Artículos.

The previous sections focussed on explanations of the ppl margins earned in supplying the different fuels. However, as noted, the distribution assets are used jointly in the provision of road and heating fuels. Consequently, it is informative to consider the overall level of profitability achieved by the liquid fuel supply companies in the Isle of Man.

6.1.1 Profitability indicators

This analysis used three broad indicators of profitability for the different fuel supply companies in the Isle of Man for the period of 2005 to 2008:

 Gross margin – defined as turnover net of duty, VAT and the cost of good sold. The gross margin is calculated by dividing gross profits by revenue (net of duty and VAT).

 Return on sales (ROS) – defined as the operating returns on the business. The ROS is calculated by deducting operating expenses from gross profits (to produce earnings before interest and tax, or EBIT) and dividing this by revenue (net of duty and VAT).

 Return on capital employed (ROCE) – defined as the return to investors (debt holders and equity) against the capital employed; calculated by dividing the Earnings Before Interest and Tax (EBIT) by the sum of debt and equity. Total (IoM) and Manx Petroleums submitted statutory and management accounts for their operations, while GB Oils and Shell UK submitted management accounts.53 _The information provided by GB Oils (CPL) is insufficient for a complete assessment and was therefore excluded from the analysis.54 _{The profitability analysis used the information} submitted and several assumptions55 _{to estimate the relevant accounting measures of} profitability.

53 _{Shell did not provide statutory reports as the Isle of Man business does not exist as an independent}

business but is part of Shell UK Oil Products Ltd (SUKOP) its subsidiary responsible for the refining and marketing of fuels and lubricants within the UK. Similarly GB Oils in the Isle of Man does not exist as an independent business. Statutory accounts are only relevant for registered companies.

54 _{The UK parent company for CPL Petroleum was acquired by DCC Plc, the holding company for GB Oils}

in July 2007. The trading data prior to the acquisition forms part of CPL Industries Ltd records for which GB Oils was unable to access, as it is held by CPL. As a result, the finacials received are largely for a few months. In addition, GB Oils is a relatively small player in the market [...text redacted...] and therefore its exclusion is unlikely to significantly affect the conclusions reached using other company data.

55 _{The assumptions include:}

 Manx Petroleums - the turnover figures for Manx Petroleum include payments to Manx from Shell for distribution services and that the payments to Manx Petroleum from Shell in the calendar years 2005, 2006, 2007, and 2008 are the same as the actual payments during the period December 2007 to November 2008. The distribution of Manx Petroleum‘s administrative expense between its retail and distribution services is based on volumes splits.

 Total (IoM) - the distribution of Total‘s administrative expense between its road fuel and heating fuel retail services is based on the volume splits. The distribution of Total‘s turnover and Cost of Goods Sold between its road fuel and heating fuel retail services is based on the respective split between the total revenues.

6.2

Company profitability

Table 23 below highlights the results of the analysis of the profitability ratios for 2005- 2008. It also highlights the profitability ratios calculated as part of the 2006 OFT fuel study for comparison.

Table 23 – Estimated company profitability ratios, 2001-2008

Gross margins 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total 24.5 25.7 25.2 24.7 24.5 19.9 18.6 20.6 15.5 Manx Petroleums 17.4 19.2 17.6 17.5 17.4 13.3 12.3 13.4 9.6 Shell 18.1 15.6 14.0 13.5 Return on sales Total 6.1 7.7 6.2 9.0 6.1 6.8 6.5 8.8 6.6 Manx Petroleums 4.4 7.5 4.8 5.6 4.4 4.1 4.4 3.2 2.6 Shell 2.5 3.2 0.2 3.5

Return on capital employed

Total 15.8 16.8 12.1 18.0 15.8 16.3 13.8 16.3 14.2 Manx Petroleums 19.1 29.5 17.4 14.4 19.1 16.1 16.6 9.8 10.7 Source: 2001-2004 from Isle of Man OFT Fuel Study, October 2006; 2005-2008, Pöyry estimates from data submissions (Shell UK, Total IoM, Manx Petroleum).

