Financial Review

“Another good year of growth and development”
DCC again achieved another year of growth and development, in a year when economic conditions in our main markets remained difficult. During the year the Group’s operating profits increased by 15.5%, on a constant currency basis, to €229.6 million and we deployed an incremental €207.9 million on acquisitions and net capital expenditure.

The return on invested capital improved again to 19.9% (2010: 18.4%).

As the key financial performance indicators set out in Table 1 show, the Group performed strongly in 2011 delivering an improvement in revenues and operating profits and returns on capital employed whilst still retaining a strong, well funded and highly liquid balance sheet.

Accounting Policies
The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and their interpretations as issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), applicable Irish law and the Listing Rules of the Irish and London Stock Exchanges. Details of the basis of preparation and the significant accounting policies of the Group are included on pages 80 to 88.

Table 1: Key financial performance indicators

  2011 2010
     
Revenue growth – constant currency 25.4% 5.1%
Operating profit growth* – constant currency 15.5% 6.9%
Interest cover (times) 15.8 17.7
Net debt as a percentage of total equity 4.9% 6.4%
Net debt/EBITDA (times) 0.2 0.2
Working capital as a percentage of total revenue 1.6% 1.8%
Working capital – days 4.9 4.6
Debtors – days 36.8 35.3
Operating cash flow (€’m) 269.6 297.8
Free cash flow after interest and tax (€’m) 123.6 229.1
Return on total capital employed 19.9% 18.4%

* excluding exceptionals and amortisation of intangible assets.

Group revenue increased by 25.4%, on a constant currency basis, primarily as a result of acquisitions and the impact of higher oil prices

Overview of Results

Summary Income Statement

              Change on prior year
  2011
€’m
2010
€’m
Reported Constant
currency
         
Revenue 8,680.6 6,725.0 +29.1% +25.4%
         
Operating profit        
DCC Energy 137.3 113.1 +21.4% +17.2%
DCC SerCom 46.0 40.8 +12.7% +9.9%
DCC Healthcare 23.2 21.1 +9.7% +7.2%
DCC Environmental 11.6 9.3 +24.7% +19.7%
DCC Food & Beverage 11.5 8.5 +36.0% +35.6%
Group operating profit 229.6 192.8 +19.1% +15.5%
Share of associates’ (loss)/profit after tax (0.2) 0.2    
Finance costs (net) (14.6) (10.9)    
Profit before exceptional items, amortisation of intangible assets and tax 214.8 182.1 +18.0% +14.3%
Amortisation of intangible assets (10.9) (6.2)    
Exceptional charge(net) (14.3) (11.0)    
Profit before tax 189.6 164.9 15.0% +10.9%
Taxation (43.8) (33.2)    
Non-controlling interests (0.7) (0.9)    
Net earnings 145.1 130.8 +10.9% +6.9%
         
Adjusted earnings per share (cent) 203.15 177.98 +14.1% +10.5%


Revenue
Group revenue increased by 25.4%, on a constant currency basis, primarily as a result of acquisitions and the impact of higher oil prices. DCC Energy had a 15.5% increase in sales volumes, however, on an organic basis, volumes declined by 1%. Excluding DCC Energy, Group revenue was 8.2% ahead of the prior year, on a constant currency basis, of which 5.4% was organic.

Operating Profit
DCC had a very strong year with all five divisions reporting operating profit growth. Group operating profit increased by 15.5%, on a constant currency basis, to €229.6 million. Approximately two thirds of the growth was organic and the balance came from acquisitions completed in the current and prior year. The Group had a strong first half which was followed by an excellent third quarter, driven by the exceptionally cold weather conditions throughout northern Europe, particularly in the last six weeks of the quarter, which benefited DCC Energy, DCC’s largest division. However, trading in the fourth quarter in DCC Energy was adversely impacted by the milder weather conditions, particularly relative to the same period in the prior year.

Approximately 77% of the Group’s operating profit in the period was denominated in sterling. The average exchange rate at which sterling profits were translated during the year was Stg£0.8522 = €1, compared to an average translation rate of Stg£0.8873 = €1 for the prior year, an appreciation of 4% which resulted in a positive translation impact on Group operating profit of €6.9 million. Consequently on a reported basis operating profit increased by 19.1%.

DCC Energy, DCC’s largest division, had the benefit of another extremely cold winter overall and generated constant currency operating profit growth of 17.2%, driven by the 15.5% increase in volumes.

