Ocean Wilsons Holdings Limited Annual Report 2016 Contents 1 Ocean Wilsons Holdings Limited 2 Chairman’s Statement 6 Financial Review 11 Wilson Son Limited 12 Investment Portfolio 13 Investment Manager’s Report 16 Directors and Advisers 17 Report of the Directors 25 Independent Auditors’ Report 28 Consolidated Statement of Comprehensive Income 29 Consolidated Balance Sheet 30 Consolidated Statement of Changes in Equity 31 Consolidated Cash Flow Statement 32 Notes to the Accounts 76 Statistical Statement 2012 – 2016 77 Notice of Annual General Meeting 79 Form of Proxy Ocean Wilsons Holdings Limited Ocean Wilsons Holdings Limited/Annual Report 2016 Highlights Wilson Sons Limited (“Wilson Sons”) is a Bermuda company listed on the São • • • • • • Profit for the year increased US$51.4 million to US$80.7 million Paulo Stock Exchange (BOVESPA) and Luxembourg Stock Exchange. Ocean (2015: US$29.3 million) benefiting from strong exchange gains. Wilsons holds a 58.25% interest in Wilson Sons which is fully consolidated in the Group accounts with a 41.75% non-controlling interest. Wilson Sons is one Operating margins* were a healthy 21.2%, in line with prior year of the largest providers of maritime services in Brazil. Wilson Sons’ activities (2015: 21.5%). include harbour and ocean towage, container terminal operation, offshore oil and gas support services, small vessel construction, logistics and ship agency. The Brazilian Real appreciated 17% in the period against the US Dollar at Wilson Sons has over four thousand employees. Ocean Wilsons (Investments) year end from R$3.90 at 1 January 2016 to R$3.26 at the year end. Limited is a wholly owned Bermuda investment company. The company holds a portfolio of international investments. Earnings per share for the year up by 191% to 127.4 cents (2015: 43.7 cents). Objective Dividend unchanged at 63 cents per share (2015: 63 cents per share). to both the investment portfolio and our investment in Wilson Sons. The long- Investment portfolio decreased US$5.5 million US$238.9 million businesses without pressure to produce short-term results at the expense of (2015: US$244.4 million). long-term value creation. The same long-term view allows our Investment term view taken by the Board enables Wilson Sons to grow and develop its Managers to make investment decisions that create long-term capital growth. Ocean Wilsons Holdings Limited is run with a long-term outlook. This applies About Ocean Wilsons Holdings Limited Ocean Wilsons Holdings Limited (“Ocean Wilsons” or the “Company”) is a Bermuda based investment holding company which, through its subsidiaries, operates a maritime services company in Brazil and holds a portfolio of international investments. The Company is listed on both the Bermuda Stock Exchange and the London Stock Exchange. It has two principal subsidiaries: Wilson Sons Limited and Ocean Wilsons (Investments) Limited (together with the Company and their subsidiaries, the “Group”). * Operating margins are defined as operating profit divided by revenue. 1 Ocean Wilsons Holdings Limited/Annual Report 2016 Chairman’s Statement Introduction As at 31 December 2016, the investment portfolio including cash under The Group produced another strong operating performance and solid financial management was valued at US$238.9 million, representing US$6.76 per share results despite the challenging economic environment in Brazil. The Brazilian (2015: US$244.4 million and US$6.91 per share). economy shrank 3.6% in 2016 as Brazil continues to suffer its worst recession on record. In the face of this difficult environment our Brazilian businesses continued Group Results to prove their resilience with solid performances in key operational indicators at Profit for the year increased US$51.4 million to US$80.7 million compared to our container terminal, towage and offshore businesses. The solid performance US$29.3 million in 2015, principally due to a US$12.8 million exchange gain underlined the fundamental strength of our core Brazilian businesses in this on foreign currency borrowings, an US$18.1 million movement in foreign testing economic environment. exchange gains on monetary items and a US$3.2 million increase in the share 2016 2015 % Change million decrease in operating profit and negative returns from the investment of results of joint ventures. These gains were partially offset by a US$12.7 Operating volumes Container Terminals (container movements in TEU ’000) 1,029.8 1,035.2 (0.5%) Towage portfolio of US$4.1 million. Operating profit for the period was lower than the comparative period in 2015 reflecting the fall in revenue as operating margins (number of harbour manoeuvres performed) 58,376 58,620 Offshore Vessels (operating days own vessels) 6,428 6,585 (0.4%) (2.4%) for the year were steady at 21.2% compared with 21.5% in 2015. Group revenue for the year was 10% lower at US$457.2 million (2015: US$509.3 million), principally due to lower shipyard activity and a higher average The combined movement at Tecon Rio Grande and Tecon Salvador was over USD/BRL exchange rate in the year which adversely impacts BRL one million “TEUs” (twenty-foot equivalent units) for the second consecutive denominated revenue when converted into our USD reporting currency. The year. Container volumes at Tecon Salvador grew 6% to 310,300 TEUs driven exchange gain on foreign currency borrowings and positive movement in principally by higher export and cabotage movements. Cabotage (the foreign exchange gains on monetary items were caused by the 17% transport of goods between two places in the same country) is a growing appreciation of the BRL against the USD from R$3.90 at 1 January 2016 to option for domestic cargo transportation in Brazil and in 2016 accounted for R$3.26 at the year end. These exchange rate driven items boosted earnings 10% of all containers moved at our two terminals. In November 2016, we per share for the year to 127.4 cents per share compared with 43.7 cents in were pleased to announce that the Group signed an amendment with the 2015. Brazilian Ministry of Transport, Ports and Civil Aviation to the Tecon Salvador concession agreement extending the term of the concession until 13 March Investment portfolio performance 2050. Under the terms of the extension the Group is required to complete The investment portfolio fell US$5.5 million to US$238.9 million at year end minimum expansion and maintenance capital expenditure. The extension of (2015: US$244.4 million) after paying dividends of US$4.25 million to Ocean the concession period and expansion of the terminal is an important element Wilsons Holdings Limited and deducting management and other fees of in the Wilson Sons strategy to further develop and improve this asset. US$2.6 million. The portfolio returned a muted 0.3% in the year despite global equity markets rising 7.9% and emerging markets (to which the Our core towage business continued to perform well with firm demand for portfolio has an over-weight bias) rising 11.2% in the year. Portfolio harbour towage services throughout the year. Following a strong performance in performance was impacted as some of the portfolio’s largest long/short equity 2015, special towage operations revenue weakened, impacted by the downturn holdings produced negative returns in the year as their investment strategies in the Brazilian offshore oil and gas industry and an absence of firefighting were punished by the markets. Despite the recent performance of these equity support revenue. The Group remains the leading towage operator in Brazil holdings the long-term track record of these funds continues to be excellent consistently performing nearly 50% of all harbour manoeuvres with a fleet of and all were significant contributors to portfolio performance in the past. seventy-five tugboats operating in over 25 ports throughout the country. During Returns from private equity in the year were muted. the year, our fleet was further enhanced by receiving five tugboats built at the Wilson Sons shipyards in Guarujá, São Paulo state. In addition to the tugboats Global equities remain the largest weighting in the investment portfolio, delivered to Wilson Sons, our shipyards successfully delivered to third parties an accounting for 55% of the portfolio valuation (US$131.2 million), and private Oil Spill Recovery Vessel (OSRV) and two new platform supply vessels (PSVs) to assets accounting for 35% (US$84.2 million), 3% higher than 2015. Private our offshore joint venture, Wilson Sons Ultratug Offshore. The two new PSVs assets grew US$6.1 million to US$84.2 million at year end (2015: US$78.1 (Pinguim and Larus) received from our shipyard during the year are both million) because of new capital drawdowns of US$10.7 million, less distributions operating under long-term contracts to Petrobras (six-year contracts). The Wilson received of US$6.9 million and an increase in net value of US$2.3 million. The Sons Ultratug Offshore strategy of operating many of our vessels under long- balance of the portfolio is invested in market neutral funds, cash and bonds. term contract has proven successful in protecting the joint venture from the worst effects of a depressed market and contributed to a positive result in the The investment portfolio retains an overweight position in emerging markets current year. At the year end the joint venture operated a fleet of twenty-three with much of the overweight sitting within the private equity element. PSVs of which nineteen were under long-term contract to Petrobras with the Emerging markets account for 34% of the overall portfolio net asset value at remainder available in the Brazilian spot market or laid up until market year end but 62% of the private equity value and only 19% of the portfolio’s conditions improve. Vessel operating days in 2016 were lower than prior year as public funds. At 31 December 2016, the top ten investments accounted for some PSV charters were concluded in the year and not renewed. 41% of the investment portfolio valuation (US$98.9 million). 2 Ocean Wilsons Holdings Limited/Annual Report 2016 Investment Manager Dividends are set in US Dollars and paid annually. The Ocean Wilsons Ocean Wilson (Investments) Limited (“OWIL”), a wholly owned subsidiary Holdings Limited dividend policy is to pay a percentage of the average capital registered in Bermuda, holds the Group’s investment portfolio. OWIL has employed in the investment portfolio determined annually by the Board and appointed Hanseatic Asset Management LBG, a Guernsey registered and the Company’s full dividend received from Wilson Sons in the period after regulated investment group, as its Investment Manager. deducting funding for the parent company costs. Investment management fee The Board of Directors may review and amend the dividend policy from time The Investment Manager receives an investment management fee based on to time in light of our future plans and other factors. the valuation of the funds under management and an annual performance fee of 10% of the annual performance which exceeds the benchmark, provided Tecon Salvador concession that the high-water mark has been exceeded. The portfolio performance is On 16 November 2016, Tecon Salvador signed the second amendment to the measured against a benchmark calculated by reference to US CPI plus 3% per Tecon Salvador concession agreement, with the Brazilian Ministry of Transport, annum over rolling three-year periods. The Investment Manager receives an Ports and Civil Aviation as approved by the National Agency for Waterway annual performance fee of 10% of the net investment return that exceeds the Transportation (ANTAQ) and the State of Bahia Dock Company (Companhia benchmark. Payment of performance fees are subject to a high-water mark Docas do Estado de Bahia - CODEBA). Among other provisions, the second and are capped at a maximum of 2% of portfolio NAV. The Board considers a amendment extends the term of the concession until 13 March 2050 and the three-year measurement period appropriate due to the investment mandate’s Company is required to complete minimum expansion and maintenance long-term horizon and an absolute return inflation-linked benchmark capital expenditure through to the end of the concession. The required appropriately reflects the company’s investment objectives while having a minimum expansion investments are budgeted at approximately R$398.0 linkage to economic factors. million using December 2013 base values (equivalent to approximately US$122.0 million at year end exchange rates). These investments will be The investment management fee is at an annual rate of 1% of the valuation completed in phases during the term of the concession to ensure the terminal of funds under management. In 2016 the investment management fee was reaches a capacity of 925,000 TEUs per year and allow the terminal to US$2.4 million and no performance fee was payable to the Investment support the market trend towards larger vessels being deployed by Manager. Net asset value international shipping lines. Civil works for the expansion of the terminal are expected to start by the end of 2017. At the close of business on 31 December 2016, the Wilson Sons’ share price Tecon Salvador non-controlling interest was R$33.50, resulting in a market value for the Ocean Wilsons holding of On 2 February 2016, Wilson Sons, through its subsidiaries, completed the 41,444,000 shares (58.25% of Wilson Sons) totalling approximately acquisition of the 7.5% non-controlling interest in Tecon Salvador S.A for US$425.9 million which is the equivalent of US$12.04 (£9.85) per Ocean consideration of US$4.7 million from Intermaritima Terminais Ltda. The Wilsons Holdings Limited share. consideration included US$1.9 million in cash and the settlement of US$2.8 million in debt. The transaction also includes an additional US$0.8 million Adding the market value per share of Wilsons Sons of US$12.04 and the payment that is conditional upon future contractual events which were investment portfolio at 31 December 2016 per share of US$6.76 results in a subsequently fulfilled. Following completion of the transaction the Wilson net asset value per Ocean Wilsons Holdings Limited share of US$18.80 Sons group holds 100% of the shares of Tecon Salvador S.A. and Ocean (£15.37) per share. The Ocean Wilsons Holdings Limited share price of £10.23 Wilsons has a 58.25% effective interest. at 31 December 2016 represented an implied discount of 33% which is in line with the prior year end but higher than the historic long-term discount. Charitable donations We believe that the discount at year end reflects the continued political and Our subsidiary Wilson Sons continues to support several local charities and economic uncertainty surrounding Brazil at the moment. causes in Brazil. Group donations for charitable purposes in the year amounted to US$136,000 (2015: US$134,000). Dividend The Board is recommending an unchanged dividend of 63 cents per share to Health, safety and education be paid on 9 June 2017, to shareholders of the Company as of the close of The Group continues to invest in the training, development and safety of our business on 12 May 2017. At the current exchange rate this represents staff. We implemented the WS+ safety programme in conjunction with DuPont approximately a 15% increase in Sterling terms over the 2015 dividend. to promote improved safety throughout the Wilson Sons Group. Over the last Shareholders will receive dividends in Sterling by reference to the exchange five years the Wilson Sons Group has reduced the lost time injury frequency rate applicable to the USD on the dividend record date (12 May 2017) except rate by 90%. In April 2016 Brasco achieved the mark of 2 million man-hours for those shareholders who elect to receive dividends in USD. Based on the worked without an accident requiring a medical leave of absence (equivalent current share price and exchange rates a dividend of 63 cents per share to four years without significant accidents). Brasco is the first operation in the signifies an attractive dividend yield of approximately 5%. Group to achieve this mark. 3 Ocean Wilsons Holdings Limited/Annual Report 2016 Chairman’s Statement Corporate governance Whilst the current stock market cycle is looking rather extended and global The Board has put in place corporate governance arrangements which it risks have undoubtedly risen, our view remains one of positive returns from believes are appropriate for the operation of your Company. The Board has equities. Improving growth and the anticipation of a Trump induced fiscal considered the principles and recommendations of the 2014 UK Corporate expansion in the United States are fueling upgrades in the global growth Governance Code (“the Code”) issued by the Financial Reporting Council and outlook. There is a corresponding increase in inflation expectations with decided to apply those aspects which are appropriate to the business. This interest rates set to rise in the US although not to the levels experienced in reflects the fact that Ocean Wilsons Holdings Limited is an investment holding past cycles. The prospects for emerging equity markets also looks positive as company incorporated by an act of parliament in Bermuda with significant we expect growth in 2017 to be above the rate in developed markets as the operations in Brazil. The Company complies with the Code where it is economic environment in some emerging markets improves. Valuations also beneficial for both its shareholders and its business to do so. It has done so compare favourably to that of developed markets with the latter well ahead of throughout the year and up to the date of this report but it does not fully historic averages. Any rise in more protectionist policies would though be a comply with the Code. The areas where the Company does not comply with negative for the region and we will monitor any changes here carefully. We the Code, and an explanation of why we do not comply, are contained in the remain positive on the long-term prospects for emerging markets and our section on corporate governance in the Annual Report. The position is portfolio. regularly reviewed and monitored by the Board. Management and staff Outlook On behalf of the Board and shareholders, I would like to thank our Brazil is currently enduring its worse economic recession on record. Although management and staff for their efforts and hard work during the year. The there are signs that things may start to bottom out, the outlook for 2017 performance delivered during the current downturn is a testament to their remains subdued. Our container terminals business continues to perform well hard work and dedication. and the extension of the Tecon Salvador concession period and associated terminal expansion is an important element in our strategy to further develop J F Gouvêa Vieira and improve this business. We do not expect significant capital expenditure Chairman on this project before 2018. Demand for towage services remains firm 24 March 2017 although we are facing a more competitive environment than in previous years. The prospects for an improvement in the important Brazilian offshore oil and gas market remain poor with little likelihood of any significant improvement before the end of 2018. Brasco, our oil and gas support base provider continues to suffer from the malaise facing the industry however we remain optimistic regarding the long-term prospects for this business. Our offshore vessels joint venture, Wilson Sons Ultratug Offshore currently operates twenty-three PSVs of which nineteen are under long-term contract with no further contracts due to expire during 2017. Market over-capacity continues to dampen demand for both vessel hire and new buildings. The shipyard new buildings order book currently consists of two tugboats for third parties and two tugboats for our own fleet. Following on the cost cutting actions undertaken in 2016 management continues to focus on reviewing costs across the Group to improve efficiency and streamline our operations. The performance of our Brazilian businesses during the current recession demonstrates their fundamental strength and quality of the assets. We are confident of the resilience of our business and are well placed to benefit from growth in trade flows, demand for maritime oil and gas support services and any turnaround in economic growth. 4 Ocean Wilsons Holdings Limited/Annual Report 2016 The tugboat Procyon built at our shipyard in Guaruja. 5 Ocean Wilsons Holdings Limited/Annual Report 2016 Financial Review Operating profit 3% lower at US$148.3 million (2015: US$152.5 million) principally due to the Group operating margins for the year at 21.2% were in line with prior year weaker average USD/BRL exchange rate. Brasco continued to suffer from (21.5%). Operating profit for the period was US$12.7 million lower than the weak demand from the Brazilian offshore oil and gas industry with revenue comparative period in 2015 at US$96.8 million (2015: US$109.5 million) falling 17% to US$19.4 million (2015: US$23.5 million) as the terminals reflecting the decrease in revenue. performed fewer spot and long-term vessel turnarounds in 2016. Logistics revenue declined 13% to US$43.3 million (2015: US$49.9 million) as bonded Raw materials and consumables used in the year were US$18.0 million lower warehouse revenue was adversely impacted by continuing weakness in the at US$37.7 million (2015: US$55.8 million) principally due to lower third party Brazilian economy creating a difficult import environment and the higher shipyard activity. Depreciation and amortisation for the year at US$52.6 average USD/BRL exchange rate. million was in line with prior year (2015: US$53.2 million). Higher depreciation at our towage business resulting from the increase in our towage All Group revenue is derived from Wilson Sons’ operations in Brazil. fleet was offset by lower corporate and logistics business depreciation. Reclassification Employee expenses were 2% lower at US$144.3 million (2015: US$147.3 Provisions relating to legal claims were previously reported in other operating million) and other operating expenses 11% lower at US$126.5 million (2015: expenses. In 2016, to improve the transparency of the financial statements, US$142.2 million). Other operating expenses decreased mainly due to the Group decided to reclassify provisions to revenue, employee benefits reduced tug rental costs following the acquisition of six tugboats previously expense and income tax expense according to the underlying nature of the leased and reductions in costs associated with discontinued logistics legal claims. The impact of this reclassification on net profit is zero. Details are operations. Employee expenses benefited from a reduction in headcount, provided in note 2 to the accounts. mainly at our shipyard, logistics, Brasco and ship agency businesses. Share of results of joint ventures Revenue from Maritime Services The share of results of joint ventures is Wilson Sons’ 50% share of net profit Group revenue for the year was 10% lower at US$457.2 million (2015: for the period mainly from our offshore joint venture. The Group’s share of US$509.3 million), principally due to lower shipyard activity and an average results of joint ventures grew US$3.3 million from US$4.8 million in 2015 to USD/BRL exchange rate in the year which was 4% higher than the US$8.1 million in the current year, largely due to exchange gains on monetary comparative period in 2015 (3.48 v 3.34). items in the period. Operating profit for a 50% share in the joint venture in the year was US$3.4 million lower at US$19.3 million, principally due to fewer Third-party shipyard revenue for the year was US$27.5 million lower at operating days and higher operating costs as a result of our expanded fleet. US$26.4 million, (2015: US$53.9 million) due to continued weak demand for At year end our joint venture has twenty-three PSVs compared with nineteen vessel construction from the Brazilian offshore oil and gas industry. The PSVs in 2015. Total operating days for the year were 2% lower at 6,428 days shipyard continued to provide important services for the Group invoicing against 6,585 days in 2015 as some PSVs were off-hire during the year. US$50.5 million of intercompany sales in the year relating to vessel construction and maintenance that are not recognised in the income Investment revenue statement (2015: US$49.1 million). Investment revenue for the year at US$15.1 million was US$1.8 million lower than prior year (2015: US$16.9 million) principally due to lower interest on Towage and ship agency revenue for the year fell 4% to US$219.7 million bank deposits of US$7.9 million (2015: US$10.7 million). Income from equity (2015: US$229.2 million) mainly due to fewer towage special operations in investments of US$4.8 million was US$0.6 million higher than 2015 (2015: the year and the weak ship agency market. Towage special operations US$4.2 million). revenue was US$9.2 million lower in 2016 at US$25.1 million (2015: US$34.3 million) as the prior year was boosted by revenue from firefighting support in Investment gains and losses the port of Santos and special operations for shipyards. Higher margin special Other losses of US$4.1 million arise from the Group’s portfolio of trading operations accounted for 12% of our towage revenue in the year compared investments (2015: US$1.4 million) and consist of profits on the disposal of with 16% in 2015. Towage harbour revenue at US$180.8 million was in line trading investments of US$1.9 million (2015: US$3.0 million) and unrealised with prior year (2015: US$179.7 million) while ship agency revenue declined losses on trading investments of US$6.0 million (2015: US$4.4 million gain). 10% to US$13.9 million (2015: US$15.4 million). Finance costs Revenue at our port terminal and logistics business declined 6% to US$211.1 Finance costs for the year were $0.6 million compared with US$45.4 million for million (2015: US$225.9 million) principally due to reduced logistics 2015, mainly as a result of exchange gains on foreign currency borrowings of operations, a fall in revenue at our offshore oil and gas support base Brasco US$12.8 million (2015: US$32.6 million loss) resulting from the appreciation of and a higher average USD/BRL exchange rate used to convert revenue into the BRL against the USD at year end. The cash flow effect of these exchange our reporting currency. Container volumes handled at our container terminals movements on foreign currency borrowings will only be realised over the life of were in line with prior year 1,029,800 TEUs (2015: 1,035,200 TEUs), with the loans when capital repayments are made. Interest on loans of US$12.3 higher export and cabotage volumes offsetting lower import, transshipment million was US$0.5 million higher than prior year (2015: US$11.8 million). and empty container movements. Container terminal revenue in 2016 was Other interest mainly relates to interest on outstanding tax balances. 