Morning, welcome to DCC's interim results presentation for the six 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. For those on the phone, it has the most incredible AV system. I think it's because we're getting bigger in the pro AV market that we have to get more sophisticated AV. Anyway, welcome. I'm Donal Murphy. I think everyone, certainly in the room, knows me at this stage, Chief Executive, 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 Ion Laboratories a little bit later.
Eddie O'Brien, Managing Director of Retail and Oil, Henry Cubbon, Managing Director of LPG, and Fergal O'Dwyer, Chief Financial Officer. Thankfully, I don't have to read our disclaimer, but it's there for everyone to peruse at their leisure. Just take you through the highlights of the results. A little bit of a deep dive into each of the four divisions, talk to you about our development activity, and we're really pleased today to be announcing the acquisition of Ion Laboratories. We will open it up to questions. 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. I suppose that good growth and development is set against the 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 feel particularly pleased that all four divisions performed strongly in the first half of the year. Adjusted EPS up 3% to GBP 1.102, reflecting the strong earnings growth and the equity placing in the prior year. The board has proposed an interim dividend increase of 10% to GBP 0.495 per share. 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 and beauty journey with Ion Laboratories. I'll come back and talk about that a little bit more detail later on.
The balance sheet remains very strong and liquid. 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. Not always do all the divisions fire on 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. Just to pick out a couple of numbers from the financial summary, just on the revenue side. On the face of it, revenue's back 1.4% to GBP 7.3 billion.
As you all know, a very substantial part of our business is in the energy sector, very much impacted by the movement and the commodity price or the price of oil and the price of LPG dropped down during the first six months. We look at energy on a volume perspective, so very pleased with the volume performance within the LPG business, up 7.7% during the first half of the year. Retail and 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.
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 six months, GBP 245.3 million, excluding lease creditors, a very strong financial position. 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. Just moving on to look at the businesses in a little bit more detail. Very pleased, as I say, that all four divisions performed strongly during the first half of the year. DCC LPG operating profits growing 19.8%, 18.6% on a constant currency basis.
Three-quarters of that was organic growth. Retail and Oil up 6%, 6.2% on a constant currency basis. About a third of that was organic growth. DCC Technology, very strong growth, up 42.6%, benefiting from acquisitions. DCC Healthcare up 5.8%, 5.6% on a constant currency basis. Again, about three quarters of that growth was organic. Overall, a strong performance across each of the four divisions. It's a little bit less meaningful in the first half of the year, the split by division, 30% in LPG, 37% of profitability in Retail and Oil, 16% in Technology and 17% in our Healthcare division. Going on to look at DCC LPG. Very strong performance in the first half of the year.
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. 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 volumes. Very strong performance on an operating margin per ton 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 expectations. We have been leveraging the Butagaz brand to expand the business into other areas. You've heard us talk before of our click and collect cylinder distribution capability in France.
We've continued to roll that out across the market. We've been rolling out a wood pellets business in the renewable space, and we continue to have very strong growth within the Gaz Européen business, our B2B natural gas and electricity business, and we continue to grow our B2C natural gas and electricity business. Business in the U.K. and Ireland performed very strongly. 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. That continues to be delivering good growth. Again, benefiting from good procurement and cost control across the business. Germany performed very well. Growing our customer volumes. We launched a new online sales tool in the German market, and that has been working well in terms of recruiting new customers.
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 good growth. We have fully integrated the Pacific Coast Energy business that we completed last April into the DCC Propane business. 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. Overall, a very good performance within the LPG business. We've built a business of real scale within LPG. We sell 2.1 million tons of gas equivalent across the business. We have operations in 10 countries on three continents. We have 730,000 direct customers and over 4 million customers buying our gas cylinders. 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 and Oil business. Again, very good performance in the seasonally less significant first half of the year. Clearly both the energy businesses are very weighted towards the second half of the year. Operating profit up 6%. As I say, about a third of that was organic growth. Volumes were back 3.8% and back 4.9% organically, and that was principally in Britain. We decided to exit out of elements of high volume, low margin business, particularly in the marine and the commercial sector. 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. We were very pleased with the continued increase in penetration in premium rate fuels.
