Chief Executive’s Review

Chief Executive’s Review

“Another year of profit growth and improved returns on capital”

It is pleasing to report that in another year which has seen ongoing difficult economic conditions in each of our principal geographic markets, DCC has generated operating profits of €229.6 million which represents growth, on a constant currency basis, of 15.5%. Approximately 77% of the Group’s operating profit was denominated in sterling in the year and the impact of a 4% favourable movement in the average sterling : euro exchange rate resulted in reported growth in operating profit of 19.1%.

Results Highlights
             Change on Prior Year
    Reported Constant
Currency†
         
Revenue 8,680.6m   +29.1% +25.4%
Operating profit* 229.6m   +19.1% +15.5%
Profit before exceptional items, amortisation of intangible assets and tax 214.8m   +18.0% +14.3%
Adjusted earnings per share* 203.15 cent   +14.1% +10.5%
Dividend per share 74.18 cent   +10.0%  
Operating cash flow 269.6m (2010: €297.8m)    
Free cash flow** 123.6m (2010: €229.1m)    
Net debt at 31 March 2011 45.2m (2010: €53.5m)    
Total equity 931.9m (2010: €836.9m)    
Return on total capital employed 19.9% (2010: 18.4%)    

† All constant currency figures quoted in this report are based on retranslating 2010/11 figures at prior year translation rates
* Excluding net exceptionals and amortisation of intangible assets
** After interest and tax payments

Adjusted earnings per share of 203.15 cent was 10.5% ahead on a constant currency basis and 14.1% ahead on a reported basis.

Dividend per share is up 10% to 74.18 cent with dividend cover at 2.7 times (2.6 times in 2010).

In the two previous financial years the Group achieved a material reduction in working capital days – which fell from 16.4 days at 31 March 2008 to 4.6 days at 31 March 2010. This reduction was largely maintained at 31 March 2011 with working capital days at 4.9 days. Operating cash flow in the year was €269.6 million. Free cash flow was €123.6 million after higher than normal capital expenditure and tax payments.

A focus on driving returns on total invested capital well in excess of its cost of capital has always been core to DCC’s strategy. It is therefore good to report that in the year to 31 March 2011, return on total invested capital increased to 19.9% from 18.4% in the prior year.

DCC employs just over 8,000 people and I have spoken previously of the talent and commitment that exists throughout the Group. These results are a reflection of that talent and commitment. In the year just past our people demonstrated that commitment to our customers in many ways – in particular there are many examples where significant effort and sacrifice was made to ensure the maintenance of customer deliveries and service through some very extreme winter weather conditions. I would again like to thank all of our people for their dedication.

Divisional Highlights

Each of the five divisions reported operating profit growth for the year and detailed business reviews for the divisions are set out on pages 18 to 37. Key features of the year include:-

DCC Energy had another year of excellent profit growth, benefitting from the successful integration of a number of acquisitions completed in prior years and another extremely cold winter overall. Volumes increased by 15.5%, due to the impact of acquisitions and this resulted in DCC Energy selling 7.1 billion litres of product in the year. A number of small acquisitions were completed during the year and in February 2011, as previously announced, DCC Energy reached conditional agreement to acquire the entire issued share capital of Pace Fuelcare, a British based oil distribution business which sells over 500 million litres of fuel to independent retail petrol stations and a broad range of commercial, industrial, agricultural and domestic customers. This acquisition is subject, inter alia, to clearance from the UK Office of Fair Trading (OFT).

DCC SerCom had a very good year of profit growth and development. The division benefitted from an excellent performance in SerCom Distribution which achieved constant currency operating profit growth of 16.6%. This result reflected very strong organic growth in the Reseller business, good organic growth in the Retail business and the benefit of acquisitions completed during the year. In October 2010, DCC SerCom completed the acquisition of Comtrade SA, a leading distributor of AV accessories and peripherals to the retail sector in France. This acquisition is a further step in DCC SerCom’s strategy to extend its product, customer and market coverage in Retail distribution. In March 2011 DCC SerCom completed the acquisition of Advent Data Limited, a leading distributor of electronic office supplies to a broad range of resellers, retailers and e-tailers in the UK. The acquisition of Advent Data is consistent with SerCom Distribution’s strategy to expand its Reseller distribution business in complementary product markets.

DCC Healthcare achieved strong constant currency operating profit growth in continuing activities against a challenging market background. Despite increased price pressure in public healthcare systems, the Hospital Supplies and Services business performed well while DCC Health and Beauty Solutions had a very good year, generating excellent revenue and operating profit growth, strengthening key customer relationships and expanding its customer base. In June 2010, DCC Healthcare disposed of its Mobility & Rehabilitation business which was consistent with our strategy to concentrate our focus on our larger healthcare businesses which have strong leadership positions and significant opportunities for organic and acquisition growth.

DCC Environmental traded satisfactorily in a market which saw a further decline in construction derived waste volumes and significant disruption by the extreme weather conditions in December 2010. The joint venture development of Scotland’s largest anaerobic digestion plant (with Scottish and Southern Energy plc) reached a significant milestone with the completion of construction and has commenced its commissioning phase.

