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Edited Transcript of DCC.L earnings conference call or presentation 14-May-19 8:00am GMT

Full Year 2019 DCC PLC Earnings Call

Co. Dublin May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of DCC PLC earnings conference call or presentation Tuesday, May 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Conor Costigan

DCC plc - MD of DCC Healthcare

* Donal Murphy

DCC plc - CEO & Executive Director

* Fergal O’Dwyer

DCC plc - CFO & Executive Director

* Henry Cubbon

DCC plc - MD of DCC LPG

* Tim Griffin

DCC plc - MD of DCC Technology

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Conference Call Participants

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* Allan Smylie

Davy, Research Division - Transport, Distribution and Logistics Analyst

* Annelies Judith Godelieve Vermeulen

Morgan Stanley, Research Division - Research Analyst

* James Peter Winckler

Jefferies LLC, Research Division - Equity Analyst

* Rajesh Kumar

HSBC, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Donal Murphy, DCC plc - CEO & Executive Director [1]

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Just before I start, I think most people know me at this stage, Donal Murphy, Chief Executive of DCC. Just to introduce my colleagues, the closest to me, Fergal O’Dwyer, Chief Financial Officer; Eddie O'Brien, Managing Director of our Retail & Oil Division; Henry Cubbon, Managing Director of our LPG Division; Conor Costigan, Managing Director of our Healthcare Division; and Tim Griffin, Managing Director of our Technology Division. So later on, the guys will answer all the hard questions as we get into Q&A.

So just the agenda for today, take you through a little bit of the highlights of the results, a little bit more in the business review, talking through the 4 divisions. Fergal will take you through a little bit of detail on the financial summary and take us through a little bit on IFRS 16 and the implications of that on the business.

I'll talk you through some of the development activity because it has been another active period from a development perspective with GBP 370 million of capital committed to acquisitions during the year, and then we'll summarize and open us up to Q&A.

So just starting with the performance for the year. So it really has been an excellent performance. Group operating profit up 20.1% to GBP 460.5 million. When you consider the challenging global economic environment that we're operating in and also the challenges of weather in the year, which was a pretty mild year, I think the results were -- results have been very strong. So we're very pleased with the performance, particularly pleased that all divisions have delivered very strong profit growth during the year so all 4 divisions delivering strongly. Our adjusted earnings per share on a continuing basis, up 12.8% to 358.2p, reflecting the equity placing that we did last September.

There's very few companies, I think, that could demonstrate a track record and dividend growth like DCC. So the Board is proposing a 12.5% growth in our dividend. So it'll be our 25th consecutive year of dividend growth since we went public in 1994. We had cash as king for us and for every business, and so we're very pleased with the cash flow performance. Free cash flow conversion of 94%. And the key metric for DCC is return on capital employed. So our return on capital employed remaining strong at 17%. So it's a very strong result for the year. As I said earlier, it's been a very active period from a development perspective. In the 12 months up to now, including commitments that we announced today of GBP 90 million, we'll have committed GBP 370 million to acquisitions across all of our divisions, and I'll come back and talk about the development activity a little bit later in the presentation.

So standing back from it, DCC's strategy is delivering. Our strategy is significantly growing our profits, of turning those profits into cash and redeploying that capital across our 4 divisions, has delivered for us. I think the other thing that has delivered very strongly for us during the year has been diversity, and we are committed to diversity within DCC. And diversity has clearly worked in the results that we're presenting here today.

So just to look at the businesses in a little bit more detail. So as I say, really pleased that we've had strong performance across each of our 4 divisions during the year: LPG, operating profits up 20.5%; Retail & Oil, our operating profits up 17.6%; DCC Technology, operating profits up 35.1%; and DCC Healthcare, operating profits up 11.1%. So all our divisions delivering very strong growth. The change in mix, a little bit now, 44% of our profitability coming from our LPG activity; 29% from our Retail & Oil activities; Technology, 14%; and Healthcare, 13%. And I suppose the most significant change over the last number of years has been diversity in terms of our geographic footprint. So now the U.K., 41% of our profitability; Continental Europe, 45% of our profitability; 10% in the rest of the world. So significant growth outside of the core markets where DCC started in the U.K. and Ireland and Ireland representing 4% of the profitability of the group.

So just looking at the LPG business in a little bit more detail. I'd say, very pleased with the performance in the year. Operating profit up 20.5% to GBP 201.8 million. This was a really strong performance when you consider the weather challenges that we had during the year. Our volumes were up 10.8%, reflecting the acquisitions that we completed at the end of last year and -- or at the start of the current financial year, so the business Retail West business in the U.S., the TEGA business in Germany and the Shell-branded business in Hong Kong and Macau, all those businesses have been fully integrated into the group and have performed in line with or ahead of our expectations. Modestly, volumes were behind, driven by the mild weather during the year.