6 Ocean Wilsons Holdings Limited/Annual Report 2016 Rubber-tyred gantry (“RTG”) cranes at TECON Rio Grande. 7 Ocean Wilsons Holdings Limited/Annual Report 2016 Financial Review Exchange rates Profit before tax The Group reports in USD and has revenue, costs, assets and liabilities in both Profit before tax for the year increased US$48.8 million to US$117.5 million BRL and USD. Therefore, movements in the USD/BRL exchange rate can compared to US$68.7 million in 2015. The improvement is principally due to influence the Group’s results both positively and negatively from year to year. the US$12.8 million exchange gain on foreign currency borrowings (2015: During 2016 the BRL appreciated 17% against the USD from R$3.90 at US$32.6 million loss), the US$18.1 million movement in foreign exchange 1 January 2016 to R$3.26 at the year end. In contrast, in 2015 the BRL gains on monetary items and a US$3.2 million increase in the share of results depreciated 47% against the USD from R$2.66 at 1 January 2015 to R$3.90 of joint ventures. These gains were partially offset by a US$12.7 million at the year end. The principal effects from the movement of the BRL against decrease in operating profit and negative returns from the investment portfolio the USD on the income statement are set out in the table below: of US$4.1 million (2015: US$1.4 million). 2016 2015 Taxation US$ million US$ million Income tax expense for the year at US$36.8 million was US$2.7 million Exchange gains/(losses) on monetary items (i) 2.3 (15.8) Exchange gains/(losses) on foreign currency borrowings Deferred tax on retranslation of fixed assets (ii) Deferred tax on exchange variance on loans (iii) Total 12.8 22.4 (14.3) 23.2 (32.6) (27.0) 25.0 (50.4) higher than last year (2015: US$39.5 million). This represents an effective tax rate for the period of 31.3% (2015: 57.4%) compared with the corporate tax rate prevailing in Brazil of 34.0%. The difference in the effective tax rate is principally due to deferred tax items and expenses that are not included in determining taxable profit in Brazil and expenses or income at our Bermudian companies that are not subject to income tax. The principal impacts from these items on the tax charge in the income statement are set out in the table (i) This arises from the translation of BRL denominated monetary items in below: 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 is reduced in US Dollar terms. (iii) Deferred tax credit arising from the exchange losses on USD denominated borrowings in Brazil. The appreciation of the BRL against the USD in 2016 resulted in a positive impact of US$23.2 million on the income statement in the year compared with a US$50.4 million negative impact in 2015 caused by the devaluation of the BRL against the USD. US$ 2016 % of US$ 2015 % of million taxable profit million taxable profit Deferred tax items not included in determining taxable profit (i) (2.9) (2.5%) 5.3 7.7% Income/expenses not included in determining taxable profit (ii) (3.0) (2.6%) 11.0 16.0% Net (income)/expenses incurred outside Brazil 2.8 2.4% 1.1 1.6% Items deductible for Brazilian income tax not included in the income statement – – (1.3) (1.9%) Total (3.1) (2.7%) 16.1 23.4% A currency translation adjustment gain of US$32.7 million (2015: US$81.9 Charge/(credit) to the current period tax charge (i) The principal deferred tax items not included in determining taxable profit are a deferred tax million loss) on the translation of operations with a functional currency other credit arising on the retranslation of BRL denominated fixed assets in Brazil, the deferred tax than USD is included in other comprehensive income and recognised directly charge on the exchange losses on USD denominated borrowings and tax losses at our in equity. The positive currency translation adjustment in 2016 is due to the Brazilian subsidiaries not recognised in deferred tax. appreciation of the BRL against the USD in the current year. (ii) The main items not included in determining taxable profit are the tax effect of foreign exchange gain/(loss) on monetary items and the tax effect of the share of results of joint ventures. The average USD/BRL exchange rate during 2016 was 4% higher at 3.48 than prior year (2015: 3.34). A higher average exchange rate adversely affects A more detailed breakdown is provided in note 10. BRL denominated revenues and benefits BRL denominated costs when converted into our USD reporting currency. Foreign exchange gains/(losses) on monetary items Foreign exchange gains on monetary items of US$2.3 million (2015: US$15.8 million loss) arise from the Group’s foreign currency monetary items and principally reflect the movement of the BRL against the USD during the period. In 2015 the Brazilian Real depreciated against the US Dollar generating an overall exchange loss on monetary items. The current year effective tax rate of 31.3% is lower than prior year (57.4%), principally because of the 17% appreciation of the BRL against the USD in the year compared with a 47% depreciation in 2015 as a number of the items not included in determining taxable profit are driven by movements in the BRL/USD exchange rate. Profit for the year After deducting profit attributable to non-controlling interests of US$35.6 million (2015: US$13.8 million), profit attributable to equity holders of the parent was US$45.1 million (2015: US$15.5 million), an increase of US$29.6 million. Non-controlling interests at 44% are a lower percentage of the Group 8 Ocean Wilsons Holdings Limited/Annual Report 2016 The PSV Larus built at our shipyard in Guaruja in 2016 and operating under long-term contract to Petrobras. 9 Ocean Wilsons Holdings Limited/Annual Report 2016 Financial Review profit for the year (2015: 47%) principally due to the purchase of the Tecon Net debt and financing Salvador non-controlling interest during 2016. All debt at the year end was held in the Wilson Sons Limited Group and has Earnings per share Earnings per share for the year were 127.4 cents compared with 43.7 cents in 2015. Cash flow Net cash inflow from operating activities for the year was US$51.7 million no recourse to the parent company, Ocean Wilsons Holdings Limited, or the investment portfolio held by Ocean Wilsons Investments Limited. The Group’s borrowings are used principally to finance vessel construction and the development of our terminal business. The Group’s main sources of financing are the Fundo da Marinha Mercante “FMM”, a Brazilian Government fund dedicated to funding vessel construction in Brazil and the International lower at US$93.8 million, compared with US$145.5 million in 2015 reflecting Finance Corporation. The FMM is funded by a levy on inbound freight to Brazil lower operating profit, negative working capital movements in the period and and the BNDES and Banco do Brasil act as lending agents for the FMM. higher income tax paid. Prior year operating cash flow benefitted from a significant positive movement in working capital of US$16.7 million compared Borrowings are long-term with defined repayment schedules repayable over with a US$17.6 million adverse movement in 2016. Income taxes paid in the different periods up to 18 years of which 69% is fixed rate debt and 31% year increased to US$34.4 million (2015: US$22.7 million) mainly because variable rate debt. The weighted average interest rate of our debt at year end less recoverable taxes were used to compensate tax liabilities due in the year. was 3.12%. The Group’s borrowings are principally USD related with 92% of Capital expenditure in the year of US$96.2 million was US$30.4 million borrowings USD denominated or linked to the USD. As a significant portion of the Group’s pricing is denominated in USD this acts as a natural hedge to our higher than 2015 (US$65.8 million) principally due to the one-off acquisition long-term exchange rate exposure. At 31 December 2016 the Group had net of six tugboats that were previously bareboat chartered to the Group and part debt of US$260.8 million (2015: US$226.4 million): payment for the acquisition of three ship-to-shore and nine rubber-tyre gantry cranes to be delivered in 2017. The Group continued to invest significant capital expenditure in towage vessel construction. New loans to finance capital expenditure of US$46.6 million (2015: US$31.9 million) were raised during the year while capital repayments of US$41.0 million (2015: US$49.9 million) were made on existing loans. Debt Short-term Long-term Total debt Dividends of US$22.3 million were paid to shareholders in the period (2015: US$22.3 million) with a further US$14.9 million paid to non-controlling interests in our subsidiaries (2015: US$13.3 million). The appreciation of the Cash and cash equivalents* Net debt 2016 2015 US$ million US$ million 49.8 325.8 375.5 (114.7) 260.8 41.5 322.3 363.8 (137.6) 226.2 BRL during the year was reflected in the foreign exchange rate changes in the * Included in cash and cash equivalents are short-term investments in Wilson Sons Limited which cash flow, generating a gain of US$11.3 million (2015: US$26.9 million loss). are intended to fund Wilson Sons Limited operations in Brazil At 31 December 2016, the Group had US$77.3 million in cash and cash The Group’s reported borrowings do not include US$266.9 million of debt equivalents (2015: US$97.6 million) of which US$52.7 million was from the Company’s 50% share of borrowings in our Offshore Vessel joint denominated in BRL (2015: US$83.3 million). Trading investments includes venture. US$37.4 million (2015: US$40.0 million) in USD denominated fixed rate certificates held by Wilson Sons Limited which are not part of the Group’s investment portfolio managed by Hanseatic Asset Management LBG and are Keith Middleton Finance Director intended to fund Wilson Sons Limited operations in Brazil. Balance sheet Equity attributable to shareholders of the parent company increased US$40.3 million to US$535.3 million at year end (2015: US$495.0 million). The growth in equity is principally due to profits for the year of US$45.1 million, plus a positive currency translation adjustment of US$19.0 million less dividends paid of US$22.3 million. The currency translation adjustment arises from exchange differences on the translation of operations with a functional currency other than USD. On a per share basis equity attributable to shareholders is the equivalent of US$15.14 per share (31 December 2015: US$14.00 per share). 10 Wilson Sons Limited Ocean Wilsons Holdings Limited/Annual Report 2016 The Wilson Sons 2016 Earnings Report released on 24 March 2017 is Maximising capacity utilization of our Upstream Oil and Gas Support available on the Wilson Sons Limited website: www.wilsonsons.com.br Terminals (Brasco). Additional to our operations at Brasco Niteroi, we also In it Cezãr Baião, CEO of Operations in Brazil, said: offshore support vessels with excellent access to the Campos and Santos oil have a continuous 500 metres of berth at our Brasco Caju base to attend producing basins. This expanded capacity positions Brasco as one of the “Wilson Sons 2016 net profit of US$85.1 million benefited from efforts to improve largest offshore support base operators for the Brazilian Oil and Gas industry. efficiency and productivity, our diversified portfolio and strong exchange gains We are continuously monitoring offshore operations along the Brazilian coast on balance sheet items. A solid result despite a continuing weak Brazilian to meet the demand for such services. macroeconomic scenario and stress throughout the oil and gas services market. In the current competitive environment, fleet increases and efficiency gains led to the Brazilian market. We intend to continue to modernise and expand our a 9.4% increase in the Towage EBITDA. The highlight in container terminals is fleet of tugboats in order to provide consistently high-quality service to our the 6% growth in Tecon Salvador operating volumes and the early renewal of customers and consolidate our leading position in the Brazilian towage the concession at that terminal for 25 years through to 2050. The offshore market. We regularly review our fleet deployment to optimise efficiency and support vessel business was boosted by the commencement of operations of two to seek out new niches in the market where we may be able to provide long term contracts for the largest vessels in the fleet, although it will be difficult additional services or increase our geographical footprint of towage services Strengthening our position as the leading provider of towage services in to find employment for the four vessels that are currently offhire until market to new ports in Brazil. conditions improve. With a continued challenging trading environment we have implemented and third-party vessel construction, repair, maintenance and dry docking adjustments across a number of businesses and are seeking further structural services to meet the demand of national and international vessel owners in Maximising potential of our shipyard facilities through a mix of in-house improvements to our cost base and efficiency. In this challenging environment Brazil. we continue our focus on improving cash flow, operational efficiencies and maximizing the use of our installed capacity across all businesses. Solidifying our Offshore Support Vessel services to oil and natural gas platforms. Using our knowledge and experience, we intend to continue to I would like to thank all our stakeholders but in particular, the dedication of all consolidate our activities through the delivery of contracted vessels and our employees who have helped achieve the results and the significant 55% maintain our position amongst the leading suppliers of services to the reduction in lost time accidents during the year. The importance of safe, offshore oil and gas industry in Brazil. sustainable operations to our strength as a company should never be underestimated”. The Wilson Sons Strategy is: Exploring new opportunities and strategies to provide the best and most complete set of services to our customers. We are always looking to provide new and innovative services to our customers, and to anticipate their needs. We intend to continue our strategy with shipping companies in order To grow our existing assets while strengthening the businesses and looking to provide a complete set of local and international trade-related services for new opportunities, focusing on Brazil and Latin America. Continue to across a nationwide network. We also seek to make these services more consolidate our position in all the segments in which we operate, maximising efficient and cost-effective, in order to maintain our strong customer base and economies efficiency, quality and the range of our services we provide to strengthen our relationships with those customers. customers. Increasing economies of scale and productivity, realisation of potential Fulfilling capacity in our expanded port terminals. In order to meet synergies and cost savings across our business segments. We continuously demand from domestic and international trade, we have expanded our two seek to optimise our operations and productivity and reduce our costs through container terminals since the inception of the concessions. By maximising synergies and the exchange of know-how among our businesses and utilisation of this installed capacity, we are best able to continue increases in administrative areas. We are and will continue to be focused on integrating productivity and service to our clients with economies of scale. We will similar activities in order to realise savings in administrative and back-office diligently pursue this objective. The renewal of our Salvador Terminal through areas, especially in our branch offices. We seek to achieve economies of scale to 2050 includes investments in additional berth space and equipment to be and reduce costs wherever possible. We demand that the managers of our installed in the coming years further enhancing the productivity of the different divisions continually develop new strategies to improve our terminal. We will evaluate new concessions and the development of new operations and explore new businesses. terminals in other Brazilian ports and analyse these potential investments in light of our existing operations, and their ability to provide a strong return on Health, Safety and the Environment are a priority for the execution of our shareholders’ equity. overall strategy of sustainable ethical business. We continue programmes to promote best practice safety throughout the Group through the training of our personnel and the promotion of a safety oriented environment and culture. 11 Ocean Wilsons Holdings Limited/Annual Report 2016 Investment Portfolio Investment Objective When the Investment Manager believes there is a potential fit, thorough due The Investment Manager will seek to achieve the investment objective through diligence is performed to verify the manager’s background and identify the investments in publicly quoted and private (unquoted) assets across three principal risks. The due diligence process would typically include visiting the ‘silos’: (i) Core regional funds which form the core of our holdings, enabling us manager in their office (in whichever country it may be located), onsite visits to capture the natural beta within markets, (ii) Sector specific silo, represented to prospective portfolio companies, taking multiple references and seeking a by those sectors with long-term growth attributes, such as technology and legal opinion on all relevant documentation. biotechnology, and (iii) Diversifying silo, which are those asset classes and sectors which will add portfolio protection as the business cycle matures. All investments are reviewed on a regular basis to monitor the ongoing Investment Policy compatibility with the portfolio, together with any ‘red flags’ such as signs of ‘style drift’, personnel changes or lack of focus. Whilst the Investment The Investment Manager will seek to achieve the Investment Objective Manager is looking to cultivate long-term partnerships, every potential repeat through investments in publicly quoted and private (unquoted) assets across investment with an existing manager is assessed as if it were a new the three silos. Cash levels will be managed to meet future commitments (e.g. relationship. to private assets) whilst maintaining an appropriate balance for opportunistic investments. Portfolio Characteristics The portfolio has several similarities to the ‘endowment model’. These Commensurate with the long-term horizon, it is expected that the majority of similarities include an emphasis on generating real returns, a perpetual time investments will be concentrated in equity, across both ‘public’ and ‘private’ horizon and broad diversification, whilst avoiding asset classes with low markets. In most cases, investments will be made either through collective expected returns (such as government bonds in the current environment). This funds or limited partnership vehicles, working alongside expert managers in diversification is designed to make the portfolio less vulnerable to permanent specialised sectors or markets to access the best opportunities. loss of capital through inflation, adverse interest rate fluctuations and currency devaluation and to take advantage of market and business cycles. The The Investment Manager maintains a global network to find the best Investment Manager believes that outsized returns can be generated from opportunities across the three silos worldwide. The portfolio contains a high investments in illiquid asset classes (such as private equity). In comparison to level of investments which would not normally be readily accessible to public markets, the pricing of assets in private markets is less efficient and the investors without similar resources. Furthermore, a large number of holdings outperformance of superior managers is more pronounced. are closed to new investors. There is currently no gearing although the Board would, under the appropriate circumstances, be open-minded to modest levels of gearing. Likewise, the Board may, from time to time, permit the Investment Manager opportunistically to use derivative instruments (such as index hedges using call and put options) to actively protect the portfolio. Investment Process Manager selection is central to the successful management of the investment portfolio. Potential individual investments are considered based on their risk- adjusted expected returns in the context of the portfolio as a whole. Initial meetings are usually a result of: (i) a ‘top-down’ led search for exposure to a certain geography or sector, (ii) referrals from the Investment Manager’s global network or (iii) relationships from sell-side institutions and other introducers. The Investment Manager reviews numerous investment opportunities each year, favouring active specialist managers who can demonstrate an ability to add value over the longer-term, often combining a conviction-based approach, an unconstrained mandate and the willingness to take unconventional decisions (e.g. investing according to conviction and not fear of short-term underperformance versus an index). Excessive size is often an impediment to continued outperformance and the bias is therefore towards managers who are prepared to restrict their assets under management to a level deemed appropriate for the underlying opportunity set. Track records are important but transparency is an equally important consideration. Alignment of interest is essential and the Investment Manager will always seek to invest on the best possible terms. Subjective factors are also important in the decision making process – these qualitative considerations would include an assessment of the integrity, skill and motivation of a fund manager. 12 Investment Manager’s Report Ocean Wilsons Holdings Limited/Annual Report 2016 Market Commentary driven by the political elite favouring the owners of assets, corporates and the 2016 proved to be full of surprises with the winds of change blowing through emerging nations. This section of the population took their opportunities during stock markets. The year started ominously, with world equities falling 11% by 2016 to vote for change. mid-February, as investors worried about the prospect of global economies slipping into recession on the back of a normalisation in the US interest rate Initially this populist uprising saw the UK vote to leave the European Union. cycle. Quite quickly, however, the status quo reasserted itself with the US Despite economists’ warnings, and the desire by the major political parties to Federal Reserve repealing its previous commitment to four rate rises in the year stay within the union, UK voters chose to pursue a path of independence and returning to its policy of shoring up markets through low rates. During the regardless of the potential risks of such an action. Then, further damaging the year there were a number of important trends and many missteps made by reputation of pollsters, Donald Trump won the US presidential election on a market commentators. mandate of increased spending, tax cuts, protectionism and deregulation. Despite predictions ahead of both these events that markets would collapse, Heading the list was the rise in political risk. In recent years politics has been stock markets proceeded to rally sharply as investors took a more sanguine something of a non-event from a market perspective, with little to differentiate view of their impact. the major political parties both within the key developed markets and indeed from one country to another. Policies were centred on the belief in free markets, Pulling all of this together, 2016 was a year of decent stock market globalisation and balanced budgets, creating an environment of stability and performance, albeit one in which there were multiple twists and turns providing predictability. 2016 turned this on its head with the rise of the populist vote. plenty of opportunity for active managers to be whip-sawed! It is interesting to Many voters felt that they had been left behind in recent years by policies note that some of the most dramatic moves came in the foreign exchange Chart 1: Market performance 2016 (USD) 69% 52% 45% 8% 8% 11% 12% 15% 14% 10% 10% 10% 12% 9% 16% 19% 3% 2% 6% 3% 1% 4% 2% 0% 0% -1% n r u t e r % 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 3% 2% -3% -18% G old W TI C ushin g C o p per U S D /E U R U S D /G B P U S D /JP Y U S D /B RL U S D /C H F Bars represent 2016 YTD returns -30% D evelo ped M arkets E m ergin g M arkets N orth A m erica Fro ntier M arkets Glo bal M arkets (D E M /E M /F M) U K Japa n Euro pe G er m a ny Fra nce Brazil R ussia In dia Africa C hin a Glo bal Treasury Glo bal Hig h Yield Glo bal A ggregate C orp orate B o n d m o dity In dex E M Glo bal Diversified C E M BI Diversified E M BI Glo bal Blo o m berg C o m markets, with the US dollar rising by 19% versus sterling, but falling 18% equities should receive a helpful boost in the year ahead. Combined with better against the Brazilian real. Outlook prospects in a number of the emerging markets, with countries such as Brazil exiting deep recessions, and China benefiting from government stimulus packages, global growth should pick-up in 2017. In contrast, bond valuations, It would be comforting if 2017 represented a period of stability and transparency despite the recent rise in yields, remain extremely unattractive in a historical in stock markets. Unfortunately, this seems unlikely to be the case with the context unless we experience a prolonged period of economic malaise, and if range of outcomes unusually wide and often binary in nature. they continue to rise then bond investors will suffer further. The devil will be in the detail, but our central view remains largely unchanged Hence we retain our bias towards equities and, despite the recent uptick in for 2017. That is, a period of positive but low returns in equity markets, while government bond yields, we see little attraction in holding bonds. Instead, we government bonds remain largely unattractive, especially if inflation continues advocate buying those assets that are structured in such a way that they can to tick-up. Arguably the economic backdrop for equities has modestly improved generate positive returns even in falling markets. Included in this list would be as we enter the new year. If Trump is successful in his efforts to kick-start the US absolute return bond funds, event driven funds, where the market risk has been economy through a programme of tax cuts and greater fiscal spending, then stripped out, and macro hedge funds. 