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Edited Transcript of DCC.L earnings conference call or presentation 12-Nov-19 9:00am GMT

Half Year 2020 DCC PLC Earnings Call

Co. Dublin Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of DCC PLC earnings conference call or presentation Tuesday, November 12, 2019 at 9:00:00am 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

* Eddie O'Brien

DCC plc - MD of DCC Retail & Oil

* 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

* Christopher Bamberry

Peel Hunt LLP, Research Division - Analyst

* Gerry Hennigan

Goodbody Stockbrokers, Research Division - Investment Analyst

* James Peter Winckler

Jefferies LLC, Research Division - Equity Analyst

* Katherine Somerville

RBC Capital Markets, 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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Operator [1]

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Welcome to the DCC interim results presentation for the 6 months ended 30th of September 2019. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, the 12th of November 2019, and the conference will start shortly.

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

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All right. Good morning, and welcome to DCC's interim results presentation for the 6 months ending the 30th of September 2019. It's great to see you all here today. We're in a bigger room than we normally are in the Stock Exchange. And for those on the phone, it has the most incredible AV system. So I think it's because we're getting bigger in the Pro AV market, thus we have to get more sophisticated AV.

But anyway, welcome. I'm Donal Murphy. I think everyone certainly in the room knows me, at this stage, Chief Executive of DCC. I'm joined by my colleagues from the far side of the room, Tim Griffin, Managing Director of DCC Technology; Conor Costigan, Managing Director of DCC Healthcare, who's going to talk and tell us all about all the exciting things in high-end laboratories a little bit later; Eddie O'Brien, Managing Director of Retail & Oil; Henry Cubbon, Managing Director of LPG; and Fergal O’Dwyer, Chief Financial Officer.

So thankfully, I don't have to read our disclaimer, but it's there for everyone to peruse at their leisure.

So just to take you through the highlights of the results. A little bit of a deep dive into each of the 4 divisions, talk to you about our development activity, and we're really pleased today to be announcing the acquisition of Ion Laboratories. And then we will open this up to questions.

So we're very pleased with the performance in the first half of the year. It's been another period of good growth and development for the group. And I suppose that good growth and development is set against a backdrop of a pretty challenging macroeconomic environment and particularly here within the U.K. market.

Our operating profits were up 14.5%, 13.7% on a constant currency basis, to GBP 162.6 million, very much in line with expectations. I was so particularly pleased that all 4 divisions performed strongly in the first half of the year.

Adjusted EPS, up 3% to 110.2p, reflecting the strong earnings growth and the equity placing in the prior year. The Board has proposed an interim dividend increase of 10% to 49.5p per share.

And it has been a pretty active period from a development and particularly an integration perspective during the first half. We committed or we spent GBP 118 million on acquisitions during the period. I'm particularly pleased to be announcing the next acquisition in the U.S. for DCC and the next acquisition in our U.S. Health & Beauty journey with Ion Laboratories, and I'll come back and talk about that a little bit more detail later on.

The balance sheet remains very strong and liquid, and that's very important for us because we do believe that we continue to have the opportunities, the platforms and the capabilities to continue to build DCC into a global leader in our chosen sector.

As you know, diversity is very important to DCC, and we believe that diversity has been very important in the performance in the first half of the year. So not always do all the divisions fire in all cylinders at the same time, and that diversity, both geographic diversity and sectoral diversity, has worked well in the first half of the year.

So just to pick out a couple of numbers from the financial summary. Just on the revenue side, on the face of it, revenues back 1.4% to GBP 7.3 billion. But as you all know, a very substantial part of our business is in the Energy sector, very much impacted by the movement in the commodity price, so the price of oil and the price of LPG dropped down during the first 6 months. So we look at Energy on a volume perspective. So very pleased with volume performance within the LPG business, up 7.7% during the first half of the year.

Retail & Oil volumes were back 3.8%, very much driven by exiting out of some high-volume, low-margin business in the U.K. market.

If we exclude the Energy businesses, our revenues were up 11.7% during the first half driven by acquisitions.

Operating cash flow of GBP 149.9 million during the first half.

And from a working capital perspective, working capital days increased to 2.4 days from 1.3 days in the prior year, reflecting the positive working capital characteristics of acquisitions completed in the prior year and in this year. On a like-for-like basis, working capital was broadly in line with the prior year.

Net debt at the end of the 6 months, GBP 245.3 million excluding lease creditors, so a very strong financial position. And including lease creditors or adjusting for IFRS 16, GBP 531.7 million, very much in line with what we said the impact of IFRS 16 would have when we announced our results last May.

So just moving on to look at the businesses in a little bit more detail. Very pleased, as I say, that all 4 divisions performed strongly during the first half of the year. DCC LPG, operating profits growing 19.8%, 18.6% on a constant currency basis. 3/4 of that was organic growth.

Retail & Oil, up 6%, 6.2% on a constant currency basis. About 1/3 of that was organic growth.

