BUSINESS REVIEW - ADNOC Distribution
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BUSINESS
REVIEW
ADNOC Distribution Annual Report 2018 23
Business Review
OUR MARKETS
ADNOC Distribution participates primarily in the sale and distribution of
transportation fuels to retail and wholesale customers and the operation
of forecourt convenience stores in the UAE. The Company also opened
its first two retail fuel service stations in Saudi Arabia in 2018.
We enjoy the leading position in the The United Arab Emirates is the Further, the growth of the non-oil
retail and wholesale transportation second-largest economy in the Gulf sector in the UAE – particularly
fuel markets in the UAE, with a Cooperation Council (GCC) after trading, finance, real estate and
particularly dominant position in Saudi Arabia, based on nominal gross tourism – supports the view that the
Abu Dhabi and the Northern Emirates. domestic product (GDP). As the UAE country is generally less vulnerable
We also are a leading operator of diversifies its economy to reduce its to energy price fluctuations than
convenience stores in the UAE, and reliance on oil, the country has some of its GCC neighbors. Abu
operate in the UAE and international become regarded as one of the best Dhabi, the capital of the UAE, is a
lubricants markets, and in the UAE foreign investment destinations in key center of the UAE’s political,
markets for liquefied petroleum gas the GCC. High rates of economic industrial and cultural activity, and
(LPG) and compressed natural gas growth, rising levels of disposable has played an important role in
(CNG) for natural gas vehicles. income, moderate rates of inflation developing the country and its
and a growing population are economy. Abu Dhabi contains
important contributors. over 90 percent of the UAE’s oil
and gas reserves.
RETAIL BUSINESS
Fuel Non-fuel Rental properties Vehicle inspection
ADNOC Distribution is the The Company’s non-fuel The Company leases more The Company’s 24 vehicle
UAE’s leading operator of retail activities comprise than 900 rental properties at inspection centers are the only
fuel service stations, operating convenience stores located its service stations to tenants authorized providers of
in 376 locations in the country at its service stations, that include restaurant government-mandated annual
as of 31 December 2018. The as well as ancillary services operators and companies vehicle inspections in the
Company also has begun to such as car washes and offering banking, automobile Emirate of Abu Dhabi.
expand internationally with the lube changes. insurance and other services.
opening of two locations in
Saudi Arabia in 2018.
The Company is also active
in the retail sale of liquefied
1 2
petroleum gas (LPG),
Allied
compressed natural gas (CNG) Retail
and automotive lubricants. Services
24
90%
Abu Dhabi contains Northern Emirates
over 90 percent
of the UAE’s oil and
gas reserves. Dubai
Abu Dhabi city
Abu Dhabi
COMMERCIAL BUSINESS
Fuel Lubricants Aviation
The UAE wholesale fuels Lubricants (engine oils and Although the Company’s civil The Company also sells
market consists primarily of greases) are used by aviation sales and supply aviation fuel, and provides
sales of diesel and gasoline commercial, industrial, marine business was transferred to refueling and related
to commercial, industrial and and government customers ADNOC in 2017, the Company services, to certain strategic
government customers. for motor vehicles as well as continues to provide fuel aviation customers.
for other engines, machinery distribution services and
and equipment. aircraft refueling operations
to ADNOC’s civil aviation
customers.
3 Corporate
4 Aviation
ADNOC Distribution Annual Report 2018 25
Business Review RETAIL BUSINESS ADNOC Distribution’s Retail business comprises the sale of fuel (gasoline, diesel, CNG and LPG) at retail fuel service stations, and the operation of convenience stores and car care services, such as car wash and lube changes, at its service stations. 26
Service stations Convenience stores
378
UAE
250
UAE
2018 +4.7% 376 2018 +6.4% 250
2017 359 2017 235
Saudi Arabia
2018 2
ADNOC Distribution Annual Report 2018 27
Business Review
RETAIL BUSINESS
BUSINESS OVERVIEW Our main fuel products include three Our partnership with Géant capitalizes
ADNOC Distribution’s Retail business grades of gasoline (91, 95 and 98 on the strong market for food-on-the-
is segregated into fuel (gasoline, octane) and diesel. We also sell CNG, move as well as for top-up shopping.
diesel, CNG and LPG) and non-fuel LPG and engine lubricants at our Fuel customers can combine a
(convenience stores and car care service stations. refueling stop at one of our service
services, including car wash and lube stations with supplementing the larger
There are approximately 7,500 natural
change services). The core business weekly grocery shopping.
gas vehicles (NGVs) in the UAE,
is highly cash-generative with stable, including taxis, government vehicles, Other non-fuel services we offer at
regulated unit fuel margins and iconic commercial and privately owned many of our service station locations
branding at strategically located sites. vehicles and buses. The number of include car wash and lube change
NGVs is forecast to more than double services. In addition, various services
Retail by 2022, resulting in increased are provided by our partners and
Fuel demand for CNG. tenants, such as vehicle servicing,
With 376 owned and operated retail repairs and tire changes.