DCC SerCom, DCC’s second largest division, delivered a strong performance with constant currency operating profit 9.9% ahead of the prior year, reflecting another excellent result in SerCom Distribution (where operating profit, on a constant currency basis, was 16.6% ahead of the prior year). DCC Healthcare, DCC Environmental and DCC Food & Beverage each reported increases in operating profit.

The benefits of cost efficiencies achieved in the prior year were maintained, with operating costs 1% higher than the prior year (on a constant currency basis and adjusted for the impact of acquisitions and disposals) notwithstanding the organic increase in revenues in many of
the Group’s businesses and an increase in DCC Energy’s operating costs in November and December 2010 as it made significant efforts to service its customers during this extremely cold period.

Although DCC’s operating margin (excluding exceptionals) was 2.6% (2.9% in 2010), it is important to note that this measurement of the overall Group margin is of limited relevance due to the influence of changes in oil product costs on the percentage. While changes in oil product costs will change percentage operating margins, this has little relevance in the downstream energy market in which DCC Energy operates, where profitability is driven by absolute contribution per litre (or tonne) of product sold and not by a percentage margin. Excluding DCC Energy, the operating margin (excluding exceptionals) for the Group’s other divisions was 3.6% (3.5% in 2010).

Interest was covered 15.8 times by Group operating profit
(17.7 times in 2010)


Table 2: Revenue - Constant Currency
             2011          2010          Change
  H1
€’m
H2
€’m
FY
€’m
H1
€’m
H2
€’m
FY
€’m
H1
€’m
H2
€’m
FY
€’m
                   
DCC Energy 2,722.4 3,214.0 5,936.4 1,788.2 2,631.9 4,420.1 +52.2% +22.1% +34.3%
DCC SerCom 782.1 1,044.5 1,826.6 665.1 953.4 1,618.5 +17.6% +9.6% +12.9%
DCC Healthcare 161.9 152.5 314.4 163.8 170.2 334.0 -1.1% -10.4% -5.9%
DCC Environmental 51.7 51.3 103.0 36.0 41.4 77.4 +43.6% +24.0% +33.1%
DCC Food & Beverage 137.2 112.4 249.6 155.7 119.3 275.0 -11.9% -5.8% -9.2%
Total 3,855.3 4,574.7 8,430.0 2,808.8 3,916.2 6,725.0 +37.3% +16.8% +25.4%
Weighting % 45.7% 54.3% 100.0% 41.8% 58.2% 100.0%      

Excellent Second Half Performance
Overall, DCC’s results in the significantly more important second half of its financial year were excellent. An analysis of Group revenue and operating profit, on a constant currency basis, for the first half and the second half and the full year to 31 March 2011 is set out in Tables 2 and 3.

 

A detailed review of the operating performance of each of DCC’s divisions is set out on pages 18 to 37.

Finance Costs (net)
Net finance costs increased to €14.6 million (2010: €10.9 million) primarily due to the additional interest costs associated with the €284 million of private placement debt which the Group raised in March 2010 to fund future acquisitions and development. The Group’s net debt averaged €167 million, compared to €155 million during the prior year. Interest was covered 15.8 times by Group operating profit before amortisation of intangible assets (17.7 times in 2010).

Profit before tax of €189.6 million increased by 10.9% on a constant currency basis (15.0% on a reported basis)

Profit Before Net Exceptional Items, Amortisation of Intangible Assets and Tax
Profit before net exceptional items, amortisation of intangible assets and tax of €214.8 million increased by 14.3% on a constant currency basis (an increase of 18.0% on a reported basis).

Net Exceptional Charge and Amortisation of Intangible Assets
The Group incurred a net exceptional charge before tax of €14.3 million as follows:

  €’m
   
Gain on disposal of subsidiaries 0.8
Cumulative foreign exchange translation losses relating to subsidiaries disposed of (3.1)
Restructuring of pension arrangements 5.0
Write down of property, plant and equipment (6.1)
Acquisition costs (3.6)
Reorganisation costs and other (7.3)
   
Total (14.3)


During the first half DCC Healthcare disposed of its Mobility & Rehabilitation businesses and DCC Food & Beverage disposed of one of its smaller Irish businesses. The net cash impact of these transactions (€28.4 million) resulted in a pre-tax gain on their book carrying values, including goodwill, of €0.8 million. These businesses accounted for less than 1% of DCC’s operating profit for the year ended 31 March 2010.

