Ocean Wilsons Holdings Ld - Interim Management Statement

Ocean Wilsons Holdings Limited ("Ocean Wilsons" or the "Company") today provides its interim management statement for the six months ended 30 June 2019.

 

Key points

·          As at 1 January 2019 the Group adopted the new accounting standard IFRS 16 - "Leases". The principal impact on the balance sheet as at 30 June 2019 is the recognition of right to use assets of US$185.0 million and finance lease liabilities of US$186.8 million. The principal impact of IFRS 16 on the income statement for the period is to increase operating profit by US$4.6 million and decrease profit for the period by US$2.1 million. The comparatives for the 2018 financial statements have not been restated in accordance with IFRS 16.

·          Although operating profit for the six months to 30 June 2019 fell 25% to US$35.1 million (2018: US$46.8 million), profit for the period was up US$17.3 million to US$34.0 million (2018: US$16.7 million) principally due to an increase in returns from the investment portfolio and positive foreign exchange movements. Excluding the impact of IFRS 16, profit for the current period would have been US$2.1 million higher at US$36.1 million.

·          The investment portfolio increased US$19.5 million to US$278.4 million (31 December 2018: US$258.9 million) after dividends paid from the portfolio of US$2.0 million.

·          Net cash inflow from operating activities for the period of US$47.6 million (2018: US$55.6 million).

·          The Brazilian Real "BRL" was 1% higher against the US Dollar "USD" at 30 June 2019 compared with 31 December 2018. The average US Dollar/Brazilian Real exchange rate in the period at 3.85 was 12% higher than the comparative period in 2018 of 3.43.

·          Dividends paid to shareholders in the period of US$24.8 million (2018: US$24.8 million).

Chairman's Statement

Introduction

The investment portfolio produced a solid performance during the first half of 2019 rising 8% in the period as markets rallied following the softening at the end of 2018. Our Brazilian business continued to generate strong operating cashflow in the first half of the year despite a backdrop of weak economic activity as the Brazilian economy shrank in the first quarter of 2019. Revenue and operating profit both fell as operating results were impacted by weaker volumes in our towage and offshore businesses reflecting the competitive environment in these markets. Container volumes handled at our two container terminals remained firm in the period and work continued on the expansion of the Tecon Salvador terminal.

Group Results

Revenue

Group revenue for the six months ended 30 June 2019 decreased by 15% to US$199.2 million (2018: US$235.0 million), due the higher average USD/BRL exchange rate and difficult trading environment at some of our businesses. Port terminals and logistics revenue grew 3% in BRL terms for the period, although in USD terms, revenue was 9% lower at US$117.8 million (2018: US$128.9 million), principally due to the higher average USD/BRL exchange rate used to convert revenue into our reporting currency. The higher average exchange rate impacted container terminal revenue in USD terms which declined 10% to US$80.6 million (2018: U$89.4 million). Container volumes handled at Tecon Rio Grande and Tecon Salvador for the period were marginally higher than the comparative period at 486,700 "TEUs" (twenty-foot equivalent units) (2018: 484,000 TEUs). Volumes at Tecon Salvador were 13% higher driven by higher international trade and cabotage volumes, while volumes at Tecon Rio Grande were 5% lower mainly due to less transshipment volume resulting from the cancellation of two feeder services from Argentina in the period. Brasco revenue increased US$0.8 million to US$11.5 million (2018: US$10.7 million) with the commencement of two contracts with Enauta and Total to support their offshore drilling campaigns. Towage revenue at US$74.1 million was US$12.4 million lower than the comparative period (2018: US$86.5 million) as market pressures continued to impact both pricing and harbour towage volumes. Harbour towage manoeuvres performed in the period were 7% lower at 25,839 (2018: 27,885) with the volumes also negatively influenced by lower iron ore exports. Additionally towage revenue was impacted by a US$3.5 million decline in income from special operations to US$3.6 million (2018: US$7.1 million) reflecting the more volatile nature of this activity which includes ocean towage, salvage, firefighting and shipyard support. Ship agency revenue at US$4.3 million was 13% lower than the comparative period (2018: US$5.0 million). Shipyard third-party revenue at US$3.0 million (2018: US$14.9 million) continued to suffer from the poor market for small vessel construction in Brazil with third party work restricted to dry-docking operations in the period.