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. It attracts 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. 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 a deal that we had entered into with Shell on the aviation side, but that completed during the period.
We'll be able to leverage the Shell brand to grow that business both in Denmark and hopefully over time, beyond. France, again, performed very well, benefiting from the investment that we made in upgrading our network to the Synergy Fuels concept, the Synergy Fuels differentiator products we're selling through that network. Also benefiting from upgrades in our car wash capability. We rolled out a customer loyalty program, our Club Services program, which has been beneficial in terms of getting greater customer attraction to the sites. DCC Technology, again, very strong growth in the first six months, up 42.6%. 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 as well to continue to grow in the consumer area.
Our B2B business in Europe, again, performed in line with expectations during the first six 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 down into Iberia and Austria. 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, 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 Jam targets in North America. Overall, pleased with the performance of DCC Technology in the first six months.
Finally, on DCC Healthcare, we had a good performance in the first half of the year. Operating profit up 5.8%, and as I said earlier, about three-quarters 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 the U.K. and Ireland. Particularly good growth in the sales of blood plasma products in Ireland and exempt medicinal products in the Irish market. The U.K. 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. Also a little bit of constraint from a public healthcare funding perspective. We exited the generic pharma business that we had and the related beta-lactam manufacturing facility that we had in Ireland.
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. Pleased to have completed a couple of small bolt-on acquisitions within the business in the U.K., a 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 a medical device business called VacSax. Continuing to redeploy capital into the DCC Vital business. Overall, Vital had a good performance in the first half of the year. DCC Health and Beauty, again, continuing our trend of strong sales growth, particularly strong growth in skincare 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. That's all investment for future profit growth. This market is a high growth market, and a market that we are very keen to deploy further capital in. 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. The U.S. has become a very important market for DCC in all, actually across all, well, three of our divisions with operations there today. We've had a particular focus in trying to find opportunities to expand the health and beauty business in the U.S. market. We're really pleased to announce that acquisition today.
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 six 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. 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.
As I said earlier, that's a high growth region of the LPG market in the U.S. Very pleased that those integrations have gone well. Post the period end, today, we announced the acquisition of Ion Laboratories, enterprise value of GBP 60 million. It is a significant step forward for us in building our footprint within the U.S. health and beauty market. It's a very large market. It's a very fragmented market. Conor and the team have been working hard on that market over the last three years to identify opportunities. 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 at an appropriate valuation. We believe that this is a really interesting business.
It has very strong capability across quite a range of formats, from tablets, capsules, capsule in capsule, powders, liquids. It has a broad range of capability. It's investing at the moment in our latest buzzword, a gummy line. Gummies is a very fast growth segment of the nutritional market, particularly in the U.S., and Ion has invested in the infrastructure to build a gummy business, which is coming on stream shortly. Business operates from facilities of 350,000 sq ft down in Florida, and it's got a very experienced management team. It's a really important next step in DCC building a significant presence within the U.S. health and beauty market. I suppose these are updates of a couple of slides that we showed at our capital markets day. I think, just looking at the scale of the market, the global nutritional market, $136 billion.
The biggest segment of that market is clearly the U.S. at $46 billion. That market is growing at 6%, or projected to grow at 6% per annum. 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. 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. Just to put the acquisitions, while they may be modest in the overall scale of the group, we think they're very important building blocks in terms of DCC building a significant presence within the health and beauty market. As I say, it's a very large and growing market.
