MARKETING

Group CE's Report

OANDO MARKETING
Oando Marketing is the leading oil-marketing retailer with over 500 retail outlets in Nigeria and operations in Ghana, Togo, Liberia and Republic of Benin. The company markets a wide range of products including Premium Motor Spirit (PMS), Automotive Gas Oil (AGO, also known as Diesel), Dual Purpose Kerosene (DPK), Aviation Turbine Kerosene (ATK), Low Pour Fuel Oil (LPFO), Lubricating Oils and Greases, Insecticides, Bitumen, Chemicals and Liquefied Petroleum Gas (LPG, also known as Cooking gas).

2006 In Review
Issues Arising During The Year

2006 was dominated by the loss of the Kaduna and Warri refineries for most of the year as a result of pipeline vandalisation by militants in the Delta region. Following a record production year in 2005, this was a major setback for the industry as a whole, as most players saw a significant drop in the volume of products (especially white products) received locally from the Petroleum Pricing and Marketing Company (PPMC). Given the low margin structure of the industry, fixed cost overhang led to reduced profitability for a majority of these players.

Another major factor that shaped 2006 was the government’s introduction of the Petroleum Subsidy Fund (PSF), a response to the need to increase PMS imports to mitigate the loss of the local PMS production. Your company was the most aggressive supporter of this government initiative during the period under review but severe delays in receiving subsidy reimbursements and related interest financing costs significantly reduced the initial expected benefits of the Fund.

Business Review (By Main Product Lines):

1. Premium Motor Spirit (PMS)
PMS fortunes were dominated by the loss of local production and the cash flow impairment from late PSF and PEF (Petroleum Equalisation Fund) reparation. Oando’s aggressive support of this government initiative resulted in your company importing by far the greatest volumes under the scheme. As a result, PMS still contributed over 50% of gross margin contribution

2. Automotive Gas Oil (AGO)
AGO, a deregulated product, saw record average prices (26% rise on 2005 values) as supply was dominated by imports in a year that also saw record crude oil prices. Your company’s ability to leverage the import capabilities of its sister trading company saw healthy margins for most of the year, off-setting the consumer price resistance which dampened volumes.

3.House Hold Kerosene (HHK)
HHK, largely government supplied and included in the PSF, witnessed wild supply and pricing swings in 2006. Volumes were significantly lower than the previous two years but margins were largely attractive.

4. Aviation Turbine Kerosene (ATK)
In the import focused Aviation Fuel business, Oando’s importing strength should have delivered strong margins for the business. However, in the period under review, cost disadvantage versus competitors using grey imports caused contribution to lag expectations throughout the year.

5. Lubricants
Oando’s retail lubricant business witnessed strong growth in 2006, as the strategic focus for expansion in new non-forecourt channels enabled us protect unit margins in a highly competitive environment. However, the Commercial business was affected by the drive to improve cash collection and the process changes required to bed down the new Branch Structure. Commercial customer rationalisation has now received its final adjustment and Marketing has a sophisticated set of credit controls that will see consistent and risk managed commercial revenues going forward.

6. Other Specialty Products
Volumes of other specialty products suffered in 2006 due to supply interruptions, aggressive market pricing and the move to a better quality of commercial customers. We expect positions on these products to reflect a more risk adjusted position in 2007.

West Africa Operations

The West African businesses witnessed improved margins in 2006, as country (Nigeria) supply activity continued to expand across the region. Oando Togo was also admitted into the select group of government product importers during the period.

Performance

In review, Oando Marketing assumed the No1 volume player position in the downstream marketing sector, creatively growing its higher margin lubricant volumes and restructuring its operations to reduce fixed costs. As a result, revenue from the business unit increased by 9% from $965 million in 2005 to $1.044 billion in 2006, primarily driven by a 22% aggregate rise in product prices. This was despite a 9% decrease in volumes, as total white products volumes fell due to the loss of the Kaduna and Warri refineries for 10 months of the year.

Profit after tax also increased by 70% from $10.91 million in 2005 to $18.65 million in 2006. This increase would have been significantly greater but for higher financing cost due to unplanned borrowing resulting from late settlement of government receivables. At the gross margin level, the company also maintained a net increase of 2% as select products continued to enjoy higher margins.

People

Our operations and our people underwent considerable change as a result of the value creating Branch Project transition. Over 60 members of staff left the company, after securing a strong union negotiated severance package. This negotiated settlement remains valid for the next two years in recognition of the further operational changes that profitability improvement will bring in the near future.

The savings from the change are already kicking in, as the company has maintained a 10% reduction in operating expenses despite the release of severance payments.

Despite the rationalization, the company continues to build for the future with functional training activity at record levels, utilising local and foreign service providers.

Process

Finally, the year saw the final and successful push for NIS ISO 9001: 2000 qualification. With this new discipline in place, Oando Marketing is set to embed the consistency of service and profitability delivery and block the leakages in the system that have proved challenging in the past.

Our Plans For 2007

Our aim in 2007 is to rationalise scope to deliver improved liquidity and profitability to the Group and to shareholders. Targets have been set for a reduction in operation costs in excess of that achieved in 2006; this should deliver further value as the company switches to a more reliable and lower cost branch structure. Tight working capital management as well as the newly agreed government receivables framework will lessen our interest burden. We will also continue to revisit our Key Business Controls to ensure we are well protected against fraud, shortages, loss of products and theft of assets. We are confident of increased profitability and liquidity in 2007.