IAS 21 requires that any foreign exchange translation differences which have been written off directly to reserves in prior years be recycled through the Income Statement on the disposal of the related asset. The amount of such differences relating to the above disposals, which did not have any impact on the Group’s total equity, was €3.1 million.

Restructuring of certain of the Group’s pension arrangements during the year gave rise to a net reduction in pension liabilities and an exceptional gain of €5.0 million.

Table 3: Operating Profit - Constant Currency

             2011          2010          Change
  H1
€’m
H2
€’m
FY
€’m
H1
€’m
H2
€’m
FY
€’m
H1
€’m
H2
€’m
FY
€’m
                   
DCC Energy 29.0 103.5 132.5 25.2 87.9 113.1 +14.8% +17.9% +17.2%
DCC SerCom 13.9 31.0 44.9 13.7 27.1 40.8 +1.3% +14.2% +9.9%
DCC Healthcare 10.9 11.8 22.7 8.7 12.4 21.1 +25.8% -5.6 % +7.2%
DCC Environmental 6.7 4.4 11.1 4.7 4.6 9.3 +43.9% -4.9% +19.7%
DCC Food & Beverage 5.4 6.1 11.5 4.3 4.2 8.5 +26.0% +45.2% +35.6%
Total 65.9 156.8 222.7 56.6 136.2 192.8 +16.5% +15.1% +15.5%
Weighting % 29.6% 70.4% 100.0% 29.4% 70.6% 100.0%      


The Group made a provision of €6.1 million against the carrying value of one of its buildings.

IFRS 3 (revised) requires that the professional (legal and financial due diligence) and tax (such as stamp duty) costs relating to the evaluation and completion of an acquisition are expensed in the Income Statement whereas previously they were capitalised as part of the acquisition cost. During the year these costs amounted to €3.6 million.

The balance of the net exceptional charge relates primarily to restructuring costs arising from the integration of recently acquired businesses.

 

The charge for the amortisation of intangible assets increased to €10.9 million (2010: €6.2 million).

Profit Before Tax
Profit before tax of €189.6 million increased by 10.9% on a constant currency basis (15.0% on a reported basis).

Taxation
The effective tax rate for the Group increased to 21% compared to 19% in the previous year, primarily due to the increased proportion of profits arising in Britain and continental Europe.

Adjusted Earnings Per Share
Adjusted earnings per share of 203.15 cent increased by 10.5% on a constant currency basis (an increase of 14.1% on a reported basis). The increase was 11.5% in the first half and 10.2% in the seasonally more important second half.

The compound annual growth rate in DCC’s adjusted earnings per share over the last 15, 10 and 5 years is as follows;

    CAGR %
     
15 years (i.e. since 1996) 13.1%
10 years (i.e. since 2001) 9.5%
5 years (i.e. since 2006) 10.4%


Dividend
The total dividend for the year of 74.18 cent per share represents an increase of 10.0% over the previous year. The dividend is covered 2.7 times (2.6 times in 2010) by adjusted earnings per share. Over the last 17 years (i.e. since DCC’s flotation on the Irish and London stock exchanges), DCC’s dividend has grown at a compound annual rate of 15.6%.

Return on Capital Employed
The creation of shareholder value through the delivery of consistent, long-term returns well in excess of the cost of capital is one of DCC’s core strengths. DCC again achieved excellent returns on total capital employed (as detailed in Table 4), generating a return of 19.9% on total capital employed (18.4% in 2010).

DCC’s return on total capital employed has remained consistently high through a combination of good organic growth, well executed acquisitions and excellent integration synergies.

Table 4: Return on total capital employed

  2011
ROCE
2010
ROCE
     
DCC Energy 26.9% 26.5%
DCC SerCom 16.2% 16.1%
DCC Healthcare* 16.3% 14.6%
DCC Environmental 10.0% 9.7%
DCC Food & Beverage 14.9% 10.2%
Group 19.9% 18.4%


* Continuing activities

Cash Flow
In recent years the Group has achieved a significant reduction in net working capital days which reduced from 16.4 days at 31 March 2008 to 4.6 days at 31 March 2010. These gains were largely retained at 31 March 2011 when net working capital days were 4.9 days. The cash flow generated by the Group for the year ended 31 March 2011 is summarised in Table 5.

Operating cash flow in 2011 was €269.6 million compared to €297.8 million in 2010 which benefited from a net reduction in working capital in that year. After higher than normal capital expenditure and tax payments, free cash flow was €123.6 million compared to €229.1 million in the prior year.

