Coronavirus Update

Ocean Wilsons Holdings Limited - Interim Statement

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Ocean Wilsons Holdings Limited

 

 Interim Statement for the six months ended 30 June 2020

 

Ocean Wilsons Holdings Limited ("Ocean Wilsons" or the "Group" or "Company") today provides its interim statement for the six months ended 30 June 2020.

Key points

·

Resilient first half performance with solid key operational indicators from our main Brazilian business in challenging market conditions.

·

Operating profit for the period was 12% higher than the comparable period at US$39.3 million (2019: US$35.1 million).

·

Strong balance sheet and healthy cash generation. Net cash inflow from operating activities for the period of US$68.5 million (2019: US$47.6 million).

·

Bottom line earnings impacted by negative foreign exchange movements and negative returns from the investment portfolio. The loss for the period was US$18.4 million (2019: US$34.0 million profit).

·

The Brazilian Real "BRL" at 5.48 was 26.5% weaker against the US Dollar "USD" at 30 June 2020 compared with 31 December 2019 (4.03). The average USD/BRL exchange rate used to convert revenue and expenses into our reporting currency in the period at 4.92 was 28% higher than the comparative period in 2019 of 3.85, impacting both revenue and costs in USD terms.

·

Impacted by the fall in global equity markets, the investment portfolio and cash under management was US$17.6 million lower at US$267.7 million compared to 31 December 2019 (US$285.3 million).

·

Dividends paid to shareholders in the period of US$10.6 million (2019: US$24.8 million).

 

Chairman's Statement

 

Introduction

 

The strength and resilience of our business model has again been confirmed by our solid performance during the challenging market conditions created by the Covid-19 pandemic. These results are only possible due to the dedication and commitment of all our employees to ensure business continuity so as to meet the needs of our customers and other stakeholders. The health and safety of our employees and all our stakeholders has remained paramount during this period. Our key operational indicators showed only a modest reduction in volumes and o ur Brazilian business continued to generate healthy free cash flow. However bottom line earnings were adversely impacted by currency effects resulting from the devaluation of the Brazilian Real against the US Dollar in the period and negative returns from the investment portfolio.

 

Operating volumes (to 30 June)

2020

2019

% Change

Container Terminals (container movements in TEU '000s) *

484.0

486.7

(0.6%)

Towage (number of harbour manoeuvres performed)

25,175

25,839

(2.6%)

Offshore Vessels (days in operation)

2,553

2,265

12.7%

  *TEUs stands for "twenty-foot equivalent units".

Group Results

 

Revenue

Revenue fell by 13% during the first half year to US$174.2 million (2019: US$199.2 million), principally due to the devaluation of the BRL against the USD, a decline in logistics revenues and lower offshore support base revenues. In BRL terms revenues rose 11%. Port terminals and logistics revenue is predominantly denominated in BRL and so was hardest hit by the devaluation of the BRL against the US Dollar, declining 26% to US$86.7 million (2019: US$117.8 million). Within this container terminal revenue was 16% lower at US$67.4 million (2019: US$80.6 million) mainly due to the higher average USD/BRL exchange rate. Container volumes handled at the Rio Grande container and Salvador container terminals for the period were marginally lower than the comparative period at 484,000 TEUs (2019: 486,700 TEUs). Lower international trade and cabotage volumes were partially offset by higher transshipment and inland navigation volumes. Cabotage and import volumes decreased 11%, reflecting a slowdown in domestic consumption and industrial activity in Brazil due to the Covid-19 pandemic. Logistics revenue declined 42% to US$14.8 million (2019 US$25.2 million) due to the end of a specific high-volume contract, the impact of the Covid-19 outbreak on import volumes and the weaker BRL. Brasco revenue decreased US$7.0 million to US$4.5 million (2019: US$11.5 million) against a backdrop of a weak oil and gas sector.

 

On a positive note, towage revenue, which is predominantly denominated in USD, increased 11% to US$82.3 million (2019: US$74.1 million) reflecting an improved sales mix and higher revenue from special operations. Special operations revenue at US$8.4 million, was US$4.8 million higher than the comparative period (2019: US$3.6 million) principally due to higher activity for LNG and an increase in salvage operations. Harbour towage benefitted from an 11% increase in the average deadweight of vessels attended, reflecting the impact of a higher proportion of larger vessels docking at Brazilian ports. Harbour towage manoeuvres performed in the period were 2.6% lower at 25,175 (2019: 25,839). Shipyard third-party revenue remained depressed at US$1.2 million (2019: US$3.0 million) due to the weak market conditions in Brazil, with third party work restricted to dry-docking operations in the period.