13 Ocean Wilsons Holdings Limited/Annual Report 2016 Investment Manager’s Report Performance 10 Year Cumulative Indexed Returns 160 150 140 130 120 110 100 90 80 70 60 50 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Ocean Wilson (Investments) Limited Performance MSCI ACWI FM NR USD Ocean Wilson (Investments) Limited Benchmark MSCI Emerging Markets NR USD Portfolio Commentary Our two holdings in Japanese funds were negative contributors to performance The portfolio ended the year with a 0.2% rise in the fourth quarter, leading to a in 2016, with Indus Japan Long Only Fund and Goodhart Partners: Hanjo return of 0.3% for the year. This result was behind the Performance Benchmark Fund declining -4.1% and -2.9% respectively, which compares unfavourably (3% in excess of the US CPI), which was up 5.1% for the year. with the MSCI Japan which produced a modest positive performance of 2.0% The top two contributors to performance over the course of the year were for the year. Findlay Park American Fund and Prosperity Quest Fund having returned Among the top contributors to performance over the year were two private 8.4% and 42.6%, respectively. The return of the Findlay Park fund was achieved equity funds, Hony Capital Fund V, LP and Silver Lake Partners IV, , which whilst the portfolio manager maintained a cautious outlook, most clearly are now held at 1.27x and 1.34x investment cost in the portfolio, respectively. reflected in the cash balance which frequently exceeded 15%. The manager The funds saw strong rises in their valuations during 2016 as a result of a continues to focus on identifying stable businesses with excellent cashflow combination of strong exits and uplifts in the valuations of their unrealised metrics, eschewing overly leveraged or highly cyclical businesses. Strong positive portfolios. Both funds remain relatively immature and further realisation activity performance was generated by the portfolio’s other holdings in the US, with in future years should continue to drive value generation. The strong both Vulcan Value Equity and Select Equity Offshore performing well as they performance from Silver Lake was largely a result of the positive performance of took advantage of the market’s continued appetite for US equities. its investment in Broadcom (formerly Avago) which is valued at 3.4x investment cost and has already returned more than 1.5x investment cost despite the The Prosperity Quest Fund invests in the equities of Russian companies and investment being less than three years old. benefited from a number of factors, including the rebound in the oil price and improving investor sentiment towards the Emerging Markets. Strong It was a difficult year for many funds which have been significant contributors to performance was generated by a number of the other Emerging Market related performance in recent years. Adelphi European Select Equity Fund, holdings, including NT Asian Discovery, Dynamo Brasil VIII and Gramercy Lansdowne Developed Markets Fund and BlackRock European Hedge Distressed Opportunity Fund II which returned 11.0%, 47.6% and 13.7% Fund were all material negative contributors as their investment strategies of respectively. These returns follow a number of challenging years for Emerging buying high quality, resilient business with strong cashflow generation Markets, in which investors have struggled against a de-rating of assets and credentials and avoiding (or shorting) highly cyclical, frequently commodity declining currencies. The reversal in market sentiment has been driven by a related “value” stocks were punished by a market which underwent a substantial number of factors, including a more favourable environment for commodity sector rotation. These funds do not seek to track a particular benchmark and exporters, the perception of improved corporate and political governance, therefore their performance has the potential to deviate materially from the somewhat resilient growth data as well as a valuation discount to Developed indices. Markets. 14 Investment Portfolio at 31 December 2016 Findlay Park American Fund BlackRock European Hedge Fund Adelphi European Select Equity Fund Egerton Long - Short Fund Limited NTAsian Discovery Fund Lansdowne Developed Markets Fund Goodhart Partners: Hanjo Fund Helios Investors II, LP Greenspring Global Partners IV, LP Schroder ISF Asian Total Return Top 10 Holdings Hony Capital Fund V, LP Gramercy Distressed Opportunity Fund II, LP Indus Japan Long Only Fund Select Equity Offshore, Ltd Global Event Partners Ltd Vulcan Value Equity Fund Hudson Bay International Fund Ltd Prince Street Opportunities Fund Pangaea II, LP China Harvest II, LP Top 20 Holdings GAM Star Technology KKR Special Situations Fund, LP L Capital Asia, LP L Capital Asia 2, LP Oaktree CM Value Opportunities Fund Navegar I, LP NYLIM Jacob Ballas India III, LLC Prosperity Quest Fund iShares Core EM IMI UCITS ETF African Development Partners I, LLC Top 30 Holdings 32 remaining holdings Cash TOTAL Hanseatic Asset Management LBG March 2017 Ocean Wilsons Holdings Limited/Annual Report 2016 Primary Focus US equities – long only Europe equities – hedge Europe equities – long-only Europe / US equities – hedge Asia ex-Japan equities – long only Europe / US equities – hedge Japan equities – long only Private Assets – Africa Private Assets – US Venture Capital Asia ex-Japan equities – long only Private Assets – China Private Assets - distressed debt Japan equities – long only US equities – long-only Global equities – long-short US equities – long-only Market Neutral – multi-strategy Emerging Markets equities – long-only Private Assets – GEM Private Assets – China Technology – long-only Private Assets – distressed debt Private Assets – Asia (Consumer) Private Assets – Asia (Consumer) US high yield corporate debt – hedge Private Assets – Philippines Private Assets – India Emerging Markets equities – long-only Emerging Markets equities – long-only Private Assets – Africa Market value US$000 17,511 12,150 11,835 11,643 9,785 9,647 7,059 6,519 6,466 6,307 98,922 6,082 6,005 5,409 5,376 5,333 5,165 5,053 5,042 4,799 4,743 % of NAV 7.3 5.1 5.0 4.9 4.1 4.0 3.0 2.7 2.7 2.6 41.4 2.5 2.5 2.3 2.3 2.2 2.2 2.1 2.1 2.0 2.0 151,929 63.6 4,637 4,495 4,461 4,448 4,349 3,696 3,598 3,400 3,373 3,216 191,602 42,824 4,472 238,898 1.9 1.9 1.9 1.9 1.8 1.5 1.5 1.4 1.4 1.3 80.2 17.9 1.9 100.0 15 Ocean Wilsons Holdings Limited/Annual Report 2016 Directors and Advisers Directors J F Gouvêa Vieira* (Chairman) W Salomon* (Deputy Chairman) K Middleton A Berzins* C Maltby* A Rozental* C Townsend* * Non-executive Secretary Malcolm S Mitchell Registered Office PO Box HM 1022 Clarendon House Church Street Hamilton HM DX Bermuda Registrars Codan Services Limited Clarendon House Church Street Hamilton HM 11 Bermuda Profiles of Non-executive Directors Mr J F Gouvêa Vieira is Brazilian, aged 67 and joined the Group in 1991. He is UK Transfer Agent a partner of the Brazilian law firm of Gouvêa Vieira Advogados. He is Capita Asset Services chairman of Wilson Sons Limited, a member of the Board of Concremat, The Registry Banco PSA Finance Brasil S.A. and a number of other Companies. Mr Gouvêa 34 Beckenham Road Vieira is also a member of the Corporate Governance Committee for the Beckenham American Chamber of Commerce in São Paulo. Kent BR3 4TU Mr W Salomon is German and British, aged 59 and joined the Group in 1995. Ocean Wilsons Dividend Address He is senior partner of Hansa Capital Partners LLP. He is also a non-executive Ocean Wilsons Dividend Election director of Hansa Trust PLC and Wilson Sons Limited. Capita Asset Services The Registry Mr A Berzins is aged 57, British and resident in Singapore and joined the Group 34 Beckenham Road in 2014. He is a non-executive director of Aberdeen Asian Income Fund. Beckenham Kent BR3 4TU Mr C Maltby is aged 66, British and resident in Switzerland. He is a Director of Abingworth BioEquities Fund Limited, and a member of the Supervisory Board Auditor of Bilfinger Berger Global Infrastructure SICAV SA. KPMG LLP 15 Canada Square Mr A Rozental is Mexican, aged 71 and is the founding partner of Rozental & London E14 5GL Asociados. He is a non-executive director of Wilson Sons Limited and HSBC Bank Mexico. He is chairman of ArcelorMittal Mexico. He is an external Bankers advisor to AT&T, Airbus Mexico, Toyota de México and Canada's Brookfield Deutsche Bank International Limited Asset Management. Jersey Mr C Townsend is German and British and resident in Switzerland. He is aged Investment Manager 43, is a solicitor, and has an MBA from the London Business School. He is Hanseatic Asset Management LBG investment director of Hansa Capital GmbH. Guernsey, Channel Islands Brazilian Business Website www.wilsonsons.com.br Bermuda Office PO Box HM 2250 Richmond House 12 Par-la-Ville Road Hamilton HM JX Bermuda Website: www.oceanwilsons.bm 16 Report of the Directors Ocean Wilsons Holdings Limited/Annual Report 2016 The Directors submit herewith their Report and Accounts for the year ended In accordance with the Company’s (Ocean Wilsons Holdings Limited) bye-laws, 31 December 2016. Mr K Middleton and Mr W Salomon retire at the next annual general meeting and, being eligible, offer themselves for re-election. The Directors who held The Group accounts, presented under International Financial Reporting office at 31 December 2016 had the following interest in the Company shares: Standards (IFRS), comprise the Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Interest 2016 2015 Equity, Consolidated Cash Flow Statement and the related notes 1-36. J F Gouvêa Vieira Beneficial 170,100 170,100 Profits and Dividends K Middleton Beneficial 30,000 30,000 As permitted by Section 84(1A) of the Bermuda Companies Act 1981 the W Salomon* Beneficial 4,659,349 4,659,349 Group’s accounts have been drawn up in accordance with International Financial Reporting Standards. The Group’s profit after tax on ordinary activities attributable to equity shareholders amounted to US$45,060,000 (2015: US$15,470,000). The Directors are recommending the payment of a dividend for the year of 63.0c (2015: 63.0c) gross per share. The dividend will be paid on 9 June 2017 to all shareholders who are on the register at close of business on 12 May 2017. Principal Activities The Group’s principal activities during the year were the holding of investments and the provision of maritime and logistics services in Brazil. The investment strategy agreed with the Group’s Investment Manager is to maximise the total return on assets, by investing in a portfolio of diversified assets including global equities, fixed income and alternative assets with a particular emphasis on emerging markets. Investments are intended to add value over the medium to longer-term through a non-market correlated, conviction based investment style. Our subsidiary, Wilson Sons Limited, has provided maritime services in Brazil for over 175 years. Wilson Sons Limited strategy is to provide maritime and logistics services to the domestic economy, international trade and the oil and gas market. Details of our activities are set out in the Investment Manager’s report and Financial review on pages 6 to 15. Directors The present Members of the Board are as shown on page 16. C Townsend Beneficial 3,969,049 40,000 C Maltby A Berzins Beneficial Beneficial 9,000 5,000 9,000 5,000 *Additional indirect interests of Mr W H Salomon and Mr C Townsend in the Company are set out in substantial shareholdings below. Service Contracts Regarding the Directors proposed for re-election at the Annual General Meeting Mr K Middleton has terms of service, which can be terminated by the company on not less than twelve months’ notice in writing and by the Director on not less than six months’ notice in writing. There is no service contract between Mr W Salomon and the company. Employees The average number of persons, including Directors, employed by the Group was 4,436 (2015: 5,439). Share option plan On 13 November 2013, the board of Wilson Sons Limited approved a Share Option Plan, which allowed for the grant of options to eligible participants to be selected by the board. The shareholders in special general meeting approved the plan on the 8 January 2014 including an increase in the authorized capital of the company through the creation of up to 4,410,927 new shares. The options provide participants with the right to acquire shares via Brazilian Depositary Receipts (“BDR”) in Wilson Sons Limited at a predetermined fixed price not less than the three-day average mid-price for the days preceding the date of option issuance. The following grants have been issued under the Stock Option Plan. Number of options Exercise price 2,914,100 R$ 31.23 139,000 247,500 33.98 34.03 Date of Grant 10 January 2014 13 November 2014 11 August 2016 Further details are provided in note 31. Auditor Under current Brazilian Stock Exchange regulations a listed company’s auditor cannot serve for more than five years. KPMG LLP is therefore resigning as auditor of the Wilson Sons Limited group in 2017. Due to the materiality of the Wilson Sons Limited group to Ocean Wilsons Holdings Limited the Board resolved that Ocean Wilsons Holdings Limited and Wilson Sons Limited should both be audited by member firms of the same international accounting 17 Ocean Wilsons Holdings Limited/Annual Report 2016 Report of the Directors organisation. Following a co-ordinated selection process by Wilson Sons independence and knowledge on the Board and, in the light of this Limited and Ocean Wilsons Holdings Limited the two Boards selected Ernst & evaluation, prepares a description of the role and capabilities required for Young LLP as auditor for 2017. Consequently KPMG LLP are retiring as auditor a particular appointment. An independent external search consultant will and a resolution to appoint Ernst & Young LLP under the provisions of Section conduct a search for appropriate candidates with the right blend of skills 89 of the Bermuda Companies Act 1981 will be proposed at the forthcoming and experience which are then submitted to the Board for evaluation. Annual General Meeting. Substantial Shareholdings than nine years should be subject to annual re-election. As at 10 March 2017, the Company has been notified of the following holdings of its shares, in excess of 3% of the issued ordinary share capital: Directors serving more than nine years are not subject to annual re- • The Code states that non-executive directors who have served longer election as the Board considers continuity and knowledge of the Name of holder Hansa Trust PLC Number of shares % held Company’s investments and business acquired over time is of great value. 9,352,770 26.45 The non-executive Directors who have served longer than nine years are Codan Trust Company Limited and Helen Cooper 4,435,064 12.54 C Townsend Utilico Emerging Markets Utilities Limited Dynamo Adminisração de Recurso 3,969,049 11.22 2,471,044 1,820,354 6.99 5.15 The Company has been advised that Mr W Salomon is interested in 4,435,064 shares registered in the name of Codan Trust Company Limited and Helen Cooper. The Company has also been advised that Mr W Salomon Mr J F Gouvêa Vieira and Mr W Salomon. The Board The Board currently comprises the chairman, Mr J F Gouvêa Vieira, deputy chairman Mr W Salomon, a further four non-executive directors, Mr A Berzins, Mr A Rozental, Mr C Townsend and Mr C Maltby and one executive director, Mr K Middleton. Mr Rozental, Mr Berzins and Mr Maltby are considered by the Board to be independent under the Code. The Board has appointed Mr A Rozental as the senior independent director. The directors’ biographies appear has an interest in 26.4% and Mr C Townsend an interest in 25.9% of the on page 16. voting shares of Hansa Trust PLC. Contracts and agreements with substantial shareholders All directors are subject to election by shareholders at the first AGM following their appointment to the Board and are subject to re-election by shareholders No contracts existed at the end of the year in which a substantial shareholder once every three years. Mr K Middleton and W Salomon are offering of the Company is or was materially interested. themselves for re-election at the next AGM. The Board considers on a regular basis how to refresh itself. Corporate Governance The Board has put in place corporate governance arrangements that it believes are appropriate for the operation of the Company. The Board has considered the principles and recommendations of the 2014 UK Corporate Non-executive directors hold letters of appointment. The other commitments of directors appear on page 16 as part of their biographies and the Board is satisfied that these commitments do not conflict with their ability to carry out Governance Code (“the Code”) issued by the Financial Reporting Council and effectively their duties as directors of the Company. decided to apply those aspects which are appropriate to the business. This reflects the fact that Ocean Wilsons Holdings Limited is an investment holding Company incorporated by an act of parliament in Bermuda with significant operations in Brazil. The Company complies with the Code where it is beneficial for its business to do so, and has done so throughout the year and up to the date of this report, but as noted below, it does not fully comply with The division of responsibilities between the chairman and the executive director have been clearly established, set out in writing and agreed by the Board. The Group does not have a chief executive. The Board has appointed an executive director, Mr K Middleton to administer the Code. The position is regularly reviewed and monitored by the Board. the Holding Company. Below are the areas where Ocean Wilsons Holdings Limited does not comply with the 2014 UK Corporate Governance Code and the rationale for not complying: • The Code states the Company should have a Board nomination committee. The Board does not have a separate nomination committee as the identification and appointment of a new Board member is a matter for the full Board. The Board evaluates the balance of skills, experience, Our maritime services subsidiary, Wilson Sons Limited (an autonomous listed company) is supervised by the Board of Wilson Sons Limited who have appointed Mr C Baião as chief executive to run the business in Brazil. The chief executive in turn delegates responsibility to senior executives, in particular strategic business unit directors. Ocean Wilsons Holdings Limited manages its interest in Wilson Sons Limited through the appointment of three Ocean Wilsons Holdings Limited Directors as non-executive directors of Wilson Sons Limited, (presently Mr J F Gouvêa Vieira, Mr W Salomon and Mr A Rozental), voting on matters requiring Wilson Sons Limited shareholder 18 Ocean Wilsons Holdings Limited/Annual Report 2016 approval and through the relationship agreement between Ocean Wilsons Holdings Limited and Wilson Sons Limited signed following the listing of Wilson Sons Limited on the Sao Paulo and Luxembourg Stock Exchanges. The relationship agreement details areas of co-operation between Ocean Wilsons Holdings Limited and Wilson Sons Limited in meeting accounting, reporting and compliance requirements for both companies. The Board delegates authority to manage the portfolio of investments to Hanseatic Asset Management LBG. The Ocean Wilsons Holdings Limited Board has a formal schedule of matters specifically reserved for its attention. As previously stated, autonomy is given to the Wilson Sons Limited Board to supervise the Wilson Sons Limited business and decisions taken by the Wilson Sons Board do not require ratification by the Board of Ocean Wilsons Holdings Limited. The schedule of matters reserved for the Board of Ocean Wilsons Holdings Limited includes: • • • • • • To vote the shares in Wilson Sons Limited on matters presented to shareholders for shareholder approval; Appointment of Ocean Wilsons Holdings Limited directors to the Board of Wilson Sons Limited; To approve changes in Wilson Sons Limited auditor or accounting policies; Agree the strategy of Wilson Sons Limited; Undertaking a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors; and Review of the Company’s overall corporate governance arrangements. • • • • • • • • • • • • • • • The Board of Ocean Wilsons (Investments) Limited is currently constituted by Determining the overall strategy of the Group; the same directors as the Board of Ocean Wilsons Holdings Limited. Mr C Determining the responsibilities of the chairman and directors; Wilsons (Investments) Limited. The Board delegates authority to run the Maltby an independent director is the chairman of the Board of Ocean investment portfolio held by Ocean Wilsons (Investments) Limited to the Approving changes to the capital structure of the Company or other Investment Manager within certain guidelines. The Board of Ocean Wilsons matters relevant to its status as a listed Company; (Investments) Limited has a formal schedule of matters specifically reserved for its attention which include: Approving significant matters relating to capital expenditure, acquisitions and disposals and consideration of significant financial matters outside the Wilson Sons Limited Group; Appointment of directors to Ocean Wilsons Holdings Limited and Ocean Wilsons (Investments) Limited; Selection of the chairman of the Board; Appointment and removal of the company secretary; Appointment and removal of executives; To decide on potential conflicts of interest and authorize potential conflicts; Approval of annual and interim reports; Approving any dividends and dividend policy; • • • • • • • • • Appointment, removal and terms of an Investment Manager; Determine investment guidelines and restrictions in conjunction with the Investment Manager; Approval of the investment objective and benchmark; To approve and set borrowing limits; To approve and set limits on the use of derivative instruments; Review the performance of the Investment Manager; Approval of the annual accounts for Ocean Wilsons (Investments) Limited; Approving any dividends; and Appointment, removal and terms of the custodian of the Investment Manager. Appointment of external auditor, financial advisor or corporate broker; Establishing the finance committee and their terms of reference; independent professional advice at the Company’s expense if the need arises. The Board has full and timely access to all relevant information to enable it to Determining membership and Chairmanship of Board Committees; perform its duties. The Company has directors and officers insurance in place. The Company has a procedure in place by which directors can seek To approve any agreements or amendments to agreements between The executive director is responsible for advising the Board on all corporate Ocean Wilsons Holdings Limited and Wilson Sons Limited including the matters. Each director has access to the advice and services of the company relationship agreement; secretary Mr M Mitchell and the executive director. 