DCC Healthcare: Acquisition of Medi-Globe Transcript

DCC Healthcare Acquisition of Medi-Globe

Thursday, 8th September 2022

Donal Murphy

Chief Executive, DCC Plc

Welcome

Good morning, and welcome. I am Donal Murphy, Chief Executive of DCC. And I am joined on the call this morning by Kevin Lucey, our CFO, and by Conor Costigan, Managing Director of our Healthcare division.

Thank you for joining us this morning on this very exciting day for DCC, as we announced a significant expansion of DCC Healthcare in the medical devices sector, through the acquisition of Medi-Globe Group.

This is DCC Healthcare's largest acquisition to-date and creates a scaled platform in the European medical devices sector. Thankfully, I do not have to read the disclaimer this morning.

Our Strategy

So firstly, let me give you a quick reminder of our Group strategy and our capital allocation priorities.

DCC is a purpose-led organisation, and we are focused on the value we create for all our stakeholders. We focus on creating sustainable growth and superior value over the long term. We achieve this through a consistent, strategic objective to build a growing, sustainable and cash-generative business, which consistently provides returns on capital employed significantly ahead of our cost of capital.

We take a long-term sustainable view of value creation, which ensures our commercial strategies prioritise growth, and create value adding strategic positions in our chosen markets. Conor will outline later how Medi-Globe fits with this objective.

Our priorities for capital deployment

Our focus on capital allocation ensures our ability to reinvest into growth trends, and our capital allocation priorities are aligned with the growth trajectory of the sectors we operate in. Medi-Globe provides us with a strong position in a high growth sector of the healthcare market.

DCC Healthcare Acquisition of Medi-Globe

Thursday, 8th September 2022

While organic growth is always our number one growth objective. Acquisitions are also a key pillar of DCC's growth strategy. Over the last two years, we have committed circa £1 billion on acquisitions with the majority of the spend in the technology and healthcare divisions.

We have created significant new synergistic platforms for growth across the energy, healthcare and technology sectors in recent years. We have built a scaled business and a material platform for further growth in North America in just four years. We believe that our capital deployment priorities will deliver substantial growth and are aligned with our growth trends in our chosen sectors, and our target to achieve net zero by 2050 or sooner.

We allocate capital to M&A, where we see opportunity to bring good businesses into the Group and improve them further, or improve our Group capability by bringing them in. We focus on delivering sustainable returns on capital well in excess of our cost of capital.

Our capital deployment priorities are aligned with the growth trajectories of the sectors that we operate in, with healthcare as our highest growth sector and our top priority for capital deployment.

Throughout the rest of this presentation, you will hear why we believe that Medi-Globe is an excellent strategic fit for DCC.

Largest Healthcare acquisition to date

The acquisition of Medi-Globe, DCC Healthcare's largest acquisition to-date, creates a scaled platform for DCC in the European medical devices sector. Medi-Globe is focused on single-use medical devices used in minimally-invasive diagnostic and therapeutic procedures, mainly in gastroenterology and urology.

It represents a further material expansion of DCC Vital's presence in the European healthcare market, following our expansion in the European primary care market through the acquisition of Wörner. The acquisition is based on an enterprise value of approximately €245 million on a cash-free,debt-free bases.

Together with DCC Vital's existing own brand medical device activities, the acquisition of Medi-Globe creates an international platform of scale in single-use devices, which Conor will outline to you shortly. The acquisition also creates meaningful synergy opportunities, in particular, through leveraging DCC Vital and Medi-Globe's respective product portfolios and commercial infrastructures.

Conor will now provide you with more detail on the Medi-Globe business and its strategic fit for DCC Healthcare. Kevin will then take you through the attractive financial profile of the transaction. And we will then open up to Q&A on this acquisition. Conor.

Conor Costigan

Managing Director, DCC Healthcare

Overview of Medi-Globe

Thank you, Donal, and good morning, everyone. We are delighted to be here to talk about this very important acquisition for DCC Healthcare. It is our largest acquisition to-date. We are very excited about Medi-Globe joining the Healthcare group.

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DCC Healthcare Acquisition of Medi-Globe

Thursday, 8th September 2022

I suppose the key attractions of this business for us are its high-quality portfolio focused on single-use devices for endoscopy in the gastroenterology and urology market segments, with its strong market positions, particularly strong positions in Germany and France, but additional direct operations in Austria, the Netherlands, Czech Republic, Brazil, and then a very strong network of international distributors.

Another key attraction for us is the product development and innovation capability of the business and the pipeline of products coming down the track, which will feed into the growth over the coming years.

The business has a super management team, very experienced, who have really led very strong growth and strengthening of the business, strategic focus over the last number of years.

So I suppose all of those ingredients create a very strong platform for future growth. And we will come on and talk about the synergy opportunities as well.

Focused on growing therapeutic areas

So the business is focused on growth markets, gastroenterology and urology. Those markets combined globally are worth approximately €3 billion today. And both of those sectors are growing ahead of the medical devices market generally, projected growth rates of 6-7%. And that is all underpinned by key macro trends, demographic trends that people would be familiar with, but also the increased screening, increased diagnostic procedures and also a preference for minimally invasive procedures such as endoscopy.

In terms of just to give people a flavour for the types of products we are involved in, and I do not know if people know what endoscopy is, but it is a minimally invasive procedure, which involves examining the inside of the body, mainly digestive tract, stomach, kidney, ureter with an instrument called an endoscope.

Medi-Globe is not involved in the capital equipment side of that, so not involved in the vision systems, but we are involved in or the business is involved in the devices that are inserted into the instrument port, which perform the diagnostic or therapeutic procedure. So on the gastroenterology side, we have products like guidewires, biopsy needles, catheters, typically used, for example, to take samples using fine needle biopsy needles from difficult to access parts of the body, such as the gallbladder or the pancreas.

