DCC Technology, trading here as Exertis, published its year end results to the 31st March, last month. DCC’s Technology Division accounts for £2.442 billion of the DCC Group’s £10.601 billion revenue. From a group perspective, the 35.5% growth in overall operating profit to £300.5 million is to be applauded. With a proposed 15.0% increase in the final dividend and a return on capital employed of 21.0%. both shareholders and DCC’s senior management can be well satisfied.
But, explained Gerry O’Keeffe, Managing Director of Exertis UK & Ireland, the 28.8% decline in the operating profits of DCC Technology puts the Division in an unfamiliar place. The Division has enjoyed strong and consistent growth in the past, further encouraged by the integration of the various business units under the Exertis marque.
Gerry O’Keeffe, Managing Director of Exertis UK & Ireland on acquisitions: “We are not just buying a profit stream – there has to be something about the business that suggests that we can add value, and drive growth in the future.”
Operating margin
The DCC Group is committed to using acquisition as a catalyst for growth and has been successful in turning newly acquired businesses into net contributors to the enterprise remarkably quickly. O’Keeffe says that the strategy will be continued going forward with the Technology Division, should the right takeover targets emerge. “We are not just buying a profit stream – there has to be something about the business that suggests that we can add value, and drive growth in the future.”
Acquisitions in 2015 included consumer technology consumer technology distributor Computers Unlimited and CUC, a specialist distributor of cabling and connector products. CUC offered a good fit with DCC Technology’s AV and networking businesses. An additional benefits of the CUC acquisition is that significantly broadened the customer base of the Division’s Continental European business, instrumental in the Group’s ambition to grow its influence from Austria to the Nordics.
Trading conditions
In reporting the results, DCC acknowledged that the Technology Division had a very difficult year, challenging trading conditions in the UK, the Division’s largest territory. Accounting for 72% of the revenue of the division, the UK business was “materially affected by a reduction in sales of products from one large supplier”, particularly in the first half of the year, and also by weaker than anticipated demand for tablet computing, smartphone and gaming products. Overall, these factors contributed to a like-for-like sales decline of 7%.
Although the business achieved growth in other areas, notably audio visual technology and components, the change in product mix, together with the effects of negative operating leverage, contributed to the reduction in operating margin in the UK. An already slim operating margin of 2.1% in 2015 declined to 1.4% this year.
While prospective acquisitions are unfolding, O’Keeffe acknowledges that they can take months or even years to reach completion, DCC has grasped the nettle of improving operating margins.
Action plans
DCC Technology has embarked on a programme designed to boost efficiencies and to add value. The business has reduced its cost base and is continuing to build its market position in new and developing margin-rich product categories such as smart technology, audio visual, network security and virtual reality. Capital infrastructure projects in progress will significantly enhance the IT and operational capability of the business, provide capacity for further growth and enable efficiency improvements.
These projects remain on course for completion in the first half of 2017 and include the construction of a new, purpose built, 450,000 sq.ft. UK national distribution centre in the north of England. The project, budgeted at a net £40 million plus, is progressing well and the relocation to the new facility will take place on a phased basis, beginning in the second half of the financial year ending 31 March 2017. There will also be a significant upgrade to DCC Technology’s ERP and logistics infrastructure.
DCC Technology’s origins in the distribution of consumer technology initially limited its ability to add value to products. While some of these product categories are in decline, O’Keeffe believes that others will emerge to take their place. The company is now committed to developing its business in solution selling in categories including AV, networking and security.
This will necessitate some changes within Exertis with, for example, all customer-facing staff will be qualified to CTS level, through the Exertis Academy, and new customer demonstration suites have been provided in the new Exertis HQ in Basingstoke. The return on this investment will some in the form of higher gross margins, leading to a positive outlook for 2017.
Overseas expansion
When all the improvements are in place, taking this more efficient model with greater potential for added value into a wider geographical territory should see DCC Technology enter a virtuous spiral. The Division’s business in Ireland is reported as having achieved strong growth, and having benefitted from improved demand across a number of product segments.
The Continental European business achieved strong organic growth in the Nordics and Benelux, offsetting weaker demand in the French market. DCC Technology is focused on further broadening the base of its activities in the coming year, from both a product and a customer perspective. The business is confident that the business development and cost efficiency initiatives undertaken will bring about a return to growth in the coming year.
Within its current geographical footprint. DCC Technology has estimated that The value of the technology distribution market in UK, Ireland, France, Sweden and the Netherlands is €26 billion.
Objectives
To exploit this potential, DCC Technology’s principal medium term strategic objectives are: to broaden the range of sales channels and products addressed by the business in its existing markets, including emerging technology segments; to further develop and deliver a range of industry leading services supported by best in class infrastructure; and to extend the geographic footprint of the business through complementary acquisitions. With more than £1 billion in cash reserves available to the DCC Group to fund investments, who would argue against these objectives being met?