19 Ocean Wilsons Holdings Limited/Annual Report 2016 Report of the Directors During 2016, four scheduled meetings of the Ocean Wilsons Holdings Limited gender diversity, the Board considers that a merit based approach is the only Board were held at different locations. Details of attendance at Board appropriate approach for determining the composition of the Board and as meetings and meetings of the Board committees are set out below. In addition such has not set specific targets for gender diversity. to scheduled Board meetings if matters arise at short notice requiring urgent attention a telephone Board meeting is arranged. During 2016 no telephone Remuneration Board meetings were held. Non-executive Directors’ fees are set out within limits set in the Company’s Articles of Association. The present limit is US$700,000 in aggregate per Directors’ attendance at Board and Finance Committee meetings: annum and the approval of shareholders in a General Meeting is required to Director Mr J F Gouvêa Vieira Mr W Salomon Mr K Middleton Mr A Rozental Mr C Townsend Mr C Maltby Mr A Berzins Finance Committee Board Meetings attended Meetings attended 4 4 4 4 4 4 4 4 4 – 4 4 4 4 The formal agenda for each scheduled Board meeting is set by the chairman in consultation with the executive director. The Board of Ocean Wilsons Holdings Limited is invited to attend Wilson Sons Limited Board meetings where appropriate to receive operational updates, including one meeting a year in Brazil where the Board of Ocean Wilsons Holdings Limited is invited to attend the Wilson Sons Limited Board meeting to meet business unit directors and receive detailed management reports on the Brazilian business. The non-executive directors also meet informally, without any executives present, to discuss matters in respect of the business. All new directors receive an induction on joining the Company. This covers such matters as strategy, operation and activities of the Group and corporate governance matters. Site visits and meetings with senior management are also arranged. The Board as a whole make periodic operational site visits. Directors are encouraged to visit other sites. Directors are also provided with industry and regulatory updates. The Board has in place a procedure for the consideration and authorisation of conflicts or possible conflicts of interest with the Company’s interests annually. If a director has a conflict of interest he leaves the meeting prior to discussion unless requested to remain and leaves determination of such matters to the other directors. Board Evaluation The Board undertakes an annual formal performance evaluation for the Board and individual directors. The process involves completion of internally prepared questionnaires. The chairman discusses their responses with each director and then reports the results of the process to the Board which discusses the results highlighting any areas for improvement. change this amount. The Board of Wilson Sons Limited is responsible for all remuneration matters relating to Wilson Sons Limited and its subsidiaries. Mr J F Gouvêa Vieira, Mr W Salomon and Mr A Rozental receive directors fees from Wilson Sons Limited in addition to their fees as directors of Ocean Wilsons Holdings Limited. Board Committees The Board has established a finance committee which has formal terms of reference approved by the Board and are reviewed on an ongoing basis by the Board. The finance committee acts as the audit and remuneration committee. The committee’s terms of reference are available at the Company’s registered office. Mr A Berzins an independent director is the chairman of the finance committee. The Board will review Board composition on an ongoing basis (including as part of the formal Board evaluation process) and regularly consider whether any skill gap exists. The Board will evaluate the balance of skills, experience, independence and knowledge on the Board. If the Board considers that a skill gap exists in either the Board or its committees a description of the role and capabilities required for a particular appointment will be prepared and passed to an independent external search consultant. The external search consultant will conduct a search for appropriate candidates with the right blend of skills and experience which are then submitted to the Board for evaluation. Any director may suggest a person to be appointed a non-executive director of the Company. The procedure to be followed is: (a) The C.V. and qualifications of the candidate for the position will be submitted to the chairman who will discuss the proposal with at least two other directors. (b) The candidate will be interviewed by the chairman, sponsor and at least one other director. (c) If thought fit, a resolution will be submitted to the Board for the appointment of the candidate. Board Diversity Policy The Board considers diversity, including the balance of skills, experience, knowledge and nationality, amongst many other factors, when reviewing the appointment of new Directors. The Board does not consider it appropriate to establish targets or quotas in respect of Board appointments. With respect to Finance Committee report The finance committee comprises all non-executive directors, three of whom are considered by the Board to be independent during 2016. The Board is satisfied that during 2016 four directors, Mr C Maltby, Mr W Salomon, Mr A Berzins and Mr A Rozental, have recent and relevant financial experience as 20 Ocean Wilsons Holdings Limited/Annual Report 2016 all have served on the audit committees of other listed companies. Mr W Overview of the actions taken by the Finance Committee to discharge its Salomon also has considerable experience in finance and investment banking duties and Mr C Maltby and Mr A Berzins both hold accounting qualifications. Since the beginning of 2016 the finance committee has: The finance committee met four times in 2016. At the request of the finance • reviewed the December 2015 report and financial statements, the June committee the chief executive of Wilson Sons Limited, the finance director of 2016 half yearly financial report and the quarterly update issued in May Wilson Sons Limited and the executive director of Ocean Wilsons Holdings and November 2016. As part of the review of the December 2015 report, Limited attended each of these meetings. The external auditor attended one the Committee received a report from the external auditor on their audit meeting. The finance committee meets with the external auditor without the of the annual report and financial statements; executive present. The committee has defined terms of reference. The principal responsibilities of goodwill. The long-term operating assumptions were lowered compared • reviewed the revised assumptions used in the impairment test on Brasco the committee are: to the previous year and capital expenditure assumptions were also revised and phased according to the new evolution of operational data. • to review the integrity of the interim and full year financial statements of The discount rate was updated to reflect the correlation of the Wilson the Company, reviewing significant financial reporting judgements Sons Limited BDR price and the S&P index between 2007 and Aug 2016. contained in them; Based on these assumptions a recommendation was made for no • • to review the Company’s internal control and risk management systems; impairment in 2016. to make recommendations to the Board, for it to put to the shareholders Provisions relating to legal claims were previously reported in other for their approval in general meeting, in relation to the appointment, operating expenses. To improve the transparency of the financial reappointment and removal of the external auditor and to approve the statements, the Finance Committee decided to reclassify provisions to remuneration and terms of engagement of the external auditor; revenue, employee benefits expense and income tax expense, according • reviewed the classification of provisions relating to legal claims. to the underlying nature of the legal claims; • to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into • reviewed the economic useful life of the Guarujá II shipyard. Following an consideration relevant professional and regulatory requirements; independent technical review the economic useful life of the Guarujá II shipyard was increased from 30 to 60 years; • to consult with the Group’s auditor and, where necessary the auditor of the subsidiary companies, regarding any matters arising in the course of • reviewed the effectiveness of the Group’s internal controls and disclosures the annual audit which should be brought to the attention of the Board; made in the annual report and financial statements on this matter. As part of this review, the Committee considered a report on internal controls to monitor the Group’s risk exposure; and the Group’s risk register and suggested amendments; to consider the need for an internal audit function; to determine the remuneration for all executives, the chairman and non- executive directors; • • reviewed and approved the scope of audit work to be undertaken by the auditor; agreed the fees to be paid to the external auditor for the audit of the December 2016 financial statements including consideration of the levels to determine the level of awards made under the Company long-term of non-audit fees which the committee concluded were immaterial; incentive plan and performance conditions and vesting periods that apply; • conducted a co-ordinated selection process with Wilson Sons Limited to select a new external auditor for 2017. As part of the audit tender to determine bonuses payable under the Company Bonus scheme; and process, invitations to tender for external audit services were sent to a number of accounting firms. Follow up meetings were held between to review arrangements by which staff of the Company may, in management, members of the finance committee and the tendering firms confidence, raise concerns about possible improprieties in matters of to discuss proposals received. The Finance Committee selected Ernst & financial reporting or other matters. Young LLP to be appointed by members at the next AGM in June 2017; • • • • • • • • assessed the qualification, expertise and resources, and independence of the external auditor; reviewed the need for an internal audit function; and 21 Ocean Wilsons Holdings Limited/Annual Report 2016 Report of the Directors • reviewed and approved the company remuneration policy. The committee forecasts under the principles of IAS 36. The Committee examined and used an external advisor to benchmark non-executive director fees challenged management’s key assumptions used in the impairment tests against comparative companies as no adjustment has been made to non- to understand their impact on the recoverable amounts. The Committee executive director fees since 2013. Following the review, non-executive was satisfied that the significant assumptions used were appropriate and fees were adjusted based on the proposal presented by the Chairman of sufficiently robust. The Committee was further satisfied with the the Finance Committee. impairment disclosures in the financial statements. of goodwill to its value in use, calculated using the discounted cash flow To fulfil its responsibility regarding the independence of the external auditor, • Revenue recognition – The revenue recognition risk could arise from the finance committee reviewed: inappropriate revenue recognition policies, incorrect application of policies or cut-off errors surrounding year end. The committee considered • the external auditor plan for the current year, noting the role of the audit the Group’s revenue recognition policies and the level of transactions partner, who signs the audit report and who, in accordance with compared to previous periods. The committee receives quarterly professional rules, has not held office for more than five years and any management reports on revenue and financial performance with changes in key audit staff; comparisons to budget and prior year. The committee reviews and questions management explanations for variances and revenue a report from the external auditor describing their arrangements to performance. The committee also discusses potential risks surrounding identify, report and manage any conflicts of interest; and revenue recognition with the external auditor and reviews their audit the overall extent of non-audit services provided by the external auditor, in addition to approving the provision of significant non-audit services by Internal Controls findings. • • the external auditor. The Board is responsible for the system of internal control and reviewing its effectiveness. The internal controls are designed to cover material risks to In addition the Group does not currently employ any former external audit achieving the Group’s objectives and include business, operational, financial staff. KPMG LLP have been the Group’s auditor since 31 December 2012 and compliance risks. These controls have been in place throughout the year. following a competitive tender. The internal controls are designed to identify, evaluate and manage rather than eliminate risk of failure to meet business objectives. The internal control After discussion with management, the Board of Wilson Sons Limited and the process distinguishes between the parent group and the principal operating external auditor, the committee determined that the key risks of misstatement subsidiary, Wilson Sons Limited, which is managed by an autonomous board. of the Group’s financial statements relate to: • Provisions – Legal claims against the Brazilian operations comprise civil and “BOVESPA” and Luxembourg Stock Exchange, whose rules are different from environmental cases, tax cases and labour claims. The reporting risk relates the London Stock Exchange. The company’s internal control procedures, whilst to the completeness of claims recorded and the estimation of the provisions sufficient for the Board of Wilson Sons Limited to identify, manage and control held against these exposures. There remain a significant number of the principal risks, may differ from the requirements of the Turnbull contingent liabilities, particularly concerning labour and taxation claims. Committee. The Board of the principal operating subsidiary is responsible for Provisions are based on prior experience, management’s best knowledge of identifying key business risks and establishing and reviewing internal control Wilson Sons Limited is listed on both the Sao Paulo Stock Exchange the relevant facts and circumstances and expert legal advice relative to procedures. each case. The committee questioned management on their assumptions used in determining provisions and the procedure for classification of legal The Board reviews the need for an internal audit department annually and liabilities as probable, possible or remote loss by the external lawyers. The considers that the parent group is not sufficiently large to justify an internal committee reviewed quarterly legal reports from management on audit function. Wilson Sons Limited operates an internal audit function and contingencies and asked questions on the background and progress of the Wilson Sons Limited board monitors their internal financial control material claims. The committee evaluated the current level of provisions in systems through reports received from the internal audit function. light of historical trends and claim history to ensure provisions were adequate. The committee further ensured that adequate resources are In reviewing Wilson Sons Limited, the Board receives reports from the Wilson allocated to recording, evaluating and monitoring legal claims to ensure the Sons Limited internal audit department, legal department and the Wilson Sons completeness of claims recorded and provisions made. Limited external auditor. • Impairment Risk to Goodwill and Intangibles – The Group has significant The parent group (including Ocean Wilsons (Investments) Limited) has an Goodwill and Intangibles balances. The reporting risk is that these ongoing process for identifying, evaluating and managing key risks including balances may be overstated. Management perform impairment reviews financial, operational and compliance controls. A risk register is maintained for Intangibles and tests goodwill as required by IAS 36, Impairment of detailing business risks, together with controls and responsibilities. The risk Assets. The impairment test is performed by comparing the carrying value register is regularly reviewed by the finance committee. 22 Ocean Wilsons Holdings Limited/Annual Report 2016 The systems operated both by the parent group and principal operating Whilst the directors have no reason to believe the Company will not be viable subsidiary are reviewed annually. The Board is satisfied that these systems are over a longer period, given the uncertainties involved in longer term operating effectively. forecasting the directors have determined that a three year period to 31 December 2019 is an appropriate period over which to provide its viability The Ocean Wilsons Holdings Limited employee whistle blowing policy is statement. The three year period also aligns with the rolling three year designed to enable employees of the Company to raise concerns internally investment portfolio performance benchmark. and at a high level and to disclose information which the individual believes shows malpractice or impropriety. The Wilson Sons Limited Group whistle In making the assessment, the directors have considered a number of factors blowing policy and procedures enable employees who have concerns about that affect the Group, including the principal risks and mitigating factors. The the application of the Group’s Code of Ethics to raise them with the Wilson directors also took account that the Group has two distinctly separate Sons Limited ethics committee. The ethics committee will maintain their investments, Wilson Sons Limited, a maritime services company in Brazil and anonymity and report back to the employee on actions taken. Ocean Wilsons (Investments) Limited which holds a portfolio of international investments. There is no recourse between the two investments. In addition Relations with Shareholders the Company holds no external debt. Communications with shareholders are important to the Board. Ocean Wilsons Holdings Limited sends both its annual report and accounts and half year Wilson Sons Limited accounts to all shareholders. To ensure Board members develop an The assessment considered that the Wilson Sons Group business model has understanding of the views of major shareholders there is regular dialogue proven to be strong in the long term with a range of businesses that have with major institutional shareholders. The Deputy Chairman and executive consistently demonstrated their ability to trade, even in challenging market director usually attend a number of these meetings. A report of meetings with conditions, as evidenced in 2015 when the Group produced a solid shareholders is distributed to all directors. All broker reports are distributed to performance despite the Brazilian Real depreciating 47% against the US all Board members. The Annual General Meeting of the Company is held in Dollar in the year. Operational activities are funded by cash generated from Bermuda. When a significant proportion of the votes have been cast against a operations, while the Wilson Sons Group borrowings are used to finance resolution at an Annual General Meeting the Board will contact significant capital expenditure. The Wilson Sons Group borrowings are long-term with shareholders to understand the reasons behind their vote. The Company defined repayment schedules repayable over different periods up to 18 years website www.oceanwilsons.bm contains copies of the annual and interim and an average weighted maturity of 11 years. There is no recourse from report and stock exchange announcements. Wilson Sons to the Company or Ocean Wilsons (Investments) Limited in Going Concern respect of the Wilson Sons Limited borrowings. The Wilson Sons Group is not reliant on one particular customer, its largest customer constituted The Group closely monitors and manages its liquidity risk. The Group has approximately 4% of the Group’s revenue in 2016 (and including joint venture considerable financial resources including US$77.3 million in cash and cash revenue 16%). In addition, Wilson Sons has opportunities to mitigate any equivalents and the Group’s borrowings have a long maturity profile. The adverse impacts given the flexible cost base of some of their business. Group’s business activities together with the factors likely to affect its future development and performance are set out in the Chairman’s Statement, Whilst the Board considered all the principal risks identified the following were Financial review and Investment Manager report on pages 1 to 15. The selected by the Group for stress testing using the Wilson Sons Limited long- financial position, cash flows and borrowings of the Group are set out in the term model, exchange rate risk, exposure to the offshore oil and gas industry Financial review in pages 6 to 10. In addition note 36 to the financial and customer concentration risk. In testing we assumed that Petrobras statements include details of its financial instruments and hedging activities remained a going concern. and its exposure to credit risk and liquidity risk. Details of the Group’s borrowings are set out in note 22. Based on the Group’s forecasts and Ocean Wilsons (Investments) Limited sensitivities run, the directors have a reasonable expectation that the In making the assessment for the investment portfolio, the Board has Company and the Group have adequate resources to continue in operational considered matters such as significant stock market volatility, changes in existence for the foreseeable future. For this reason, they continue to adopt exchange rate and a significant reduction in the liquidity of the portfolio. The the going concern basis in preparing the accounts. investment portfolio and cash under management at 31 December 2016 was US$238.9 million with outstanding capital commitments of US$33.9 million Viability statement and no external debt. In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the viability of the Group over a three year period to We believe that if severe but plausible downside scenarios were to crystallise, 31 December 2019, taking into account the Group’s current position and many of the individual risks disclosed would be likely to be confined to either potential impact of the principal risks and uncertainties. Based on this Wilson Sons Limited or Ocean Wilsons (Investments) Limited. The risk is to the assessment, the directors confirm that they have a reasonable expectation that valuation of the Group’s balance sheet rather than the viability of the Group. the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2019. 23 Ocean Wilsons Holdings Limited/Annual Report 2016 Report of the Directors Directors’ responsibilities The Directors are responsible for preparing the annual report in accordance with applicable laws and regulations. The Directors are required by Bermuda company law to lay financial statements before the Company in a general meeting. In doing this the Directors prepare accounts on a going concern basis for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those accounts, the Directors have considered whether: • • • suitable accounting policies have been adopted and applied consistently; judgements and estimates are reasonable and prudent; and applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts. The Board consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy. By Order of the Board Codan Services Limited Assistant Secretary 24 March 2017 24 Independent Auditor’s Report to the Members of Ocean Wilsons Holdings Limited Only Ocean Wilsons Holdings Limited/Annual Report 2016 Opinions and conclusions arising from our audit inspect the stage of completion of individual projects through observation 1. Our opinion on the financial statements is unmodified and discussion with site personnel. In addition, we challenged the Group’s We have audited the Group financial statements (“the financial statements”) of judgements in respect of forecast contract out-turn costs via agreement to Ocean Wilsons Holdings Limited (“the Group”) for the year ended internal certifications, which were tested on a sample basis with reference 31 December 2016 set out on pages 28 to 75. to our own assessments, historical outcomes and industry norms. We also inspected the selected contracts for key clauses and assessed whether In our opinion the financial statements give a true and fair view of the state of these key clauses have been appropriately reflected in the amounts the Group’s affairs as at 31 December 2016 and of its profit for the year then recognised in the financial statements. ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. In evaluating the timing of the recognition of other maritime services revenue, we assessed the Group’s revenue recognition policies against the 2. Our assessment of risks of material misstatement relevant accounting standards. We visited a number of sites, including all In arriving at our audit opinion above on the financial statements the risks of of the Group’s operational port terminals (Tecon Salvador, Tecon Rio material misstatement that had the greatest effect on our audit, in decreasing Grande and Brasco) to test controls that that the Group’s revenue order of audit significance, were as follows (unchanged from 2015). recognition policies were being consistently applied. Additionally, we, tested the appropriateness of a sample of revenue accrued and deferred Maritime services revenue recognition (US$457.2m (2015: US$509.3m)) at year end, by agreeing revenue back to the specific contract terms. In Risk vs 2015: (cid:1)(cid:2) addition, at year end, the audit team performed cut-off procedures to Refer to page 22 (Finance Committee Report), page 38 (accounting policy) and ensure revenue was recognized in the correct period. page 41 (financial disclosures). • The risk – we considered two principal risks of material misstatement: disclosures in respect of revenue recognition. Determining the percentage of completion on shipbuilding contracts; and determining when services or obligations have been delivered to assess Impairment risk to goodwill and intangible assets relating to business whether revenue from port terminals, towage operations, logistics and combinations (US$30.6m and US$18.6m respectively (2015: US$27.4m offshore businesses have been recognised in the correct period. and US$16.6m respectively)) Risk vs 2015: (cid:1)(cid:2) Refer to page 22 (Finance Committee Report), page 39 (accounting policy) and We also considered the adequacy of the Group’s accounting policy The Group recognises shipbuilding revenue based on the stage of page 47 (financial disclosures). completion of contracts, which is assessed by reference to the proportion of contract costs incurred for the work performed to the balance sheet • The risk – The Group’s investments in Tecon Rio Grande, Tecon Salvador date relative to the estimated total contract costs to completion. The and Brasco all gave rise to intangible assets and goodwill on acquisition. recognition of revenue therefore relies on estimates of the final out-turn These investments are separate cash-generating units (CGU) and are of costs on each contract, which are inherently judgemental and could be tested for impairment as described in note 1. The value in use of the susceptible to a material misstatement. CGUs was assessed based on discounted cash flows projections. Due to the inherent risk and uncertainty involved in forecasting and discounting The Group recognises revenue when services in its port terminals, towage future cash flows in this industry in a developing economy, this is one of operations, logistics and offshore businesses have been fulfilled. The the key judgemental areas that our audit concentrated on. There is a risk recognition of this revenue could be susceptible to timing errors in of recoverability of the Group’s significant goodwill and intangible assets determining when services or obligations have been delivered, due to possible weakening demand or the variability of the cost base in particularly given the Group’s large volume and geographical spread of this industry. transactions in progress at year end. This could result in revenue being recognised in the incorrect period. • Our response – Our audit procedures included testing the Group’s forecasting by considering the historical accuracy of previous forecasts. • Our response – In evaluating shipbuilding revenue, our audit procedures We compared actual results in the current year to forecasts prepared in included testing all completed contracts at year end by agreeing revenue previous periods and substantiated significant variances. We compared recognized to invoices raised, underlying contracts and correspondence the Group’s port terminal cash-flow assumptions against underlying with counterparties. For all construction projects that were not completed contracts to agree revenue streams and contract end dates. In addition, at year end, We obtained the project management reviews supporting the we used our own experience nd discussions with a range of operational estimates of actual and forecast out-turn costs and challenged senior personnelto assess the probability of contracts being won, renewed or operational, commercial and financial management personnel on the lost, which are included as future cash flows in the forecasts. We used our