Financial review from the Chief Financial Officer

In FY2019, the Trafigura Group continued the track record of steady financial and commercial performance it has delivered over several years, registering a profit for the year of USD867.8 million. This was in line with the figure of USD872.8 million recorded in FY2018 and within the range of annual profits declared every year since FY2014. The net figure reflects a combination of very strong performance by both trading divisions on one hand, and some value adjustments relating to our fixed asset portfolio on the other hand – principally consisting of impairments and write-offs in relation to Nyrstar N.V. The 2019 financial year also saw the Group realise significant gains from shipping investments. At the same time, we maintained our strong financial liquidity and substantially reduced our financial leverage.

Gross profit for the year stood at USD2,978 million. This represented an increase of 25 percent on FY2018 and an all-time record for the Group, reflecting the strong performance of both of our Oil and Petroleum Products and Metals and Minerals trading divisions. Oil trading generated gross profit nearly two thirds higher than in FY2018 at USD1,681 million, or 56 percent of the total. Metals and Minerals matched what had been a strong performance in FY2018, generating gross profit of USD1,297 million or 44 percent of the total. Another indicator of our strong financial performance was EBITDA, which was a record for the Group at USD2,129 million, an increase of 24 percent on FY2018.

Our trading operations continued to benefit from our positioning in the market. In oil, heightened market volatility also helped boost margins, but performance also reflected the fact that we have reshaped the business over the past two years to capture the most profitable trade flows. The Group further consolidated its position as an exporter of crude oil in the US, whilst also developing important positions in other strategic flows (such as refined products and liquefied natural gas), further diversifying the oil book across the global energy market. In non-ferrous metals, we maintained our market position as a key trader of both metal concentrates and refined metals.

Revenue in 2019 totalled USD171,474 million, a decrease of five percent from the figure of USD180,744 million recorded in FY2018. Whilst trading volumes increased year-on-year, average prices of many of the commodities we trade were lower than in the previous year. The total volume of commodities traded rose by four percent to 389 million tonnes from 371 million tonnes.

As at 30 September 2019, total assets amounted to USD54,151 million, largely unchanged from a year earlier, despite the full consolidation of Nyrstar. Fixed and noncurrent assets were 22 percent higher at USD10,777 million, reflecting the inclusion of Nyrstar’s fixed assets in our balance sheet. Equity-accounted investees were valued at USD3,417 million, compared to USD3,361 million a year earlier: this reflects the net effect of additions, disposals, impairments, and income and losses from various investments. It includes, for instance, the reduction in the value of Trafigura’s 49 percent stake in Puma Energy, from USD1.95 billion as at 30 September 2018 to USD1.75 billion at the end of this financial year. The “other non-current assets” line was USD348 million, significantly lower than the USD1,095 million recorded as at 30 September 2018, leading to the recovery of cash collateral posted against hedges. Prepayments, including near-term advances and those with a duration of more than 12 months, rose to USD4,133 million from USD3,660 million a year ago. Trafigura lays off a significant portion of such risks through insurance risk cover and bank syndication arrangements.

Operating cash flow before working capital changes was USD1,993 million, up from USD1,655 million in 2018. Trafigura believes that its financial performance is best assessed on the basis of cash flow before working capital changes, since the level of working capital is predominantly driven by prevailing commodity prices and price variations are financed under the Group’s selfliquidating finance lines.

Working capital needs decreased significantly year-onyear with a net working capital release of USD3,153 million for the year compared to a USD702 million requirement in 2018, leading to the equivalent repayment of working capital financing lines.

Investing activities resulted in a net cash use of USD285 million, compared to a net use of USD95 million in 2018. The net cash used in financing activities was USD3,074 million in FY2019, compared to the USD148 million generated in the previous year, in line with the USD3 billion release of working capital mentioned above.

The overall balance of cash and cash equivalents as of 30 September 2019 was USD6,267 million, compared to USD5,356 million a year earlier.

Trafigura does not hold a public rating and does not seek to obtain one. There are a number of reasons for this, including the fact that Trafigura’s strategy has always been to obtain funding from stakeholders who understand its business model, rather than making investment decisions on the basis of a rating. In addition, holding a rating could cause Trafigura to take more shortterm focused decisions in order to maintain a particular rating level. This would conflict with the Group’s focus on long-term value creation and maintenance of a strong balance sheet. Trafigura has been highly successful in securing funding without a public rating and as at 30 September 2019, had access to over USD60 billion in credit facilities from diverse funding sources. Financial discipline is inherent to Trafigura’s business and finance model due to its reliance on debt markets for capital and liquidity. Trafigura’s significant expansion of its sources of financing over the years has been achieved on the basis of the Group maintaining an acceptable and sustainable credit standing, consistent with an investment grade profile. The Group’s financial discipline is reinforced by the financial covenants provided to unsecured lenders and is underlined by the strong support we receive from our banking group and investors.