Operating Profit

Operating profit was US$4.2 million higher than the comparative period at US$39.3 million (2019: US$35.1 million), principally due to improved operating margins in the period. Operating margins for the period improved to 22.6% (2019: 17.6%) due to stronger margins at our towage and port terminal businesses. Operating margins benefitted from the higher average USD/BRL exchange rate (28% year on year) and cost reduction and austerity measures implemented to safeguard the financial strength of our businesses in Brazil. Raw materials and consumables used were US$3.7 million lower at US$9.1 million (2019: US$12.9 million) impacted by the average USD/BRL exchange rate and lower operating activity. Employee expenses were US$13.9 million lower at US$56.9 million (2019: US$70.8 million) principally due to the exchange rate impact. Other operating expenses were 19% lower at US$38.0 million (2019: US$47.1 million) with higher tug rental and service costs offset by the higher average USD/BRL exchange rate. The depreciation and amortisation expense at US$25.8 million was US$1.0 million lower than the comparative period (2019: US$26.8 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$4.6 million greater at US$5.2 million (2019: US$0.6 million) principally due to higher foreign exchange losses of US$10.8 million (2019: US$0.4 million gain). Operating profit in the period for a 50% share in the joint venture was US$2.7 million (2019: US$2.4 million). The income tax credit in the period was US$6.5 million higher than the prior period comparative at US$7.4 million (2019: US$0.9 million).

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

Losses on the investment portfolio of US$13.8 million (2019: US$22.8 million profit) comprise unrealised losses on financial assets at fair value through profit or loss of US$18.3 million (2019: US$21.1 million gain), realised profits on the disposal of financial assets at fair value through profit or loss of US$3.0 million (2019: US$0.4 million) and income from underlying investment vehicles of US$1.5 million (2019: US$1.3 million).

Other Investment income

Other investment income was US$1.3 million lower than the comparable period at US$0.9 million (2019: US$2.2 million) due to lower interest on bank deposits of US$0.4 million (2019: US$1.7 million).

Finance costs

Finance costs for the period were US$1.4 million lower than the comparative period at US$11.4 million (2019: US$12.8 million). Interest on lease liabilities decreased US$1.0 million to US$6.8 million (2019: US$7.8 million) due to the impact of IFRS 16 in the period. Interest on bank loans and overdrafts was US$0.8 million lower than the prior year at US$4.6 million (2019: US$5.3 million). Exchange gains or losses on foreign currency borrowings in the period were zero as all material borrowings have been aligned with the functional currency of the entity where the borrowings are held.

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 2020 the BRL depreciated 26.5% against the USD from R$4.03 at 1 January 2020 to R$5.48 at the period end. In the comparative period in 2019 the BRL appreciated 1% against the USD from R$3.87 to R$3.83.

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

 

 

2020

2019

 

US$ million

US$ million

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

(11.7)

0.3

Exchange gain on foreign currency borrowings

-

0.9

Deferred tax on retranslation of fixed assets(ii)

(21.2)

3.2

Deferred tax on exchange variance on loans(iii)

19.6

(5.3)

Total

(13.3)

(0.9)

 

(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 R$4.92 was 28% higher (2019: R$3.85) than the comparative period in 2019. A higher average exchange rate negatively impacts BRL denominated revenues and benefits BRL denominated costs when converted into our reporting currency.

Foreign exchange gains/losses on monetary items

Foreign exchange losses on monetary items of US$11.7 million (2019: US$0.3 million gain) arose from the Group's foreign currency monetary items and reflect the movement of the BRL against the USD during the period.

(Loss)/profit before tax

Although operating profit increased US$4.2 million compared with prior year, the Group recorded a loss before tax in the period of US$1.8 million which was US$48.9 million lower than the prior year (2019: US$47.1 million profit). The decline in profit before tax is principally due to the US$36.6 million negative movement in returns on the investment portfolio at fair value through profit and loss, a US$12.0 million negative movement in foreign exchange gains or losses on monetary items and a US$4.6 million fall in share of results from joint ventures. The US$1.4 million improvement in finance costs was offset by a decline in investment income, which was US$1.3 million lower.