judgements underlying those estimates and investigated any significant own corporate finance valuation specialists to assist us in evaluating the variances between actual and forecast out-turn costs. We evaluated the Directors’ assumptions and judgements relating to projected economic financial performance of contracts against budget and historical trends to growth, inflation, exchange rates, cost base, terminal values and discount assess management’s forecasts. We also undertook site visits to physically rates used to derive recoverable amounts. We compared the Group’s 25 Ocean Wilsons Holdings Limited/Annual Report 2016 Independent Auditor’s Report to the Members of Ocean Wilsons Holdings Limited Only assumptions to externally derived data, industry norms and our (2015: 5.3%). Component teams performed procedures on foreign exchange expectations based on our knowledge of the client and experience of the gains or losses. We reported to the finance committee any corrected or industry in which it operates. As part of this procedure, sensitivities over uncorrected identified misstatements exceeding US$0.25m (2015: US$0.27m), each of the assumptions and judgements were evaluated. in addition to other identified misstatements that warranted reporting on We considered the adequacy of the Group’s disclosures in respect of qualitative grounds. impairment testing and whether disclosures about the sensitivity of the Of the Group’s 23 reporting components (2015: 25), we subjected 7 to audits outcome of the impairment assessment to changes in key assumptions for Group reporting purposes (2015: 9) and 16 to specified risk-focused audit properly reflected the risks inherent in the key assumptions and the procedures (2015: 16) over all material financial statement captions . Those 16 requirements of accounting standards. components were not individually financially significant enough to require an audit for group reporting purposes, but did present specific individual balances Provisions (US$20.0m (2015: US$13.9m)) Risk vs 2015: (cid:1)(cid:2) that needed to be addressed. Refer to page 22 (Finance Committee Report), page 37 (accounting policy) and pages 59 and 60 (financial disclosures). The components within the scope of our work accounted for the following percentages of the group’s results: • The risk – As is common for businesses in Brazil, the Group receives a high volume of legal claims from general civil proceedings, labour claims and changing tax legislation. These resultant contingent liabilities are potentially significant and the application of accounting standards to determine the amount, if any, to be provided as a liability, is inherently subjective. In making these decisions, the Directors use their judgement and where appropriate receive external advice, in order to make their best estimate of provisions to be recorded in the financial statements. This is one of the key areas that our audit concentrated on as a result of the impact that a material claim could have on the Group’s financial position and result for the year. • Our response – Our audit procedures included obtaining an understanding from the Directors and in-house legal counsel of the basis for their estimates, and challenging the basis used with reference to the latest available corroborative information. This involved an assessment of correspondence with the Group’s external counsel on all significant legal cases and discussions with them when further clarity was deemed necessary. In addition, we obtained direct formal confirmations to confirm the amounts and status of claims from the Group’s external counsel for all significant litigation. With regard to open tax cases, in addition to the above we used our own tax specialists to assess the Group’s tax positions based on its correspondence with the relevant tax authorities and our knowledge of local tax jurisdictions. We analysed and challenged the assumptions used to determine tax provisions based on our tax specialists’ knowledge and experiences of the application of the international and local legislation by the relevant authorities and courts. We also assessed whether the Group’s disclosures detailing significant legal proceedings adequately disclose the provisions and contingent liabilities of the Group. 3. Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at US$5.0m (2015: US$5.35m), determined with reference to a benchmark of average Group profit before taxation excluding foreign exchange gains or losses over a four year average period, of US$104.9m, of which it represents 4.8%, Group Number profit Group of Group before total components revenue tax assets 7 16 23 25 83% 17% 96% 89% 4% 11% 100% 100% 100% 100% 100% 100% Audits for Group reporting purposes Specific risk-focused audit procedures Total Total (2015) The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which were US$2.5m for the component in Jersey and a range of US$1.3m to US$4.7m for the components in Brazil (2015: US$1.3m to US$5.0m), having regard to the mix of size and risk profile of the Group across the components. The work on 22 of the 23 components in the Group were performed by the component auditor in Brazil and the component in Jersey is audited by the Group team. The Group team visited Brazil twice in the year, including to assess the audit risk and strategy. Telephone conference meetings were also held with the component auditor. At these visits and meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. 4. We have nothing to report on the disclosures of principal risks Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: • the directors’ viability statement on page 23, concerning the principal risks, their management, and, based on that, the directors’ assessment and expectations of the Group’s continuing in operation over the 3 years to 2018; or • the disclosures in note [2] of the financial statements concerning the use of the going concern basis of accounting. 26 Ocean Wilsons Holdings Limited/Annual Report 2016 5. We have nothing to report in respect of the matters on which we are The purpose of our audit report and to whom we owe our responsibilities required to report by exception This report is made solely to the Company’s members, as a body, in Under ISAs (UK and Ireland) we are required to report to you if, based on the accordance with section 90 of the Bermudan Companies Act 1981. Our audit knowledge we acquired during our audit, we have identified other information work has been undertaken so that we might state to the Company’s members in the annual report that contains a material inconsistency with either that those matters we are required to state to them in an auditor’s report and for knowledge or the financial statements, a material misstatement of fact, or that no other purpose. To the fullest extent permitted by law, we do not accept or is otherwise misleading. assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we In particular, we are required to report to you if: have formed. • we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider John Luke that the annual report and financial statements taken as a whole is fair, for and on behalf of KPMG LLP balanced and understandable and provides the information necessary for Chartered Accountants shareholders to assess the Group’s position and performance, business 15 Canada Square, London E14 5GL model and strategy; or 24 March 2017 • the finance committee report does not appropriately address matters communicated by us to the finance committee. Under the Listing Rules we are required to review: • • the directors’ statements, set out on page 23, in relation to going concern and longer-term viability; and the part of the Corporate Governance Statement on pages 18 to 23 relating to the Company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review. We have nothing to report in respect of the above responsibilities. Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 24, the directors are responsible for the preparation of financial statements which give a true and fair view. Our responsibility is to audit, and express an opinion on, the Group financial statements in accordance with applicable law and international Standards of Auditing (UK and Ireland). Those standards require us to comply with the UK Ethical Standards for Auditors. Scope of an audit of financial statements performed in accordance with ISAs (UK and Ireland) A description of the scope of an audit of financial statements is provided on our website at www.kpmg.com/uk/auditscopeother 2014. This report is made subject to important explanations regarding our responsibilities, as published on that website, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. 27 Ocean Wilsons Holdings Limited/Annual Report 2016 Consolidated Statement of Comprehensive Income for the year ended 31 December 2016 Revenue Raw materials and consumables used Employee benefits expense Depreciation & amortisation expense Other operating expenses Profit/(loss) on disposal of property, plant and equipment Operating profit Share of results of joint venture Investment revenue Other gains and losses Finance costs Foreign exchange gains/(losses) on monetary items Profit before tax Income tax expense Profit for the year Other comprehensive income: Items that are or may be reclassified subsequently to profit and loss Employee benefits Effective portion of changes in fair value of derivatives Exchange differences arising on translation of foreign operations Other comprehensive income/(loss) for the year Total comprehensive income/(loss) for the year Profit for the period attributable to: Equity holders of parent Non-controlling interests Total comprehensive income/(loss) for the period attributable to: Equity holders of parent Non-controlling interests Earnings per share Basic and diluted Year to Year to 31 December 31 December 2016 US$’000 457,161 (37,741) 2015* US$’000 509,268 (55,760) (144,274) (147,279) (52,585) (126,470) 745 96,836 8,073 15,065 (4,134) (599) 2,286 117,527 (36,836) 80,691 1,130 1,513 32,679 35,322 116,013 45,060 35,631 80,691 65,576 50,437 116,013 (53,214) (142,175 (1,294) 109,546 4,843 16,908 (1,388) (45,403) (15,792) 68,714 (39,455) 29,259 (108) (1,495) (81,935) (83,538) (54,279) 15,470 13,789 29,259 (32,741) (21,538) (54,279) Notes 3 6 5 17 7 8 9 10 5 12 127.4c 43.7c * The 2015 Consolidated Statement of Comprehensive Income has been represented. Provisions relating to legal claims previously reported in other operating expenses were reclassified to revenue, employee benefits expense and income tax expense, according to the underlying nature of the legal claims. For further details refer to note 2. 28 Consolidated Balance Sheet as at 31 December 2016 Non-current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax assets Trade and other receivables Investment in joint venture Other non-current assets Current assets Inventories Trading investments Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Derivatives Current tax liabilities Obligations under finance leases Bank overdrafts and loans Net current assets Non-current liabilities Bank loans Derivatives Employee benefits Deferred tax liabilities Provisions Obligations under finance leases Total liabilities Net assets Capital and reserves Share capital Retained earnings Capital reserves Translation and hedging reserve Equity attributable to equity holders of the parent Non-controlling interests Total equity Ocean Wilsons Holdings Limited/Annual Report 2016 As at As at 31 December 31 December 2016 US$’000 2015 US$’000 Notes 13 14 15 23 21 17 27 19 18 21 30,607 30,444 646,926 29,055 55,070 22,230 13,408 27,389 26,274 557,190 32,128 44,328 18,301 8,018 827,740 713,628 15,427 276,181 81,265 77,314 450,187 28,285 276,878 83,981 97,561 486,705 1,277,927 1,200,333 25 (68,257) (78,889) 24 22 (712) (3,299) (1,211) (1,339) (3,732) (1,192) (49,780) (41,490) (123,259) (126,642) 326,928 360,063 22 (325,750) (322,265) 23 26 24 27 (1,182) (648) (48,974) (20,037) (1,085) (397,676) (520,935) 756,992 11,390 521,878 31,760 (1,547) (1,308) (52,631) (13,922) (1,536) (393,209) (519,851) 680,482 11,390 501,426 31,760 (29,685) (49,542) 535,343 221,649 756,992 495,034 185,448 680,482 The accounts on pages 28 to 75 were approved by the Board on 24 March 2017. The accompanying notes are part of this Consolidated Balance Sheet. J. F. Gouvêa Vieira Chairman K. W. Middleton Director 29 Ocean Wilsons Holdings Limited/Annual Report 2016 Consolidated Statement of Changes in Equity as at 31 December 2016 For the year ended 31 December 2015 Balance at 1 January 2015 Currency translation adjustment Employee benefits (note 37) Effective portion of changes in fair value of derivatives Profit for the year Total income and expense for the period Dividends Derivatives Share based payment expense Balance at 31 December 2015 For the year ended 31 December 2016 Balance at 1 January 2016 Currency translation adjustment Employee benefits (note 37) Effective portion of changes in fair value of derivatives Profit for the year Total income and expense for the period Dividends Acquisition of non-controlling interest Share based payment expense Balance at 31 December 2016 Share capital Attributable Hedging and to equity Non- Share capital US$’000 Retained earnings US$’000 Capital Translation holders of controlling reserves US$’000 reserve the parent US$’000 US$’000 interests US$’000 Total equity US$’000 11,390 508,298 31,760 (1,677) 549,771 217,573 767,344 – – – – – – – – – (63) – 15,470 15,407 (22,279) – – – – – – – – – – (47,342) (47,342) (34,593) (81,935) – (806) (63) (806) (45) (689) (108) (1,495) – 15,470 13,789 29,259 (48,148) (32,741) (21,538) (54,279) – (22,279) (14,104) (36,383) 283 – 283 – 203 3,314 486 3,314 11,390 501,426 31,760 (49,542) 495,034 185,448 680,482 11,390 501,426 31,760 (49,542) 495,034 185,448 680,482 – – – – – – – – – 659 – 45,060 45,719 (22,279) (2,988) – – – – – – – – – 18,953 18,953 13,726 32,679 – 904 659 904 471 609 1,130 1,513 – 45,060 35,631 80,691 19,857 65,576 50,437 116,013 – – – (22,279) (15,235) (37,514) (2,988) (2,411) (5,399) – 3,410 3,410 11,390 521,878 31,760 (29,685) 535,343 221,649 756,992 The Group has one class of ordinary share which carries no right to fixed income. Capital reserves The capital reserves arise principally from transfers from revenue to capital reserves made in the Brazilian subsidiaries arising in the following circumstances: (a) profits of the Brazilian subsidiaries and Brazilian holding company which in prior periods were required by law to be transferred to capital reserves and other profits not available for distribution; and (b) Wilson Sons Limited bye-laws require the company to credit an amount equal to 5% of the company’s net profit to a retained earnings account to be called legal reserve until such amount equals 20% of the Wilson Sons Limited share capital. Hedging and translation reserve The hedging and translation reserve arises from exchange differences on the translation of operations with a functional currency other than US Dollars and effective movements on hedging instruments. Amounts in the statement of changes of equity are stated net of tax where applicable. 30 Consolidated Cash Flow Statement for the year ended 31 December 2016 Net cash inflow from operating activities Investing activities Acquisition of non-controlling interest Interest received Dividends received from trading investments Proceeds on disposal of trading investments Purchase of trading investments Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Net cash used in investing activities Financing activities Dividends paid Dividends paid to non-controlling interests in subsidiary Repayments of borrowings Repayments of obligations under finance leases New bank loans raised Derivative paid Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Ocean Wilsons Holdings Limited/Annual Report 2016 Notes 29 28 11 Year to Year to 31 December 31 December 2016 US$’000 93,812 (1,855) 7,460 4,811 63,664 (67,101) 3,174 (96,209) (5,277) (91,333) (22,279) (15,235) (40,965) (1,086) 46,604 (1,016) (33,977) 2015 US$’000 145,459 – 11,702 4,244 57,783 (75,558) 987 (65,779) (2,238) (68,859) (22,279) (14,104) (49,894) (1,081) 31,881 (445) (55,922) (31,498) 20,678 97,561 103,810 11,251 (26,927) 77,314 97,561 31 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts for the year ended 31 December 2016 1 General Information Ocean Wilsons Holdings Limited is a company incorporated in Bermuda under the Companies Act 1981 and the Ocean Wilsons Holdings Limited Act, 1991. The address of the registered office is given on page 16. The nature of the Group’s operations and its principal activities are set out in the operating and financial review on pages 1 to 15. These financial statements are presented in US Dollars because that is the currency of the primary economic environment in which the Group operates. Entities with a functional currency other than US Dollars are included in accordance with the policies set out in note 2. 2 Significant accounting policies and critical accounting judgements Basis of accounting The financial statements have been prepared in accordance with IFRSs adopted for use by the International Accounting Standards Board (“IASB”). The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments and share-based payments liabilities that are measured at fair values. The principal accounting policies adopted are set out below. Going concern The directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group closely monitors and manages its liquidity risk. The Group has considerable financial resources including US$77.3 million in cash and cash equivalents and the Group’s borrowings have a long maturity profile. The Group’s business activities together with the factors likely to affect its future development and performance are set out in the Chairman’s statement, Operating review and Investment Manager’s report on pages 1 to 15. The financial position, cash flows and borrowings of the Group are set out in the financial review in pages 6 to 10. In addition note 36 to the financial statements include details of its financial instruments and hedging activities and its exposure to credit risk and liquidity risk. Details of the Group’s borrowings are set out in note 22. Based on the Group’s forecasts and sensitivities run, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Reclassification Provisions relating to legal claims were previously reported in other operating expenses. In 2016 to improve the transparency of the financial statements, the Group has decided to reclassify provisions to revenue, employee benefits expense and income tax expense, according to the underlying nature of the legal claims. Previous financial figures and those reclassified are as follows: Revenue Employee benefits expense Other operating expenses Income tax expense Total Basis of consolidation As presented Reclassified 31 December 31 December 2016 US$’000 – – (3,706) – 2015* US$’000 346 (3,679) (622) 249 (3,706) (3,706) The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year (collectively the “Group”). The Group controls an entity when it is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interest’s share of changes in equity since the date of the combination. Where a change in percentage of interests in a controlled entity does not result in a change of control, the difference between the consideration paid for the additional interest and the book value of the net assets in the subsidiary at the time of the transaction is taken direct to equity. 32 Ocean Wilsons Holdings Limited/Annual Report 2016 2 Significant accounting policies and critical accounting judgements (continued) Foreign currency The functional currency for each Group entity is determined as the currency of the primary economic environment in which it operates (its functional currency). Transactions other than those in the functional currency of the entity are translated at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the statement of comprehensive income for the period. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. On consolidation, the statement of comprehensive income of entities with a functional currency other than US Dollars are translated into US Dollars, the Group’s presentational currency, at average rates of exchange. Balance sheet items are translated into US Dollars at year end exchange rates. Exchange differences arising on consolidation of entities with functional currencies other than US Dollars are classified as equity and are recognised in the Group’s translation reserve. Investments in entities accounted for using the equity method The Group’s investments in entities accounted for using the equity method include its interests in associates and jointly controlled (joint ventures) ventures. Associates are those entities in which the Group, directly or indirectly, has significant influence but not control or joint control, over the financial and operating policies. A jointly controlled entity is in a contractual agreement whereby the Group has joint control, where the Group is entitled to the net assets of the contractual agreement, and not entitled to specific assets and liabilities arising from the agreement. Investments in associates and jointly controlled entities are accounted for using the equity method. Such investments are initially recognised at cost, which includes expenses for the transaction. After initial recognition, the financial statements include the Group’s share in the profit or loss for the year and other comprehensive income of the investee until the date that significant influence or joint control ceases. Investments in joint ventures Interests in joint ventures A joint venture is a contractual agreement where the Group has rights to the net assets of the contractual arrangement and is not entitled to specific assets and liabilities arising from the agreement. Investments in joint venture entities are accounted for using the equity method. After initial recognition, the financial statements include the Group’s share in the profit or loss for the year and other comprehensive income of the investee until the date that significant influence or joint control ceases. Interests in joint operations Joint operation is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control which is when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control. The joint operations assets and any liabilities incurred jointly with other ventures are recognised in the financial statements of the relevant entity and classified according to their nature. The Group’s share of the assets, liabilities, income and expenses of joint operation entities are combined with the equivalent items in the consolidated financial statements on a line-by-line basis. The consolidated financial statements include the accounts of joint ventures and joint operations which are listed in Note 17. Employee Benefits Short-term employee benefits Obligations of short-term employee benefits are recognised as personnel expenses as the corresponding service is provided. The liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Stock option plan For equity-settled share-based payment transactions, the Group measures the options granted, and the corresponding increase in equity, directly, at the fair value of the option grant. Subsequent to initial recognition and measurement the estimate of the number of equity instruments for which the service and non-market performance conditions are expected to be satisfied is revised during the vesting period. The cumulative amount recognised is based on the number of equity instruments for which the service and non-market conditions are expected to be satisfied. No adjustments are made in respect of market conditions. 33 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) Employee Benefits (continued) Share-Based payment transactions The fair value of the amount payable to employees regarding the rights on the valuation of the shares, which are settled in cash, is recognised as an expense with a corresponding increase in liabilities during the period that the employees are unconditionally entitled to payment. The liability is remeasured at each balance sheet date and at settlement date based on the fair value of the rights on valuation. Any changes in the fair value of the liability are recognised in income as personnel expenses. Defined health benefit plans The Group's net obligation regarding defined health benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees receive in return for their service in the current period and prior periods. That health benefit is discounted to determine its present value. Any costs of unrecognised past service and the fair value of any plan assets are deducted. The calculation of the liability of the defined health benefit plan is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential liability for the Group, the liability to be recognised is limited to the present value of economic costs in the form of future contributions to the plan. To calculate the present value of economic liabilities, any minimum funding requirements applicable are taken into account. Remeasurements of the net defined health benefit obligation, which include: actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if applicable, excluding interest), are immediately recognised in OCI. The Group determines the net interest on the net amount of defined benefit liabilities (assets) for the period by multiplying them by the discount rate used to measure the defined health benefit obligation. Defined benefit liabilities (assets) for the period take into account the balance at the beginning of the period covered by the financial statements and any changes in the defined health benefit net liability (asset) during the period due to the payment of contributions and benefits. Net interest and other expenses related to defined health benefit plans are recognised in income. Other long-term employee benefits The Group’s net obligation in respect of other long-term employee benefits is the amount of future benefit that employees receive in return for the service rendered in the current year and previous years. That benefit is discounted to determine its present value. Remeasurements are recognised in the income statement. Benefits of termination of employment relationship The benefits of termination of employment relationship are recognised as an expense when the Group can no longer withdraw the offer of such benefits and when the Group recognizes the costs of restructuring. If payments are settled after 12 months from the balance sheet date, then they are discounted to their present values. Taxation Tax expense for the period comprises current tax and deferred tax. Current tax is based on assessable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on temporary differences (i.e. differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit). Deferred tax is accounted for using the balance sheet liability method and is provided on all temporary differences with certain limited exceptions as follows. Deferred tax is not provided: in respect of tax payable on undistributed earnings of subsidiaries, associates and joint ventures where the Group is able to control the remittance of profits and it is probable that there will be no remittance of past profits earned in the foreseeable future; on the initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination; nor is deferred tax provided on subsequent changes in the carrying value of such assets and liabilities, for example where they are depreciated; or on the initial recognition of any non-tax deductible goodwill. • • • 34 Ocean Wilsons Holdings Limited/Annual Report 2016 2 Significant accounting policies and critical accounting judgements (continued) Taxation (continued) Deferred tax assets are recognised only to the extent that it is probable that they will be recovered through sufficient future taxable profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also taken directly to equity. A company will normally have a legally enforceable right to set off a deferred tax asset against a deferred tax liability when they relate to income taxes levied by the same taxation authority and the taxation authority permits the company to make or receive a single net payment. In the consolidated financial statements, a deferred tax asset of one entity in the Group cannot be offset against a deferred tax liability of another entity in the Group, as there is no legally enforceable right to offset tax assets and liabilities between Group companies. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is charged so as to write off the cost or valuation of assets, other than land and assets under construction, over their estimated useful lives, using the straight-line method as follows: Freehold Buildings: 25 to 60 years Leasehold Improvements: Lower of the rental period or useful life considering residual values Floating Craft: Vehicles: 25 to 35 years 5 years Plant and Equipment: 5 to 20 years The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Assets in the course of construction are carried at cost, less any recognised impairment loss. Costs include professional fees for qualifying assets. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for intended use. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets, except when there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term in which the asset shall be fully depreciated over the shorter of the lease term and its useful life. Dry docking costs are capitalised and depreciated over the period in which the economic benefits are received. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in the profit or loss in the period in which they are incurred. Goodwill The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rate, growth rates and expected changes to selling prices and costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash generating unit. Growth rates are based on management’s forecasts and historical trends. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. 35 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) Business combinations Business combinations are accounted using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated considering the sum of the acquisition-date fair values of assets, liabilities and the equity interests transferred to the Group when the control of the acquisition is transferred. Acquisition-related costs are recognised in the income statement as incurred. Any goodwill that arises is tested annually for impairment. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments is recognised in the income statement. Sale of non-controlling interest Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interest’s share of changes in equity since the date of the combination. Intangible assets Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. There is no indefinite life intangible asset. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in the income statement when the asset is derecognised. Impairment of tangible and other intangible assets Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating unit (“CGU”) are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials, spare parts and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. 36 Ocean Wilsons Holdings Limited/Annual Report 2016 2 Significant accounting policies and critical accounting judgements (continued) Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. • Trade Receivables: Trade receivables, loans and other amounts receivable are stated at the initial fair value of the amounts due, less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is recognised in the income statement. • Investments: Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at the fair value, plus directly attributable transaction costs. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in the income statement for the period. The fair value of financial assets traded in active markets are based on the mid market price the close of trading on the reporting date. Unquoted investments held for trading purposes are stated at fair value through profit and loss as determined by using various valuation techniques, except where fair value cannot be reliably measured, when the investment is held at cost less any provision for impairment. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the income statement for the period. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. • • Cash and Cash Equivalents: Cash and cash equivalents comprise cash on hand and other short-term highly liquid investments that are convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Bank Borrowings: Interest-bearing bank loans and overdrafts are recorded as the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the statement of comprehensive income using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Derivatives The Group periodically uses derivative financial instruments to reduce exposure to foreign exchange and interest rate movements. Derivatives are measured at each balance sheet date at fair value. Gains and losses arising from changes in fair value for exchange and interest derivatives are included in the income statement for the period within investment revenue or finance costs. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value, with gains or losses reported in the statement of comprehensive income. Hedge Accounting (Cash flow hedge) The Group seeks to apply hedge accounting (cash flow hedge) in order to manage volatility in the income statement. When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in the income statement. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date and discounted where the effect is material. In the normal course of business in Brazil, the Group is exposed to local legal cases. Provisions for legal cases are made when the Group’s management, together with their legal advisors, consider the probable outcome is a financial settlement against the Group. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation based upon legal advice received. For labour claims, the provision is based on prior experience and managements’ best knowledge of the relevant facts and circumstances. For tax cases, the provision is based on managements’ best knowledge of the relevant facts and circumstances and legal advice received. 37 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) Construction contracts Shipyard construction contracts in progress represents the gross amount expected to be collected from customers for contract work performed to date. Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Construction contracts in progress is presented as part of trade and other receivables in the balance sheet for all contracts in which costs incurred plus recognised profits exceed progress billings and recognised losses. If progress billings and recognised losses exceed costs incurred plus recognised profits, then the difference is presented as deferred income/revenue in the statement of financial position. Customer advances are presented as deferred income/revenue in the balance sheet. Revenue Revenue is measured at fair value of the consideration received or receivable for goods and services provided in the normal course of business net of trade discounts and other sales related taxes. Maritime revenue Revenue related to services is recognised when the work in proportion to the stage of completion of the transaction contracted has been performed in accordance with contracted terms. Revenue from construction contracts is recognised by reference to the stage of completion of the contract, Revenue from providing containerised and associated services is recognised on the date in which the services have been performed. Revenue from providing towage services is recognised on the date on which the services have been performed. Revenue from providing agency and logistics services is recognised when the services have been agreed and the transaction has occurred. Investment revenue Interest revenue is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. Dividend income from investments is recognised when the shareholders rights to receive payment have been established. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease, or if lower the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the statement of comprehensive income. Rentals payable under finance leases are charged to income on a straight-line basis over the term of the relevant lease. Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group’s accounting policies, which are described above, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements. 38 Ocean Wilsons Holdings Limited/Annual Report 2016 2 Significant accounting policies and critical accounting judgements (continued) Provisions (including provision for Brazilian taxes) In the normal course of business in Brazil, the Group is exposed to local legal cases. Provisions for legal cases are made when the Group’s management, together with their legal advisors, consider the probable outcome is a financial settlement against the Group. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation based upon legal advice received. For labour claims, the provision is based on prior experience and management’s best knowledge of the relevant facts and circumstances. For tax cases the provision is based on management’s best knowledge of the relevant facts and circumstances and legal advice received. There are uncertainties regarding the interpretation of complex tax regulations and the value and timing of future taxable results. Given the long-term nature and the complexity of existing contracts, differences between the actual results and the assumptions adopted or future changes in such assumptions could require future adjustments to the tax income and expense already recorded. The Group establishes provisions, based on applicable estimates, for possible consequences of auditing by tax authorities of the respective jurisdictions where it operates. The amount of such provisions is based on several factors, such as prior experiences with fiscal audits and different interpretations of the tax regulations by the taxable entity and by the tax authority in question. Such differences in interpretation may arise for the most diverse matters, depending on the conditions in force in the respective domicile of the Group’s entity. Management has considered a range of possible outcomes in relation to provisions, in the context of the uncertainties noted above and they consider that the position taken represents the best estimate at the balance sheet date. Current and deferred tax The Group records assets related to deferred taxes resulting from temporary differences and tax losses between the book value of assets and liabilities and their tax bases. Deferred tax assets are recognised to the extent that the Group expects to generate sufficient taxable profit based on projections and forecasts prepared by management. Such projections and forecasts include several assumptions regarding the Group’s performance, foreign exchange rates, volume of services, other rates and factors that may differ from present estimates. Under the current Brazilian tax legislation, tax losses do not expire for utilization. However, cumulative tax losses can only be offset by up to 30.0% of the annual taxable profit. Management has considered a range of possible outcomes in relation to deferred tax, in the context of the expected future taxable profits noted above and they consider that the position taken represents the best estimate at the balance sheet date. Impairment of goodwill and intangibles The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite-lived intangible assets could be susceptible to impairment and are tested annually for impairment. An impairment loss is recognised if the carrying amount of an asset or cash generating unit “CGU” exceeds its recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. Management has considered a range of possible outcomes in relation to the assumptions used in calculating the discounted cash flow to support the goodwill and intangible assets. They consider that the position taken represents the best estimate at the balance sheet date, further analysis is included in note 13. 39 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) Revenue recognition Shipyard construction contracts in progress represents the gross amount expected to be collected from customers for contract work performed to date. Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. The Group also recognises remaining maritime revenue when services have been fulfilled. The recognition of this revenue could be susceptible to timing errors in determining when services or obligations have been delivered, particularly given the Group’s large volume and geographical spread of transactions in progress at year end. Management has considered a range of possible outcomes in relation to the recognition of shipyard construction revenue. They consider that the position taken represents the best estimate at the balance sheet date. Stock option plan The fair value of equity-settled share-based payments are determined using a binomial model, as the awards are equity-settled the fair value is assessed at the date of grant. The assumptions used in determining this fair value include, amongst others, the life of the options, share price volatility, dividend yield, employee turnover and the risk free rate. Expected volatility is determined by calculating the volatility of the Group’s share price over a historical period. Expected dividend yield is based on the Wilson Sons dividend policy. The employee turnover is consistent with recent turnover and is an appropriate assumption for the employees in the plan. In determining the risk free rate the Group utilises the yield on a zero coupon government bond in the currency in which the exercise price is expressed. Management has considered a range of possible outcomes in relation to the assumptions used in calculating the fair value of equity-settled share-based payments. They consider that the position taken represents the best estimate at the balance sheet date. Useful lives of property, plant and equipment and intangible assets with finite useful lives Depreciation and amortisation are charged so as to write off the cost or valuation of assets, other than land and assets under construction, over their estimated useful lives, using the straight-line method. Estimated useful lives are determined based on prior experience and management’s best knowledge, and are reviewed annually. Management has considered a range of possible outcomes in relation to the assumptions used in the estimated useful life of the Group’s assets with finite useful lives. Management performs ongoing reviews of estimated useful lives and they consider that the position taken represents the best estimate at the balance sheet date. Valuation of unquoted investments The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs. Through the Investment Manager management has considered the valuation of investments in particular level 3 assets and they consider that the position taken represents the best estimate at the balance sheet date. New standards and interpretations not yet adopted A number of new standards and amendments to standards can be early adopted and effective for annuaI periods beginning after 1 January 2016; however, the Group has not applied the following new or amended standards in preparing these consolidated financial statements. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The Group plans to adopt IFRS 15 in its consolidated financial statements for the year ending 31 December 2018, using the retrospective approach. As a result, the Group will apply all of the requirements of IFRS 15 to each comparative period presented and adjust its consolidated financial statements. 40 Ocean Wilsons Holdings Limited/Annual Report 2016 2 Significant accounting policies and critical accounting judgements (continued) New standards and interpretations not yet adopted (continued) The Group is currently performing a detailed assessment of the impact resulting from the application of IFRS 15 and expects to disclose additional quantitative information before it adopts IFRS 15. IFRS 9 Financial instruments In July 2014, the International Accounting Standards Board issued the final version of IFRS 9 Financial Instruments. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group currently plans to apply IFRS 9 initially on 1 January 2018. The actual impact of adopting IFRS 9 on the Group’s consolidated financial statements in 2018 is not known and cannot be reliably estimated because it will be dependent on the financial instruments that the Group holds and economic conditions at that time as well as accounting estimates and judgements that it will make in the future. The new standard will require the Group to revise its accounting processes and internal controls related to reporting financial instruments and these changes are not yet complete. IFRS 16 Leases IFRS 16 introduces a single, on-balance lease sheet accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases- Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 applies to annual reporting periods beginning on or after 1 January 2019. The Group has started an initial assessment of the potential impact on its consolidated financial statements. So far, the consolidated financial statements will be impacted, but the Group has not yet quantified all the impacts on its reported assets and liabilities following an adoption of IFRS 16. Other amendments The following new or amended standards are not expected to have a significant impact on the Group’s consolidated financial statements: • • • • Disclosure Initiative (Amendments to IAS 7); Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12); Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2), and Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). 3 Revenue An analysis of the Group’s revenue is as follows: Sales of services Revenue from construction contracts Investment income (note 7) All revenue is derived from continuing operations. Year ended Year ended 31 December 31 December 2016 US$’000 430,753 26,408 457,161 15,065 472,226 2015* US$’000 455,383 53,885 509,268 16,908 526,176 * The 2015 comparative has been represented. Provisions relating to legal claims previously reported in other operating expenses were reclassified to revenue, employee benefits expense and income tax expense, according to the underlying nature of the legal claims. For further details refer to note 2. 41 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 4 Business and geographical segments Business segments Ocean Wilsons has two reportable segments: maritime services and investments. The maritime services segment provides towage, port terminals, ship agency, offshore, logistics and shipyard services in Brazil. The investment segment holds a portfolio of international investments. Segment information relating to these Maritime Services Investment Unallocated Consolidated Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2016 US$’000 457,161 101,536 8,073 10,236 – (599) 2,623 121,869 (36,836) 85,033 (102,418) (52,584) 2016 US$’000 – (2,559) – 4,824 (4,134) – 35 (1,834) – 2016 US$’000 – (2,141) – 5 – – (372) (2,508) – (1,834) (2,508) – – – (1) 2016 US$’000 457,161 96,836 8,073 15,065 (4,134) (599) 2,286 (117,527) (36,836) 80,691 (102,418) (52,585) 1,036,829 238,898 2,200 1,277,927 (520,341) (244) (350) (520,935) businesses is presented below. For the year ended 31 December 2016 Revenue Result Segment result Share of results of joint ventures Investment revenue Other gains and losses Finance costs Foreign exchange losses on monetary items Profit before tax Tax Profit after tax Other information Capital additions Depreciation and amortisation Balance Sheet Assets Segment assets Liabilities Segment liabilities 42 Ocean Wilsons Holdings Limited/Annual Report 2016 Maritime Services Investment Unallocated Consolidated Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2015 US$’000 509,268 114,531 4,843 12,660 – (45,403) (15,883) 70,748 (39,455) 31,293 (69,889) (53,213) 2015 US$’000 – 2015 US$’000 2015 US$’000 – 509,268 (2,681) (2,304) 109,546 – 4,248 (1,388) – (46) 133 – 133 – – – – – – 137 (2,167) – (2,167) – (1) 4,843 16,908 (1,388) (45,403) (15,792) 68,714 (39,455) 29,259 (69,889) (53,214) 953,236 245,302 1,795 1,200,333 (519,224) (242) (385) (519,851) 4 Business and geographical segments (continued) For the year ended 31 December 2015* Revenue Result Segment result Share of results of joint ventures Investment revenue Other gains and losses Finance costs Foreign exchange losses on monetary items Profit before tax Tax Profit after tax Other information Capital additions Depreciation and amortisation Balance Sheet Assets Segment assets Liabilities Segment liabilities * The 2015 comparative has been represented. Provisions relating to legal claims previously reported in other operating expenses were reclassified to revenue, employee benefits expense and income tax expense, according to the underlying nature of the legal claims. For further details refer to note 2. Finance costs and associated liabilities have been allocated to reporting segments where interest costs arise from loans used to finance the construction of fixed assets in that segment. Geographical Segments The Group’s operations are located in Bermuda, Brazil, Panama and Uruguay. All of the Group’s sales are derived in Brazil. The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and intangible assets, analysed by the geographical area in which the assets are located. Brazil Bermuda and other Additions to Carrying amount of property, plant and equipment segment assets and intangible assets Year ended Year ended 31 December 31 December 31 December 31 December 2016 US$’000 985,329 292,598 2015 US$’000 909,652 290,681 2016 US$’000 102,418 – 2015 US$’000 69,889 – 1,277,927 1,200,333 102,418 69,889 43 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 5 Profit for the year Profit for the year has been arrived at after charging: Depreciation of property, plant and equipment Amortisation of intangible assets Operating lease rentals Auditor’s remuneration for audit services (see below) Non-executive directors emoluments A more detailed analysis of auditor’s remuneration is provided below: Financial statement audit of group and subsidiaries Other services 6 Employee benefits expense Aggregate remuneration comprised: Wages and salaries Share based payments Social security costs Other pension costs Year ended Year ended 31 December 31 December 2016 US$’000 47,337 5,248 17,178 460 491 460 – 460 2015 US$’000 47,562 5,651 11,313 481 446 481 – 481 Year ended Year ended 31 December 31 December 2016 US$’000 2015* US$’000 117,597 120,540 3,420 22,253 1,004 3,346 22,395 998 144,274 147,279 * The 2015 comparative has been represented. Provisions relating to legal claims previously reported in other operating expenses were reclassified to revenue, employee benefits expense and income tax expense, according to the underlying nature of the legal claims. For further details refer to note 2. 7 Investment revenue Interest on bank deposits Dividends from equity investments Other interest 8 Other gains and losses Decrease in fair value of trading investments held at year end Profit on disposal of trading investments Other gains and losses form part of the movement in trading investments as outlined in note 18. 44 Year ended Year ended 31 December 31 December 2016 US$’000 7,919 4,811 2,335 15,065 2015 US$’000 10,725 4,244 1,939 16,908 Year ended Year ended 31 December 31 December 2016 US$’000 (6,030) 1,896 (4,134) 2015 US$’000 (4,396) 3,008 (1,388) 9 Finance costs Interest on bank overdrafts and loans Exchange (gain)/loss on foreign currency borrowings Interest on obligations under finance leases Other interest Ocean Wilsons Holdings Limited/Annual Report 2016 Year ended Year ended 31 December 31 December 2016 US$’000 12,277 (12,806) 414 714 599 2015 US$’000 11,833 32,604 596 370 45,403 Borrowing costs incurred on qualifying assets of US$0.8 million (2015: US$1.5 million) were capitalised in the year at an average interest rate of 3.12% (2015: 3.00%). 10 Taxation Current Brazilian taxation Corporation tax Social contribution Total current tax Deferred tax Charge/(credit) for the year in respect of deferred tax liabilities (Credit)/charge for the year in respect of deferred tax assets Total deferred tax Total taxation Year ended Year ended 31 December 31 December 2016 US$’000 2015* US$’000 26,900 10,924 37,824 20,661 (21,649) (988) 36,836 26,755 11,055 37,810 (29,069) 30,714 1,645 39,455 * The 2015 comparative has been represented. Provisions relating to legal claims previously reported in other operating expenses were reclassified to revenue, employee benefits expense and income tax expense, according to the underlying nature of the legal claims. For further details refer to note 2. Brazilian corporation tax is calculated at 25% (2015: 25%) of the assessable profit for the year. Brazilian social contribution tax is calculated at 9% (2015: 9%) of the assessable profit for the year. At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda and accordingly, no provision for such taxes has been recorded by the Company. In the event that such taxes are levied, the company has received an undertaking from the Bermuda Government exempting it from all such taxes until 31 March 2035. 