Bank financing

As a privately owned company, Trafigura funds itself primarily through the banking market, relying on a combination of diversified funding sources and strong banking relationships. Trafigura has cemented relationships with its lending banks and investors over many years, and they have supported us throughout various commodity cycles and financial market environments.

The Value at Risk (VaR) metric is one of the various risk management tools that Trafigura uses to monitor and limit its market risk exposure.

Trafigura uses an integrated VaR model which captures risks including commodity prices, interest rates, equity prices and currency rates (see further details in Note 30). During 2019, the average 95 percent oneday VaR for derivative positions was USD11.6 million (2018: USD7.8 million) which represented less than one percent of Group equity.

Trafigura is owned by its management and over 700 of its senior employees, who are therefore focused on the long-term success of the business, promoting management depth and stability, and encouraging prudent risk management. The decision as to which employees may become shareholders is discretionary based on individual performance, seniority and future potential.

Trafigura has significantly built up its shareholders’ equity since its inception in 1993 and the Group retains profits to further increase its capital base. Any discretionary buy-backs are subject to sufficient liquidity being available and to the company remaining compliant with financial covenants.

As a physical trading group, Trafigura relies on a specific funding model. As a result, one cannot apply the same financial analysis framework as for other, more typical industrial companies.

For Trafigura, banks and rating agencies have historically considered financial leverage after excluding some specific balance sheet items (e.g. inventories, securitisation programme), resulting in the use of adjusted debt as an overall leverage metric. Adjusted debt corresponds to the company’s total non-current and current debt less cash, fully hedged readily marketable inventories (including purchased and prepaid inventories which are being released), debt related to the Group’s receivables securitisation programme and the non-recourse portion of loans from third parties. This metric is a better measure of the Group’s financial leverage than a simple gross debt metric. In particular, the following adjustments are made:

• The receivables securitisation programme is taken out on the basis it is an entirely distinct legal entity from Trafigura with no recourse to the Group and is only consolidated into the financial statements in accordance with the Group’s accounting rules.
• Cash and short-term deposits are deducted from debt.
• Pre-sold or hedged stock, including purchased and pre-paid inventories which are being released, is deducted from debt. This reflects the great liquidity of the stock and the ease at which it could be converted to cash. As previously described, Trafigura’s policy is to have 100 percent of stock hedged or pre-sold at all times.
• Non-recourse invoice discountings or portion of loans (for example non-recourse portions of bank financings used to extend prepayments to counterparties) are deducted from debt.

As at 30 September 2019, the ratio of adjusted debt to Group equity stood at 0.78 down from 0.97 at 30 September 2018. This reduction reflected multiple initiatives, including reduced capital expenditure, increased utilisation of our securitisation programme and more efficient management of working capital. We have therefore attained our medium-term target of reducing the adjusted debt ratio to 1x or less. We will continue to manage our business to ensure that this ratio does not increase over 1.0x over a sustained period.

The Company's adjusted debt to equity ratio at the end
of the reporting period is calculated as follows:

Adjustments

Trafigura operates in a multitude of jurisdictions and adheres to applicable local and international tax law in the countries in which it operates, including legislation on transfer pricing. The Group’s tax policy is to pay appropriate tax according to work carried out in each jurisdiction, as determined by a functional analysis of operations using standard measures wherever possible, underpinned by reports prepared to fulfil local transfer pricing requirements. The Group’s effective tax rate – the average rate at which consolidated pre-tax profits are taxed – varies from year to year according to circumstances, and in 2019 it was 12.5 percent compared to 9.7 percent in 2018.

While 2019 was a good year for trading and financial performance, there is an expectation that 2020 could be better still. The market backdrop remains favourable in both oil and metals. Prices remain relatively volatile and uncertainty is being enhanced by a tense geopolitical environment, protracted trade negotiations and specific disruptions, such as the implementation of the IMO 2020 rule change limiting sulphur emissions from the global shipping fleet. Moreover, our market position in both segments has never been stronger.

Our asset position is also improving. With NN2 fully consolidated within our balance sheet and the implementation of its turnaround plan, we will experience a first full-year contribution by that company to our EBITDA. Among our equity-accounted investees, the turnaround of Puma Energy is on course. Our infrastructure joint venture with IFM Investors is also set to continue to make a positive contribution. And with the bunker market likely to experience considerable turbulence as a result of IMO 2020, we see further upside in the shipping market. We expect the Trafigura Group to continue on its established history of delivering strong trading profits while managing financial and balance sheet risks in a prudent manner.

Christophe Salmon

Chief Financial Officer