This is a slide I think Conor put up at the capital markets day. If anyone wants to go back and look at the slide from the capital markets day presentation, we've colored in green current formats, a couple more formats from when we were down in Marseille. Now into the sports nutrition powders and into gummies. Gummies is going to be the order of the day, I think, for us today. We have a very broad array of capabilities now across the breadth of our health and beauty business. Tablets, capsules, soft gels, liquids, tropical medicine, clearly on the beauty side, into the more complicated skin, hair care products, now sports nutrition powders and gummies. Just to put the acquisitions into a little bit of context.
Just to summarize, we believe it's been a very strong first half performance. 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 four divisions. Very pleased with the continued development activity. We're very busy on acquisitions. Everyone asks us all the time, pipelines, everything. We try and avoid answering the pipeline question. We're very busy on the development front, hopefully you see the evidence of some of that coming through today. Very strong balance sheet to continue to drive that growth agenda. 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. 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 business in particular, the group believes that the year ended 31 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. 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. We'll open it up to questions.
Morning. It's Rory from UBS. I didn't know if there'd be like an AV component here somewhere.
There should be an AV component there, Rory. It's a top sales.
Firstly, on the LPG margin, which was really strong in the smaller of the halves, up GBP 6 a tonne. Can you help us understand how much was your internal efficiency? How much was cost of product? What's mix doing, how we kind of take that forwards? Secondly, on Retail and Oil. You talked about these business exits because you're seeing in this kind of high volume, low margin business. What I always thought was kind of high volume, low margin is kind of the core of what DCC does. 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? Why are those segments now not viable? 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? Thank you.
Okay. Fergal, do you want to just talk about the margin there for a second?
Well, margin, taking the last one first. 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, particularly Jam business, in North America. Will margin come under a bit of pressure in the second half? From an operating leverage point of view, it will. Overall, we expect sort of a small increase in the margin for the year. On LPG, it's the law of small numbers here. Yeah, we had a modestly more benign pricing environment, cost of product environment. The rest is about the operating leverage effect of 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 really the law of small numbers.
I'm really pleased. The growth, and Henry can talk about a little bit, just the growth in volume, in the first nine. Clearly the first half last year, the comparisons were a little bit weaker. We've had good growth in the LPG segment of the market, and particularly good growth in the natural gas and Gaz Européen. In particular, we've been 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.
Yes. Of our sort of 7.7% volume growth, 7.1% of that is organic. The inorganic piece was the acquisition in the U.S. The organic piece, 7.1%, around half of that comes from B2B natural gas in France, where we've been growing relatively strongly there. That's good growth and good developments. 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 conversion. We're seeing industrial and commercial consumers of energy off the gas grid switching across to LPG, and that's continuing and will continue going into the future. 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. Overall, pretty pleasing across the piece.
I think, Rory, there's always pieces of business that we'd prefer not to be doing, and you've got to, I suppose, the current economic environment as well, and we've been here before. In 2008, we very much focused on making sure that we're going to get paid for every liter of fuel that we sell. 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. Eddie, do you want to?
Rory, nothing's changed in the core business, so our operating model is still very much low margin and driving volume through it. On marine, we were in a number of tank positions three, four 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 to tighten and 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. It's nothing in the core business. It's more price-sensitive business, and specifically on marine. We got out of a couple of tank positions.
I think the cash, again, if you look at the cash margin piece, Rory, it's the key thing and the debate I regularly have with Eddie. Do you look at cash contribution in this business versus necessarily always volume? We like to grow a bit of both, but the cash contribution is the key thing, and the performance is really strong in the Retail and Oil business.
Yeah. Just to clarify, the exits were 3% of volumes on an annual basis. Is that right?
Yeah. They'll roll through to the rest of the year.
Thank you.
Tim, there was a tech question, was there?
If we could just.
Oh, margin. Okay.
Margin and the read-through of the U.K. second half.
The U.K. margin will be down in H2 as it was in H1 in an overall way. Margin for the Tech Division will be broadly similar to last year, give or take. It is very difficult to call this early stage as you head into the more seasonally weighted sort of second half.