LPG is the primary cooking fuel in
fuel service stations as of 31 the UAE and is also used for other
December 2018, we are the number Allied Services
commercial and industrial applications.
one retail fuel brand in the UAE. We We sell LPG in 25 and 50 lb cylinders, Property management
are the sole operator of retail fuel primarily to residential customers Our Allied Services segment manages
service stations in Abu Dhabi and for home cooking, and in bulk to and leases retail space at our service
Sharjah, and we operate the majority residential and corporate customers. stations. Our tenants occupy over
of the service stations in the Northern 900 properties, offering quick service
Emirates. We opened our first three We market various lubricant
restaurants and ancillary products
stations in Dubai during 2018, products under our proprietary
and services, such as banking and
becoming the only fuel retailer with a Voyager brand. The quality of our
automobile insurance, to our fuel and
presence in all seven emirates of the Voyager lubricants is recognized
convenience store customers.
UAE. In 2018, we also expanded our by the American Petroleum Institute
operations internationally, opening and the European Automobile Major tenants include well-known
two service stations in Saudi Arabia. Manufacturers’ Association. global brands such as McDonald’s,
Starbucks, KFC and Burger King.
Since the elimination of retail fuel Non-fuel
subsidies in the UAE in August 2015 We operate 250 ADNOC Oasis Vehicle inspection
and the introduction of a stable and convenience stores, including 13 Our vehicle inspection centers
predictable fuel pricing policy, we Géant Express branded convenience are the only authorized providers
have enjoyed steady and consistent stores, as of 31 December 2018, of government-mandated vehicle
profitability. Since October 2017, we offering groceries, refreshments and inspections in the Emirate of
have also benefited from a five-year snacks, confectionery, tobacco and Abu Dhabi.
fuel supply agreement with ADNOC, various services.
We operate 24 light vehicle inspection
our parent company. This guarantees
To capitalize on our market-leading and testing centers in Abu Dhabi
supply on terms which we believe
position, we have implemented a which provide a wide range of
give us a competitive advantage.
number of initiatives to improve inspection services. In total, more
We benefit from high barriers to entry service, choice and convenience for than 900,000 services are provided
into our markets due to the relationship our customers, and to grow revenue every year.
with ADNOC and our extensive fuel and profitability.
distribution infrastructure.
28
Retail segment
Key financials (AED million) 2018 2017 YoY %
Revenue 15,704 13,746 14.2%
Gross profit – fuel 3,016 2,603 15.9%
Gross profit – non-fuel 291 266 9.4%
EBITDA 1,639 1,254 30.8%
Operating profit 1,215 901 34.8%
Capital expenditure 423 438 -3.4%
OPERATIONAL REVIEW Our partnership with Géant has We also have launched a new premium
Although ADNOC Distribution enjoys significantly enhanced our retail vehicle inspection service which
a reputation for the high quality of experience and has quickly proved allows customers to benefit from a
our products and services, we are popular with our customers, who fast-tracking option during their
committed to setting the bar for enjoy the new product offerings vehicle testing process. An additional
quality and service even higher. in a more vibrant environment. door-to-door service offering is also
available where customers can
We have also rolled out Oasis Café,
Retail arrange for pick up and drop off. If
our proprietary coffee and bakery
these services prove popular with our
ADNOC Flex offering, to 12 sites to better target
customers, we will consider rolling
The launch of ADNOC Flex, offering the customer-on-the-go market –
them out to additional locations.
our customers the choice of premium many of them commuters – who
or self-service refueling, represents want a quick convenience stop for
FINANCIAL PERFORMANCE
a major cultural change in the UAE, a quality coffee or light snack.
where self-service is a relatively new Retail
concept. Initial penetration rates of Allied Services
Volumes
our premium refueling option vary Property management Retail fuel volume sold decreased by
by location and have averaged Our property management services, 3.4 percent in 2018 compared to 2017,
approximately 15 to 20 percent. We whereby we lease space at our while sales of CNG, LPG, kerosene and
intend to launch a proprietary loyalty service stations to quick service lubricants grew by 15.5 percent year
program in 2019, which we believe restaurants and providers of other on year.