DCC Technology, very strong growth, up 42.6%, benefiting from acquisitions.

And DCC Healthcare, up 5.8%, 5.6% on a constant currency basis. And again, about 3/4 of that growth was organic.

So overall, a strong performance across each of the 4 divisions. It's a little bit less meaningful in the first half of the year, but the split by division, 30% in LPG, 37% of profitability in Retail & Oil, 16% in Technology and 17% in our Healthcare division.

So going on to look at DCC LPG. Very strong performance in the first half of the year. And as you know, in DCC, the first half of the year is the seasonally less significant half of the year for the group and very much the less significant half of the year for the LPG business. But we're very pleased with the profit growth, very pleased with the volume growth, up 7.7%, 7.1% organically. Good organic growth in our LPG volumes and good organic growth within our gas and electricity volume. Very strong performance on an operating margin per tonne basis as we benefited from a more benign cost of product environment and also very good cost control across the business.

The business in France performed very much in line with our expectation. We have been leveraging the Butagaz brand to expand the business into other areas. You've heard us talk before of our Click & Collect cylinder distribution capability in France. We've continued to roll that out across the market. We've been rolling out a pellet business, the wood pellets business in the renewable space. And we continue to have very strong growth within the gas European business, our B2B natural gas and electricity business. And we continue to grow our B2C natural gas and electricity business.

Business in Britain and Ireland performed very strongly, again good volume growth within the business. We have good momentum from the oil to LPG conversions that we talked about a number of times in the past. So that continues to be delivering good growth and again benefiting from good procurement and cost control across the business.

Germany performed very well, again, growing our customer volumes. We launched a new online sales tool in the German markets, and that has been working well in terms of recruiting new customers.

And the business in Hong Kong and Macau has performed very well, notwithstanding the ongoing disputes within the country there.

Very pleased with the performance within the U.S. business. Very, very good growth, and we have fully integrated the Pacific Coast Energy business that we completed last April into the business, the DCC Propane business. And we now have a very strong presence in the Pacific Northwest segment of the market, which is a growing segment of the market within the U.S.

So overall, a very good performance within the LPG business. We've built a business of real scale within LPG. We sell 2.1 million tonnes of gas equivalent across the business. We have operations in 10 countries on 3 continents. We have 730,000 direct customers and over 4 million customers buying our gas cylinders, and we're very well positioned to continue growing DCC LPG into a global leader in the LPG market.

Moving on to look at our Retail & Oil business. Again, very good performance in the seasonally less significant first half of the year. So clearly, both the Energy businesses are very weighted towards the second half of the year. Operating profit, up 6%. As I say, about 1/3 of that was organic growth.

Volumes were back 3.8% and back 4.9% organically, and that was principally in Britain. And we decided to exit out of elements of high-volume, low-margin business, particularly in the marine and the commercial sector. And also, generally, the commercial sector has been a little bit more difficult in Britain given the economic backdrop.

Notwithstanding the decline in volume, the operating profits in Britain and Ireland grew, and we were very pleased with the continued increase in penetration and premium rate fuel. This is where we sell cleaner burning fuels. And not only are they good for the customer and good for the environment, but they're also good from a margin perspective, so attract higher margin on those products.

We have been expanding out into adjacent areas, such as our lubricants. We have been continuing to invest in our retail network. And we've been growing our business in truck stops, providing services for HGV vehicles, both for parking services, washing services and card-based services through our Fuel Card business. So overall, very pleased with the profit performance in the U.K.

Business in Scandinavia has performed very well driven by the Danish business, which had a particularly strong performance within the retail segment of the market. We talked in May about the deal that we've entered into with Shell on the aviation side, that had completed there during the period. So we'll be able to leverage the Shell brand to grow the business both in Denmark and, hopefully, over time, beyond.

France, again, performed very well, benefiting from the investments that we made in upgrading our network to the synergy fuels concepts, the synergy fuel differentiated products were selling through that network, also benefiting from upgrades in our car wash capability. And we rolled out a customer loyalty program, our Club Certas program, which has been beneficial in terms of getting greater customer attraction to the sites.

DCC Technology. Again, very strong growth in the first 6 months, up 42.6%. Again, DCC Technology is weighted towards the second half of the year. That growth was all driven by acquisitions.

The business in Britain, operating profit declined. The U.K. has been, over the summer months and into the autumn, just demand for technology products, particularly consumer products and enterprise products, has been more challenging, and that has had an impact on the business in Britain.

Our business in Continental Europe has performed well. The business in the Nordics, we've had good sales growth, particularly in AV products and IT products.

We announced in May the acquisition of Amacom, which is a retail consumer products distribution business in the Netherlands. That business has performed very strongly, has been fully integrated into our consumer propositions within DCC Technology and positions us well to continue to grow in the consumer area.

And our B2B business in Europe, again, performed in line with expectations during the first 6 months. And we fully integrated the Comm-Tec business, which is a Pro AV business that we announced last May which has operations in Germany, in Switzerland, in Italy and then into Iberia and Austria. So extending our geographic footprint in the Pro AV market.