DCC again achieved excellent returns on capital employed, generating a return of 19.9% on total capital employed (18.4% in 2010)


The cash impact of acquisitions in the year was €78.3 million. Net capital expenditure in the year of €77.2 million is significantly higher than the prior year amount of €35.7 million and compares to a depreciation charge of €52.9 million. DCC Energy’s net capital expenditure of €40.8 million is higher than its depreciation charge (€31.2 million) due to increased investment to support the ongoing development of new business (predominantly the upgrading of the distribution fleet). In November 2010, DCC SerCom’s UK Retail distribution business purchased a 250,000 square feet warehouse near Wellingborough, north of London. The total cost of the warehouse including fit-out was €17 million. This investment allows Gem Distribution to market its third party logistics services to software and DVD publishers from a modern, customised facility within easy reach of the south east of England.

The exceptional cash outflow of €8.9 million primarily relates to restructuring costs.


Table 5: Summary of cash flows

Year ended 31 March 2011
€’m
2011
€’m
2010
€’m
2010
€’m
         
Operating profit   229.6   192.8
         
(Increase)/decrease in working capital:        
         
DCC Energy (19.8)   45.9  
DCC SerCom 8.9   8.7  
DCC Healthcare 2.1   6.1  
DCC Environmental 0.6   1.0  
DCC Food & Beverage (2.6) (10.8) 10.1 71.8
         
Depreciation and other   50.8   33.2
         
Operating cash flow   269.6   297.8
         
Capital expenditure (net)   (77.2)   (35.7)
Interest and tax paid   (68.8)   (33.0)
         
Free cash flow   123.6   229.1
         
Acquisitions   (78.3)   (133.6)
Disposals   28.4   0.8
Dividends   (58.3)   (52.5)
Exceptional items   (8.9)   (12.8)
Share issues   3.8   7.7
         
Net inflow   10.3   38.7
Opening net debt   (53.5)   (90.7)
Translation   2.0   (1.5)
         
Closing net debt   (45.2)   (53.5)

 

DCC’s financial position remains very strong, well funded and highly liquid.


Balance Sheet and Group Financing
DCC’s financial position remains very strong, well funded and highly liquid. At 31 March 2011 the Group had net debt of €45.2 million (2010: €53.5 million) and total equity of €931.9 million (2010: €836.9 million). This equates to gearing of 4.9% (2010: 6.4%) and a net debt to EBITDA ratio of 0.2 times (2010: 0.2 times). DCC has significant cash resources and relatively long term debt maturities. Substantially all of the Group’s debt has been raised in the US private placement market with an average credit margin of 1.23% over floating Euribor/Libor and an average maturity of 6.0 years from 31 March 2011.

The Group’s strong funding and liquidity position at 31 March 2011 is summarised in Table 6.

Table 6: Funding and liquidity position

  2011
€’m
   
Cash and short term bank deposits 700.3
Overdrafts (34.2)
Cash and cash equivalents 666.1
   
Bank debt repayable within 1 year (0.5)
US Private Placement debt repayable*:  
Y/e 31/3/2012 (5.3)
Y/e 31/3/2014 (62.9)
Y/e 31/3/2015 (216.2)
Y/e 31/3/2016 (14.4)
Y/e 31/3/2017 (112.5)
Y/e 31/3/2018 (52.9)
Y/e 31/3/2020 (205.2)
Y/e 31/3/2022 (43.1)
   
Other 1.7
Debt (711.3)
Net debt (45.2)


* Inclusive of related swap derivatives

Table 7: Analysis of net debt

  2011
€’m
2010
€’m
     
Non-current assets:    
Derivative financial instruments 84.4 101.9
     
Current assets:    
Derivative financial instruments 3.5 1.4
Cash and short term deposits 700.3 714.9
  703.8 716.3
     
Non-current liabilities:    
Borrowings (0.7) (2.5)
Derivative financial instruments (30.1) (19.3)
Unsecured Notes due 2013 to 2022 (761.5) (791.2)
  (792.3) (813.0)
     
Current liabilities:    
Borrowings (35.3) (58.2)
Derivative financial instruments (0.5) (0.5)
Unsecured Notes due 2011 (5.3) -
  (41.1) (58.7)
Net debt (45.2) (53.5)


Substantially all of the Group’s debt has been raised in the US private placement market.