Taxation

The corporate tax rate prevailing in Brazil is 34%. The Group recorded an income tax expense for the period of US$16.6 million (2019:US$13.1 million) despite recording a loss before tax in the period due to net expenses that are not included in determining taxable profit in Brazil and net losses incurred outside of Brazil that are not subject to income tax, being mainly losses arising on the investment portfolio. The principal net expenses not included in determining taxable profit in Brazil are foreign exchange losses on monetary items, share of results of joint ventures and deferred tax items. These are mainly deferred tax credits arising on the retranslation of BRL denominated fixed assets in Brazil and the deferred tax charge on the exchange losses on USD denominated borrowings.

(Loss)/profit for the period

After deducting the loss attributable to non-controlling interests of US$0.5 million (2019: US$5.9 million profit) the loss attributable to equity holders of the Company is US$17.8 million (2019: US$28.1 million profit). The loss per share for the period was US 50.2 cents (2019: US 79.5 cents earnings per share).

Investment portfolio performance

Impacted by the fall in global equity markets the investment portfolio and cash under management was US$17.6 million lower at US$267.7 million as at 30 June 2020, (31 December 2019: US$285.3 million) after paying dividends of US$2.5 million to Ocean Wilsons Holdings Limited and deducting management and other fees of US$1.4 million.

Cash flow and debt

Net cash inflow from operating activities for the period was US$20.9 million higher at US$68.5 million than the comparative period in 2019, (US$47.6 million) mainly due to positive working capital movements and higher operating profit in the period. Capital expenditure in the period of US$41.0 million was spent mainly on civil works and equipment for the Salvador container terminal expansion (2019: US$44.6 million). Dividends of US$10.6 million were paid to shareholders in the period (2019: US$24.8 million) with a further US$6.4 million paid to non-controlling interests in our subsidiaries (2019: US$16.5 million). Due to the uncertainty created by the Covid19 pandemic, the board of the Company withdrew its recommendation to pay a final dividend for 2019 of US$0.70 per share and instead paid a final dividend of US$0.30 per share. At 30 June 2020, the Group had cash and cash equivalents of US$100.4 million (31 December 2019: US$69.0 million). Group borrowings including lease liabilities at the period end were US$483.7 million (31 December 2019: US$529.1 million). New loans were raised in the period of US$47.2 million (2019: US$66.2 million) while capital repayments on existing loans in the period of US$20.5 million (2019: US$44.0 million) were made. The reduction in loan repayments is mainly due to deferred capital repayments under the BNDES "Standstill" agreement. (Please refer to the liquidity section in the Covid-19 impact assessment set out below).

The Group's reported borrowings do not include the Company's 50% share of our offshore vessel joint venture's debt being US$224.3 million (2019: US$220.3 million).

Balance sheet

Equity attributable to shareholders at the balance sheet date was US$61.5 million lower at US$508.3 million compared with US$569.8 million at 31 December 2019. The main movements in equity in the year were the loss for the period of US$17.8 million, dividends paid of US$10.6 million and a negative currency translation adjustment of US$34.3 million. The currency translation adjustment arises from exchange differences on the translation of operations with a functional currency other than USD and reflect the significant devaluation of the BRL in the period.

 

Salvador container terminal

The expansion of the Salvador container terminal which includes the expansion of the principal quay and the installation of three super-post-Panamax quay cranes and five rubber-tyred gantry yard cranes is now focused on the levelling and paving of an existing backyard area. The full expansion is expected to be completed in the fourth quarter of 2020. The extended 800-metre quay will allow the simultaneous berthing of two super-post-Panamax ships.

COVID-19

 

Coronavirus outbreak ("COVID-19")

On 11 March 2020, the World Health Organization declared the Covid-19 outbreak a global pandemic and governmental authorities in various jurisdictions imposed lockdowns and precautionary restrictions to contain the virus. Since June 2020, several countries have reduced the number of new Covid-19 cases and some regions began to gradually relax physical distancing restrictions and re-open businesses, although maintaining some level of social distancing and other precautionary measures. Although the final impact on the global economy and financial markets is still uncertain, some industries were severely affected by the reduction in demand for services and goods.  

 

Governments worldwide announced measures to provide both financial and non-financial assistance to disrupted industries and the affected business organisations. In Brazil, the Executive and Legislative branches published several normative acts to prevent and contain the pandemic as well as to mitigate the respective impacts on the economy, such as the postponement of tax and social charge payments. Wilson Sons provides port and maritime logistics services which have been recognised as essential activities by the Brazilian government. This has assisted in limiting the negative effects of Covid-19 on the Group's results in the first half of 2020.