Our investments within North America. Jam and Stampede performed very well in the first half of the year, particularly good growth in the Pro AV sector. So all this wonderful equipment that you see in the room here, in government sectors, in the hospitality sector, in particular, and good growth in Pro Audio and lighting segments that the Jam targets in North America.

So overall, pleased with the performance of DCC Technology in the first 6 months.

And so finally, on DCC Healthcare, we had a good performance in the first half of the year. Operating profit, up 5.8%. And as said earlier, about 3/4 of that growth was organic.

We had a good performance in DCC Vital, our business supplying medical products and pharma products to healthcare providers in Britain and Ireland, particularly good growth in the sales of blood plasma products in Ireland and exempt medicinal products in the Irish market.

The British market performed robustly in a market that was impacted by a little bit of destocking, I think post the original Brexit date. And we'll avoid talking about Brexit if we can today. And also a little bit of constraint from a public healthcare funding perspective.

We exited the generic pharma business that we had on the related beta lactam manufacturing facility that we had in Ireland, and that really enables us to sharpen our strategic focus on the areas where DCC Vital has really competitive advantage, in the medical device and the agency pharma and exempt medicines business in Britain and Ireland. And pleased to have completed a couple of small bolt-on acquisitions within the business in the U.K., business into our primary care segment of the market, a business called SP Services that provides products and services into the blue light sector of the market and then the medical device business called VacSax.

So continuing to redeploy capital into the DCC Vital business. So overall, Vital had a good performance in the first half of the year.

DCC Health & Beauty, again continuing our trend of strong sales growth, particularly strong growth in skin care products and good growth across all our nutritional products and our nutritional formats and particularly in liquids and soft gels. We have been investing in that business to increase our capacity and to take on new customers and new product lines, and that held back profit growth in the period, but that's all investment for future profit growth.

And this market is a high-growth market and a market that we are very keen to deploy further capital in. So we're particularly pleased to be announcing today the acquisition of Ion Laboratories, which is a Florida-based contract manufacturer of nutritional products, and I'll come back and give a little bit more detail on that.

But the U.S. has become a very important market for DCC in all -- actually, across all -- well, 3 of our divisions with operations there today. But we've had a particular focus in trying to find opportunities to expand the Health & Beauty business in the U.S. market. So we're really pleased to announce that acquisition today.

So touching on development. And again, it's been an active period from a development perspective and very much an active period from an integration perspective, a lot of the acquisitions that we completed in the prior year being fully integrated into the group during the first 6 months.

Committed -- spend -- cash spend on acquisitions in the first half was GBP 118 million. We completed the integration of the Amacom business, as I say, broadening out our consumer technology business in Western Europe. We completed the acquisition and integration of the Comm-Tec business, expanding out our B2B Pro AV capability within Europe. So both those businesses, significantly strengthening the Technology business in Continental Europe.

DCC LPG, we have fully integrated the Pacific Coast Energy business, and we have now a strong footprint in the Pacific Northwest region of the market. And as I said earlier, that's a high-growth region of the LPG market in the U.S. So very pleased with -- that those integrations have gone well.

Post the period end, today, we announced the acquisition of Ion Laboratories, enterprise value of $60 million. And it is a significant step forward for us in building our footprint within the U.S. Health & Beauty market. It's a very large market, it's a very fragmented market. And Conor and the team have been working hard on that market over the last 3 years to identify opportunities. And in typical DCC style, we build relationships with people. We work hard to convince them that DCC is the right partner for their business going forward, and then we buy the business as an appropriate valuation. So we believe that this is a really interesting business. It has very strong capability across quite a range of format, from tablets, capsules, capsules within capsules, powders, liquids. So it has a broad range of capability. It's investing at the moment in our latest. Those were the gummy line. So gummy is a very fast growth segment of the nutritional markets, particularly in the U.S. And Ion has invested in the infrastructure to build the gummy business, which is becoming onstream shortly.

Business operates from facilities of 350,000 square feet then in Florida, and it's got a very experienced management team. So it's a really important next step in DCC building a significant presence within the U.S. Health & Beauty market.

And of course, these are updates of a couple of slides that we showed at our Capital Markets Day. And I think the -- just looking at the scale of the market, so the global nutritional market, $136 billion. The biggest segment of that market is clearly the U.S. at $46 billion. And that market is growing at 6% or projected to grow at 6% per annum. So not only is it a very large market, but it's a relatively high-growth market.

The contract manufacturing segment of that market is estimated to be about $7 billion in the U.S., and we have a very tiny share of that. And the contract manufacturing market is projected to grow actually slightly faster than the growth in the overall market at 7% as more companies outsource to contract manufacturers.

So just to kind of put the acquisitions, while they may be modest in the overall scale of the group, we think they are very important building blocks in terms of DCC building a significant presence within the Health & Beauty market. And as I say, it's a very large and growing market.

