IN OIL DISTRIBUTION, DCC ENERGY'S STRATEGY IN BRITAIN IS TO ACHIEVE A 20% MARKET SHARE (CURRENTLY 16%) OF ITS ADDRESSABLE MARKET.




CASE
STUDY

GB OILS RETAIL GROWTH
It has been DCC Energy's strategy to expand the business in non heating dependent areas with a specific focus on supply into the retail service station sector in Britain. Through its depot infrastructure across the country, robust supplier portfolio and fleet in excess of 1,000 trucks, GB Oils is exceptionally well positioned to supply the retail sector throughout the country. Over the past year, GB Oils has significantly grown the number of retail sites to which it delivers, both organically and through acquisition, from 804 to 1,350, making GB Oils the largest distributor to dealer owned dealer operated sites in the country. The portfolio of customers now includes almost 300 Gulf branded sites, a similar number of Total branded sites, and, through the acquisition of Pace Fuelcare, 120 Pace branded stations. GB Oils now supplies circa 1.3 billion litres of product to retail stations across Britain.



THE BUSINESS STRATEGY FOR DCC ENERGY RECOGNISES THAT IT IS IMPORTANT TO OUR LONG TERM SUCCESS THAT WE DIVERSIFY BY GROWING THE NON-HEATING DEPENDENT SECTORS OF THE BUSINESS, INCLUDING THE DEVELOPMENT OF RENEWABLES BUSINESS THROUGH DCC NEW ENERGY.

OPERATING REVIEW -

DCC ENERGY


DCC ENERGY IS THE LEADING OIL AND LIQUEFIED PETROLEUM GAS (LPG) SALES, MARKETING AND DISTRIBUTION BUSINESS IN BRITAIN AND IRELAND AND ONE OF THE LEADING OIL DISTRIBUTION BUSINESSES IN AUSTRIA AND DENMARK. IN FEBRUARY 2012, THROUGH THE ACQUISITION OF SWEA, DCC ENERGY BECAME THE MARKET LEADER IN OIL DISTRIBUTION IN SWEDEN. IN THE YEAR ENDED 31 MARCH 2012, DCC SOLD 7.9 BILLION LITRES OF PRODUCT FROM ITS EXTENSIVE NETWORK OF 320 FACILITIES TO ITS CUSTOMER BASE OF APPROXIMATELY ONE MILLION CUSTOMERS.

Markets and Market Position

Oil
DCC Energy's oil distribution business supplies transport fuels, heating oils, and fuel oils to commercial, retail, domestic, agricultural, industrial, aviation and marine customers in Britain, Ireland, Sweden, Denmark and Austria. In Britain, DCC Energy sells oil under a portfolio of brands including Bayford, Butler Fuels, Brogan, Carlton Fuels, CPL Petroleum, Gulf, Pace Fuelcare, Scottish Fuels, Shell and Texaco. Outside of Britain, DCC Energy sells oil under the leading brands of Emo Oil (Ireland), Swea (Sweden), DCC Energi (Denmark), Energie Direct (Austria) and Top Oil (Austria).

DCC Energy is one of the leading sales and marketing businesses for branded fuel cards in Britain. The business sells in excess of 500 million litres of transport fuels annually through its portfolio of fuel cards under the BP, Esso, Shell, Texaco and Diesel Direct brands. Fuel cards are now an essential tool for commercial organisations to manage their transport fuel costs. DCC Energy provides its customers with access to the breadth of the British retail petrol station and bunker network through its portfolio of branded fuel cards, while giving them detailed information on fuel utilisation to assist in minimising their spend on transport fuels.

Britain
DCC Energy has acquired a number of companies in the highly fragmented oil distribution market in Britain having first entered the market in September 2001 with the acquisition of BP's business in Scotland and is now the largest oil distributor in Britain. DCC's addressable market in Britain has been for transport fuels and heating oils to commercial, industrial, domestic, agricultural and the smaller independent petrol stations. This market is a total of circa 32 billion litres and DCC will sell circa 5.3 billion litres of product to this market, giving a market share of approximately 16%. In addition, with the acquisition of the Total assets, which included supply to larger independent dealers, DCC has now entered the market to supply the broader retail petrol station market which comprises approximately 9,000 retail sites selling circa 35 billion litres of fuel. On a combined basis DCC is now supplying circa 1,350 sites throughout the country with a total volume of circa 1.3 billion litres, giving DCC approximately 4% of the overall retail petrol station market.

Ireland
Emo Oil is one of the leading oil distributors in Ireland with a market share of 9%. DCC's addressable oil market in Ireland is estimated at 9 billion litres.

Continental Europe
The newly acquired Swedish oil distribution business (Swea) is the market leader in Sweden with a share of circa 17% of the addressable market which is estimated at 3 billion litres. The addressable oil distribution market in Denmark is estimated at 2 billion litres of which DCC Energi Danmark has a market share of 13% and is the number two oil distributor. The addressable oil distribution market in Austria is estimated at 5 billion litres and DCC's business Energie Direct is the number two in this market with a share of 12%. With the oil majors continuing to divest oil distribution assets, DCC Energy is well placed to continue its growth by acquisition.