Great. Thank you.
Behind you there. It's probably the easiest. Alan.
Thanks, Donal. I have three questions, please. Firstly, for Conor, this may be a hard one to answer, but within the U.S. nutrition CMO market-
That's fine.
Do you have a rough sense of how much that's outsourced currently and what your share is post-Alan? That'll be the first question.
Go on.
For Fergal on working capital. The working capital outflow is higher year-over-year. I presume a lot of that's due to the recent Technology acquisitions. 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. The final one on U.S. LPG. 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. Thank you.
Go, Conor.
As Donal said, the contract manufacturing market is about GBP 7 billion. How much of that is addressable by DCC is difficult to quantify. If you think of our revenues now at circa GBP 150 million, where it's a very small market share at any level, any assumption you want to make on that. I think, with tons of headroom to grow, it's fragmented, tons of headroom to grow from an acquisition point of view. Organically, it's a high growth market as well. Lots of innovation, lots of dynamism. Lots of organic opportunities. The acquisition of Ion gives us a much broader platform now in terms of all the product formats that we have. They've been operating from 160,000 sq ft.
Earlier this year, they took on a second facility which is actually slightly bigger than the existing facility, that's only partially utilized today. We've a big canvas in which we can develop that business now over the coming years. There's lots of scope. That certainly, we're not worried about banging off any roof there.
Conor did an exercise probably three years ago where 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 clearly be targets for DCC. As I said earlier, our approach is to work and build the relationships and identify, hopefully the jewels in the crown, and hopefully we have a couple of those already. There's plenty of transatlantic flights anyway, still to be had to continue to build the business. We're kind of building, obviously, a management team and structure around the U.S. business as well to enable that growth. It's an interesting opportunity for us. Not to forget about our business here in Europe, which has been the highest organic growth business within the group.
I want to continue to build that business here in Europe as well.
On the working capital level, working capital is in line with our expectations. As Ion said, throughout the recent tech acquisitions, the working capital days are broadly the same. You've got to look at what sort of cash flow and working capital on a sort of an annual movement basis. If you take September to 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. 20 something of that is actually due to lower usage of supply chain financing, which we called out in the statement. That's really driven by lower activity levels, generally within the U.K. technology business.
Like for like, we 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 go for the year to March 2020.
I think the question, just distressed players, was that it in the LPG market in the U.S.? There's certainly some, I think at the high end of the market. Look, I think there's, we said when we enter that market, there's 4,000 players within the LPG market, in the U.S. We have probably heading for 0.7% share of that market now. We're at still a pretty small player. 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 the players within the market. We come back to our platforms and opportunities.
That's certainly a platform and opportunity. We'd like to deploy more capital over there.
Thanks.
Kate? I'll just pass the book. Easier.
Around you. Hi, it's Kate from RBC. First one for Henry, just on the LPG market in the U.S. You talk about the oil to LPG conversions in the U.K. Are you seeing similar dynamics in the U.S.? Are there any differences in the LPG market over there compared to Europe? On the GBP 180 million spend on M&A, do we expect all of these to reach the 15% return on invested capital target in first three years of ownership? Looking at potential deals, would you ever be more flexible on that return target?
Okay, Henry?
Yeah, just on the oil to LPG in the U.S. 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 oil to LPG opportunity in the U.S. is predominant 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.
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's relatively strong there. There's a fair bit of new housing being constructed, and we're seeing good growth from that. In terms of oil for LPG, it's more the Northeast of the U.S.
In terms of returns, Kate, we very much target acquisitions to deliver that kind of 15% return over time, depending on the acquisition. Some will get there quicker, some will take a little bit longer. The likes of the health and beauty acquisition, that's probably a 15% return over a three-year kind of time period. I think if you look at us out over three years, I think that's where we'd see the 15% returns. Jerry.