And this is a slide, I think Conor put up at the Capital Markets Day. And if anyone wants to go back and look at the slides from the Capital Markets Day presentation, we've colored in green current formats, a couple more formats from when we were down in Marseille, so now into the sports nutrition powders and into gummies. So gummies is going to be the order of the day, I think for us today. But we have a very broad array of capabilities now across the breadth of our Health & Beauty business, tablets, capsules, soft gels, liquids, tropical medicine, clearly on the beauty side then into the more complicated skin, hair care products and now sports nutrition powders and gummies. So just to put the acquisitions into a little bit of context.

So just to summarize, we believe it's been a very strong first half performance. And I think set against the backdrop of the pretty challenging macroeconomic environment, I think we'd be pretty pleased with the performance, good growth across each of our 4 divisions. Very pleased with the continued development activity. We're very busy on acquisitions, everyone else, because all the time, pipelines, everything where we try and avoid answering the pipeline question, but we're very busy on the development front. And hopefully, you see the evidence of some of that coming through today.

Very strong balance sheet to continue to drive that growth agenda, and we very much believe that we have the platforms, the opportunities, and most importantly, the capability to continue to build DCC into a global leader in our chosen sector. So that's just very important in terms of where we see the business going forward.

Our outlook statement, notwithstanding the continued uncertain macroeconomic outlook impacting the U.K. economy in particular and DCC Technology's business in particular, the group believes that the year-end at 31st March 2020 will be another year of good operating profit growth and further development and will be broadly in line with current market consensus expectations.

And we leave you with our favorite slide, which is our 25-year track record and something that we're very proud of and are very focused on continuing.

So we'll open it up to questions.

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Questions and Answers

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

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Rory?

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [2]

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It's Rory from UBS. And I don't know there'll be like an AV component here somewhere, given...

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

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It should be an AV component there, Rory, it's a puff there.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [4]

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Firstly, on the LPG margin, which is really strong in the smaller of the halves, about GBP 6 a tonne, can you help us understand how much was your internal efficiency? How much was cost of product? And what's mix doing? And so how we can take that forward?

And then secondly, on Retail & Oil. You talked about these business exits because you're seeing in this kind of high-volume, low-margin business. But I've always thought it's kind of high-volume, low-margin is kind of the core of what DCC does. So can you explain what's changing there? Are you seeing more price pressure on your margin? Is it that volumes are falling beyond what you see as sustainable? And so why are those segments now not viable?

And then lastly, just on Technology. Again, the margin really strong through H1. You're talking about risk in the U.K. Do you think that margin will start to kind of be under pressure through H2?

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Donal Murphy, DCC plc - CEO & Executive Director [5]

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Okay. Fergal, do you want to just talk about the margin there for a sec?

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [6]

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Well, margin, take on the fast one first. I mean the margin in H1 is a function more of mix in the sense that we've got the U.S. businesses, which are higher-margin businesses, and particularly Jam business in North America.

Will margin come under bit of pressure in the second half? From an operating leverage point of view, up, it will. But overall, we expect sort of a small increase in the margin for the year. On LPG, that -- it's the last about numbers here. Yes, we had a modestly more benign pricing environment, cost of product environment. There is no read-through. And the rest then is about the operating leverage effect of a 7% organic increase in our volumes.

Is there any read-through of that into the second half? Not really. To be quite honest, it's -- we -- the last small numbers.

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Donal Murphy, DCC plc - CEO & Executive Director [7]

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I think we're really pleased, like growth, and Henry can talk about a little bit, just the growth in volume in the first [half]. Clearly, the first half last year, the comparisons were a little bit weaker. But we've had good growth in the LPG segment of the market and particularly good growth in the natural gas and gas European in particular. We focused on growing that B2B natural gas business in France, and that has worked really well.

Henry, I don't know if you want to add anything?

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Henry Cubbon, DCC plc - MD of DCC LPG [8]

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Yes, Donal. So the 7.7% volume growth, 7.1% of that is organic. So the inorganic piece was the acquisition in the U.S. But the organic piece, 7.1%, around half of that comes from B2B natural gas in France, where we've been growing relatively strongly there. And that's good growth and good development. And another half of the organic growth or 50% of the organic growth comes purely from LPG, particularly seeing good growth in U.K. and Ireland from oil to gas conversions. So we're seeing industrial and commercial consumers of energy off the gas grid switching across to LPG, and that's continuing and will continue again in the future. So we're seeing some good growth there.

As Donal mentioned earlier as well, in Germany, we've seen some growth in our LPG piece there. We have a really modest market share, and we've launched a fairly innovative website where we're seeing a bit of growth through that. So overall, pretty pleasing across the piece.

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

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I think, Rory, there's always pieces of business that we prefer not to be doing. And you've got to the current -- I suppose the current economic environment as well. And we've been here before in 2008. We very much focus on making sure that we're going to get paid for every liter of fuel that we sell. So there's probably a little bit of tightening from a credit perspective to some segments of the market that we've probably chosen are less attractive to us.