will further drive the success of our goods and services to our customers,
ADNOC Flex offerings. experienced solid growth in 2018. Results
As part of the launch of ADNOC Flex Much of this growth can be attributed Retail revenue, which covers fuel and
and in a major step towards cashless to major brands such as McDonald's, non-fuel sales, reached AED 15,704
refueling, we have distributed KFC and Burger King, which strongly million in 2018, an increase of 14.2
300,000 Smart Tag RFID chips to our complement our convenience store percent over 2017. This revenue
customers for use with our ADNOC business profile. Our aim is to growth was primarily due to higher
Wallet application which allows leverage these relationships and to fuel prices, partially offset by the
customers to refuel without the use build for the longer term. In doing so, decrease in total fuel sales volume.
of cash or bank card. we are shifting from a purely rental
Retail gross profit was AED 3,307
model to revenue sharing, which has
million in 2018, an increase of 15.3
Convenience store revitalization contributed to our growth in 2018.
percent compared to 2017. Retail
The improvement in profitability
Vehicle inspection EBITDA was AED 1,639 million in
at our convenience stores in 2018
In 2018 we opened three new vehicle 2018, an increase of 30.8 percent
demonstrates the positive results of
inspection centers and now operate over 2017. The increase in gross
our convenience store revitalization
24 vehicle inspection centers in profit and EBITDA was mainly due
program and our Géant partnership.
Abu Dhabi. We performed over to higher fuel margins resulting
Our back-to-basics program was a
900,000 vehicle inspections at our from our Refined Products Supply
major driver, involving the complete
vehicle inspections centers in 2018, Agreement with ADNOC. Operating
reformatting of many of our sites, a
benefiting from the full-year impact cost efficiencies and improvement
stronger customer value proposition
of price increases that went into in gross profit also contributed to the
with new promotions, and the
effect in June 2017. increase in EBITDA.
rationalization of our product offering,
including the removal of 3,500 lower
performing and lower margin
products to realize higher margins,
provide greater convenience and
increase customer satisfaction.
ADNOC Distribution Annual Report 2018 29
Business Review
RETAIL BUSINESS
Other operating metrics Other operating metrics
Retail fuel transactions (million) Fuel transactions increased by 1.8 We have actively driven tenant
167.8
percent in 2018 compared to 2017. occupancy across our network despite
a challenging rental market. We are
Our non-fuel segment (mainly
also transitioning our tenancy business
convenience stores) generated
to a revenue-sharing model in order to
2018 +1.8% 167.8 higher revenues, notwithstanding a
maximize revenue and profitability.
2017 164.8 decrease in non-fuel transactions in
2018 compared to 2017, driven by The number of vehicles inspected
higher average basket sizes and during 2018 increased by 8.7 percent
Retail non-fuel transactions (million) conversion rates. This improvement compared to 2017.
42.7
was driven by management initiatives
to improve the customer experience, OUTLOOK
including a more focused stores We expect to see low, single digit
revitalization program and the growth in our fuel volumes in 2019
2018 –10.7% 42.7 introduction of Premium Rewards, as a result of management initiatives
2017 47.8 which offers our Premium refueling and our expansion into Dubai, which
customers rewards that can be remains an attractive market.
redeemed in our convenience stores.
Our first three retail fuel service
Convenience store basket size (AED)
18.1
Allied Services stations opened in Dubai in the fourth
quarter of 2018, and measured
Results expansion is a priority for 2019. We
Allied Services revenue increased also expect to see increasing fuel
in 2018 due to a higher number of sales volumes as a result of expansion
2018 +16.8% 18.1
2017 15.5
vehicle inspections and a greater into other new geographies. We have
number of tenants versus 2017. recently signed a memorandum of
The results were also positively understanding to support network
affected by the full-year impact of an expansion in Saudi Arabia, and a
Convenience store
increase in vehicle inspection fees memorandum of understanding for
sales revenue (AED million)
679
which came into effect in June 2017. the marketing and distribution of our
lubricant products in India.