Our operating profit in the division on an organic basis, as anticipated, was behind due to the investments that we've been making in our natural gas and electricity business in France and due to the mild weather that I mentioned earlier. The French business, which is the largest part of our LPG division, performed very well during the year. We continue to diversify that business out, and we've been growing. And if you recall back to May 15, when we announced the acquisition of that business, it was principally a B2C business in both the cylinder and the bulk market. And we have been building that business out into the commercial sector of the LPG market, continue to make good inroads into that. We have been building out a little bit of innovation into our business. We have deployed 200 Click & Collect automated cylinder distribution machines to sell Butagaz cylinders across unmanned sites and retail sites, including rolling those out, and some of you will have seen, when we had our Capital Markets Day, one of those facilities on an ESSO-branded site and in -- down in Marseille. So we've been rolling those out in the country. We have 200 now in situ. We're building a little wood pellet business. So it's starting to grow into the renewable energy area within France. And then we've been continuing to invest in the natural gas and electricity business. All of these leveraging the strength of the Butagaz brand in France.

In Britain and Ireland, again, strong performance, good underlying volume growth within the business, leveraging our leadership position in the Oil2LPG sectors, where we have been growing strongly in the commercial segment of the market.

So the business now in LPG, we're in 10 countries on 3 continents. We have a very strong position to continue to deploy capital. And we announced this morning the acquisition of a business called Pacific Coast Energy, which is our first notable acquisition, bolt-on acquisition, the Retail West business that we took over in April, and I'll come back and talk about that a little bit later in the presentation.

Moving on to Retail & Oil. Again, a very strong performance in the year. Operating profit up 17.6%. Pleasingly, 1/3 of that growth was organic growth within the Retail & Oil business. Our volumes were modestly behind the prior year, 12.2 billion liters of fuel, very much driven by the mild weather that we encountered during the year. And weather in the Retail & Oil business has 2 impacts, and if you recall back to last spring and summer, it was very harsh, very dry, so that impacted on demand for agricultural fuel. And then during the winter months in the heating segment of the market, impacting on demand for heating products. So notwithstanding that, we had a very strong performance within the Retail & Oil business.

Business in Britain and Ireland, we've been very focused on growing our business in premium-related products, in differentiated fuels, value-added products and services such as our lubricants business, our Fuel Card business. That has delivered strong organic growth within our business in Britain and Ireland. Our businesses in Scandinavia, again, performed well. We had strong underlying organic growth. The Danish business, in particular, performed very strongly, good growth in our commercial sector, good growth within our retail sector. And while the market has remained challenging in Norway, we have been implementing changes within that business, which is delivering business improvement. So again, Scandinavia has been a very strong performer for us in the year.

We entered into a partnership with Shell, which is an interesting development for us. As part of the business we bought a couple of years ago from Couche-Tard in Denmark, we took on the market leader in the aviation sector of the market. So we've entered into a branding and distribution partnership with Shell in Denmark, we're now the largest supplier of aviation fuels in Denmark, supplying all the airports. Copenhagen is the hub airport for Scandinavia. So it is an important access point for Shell as well, so that's our first equity partnership with Shell and hopefully will lead to other opportunities into the future.

Business in France, again, performed well, notwithstanding the regular protests within the market, so that impacted somewhat on our volumes, but the underlying organic profit growth has been good in France. So it's the Retail and Oil story, [say] notwithstanding some of the challenges of protest and weather, has been very strong during the year and particularly pleased with the performance there.

Moving on to look at our Technology division. Operating profits, up 35.1% in the year. There were 2 factors really, the acquisitions that we completed, some smaller acquisitions in the prior year, but the acquisitions completed earlier this year and a very strong organic performance within our business in the U.K. and Ireland. As we're calling out, the return on capital employed within the Technology division, which was back on the prior year, 2 factors there impacting the returns. Obviously, the initial returns on the acquisitions, and we see those grow as we both integrate the businesses and drive the organic growth within those new acquisitions and the investments that we've been making in our warehouse and operational infrastructure in the U.K., in France and in the Nordics. And we're going to start to see the benefits of those investments going through in the current financial year.

Business in the U.K. and Ireland, this is the largest part of our Technology division, continues to grow organically very strongly, really pleased. We've been growing our market shares. And there's particular strong growth within the mobile products area, within that central products, and that's a big growth area, the whole data center segment in the market and then AV products, and that's been a particular focus for us as we've been building out our business in the AV area. Record period for development within the Technology division. So we spent in total or committed in total GBP 310 million to development activity in Technology, significantly strengthening our position within the European market and obviously making our first acquisitions and first investment in the very large and very fragmented North American market. The 2 businesses, Jam and Stampede in North America, have both been integrated into the group now and, again, performing in line with our expectations. So a really strong performance within our Technology division, and we're really pleased with the investments and scaling up our Technology business.

Finally, Healthcare and again, very strong performance. Operating profit up 11.1% in the year, about half of that is organic, and the Healthcare division has consistently delivered strong organic growth. Our Vital business, our business supplying products and services into Healthcare providers. So the hospitals and the GPs continue this track record of strong growth, good growth in our medical products area into hospitals. We're the market leader in the GP sector here in Britain. We continue to grow that sector. So both selling into branded products and our own branded products into the hospitals and into the GP sector of the market. We had 2 bolt-on acquisitions in the prior year. We had the benefits of those going through and actually another bolt-on acquisition in that sector as part of our acquisition today. So good growth in the GP sector of the market.