So Eddie, do you want to...

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Eddie O'Brien, DCC plc - MD of DCC Retail & Oil [10]

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Nothing changed in the core business. So the operating model is still very much low-margin and driving volume through it. On marine, we were in a number of tank positions 3, 4 years ago, and the leases were coming to an end. And we couldn't add value from a lubricants point of view, so we refocused back to Aberdeen and Inverness. I think as Donal said, when the economy starts tightening, you see some tender business that tends to get to very low prices, and there's a point for credit risk or -- we just don't compete. So there's nothing in the core business. It's more price-sensitive business and specifically on marine. We've got over a couple of tank positions.

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

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I think the cash -- again, if you look at the cash margin piece, Rory, like it's the key thing and the base I regularly have with Eddie, do you look at cash contribution in this business versus necessarily always volume? So we like to grow a bit of both, plus the cash contribution is the key thing and the performance is really strong in the Retail & Oil business.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [12]

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And you said that the exits were 3% of volumes on an annual basis. Is that right?

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Eddie O'Brien, DCC plc - MD of DCC Retail & Oil [13]

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Yes. They'll roll through to the rest of the year.

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Donal Murphy, DCC plc - CEO & Executive Director [14]

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And Tim, there was a Tech question there. About margin. Okay.

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [15]

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About margin, I think I have a read-through for a second. The U.K. margin will be down in H2, as it was in H1 and in an overall way, margin from the Tech division will be broadly similar to last year, give or take. It's very difficult to call this early stage as you add into some more seasonal way as of -- for the second half.

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Donal Murphy, DCC plc - CEO & Executive Director [16]

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The analyst there is from Davy Research. Allan?

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Allan Smylie, Davy, Research Division - Transport, Distribution and Logistics Analyst [17]

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So I have 3 questions, please. Firstly, for Conor, this may be a hard one to answer. But within the U.S., your addressable market, you have a rough sense of how much that's outsourced currently, how much your share is post Ion? That would be the first question.

Secondly, I prefer on a working capital. The working capital outflow is higher year-on-year. I presume a lot of that is due to the recent Technology acquisitions. So if you could just help us think about how that's tracking versus your own expectations internally for the half and also for the full year?

And then the final one on U.S. LPG, like there's continued pressure at the top end of that market. I'm just wondering if that's feeding through into M&A prices in that space.

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Donal Murphy, DCC plc - CEO & Executive Director [18]

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Go, Conor?

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Conor Costigan, DCC plc - MD of DCC Healthcare [19]

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The -- I mean that is the -- as Donal said, the contract manufacturing market is about $7 billion. How much of that is addressable by DCC is difficult to quantify. But if you think of our revenues now at circa GBP 150 million, we're small -- it's a very small market share at any level, any assumption you want to make on that. So I mean I think it's with tons of headroom to grow. It's fragmented, so tons of headroom to grow from an acquisition point of view. And then organically, it's a high-growth market as well and lots of innovation, lots of dynamism, so lots of organic opportunities. And sort of the acquisition of Ion gives us a much broader platform now in terms of all the product formats that we have. It also -- they've been operating from 160,000 square feet. Earlier this year, they took on a second facility, which is actually slightly bigger than the existing facility. That's only partially utilized today. So we have a big canvas on which we can develop that business now over the coming years. So there's lots of scope. That's certainly -- we're not worried about buying off any roof there.

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Donal Murphy, DCC plc - CEO & Executive Director [20]

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We didn't like -- Conor didn't exercise probably 3 years ago, however we looked at the entire market. And we have a very long list, and it is very, very fragmented, of companies that are operating in the sector that would be -- will clearly be targets for DCC. So as I said earlier, our approach is to work and build the relationship and identify, hopefully, the jewels in the crown. And hopefully, we have a couple of those already. But there's plenty of transatlantic flights anyway, still to be had to continue to build the business. And we're kind of building, obviously, a management team and structure around the U.S. business as well to enable that growth. So it's an interesting opportunity for us.

And we don't -- and not to forget about our business here in Europe, which is -- which has been the highest organic growth business within the group. So we want to continue to build our business here in Europe as well.

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [21]

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On the working capital, Allan, I mean working capital is in line with our expectations. As Donal said, throughout the recent Tech acquisitions, the working capital days are broadly the same. You got to look at what sort of cash flow and working capital on a sort of an annual movement basis. So if you take September-September, you can work it out from the statement. There's a net outflow on the cash line on working capital, like-for-like increased by GBP 35 million September to September. GBP 20 million something of that is actually due to lower usage of supply chain financing, which we called out in the statement. And that's really driven by lower activity levels generally within the U.K. Technology business. So like-for-like, when you strip that out, we have a net increase in working capital from a cash flow point of view in the 12 months of about GBP 15 million. Does it change our expectations vis-à-vis the year overall? Absolutely, no change at all in terms of the expectations we would have called out to you previously as to how we see working capital to go for the year to March 2020.

