The next big thing keeps on growing
News that DCC has entered the FTSE top 250 list serves as a reminder that it is possible for an Irish-based company to carve out a successful niche for itself in the midst of a recession while, at the same time, appearing to break some of the cardinal rules for business success.
The Stillorgan-based company may not yet be at the FTSE 100 top table but it is certainly getting there.
Chief executive Tommy Breen has built on the group’s unusual record of steady profit growth, lasting 17 years, a record only finally broken as the result of an exceptionally mild winter in 2011/12. Shareholders have benefited from 19 consistent years of dividend growth.
The figures speak for themselves — last month, when DCC delivered its latest full-year results, its share price jumped 7%. Revenues were up 25% to nearly €13bn while operating profit rose by 27.5% to €229m.
The market valuation reached €2.3bn (€2.7bn). DCC’s free cash flow was almost €200m.
At first sight, DCC appears all over the place for a company of its size. Its involvement in five disparate sectors appears calculated to stretch its relatively modestly sized management team to breaking point.
Some fund managers have questioned this. They’ve never been comfortable with DCC’s diversified approach, which calls to mind those long-departed conglomerates of the 1960s and 1970s.
Breen has been central to DCC’s development from its early days to its current position as a group with a market value of over €2bn. A polite character, he is well able to hold his ground and put critics in their place. Over time, he has won people over by the credibility earned through consistent delivery.
Breen joined DCC in 1984, eight years after its foundation by a senior AIB executive, Jim Flavin. A polished and sophisticated character, Flavin became one of the best known figures on the Irish Stock Exchange. However, his fortunes took a turn for the worse when he fell out with the McCann family, which ran Fyffes plc, the former Fruit Importers of Ireland.
DCC had been an early investor in Fruit Importers of Ireland and Flavin became a close friend of founder Neil McCann and a member of the Fyffes board. The relationship hit the buffers in dramatic style when Flavin, while still a director of the company in 1999, banked a large profit for DCC on the sale of shares in the company.
It was alleged that he had made use of insider information.
The matter was fought out between the former friends in courtrooms and in 2007, the Supreme Court found against Mr Flavin.
The following year, Jim Flavin stood down as executive chairman of DCC.
The whole saga was clearly damaging to DCC, but to the credit of its executive team, they just stuck to the knitting and to a strategy that has delivered big time for shareholders.
Tommy Breen was at the heart of the team, which has long had a long-serving core of people.
Breen grew up in Downpatrick, Co Down, graduating in economics at Queens University, Belfast, before working for KPMG as a chartered accountant. He joined DCC in Oct 1985 at the age of 26.
Between 1996 and 2004, he managed SerCom, the group’s IT distribution division, before moving on to manage the energy division for two years.
He then served as chief operating officer and managing director, getting a good overview of the business before assuming the chief executive’s job in May 2008, just as the economy was entering the sharpest downturn in living memory.
DCC has followed a strategy of expansion by means of bolt-on acquisitions. For many years, it has operated through five divisions: Energy, IT distribution, healthcare, environmental, and food and beverages.
Increasingly, from the 1990s on, Britain has became the focus of DCC — its move to a full listing in London, early in the year and its delisting from the Irish Stock Exchange, is merely the culmination of a long process.
As Breen recently pointed out, the UK now accounts for over two-thirds of profits compared with less than 15% in the case of Ireland.
DCC will now release its figures in sterling form.
Breen is targeting the continent of Europe for further expansion — he has Germany, in particular, in his sights.
Behind DCC’s success lies a mix of careful financial husbandry and informed opportunism when it comes to acquisitions.
Consistency has been another feature. The energy division has been a star performer in recent years — its origins lie in an investment DCC made in Louth company Flogas, some three decades ago. In the latest financial year, boosted by several months of cold weather, the division turned in operating profits of €130m, up 56% on the preceding year.
It is involved in the distribution of oil and liquefied natural gas in Ireland, the UK, Scandinavia, Belgium, Holland, and Austria, with a small presence in Germany.
The IT distribution division, SerCom, has been another solid performer. DCC has positioned itself strongly as a distributor of products such as Xboxes and tablets to customers including Amazon, Argos, and Tesco while building strong relations with suppliers such as Dell and Chinese group Lenovo.
Breen is credited with having an in-depth knowledge of such businesses. He works closely with Fergal O’Dwyer, the financedirector, and is closely involved in acquisitions.
Around 60% of profits in the year to Mar 31 came in energy, 20% in IT distribution, and 10% in healthcare where DCC has emerged as a nifty player, supplying products direct to patients in their homes and taking advantage of moves by hospital trusts to make savings through a consolidation in suppliers.
The laggards in the DCC family have been food and beverages, and environmental. The former is largely Irish-based and held back by the slowdown here, while the environmental division has yet to fulfil early hopes. Its focus on commercial waste management and recycling has come up against the realities of retrenchment in the UK, in particular.
Breen emphasises the importance of securing strong market positions in the various sectors in which it operates. From early on, it was clear DCC would have to break out of Ireland.
Speaking at a conference earlier this year, he said: “We had to look across the Irish Sea and we did this through the 1990s.”
DCC has had a business in France since 2000 and it moved into Austria and Denmark in 2009, expanding further in the past year.
One drawback has been a lack of managers with the requisite language skills to put on the ground.
Breen recalls arriving to visit a new French acquisition. After an early flight, they reached Versailles at 11.30am only to break for a lengthy lunch an hour later. They had to leave at 3.30pm to catch the flight home.
Understanding the local culture is key, though the day of the long lunch has gone from that business, he added.
He pointed also to the challenges posed by differing legal and tax systems. To overcome this, DCC has relied on the contacts of its legal advisers, William Fry.
Breen’s ambition is to establish DCC as a leading pan-European distributor, but he will not rush his fences. “We have spent a lot of time in contingency planning.”
Breen must marry natural caution with his desire to build the group into a position as a major European distribution play.
It will be interesting to watch how he progresses from here.
Tommy Breen
54. Grew up in Downpatrick, Co Down, Northern Ireland.
Queens University, Belfast. BA in Economic Science.
1980-85: KPMG.
1985: Joined DCC.
1996-2004: SerCom division managing director.
2004-6: Energy division managing director.
2006-7: Chief operating officer.
May 2008 to date: CEO, DCC plc.
2013: DCC delists from Irish market. Full listing in London. June 2013: DCC joins FTSE 250.
Married; Children.
Following Leinster and Ireland rugby teams.
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