The stellar organic growth business within DCC over a number of years has been our Health & Beauty business, and that continued in the year just gone. So we had a very strong organic profit growth, and we had the benefit of the first time contribution from Elite, which we acquired January, 12 months ago which -- in the U.S. The nutrition business, very strong organic growth, benefiting from the growth that we're able to provide to our customers to grow their businesses. International growth, some of our customers growing strongly into China and into Scandinavia and our products and our services supporting their growth. And the development of nutritional liquids within the Nutritional business. And our Beauty business, again, continued its strong organic growth, growing with our existing customers and indeed leveraging on some new customers into that business. So a continued track record of really strong organic growth within the Health & Beauty business.

The dynamics in this business are very positive. We're very keen to deploy capital within the Health & Beauty business. We have committed capital to extending our infrastructure within the business. We're in the process of doubling the capacity within our softgels business down in Wales. And you see that within our CapEx commitment and indeed, we're very committed to developing the business further into -- both into the U.S. and into the European markets through acquisitions. So really see that as a very interesting growth area for us going forward.

So I'll hand over to Fergal, take you through some more detail on the financials.

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [2]

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Thanks, Donal. First thing you'll notice about our results is that we're not calling out any constant currency numbers. The main sort of impact on translation of our numbers comes from the Euro-Sterling exchange rate, and it was broadly unchanged at 1.13 for both years, so we can save ourselves the trouble of having to call out a constant currency number along with a reported number.

Overall, operating profits up 20%. The -- Reasonable amount of moving parts when you look at the overall organic growth number, clearly, the weather was not our friend, and also we've had continued investment in our net gas business in France. On an absolute basis, the organic number for the group overall would be between 1% and 2%. But when you shift out the weather impact and the impact of the increased investment in our net gas business in France, it's of the order of just around 5%. Our finance costs, they are up from GBP 35 million to GBP 46 million. Our average debt is roughly GBP 200 million on the prior year, really driven by the heavy level of acquisition spend we had in both the prior year and in the current year.

We also did a private placement funding in September or halfway through the previous year, which impacted on the carry cost of our interest. Our effective tax rate is unchanged at 17%. Adjusted earnings per share, up 12.8%. Overall, our adjusted earnings are up in excess of 18%, but the equity rate of 10% halfway through the year takes broadly 5% off that to get you adjusted earnings per share of 12.8%. The dividend per share, up 13.7% for the final dividend, giving an overall increase of 12.8%. As Donal says, 25 years of an unbroken record of dividend growth. Overall, our compound growth rate over that 25 years is 14.4%. And return on capital employed, very, very strong at 17%. So what drives that return on capital employed? It's the operating profit performance obviously and it's also the cash flow, capital efficiency that we have within the business.

So let's have a quick look at just the operating cash -- the free cash flow performance of the business in the year just ended. The numbers on the right are our 25-year numbers because we kind of keep tabs to ourselves as to where we go year-on-year. I won't get into it. I'll just leave it there for the moment, but overall, our cash conversion during the 25 years has been 101%. In the year just ended, really, really pleased with the overall free cash flow development of the group, up nearly 1/3 on the previous year and a free cash flow conversion of around 94%. We had cash inflow of nearly GBP 38 million on the working capital line. Driven in the main by a reduction in the working capital of some of the businesses we bought last year and in the current year, particularly within the technology space.

Our CapEx is roughly GBP 60-something-million ahead of our depreciation as we continue to invest in the organic growth of our businesses. Particularly within the LPG division, we have the initial development of our Avonmouth storage facility. We've got oil to gas conversions that require CapEx. Within the Retail & Oil business, we've got continued forecourt development and new forecourt acquisitions that are ongoing. Within the Healthcare space, particularly Donal has already called out the capacity enhancements that we're looking at within our Health & Beauty business. And within the technology space, we've been enhancing our logistics and warehousing capability.

When you take acquisitions into account and our dividend payment, you would expect us to have a roughly GBP 100 million deficit in our cash flow. But because of the GBP 600 million or so equity raise that we had during the year, we end up with a net cash inflow of GBP 510 million, leaving us with net debt at the end of the year of practically 0 or just GBP 18 million of net debt. So we go into the year to March '20 with an extremely strong, well-formed and highly liquid balance sheet.

Just a word on leases because a lot of companies are talking about leases. DCC obviously has done its review. This is the -- just to step back for a second. The new IFRS 16 on leases, to be technical about it, requires broadly what we would have previously regarded as operating leases to be taken on the balance sheet as right-of-use assets and on the other side of the balance sheet, to put a lease creditor on your balance sheet, okay? That standard comes in from 1st of April 2019. So it will be on our balance sheet at 31 March 2020. We have done our review, and we would be -- if we were doing it at 31 March 2019, we would be capitalizing roughly 2,000 leases with roughly 700 lessors. So it's not like we've got one big institutional landlord sitting on top of DCC that got one lease with DCC for large amounts of property with upward-only rents and no break clauses or whatever. The average maturity of our leases is around 5 years.

