Trafigura Locations
Trafigura logo

Financial review from the Chief Financial Officer

Record gross profit and EBITDA from trading operations have produced a strong financial result for FY2019 in line with FY2018 and previous years, despite some impairments in fixed assets.

Christophe Salmon, Chief Financial Officer

Strong and steady financial performance

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.

During the year, Trafigura acquired 98 percent of NN2 Newco Limited ('NN2'), the holding company of the operating business of Nyrstar, a leading zinc and lead smelting business, following a major financial restructuring between Nyrstar, its bondholders and bank creditors. The transaction was legally enacted by an agreement between financial stakeholders and the UK courts following the sanction of two English schemes of arrangement. The restructuring was completed on 31 July 2019, on which date the business became fully consolidated within the Trafigura Group balance sheet. As detailed by our Executive Chairman on the preceding pages, we believe that this restructuring will create a stable basis for Nyrstar to turn around its operations following a period of financial distress. However, it also comes with significant short-term costs, including a write-off of our remaining equity holding in Nyrstar N.V. and other impairments.

Trafigura realised significant gains as a result of two important transactions with ship owners Frontline Ltd. and Scorpio Tankers Inc. Following discussions that started in July 2019, we concluded contractual agreements in August and September with these two companies to sell 29 oil tankers through the sale of two subsidiaries and the exercise of purchase options embedded within the existing lease agreements. The tankers were sold in exchange for equity in Frontline and Scorpio Tankers, generating an income gain of USD201 million. This did not, however, fully compensate for the impairments, value adjustments and write-offs relating to our continuing equity investment in Nyrstar N.V. and other investments, which totalled USD315 million.

These movements were the main drivers of the “other income and expenses” line in the P&L showing a loss of USD172 million. The Frontline and Scorpio transactions are a testament of Trafigura's ability to access assets that can serve our trading activity and be monetised at the right moment. Overall, these results represent a continuation of Trafigura’s strong and steady financial performance, combining a dynamic trading business with conservative balance sheet management and a prudent and disciplined financial approach. The decision to reduce the distribution to shareholders from USD528 million in FY2018 (59 percent of the previous year's profit) to USD337 million in FY2019 (39 percent of FY2018 profit) emphasises the importance attributed to growing our equity base and maintaining our leverage ratio within our target guidance of 1x adjusted debt to equity. To underline the latter, the ratio of adjusted debt to equity fell to 0.78x in 2019, continuing a downward trend dating back to 2016.

$171.5bn
Group revenue
2019
171.5
2018
180.7
$54.2bn
Total assets
2019
54.2
2018
53.8
$3.0bn
Gross profit
2019
3.0
2018
2.4
$6.5bn
Shareholders' equity
2019
6.5
2018
5.9
1.7%
Gross profit margin
2019
1.7
2018
1.3
$2.1bn
EBITDA
2019
2.1
2018
1.7
$867.8m
Net profit
2019
867.8
2018
872.8
0.78x
2019
0.78
2018
0.97

Profitability

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.

Oil and petroleum products volume rose by six percent to 292 million tonnes, representing an average daily volume of 6.1 million barrels. Metals and minerals volume was just 1 percent higher at 97 million tonnes. Aggregate gross profit margin was 1.7 percent, compared to 1.3 percent in FY2018. This shows how our focus on repositioning the business around the more profitable flows is paying off in a market that remains competitive despite consolidation. General and administrative expenses rose to USD1,157 million (which is equivalent to a 10 percent increase excluding the Nyrstar effect) and is due primarily to the inclusion of Nyrstar in the total and to an increase in compensation paid to Trafigura staff. Gross financing costs were 18 percent higher than in FY2018 at USD1.4 billion, driven by the sharp increase in USD Libor compared to FY2018. 

In the other income and expenses line, the significant losses, apart from the Nystar related impairments, write-offs and costs of USD73 million, were a USD121 million adjustment in the value of securities related to the Porto Sudeste iron ore operation in Brazil. The Group’s share of profit of equity-accounted investees was USD48 million, up from USD17 million in 2018. This reflects the net effect of Trafigura’s share of the profits and losses of industrial assets held but not consolidated on our balance sheet, including the profit generated by Minas de Aguas Tenidas (MATSA), our flagship copper mine in Spain that is jointly-owned with Mubadala, and an excellent debut by "Simba", the newly-established infrastructure joint venture between Trafigura and IFM Investors.

Balance sheet

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.

Current assets were slightly down from last year at USD43,372 million and inventories were also lower at USD13,435 million, reflecting lower average commodity prices. Trade and other receivables were also lower at USD18,517 million.

Group equity was USD6,805 million, up from USD6,250 million a year ago. It is Trafigura’s policy to continue to grow its equity base. Equity increased year on year by close to USD600 million, which is mainly explained by the retained earnings and by the net proceeds from perpetual bonds. The Group redeemed its SGD200 million perpetual bond at its first call date in February 2019 and on 31 July 2019, issued a EUR262.5 million perpetual bond as part of the acquisition of the Nyrstar operating companies, valued at USD267 million in the balance sheet. Current liabilities, including short-term bank borrowings, were USD37,379 million, down from USD38,576 million at the FY2018 year-end.

Cash flow

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.

Public ratings

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.

