Oando Marketing
Our marketing business continues to be the leading marketing retailer in the country with about 500 retail outlets and operations in Ghana, Togo, Republic of Benin and Liberia. Oando Marketing deals in a range of petroleum products which include, Premium Motor Spirit (PMS), Automotive Gas Oil (AGO commonly known as diesel), Dual Purpose Kerosene (DPK), Aviation Turbine Kerosene (ATK), Low Pour Fuel Oil (LPFO), Lubricating oil and Greases, Insecticides, Bitumen, Chemicals and Liquefied Petroleum Gas (LPG commonly known as Cooking Gas)
Review of 2007 Operating Activities:
Our gross margin in 2007 grew by 32% compared to 2006 while profit before tax grew by 69%. This is despite the externalities which adversely affected our business. The most significant of these which was well beyond our control was the several days of election holidays during which we could carry out only skeletal commercial and operational activities for our products. Our performance in the marketing business in 2007 is therefore as a result of well managed operational cost reduction initiatives and efficient interest cost management.
Product Review
White Products (PMS, AGO, HHK):
During the period, our white products business which contributes up to 83% of our revenues faced a wildly fluctuating external market. PMS imports by NNPC for the first Quarter of 2007 were well below expectation and with the Port Harcourt refinery being the only refinery in operation the supply of white products was well below expectation. During the first half of the year, there were occasional outbreaks of unrest in isolated parts of the country as a result of the elections and this contributed to the slowdown of commercial activities in these areas. This had its negative effects on our white products business. On the other hand the continued insolvency of the Petroleum Equalization Fund (PEF) led to a reduction in bridging volumes (products sold to stations in the Northern part of Nigeria) and this led to the loss of over 100m litres of sales.
By the second quarter, our new PMS and HHK pricing strategies had started to yield some results and this resulted in a 20% rise in unit margins. In addition to this our internal re-organization, which berthed a potentially new division known as Oando Terminals and Logistics, provided huge cost savings as product handling and dispatching from importation to customer’s tank was done with a lot more efficiency.
Our performance with AGO was satisfactory despite the imbalance of government supply to the major marketing companies, supply constraints were eased due to refinery outage. Both the Retail and Commercial channels were able to deliver above budget unit margins, more than off-setting the consumer price resistance which dampened volumes for the first quarter but cost pressure severely dampened second half contribution.
HHK sourced locally and under the PSF, was able to deliver very strong unit margins for the company for the first two quarters. However, price enforcement at a level below which suppliers can reasonably be expected to recoup costs severely reduced second half contribution. The supply problems resulting from diversion of PPMC HHK imports to the Aviation business have finally begun to reduce although the price distortion that this creates continues to impair our Aviation Fuel business.
In the earlier part of the year under review, our ATK cost caused us some disadvantage when compared with some of our competitors who had more access to cheaper PPMC supply. Our strategy for the latter part of the year was to significantly reduce our logistics cost while continuing to seek cheaper sources for the product without jeopardizing quality.
Other Products (Lubricants, Specialties):
Lubricants saw strong growth in the Retail business, as a result of the strategic focus for expansion in new non-forecourt channels. Unit margins came under pressure due to increasing costs and a highly competitive environment. The Commercial business was affected by the customer rationalisation drive to give the company a sophisticated set of credit customers. In addition to this, our eastern (marine) business suffered some reduction in commercial activities as a result of the unrest caused by militants in the Niger Delta and Port Harcourt regions. By the end of the first quarter in 2007, we had successfully resolved all product costing issues and provided a higher profitability mix in the Commercial business to ensure the product line was able to deliver sales returns as expected.
Other specialty product volumes still suffer from supply interruptions, the move to a better quality of commercial credit customers and aggressive market pricing. Our 2007 positions on these products reflected a more risk adjusted position and this will continue into 2008.
Balance Sheet Management
The balance sheet was assiduously guarded through the year; trade accounts receivables are now of a superior quality and PEF receivables were controlled by the management of bridging in the first half of the year and the new policy of offsetting the liability until the balance comes closer to the company’s favour. The company also secured dollar based financing to retire overdrafts and corporate paper using this lower cost financing. This led to a better interest cost performance.
Capital expenditure remained tight on strategy to support liquidity, with the company’s focus on maintaining excellent retail and terminal assets.
Looking forward to 2008
Despite the expected continued uncertainty in Government Policy and increasing competitive pressures in 2008, we expect our marketing business to continue to deliver quality products and services to all its customers while delivering good returns to all shareholders.
Price control policy of PMS remains a significant unknown in 2008 and we look forward to the government addressing this uncertainty thereby allowing us to add more value to our customers. We will continue to focus on liquidity as a Strategy for our Marketing business, with a lot of emphasis on efficiency and control, which will underpin our value delivery approach in 2008. We expect the following initiatives to be the high points for 2008, they include:
- Optimizing asset efficiency to maximize throughput;
- Increased utilization of our ERP platform;
- Higher margin products will continue to receive heavy resource support;
- Heavier investment in human capabilities will ensure your company makes the best choices for the long term profitability of your investment
|