So what will it mean? [It] will roughly take GBP 320 million of right-of-use assets onto our balance sheet and then the other side of our balance sheet, set up a lease creditor of around GBP 320 million, the opposite number. It would impact our operating profit if we introduced it for the year to March '20, which we will, by around GBP 6 million upwards. It would increase our finance costs by roughly GBP 8 million upwards. So the overall impact on our adjusted earnings per share would be quite small, very modest, at around 2p. It impacted our reported returns and capital, would've --would be up to the order of 1.6%. We just need to stress that it's got absolutely no change to our underlying cash flows, business or our operating model.

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Donal Murphy, DCC plc - CEO & Executive Director [3]

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Thanks, Fergal. I think actually the IFRS 16 is actually a bull point for DCC because we've always kind of focused on anytime we enter into obligations, anytime we enter into investments, we look at the lease obligations in any of the business as well, and we take that into consideration, ultimately, in terms of our returns that we're going to generate. So I think it's going to -- it's pretty modest, as Fergal says, but I think it just demonstrates that we've really been focused on this over many years. So just to touch on our development activity and again, a very active period for development, spending GBP 370 million or committing GBP 370 million to acquisitions and GBP 90 million that we announced today. We have a very clear development strategy, but our #1 priority in the DCC Group is to grow our businesses organically. So first and foremost, it's all about driving organic growth and then complementing that through acquisitions. So the year has been a strong period, building scale into the markets that we operate within and then growing into new geographies. So our development strategy, get our leadership positions in the markets we're in and then start to build out and take that capability into new markets, and I think we can demonstrate that in the year just gone. So maybe taking you through a couple of the highlights and going back to the strategies that we outlined for each of our divisions in Marseille back in September. I think we've clear kind of demonstration of that strategy and action.

So in the LPG division, we bought the Retail West business. We took it over on the 1st of April just gone. Buying that business was not to get 0.6% share of the highly fragmented U.S. LPG market. It was to buy a platform that we could start to consolidate further on. We've been busy building relationships, working those relationships as we typically do to find acquisition opportunities. So very pleased to be announcing Pacific Coast Energy today. That's a business operating in the northwest of the U.S. It's in Washington and Oregon. It has 6 facilities. It's supplying product into both residential customers and into commercial customers. And it is very synergistic with our existing business. We have 3 states where we have very strong positions in Indiana, in Illinois and in Kansas. And we have a modest or more modest presence in 7 other states before we announced this acquisition. So part of the strategy within the U.S. is to build out into new markets, into new regions and then obviously infill acquisitions in the markets that we're already in or within the states that we're already in. So it's a GBP 30 million acquisition. So it's material enough in terms of a first step within building and consolidating that U.S. market. And just to remind people, like there's 4,000 players within the market. It's very fragmented. There's a small number of larger players, and there's lots and lots and lots of smaller players. So this plays very much into DCC's sweet spot of acquiring, integrating, extracting synergies out of energy businesses, so we're very pleased with that acquisition.

In the Retail & Oil, I talked about the aviation partnership with Shell, which hopefully will lead to other opportunities with Shell and others indeed going forward. A couple of other ones just to call out. In our retail business, we completed a bolt-on acquisition within France, a company called [Dubri], 80-dealer -- retail dealer network leveraging the Esso brand so kind of further strengthening our position within France and leveraging that brand partnership that we have with Exxon. We have a very strong position in our Retail & Oil business here in Britain in lubricants, and we bought a couple of lubricant blending businesses here in the market, again, giving us further scale and capability within the lubricants market here in Britain.

And then I suppose the stellar performance in terms of development activity during the year has been within our technology division. We have a number of acquisitions this year, growing and significantly strengthening our business here in Europe and indeed, then building our business out into North America. And maybe just to call those out. So our first acquisition in North America was Stampede, a specialist distribution business in the professional AV sector of the market. It gives us a decent presence within the AV market in the U.S. It has some business in Europe, which has been integrated already into our existing business here in Europe. That was a business that had sales of GBP 280 million in the year before we acquired it. So it's our -- it was a very material step for us in building our business out into that very large, very fragmented North American market. In July as well, we announced the acquisition of Kondor. Kondor is a business that supplies mobile accessories, supplies audio products into the retail and e-tail sector across Europe, very complementary to our existing business here in Britain, our Exertis business. In September, we announced the acquisition of Jam. Jam was a very material further development for us in building our business in North America. Jam is a market-leading specialist business supplying products services into the consumer electronics, musical instruments and pro audio segments of the market.

So indeed, it's a world leader in both musical instruments and pro audio, a business that had GBP 320 million of revenue in its last financial year. So those 2 businesses in the U.S. We now have GBP 600 million of revenue in the technology sector in the U.S. and a real platform for further growth. So that's been a very material development step for the technology division. And then today, really pleased to be announcing 2 further acquisitions in technology: Comm-Tec and Amacom. Comm-Tec is a business in -- main operation is in Germany, specializing again in the professional AV segment of the market and IT products, selling products into systems integrators and to installers, into resellers. Businesses operations in Germany, in Austria, in Switzerland, in Italy and in Spain and had GBP 90 million of revenues in its last financial year. So further strengthening that pro AV segment of the market and the specialism that we have within the pro AV sector. And Amacom is a business that supplies IT, consumer electronics, AV products into the e-tail and retail sector within the Netherlands but has a very slick IT platform that it uses to integrate directly within its retail customers and support its suppliers, selling products through to the retail channel. And that technology is something that we'll be able to leverage throughout the rest of our business.