2018 +2.8% 679
2017 661
Allied Services segment Allied Services segment
gross profit (AED million)
221
Key financials (AED million) 2018 2017 YoY %
Revenue 221 184 20.4%
Gross profit 221 184 20.4%
EBITDA 105 85 24.0%
2018 +20.4% 221
Operating profit 83 63 31.9%
2017 184
Capital expenditure 3.0 22 -86.2%
30
In 2019, we expect to invest Finally, the UAE government’s recent
approximately AED 1,100 million announcement of several long-term Retail segment gross profit (AED million)
3,307
(USD 300 million) in capital visa initiatives to attract human
expenditures to boost our network capital and to create an encouraging
expansion in UAE, particularly in environment for long-term business
Dubai and internationally, as well as growth will serve to make the
2018 +15.3% 3,307
to invest in our digital initiatives. country an even more attractive
2017 2,869
investment proposition to regional
The International Monetary Fund (IMF)
and international investors.
forecasts the UAE’s real GDP growth
to strengthen to 3.7 percent in 2019 The roll-out of ADNOC Flex, which Retail segment fuel
(against 2.8 percent in 2018), largely gives our retail customers the choice gross profit (AED million)
3,016
driven by increased government of premium or self-service refueling
spending and stronger private sector across our service station network,
growth. The announcement of a fundamentally changes the UAE fuel
number of significant investments retail market. It also highlights our
in the Abu Dhabi economy supports objective of moving to smarter, 2018 +15.9% 3,016
this view. technology-driven customer service, 2017 2,603
with greater choice, convenience and
We believe that a combined total
better-quality goods and services
of USD 18.6 billion of investments
at its heart. Retail segment non-fuel
in the Abu Dhabi economy will
gross profit (AED million)
291
positively impact our businesses. We have also been successful in
The investments comprise a spending reducing operating and capital costs
stimulus, amounting to USD 13.6 without sacrificing safety, quality and
billion, and the USD 5 billion Ghadan our overall customer experience, and
21 plan, to sustain competitiveness will continue this approach. 2018 +9.4% 291
and entrepreneurship over a three- 2017 266
year period.
Dubai has also announced plans
Retail segment gross profit breakdown
to liberalize regulations in various
sectors, including free zones, to
bolster its appeal to foreign investors
and visitors. Dubai also continues
to invest heavily, with approximately
USD 7 billion allocated to infrastructure
development around Expo 2020. This
flagship event is forecast to attract
large numbers of visitors to the
country and to boost private
consumption and services exports.
Gross profit – fuel 91.2%
Gross profit – non-fuel 8.8%
Our non-fuel segment (mainly
convenience stores) generated
higher revenues, notwithstanding
a decrease in non-fuel
transactions in 2018 compared
to 2017, driven by higher
average basket sizes and
conversion rates.
ADNOC Distribution Annual Report 2018 3132
Business Review
COMMERCIAL
BUSINESS
ADNOC Distribution’s Commercial segment is the UAE’s leading
marketer, supplier and distributor of bulk refined petroleum
products, including diesel, gasoline, LPG and lubricants, to
commercial, industrial and government customers.
Commercial fuel volumes (million liters) Lubricant volumes (million liters)
2,157
2018 -4.3% 2,157
82
2018 +80% 82
2017 2,255 2017 46
ADNOC Distribution Annual Report 2018 33Business Review
COMMERCIAL BUSINESS
BUSINESS OVERVIEW Corporate Aviation
We are the leading marketer, supplier Fuel – gasoline, diesel and LPG We sell aviation fuels to strategic
and distributor of bulk refined Demand for wholesale fuels in the UAE customers in the UAE and utilize highly
petroleum products, including diesel, is closely aligned with the country’s advanced facilities to provide refueling,
gasoline, LPG, lubricants and other economic performance. defueling and other related services
products, to commercial, industrial to ADNOC’s civil aviation customers
and government customers in the Lubricants and base oil (comprising international and regional
UAE’s highly competitive business- Our range of proprietary Voyager commercial and private aviation
to-business commercial market. We lubricants covers most requirements customers) at seven commercial
also export our proprietary Voyager for commercial fleet operators and the airports in the UAE.
lubricants to distributors in 14 construction, manufacturing, marine
countries, including the GCC region, and power generation sectors. Our OPERATIONAL REVIEW
and in Africa and Asia. offering comprises automotive and
marine engine lubricants, automotive Corporate
Our aviation division comprises two
gear and transmission fluids, and Fuel – diesel, gasoline and LPG
elements: the sale of aviation fuel and
industrial lubricants and greases. Fluctuating demand across all
services to strategic customers; and
the provision of aviation services to the We operate a lubricant blending plant products, including diesel and lubes,
civil aviation sector, where we provide in Abu Dhabi with an annual capacity was a notable feature of 2018. Sales
maintenance of fuel systems and of 55 million liters, and which produces of LPG were less affected. We noted
fueling services. more than 125 types and grades of increased competition in diesel, a
lubricants and greases. trend that seems set to continue as
the market matures and attracts more
competitors with aggressive pricing.