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Donal Murphy, DCC plc - CEO & Executive Director [22]

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And I think the -- what's the question, just distressed players that is in the LPG markets in the U.S. and there's certainly some, I think at the high end of the market.

And look, I think there's -- we said when we entered that market, there's 4,000 players within the LPG markets in the U.S. We have -- we're probably heading for 0.7% share of that market now. So we're a still a pretty small player. But the business we have, DCC Propane, we've built a lot of credibility. And Henry and the team have built a lot of credibility as an acquirer of businesses within the market, Pacific Coast Energy is a good example of that. We believe there'll be plenty of opportunities to deploy capital over there. We'll see what the future brings for other players within the market, but we come back to our platforms and opportunities. That's certainly a platform and opportunity, so we'd like to deploy more capital over there.

Kate? Just pass the book if you're...

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Katherine Somerville, RBC Capital Markets, Research Division - Analyst [23]

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Yes. It's Kate from RBC. First one for Henry, just on the LPG market in the U.S. So you talked about the older LPG conversions in the U.K. Are you seeing some of the dynamics in the U.S.? And are there any differences in the LPG market compared -- over there compared to Europe?

And then on the GBP 118 million spend on M&A. Do we expect all of these to reach the 15% return on invested capital target in first 3 years of ownership? And looking at potential deals, would you ever be more flexible on that returned target?

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Donal Murphy, DCC plc - CEO & Executive Director [24]

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Okay. Henry?

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Henry Cubbon, DCC plc - MD of DCC LPG [25]

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And just on LPG in the United States. The U.S. clearly is a very, very large market, and it tends to be regional when we're looking at the various dynamics there. The also LPG opportunity in the U.S. is predominantly in the northeast, where there's a large amount of oil and other similar products used for energy off the grid. In other parts of the U.S., it's much less prevalent. So it just depends on which region you're in. We are seeing a little bit of it in the regions we're in, but we're seeing more growth coming from new house builds, particularly in the northwest, where the economy is relatively strong there. There's a fair bit of new housing being constructed, and we're seeing good growth from that. But in terms of oil to LPG, it's more in the northeast of the U.S.

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

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And in terms of returns, Kate, like, we very much target acquisitions to deliver that kind of 15% return over time depending on the acquisitions. Some will get there quicker, some will take a little bit longer. So the likes of the Health & Beauty acquisition, it -- that's kind of probably a 15% return over a 3-year kind of time period. So I think if you look at this over 3 years, I think that's where we'd see the 15% returns.

Gerry?

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Gerry Hennigan, Goodbody Stockbrokers, Research Division - Investment Analyst [27]

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Gerry from Goodbody. Donal, just if I compare the Healthcare performance relative to the Tech performance, given the fact that both company -- both entities are fairly well exposed to U.K. and the backdrop of your comments around the U.K. economy, you could argue actually that Healthcare is more exposed to the U.K. economy, yet it performed very, very well. Is there something else on the Tech side that meant that it underperformed relative to Healthcare?

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

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No. I don't think so. I think, Gerry, like the Healthcare business, clearly, our customer, the customers of the tile business is the NHS. So while you'll find that there might be a little bit of destocking or there's certainly constraint sometimes on the pricing side, but there's a lot of patients that need products and we supply the products, and if they don't get the products, they don't get the healthcare. So you don't really have a choice in the healthcare sector. The Health & Beauty business, again, that's been -- that's very different, like a lot of the products that we're selling, over half of them that we manufacture in the U.K. get exported outside of the U.K. And it's a high-growth, it's clearly been a high-growth market.

Technology, we've been here. We've been in the technology business for a very long periods of time. And the Technology business, when the market gets tougher, you do see an impact quicker on the sales. And we saw that kind of from -- over the summer and into the autumn, it got increasingly more difficult. It's on consumer products, it's on enterprise products. Companies concern about Brexit. Companies probably aren't upgrading their infrastructure, and that's having a bit of an impact. But I go back out, been around this for a very long period of time. But when I was running the Technology business, which was an awful long time ago, but in 2005, post the bonds in London on the 7th of July, in the period from 7th of July to September, we had a 22.5% decline in our sales during that period of time, I mean all around customer sentiment, and it bounced back very quickly. So I think the market is tough, and we've seen a bit of an impact. But the great thing, I think if you look at our Technology business now, it's very diverse geographically. So had begun a couple of years ago, predominant part of our business would have been in the U.K. and it would've been much more significant to us. So I think the geographic diversity has been very helpful, the breadth of products that we're providing has been very helpful, but we're not immune to the demand characteristics of the market.

James?

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [29]

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James from Jefferies. Just had 2 main ones on Retail & Oil and Technology, similar trends in the way of sort of backward moving organic volumes as well as -- but offset by better moving margins. And I'm just wondering in terms of what is expected to change in the H2. So I think for -- you suggested expectations of about flat year-over-year margins in H2 for Technology. I understand the negative operating leverage point, but that should have also been at play in the first half of the year. Obviously, there was H2 weighting maybe a bit more pronounced. But I'm wondering if the exit rate in terms of the organic volumes was worse into the end of H1 and any reason why we shouldn't see the mix benefit that you saw in H1 benefit the margin and offset some of that organic volume pressure in Tech is something that I'm curious about.