Trafigura’s banking group consisted of around 135 financial institutions across the world as at 30 September 2019. Access to deep and constant liquidity is a key reason for Trafigura’s leading competitive position and we see transparency and clear communication with banks, financial stakeholders and trading counterparties as instrumental to maintaining this position. Trafigura sources funding from a number of markets: syndicated bank loans markets, securitisation markets, bond markets (public or private) and trade finance.

In terms of financing and liquidity, Trafigura achieved an increase in its available credit lines from USD58.4 billion to USD59.7 billion following Nyrstar’s integration. This increase comes mainly from the transaction facilities which finance day-to-day activity and represent the largest portion of the Group’s financing.
Of those total current lines, more than USD19.0 billion remained unutilised at the end of September 2019, providing significant buffer of unused credit in case of unforeseen events. In September 2019, the resilience of Trafigura’s funding model was demonstrated when the Group was able to comfortably manage significant margin calls when crude oil increased by approximately 15 percent over a day. As at 30 September 2019, the Group had USD9.2 billion (FY2018: USD9.5 billion) of committed unsecured syndicated loans, of which USD2.3 billion (FY2018: USD2.7 billion) remained unutilised. The Group had USD6,267 million of cash and cash equivalents at the end of the year.

During its financial year, Trafigura refinanced both of its flagship revolving credit facilities in Europe and Asia, which represent the cornerstone of Trafigura’s unsecured funding. In October 2018, Trafigura refinanced its Asian Revolving Credit Facility (RCF) and Term Loan Facilities (TLF) at USD1,945 million equivalent with the support of 28 banks. The transaction comprised three tranches: a one-year USD denominated revolving credit facility (USD1,075 million), a one-year CNH denominated term loan facility (USD370 million equivalent) and a three-year USD term loan facility (USD500 million). This facility was further upsized to USD2,030 million equivalent post closing via the accordion feature.

In March 2019, Trafigura successfully refinanced the one-year tranche of its European RCF at USD2,050 million at tighter pricing levels with the support of a larger and deeper bank group. At the same time as refinancing the one-year facility, the company decided to extend the maturity of the USD3,550 million three-year tranche by 365 days, hence maintaining the facility tenor to three years. The one-year tranche was subsequently upsized to USD2,180 million via the accordion feature.

Debt and capital markets issuance

Over the past five years, Trafigura has increasingly sought financing outside of the traditional commodity trade finance bank markets in order to diversify its funding sources, lengthen the Group's maturity profile and continue to grow access to funding in support of growth.

Trafigura took advantage of the conducive debt capital market environment in FY2018 and raised liquidity to pre-finance two upcoming maturities; the EUR607 million Eurobond, which matured in November 2018, and the SGD200 million perpetual bond, which was redeemed in February 2019 on its first call date.

Over FY2019, Trafigura opportunistically focused its efforts on debt capital markets that offered attractive market conditions, a key advantage of the funding diversification strategy. In May 2019, Trafigura successfully issued a fourth tranche of its Panda Bond Programme. This 540 million renminbi-denominated issuance was significantly oversubscribed and drew a more diverse investor base than for the previous tranches. Moreover, the coupon has significantly tightened since the first tranche issued in April 2018, confirming the strong appetite of the Chinese bond market for Trafigura’s long-term debt.

As part of the acquisition of NN2, Trafigura Group issued three bond instruments:

i) a EUR262.5 million perpetual resettable step-up subordinated securities issued by Trafigura Group Pte. Ltd., with an interest rate of 7.5 percent per annum, resetting after five years and listed on the Singapore Stock Exchange.

ii) a USD88 million guaranteed senior notes issued by Trafigura Funding S.A. under the EUR3 billion Euro Medium-Term Notes Programme, through a tap of the USD400 million notes issued in March 2018, maturing on 19 March 2023.

iii) a USD251 million, seven-year zero coupon commoditylinked principal amortising instrument issued by a subsidiary of the Trafigura Group, guaranteed by Trafigura Group Pte. Ltd., Trafigura Trading LLC and Trafigura Pte. Ltd., and listed on the Vienna MTF.

In September 2019, Trafigura Group issued a further CHF55 million bond into the Swiss retail market. This incremental transaction allowed Trafigura to increase liquidity raised in the Swiss market to CHF220 million following its inaugural bond issued in May 2018. By tapping the CHF bond market, Trafigura has succeeded in optimising its long-term funding costs, showing again the benefit of the funding diversification strategy followed by the Group.

Value at risk

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.

Shareholder structure

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.

Leverage and adjusted debt

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:

 

2019

USD’M

2018

USD’M

Non-current loans and borrowings 8,492.1 8,462.1
Current loans and borrowings 22,455.5 23,741.6
Total debt 30,947.6 32,203.7

Adjustments

Cash and cash equivalents 6,267.2 5,355.8
Deposits 374.2 334.4
Inventories (including purchased and pre-paid inventories) 14,137.2 15,620.5
Receivables securitisation debt  4,422.1 4,294.1
Non-recourse debt 437.2 562.2
Adjusted debt 
5,309.7
6,036.7
Group equity 
6,804.7
6,250.1
Adjusted debt to Group equity ratio at the end of the period 
0.78
0.97

 

Taxation

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.

Outlook

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

2019 Annual Report
2019 Annual Report

2019 Annual Report

Download the report