Hi. Jerry from Goodbody. Don, if I compare the Healthcare performance relative to the Tech performance, given the fact that both entities are fairly well exposed to the U.K. and the backdrop to 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 well. Is there something else on the Tech side that meant that it underperformed relative to Healthcare?
No, I don't think so. I think, Jerry, the healthcare business, clearly our customer, the customers of the Vital business is the NHS. While you'll find that there might be a little bit of destocking or there's certainly constraints 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. You don't really have a choice in the healthcare sector. The Health and Beauty business, again, that's very different. 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 clearly been a high growth market.
Technology, we've been here, we've been in the technology business for a very long period of time, and the technology business, when the market gets tougher, you do see an impact quicker on the sales line, 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 concerned about Brexit, companies probably aren't upgrading their infrastructure, and that's having a bit of an impact. I go back, I've 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 bombs 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, and all around customer sentiment, and it bounced back very quickly. I think the market is tough, and we've seen a bit of an impact. The great thing, I think if you look at our technology business now, it's very diverse geographically. Had we been a couple of years ago, predominant part of our business would've been in the U.K., and it would be much more significant to us. 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.
Okay.
James.
Hi. Thank you. James from Jefferies. 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. I'm just wondering in terms of what is expected to change in the H2. I think, Fergal, you suggested expectations of about flat year-over-year margins in H2 for Technology. I understand the negative operating leverage point, that should have also been at play in the first half of the year.
Obviously with the H2 waiting, it may be 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 you 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. Retail and oil exited services with about 3% of annual volumes, benefited your profit per liter as well. If you're moving forward to a similar sort of decline in 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?
Fergal.
If I understand you correctly, you are saying, were the exited volumes in tech, were they more impacted by the average volumes within tech for the six months? Yes, they were. As we said, it was increasing progressively in terms of where the consumer's mindset went as we went through the six months. As we headed into the more seasonally important months of 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, were only there for a couple of months last year, were there for the full six months this year. As we go into H2, those businesses were there last year and are there this year, so we do not 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 net margin would be broadly the same year-on-year for the full year.
Okay.
Just to be very clear, the tech weakness is purely in the U.K., so the other businesses are performing very well. On retail and oil?
Yeah. I think I said earlier, the volume will continue. As Donal said, we're pretty focused on cash contributions, we'll continue to drive and optimize margins. The second half will depend really on the heating oil, how the winter goes. Predicting the PPL at this stage will be pretty difficult until we know what the winter looks like. Clearly, driving margins and driving the cash contribution, we don't see that changing in the second half.
Over the last while, mix is always a big impact on the Retail and Oil business. 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. The focus on premium fuels, the focus on value-added service, that's what's been growing the underlying margin within the Retail and Oil business. Net margin per liter moves around from time to time. It's about that gross cash contribution as Eddie said.
Thank you.
Thanks, James. Chris?
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. The vendors, the retailers, new competition. Secondly, moving on to the Ion acquisition, can I get a bit more background there on how long the process has been going on? Was it competitive? You also mentioned obviously bringing the gummy lines, but any other differences with the Elite business in terms of products or formulation, that side?
All right, Tim, do you want to take the vendors and it'd be difficult to be specific.
I'm not going to comment specifically on any individual vendor or any individual competitor. I think that share data would be the one I would point to, really, and 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. 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. We've been investing in that space to be able to offer that to our reseller community.
I think what we're seeing is broadly in line with what you'd expect given the sort of 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 governance.
We've a very strong business here in the U.K., so I think we're pretty well positioned to deal with these things. It's just demand goes out, demand goes out relatively quickly in the sector. You've just got to deal with it, and we're doing that. Like as Tim says, market shares are holding up. That's the barometer that we're looking at. We're not losing business to anyone else. It's just that business isn't there at the moment. As I said earlier, we see that been here before. It bounces back pretty quickly. Hopefully, as we go into the new year, there'll be new enthusiasm in the country here, and people will start buying products again.
Absolutely.
Ion.
