.
• We achieve this by building impactful connections, as a distributor we are at the heart of the supply chain connecting the producers of products with consumers
• We're a trusted provider building long term and deeply embedded partnerships with our customers and our suppliers

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• We focus on creating sustainable growth and superior value over the long term
• We achieve this though a consistent strategic objective to build a growing, sustainable and cash generative business which consistently provides returns on capital employed significantly ahead of our cost of capital
• Throughout our presentation today, you will see the key elements of this strategy in action
• We take a long term, sustainable view of value creation which ensures our commercial strategies prioritise growth and create value adding strategic positions in our chosen markets. You will see later how Almo fits this objective
• Our focus on capital allocation ensures our ability to reinvest into growth trends and Kevin will show you later how our capital allocation priorities are aligned with the growth trajectories of our sectors
• And finally sustainability is core to everything we do across the group and we are making really great progress on our sustainability agenda including our journey to Net Zero, more on this from me in a few moments
• We have a proven business model that has consistently delivered high growth and high returns over our 27 years as a public company. We achieve this by driving the organic performance of our businesses, investing and reinvesting capital and leveraging the benefit and resilience of our diverse sectors.
• We have proven processes for the financial and commercial management of our businesses driving organic growth and consistent cash conversion
• Our Group centre empowers our businesses while providing expertise and shared value in specialised areas
• We add value through economies of scale, synergies and deep industry experience
• We build long term and deeply embedded relationships with our customers and suppliers
• We invest capital in our businesses and deploy capital on large and small scale acquisitions where the returns on capital employed are consistently ahead of our cost of capital
• We reinvest cashflows to enable our businesses to grow and scale creating real value for shareholders
• As we will further demonstrate today, that we are an advantaged acquirer for businesses in our sectors due to our long term outlook, a differentiation from private equity and scale benefits of a strategic acquirer
• Our diversification by sector and geography gives us optionality to pursue the assets with the highest returns while also providing great resilience
• And our devolved model ensures proximity to customers, local responsibility and focus which creates real agility and drives a high performance culture.
• Our diversified model provides significant expansion opportunities and creates real resilience.
• We have clear winning strategies for each of our sectors:
• In Energy our strategy is to Lead the Energy Transition, bringing decarbonisation closer for our customers through domestic and commercial energy solutions and multi-fuel mobility networks. We are making really good progress and regularly update the market on the innovative products and solutions we are providing to our customers to reduce their carbon footprint. We will host an Investor Event in calendar Q2 next on our Energy Strategy
• Our Healthcare strategy

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• is to build a substantial international healthcare group focused on the provision of high quality contract manufacturing and related services to Health & Beauty brand owners and on the supply of medical products to healthcare providers.
• Conor Costigan gave a good update on our Healthcare strategy at our Healthcare Investor Event last September, a recording of which is available on our website
• And finally our Technology Strategy is growing a leading international specialist distribution group in technology and lifestyle products; and Tim will outline more on this shortly.
• Regardless of sector all our businesses have consistent characteristics; they are:
• Customer focused sales, marketing, distribution or light manufacturing businesses
• Asset light with relatively low capital intensity
• Generate recurring revenue with high cash conversion
• In devolved markets with similar risk profiles and importantly with consolidation opportunities
• This chart summaries the points I've discussed already and emphasises why we believe that DCC's diversified business model really delivers and will continue to do so over the long term.
• It provides:
• • Resilience through cycles
  • Exposure to multiple growth trends
  • Optionality in capital allocation
  • Facilitates geographic expansion
  • Creates many career opportunities for our people, our greatest asset
  • And it provides the ability to leverage operational and divisional best practice adding real value to all our businesses
• This is enabled at the Group level by:
• • A clear strategic direction and capital allocation framework
  • A culture of driving performance and growth
  • Backed by financial strength and discipline
• As I mentioned a few moments ago sustainability, aligned with our purpose, is core to everything we do across the Group and we are committed to driving excellence in sustainability.
• During the year we launched our first stand-alone sustainability report
• In November 2020 at our Energy Event we set out our approach to driving excellence in Sustainability and related reporting.
• In this context we are delighted to have very recently retained our AAA rating from MSCI
• And improved our CDP rating to B, up two classes, which is a significant achievement for our team.
• We are also making great progress on our journey to Net Zero

DCC NORTH AMERICA: SCALING OUR BUSINESS TO CAPTURE MARKET OPPORTUNITIES

• Now let me use our expansion into North America as a case study to demonstrate DCC's strategy in action
• Less than 4 years ago DCC decided to expand into North America and today, after the acquisition of Almo, we now have c. 30% of our Group capital employed in North America, businesses in all our sectors and approximately 3,000 colleagues growing and developing our business in North

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America. But most importantly we are only starting - as we have small shares in large, fragmented sectors. With the growth platforms we've created we now are an advantaged acquirer in North America.