LPG
DCC Energy is the second largest LPG sales marketing and distribution business in Britain and Ireland. The LPG business supplies propane and butane in both bulk and cylinders to domestic, commercial, agricultural and industrial customers for heating, cooking, transport and industrial processes. In Britain, the business operates from a nationwide infrastructure comprising 45 facilities, while in Ireland the infrastructure comprises 5 depots throughout the country. The LPG business also distributes a wide range of LPG fuel appliances, such as mobile heaters and barbeques.

Britain represents DCC Energy's largest LPG market at approximately 1.0 million tonnes. Trading under the Flogas brand, DCC Energy is the number two LPG distributor in Britain and Ireland with market shares of approximately 19% and 37% respectively. Unlike the oil distribution market, which remains highly fragmented, the LPG market in both Britain and Ireland is relatively consolidated.

New Energy
DCC Energy made its first step in developing a presence in the renewable energy sector through the acquisition of UFW in November 2011. UFW is a distributor of innovative renewable energy solutions (including solar panels, biomass, geothermal heating and underfloor heating) in Britain with a broad supplier and customer base.

Strategy and development

DCC Energy's vision is to be the leading oil and LPG sales, marketing and distribution business in Europe:

  • with strong local market shares;
  • operating under multiple brands;
  • generating high levels of ROCE;
  • expanding into new geographic regions with attractive market characteristics; and
  • continuing the development of its presence in the green/renewable energy sector.

Oil
In oil distribution, DCC Energy's strategy in Britain is to achieve a 20% market share (currently 16%) of its addressable market. Key to achieving this target is growth in non heating dependent segments of the market with a particular focus on retail petrol stations and the marine and aviation sectors. DCC Energy is now the largest supplier to independent dealer owned retail petrol stations in Britain, selling to approximately 1,350 sites across the country. The business has been actively rolling out the Gulf brand across this network and currently has approximately 300 sites under the Gulf brand. Following on from the completion of the acquisition in October 2011 of certain Total distribution assets, the business distributes to a similar number of Total branded sites and also has sites under a range of other brands including Pace, Power, Scottish Fuels, Texaco and Regent.

The business also made good progress in developing its marine and aviation offering during the year, strengthening the management team and increasing its customer base. DCC Energy is also focused on selling differentiated products and cross selling addon products and services such as lubricants and boiler maintenance services to its extensive customer base.

DCC Energy continued to expand its business in continental Europe during the year through the acquisition of Top Oil and a bio-fuels distribution business in Austria. DCC Energy took a further important step in the development of its business into new geographic areas through the acquisition of Swea (announced in December 2011). The acquisition of Swea significantly strengthens DCC's business in Scandinavia. The scale of Swea has since been increased through the acquisition of two small distribution businesses in Sweden (Lantmannen and Malardalen).

In fuel cards, DCC Energy is continuing to target high levels of organic growth through its extensive telesales team and cross selling fuel cards to its broad oil distribution customer base. The fuel cards business has expanded its customer offering through providing innovative products to customers such as CO2Count (which is set out in further detail in the Sustainability Report) and Mileage Capture, providing customers with key information on fuel consumption and emissions to allow them to better manage their businesses.

Approximately 50% of DCC Energy's margin is generated from the sale and distribution of heating dependent product. A key element of DCC Energy's strategy is to grow its business in areas outside of the heating dependent sectors to ensure diversification from, and to reduce the reliance on, the margin generated by heating products. Demand for heating volumes, as DCC Energy has experienced with the swing in demand between the years ended 31 March 2011 and 2012, is much more volatile than the demand for other oil products. DCC Energy will aim to increase the flexibility in its cost base by aligning overheads more closely with demand.

LPG
DCC Energy will continue to leverage its strong LPG market positions to drive organic profit growth on a sector by sector basis in both Britain and Ireland. Similar to the oil business, the LPG business is targeting growth in the non heating dependent segments of the market, primarily through organic volume growth with commercial and industrial customers. In April 2012, DCC Energy expanded its cylinder business into the medical gas sector in Britain through the acquisition of Medical Gas Solutions Limited, a distributor of specialist medical gasses to ambulance trusts.

Customers

DCC Energy has a very broad customer base with approximately 1 million customers across the geographies in which the businesses operate. Customers are primarily spread over the commercial, retail, industrial, domestic, agricultural and marine markets. The volume split by customer type for the year ended 31 March 2012 is as follows.

The volume split by type of product for the year ended 31 March 2012 is as follows.

     

Suppliers

As with its customer base, DCC Energy's supplier portfolio is broadly based. The top five suppliers represent 63% of total volumes supplied with no one individual supplier accounting for more than 20% of volumes supplied in the year to 31 March 2012.