Yeah. Ion, it was a business that was actually on going back to the original market landscaping exercise we did when we first started looking at the U.S. It was a name that came out of that. It was on our target list. The process came about very quickly, though, because the owner actually had a critical illness. We had to move quite fast. There were a number of other parties involved in it as well. It was a kind of a non-exclusive process. I think the fact that we built a strong relationship with the management team was an important factor in us, and our ability to move quickly. 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.
Elite has a kind of a more specialist focus on organic materials. Then Ion has a broader capability. In addition to tablets and capsules, it has powders, it has liquid nutritionals, and then it has some kind of niche specialties. I think Donal mentioned, capsule in capsule and liquid capsules. Capsule in capsules is a kind of an interesting concept where you've got two active ingredients that don't mix. Perhaps, a high-strength fish oil, and then a powder capsule inside a high-strength fish oil capsule. You can get different actives in the same delivery, that you wouldn't ordinarily be able to. 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 two businesses.
There's one shared customer, that was pre-existing, where a customer with quite a tight range of products was sourcing from both sites for security supply reasons. That's something we can probably exploit, with the overlap in capability, we can exploit that a little bit more. Then gummies, it's a category that we've been interested in. We've been looking at the acquisition opportunities in that space in the U.S. There's very few gummy manufacturers, and
We're excited about the prospect of getting into that. It's very early. They have literally just purchased the kit and are commissioning the line. There's a bit to go before we're fully up and running on that. It's going to be exciting for the business, and there'll be learning there that we can take back to our U.K. facilities as well, and look to develop that capability here as well over time.
Thank you. Sam.
Morning. It's Sam Bland here from JP Morgan. Two questions from me. First one, actually, again, on technology. Can you just talk about the operational leverage characteristics of that business, particularly obviously bearing in mind going into that seasonal period and recently thin margins in the business as well. The second one is just to kind of calibrate expectations around balance sheet capacity. Obviously, you historically talked about that 1.8 times 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 of their capacity is sitting there. Thanks.
I think no is the answer to the second part, fairly straightforwardly, but unless Fergal answers.
We wouldn't include the IFRS 16, GBP 300 million or so of cost, 2,000 leases with 700 landlords, in that debt number. Okay. If we were looking at an acquisition with something with an institutional lease for 25 years, would we regard that as debt from the point of view looking at the acquisition? Yes, we would. We wouldn't include the overall number in our sort of debt capacity. Clearly, none of our institutional banking covenants include those leases as debt on our covenants of 3.5. At the end of September, we would have been on a sort of 12-month basis, 0.4. 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, 1.9 times.
With the EBITDA we have, that gives us significant firepower in terms of how the balance sheet is set.
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, at investments, if they have lots of leases in it, we look at the leases as if they're debt. We've always factored it in. That's why it really does have minimal impact on the business. Do you want to just talk about the operating leverage, Fergal?
Yes. In terms of operating capacity, obviously we're ramping up into peak right now. The whole operation is built around being able to manage that sort of capacity. I guess there are two aspects of things that we've been doing to be able to ensure that we continue to build leverage. One is around investments in being able to get higher density cubic within the facilities that we've got. Our picked towers, in both Burnley and in the Nordics, plus the investments we've made in France to be able to enable that. The second thing is really about the sort of the science of procurement, driving better turns in our stock, reducing stock days and so on to be able to drive that capacity into our existing warehouse capabilities.
There is like it takes a little bit of time, so that's part of the challenge. Fergal, do you want to add anything?
I don't. I mean, typically because of just a throughput of revenue through the sales machine 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'll be broadly that trend will continue because we do obviously do more revenue in H2, the increase for H1 versus H2 won't be as great this year because of what's going on in U.K. technology. There will be sort of an increase between H1 and H2.
Okay. Thanks.
Any other questions in the room? I think just if we check if there's anyone online. I'll check if there's anyone online that has a question.