 

While it is difficult to predict the full impact of the Covid-19 pandemic we are not forecasting any material impact on our long-term performance as the global economy is expected to gradually recover in the coming years.

 

Covid-19 impact assessment

 

Liquidity

At 30 June 2020 the Group's cash and cash equivalents amounted to US$100.4 million. In the first quarter of 2020 Wilson Sons signed financing agreements totalling US$24.6 million denominated in Brazilian Real to reinforce short-term liquidity given the volatility caused by the Covid-19 crisis on global markets.

 

Additionally, in the second quarter of 2020 the Brazilian National Economic and Social Development Bank (BNDES) granted Wilson Sons eligibility for the Covid-19 "Standstill" agreement. This allows for the postponement of principal and interest payments that would occur between May 2020 and October 2020. This defers approximately US$10.3 million in payments by the Group's consolidated companies and US$9.9 million relating to the Company's 50% share in the offshore support vessel joint venture.

 

The Group also implemented other austerity measures such as a reduction in the 2019 final dividend paid and tax payment deferrals in line with government incentives.

 

Covenants

At 30 June 2020 the Group was in compliance with all loan covenants.

 

Expected credit losses

In view of the current scenario of economic uncertainties caused by the Covid-19 pandemic, the Group has reviewed the assumptions that make up the methodology to measure expected credit losses and has not observed an increase in customer default due to the outbreak. It is worth mentioning that the management continues to monitor the situation and assess potential impacts that could affect the Company's performance and consequently, the measurement of expected credit losses.

 

Impairment of assets

At the time of writing, the outbreak has not caused any changes in the circumstances that could require an impairment charge to be made against the Group's assets.

 

Management will continue to review key assumptions used in determining value and carefully monitor short-term fluctuations in macroeconomic assumptions related to the impacts of Covid-19 when applying to the Company's weighted average cost of capital.

 

Lease arrangements

At this time, there have been no long-term changes in the scope of the Company's leases and right-of-use assets, including adding or terminating the right to use one or more underlying assets, or extending or reducing the term of the contractual leases. The Company has obtained some short-term reductions and postponements of lease payments, which according to IFRS 16 should not be considered as lease adjustments.

Investment portfolio

In its report, the Investment Manager explains both the portfolio performance in the last quarter, when the impact of the virus compared to previous pandemics became clearer, as well as its views for the future.

Liquidity of the portfolio

Cash requirements for the portfolio are closely monitored. If sufficient resources are not available to meet short-term cashflow requirements the investment manager could meet that requirement through a combination of sales of liquid assets or use of a loan facility secured against the investment portfolio. A significant percentage of the portfolio has daily or weekly liquidity. (At 30 June 2020: 35%). During the period, the investment manager used the loan facility to manage short-term cashflow requirements and at 30 June 2020 there was a balance outstanding of US$2.5 million.

Key service providers

All the Company's key service providers have executed their business continuity plans and to date are successfully operating on a work-from-home environment.

Ocean Wilsons Holdings Limited Board

The Board continues to meet as required but makes use of videoconferencing facilities rather than meeting face to face.

 

Covid-19 response - Wilson Sons

Our priorities during the COVID-19 crisis have been to protect the health and safety of our employees and balance the needs of all our stakeholders. This is only possible due to the dedication and commitment of all our employees to ensure business continuity and meet the needs of our customers and other stakeholders. Our Brazilian business established a Covid-19 crisis committee to manage risks and responses in alignment with the interests of all stakeholders.

 

Since January 2020 Wilson Sons has been implementing several measures and protocols to ensure (i) the health, safety and well-being of its employees, clients and partners, (ii) the continuity of operations and (iii) the financial strength and resilience of its business, as presented below:

 

Workforce Safety:

 

·

Remote-working routine for all administrative staff;

·

Physical isolation of operational employees over 60 years old, with controlled exceptions;

·

Extensive travel restrictions prohibiting international travel and limiting domestic travel to business-critical travel;

·

Non-essential internal events were cancelled or postponed;

·

Employee participation in external events is prohibited;

·

In-person meetings are prohibited and must be held remotely;

·

Non-business third-party visits to the Company's operations and facilities are prohibited, with controlled exceptions;

·

Reinforced hygiene measures and the use of masks mandated;

·

Mandatory quarantine period until completely recovered in the event of employee contamination or direct contact with infected people;

·

Stricter measures for offshore support vessel crews (pre-boarding tests) and tugboat crews (medical check-ups); and

·

Other containment measures in accordance with the protocol established by the Brazilian Ministry of Health.