 

IFRS 16 - Leases

As at 1 January 2019 the Group adopted the new accounting standard IFRS 16 which requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.Following the amendments to the standard coming into effect, leases have been recorded as assets and liabilities (right of use assets and financial lease liabilities). The Group used the modified retrospective approach, meaning assets and liabilities recognised are equal at the point of application and that comparatives for the 2018 financial statements were not restated. Therefore for comparison purposes the principal impacts of IFRS 16 on the income statement for the six months ended 30 June 2019 are:

 

 

 

 

Positive/

 

 

(negative)

 

 

2019

 

 

US$ million

Other operating expenses

 

10.8

Depreciation and amortisation

 

(6.2)

Operating profit

 

4.6

Finance costs

 

(7.8)

Deferred tax

 

1.1

Profit for the period

 

(2.1)

The principal impacts on the Group's balance sheet at 30 June 2019 are the recognition of a right to use asset of US$185.0 million and finance lease liabilities of US$186.8 million.

Further details of right to use assets and lease liabilities are presented in Note 12 to the accounts.

Operating Profit

Operating profit was US$11.7 million lower than the comparative period at US$35.1 million (2018: US$46.8 million) principally due to lower revenue and operating margins for the period. Operating margins for the period declined to 17.6% (2018: 19.9%) principally due to weaker margins at our towage and port terminal businesses. Excluding the impacts of IFRS 16, operating profit in the current period would have fallen to US$30.5 million and margins to 15.4%. Raw materials and consumables used were US$8.2 million lower at US$12.9 million (2018: US$21.1 million) as a result of lower shipyard activity. Employee expenses were US$5.0 million lower at US$70.8 million (2018: US$75.8 million) due to the effect of the stronger average USD/BRL exchange rate and lower headcount. In BRL terms employee expenses increased mainly due to the rollback during 2018 of some temporary payroll exemptions. Other operating expenses were US$15.6 million lower at US$47.1 million (2018: US$62.7 million) as a result of the stronger average USD/BRL exchange rate and a US$10.8 million adjustment from the implementation of IFRS 16. Amortisation of right of use assets (US$6.4 million) relate to the right of use assets recognised under IFRS 16 at the 1 January 2019. The depreciation and amortisation expense at US$26.8 million was US$1.9 million lower than the comparative period (2018: US$28.7 million).

Share of results of joint ventures

The share of results of joint ventures is Wilson Sons' 50% share of net profit for the period from our offshore support vessel joint venture. The net loss attributable to Wilson Sons for the period was US$0.6 million (2018: US$1.3 million). A lower operating profit for a 50% share in the joint venture in the period at US$2.4 million (2018: US$4.2 million), was offset by a foreign exchange gain on monetary items of US$0.4 million (2018: US$4.1 million loss). Operating profit fell principally due to fewer operating days in the period which were 10% lower at 2,268 days against 2,533 days in 2018. The tax credit in the period of US$0.9 million was US$2.0 million lower than the prior period comparative (2018: US$2.9 million)

Other Investment income

Other investment income at US$2.2 million was US$0.2 million lower than the prior year (2018: US$2.4 million) with lower interest on bank deposits of US$1.7 million (2018: US$2.1 million) partially offset by higher other interest income of US$0.6 million (2018: US$0.4 million).

 

Returns on the investment portfolio at fair value through profit and loss

Returns on the investment portfolio of US$22.8 million (2018: US$4.1 million) comprise unrealised gains on financial assets at fair value through profit or loss of US$21.1 million (2018: US$0.1 million), income from underlying investment vehicles of US$1.3 million (2018: US$1.1 million) and realised profits on the disposal of financial assets at fair value through profit or loss of US$0.4 million (2018: US$3.0 million).

Finance costs

Finance costs for the period at US$12.8 million were US$3.0 million lower than the comparative period (2018: US$15.8 million). Within this there was a US$10.1 million positive movement in exchange gains on foreign currency borrowings with a US$0.9 million gain (2018: US$9.2 million loss) while interest on bank loans and overdrafts increased US$6.8 million to US$13.0 million (2018: US$6.2 million) principally due to the impact of IFRS 16 in the period of US$7.8 million.

Exchange rates

The Group reports in USD and has revenue, costs, assets and liabilities in both BRL and USD. Therefore movements in the USD/BRL exchange rate can impact the Group both positively and negatively from year to year. In the six months to 30 June 2019 the BRL appreciated 1% against the USD from R$3.87 at 1 January 2019 to R$3.83 at the period end. In the comparative period in 2018 the BRL depreciated 17% against the USD from R$3.31 to R$3.86.

The principal effects from the movement of the BRL against the USD on the income statement are:

 

 

2019

2018

 

US$ million

US$ million

Exchange gain / (loss) on monetary items (i)

0.3

(8.5)

Exchange gain / (loss) on foreign currency borrowings

0.9

(9.2)

Deferred tax on retranslation of fixed assets (ii)

3.2

(12.9)

Deferred tax on exchange variance on loans (iii)

(5.3)

12.0

Total

(0.9)

(18.6)

(i)        This arises from the translation of BRL denominated monetary items in USD functional currency entities.