6.2.1 Gross margins

The gross margin during the period varied across companies and time. Total reported the highest gross margins at 16.6 - 20.6%, though its additional assets and costs may explain this. Manx Petroleums had the lowest gross margins at 6.6 -13.4% while Shell UK margins ranged between 13.5 - 18.1%.

The current review period shows a significant decline in profitability for all suppliers when compared to 2001-2005. For instance, Total‘s gross margin averaged 25% for 2001-2004, compared to 18.7% for 2005-2008. Manx Petroleums‘ gross margin has also declined from an average of 17.9% to 12.1%.

Changes in the levels of gross margin highlight the extent to which changes in the price of the underlying fuel have been passed through to final consumers - declining gross margins suggest that suppliers are unable to pass on costs to consumers. In order to maintain the same level of gross margin during period of price increases, a supplier would need to increase its revenues by more than the cost. In times of higher prices, a lower ratio of cost to revenue suggests fixed pence per litre targets.

6.2.2 Return on sales

The return on sales metric is a more useful measure for low capital intensity activities. Though all firms have capital investments, the ROS is reported for completeness. The ROS for the period range between of 0.2 - 9%. Total reported the highest ROS ranging from 6.5 - 8.8% while Shell UK had the lowest at 0.2 - 3.5%. Manx Petroleums

ROS was estimated at 2.6 - 4.4%. There was no discernable pattern on how ROS has changed during the period, however 2007 seemed to be an anomaly with high ROS for Total and low ROS for Shell and Manx Petroleums.

Returns on sales were stable for Total but declined for Manx Petroleums. Manx Petroleum‘s low ROS profitability is due in part to lower revenues on fuel deliveries for Shell compared to Total‘s earnings on wholesale and retail sale of road fuels (despite similar overheads on the wholesale side). The distribution charges that Manx

Petroleums received from Shell have not been increased in almost ten years and have declined in real terms even as its overheads have increased.

6.2.3 Return on capital employed

The return on capital employed averaged 10 - 17% as highlighted in Table 23 above. ROCE for Total averaged 13.8 - 16.3% and 9.8 - 16.6% for Manx Petroleums. Manx Petroleums seemed to have experienced a significant decline in ROCE over the last two years.

Compared to 2001-2005 levels, ROCE similarly shows a decline - Total‘s ROCE declined from 15.7% (2001-2004) to 15.2% (2005-2008), while Manx Petroleum‘s ROCE declined from 20.1% to 13.3%.

ROCE is a measure of the returns achieved against investments in a business. It is affected by the capital intensity of a business, which differs across the companies in the sector depending on their niche in the supply chain or business model. For instance, Total (IoM) is vertically integrated, and is involved in several segments of the supply chain that are capital intensive, such as distribution and operation of filling stations. ROCE comparisons should therefore be viewed with these complexities in mind.

6.3

Summary

The profitability analysis presented in this section suggests that the companies in the sector are not making excessive profits:

 There are no good comparator benchmarks for operations of this scale and therefore it is hard to confirm whether these returns are reasonable. However, the most pertinent observation is that these returns, on whichever basis, are lower than that during the period of the previous study. Consequently, it does not appear that the situation in the Isle of Man worsened over the period

 profitability ratios broadly declined compared to the extent established in the last OFT report for 2001-2005 – gross margins have experienced the biggest declines suggesting that suppliers may look for a fixed return.

 Total (IoM) is the most profitable company on all measures – suggesting that its vertically integrated structure allows it to recoup some of its overheads across the supply chain. In contrast, Manx Petroleums displayed a declining and low rate of return due in part to lower revenues on fuel deliveries compared to Total‘s earnings on wholesale and retail sale of road fuels (despite similar overheads on the wholesale side).