 

 

Business Continuity:

 

·

Individual business segment continuity plans;

·

Reinforced succession plans;

·

Flu vaccine campaign;

·

Covid-19 testing in specific operations;

·

Monitored quarantine for symptomatic and infected employees (reported cases);

·

Increased inventory for critical materials with short supply risk (80 key suppliers monitored on a weekly basis);

·

Internal and external communication campaign;

·

Monitored remote-work routine (mental health, adherence, productivity, engagement, leadership, etc); and

·

Health and Safety protocols with protective measures and contingency plans (actions for suspected/confirmed cases, use of masks, mandatory temperature measurement and other items included in workforce safety).

 

 

Financial strength:

 

·

Variable cost reductions (travel bans, hiring freezes and restrictions on discretionary spending);

·

Capital and operating expenditure reductions;

·

Administrative expense reductions;

·

Personnel cost reductions;

·

Corporate project reductions and postponements;

·

Dividend reduction;

·

Tax payment deferrals in line with government incentives;

·

Debt amortisation postponements;

·

Improved working capital terms;

·

New debt raised; and

·

Credit & commercial strategy workgroup to mitigate credit default risk.

 

Brexit

Shareholders will be aware that the United Kingdom "UK" left the European Union "EU" on 31 January 2020 and is currently in an eleven-month transition period. As matters currently stand there is no agreement governing the withdrawal or the future relationship between the UK and the EU. Such is the uncertainty still surrounding the outcome that the consequent risks and potential opportunities for the Company are extremely difficult to assess. Since your Company is domiciled in Bermuda and does not operate directly within the EU, while its subsidiary Ocean Wilsons (Investments) Limited invests substantially all of its assets into investment vehicles domiciled outside the EU, it may be that the impact of Brexit will be felt principally through the consequences for the London financial markets, in which some of these investments vehicles participate and where the Company's shares are traded on the London Stock Exchange.

Board changes

During the period we were pleased to announce the appointment of two new independent non-executive directors.

Fiona Beck joined the Board as a non-executive director, effective 13 April 2020. Ms Fiona Beck is resident in Bermuda, a Chartered Accountant and experienced company director on boards of both listed and unlisted companies, including Atlas Arteria International Ltd, for whom she sits on the audit and remuneration committees. Ms Beck has held a number of senior executive and governance positions in large infrastructure companies focused in the telecommunication and technology sectors. She was the President and CEO of Southern Cross Cable Network, a submarine fibreoptic cable company connecting New Zealand and Australia to the USA. Ms Beck also led the telecommunications and technology team for the 35th Americas Cup. Ms Beck is a member of the Company's audit committee.

Caroline Foulger joined the Board as a non-executive director, effective 1 June 2020. Ms Foulger is resident in Bermuda, a Chartered Accountant and experienced company director on boards of both listed and unlisted companies, including Hiscox Ltd for whom she chairs the Audit Committee and Oakley Capital Investments Limited where she holds the role of Non-Executive Chair. Ms Foulger spent the bulk of her executive career as a partner with PwC Bermuda where, until 2012, she led the insurance and government practice areas. She has been a non-executive director since retiring from PwC in 2012 and in addition to the above roles has chaired or been a member of each of governance, remuneration and risk committees.

Outlook

The strength of our business model during the COVID-19 pandemic has been clearly demonstrated by our performance in the first half of the year. Whilst trade flows in Brazil remain sound, we are seeing some fall in imports and industrial activity in response to the pandemic. Brazilian agricultural production remains robust helping to support volumes at our two container terminals which are predominantly export focused. The weaker BRL is also improving the competitiveness of Brazil and assisting in sustaining export volumes. The anticipated recovery in the Brazilian offshore oil and gas industry is expected to be further delayed by the recent softening in oil prices which is hampering demand for offshore oil and gas support services in Brazil. We remain confident in the long-term prospects for these businesses. Whilst there is limited visibility as to the full impact of the Covid-19 pandemic, the Board is confident the Group is well positioned to successfully negotiate these unusual times. Given the continued uncertainty caused by the Covid-19 pandemic, the Board has withdrawn its market guidance for 2020 until both the impacts and duration of the pandemic becomes clearer.