(ii)       The Group's fixed assets are located in Brazil and therefore future tax deductions from depreciation used in the Group's tax calculations are denominated in BRL. When the BRL depreciates against the US Dollar the future tax deduction in BRL terms remain unchanged but are reduced in US Dollar terms and vice versa.

(iii)      Deferred tax credit arising from the exchange losses on USD denominated borrowings in Brazil.

The average USD/BRL exchange rate in the period at 3.85 was 12% higher (2018: 3.43) than the comparative period in 2018. A higher average exchange rate negatively impacts BRL denominated revenues and benefits BRL denominated costs when converted into our reporting currency, the USD.

Foreign exchange gains/losses on monetary items

Foreign exchange gains on monetary items of US$0.3 million (2018: US$8.5 million loss) arose from the Group's foreign currency monetary items and principally reflect the movement of the BRL against the USD during the period.

Profit before tax

Profit before tax for the period increased US$19.4 million to US$47.1 million compared to US$27.7 million in 2018. The improvement in profit before tax is principally due to the US$18.7 million increase in returns on the investment portfolio at fair value through profit and loss, a US$8.9 million positive movement in foreign exchange gains or losses on monetary items and a US$3.0 million decrease in finance costs. This was partially offset by the US$11.7 million decrease in operating profit. Share of results from joint ventures improved by US$0.7 million and other investment income was US$0.2 million lower.

Taxation

The tax charge for the period of US$13.1 million represents an effective tax rate in the period of 28% (2018: 40%) compared to the corporate tax rate prevailing in Brazil of 34%. The difference in the effective tax rates is due to the mix of income and expenses that are not included in determining taxable profit. The improvement in the current period effective tax rate is primarily attributable to the higher returns from our Bermudian investment portfolio that is not subject to income tax and

a positive movement in foreign exchange gains or losses on monetary items. Current taxation at US$9.7 million was US$3.2 million lower than the comparative period (2018: US$12.9 million).

Profit for the period

Profit attributable to equity holders of the parent is US$28.1 million (2018: US$10.4 million) after deducting profit attributable to non-controlling interests of US$5.9 million (2018: US$6.6 million). Profit attributable to equity holders of the parent at 83% of the profit for the period is a higher percentage for the period (2018: 60%) as the current period benefitted from higher returns from the investment portfolio which are fully attributable to equity holders of the parent.

Earnings per share for the period was 79.5 cents (2018: 28.4 cents).

Investment portfolio performance

The investment portfolio and cash under management of Ocean Wilsons (Investments) Limited "OWIL" was US$278.4 million (31 December 2018: US$258.9 million) an increase of US$19.5 million in the period after paying dividends of US$2.0 million to Ocean Wilsons Holdings Limited and deducting management and other fees of US$1.5 million.

Cash flow and debt

Net cash inflow from operating activities for the period at US$47.6 million was US$8.0 million lower than the comparative period in 2018, (US$55.6 million) mainly due to the lower operating profit in the period. Capital expenditure in the period at US$44.6 million was US$20.2 million higher than the comparative period (2018: US$24.4 million) principally due to increased expenditure on the Tecon Salvador expansion. Dividends of US$24.8 million were paid to shareholders in the period (2018: US$24.8 million) with a further US$16.5 million paid to non-controlling interests in our subsidiaries (2018: US$16.1 million).

 

At 30 June 2019, the Group had cash and cash equivalents of US$58.4 million (31 December 2018: US$60.1 million). Group borrowings including obligations under finance leases at period end were US$516.8 million (31 December 2018: US$307.4 million). The increase in borrowings is principally due to the increase in finance lease liabilities resulting from the adoption of IFRS 16. At period end obligations under finance leases were US$186.8 million, (2018: US$0.1 million). New loans were raised in the period of US$66.2 million (2018: US$2.5 million) to finance capital expenditure while capital repayments on existing loans in the period of US$44.0 million (2018: US$31.1 million) were made.

 

The Group's reported borrowings do not include the Company's 50% share of our offshore vessel joint venture's debt being US$220.2 million (2018: US$242.0 million).

Net asset value

At the close of business on 31 July 2019, the Wilson Sons share price was R$35.00, resulting in a market value for the Ocean Wilsons holding of 41,444,000 shares (58.17% of Wilson Sons) totalling approximately US$380.5 million which is the equivalent of US$10.76 (£8.82) per Ocean Wilsons Holdings Limited share.

Adding together the market value per share of Wilsons Sons, US$10.76 and the investment portfolio value per share of US$7.87 results in a net asset value per Ocean Wilsons Holdings Limited share of approximately US$28.63 (£15.27). The Ocean Wilsons Holdings Limited share price of £10.75 at 31 July 2019 represented an implied discount of 30%.