So 2 decent acquisitions today, further strengthening our position in Europe on the back of a very strong performance in building out the technology division over the last 12 months. And I think when you stand back from that acquisition activity, again, it demonstrates that diversity is working for DCC and our ability to deploy capital across the different sectors and people that have followed us for a while, some of the acquisition activity is a little bit like the boxes, that they come at similar times, and sometimes, there's gaps. And that's the way it is in terms of the different sectors as well. So we're very active in looking for opportunities across each of the 4 divisions. As we talked about them at the Capital Markets Day, we very much have the platforms now across the 17 countries and 3 continents that we operate within. We have the opportunities within those markets to build out our business, and we have the capability to go and execute on this. And I think the year just gone is a further demonstration of that, so diversity works.

So in summary, we feel our 25th year as a public company really is an excellent year in terms of performance and growth. So we're really pleased with the trading performance, really pleased with the fact that all 4 divisions performed very strongly during the year. The active development activity were much more important, the platforms, the opportunities and the capability that we have to continue to deploy capital. We have a strong balance sheet. We want to use that balance sheet wisely to deploy capital across each of our sectors at high returns on capital, and that's always the gating factor for us. And in terms of where we sit today, we see the year to March '20, the current year that we're in now, almost 2 months into it, has been another year of growth and development for the group.

We always put up this slide, but I think today, on our 25th anniversary, I think it's worth just pausing on it for a minute. Over 25 years, 14.6% year-on-year growth in our operating profit. Only one blip in that record and that, as I used to always get reminded, was my fault because we went from the coldest year to the mildest year on record when I was running the energy businesses, 13% year-on-year growth in our earnings and this unbroken dividend growth record over 25 years, 14.4% year-on-year growth in our dividends and then a free cash flow conversion on average over that 25 years of 101%, very high returns on capital during that and as Fergal pointed out earlier, a balance sheet that is extremely strong with lots of capacity for further growth. So we feel good about the year just gone. We feel good about where we're positioned as a group. We think we have those platforms, those opportunities and the capability to continue to build DCC into a global leader in our chosen sectors.

Thank you, and we'll take questions. Rory?

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Questions and Answers

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [1]

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It's Rory McKenzie from UBS. Firstly, on LPG, the profit per tonne was up 9% despite the investments into France. So can you help us bridge all the mixed differences happening in the division? Any gross margin improvement you'd flag and then increasing costs that get you back to that profit per tonne increase? And then similarly, actually, in Retail & Oil and the bridge between the gross margin impact and increased SG&A per unit and the mix, please. I've got one more about acquisitions.

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Donal Murphy, DCC plc - CEO & Executive Director [2]

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Fergal, do you want to kick off maybe and Henry, [give a number].

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [3]

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The margin is up -- the gross margin is up, and the conversion of gross margin into net margin is also within both Retail & Oil and within LPG. The margin is up in the LPG space because whilst we had a rising cost of product at the start of the year, product price did fall off in the second half of the year where we were a beneficiary. On the cost side overall, as a group, our costs are up, like-for-like costs are up 1%. So we had some productivity increases. There are spots where it was inefficient. I mean as you'll assume, would've cost us a bit from the cost point of view in terms of how we operated our business, and it was a bit more difficult to operate the business. But the margin performance, overall, was pretty okay. So your bridge on the LPG side is, yes, our margins are up. Decent margin management plus, also, we had the benefit of better cost of product. And on the Retail & Oil side, again, we had good margin performance in the U.K. business. But as you know, Rory, the oil market is near-perfect market so what happens to price of oil today will reflect itself pretty quickly into selling prices. But overall, we're pleased with the margin performance on Retail & Oil side. And notwithstanding what was going in France, our margin performance is okay.

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Donal Murphy, DCC plc - CEO & Executive Director [4]

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And I think, Rory, as well, like mix effect as well with -- like the TEGA business coming in, which is a very high-margin business coming into the...

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [5]

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And on the Retail & Oil side, usually, we've been increasing mix now of retail volumes, which is higher margin but it's a lot more capital required to run a retail business.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [6]

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And just on the LPG, the nat gas investment in France. Your actualizations for the kind of payback there and profits in the year ahead or why that starts to then turn?

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Henry Cubbon, DCC plc - MD of DCC LPG [7]

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Yes. The investments in France has been [running for] a couple of years, and we've been very pleased with how the overall marketplace has responded. The Butagaz brand is very strong and is allowing us to attract customers to our business. Our investment in the business is predominantly around obviously the IT infrastructure but also around the customer acquisition, and we're very pleased with how that's going so far. So we're looking for a couple of years more of investments, and then we should be seeing some good results coming through.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [8]

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And then just one on the acquisition in the U.S. Great to see your second LPG business there, and you talked about these will overlap. Can you talk about the process of integrating these businesses in the U.S., and any learnings or challenges you see as you try and build a pan-U. S. network, what you've seen in Europe?