The composition of net debt at 31 March 2011 and 2010 is analysed in Table 7. Further analysis of DCC’s cash, debt and financial instrument balances at 31 March 2011 is set out in Notes 27 to 30 in the financial statements.

 

Financial Risk Management
Group financial risk management is governed by policies and guidelines which are reviewed and approved annually by the Board of Directors. These policies and guidelines primarily cover foreign exchange risk, commodity price risk, credit risk, liquidity risk and interest rate risk. The principal objective of these policies and guidelines is the minimisation of financial risk at reasonable cost. The Group does not trade in financial instruments nor does it enter into any leveraged derivative transactions. DCC’s Group Treasury function centrally manages the Group’s funding and liquidity requirements. Divisional and subsidiary management, in conjunction with Group Treasury, manage foreign exchange and commodity price exposures within approved policies and guidelines. Further detail in relation to the Group’s financial risk management and its derivative financial instrument position is contained in Note 46 to the financial statements.

 

Foreign Exchange Risk Management
DCC’s reporting currency and that in which its share capital is denominated is the euro. Exposures to other currencies, principally sterling and the US dollar, arise in the course of ordinary trading.

 

A significant proportion of the Group’s profits and net assets are denominated in sterling. The sterling:euro exchange rate strengthened marginally from 0.8894 at 31 March 2010 to 0.8837 at 31 March 2011. The average rate at which the Group translates its UK operating profits strengthened by 4.0% from 0.8873 in 2010 to 0.8522 in 2011.

 

Approximately 77% of the Group’s operating profit for the year ended 31 March 2011 was denominated in sterling and this is offset to a limited degree by certain natural economic hedges that exist within the Group, for example, a proportion of the purchases by certain of its Irish businesses are sterling denominated. DCC does not hedge the remaining translation exposure on the profits of foreign currency subsidiaries on the basis and to the extent that they are not intended to be repatriated. The 4.0% strengthening in the average translation rate of sterling, referred to above, positively impacted the Group’s reported operating profit by €6.9 million in the year ended 31 March 2011.

 

DCC has investments in sterling operations which are highly cash generative and cash generated from these operations is reinvested in sterling denominated development activities rather than being repatriated into euro. The Group seeks to manage the resultant foreign currency translation risk through borrowings denominated in or swapped (utilising currency swaps or cross currency interest rate swaps) into sterling, although this hedge is offset by the strong ongoing cash flow generated from the Group’s sterling operations leaving DCC with a net investment in sterling assets. The marginal strengthening in the value of sterling against the euro during the year ended 31 March 2011, referred to above, gave rise to a translation gain of €4.6 million on the translation of DCC’s sterling denominated net asset position at 31 March 2011 as set out in the Group Statement of Changes in Equity in the financial statements.

 

Where sales or purchases are invoiced in other than the local currency, and there is not a natural hedge with other activities within the Group, DCC generally hedges between 50% and 90% of those transactions for the subsequent two months.

 

Commodity Price Risk Management
The Group is exposed to commodity cost price risk in its oil distribution and LPG businesses. Market dynamics are such that these commodity cost price movements are immediately reflected in oil commodity sales prices and, within a short period, in LPG commodity sales prices. Fixed price oil supply contracts are occasionally provided to certain customers for periods of less than one year. To manage this exposure, the Group enters into matching forward commodity contracts, not designated as hedges under IAS 39. While LPG price changes are being implemented, the Group hedges a proportion of its anticipated LPG commodity exposure, with such transactions qualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes. In addition, to cover certain customer segments for which it is commercially beneficial to avoid price increases, a proportion of LPG commodity price and related foreign exchange exposure is hedged. All commodity hedging counterparties are approved by the Board.


Credit Risk Management
DCC transacts with a variety of high credit rated financial institutions for the purpose of placing deposits and entering into derivative contracts. The Group actively monitors its credit exposure to each counterparty to ensure compliance with limits approved by the Board.

 

Interest Rate Risk and Debt/Liquidity Management
DCC maintains a strong balance sheet with long-term debt funding and cash balances with deposit maturities up to three months. In addition, the Group maintains both committed and uncommitted credit lines with its relationship banks. DCC borrows at both fixed and floating rates of interest. It has swapped its fixed rate borrowings to floating interest rates, using interest rate and cross currency interest rate swaps which qualify for fair value hedge accounting under IAS 39. The Group mitigates interest rate risk on its borrowings by matching, to the extent possible, the maturity of its cash balances with the interest rate reset periods on the swaps related to its borrowings.

 

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