And then Retail & Oil, exited services with about 3% of annual volumes benefited your profit per liter as well. So if you're moving forward to a similar sort of decline in the H2 in terms of percentage of volumes year-over-year decline, shouldn't you also expect an improvement in profit per liter as well partially offsetting that?

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [30]

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Sorry. Just to understand you -- if I understand you correctly, you're saying, were the exit volumes intact? Were they more impacted by the average and volumes would intact for the 6 months? Yes, they were. As we said, it was increasing and progressive in terms of where the consumer's mindset went as we went through the 6 months. And as we headed into the more seasonally important ones September onwards, yes, we see that.

In terms of the overall mix, we saw that mix impact benefit us in the first half because Jam and Stampede, which are higher-margin businesses, and we're only there for a number of -- couple of months last year. We're there for the full 6 months this year. As we go into H2, those businesses were there last year and they're there this year, so we don't get that enhanced mix effect. We will have from an operating leverage point of view. In the U.K. Technology business, margins will come off from that point of view.

In an overall way, for Technology, we would, therefore, see taking all of that into the round, that margins would be broadly the same. That margin would be broadly the same year-on-year for the full year.

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Donal Murphy, DCC plc - CEO & Executive Director [31]

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And just to be very clear, the Tech weakness is purely in the U.K., so the other businesses are performing very well.

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James Peter Winckler, Jefferies LLC, Research Division - Equity Analyst [32]

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And then on Retail & Oil?

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Eddie O'Brien, DCC plc - MD of DCC Retail & Oil [33]

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Yes. So I mean, as I said earlier, the volume will continue. And as Donal said, we're pretty focused on cash contribution, so we'll continue to drive and optimize margins. The second half will depend really on the heat and oil, probably the winter goes. So predicting the PPL at this stage will be pretty difficult until we know what the winter looks like. But clearly, driving margins and driving the cash contribution, we don't see that changing in the second half.

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Donal Murphy, DCC plc - CEO & Executive Director [34]

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And we've been -- like -- and over the last while, mix has always a big impact on the Retail & Oil business. So if we win more kind of dealer petrol station business, it's very low-margin but very high-return business. If it's more weighted towards the commercial domestic heating, you get a different mix on the margin impact. But the focus on premium fuels, the focus on value-added service, that's what's been growing the underlying margin within the Retail & Oil business. And net margin per liter moves around from time to time. It's about that gross cash contribution, as Eddie said.

Chris?

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [35]

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Chris Bamberry, Peel Hunt. A couple of areas, if I may. With the worsening background in Technology in the U.K., I was just looking for a bit more of -- in terms of the industry participants' reaction, so the vendors, the retailers, new competition.

And then secondly, moving on to the Ion acquisition, get a bit more background there on how long the process would be going on. Was it competitive? And you also mentioned it also brings the gummy lines, but any other differences with the Elite business in terms of products or formulation in that cycle?

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

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All right. Tim, do you want to take the vendors and if you're going to be specific...

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

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Specifically, on any individual vendor or any individual competitor, I think share data would be the one I would point to wherein we're broadly in line in terms of holding share in the U.K. Obviously, it's been a little under pressure with the nature of our vendor mix and our industry mix, retail versus business-to-business, but I think it's broadly in line.

When you actually look at the market, enterprise, double-digit down, and that's a function of the nature of the investment cycle plus what's going on with regards to as-a-service type models. And we've been investing in that space to be able to offer that to a seller community. So I think what we're seeing is broadly in line with what you'd expect given the sort of the market trends and the pressures of, as Donal said, Brexit and elections and some of the issues that have been delivered as a consequence of our American governments.

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

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We have a very strong business here in the U.K. So we're very -- I think we're pretty well positioned to deal with these things. So it's just demand goes out, demand goes out relatively quickly in the sector. You've just got to deal with this, and we're doing that. But like, as Tim says, market shares are holding up. So that's the barometer that we're looking at. So we're not losing business to anyone else. It's just that business isn't there at the moment. But as I said earlier, we often -- we see that we've been here before, it bounces back pretty quickly. So hopefully, the -- as we go into the new year, there'll be new enthusiasm in the country here, and people will start buying products again.

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Tim Griffin, DCC plc - MD of DCC Technology [39]

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Absolutely.

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

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Ion?

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Conor Costigan, DCC plc - MD of DCC Healthcare [41]

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Yes. Ion was the -- it was the name, a business that was actually on -- going back to the original market landscaping exercise we did when we first started to look at the U.S. It was a name that came out a lot. It was on our target list. The process came about very quickly though because the owner actually have a critical illness. And so we had to move quite fast to a number of other parties involved in as well. It was a kind of a non-exclusive process. And so I think the fact that we built a strong relationship with the management team was an important factor in our ability to move quickly, or they were the important factors in us getting across the line.