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Donal Murphy, DCC plc - CEO & Executive Director [9]

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Within LPG specifically, yes. Do you want to take that, Henry?

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Henry Cubbon, DCC plc - MD of DCC LPG [10]

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Yes. The -- I mean, the LPG business we have in U.S., we bought it from NGL. A year or so back, it was called Retail West at the time. We renamed it DCC Propane. And we have a pretty strong management team based there. The base is Roberts, Illinois, which is about 1.5 hours south of Chicago. And the business itself, even when it was within NGL and before, was based on a number of acquisitions coming through from originally starting up in Illinois but stretching to Kansas, across into Indiana and then across into the other states. So they have a history of acquisitions. They have a very clear business model, a very decentralized business model, so each facility that they have has a certain amount of autonomy in terms of market reaction, market response. And we have a pretty well-established kind of integration program where we bring the businesses in. So we don't see a huge amount of difficulty there. In fact, we see a lot of opportunity through our business model and through the management team to continue to add and build out as we go forward.

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Donal Murphy, DCC plc - CEO & Executive Director [11]

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I think that -- and remember, Rory, that we have a particular capability. And then DCC as a group, we've been acquiring and integrating businesses in the energy sector, certainly for as long as I've been in the group. And that is a core competency that we have. So as Henry said, the team in the U.S., it's helpful because they have that skill set within the business, clearly being complemented by the resources that we have within the group. We have invested a new Development Director within the business in the U.S. We have a new Finance Director that we put into the business in the U.S. So we're building our capability to build a scaled business within the U.S. and that starts with management as with any of our businesses. Annelies?

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Annelies Judith Godelieve Vermeulen, Morgan Stanley, Research Division - Research Analyst [12]

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Annelies Vermeulen from Morgan Stanley. Just 2 for me. Just on the return on capital, particularly on the tech division, was that purely from acquisitions? Because in LPG obviously you had acquisitions as well, but the return on capital was more stable. So is there a difference there in the initial return on capital, or is it just a longer integration process or anything [set them apart]?

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Donal Murphy, DCC plc - CEO & Executive Director [13]

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Okay. Two factors, really, on the return on capital. One, the acquisitions and -- so the entry level, and we bought them obviously in the latter part of -- some of them in the latter part of the year, you've got the entry level coming in, so we'll build that over time. But we have had a significant amount of capital investment within the technology division in both our warehousing infrastructure in France, in the Nordics, and in the U.K. And we're only starting to see the benefits of that flowing through. And we've obviously had our investments in our enterprise SAP system in the business here in the U.K. We have the first part of that live in the year just gone, and the rest of that will go live in the current financial year, but we won't see the benefits of it coming through until FY '21. So there's -- it's really the 2 factors coming together.

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Annelies Judith Godelieve Vermeulen, Morgan Stanley, Research Division - Research Analyst [14]

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Okay. And then on -- just following up on the cost control you talked about in LPG. Was that purely the low cost of product? Or are there other things you were doing there in terms of efficiency or productivity or anything like that?

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Donal Murphy, DCC plc - CEO & Executive Director [15]

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Give me the opportunity to talk about my point ones of a penny and the focus that we always bring to continuous improvement across the energy, but that is -- it's one of our core competencies as a group, constantly driving operational efficiency across the businesses, and Henry, there's plenty of things going on within LPG every day that we -- to continue to drive those improvements across the business. So managing your assets, driving the efficiency within your businesses, I think that just continues to deliver.

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Unidentified Analyst, [16]

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Donal, the equity partnership with Shell, what's the backdrop for that?

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Donal Murphy, DCC plc - CEO & Executive Director [17]

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The backdrop, I have to be careful before I get into too much detail on this, but we have -- Shell is a global player in the aviation market. Clearly, when that business was originally a Shell business, they sold, they exited out of the country. Everything was part of that package when they exited out of it. I think subsequent to exiting out of it, I'd say they kind of saw Scandinavia, in particular, as a big gap in their global market. So they had an interest in coming back into the market. We have a very strong relationship with them. We own the business. We had the market leadership position. So it gives us -- it's a real win-win situation where it gives us the ability to leverage their global network. So we're able to leverage the Shell brand, leverage their region to global airline sector, some of their capability on trading within the business while managing the business locally within that market. And so hopefully, that may be the start of other things that we could do. We certainly keep knocking on those doors as we always do.

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Unidentified Analyst, [18]

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Will that be just with Shell or will be other measures as well?

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Donal Murphy, DCC plc - CEO & Executive Director [19]

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We've great relationships with pretty much all the majors and brand relationships with plenty of them as well. So there's -- we don't leave too many stones unturned in terms of trying to find commercial opportunities that are win-win situations. Oh, Allan. We're going for the back first...

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Allan Smylie, Davy, Research Division - Transport, Distribution and Logistics Analyst [20]

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Allan Smylie, Davy. Just 2 quick ones from me. So firstly is on asset pricing. I think there's been pockets of elevated asset pricing in areas in LPG and in the retail space over the last couple of years. So any color on how that backdrop has evolved could be useful. Just a housekeeping one then for Fergal. How should we think about CapEx for this year if the business stays as it is?