On the urology side, one of the key areas of focus is stone management. So kidney stone, for example. And again, the product range would include guidewires, stone baskets, catheters, stents, cannulas. So all single-use products not on the capital side.

DCC Vital's medical devices strategy

It is a material step forward for DCC Vital's medical devices activities. As watchers of DCC Healthcare will know, over the last number of years, we have really sharpened up the focus of DCC Vital to focus on building international growth platforms in primary care supplies. Obviously, we had the acquisition of Wörner in May 2021, which, together with our existing market leadership position in Britain, has given us a very strong platform in the primary care supplies and services area.

And the acquisition of Medi-Globe in combination with our existing medical device activities will give us a very strong platform in our own brand medical devices activities.

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DCC Healthcare Acquisition of Medi-Globe

Thursday, 8th September 2022

Combining the two entities creates an international devices business of real scale. There are five big markets in Europe. We will have strong presences in three of them. We have got an enlarged product portfolio that obviously encompasses the gastro and uro areas within Medi- Globe. And then also obviously, the areas that we were already involved in terms of theatre consumables, cardiac monitoring, anaesthesia, IV giving sets, etc.

And combining, I suppose, the strength that we have in the British and Irish markets with the strength that Medi-Globe has, both in terms of its direct presence on its international distributor network, really creates a lot of synergy opportunities where we can cross sell each other's products through our distribution networks, and obviously will be a more attractive partner for our distribution partners in the indirect markets.

I think equally importantly, it is just the expanded capability we have in the business, in terms of the management team, the quality of the management team on a combined basis, the product development and regulatory capability that we have, and obviously, the commercial infrastructure.

So a lot of synergy opportunities, which we will be working hard to exploit over the next number of years. And on top of that, clearly having that strengthened platform will bring increased acquisition opportunities and capability to integrate acquisitions.

So I will just hand over to Kevin now to talk about the financial profile of the acquisition.

Kevin Lucey

CFO, DCC Plc

Attractive financial profile

Thanks, Conor. And I think this is our final slide before we open up the call to Q&A.

So just to recap briefly on some of the financial characteristics and other considerations. So clearly, this is a scaled platform for us in healthcare and medical devices, in particular, and it follows on from our expansion in the primary care sector into Europe a couple of years ago.

So those of you who know us well, and Conor mentioned this earlier, will know that we set out our stall in DCC Vital a number of years ago following the exit of some of our activities to really expand into continental Europe. And we were looking for scale businesses with good infrastructure and good management teams. And we are very happy that we have that now with this Medi-Globe acquisition.

We expect the transaction to complete before the end of the calendar year. So clearly, we will have the business in the Group for just one quarter this year. So it will be FY2024 before we see the full impact of the transaction. The business should contribute revenues of approximately €120 million in its first full year and reflecting the quality of the business, the products and the own brand nature of the products, the operating margin will be accretive to our current healthcare divisional margins.

We expect the transaction to generate a ROCE of around 10% initially, and we expect that the returns will grow from there, really reflecting the organic growth that the business is delivering today, and further new product additions to the line-up, the commercial synergies

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DCC Healthcare Acquisition of Medi-Globe

Thursday, 8th September 2022

in particular that Conor mentioned earlier. And obviously, then it also gives us capability to look at further bolt-on acquisitions as we add more scale into the business over time.

So we expect the returns from the business to increase over time and be generating a mid- teen ROCE in about three years.

So we will open the call up now to take any questions you might have regarding the acquisition.

Q&A

Colin Grant (Davy): Just initially on synergies. I wonder if you could just give us a bit more colour on how this would fit in both in terms of a product side with the existing DCC Vital businesses. You obviously have done an acquisition of Wörner in 2021. And just how that fits in with that business and others?

And then on the distribution side, how the new distribution platform you get with this Medi- Globe Group, the ability to leverage that in terms of selling products in the future, how you see that playing out and the benefits you might get from that? Maybe start with that, please.

Donal Murphy: Super. I will answer the question and hand it over to Conor to take you through the details. But as I said earlier, this is actually bang in the sweet spot for DCC in terms of our acquisition criteria because it does really two things for us. One, it brings us into a high growth segment of the healthcare market. So we are just going to drive obviously returns accretion.

But it also is materially synergistic for us and Conor and the team were out looking for opportunities. I think this business ticked all the boxes for us. So Conor, you may talk a bit more about that, the synergies?

Conor Costigan: Yeah. So, I mean, obviously, our existing medical devices business is very much focused on the British and Irish markets. We do have an international distributor network as well. But the vast majority of our sales are in Britain and Ireland, where we have very deep market penetration, very strong market coverage. And obviously, Medi-Globe is not directly present in those markets.

So that represents an opportunity. Similarly, on the flip side, Medi-Globe has about 150 customer facing people, sales reps, customer service people. The majority of those are focused on two large markets of Germany and France. We do not currently, in DCC Vital medical devices, have direct presence in those markets. So again, leveraging that commercial infrastructure creates significant opportunity.

The vast majority of what we are doing in Vital today is around the area of consumables for minimally invasive surgery, which obviously fits very well with - it's very complementary to the activities of Medi-Globe.

In terms of your reference of the Wörner acquisition. And obviously, we will have two material businesses based in Germany when this deal closes. So that is why there would not be a huge commercial overlap because they are addressing different parts of the healthcare market. It does give us a very strong position in the German healthcare market covering both primary care and acute care. And there will be opportunities coming out of that.

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