Diesel volumes (million liters) Corporate segment
1,709
Key financials (AED million) 2018 2017 YoY %
Revenue 4,733 4,050 16.9%
Gross profit 785 772 1.7%
2018 –6.9% 1,709 EBITDA 648 599 8.2%
2017 1,836 Operating profit 618 581 6.4%
Capital expenditure 16.2 0.9 1,700.0%
Aviation volumes (million liters) Aviation segment
748
Key financials (AED million) 2018 2017 YoY %
Revenue 2,194 1,697 29.3%
Gross profit 724 539 34.4%
2018 –7.7% 748 EBITDA 340 350 -2.7%
2017 811 Operating profit 305 335 -9.0%
Capital expenditure 3.9 16 -75.9%
34The grey market – off-spec products In connection with the Civil Aviation Aviation
from unauthorized sources – Supply carve-out, we entered into
Volumes
continues to impact our home market, an Aviation Services Agreement with
Aviation volumes decreased by 7.7
particularly corporate sales. In 2019, ADNOC to continue to provide fuel
percent in 2018 compared to 2017
we expect to continue to work with distribution services and aircraft
due to a decrease in fuel sales to our
government authorities to reduce refueling operations to ADNOC’s civil
strategic customers.
this impact. aviation customers.
During 2018, our fleet of more than 75 Results
LPG
aircraft-refueling vehicles performed Aviation revenue increased by 29.3
The LPG market is somewhat
more than 100,000 refueling service percent in 2018 compared to 2017
fragmented and falls into two
operations for civil aviation customers due to the inclusion of revenue
categories: bulk sales in an
at seven airports across the UAE, of derived under our Aviation Services
unregulated market, and sales of
which the majority were at Abu Dhabi Agreement with ADNOC, as well as
subsidized and unsubsidized
International Airport. higher average selling prices due to
cylinders, of which the subsidized
increased oil prices.
segment accounts for the largest In addition to our civil aviation
share, mainly in the residential sector. refueling business, we sell aviation Aviation gross profit increased by
fuel and provide refueling services to 34.4 percent in 2018 mainly as a
Greater focus on our business
certain strategic aviation customers. result of the impact of the Aviation
processes, including the introduction
Services Agreement, offset in part
of faster sales intelligence and a more
FINANCIAL PERFORMANCE by lower fuel volumes.
customer-centric approach, resulted
in a 25 percent year-on-year increase Aviation EBITDA decreased by
Corporate
in sales of bulk LPG. 2.7 percent in 2018 mainly due to
Volumes lower volumes and the inclusion of
Lubricants Corporate segment volumes decreased recoverable operating costs related
In 2018, we launched new lubricant 2.7 percent in 2018 compared to 2017, to civil aviation fueling services.
products to tap into the significant mainly as a result of higher competition
potential of the retail lubricants in diesel and lower demand for diesel OUTLOOK
business. In 2019, our target is from power generation customers, In 2019, we intend to implement an
to increase sales and to optimize which use diesel fuel as a back-up fuel enhanced lubricants strategy designed
our already strong retail and brand for power plants. to increase profitability and to expand
position in lubricants in the UAE,
our international footprint. We have
as well as to expand into new Results
recently signed a memorandum of
international markets. Corporate segment revenue
understanding to market and distribute
increased by 16.9 percent in 2018
lubricants in India, the world’s third-
Aviation compared to 2017 due to higher oil
largest lubricants market.
In September 2017, we completed the prices, while gross profit increased
Civil Aviation Supply carve-out, under by 1.7 percent year-on-year, mainly
which all contracts for the sale and as a result of more proactive pricing,
supply of jet fuel to the civil aviation partially offset by lower volumes and
sector were transferred to ADNOC. competitive pressures.
Corporate segment EBITDA increased
by 8.2 percent in 2018, partially driven
by a one-off receivables impairment
recovery in 2018.
Aviation gross profit
increased by 34.4 percent
in 2018 mainly as a result of
the impact of the Aviation
Services Agreement, offset
in part by lower fuel volumes.
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