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Donal Murphy, DCC plc - CEO & Executive Director [21]

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You do the housekeeping side, and then I'll come back and...

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [22]

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Allan, yes, CapEx, again, about GBP 160 million to GBP 170 million. We're going to have continued investment, hopefully, a new forecourt within Retail & Oil space. We will have then the further development of our Avonmouth facility coming in. So -- and again, the business is growing organically. So typically, we would run at 1.2 because we're growing organically, but on top of that then, we'll be adding new forecourt and the Avon to start of the -- further development of our Avonmouth facility.

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Donal Murphy, DCC plc - CEO & Executive Director [23]

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I think, Allan, on the asset prices, you see this from time-to-time. One, we're not seeing any material change. We talked previously probably about asset prices, particularly in the retail sector being toppy in some markets. And again, I think it comes back to the diversity piece. Notwithstanding what's happening in different segments, we really have the opportunity to deploy capital across a range of business and a range of opportunities. So the discipline around return on capital is what really we focus on all the time within the group. So we could've deployed lots of capital in the retail sector, but it would have been at much lower returns. We didn't think it's right. We don't do it. We deploy the capital elsewhere within the business. So the opportunity set is there. I don't think there's anything that has changed in terms of asset prices particularly and certainly nothing that we've seen. Things that have been expensive in the past, some of those still probably do remain expensive in some areas. But as I say, there's plenty of opportunity for us to deploy capital in the business across all 4 sectors. So don't see it as being an issue. Sam?

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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It's Sam Bland from JPMorgan. I've got 2, please. First one was related to that CapEx question. So in this year, CapEx fell ahead of depreciations. Sounds like it will be the same for next year. Were there some more of these kind of discretionary-type projects? Could they be sort of a slightly more permanent feature there, where that's a new avenue to deploy capital alongside M&A going forward? And how do you assess the return on capital from those kind of growth CapEx-type projects? Is it similar to how you assess it for M&A or in a slightly different way?

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [25]

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You've asked the question and sort of answered it as well, Sam. Absolutely, we assess. Any deployment of any capital in the same way is what the return is going to be. So yes, I mean we typically -- we've been running from a development point of view as our businesses grow organically, maybe 1.2, 1.3x depreciation. And then on top of that, you've got from time to time capacity increases that are required, significant capacity increases that are required may be in technology within the warehousing and IT space and then maybe within Health & Beauty on the manufacturing capacity side. So it is, but it's absolutely assessed in the same way as an acquisition as to what the actual return is going to be on that investment.

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Donal Murphy, DCC plc - CEO & Executive Director [26]

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I think he shares a really good example in the Healthcare sector. So while we haven't deployed much capital from an acquisition perspective, we deployed a fair bit of capital, and we're deploying kind of a fair bit of capital in expanding the capacity within our facilities. And maybe it's worth just putting on that a little bit, Conor.

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Conor Costigan, DCC plc - MD of DCC Healthcare [27]

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Yes. I mean we've built a very nice position in Europe in softgel contract manufacturing for the nutritional sector, and we've had some really interesting technology developments. So we've been the leader in Europe in vegetarian softgels, which is a big trend. Everyone will be familiar with the trend to vegan. And we've also just manufactured the world's first organic vegetarian softgel capsule, which was a very nice development as well. We have good interest in some European markets in particular. And we have a new technology in slow-release capsules. So with our expanded capacity coming on stream in Q2 this year, we'll be able to leverage all those technology developments.

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Donal Murphy, DCC plc - CEO & Executive Director [28]

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Yes. I think you'd see a bit more of that, like we're in some markets that are very strong organic growth markets, tech as well and our ability to add products, add services, greater capability to integrate with our customers and suppliers, those investments we get very strong returns on, so you'll see us continuing to do those.

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [29]

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Sure. And second one was on the GBP 90 million of acquisition spend announced today. Just talk a little bit about across that piece, the sort of returns on capital you expect from that, if it's particularly different from historic, why, et cetera?

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Donal Murphy, DCC plc - CEO & Executive Director [30]

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Yes. No. I think we'd see it pretty similar, Sam. They will be kind of entry levels, that kind of 13%, 14% and will grow from there. I say the Pacific Coast Energy is actually a higher return plan, the Retail West business as an entry point. And obviously, there's some synergies that we'll be able to extract as well, and that's in line with what we said when we acquired Retail West. That's [once] by bolt-on acquisitions and use that as a mechanism to obviously improve returns across that business. And clearly, that takes time because they're more modest. It takes a bit of time. I think the technology sector in particular is a growth market. The areas that we've been investing in are all growth areas. That -- We've a very strong position now in the whole pro AV sector. So Comm-Tec coming in, adding to that, leveraging the vendor relationship. So we're pretty, pretty positive that we'll be getting those returns well up above 15%. Aren't we, Tim?

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Tim Griffin, DCC plc - MD of DCC Technology [31]

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We are.

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Operator [32]

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(Operator Instructions)

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Unidentified Analyst, [33]

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A couple, if I may. With the impact of IFRS 16, are you thinking of adjusting your return capital targets in any way to reflect that?