Our People

DCC Energy has strong management teams with an in depth knowledge and years of experience in the markets in which the businesses operate. As our businesses have grown we have looked to augment the existing management teams with strong personnel in senior roles. Most recently we appointed a Managing Director for DCC Energy's oil businesses, a Chief Operating Officer in GB Oils, a Managing Director for DCC Energy's oil business in Ireland and a Compliance Manager for DCC Energy. We will continue to develop the management teams as the businesses grow.

DCC Energy currently employs 4,174 people.

Key Risks

DCC Energy, like all the businesses within the Group, faces a number of strategic, operational, compliance and financial risks. While the division has a broad customer base across a number of geographies, further economic downturn and its impact on demand and consumer confidence is a key risk faced by the division.

A significant proportion of DCC Energy's volumes are generated through the sale of heating dependent product and, accordingly, the division can be impacted by extreme movements in weather conditions. As discussed earlier in this report, there have been significant developments in the nonheating segments of the business and a continuation of this development and growth underpins the strategy to reduce the dependence on heating products.

DCC Energy distributed 7.9 billion litres of oil products during the year ended 31 March 2012 and the businesses operate with inherent risks to the environment and people. Ensuring that our businesses maintain rigorous health, safety and environmental standards is one of our core business principles.

DCC Energy has been highly acquisitive over the last number of years and ensuring the smooth integration of these acquisitions is critical to the success of the division. This is achieved through close monitoring of the acquired businesses and ongoing management development.

Sustainability

Climate change presents challenges in physical (extreme weather events), regulatory (carbon levies and taxes) and commercial (changing demand from customers) terms. The business strategy for DCC Energy recognises that it is important to our long term success that we diversify by growing the non-heating dependent sectors of the business, including the development of renewables business through DCC New Energy.

From an operational perspective it is pleasing to record that GB Oils achieved the Carbon Trust Standard during the year and Flogas UK was re-certified to the same standard for another two years. This independently verified standard confirms the reduction in relative emissions by the businesses and the efforts which they are making to reduce carbon emissions through greater efficiencies and optimisation. We are confident that this standard will provide our customers with assurance of our commitment to address the challenge of climate change.

Health, safety and environmental ('HSE') performance is a key priority and responsibility for all line managers and directors who are supported by experienced HSE functions in each business. Occupational safety and process safety (relating to the larger terminals which have the potential for a major accident) is managed through HSE systems and processes which identify, control and monitor HSE risks. Monthly KPIs are reviewed by the DCC Energy Board which sets annual objectives to drive improvements in near miss reporting, safety awareness, competence and overall safety culture.

The potential for oil spills to impact on the environment is a risk that is managed on a daily basis. From domestic deliveries to large storage facilities in coastal locations, a range of controls are in place to minimise this potential becoming a reality. Controls include the design and maintenance of vehicles and depots, the implementation of effective HSE procedures and, critically, the engagement of competent, trained employees who are moving product every day.

While no significant spills occurred in the period, detailed investigations following all spill events have identified areas where we can and will improve our performance. In the event of any spill occurring, immediate action is taken to contain and recover the product to minimise impact to the surrounding environment.

Performance for the Year Ended 31 March 2012

DCC Energy had a very difficult year with operating profit declining by 38.3% on a constant currency basis, as a result of the very mild weather, higher oil prices and the continuing difficult economic background particularly in the UK, its largest market.

The average temperature in the UK in the quarter to 31 December 2011 was the mildest on record. In contrast the same quarter in the prior year was the coldest on record. The average temperature in the other important heating quarter to 31 March 2012 was also significantly milder than the prior year. The substantially weaker demand for heating oil products created excess capacity across a very competitive market which resulted in reduced gross margins on all product grades. This reduction in gross margins, combined with the effect of a predominantly fixed operating cost base, had a significant impact on DCC Energy's operating profit for the year.

Overall DCC Energy sold 7.9 billion litres of product during the year, an increase of 10.8% over the prior year. Like for like volumes declined by 5.9% on the prior year with heating related volumes declining by approximately 15% and non heating related volumes declining by approximately 2%.

The performance of the oil distribution business in Britain and Ireland was significantly impacted by the factors outlined above and while the business in Continental Europe was also affected by the weather, it benefited from its substantially outsourced infrastructure and from the first time contribution of Swea.

The LPG business in Britain and Ireland was also impacted by the weak demand for heating products and the difficult economic environment with overall volumes down 10.5%.

Outlook

The outlook for DCC Energy for the year to 31 March 2013 is set against the important assumption that there will be a return to more normal winter temperatures compared to the extremely mild winter last year which should give rise to a strong recovery in DCC Energy's operating profit.

DCC ENERGY: KEY FINANCIAL PERFORMANCE INDICATORS


Strategic objective

KPI

Performance
Drive for enhanced operational performance
Revenue growth (constant currency)
Drive for enhanced operational performance
Operating profit growth (constant currency)
Deliver superior shareholder returns
Return on capital employed ('ROCE')
Drive increase in sales volumes
Volumes
Grow operating profit per litre
Operating profit per litre (constant currency)
Generate cash flows to fund organic and acquisition growth and dividends
Operating cash flow
Deliver superior shareholder returns
10 year operating profit CAGR
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