In terms of -- I suppose they have capability in tablets and capsules, which is the same as what Elite has, and Elite has the kind of a more specialist focus on organic materials. And then Ion had a broader capability. So in addition to tablets and capsules, it has powders, it has liquid nutritionals and then it has some kind of niche specialities. I think Donal mentioned capsule in capsule and liquid capsules. So capsule in capsule is a kind of an interesting concept where you've got 2 active ingredients that don't mix. So perhaps a fish or a high-strength fish oil and then a powder capsule inside the high-strength fish oil capsule. So you can get different actives in the same delivery that you wouldn't ordinarily be able to. So it's a niche capability, but it's an interesting one and a good door-opener with customers. There's almost no customer overlap between the 2 businesses as 1 customer shared customer, and that was preexisting, where a customer with quite a tight range of products has -- was sourcing from both sites for security supply reasons. And that's something we can probably exploit. With the overlapping and capability, we can exploit that a little bit more.

And then gummies, we -- it's a category that we've been interested in. We've been looking for -- looking at the acquisition opportunities in that space in the U.S. There's a very few gummy manufacturers, and so we're excited about the prospect of getting into that. It's very early. They have literally just purchased the case and are commissioning the line. So there's a bit to go before we're fully up running on that, but it's going to be exciting for the business. And they'll be learning there, thus we can take back to our U.K. facilities as well and look to develop that capability here as well over time.

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

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Sam?

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [43]

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It's Sam Bland from JPMorgan. Two questions for me. First one, actually, again, on Technology. Can you just talk about the operational leverage characteristics of that business, particularly, obviously, bear in mind, going into that seasonal period and reasonably thin margins in the business as well?

And the second one is just to kind of calibrate expectations around balance sheet capacity. Obviously, historically, you talked about that 1.8x leverage at seasonal peak. Would you now include the IFRS 16 lease creditor within that or not? Just to get an idea of how much debt that you're sitting there.

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

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I think no is the answer to the second part, fairly straightforwardly, but unless Fergal...

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

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We wouldn't include the IFRS 16, GBP 300 million or so across 2,000 leases with 700 landlords in that debt number, okay? We were looking at an acquisition with something with an institutional lease for 25 years. Would you regard that as debt from the point of view looking at the acquisition? Yes, we would. But we wouldn't include the overall number in our sort of debt capacity. Clearly, in one of our banks, our institutional banking coverage includes those leases as debt and our confidence is 3.5, the end of September, we would be on a sort of 12-month basis, [3.4]. So clearly a significant amount of capacity. We wouldn't want that number to go in terms of our own internal sort of view on leverage. We wouldn't want our leverage to go beyond 1.8, 1.9x. But with the EBITDA we have, that gives us significant firepower in terms of how the balance sheet is set.

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

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I think, Sam, if an accounting standard can ever be a bullet point, I think IFRS 16 is actually a bullet point for DCC. Because when you look at the impact of IFRS 16 on our business, very modest, because we have always looked, as Fergal said, as investments, if they have lots of leases in as we look at the leases of their debt, so we've always factored it in. So it's -- that's why it has -- it really does have minimal impact on the business.

Do you want to just talk about the operating leverage, Fergal, and...

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

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Yes. And -- so in terms of operating capacity, obviously, we're ramping up into peak right now. And the whole operation is built around being able to manage that sort of capacity. I guess there are 2 aspects of things that we've been doing to be able to ensure that we continue to build leverage. One is around investments and in being able to get higher density cubic within the facilities that we've got, so our peak towers in both Burnley and in the Nordics, plus the investments we've made in France to be able to enable that.

And then the second thing is really about the sort of the science of procurement, driving better terms in our stock, reducing stock days and so on to be able to drive that capacity into our existing warehouse capabilities.

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Donal Murphy, DCC plc - CEO & Executive Director [48]

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But there like it's -- it takes a little bit of time. So that's part of the challenge. Fergal, do you want to add anything?

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Fergal O’Dwyer, DCC plc - CFO & Executive Director [49]

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No. I mean typically, because of just the throughput of revenue through the sales which -- in H2, you will see from our numbers that, typically, our operating margin percentage in Technology is substantially greater in H2 than it is in H1, to give you an overall higher number for the year versus H1. It would be broadly -- that trend will continue because we do, obviously, do more revenue in H2. But the increase for H1 versus H2 won't be as great this year because of what's going on in U.K. Technology. But there will be sort of an increase between H1 and H2.

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Donal Murphy, DCC plc - CEO & Executive Director [50]

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Any other questions in the room?

I think just -- if we check if there's anyone online. Check if there's anyone online that has a question, maybe. It will be better.

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Operator [51]

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There are no questions on the phone lines.

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Donal Murphy, DCC plc - CEO & Executive Director [52]

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Okay. Thank you all. Thank you for your time, and see you all soon.