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [34]

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Well, we've always -- again, Chris, when we've looked at acquisitions, okay, I think they came with a very long lease with no break clauses or [anything] like that. If it walks like a debt and looks like debt, it probably is debt, so we treat it from a returns point of view as capitalized sort of debt from that point of view. So nothing's changed in the way we look at acquisitions. In terms of reported ROCE, it pulled down the ROCE by 1.6%, but it's not changing our psyche in terms of how we look at things in any shape or form.

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Unidentified Analyst, [35]

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And with regards to technology obviously there's the increase in the element of service that helped improve the margin. Just if you could have a flavor for some of the things you're doing there and how far that could go over time.

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Donal Murphy, DCC plc - CEO & Executive Director [36]

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Tim?

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Tim Griffin, DCC plc - MD of DCC Technology [37]

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Yes. So it's all improved margins, and that's a function of cost and mix into AV but also the addition of our value-added services, and that really focuses around sort of 3 broad areas. One around lifecycle management and so our MTR acquisition really starting to look at second life and how we expand by giving our vendors and our customers an opportunity to have a second life. The second is around remote capabilities, and we've got TAC and NOC capabilities to provide that to our resellers to white label those remote management capabilities. And then the third is really around deployment and installation capabilities that we provide to our integration partners. So there's 3 broad areas that we will continue to expand and invest in as well as acquire.

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Donal Murphy, DCC plc - CEO & Executive Director [38]

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And some of the mix change as well within the technology business. So the Jam business is a much higher-margin business. It's like the Comm-Tec business again, a lot of value-added products and services within it will be a higher-margin business as well. As we grow more in those areas, that will be beneficial from a margin perspective. [James]?

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [39]

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James Winckler from Jefferies. Just wondering 2 things. One on the working capital. Obviously, the inflow and outflow in any given year kind of depends heavily on the sort of businesses you buy, but I'm wondering if the mix shift in the business that's occurred over specifically last 12 months has done anything to materially change the sort of medium-term baseline expectation of about GBP 25 million outflow per year? And then secondly, on just the overall EBIT weather impact of this year having quite significantly, I believe about 11 of the last 12 months have been warmer than historic. If we operate under the baseline kind of assumption of a more normal weather this year, if you could quantify the impact that you would expect to reverse this year.

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Donal Murphy, DCC plc - CEO & Executive Director [40]

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You want to take the working capital?

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [41]

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On the working capital, I mean, no, there's been no fundamental change in the overall structure of our working capital mix. Technology is more working capital intensive than our other divisions. But even with the recent acquisitions, it doesn't move the dial significantly. We did manage to reduce the working capital within some of the recent acquisitions during the period under review. But going forward, we would revert to a more traditional GBP 25 million, GBP 30 million outflow in working capital in the year, which we're growing organically.

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Donal Murphy, DCC plc - CEO & Executive Director [42]

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We've always [attempted] the weather bit, it's not an exact science. So we -- obviously, depending on the way of profile, the way it falls, it's an estimate, but it's kind of in the order of kind of GBP 10 million to GBP 12 million will be where we'd see the impact in the year. Raj?

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Rajesh Kumar, HSBC, Research Division - Analyst [43]

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A couple, if I may. Rajesh Kumar from HSBC. Just on organic growth, if you could give us some color on how the trends in organic growth were in the second half of the year. And the second one is on the supplier side, when you're having discussions with your suppliers for next year, given what is happening with trade and tariffs in Technology, Healthcare, what is the nature of that discussion? Nothing -- not necessarily quantitatively but just in terms of what are they expecting out of distributors such as you?

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Donal Murphy, DCC plc - CEO & Executive Director [44]

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Yes. So I'll take the second one first and maybe come back then. Like the -- as a distributor, most of the markets, and indeed, as a retailer as we are in the energy markets, we're buying commodities, or we're buying third-party products. We're putting the margin on us, and we're selling it on to our customers. So we become a price taker in the market. So kind of nothing changes, really, from that perspective. The price of the underlying product may go up, but we pass it on through into the market. We do very little kind of export. We have a little bit within our Health & Beauty business, but we're typically buying product in market for the market. So whatever happens obviously in terms of demand for those products, if there's the dampening of demand, we're not going to be immune to that, but it doesn't have a direct impact on our business particularly. The organic piece, as for the organic pieces, there's pluses and minuses in it because obviously we've had, if we look at it from a group perspective, we've had the weather impact, and we have the investment in the nat gas and electricity. So if you just out for those, our organic is kind of in line with what we've been talking about over a long-term trend of -- to go to the 1/3 of our 14.6%, then organic so it's kind of above that...

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [45]

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Between 3% and 4% in the second half is the organic number -- percent. Between 3% and 4%.

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Donal Murphy, DCC plc - CEO & Executive Director [46]

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In the second half, yes.

Any other questions here? Might try -- no -- on the line? None on the line? Okay. Like just to thank everyone for being here today. And again, for all the support over the 25 years that we've been a public company with some of you for a long time and some of you for a shorter time. So thank you all.

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [47]

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Thank you.