DCC Food & Beverage had a much improved year with a recovery in profitability and an improved return on capital, despite a continuing very challenging marketplace. This reflected good cost control, operating efficiencies and the introduction of new products. During the second half the business acquired the Goodalls and YR home cooking brands.

Acquisition and Capital Expenditure

Committed acquisition expenditure in the year amounted to €130.7 million. Net capital expenditure in the year of €77.2 million is significantly higher than the prior year amount of €35.7 million and also higher than the depreciation charge of €52.9 million. The excess over the depreciation charge is mainly driven by increased investment in DCC Energy to upgrade vehicles and support the ongoing development of the business and also a €17 million investment by DCC SerCom in a new 250,000 square feet warehouse near Wellingborough, north of London. This latter investment allows Gem Distribution to market its third party logistics services to software and DVD distributors.

Acquisition and Capital Expenditure
  Acquisitions
€’m
Capex
€’m
Total
€’m
       
DCC Energy 68.0 40.8 108.8
DCC SerCom 55.9 20.1 76.0
DCC Healthcare 1.9 4.1 6.0
DCC Environmental 0.4 10.1 10.5
DCC Food & Beverage 4.5 2.1 6.6
  130.7 77.2 207.9

Financial Strength

At 31 March 2011 DCC had net debt of €45.2 million (2010 : €53.5 million) and total equity of €931.9 million (2010: €836.9 million). The Group’s net debt levels averaged €167 million during the year, compared to €155 million in the prior year.

Sustainability

DCC continues to make progress in evolving our understanding and use of the concept of sustainability to deliver benefits to our business and to our shareholders. We firmly believe that providing products and services which create social and environmental value also creates long term financial value for the benefit of our shareholders.

This year an external assessment of this Sustainability Report has been completed. Confirmation that our report meets the GRI level C+ criteria is a milestone in the ongoing development of our reporting processes. We are committed to increasing the quality of the Sustainability Report and, where appropriate, integrating it into the Annual Report. In this regard we welcome the views of all our stakeholders on how we can improve our communication in this area.

Our ongoing objective of formally integrating sustainability into subsidiary decision making requires further progress. Dedicated sustainability workshops are being delivered to progress this objective. These will provide management teams with the fundamentals of sustainability and illustrate how changing social and environmental drivers can effect business performance in the longer term.

The publication of DCC’s Business Conduct Guidelines has been a positive development during the year. It provides a consistent set of standards that all subsidiary employees are expected to maintain in their professional conduct.

Strategy

DCC’s strategy continues to be to grow a sustainable diversified business through concentrating on those businesses where it has established or has the opportunity to establish leadership positions (i.e. typically number 1 or 2) in its chosen markets.

The Group has clear, well defined, longer term growth strategies for each of its five divisions which are reviewed on a regular basis. In building these strategies, the initial focus is on organic growth potential which is then supplemented by identifying suitable acquisition opportunities. Strategically, the objective of these acquisitions is to strengthen existing market positions and in some cases carefully extend the geographic footprint. It is our strong belief however that these acquisition opportunities should be pursued in a disciplined way which will not compromise our overriding objective of driving long term returns for shareholders well above our cost of capital. The validity and success in execution of strategy in each of the businesses is monitored and reviewed regularly.

Our strategy has been largely consistent for many years and we feel we have made progress in the last year in the pursuit of our strategic objectives, some of which is demonstrated in the profit growth, cash generation and return on capital which has been achieved.

Outlook

The outlook for the year to 31 March 2012 is framed against an uncertain economic environment, particularly in the UK, and the significant assumption that there will be a return to a more normal weather pattern compared to the extremely cold winter last year. In April DCC Energy has been impacted by what has been the mildest April on record, with temperatures significantly warmer than last year and this along with the impact of the number of public holidays in the UK has resulted in Group trading being well behind the prior year. However it is important to note that April represents only approximately 5% of the Group’s budgeted profit for the year.

Consequently at this very early stage the Group anticipates that operating profit and adjusted earnings per share, both on a constant currency basis, will be broadly in line with the prior year. On a reported basis, assuming an exchange rate of Stg£0.8800 = €1 (which would represent a 3% weakening of the average rate from last year of Stg£0.8522 = €1), this would result in a modest decline in operating profit and adjusted earnings per share compared to the prior year.

This outlook excludes the potential benefit of acquisitions and the Group remains in a very strong financial position to pursue opportunities in the year ahead.


Tommy Breen
Chief Executive
9 May 2011

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Adjusted earnings per share (cent). Group operating profit (џm).


DCC’s strategy continues to be to grow a sustainable diversified business through concentrating on those businesses where it has established or has the opportunity to establish leadership positions


DCC continues to make progress in evolving our understanding and use of the concept of sustainability to deliver benefits to our business and to our shareholders. We firmly believe that providing products and services which create social and environmental value also creates long term financial value for the benefit of our shareholders.