• Having identified the nutritional contract manufacturing market as a very attractive fragmented market where we could leverage the knowledge and experience of our European business, we set about building relationships with businesses in the sector. Our first acquisition in North America was in February 2018 when we acquired Elite One Source, a nutritional contract manufacturer based in Montana. We further expanded our business in this sector through the acquisitions of Ion Labs in November 2019 and Amerilab in March 2020. Organic growth in our nutritional business in North America is strong. And we've created a platform for further capital deployment in this attractive high growth sector.
• In April 2018 we acquired Retail West: our entry into the energy sector in North America. Retail west, now DCC Propane, had operations in 10 States, mainly in the Midwest. Since the acquisition we've grown strongly, deploying c. $500m in total to create a business operating across 22 states suppling propane and related products and services to approximately 300,000 customers.
• And similarly in technology we have created a substantial platform for growth which Tim will take you through shortly.
• What pleases me most about our progress in North America is the organic growth we've achieved by leveraging the DCC business model we discussed earlier
• As I mentioned earlier geographic diversity has created great resilience in our business and created platforms for further growth. Over the past decade we've evolved the Group from being principally a business operating in the UK and Ireland to a Group operating in 21 countries on 3 continents.
• Today, the UK and Ireland accounts for c. 32% of our capital employed, Continental Europe has 34%, North America is the home for 31% with the balance in Asia.
• We have also sharpened our strategic focus over the past decade exiting sectors and businesses that did not fit our strategic framework or where we did not see sustainable growth in the medium to longer term.
• We exited our Food and Beverage Division in 2015
• We exited our Environmental Services Division in 2017
• And we also divested a number of businesses in our core sectors of energy, healthcare and technology where the growth rate or the returns profile did not meet our objectives.
• We will always focus on optimising our portfolio in line with long term trends and our long-term strategic objective
• Our expansion into North America has created substantial value. We have deployed c. $1bn (pre Almo) in North America and as you can see on the chart, significantly improved the return on capital employed from the entry level returns.
• We've achieved this by applying the DCC business model we discussed earlier:
• driving organic growth and operational efficiencies
• through capital discipline and capex investment
• and by extracting cost synergies

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• We have already created businesses of substantial scale in North America in each of our sectors. I won't call out the stats. you can read them for yourselves, but the more important point is that we have created platforms for further growth as all our sectors are large fragmented markets where we still have relatively small market shares.
• In energy there is considerable roll up potential given the highly fragmented nature of the propane market. We will also invest in our energy transition strategy bringing low carbon and renewable multi-energy products and services to our customers
• In Health and Beauty we are investing capex to further develop our capability, capacity and form factors while seeking further consolidation opportunities
• And now I'll hand you over to Tim who will update you on our technology strategy and our growth in North America
• Tim

TIM GRIFFIN, MANAGING DIRECTOR, DCC TECHNOLOGY

DCC TECHNOLOGY: GROWTH IN NORTH AMERICA

• Like elsewhere in the DCC Group, in DCC Technology we are focused on the value we create for all our stakeholders. We talk all the time in DCC about partnerships… In DCC Technology we bring this to life by building really impactful connections between our vendors and our customers.
• For our 2,500+ vendors/suppliers, we provide reach and market access. We support them through our sales, marketing and distribution channel, enabling them to maximise demand for their products.
• We are the route to market for our vendors across 19 countries.
• For our more than 50,000 customers, we provide vast breadth of solutions and product choice offering supply chain simplicity and the ability to leverage our technical and logistics capabilities.
• We have embedded long-term relationships with vendors and customers. They trust us because they know the value we add as their vital partner in the growing distribution channel
• The fantastic thing about this industry is that it is always changing and growing. Distribution is providing more and more of the services that vendors and customers require to be agile in a dynamic market. The trends towards e commerce, working from home, smart home… I could go on of course- are all being enabled by DCC Technology and the services we provide.
• We are constantly innovating to add value to our customers and vendors:
• Although the technology industry is always evolving, our position between our vendors and customers remains familiar. Our specialist focus really delivers that extra expertise and technical capabilities which bring real value to our vendors and helps us make the market for their product.
• Our knowledge, expertise and technical support are increasingly valuable for customers where products are changing constantly. We make the complex simple - for example the Pro AV architecture for a major event centre or the installation of Pro AV equipment or premium appliances in a large new construction project. We work hand in hand with the integrator to design the best solution for the end user.
• We also support the new technology coming to market with our own-brand or white label products which are complementary to our vendors' offerings - and helps build out their offering in terms of accessories or other essential peripherals and which helps their overall go-to-market

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