Сoncern Galnaftogaz is a Lviv-based company that operates one of the largest gas station networks in Ukraine. Besides holding a market share of gas station operations of nearly 19 percent, it also engages in large and small wholesale of oil products, natural gas and fertilizer, and provides fuel logistics services to third parties. Concern Galnaftogaz has been a reliable partner of the world’s leading financial institutions for over a decade, including the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), and has recently diversified its portfolio through agro-trading. Here, Vasyl’ Danylyak, executive member of the supervisory board and company CFO, explains Сoncern Galnaftogaz’s business model and where it sees potential for future growth

Could you tell me a bit about the history of the company and how it has evolved over the years?

I joined the main shareholder team when I finished my studies at university 22 years ago. We started working as a wholesale trader company and then we began to acquire regional domestic oil distribution companies. We bought this company in the secondary market, and in 2001 we joined three independent regional companies into one – Concern Galnaftogaz. We started our business as a regional player in Western Ukraine and then moved to Central and Eastern Ukraine. During these years, we completely reconstructed the gas stations that we had bought before and became a leader in the Ukrainian oil retail market. Today, we have around 400 gas stations and are number three in terms of station numbers and number two in market share in Ukraine – holding around 19 percent. We sell about 1.1 million metric tons annually. Oil retail sales is our core business and we have about 9,000 employees in our company. We are probably the most transparent company in our sector in terms of corporate governance. In 2003, early in our development, we started to cooperate with the IFC in a project related to corporate governance. When that project was finished and excellent corporate governance was established, we began to cooperate with the IFC as a lender. The first long-term facility we received from the regional IFC – the Black Sea Trade and Development Bank – was in 2004. We received $23 million, which helped us jump into another league. Over the next years, we started to work more closely with international financial institutions, and in 2005 we received the first long-term financing from EBRD and from IFC. Our cooperation with those organizations continued to deepen. Over the years, we have received more than $1 billion in loans and investment from the EBRD, the IFC and other big lenders. We’ve already repaid most of those loans. In 2009, EBRD became our shareholder and they injected new equity. It was at the height of the global financial crisis and we needed capital, so we sold them a 20 percent stake in our company. We are happy with this cooperation and the fact that even during challenging years, we have conducted ourselves professionally and have paid back our loans. In 2011, we began to expand into the East of Ukraine.

You also have an agro-trading business. How does that complement your core business?

Yes, we have also started a business in agro-trading. We have a new, young-generation team in the company that is responsible for developing this business. Since 2016, we have been building relationships with farmers and have developed the business substantially. To understand how it complements our core business, I will explain how we operate. We have three lines of business in our oil business – retail and our gas stations, our own tank storage, and we provide small wholesale services for the B2B sector such as industrial clients, farmers, small chains and others. We also have large wholesale trading, where we cooperate with large state entities like Ukrainian Railways and the Ministry of Defense, and other large corporate clients who need to supply the oil product by railway directly. With our smaller clients, we tended to operate on a pre-paid scale, but we realized there wasn’t much room for growth that way. So, we made a decision to provide trading on an after-payment basis, and, besides oil, we also work with fertilizers and, starting this year, we’ve begun to provide natural gas as well. So, we supply oil products, fertilizers and natural gas to farmers on an after-payment basis. And we’ve signed an agreement where they have the possibility of selling the harvest to the company at a reasonable price for them. It’s win-win. They are happy because they receive working capital, and we are happy because we increase our market share in wholesale trading and generate a good volume of grain trading. In 2018, we will have traded around 600,000 metric tons. We supply to the big traders like Cargill, Bunge, Louis-Dreyfus and Glencore. This type of business gives us not only new opportunities to develop our oil business, but it also diversifies our portfolio. Usually, we buy products in US dollars, but when we provide grain exports, we have a hedge in currency risk for the company.

What other growth sectors of your business are most promising?

Our company is a pioneer in the different types of services; we have not only stations but service stations with outlets, cafés and restaurants. We have approximately 40 restaurants and are the national leader in that sector. In recent years, especially after the revolution in 2014, when the currency was deeply devalued, we noticed a drop in consumption in general. People had less purchasing power so they started using more LPG, for example, than 95 octane gasoline. Due to this, the business was changed and most companies, including us, had to find a way to adjust to the new market. We decided to target non-fuel sales, and began to develop retail sales much more actively. If we compare how the margin has changed in the last five years, the growth margin of non-fuel sales was 12, whereas today it’s 21. That is another promising point of future growth.