45 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 10 Taxation (continued) The charge for the year can be reconciled to the profit per the statement of comprehensive income as follows: Profit before tax Tax at the aggregate Brazilian tax rate of 34% (2015: 34%) Deferred tax items not included in determining taxable profit Retranslation of non-current asset valuation Exchange variance on loans Tax effect of subsidiary losses not recognised in deferred tax assets Total deferred tax not included in determining taxable profit Tax effect of income/(expenses) that are not included in determining taxable profit Tax effect of foreign exchange gain or losses on monetary items Tax effect of share of results of joint ventures Tax effect of other items that are not included in determining taxable profit Tax adjustments in respect of prior years Items deductible for Brazilian taxable profit not included in the income statement Interest on own equity Income/expenses incurred outside Brazil Share option scheme Effect of different tax rates of subsidiaries operating in other jurisdictions Tax expense for the year Effective rate for the year Year ended Year ended 31 December 31 December 2016 US$’000 117,527 39,959 (22,376) 14,397 5,079 (2,900) (2,325) (2,745) (178) 2015 US$’000 68,714 23,363 27,003 (24,999) 3,291 5,295 5,369 (1,647) 6,400 2,196 849 – (1,299) 1,159 1,670 36,836 31% 1,127 (2) 39,455 57% The Group earns its profits primarily in Brazil. Therefore, the tax rate used for tax on profit on ordinary activities is the standard rate in Brazil of 34%, consisting of corporation tax, 25% and social contribution 9%. 11 Dividends Amounts recognised as distributions to equity holders in the period: Final dividend paid for the year ended 31 December 2015 of 63c (2014: 63c) per share Proposed final dividend for the year ended 31 December 2016 of 63c (2015: 63c) per share 12 Earnings per share The calculation of the basic and diluted earnings per share is based on the following data: Year ended Year ended 31 December 31 December 2016 US$’000 22,279 22,279 2015 US$’000 22,279 22,279 Year ended Year ended 31 December 31 December 2016 US$’000 2015 US$’000 Earnings: Earnings for the purposes of basic earnings per share being net profit attributable to equity holders of the parent 45,060 15,470 Number of shares: Weighted average number of ordinary shares for the purposes of basic and diluted earnings per share 35,363,040 35,363,040 46 Ocean Wilsons Holdings Limited/Annual Report 2016 31 December 31 December 2016 US$’000 15,821 12,306 2,480 30,607 2015 US$’000 11,704 13,205 2,480 27,389 13 Goodwill Cost and carrying amount attributed to: Tecon Rio Grande Brasco Tecon Salvador Total The goodwill associated with each cash-generating unit (Brasco, Tecon Salvador and Tecon Rio Grande) is attributed to the Maritime segment. As part of the annual impairment test review the carrying value of goodwill has been assessed with reference to its value in use reflecting the projected discounted cash flows of each CGU to which goodwill has been allocated. The cash flows are based on the remaining life of the concession. Future cash flows are derived from the most recent financial budget and for the period of concession remaining. The key assumptions used in determining value in use relate to growth rate, discount rate, inflation, volume, working capital and interest rate. Further projections include sales and operating margins, which are based on past experience, taking into account the effect of known or likely changes in market or operating conditions. Each CGU is assessed for impairment annually and whenever there is an indication of impairment. The stimated average growth rate used does not exceed the historical average for Tecon Rio Grande and Tecon Salvador. The growth rate of 3.7% above inflation has been estimated for Brasco, and a discount rate of 7.6% for all business units has been used. These growth rates reflect the products and industries in Brazil. These medium to long-term growth rates have been reviewed by management during the annual impairment test for 2016 and are considered to be appropriate for the period. After testing goodwill as mentioned above, no impairment losses were recognised for the periods presented. The Directors have considered the following individual sensitivities and are confident that no impairment would arise in any of the cash-generating units in any of the following two circumstances: • • If the discount rate was increased by 30%; or If the cash flow projections of all businesses were reduced by 30%. After testing goodwill as mentioned above, no impairment losses were recognised for the periods presented. The goodwill of Tecon Rio Grande consists of goodwill on the acquisition of Tecon Rio Grande and goodwill incorporated in Tecon Rio Grande upon acquisition. As Tecon Rio Grande has Brazilian Real as its functional currency, the part of the goodwill resulting from the merger of Tecon Rio Grande with other subsidiaries is subject to exchange rate effects. 47 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 14 Other intangible fixed assets Cost At 1 January 2015 Additions Write off Exchange differences At 1 January 2016 Additions Write off Exchange differences At 31 December 2016 Amortisation At 1 January 2015 Charge for the year Write off Exchange differences At 1 January 2016 Charge for the year Write off Exchange differences At 31 December 2016 Carrying amount 31 December 2016 31 December 2015 US$’000 64,348 2,238 (58) (12,579) 53,949 5,277 (292) 5,988 64,922 25,783 5,651 (52) (3,707) 27,675 5,248 (291) 1,846 34,478 30,444 26,274 Intangible fixed assets arose from (i) the acquisition of concession rights for the container and heavy cargo terminal in Salvador in 2000, and the Ponta Norte expansion at Tecon Salvador in 2010 (ii) the implementation of integrated management software (SAP) (iii) the Briclog acquisition in 2013 (Brasco). The additions to intangible assets in the period are mainly attributable to computer software. The breakdown of intangibles by type is as follows: Lease right – Brasco Lease right – Tecon Salvador Computer software – SAP Other computer software Other intangibles Total 31 December 31 December 2016 US$’000 13,853 5,049 1,970 9,371 201 2015 US$’000 11,998 4,624 3,025 6,479 148 30,444 26,274 The computer software is amortised over 5 years following completion of the installation. In November 2016 Tecon Salvador signed the second amendment to the terminal lease agreement, which extends the concession period until March 2050. Therefore, the amortisation expense for the lease right will be measured considering the validity of the lease contract (2050). Details are disclosed in Note 11. 48 Ocean Wilsons Holdings Limited/Annual Report 2016 15 Property, plant and equipment Land and buildings US$’000 Vehicles, plant Floating Craft and equipment US$’000 US$’000 Assets under construction US$’000 Cost or valuation At 1 January 2015 Additions Transfers Exchange differences Disposals At 1 January 2016 Additions Transfers Exchange differences Disposals At 31 December 2016 Accumulated depreciation and impairment At 1 January 2015 Charge for the year Elimination on construction contracts Exchange differences Disposals At 1 January 2016 Charge for the year Elimination on construction contracts Exchange differences Disposals At 31 December 2016 Carrying Amount At 31 December 2016 At 31 December 2015 369,587 241,997 326,663 15,296 59 (86,226) 12,394 13,440 – (98) (3,264) 255,694 392,157 7,259 (187) 38,581 (209) 301,138 75,344 12,095 – (23,755) 29,874 53,071 – (17,227) 457,875 124,499 15,434 2,553 – (88) (2,655) 63,596 10,824 – 11,356 (169) 85,607 139,831 19,809 1,068 – (16,808) 143,900 8,665 (59) (68,690) (4,715) 177,198 36,602 (152) 30,148 (9,811) 233,985 110,394 20,033 – (33,753) (2,916) 93,758 16,704 – 14,817 (8,714) 116,565 215,531 192,098 313,975 252,326 117,420 83,440 11,470 31,296 (13,440) – – 29,326 23,406 (52,732) – – – – – – – – – – – – – – – 29,326 Total US$’000 949,717 67,651 – (154,916) (8,077) 854,375 97,141 – 68,729 (27,247) 992,998 310,237 47,562 2,553 (57,508) (5,659) 297,185 47,337 1,068 26,173 (25,691) 346,072 646,926 557,190 The carrying amount of the Group’s vehicles, plant and equipment includes an amount of US$3.2 million (2015: US$12.9 million) in respect of assets held under finance leases. Land and buildings with a net book value of US$0.2 million (2015: US$0.2 million) and tugs with a value of US$0.3 million (2015: US$0.5 million) have been given in guarantee of various legal processes. The Group has pledged assets having a carrying amount of approximately US$290.5 million (2015: US$254.1 million) to secure loans granted to the Group. At 31 December 2016, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to US$20.4 million (2015: US$4.6 million). The amount mainly refers to the expansion of Brasco and investments in Tecon Salvador and Tecon Rio Grande. In November 2016 Tecon Salvador S.A signed the second amendment to the terminal lease agreement, which extends the lease term until March 2050. Based on management’s expectation and expert technical advice the estimated useful lives of the quay, terminal area, administrative building, warehouse, electrical substation, office and storage building are longer than the lease contract period. Therefore these assets will be depreciated over the remaining period of the lease contract until 2050. Portainers will be depreciated over their estimated useful life of 20 years. As a result of these changes the depreciation expense of Tecon Salvador for 2016, was US$4.0 million against US$4.5 million that would have been recorded if the change had not occurred. In 2016 the Group reviewed the economic useful life of the shipyard dry-dock and quay in Guarujá. On 1 April 2016 management adjusted the useful life of the shipyard dry-dock and buildings (from 30 years to 60 years), and as result of this change the depreciation expense, on 31 December 2016, was US$0.9 million (against US$1.0 million) that would have been recorded if there were no change. 49 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 16 Principal subsidiaries OCEAN WILSONS (INVESTMENTS) LIMITED Investment holding and dealing company WILSON SONS LIMITED Holding company Place of incorporation and operation Bermuda Method used Effective to account interest* for investment 100%** Consolidation Bermuda 58.25%** Consolidation WILSON SONS DE ADMINISTRAÇÃO E COMÉRCIO LTDA Brazil 58.25% Consolidation Holding company SAVEIROS CAMUYRANO SERVIÇOS MARÍTIMOS LTDA Brazil 58.25% Consolidation Tug operators WILSON, SONS S.A., COMÉRCIO, INDÚSTRIA, E AGÉNCIA DE NAVEGAÇÃO LTDA Brazil 58.25% Consolidation Shipbuilders WILSON, SONS ESTALEIRO LTDA Shipbuilders Brazil 58.25% Consolidation WILSON SONS AGENCIA MARÍTIMA LTDA Brazil 58.25% Consolidation Ship Agents WILSON, SONS NAVEGAÇÃO LTDA Ship Agents WILSON, SONS LOGÍSTICA LTDA Logistics WILSON, SONS TERMINAIS DE CARGAS LTDA Transport services EADI SANTO ANDRÉ TERMINAL DE CARGA LTDA Bonded warehousing WS PARTICIPAҪÕES S.A. Holding company WS PARTICIPACIONES S.A. Holding company TECON RIO GRANDE S.A. Port operator WILSON, SONS APOIO MARITIMO LTDA Tug operator BRASCO LOGÍSTICA OFFSHORE LTDA Port operator TECON SALVADOR S.A. Port operator Brazil 58.25% Consolidation Brazil 58.25% Consolidation Brazil 58.25% Consolidation Brazil 58.25% Consolidation Brazil 58.25% Consolidation Uruguay 58.25% Consolidation Brazil 58.25% Consolidation Brazil 58.25% Consolidation Brazil 58.25% Consolidation Brazil 58.25% Consolidation ** Effective interest is the net interest of Ocean Wilsons Holdings Limited after non-controlling interests. ** Ocean Wilsons Holdings Limited holds direct interests in Ocean Wilsons (Investments) Limited and Wilsons Sons Limited. The Group also has a 58.25% effective interest in a private investment fund Hydrus Fixed Income Private Credit Investment Fund. This private fund is administrated by Itaú bank and the investment policy and objectives are determined by the Wilson Sons treasury department in line with their policy. 50 Ocean Wilsons Holdings Limited/Annual Report 2016 17 Joint ventures The Group holds the following significant interests in joint operations and joint ventures at the end of the reporting period: Towage Consórcio de Rebocadores Barra de Coqueiros Consórcio de Rebocadores Baia de São Marcos Logistics Porto Campinas, Logística e Intermodal Ltda Offshore Wilson, Sons Ultratug Participações S.A.* Atlantic Offshore S.A.** Place of Proportion of ownership incorporation 31 December 31 December and operation 2016 2015 Brazil Brazil Brazil Brazil Panamá 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% ** Wilson, Sons Ultratug Participações S.A. controls Wilson, Sons Offshore S.A. and Magallanes Navegação Brasileira S.A. These latter two companies are indirect joint ventures of the Company. ** Atlantic Offshore S.A. controls South Patagonia S.A. This company is an indirect joint venture of the company. The aggregated Group’s interests in joint ventures are equity accounted. Revenue Raw materials and consumables used Employee benefits expense Depreciation and amortisation expenses Other operating expenses Loss on disposals of property, plant & equipment Results from operating activities Finance income Finance costs Foreign exchange gains/(losses) on monetary items Profit before tax Income tax expense Profit for the period Participation Equity result Year ended Year ended 31 December 31 December 2016 US$’000 141,728 (7,522) (41,382) (34,912) (17,063) (2,202) 38,647 2,661 (21,218) 9,591 29,681 (13,535) 16,146 2015 US$’000 141,975 (4,835) (40,226) (35,460) (15,534) (576) 45,344 1,117 (18,362) (15,799) 12,300 (2,613) 9,687 50% 50% 8,073 4,843 51 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 17 Joint ventures (continued) Property, plant and equipment Long-term investment Other assets Trade and other receivables Derivatives Cash and cash equivalents Total assets Bank overdrafts and loans Other non-current liabilities Trade and other payables Equity Total liabilities Guarantees 31 December 31 December 2016 US$’000 2015 US$’000 674,476 666,656 2,066 3,752 42,494 261 10,859 733,908 2,041 2,470 32,415 – 21,011 724,593 533,771 547,550 30,295 82,114 87,728 21,819 81,126 74,098 733,908 724,593 Wilson Sons Offshore S.A. loan agreements with BNDES are guaranteed by a lien on the financed supply vessel and, in the majority of the contracts, a corporate guarantee from both Wilson Sons de Adminisração e Comércio Ltda and Rebocadores Ultratug Ltda, each guaranteeing 50% of its subsidiary’s debt balance with BNDES. Magallanes Navegação Brasileira S.A.’s loan agreement with Banco do Brasil is guaranteed by a lien on the financed supply vessels. The security package also includes a standby letter of credit issued by Banco de Crédito e Inversiones – Chile for part of the debt balance, assignment of Petrobras’ long-term contracts and a corporate guarantee issued by Inversiones Magallanes Ltda – Chile. A cash reserve account, accounted for under long-term investments and funded with US$2.1 million, should be maintained until full repayment of the loan agreement. The loan agreement that Atlantic Offshore S.A. has with Deutsche Verkehrs-Bank “DVB” and Norddeutsche Landesbank Girozentrale Trade “Nord/LB” for the financing of the offshore support vessel "Pardela" is guaranteed by a pledge on the vessel, the shares of Atlantic Offshore and a corporate guarantee for half of the credit from Wilson Sons de Administração Ltda e Comércio. Remolcadores Ultratug Ltda, which is the partner in the business, guarantee the other half of the loan. Covenants The joint venture Magallanes Navegação Brasileira S.A. has to comply with specific financial covenants. At 31 December 2016, the company was in compliance with all clauses in the loans contracts. Atlantic Offshore S.A. has to comply with specific financial covenants on its two loan agreements with Deutsche Verkehrs-Bank “DVB” and Norddeutsche Landesbank Girozentrale Trade “Nord/LB”. Atlantic Offshore S.A. received a temporary waiver of non-compliance with Debt Service Coverage Ratio for both loans up to 31 March 2017. On 24 February 2017 a change to the calculation basis of the Debt Service Coverage Ratio was agreed with the two lenders such that Atlantic Offshore S.A became fully compliant with all loan covenants. Provisions for tax, labour and civil risks In the normal course of business in Brazil, the joint ventures remains exposed to numerous local legal claims. It is the joint ventures’ policy to vigorously contest such claims, many of which appear to have little merit, and to manage such claims through its legal counsel. In addition to the cases for which the joint ventures has made a provision, there are other tax, civil and labour disputes amounting to US$13.9 million (2015: US$9.7 million), whose probability of loss was estimated by the legal counsel as possible. 52 Ocean Wilsons Holdings Limited/Annual Report 2016 31 December 31 December 2016 US$’000 10,066 3,784 – 13,850 2015 US$’000 7,600 2,089 1 9,690 2016 US$’000 2015 US$’000 276,878 67,101 (63,664) (6,030) 1,896 260,491 75,558 (57,783) 4,396 3,008 276,181 276,878 238,781 37,400 276,181 236,155 40,723 276,878 17 Joint ventures (continued) The breakdown of aggregated possible losses is described as follows: Tax cases Labour claims Civil cases Total 18 Investments Trading investments At 1 January Additions, at cost Disposals, at market value (Decrease)/increase in fair value of trading investments held at year end Profit on disposal of trading investments At 31 December Ocean Wilsons (Investment) Limited Portfolio Wilson Sons Limited Trading investments held at fair value at 31 December Wilson Sons Limited The Wilson Sons Limited investments are held and managed separately from the Ocean Wilsons (Investments) Limited portfolio and consist of US Dollar denominated depository notes. Ocean Wilsons (Investments) Limited portfolio The Group has not designated any financial assets that are not classified as trading investments as financial assets at fair value through profit or loss. Trading investments above represent investments in listed equity securities, funds and unquoted equities that present the Group with opportunity for return through dividend income and capital appreciation. Included in trading investments are open ended funds whose shares may not be listed on a recognised stock exchange but are redeemable for cash at the current net asset value at the option of the Company. They have no fixed maturity or coupon rate. The fair values of these securities are based on quoted market prices where available. Where quoted market prices are not available, fair values are determined by third parties using various valuation techniques that include inputs for the asset or liability that are not based in observable market data (unobservable inputs). 19 Inventories Operating materials Raw materials and spare parts Total Inventories are expected to be recovered in less than one year and there were no obsolete items. 31 December 31 December 2016 US$’000 10,278 5,149 15,427 2015 US$’000 8,657 19,628 28,285 53 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 20 Construction contracts Contract costs incurred plus recognised profits less recognised losses to date Less progress billings Amounts due to contract customers included in trade and other payables 21 Trade and other receivables Trade and other receivables Amount receivable for the sale of services Allowance for doubtful debts Income taxation recoverable Other recoverable taxes and levies Loans to related parties Prepayments Other receivables Total current Total non-current 31 December 31 December 2016 US$’000 3,925 (8,505) (4,580) 2015 US$’000 72,019 (89,877) (17,858) 31 December 31 December 2016 US$’000 55,434 (1,187) 54,247 7,466 36,571 28,995 4,031 5,025 2015 US$’000 48,163 (846) 47,317 5,732 25,340 28,392 11,360 10,168 136,335 128,309 81,265 55,070 83,981 44,328 136,335 128,309 Non-current trade receivables relate to recoverable taxes with maturity dates in excess of one year, which comprise mainly PIS, COFINS, ISS and INSS, and intergroup loans. There are no indicators of impairment related to these receivables. As a matter of routine, the Group reviews taxes and levies impacting its business to ensure that payments of such amounts are correctly made and that no amounts are paid unnecessarily. The Group is developing a plan to use its tax credits, respecting the legal term for using tax credits from prior years, and if unable to recover by compensation, requesting reimbursement of these values from the Receita Federal do Brasil (Brazilian Inland Revenue Service). Included in the Group’s trade receivable balances are debtors with a carrying amount of US$9.2 million (2015: US$9.0 million) which are past due but not impaired at the reporting date for which the Group has not provided as there has not been a change in credit quality and the Group believes the amounts are still recoverable. The Group does not hold any collateral over these balances. Ageing of past due but not impaired trade receivables From 0 – 30 days From 31 – 90 days From 91 – 180 days More than 180 days Total 31 December 31 December 2016 US$’000 6,177 2,178 844 – 9,199 2015 US$’000 6,004 1,491 1,523 – 9,018 The average credit period taken on services ranges from zero to 30 days. Interest is charged at up to 1% per month on the outstanding balances with an additional fine of up to 2% per month. The Group has provided in full for all receivables over 180 days because historical experience is such that receivables that are past due 180 days are generally not recoverable. Included in the Group’s allowance for doubtful debts are individually impaired trade receivables with a balance of US$1.2 million, which are aged greater than 180 days. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected settlement proceeds. The Group does not hold any collateral over these balances. 54 Ocean Wilsons Holdings Limited/Annual Report 2016 31 December 31 December 2016 US$’000 2015 US$’000 – – – 1,187 1,187 2016 US$’000 846 (3,128) 3,291 178 1,187 – – – 846 846 2015 US$’000 1,154 (3,329) 3,405 (384) 846 21 Trade and other receivables (continued) Ageing of impaired trade receivables From 0 – 30 days From 31 – 90 days From 91 – 180 days More than 180 days Total Movement in the allowance for doubtful debts Balance at the beginning of the year Amounts written off as uncollectable Increase in allowance recognised in profit or loss Exchange differences Balance at the end of the year In determining recoverability of trade receivables, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. The directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. The directors consider that the carrying amount of trade and other receivables approximates their fair value. 22 Bank loans and overdrafts Secured borrowings BNDES – FMM linked to US Dollar¹ BNDES – Real BNDES – linked to US Dollar BNDES – FMM Real¹ BNDES – FINAME Real Total BNDES Banco do Brasil – FMM linked to US Dollar¹ IFC – US Dollar China Construction Bank - US Dollar Santander – US Dollar Eximbank – US Dollar Finimp – US Dollar IFC – Real Total others Total 1. As an agent of Fundo da Marinha Mercante’s (FMM), BNDES finances the construction of tugboats and shipyard facilities. Annual 31 December 31 December interest rate % 2016 US$’000 2015 US$’000 2.07% to 6% 7.50% to 9.69% 5.07% to 5.36% 8.09% to 11.21% 4.50% to 13.40% 2.00% – 3.00% 5.25% 4.36% 3.07% 2.71% 4.81% 14.09% 168,385 25,466 5,069 1,838 1,133 184,083 23,232 7,239 1,684 1,952 201,891 218,190 85,576 48,571 19,047 14,005 5,270 1,170 – 75,387 58,971 – – 7,356 3,503 348 173,639 145,565 375,530 363,755 55 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 22 Bank loans and overdrafts (continued) The breakdown of bank overdrafts and loans by maturity is as follows: Within one year In the second year In the third to fifth years (inclusive) After five years Total Amounts due for settlement within 12 months Amounts due for settlement after 12 months The analysis of borrowings by currency is as follows: 31 December 2016 Bank loans Total 31 December 2015 Bank loans Total Guarantees 31 December 31 December 2016 US$’000 49,780 49,029 105,953 170,768 375,530 49,780 325,750 2015 US$’000 41,490 40,231 107,996 174,038 363,755 41,490 322,265 BRL linked to US Dollars US$’000 259,030 259,030 BRL US$’000 28,437 28,437 US Dollars US$’000 Total US$’000 88,063 88,063 375,530 375,530 27,216 27,216 266,709 266,709 69,830 69,830 363,755 363,755 Loans with BNDES rely on a corporate guarantee from Wilson Sons de Administração e Comércio Ltda. For some contracts, the corporate guarantee is additional to: (i) a pledge of the respective financed tugboat or (ii) a lien over the logistics and port operations equipment financed. Loans with Banco do Brasil rely on a corporate guarantee from Wilson, Sons de Administração e Comércio Ltda. and a pledge of the respective financed tugboat. The loans that Tecon Salvador holds with IFC are guaranteed by shares of the company, projects’ cash flows, equipment and buildings. The loan agreement that Tecon Rio Grande has with the Export-Import Bank of China for equipment acquisition is guaranteed by a standby letter of credit issued by Itaú BBA S.A which in turn has the pledge on the financed equipment. The loan agreement between Tecon Rio Grande and Santander for equipment acquisition relies on a corporate guarantee from Wilson, Sons de Administração e Comércio Ltda. Undrawn credit facilities At 31 December 2016, the Group had available US$53.2 million of undrawn borrowing facilities. For each disbursement, there is a set of conditions precedent that must be satisfied. 56 Ocean Wilsons Holdings Limited/Annual Report 2016 22 Bank loans and overdrafts (continued) Covenants The Wilson, Sons de Administração e Comércio Ltda. (“WSAC”) holding company, as corporate guarantor, has to comply with financial covenants in both Wilson Sons Estaleiros Ltda and Brasco Logística Offshore Ltda loan agreements signed with BNDES. The subsidiary Tecon Salvador has to observe affirmative and negative covenants stated in its loan agreement with the International Finance Corporation – IFC including the maintenance of specific liquidity ratios and a capital structure requirements.’ The subsidiary Tecon Rio Grande has to comply with financial covenants in its loan agreement with the BNDES and Santander such as a minimum liquidity ratio and capital structure. At 31 December 2016, Tecon Rio Grande was not in compliance with the minimum Net Equity / Total Assets ratio (requirement of not less than 0.60 ratio against an actual ratio of 0.57) demanded by the BNDES contract. The failure to maintain a 0.60 ratio requires a waiver or provision of additional guarantees of at least 130% of the debt’s value within 60 days or prepayment of the debt. The value of the loan affected at 31 December 2016 was US$5.1 million. The breach does not impact our other loan agreements. At 31 December 2016, with the exception of the above covenant breach, the Company was in compliance with all other loan contracts. Fair value Management estimates the fair value of the Group's borrowings as follows: Bank loans BNDES Banco do Brasil IFC CCB Santander Eximbank Finimp Total 23 Deferred tax 31 December 31 December 2016 US$’000 201,891 85,576 48,571 19,047 14,005 5,270 1,170 2015 US$’000 218,190 59,319 75,387 – – 7,356 3,503 375,530 363,755 The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period. At 1 January 2015 (Charge)/credit to income Deferred taxes transferred to current taxes Exchange differences At 1 January 2016 (Charge)/credit to income Exchange differences At 31 December 2016 Accelerated tax variance on Other non-current asset Exchange Retranslation of depreciation US$’000 (19,910) 4,070 – 43 (15,797) (6,356) – (22,153) loans US$’000 24,600 24,999 (3,859) (4,693) 41,047 (14,305) 1,437 28,179 differences US$’000 23,463 (3,711) – 3,183 22,935 (727) (1,841) valuation US$’000 (41,685) (27,003) – – (68,688) 22,376 – Total US$’000 (13,532) (1,645) (3,859) (1,467) (20,503) 988 (404) 20,367 (46,312) (19,919) Certain tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes. Deferred tax liabilities Deferred tax assets 31 December 31 December 2016 US$’000 (48,974) 29,055 (19,919) 2015 US$’000 (52,631) 32,128 (20,503) 57 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 23 Deferred tax (continued) At the balance sheet date the Group had unused tax losses of US$42.5 million (2015: US$17.9 million) available for offset against future profits in the company in which they arose. No deferred tax asset has been recognised in respect of US$12.4 million (2015: US$6.1 million) due to the unpredictability of future profit streams. Retranslation of non-current asset valuation deferred tax arises on Brazilian property, plant and equipment held in US dollar functional currency businesses. Deferred tax is calculated on the difference between the historical US Dollar balances recorded in the Group’s accounts and the Brazilian Real balances used in the Group’s Brazilian tax calculations. Deferred tax on exchange variance on loans arises from exchange gains or losses on the Group’s US Dollar and Brazilian Real denominated loans linked to the US Dollar that are not deductible or payable for tax in the period they arise. Exchange gains on these loans are taxable when settled and not in the period in which gains arise. 24 Obligations under finance leases Amounts payable under finance leases Within one year In the second to fifth years inclusive After five years Less future finance charges Present value of lease obligations Less: Amounts due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Amounts payable under finance leases Within one year In the second to fifth years inclusive After five years Present value of lease obligations Less: Amounts due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Minimum lease payments 31 December 31 December 2016 US$’000 2015 US$’000 1,669 1,721 – 3,390 (1,094) 2,296 (1,211) 1,085 1,517 2,399 – 3,916 (1,188) 2,728 (1,192) 1,536 Present value of Minimum lease payments 31 December 31 December 2016 US$’000 1,211 1,085 – 2,296 1,211 1,085 2015 US$’000 1,192 1,536 – 2,728 1,192 1,536 It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 5 years. The average outstanding lease term at 31 December 2016 was 28 months. For the year ended 31 December 2016, the average effective borrowing rate was 16.43% (2015: 16.75%). Interest rates are set at contract date. All leases are denominated in Brazilian Real and include a fixed repayment and a variable finance charge linked to the Brazilian interest rate. Interest rates range from 15.86% to 18.03%. There is a non-significant difference between the fair value and the present value of the Group's lease obligations. The present value is calculated with its own interest rate over the future installments of each contract. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets. 58 Ocean Wilsons Holdings Limited/Annual Report 2016 31 December 31 December 2016 US$’000 44,664 4,580 12,583 6,327 103 68,257 2015 US$’000 39,875 17,858 7,704 13,259 93 78,889 25 Trade and other payables Trade creditors Amounts due to construction contract customers (note 20) Other taxes Accruals and deferred income Share based payment liability Total Trade creditors and accruals principally comprise amounts outstanding for trade purposes and ongoing costs. The average credit period for trade purchases is 58 days (2015: 61 days). For most suppliers interest is charged on outstanding trade payable balances at various interest rates. The Group has financial risk management policies in place to ensure that payables are paid within the credit timeframe. The directors consider that the carrying amount of trade payables approximates their fair value. 26 Provisions At 1 January 2015 Increase in provisions in the year Utilisation of provisions Exchange difference At 1 January 2016 Increase in provisions in the year Utilisation of provisions Exchange difference At 31 December 2016 Provisions comprise legal claims relating to civil cases, tax cases and legal claims by former employees. Analysis of provisions by type: Labour claims Tax cases Civil and environmental cases US$’000 15,702 7,697 (3,991) (5,486) 13,922 7,348 (3,987) 2,754 20,037 31 December 31 December 2016 US$’000 13,612 4,816 1,609 20,037 2015 US$’000 9,211 2,492 2,219 13,922 In the normal course of business in Brazil, the Group remains exposed to numerous local legal claims. It is the Group's policy to vigorously contest such claims, many of which appear to have little merit, and to manage such claims through its legal counsel. Both provisions and contingent liability can take a significant amount of time to resolve. In addition to the cases for which the Group booked the provision there are other tax, civil and labour disputes amounting to US$129.9 million (2015: US$84.1 million) where the probability of loss was estimated by the legal counsels as possible. 59 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 26 Provisions (continued) The breakdown of possible claims is described as follows: The analysis of possible losses by type: Tax cases Labour claims Civil and environmental cases 31 December 31 December 2016 US$’000 93,271 25,232 11,411 129,914 2015 US$’000 63,056 16,609 4,453 84,118 The main probable and possible claims against the Group are described below: Tax cases – The Group litigates against governments in respect of assessments considered inappropriate. Labour claims – Most claims involve payment of health risks, additional overtime and other allowances. Civil and environmental cases – Indemnification claims involving material damages, environmental and shipping claims and other contractual disputes. The procedure for classification of legal liabilities as probable, possible or remote loss is undertaken by the external lawyers. Upon receipt of the notification of a new judicial lawsuit, the external lawyer generally classifies it as a possible claim, recording the total amount involved. From 2014, the Group is using the estimated value at risk and not the total amount involved in each process. Exceptionally, if there is sufficient knowledge from the beginning that there is very high or very low risk of loss, the lawyer may classify the claim as probable loss or remote loss. During the course of the lawsuit and considering, for instance, its first judicial decision, legal precedents, arguments of the claimant, thesis under discussion, applicable laws, documentation for the defence and other variables, the lawyer may re-classify the claim as probable loss or remote loss. When classifying the claim as probable loss, the lawyer estimates the amount at risk for such claim. The Group considers as relevant, claims involving amounts, assets or rights over US$1.5 million. 27 Share capital Authorised 50,060,000 ordinary shares of 20p each Issued and fully paid 35,363,040 ordinary shares of 20p each 2016 US$’000 2015 US$’000 16,119 16,119 11,390 11,390 The company has one class of ordinary share which carries no right to fixed income. Share capital is converted at the exchange rate prevailing at 31 December 2002, the date at which the Group’s presentational currency changed from Sterling to US Dollars, being US$1.61 to £1. 28 Acquisition of non-controlling interest On 2 February 2016, the Wilson Sons Group, through its subsidiaries, completed the acquisition of the 7.5% non-controlling interest in Tecon Salvador S.A for a consideration of US$4.7 million from Intermaritima Terminais Ltda. The consideration included US$1.9 million in cash and the settlement of US$2.9 million in debt. The transaction also included an additional US$0.8 million payment that is conditional upon future contractual events which were subsequently fulfilled. Following completion of the transaction the Wilson Sons Group holds 100% of the shares of Tecon Salvador S.A. and the Ocean Wilsons Holdings Group has a 58.25% effective interest. The following amounts have been recognised in equity Movement attributable to equity holders of parent Movement attributable to non-controlling interest 60 US$’000 2,988 2,411 Ocean Wilsons Holdings Limited/Annual Report 2016 Year ended Year ended 31 December 31 December 2016 US$’000 2015 US$’000 117,527 (8,073) (15,065) 4,134 599 (2,286) 96,836 68,714 (4,843) (16,908) 1,388 45,403 15,792 109,546 47,337 47,563 5,248 3,420 (745) 6,456 5,651 3,346 1,294 (1,839) 158,552 165,561 12,858 (17,853) (7,187) (5,390) 4,175 12,525 (5,953) 5,988 140,980 182,296 (34,412) (12,756) 93,812 (22,690) (14,147) 145,459 29 Notes to the cash flow statement Reconciliation from profit before tax to net cash from operating activities Profit before tax Share of results of joint venture Investment revenues Other gains and losses Finance costs Foreign exchange losses on monetary items Operating profit Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Share based payment credit (Loss)/gain on disposal of property, plant and equipment Increase/(decrease) in provisions Operating cash flows before movements in working capital Decrease in inventories (Increase)/decrease in receivables Decrease in payables (Increase)/decrease in other non-current assets Cash generated by operations Income taxes paid Interest paid Net cash from operating activities Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value. Private investment funds Wilson Sons Limited has investments in private investment funds that are consolidated in the financial statements as cash equivalents. The Group has investments in a private investment fund called Hydrus Fixed Income Private Credit Investment Fund that are consolidated in these financial statements. This private investment fund comprises deposit certificates, financial notes and debentures, with final maturities ranging from January 2016 to September 2021. The Private Investment Fund is marked to fair value on a daily basis against current earnings. This private investment fund does not have significant financial obligations. Any financial obligations are limited to service fees to the asset management company employed to execute investment transactions, audit fees and other similar expenses. The fund’s investments are highly liquid which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Additionally, US Dollar linked investments are made through Itaú Exchange FICFI to preserve the US dollar value of the investment. Cash and cash equivalents held in Brazil amount to US$52.7 million (2015: US$83.3 million). Cash equivalents are held for the purpose of meeting short-term cash commitments and not for cash investment purposes. Additions to plant and equipment during the year amounting to US$0.2 million (2015: US$0.4 million) were financed by new finance leases. 61 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 30 Contingent liabilities In the normal course of business in Brazil, the Group continues to be exposed to numerous local legal claims. It is the Group’s policy to contest such claims vigorously, many of which appear to have little merit, and to manage such claims through its legal advisers. The total estimated contingent claims at 31 December 2016 are US$129.9 million (2015: US$84.1 million). These have not been provided for as the directors and the Group’s legal advisors do not consider that there are any probable losses. Contingent liabilities relate to labour, civil and environmental and tax claims. 31 Share options Stock option scheme On 13 November 2013 the board of Wilson Sons Limited approved a Stock Option Plan which allowed for the grant of options to eligible participants to be selected by the board. The shareholders in special general meeting approved such plan on the 8 January 2014 including increase in the authorized capital of the company through the creation of up to 4,410,927 new shares. The options provide participants with the right to acquire shares via Brazilian Depositary Receipts (“BDR”) in Wilson Sons Limited at a predetermined fixed price not less than the three day average mid-price for the days preceding the date of option issuance. The Stock Option Plan is detailed below: Options series 07 ESO – 3 Year 07 ESO – 4 Year 07 ESO – 5 Year 07 ESO – 3 Year 07 ESO – 4 Year 07 ESO – 5 Year 07 ESO – 3 Year 07 ESO – 4 Year 07 ESO – 5 Year Total Grant date Original vesting date Expiry date 10/1/2014 10/1/2017 10/1/2024 10/1/2014 10/1/2018 10/1/2024 10/1/2014 10/1/2019 10/1/2024 13/11/2014 13/11/2017 13/11/2024 13/11/2014 13/11/2018 13/11/2024 13/11/2014 13/11/2019 13/11/2024 11/08/2016 11/08/2019 11/08/2026 11/08/2016 11/08/2020 11/08/2026 11/08/2016 11/08/2021 11/08/2026 Exercise price (R$) 31.23 31.23 31.23 33.98 33.98 33.98 34.03 34.03 34.03 Outstanding Total Number Expired Vested not Vested Subsisting 961,653 (146,850) (22,044) 792,759 814,803 961,653 (146,850) (22,044) 792,759 814,803 990,794 (151,300) (22,712) 816,782 839,494 45,870 (11,880) 45,870 (11,880) 47,260 (12,240) 82,500 82,500 85,000 – – – – – – – – – 33,990 33,990 33,990 33,990 35,020 35,020 82,500 82,500 82,500 82,500 85,000 85,000 3,303,100 (481,000) (66,800) 2,755,300 2,822,100 The options terminate on the expiry date or immediately on the resignation of the director or senior employee, whichever is earlier. Options lapse if not exercised within 6 months of the date that the participant ceases to be employed or hold office within the Group by reason of, amongst others: injury, disability or retirement; or dismissal without just cause. The following Fair Value expense of the grant to be recorded as a liability in the respective accounting periods was determined using the Binomial model based on the assumptions detailed below: Period 10 January 2014 10 January 2015 10 January 2016 10 January 2017 10 January 2018 10 January 2019 10 January 2020 10 January 2021 Total * FOOTNOTE TO COME????????. 62 Projected IFRS2 Fair Value expense US$’000* 2,826 3,296 3,409 2,255 1,192 256 123 42 13,399 Ocean Wilsons Holdings Limited/Annual Report 2016 10 January 2014 R$30.05 28% 10 years 10.8% 1.7% 31 Share options (continued) Closing share price (in Real) Expected volatility Expected life Risk free rate Expected dividend yield Expected volatility was determined by calculating the historical volatility of the Wilson Son’s share price. The expected life used in the model has been adjusted based on management’s best estimate for exercise restrictions and behavioural considerations. 32 Operating lease arrangements The minimum lease payments under operating leases recognised in net income at 31 December 2016 was US$1.8 million (2015: US$4.8 million). At the balance sheet date, the minimum amount due in 2017 by the Group for future minimum lease payments under cancellable operating leases was US$11.2 million (2015: $7.8 million). Tecon Rio Grande The Tecon Rio Grande minimum period extends to 2022 and has an option to renew the concession for a maximum period of 25 years. Due to investments made by the Group in the container terminal, the port authority of Rio Grande has confirmed that the Group has the right to renew the concession period provided the State government remains the authority responsible for this area. The Tecon Rio Grande guaranteed payments consist of two elements: a fixed rental and fee per 1,000 containers moved based on minimum forecast volumes. The amount shown in the accounts is based on the minimum volume forecast. If container volumes moved through the terminal exceed forecast volumes in any given year, additional payments will be required. Tecon Salvador On 16 November 2016 Tecon Salvador signed the second amendment to the lease agreement which extends the lease term for an additional period of 25 years until March 2050 and the Company is obligated to complete minimum expansion and maintenance capital expenditure through to the end of the concession. Minimum expansion investments are budgeted at approximately R$398 million using December 2013 base date values. These investments will be completed in phases during the concession period to guarantee the terminal reaches a capacity of 925,000 TEUs (twenty-foot equivalent units) per year. The first phase construction is expected to commence nine months after the amendment signature and will be completed within twenty-four months of the work commencement (total investment of R$255 million). The second phase of construction must be completed by 2030 (total investment of R$29 million) and the third phase of construction must be completed by 2034 (total investment of R$114 million). Additionally, there are investments totaling R$317 million related to the maintenance of the current operating area and equipment replacement that will be completed up to 2050. Tecon Salvador guaranteed payments consist of three elements: a fixed rental, a fee per container handled based on minimum forecast volumes and a fee per ton of non-containerized cargo handled based on minimum forecast volumes. At the balance sheet date the Group had outstanding commitments for future minimum lease payments under operating leases, which fall due as follows: Within one year In the second to fifth year inclusive After five years 2016 US$'000 18,010 58,360 42,778 119,148 2015 US$'000 15,655 51,660 47,751 115,066 63 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 33 Commitments At 31 December 2016 the Group had entered into the following commitment agreements with respect to trading investments. These commitments relate to capital subscription agreements entered into by Ocean Wilsons (Investments) Limited. The details of these commitments are as follows: 31 December 2016 22 February 2017 (a) 05 December 2017 30 March 2018 4 June 2018 18 July 2018 21 December 2018 31 December 2018 22 November 2019 08 December 2019 31 December 2019 01 January 2020 18 December 2021 17 February 2022 30 April 2022 11 July 2022 (b) 01 February 2023 28 March 2023 01 April 2023 05 June 2023 21 August 2024 (c) 22 August 2024 12 March 2025 (d) 21 June 2025 14 July 2025 11 April 2029 19 October 2030 To be confirmed To be confirmed (e) Total Year ended Outstanding Year ended Outstanding At 31 December At 31 December 2016 US$’000 68 117 859 834 2015 US$’000 68 122 575 855 1,468 1,468 677 313 123 550 – 60 246 347 781 2,793 2,070 300 1,785 2,081 1,399 2,431 336 1,826 1,436 2,044 960 360 4,000 3,672 700 185 279 550 427 90 288 916 869 3,781 2,833 500 2,285 3,578 2,259 3,577 921 1,892 1,800 2,500 1,410 465 – – Commitment US$’000 3,000 4,994 5,000 5,000 5,000 5,000 5,000 4,650 5,000 5,000 3,000 4,500 5,000 3,000 7,500 4,963 5,000 5,000 5,000 3,200 5,005 5,000 2,954 1,800 2,500 3,000 500 4,000 3,928 122,494 33,936 35,193 (a) Commitment made in Euro. Total commitment €3,350,000 with amounts outstanding at 31 December 2016 €112,000 (2015: €112,000). (b) Commitment made in Euro. Total commitment €3,650,000 with amounts outstanding at 31 December 2016 €1,974,000 (2015: €2,607,070). (c) Commitment made in Sterling. Total commitment £3,000,000 with amounts outstanding at 31 December 2016 £1,983,000 (2015: £2,428,000). (d) Commitment made in Euro. Total commitment €2,500,000 with amounts outstanding at 31 December 2016 €1,741,000 (2015: €1,741,000). (e) Commitment made in Euro. Total commitment €3,500,000 with amounts outstanding at 31 December 2016 €3,500,000 (2015: nil). There may be situations when commitments may be extended by the manager of the underlying structure beyond the initial expiry date dependent upon the terms and conditions of each individual structure. 64 Ocean Wilsons Holdings Limited/Annual Report 2016 34 Retirement benefit schemes Defined contribution schemes The Group operates defined contribution retirement benefit schemes for all qualifying employees of its Brazilian business. The assets of the scheme are held separately from those of the Group in funds under the control of independent managers. The total cost charged to the income statement of US$1.0 million (2015: US$1.0 million) represents contributions payable to the scheme by the Group at rates specified in the rules of the plan. 35 Related party transactions Transactions between the company and its subsidiaries which are related parties have been eliminated on consolidation and are not disclosed in this note. Transactions between the group and its associates, joint ventures and other investments are disclosed below: Joint ventures 1. Allink Transportes Internacionais Limitada 2. Consórcio de Rebocadores Barra de Coqueiros 3. Consórcio de Rebocadores Baía de São Marcos 4. Wilson Sons Ultratug and subsidiaries 5. Atlantic offshore S.A. Others 6. Hanseatic Asset Management 7. Gouvêa Vieira Advogados 8. CMMR Intermediacão Comercial Limitada 9. Jofran Services 10. Hansa Capital GMBH Joint ventures 1. Allink Transportes Internacionais Limitada 2. Consórcio de Rebocadores Barra de Coqueiros 3. Consórcio de Rebocadores Baía de São Marcos 4. Wilson Sons Ultratug 5. Atlantic offshore S.A. Others 6. Hanseatic Asset Management 7. Gouvêa Vieira Advogados 8. CMMR Intermediacão Comercial Limitada 9. Jofran Services 10. Hansa Capital GMBH Dividends received/ Revenue from services Amounts paid/ Cost of services 31 December 31 December 31 December 31 December 2016 US$’000 9 – 623 19,640 – – – – – – 2015 US$’000 36 149 183 20,438 1,370 – – – – – 2016 US$’000 2015 US$’000 (108) – (5) – – – – (2) – – (2,385) (2,490) (79) (182) (169) (85) (92) (221) (165) (77) Amounts owed by related parties Amounts owed to related parties 31 December 31 December 31 December 31 December 2016 US$’000 5 145 2,483 15,529 13,622 – – – – – 2015 US$’000 – 130 1,767 1,927 2,940 – – – – – 2016 US$’000 2015 US$’000 – – – – – (12) – – – – (202) (203) – – – – – – – – 65 1. Mr A C Baião is a shareholder and Director of Allink Transportes Internacionais Limitada. Allink Transportes Internacionais Limitada is 50% owned by the Group and rents office space from the Group. 2. Mr W H Salomon is chairman of Hanseatic Asset Management. Fees were paid to Hanseatic Asset Management for acting as Investment Managers of the Group’s investment portfolio and administration services. 3. Mr J F Gouvêa Vieira is a partner in the law firm Gouvêa Vieira Advogados. Fees were paid to Gouvêa Vieira Advogados for legal services. 4. Mr C M Marote is a shareholder and Director of CMMR Intermediacão Comercial Limitada. Fees were paid to CMMR Intermediacão Comercial Limitada for consultancy services. 5. Mr J F Gouvêa Vieira is a Director of Jofran Services. Directors’ fees were paid to Jofran Services. 6. Mr C Townsend is a Director of Hansa Capital GMBH. Directors’ fees were paid to Hansa Capital GMBH. Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 35 Related party transactions (continued) Remuneration of key management personnel The remuneration of the executive directors and other key management of the Group, is set out below in aggregate for the categories specified in IAS 24 Related Party Disclosures. Short-term employee benefits Other long-term employee benefits Share options issued Share-based payment 36 Financial instruments Capital risk management Year ended Year ended 2016 US$'000 10,897 1,470 3,410 10 15,787 2015 US$'000 9,094 1,173 3,314 32 13,613 The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 22, cash and cash equivalents and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings disclosed in the consolidated statement of changes in equity. The Group borrows to fund capital projects and looks to cash flow from these projects to meet repayments. Working capital is funded through cash generated by operating revenues. Externally imposed capital requirement The Group is not subject to externally imposed capital requirements. Significant accounting policies Details of significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expense are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the financial statements. Categories of financial instruments Financial assets Designated as fair value through profit or loss Receivables (including cash and cash equivalents and other non-current assets) Financial liabilities Financial instruments classified as amortised cost Financial instruments classified as cash flow hedge (Derivatives) Financial risk management objectives Year ended Year ended 2016 US$’000 2015 US$’000 238,781 279,221 236,155 287,180 (433,500) (437,668) (1,894) (2,886) The Group’s Corporate Treasury function provides services to the business, co-ordinates access to domestic and international financial markets and manages the financial risks relating to the operations of the Group through internal reports. The primary objective is to keep a minimum exposure to those risks by using financial instruments and by assessing and controlling the credit and liquidity risks according to the rules and procedures established by management. These risks include market risk, (including currency risk, interest rate risk and price risk) credit risk and liquidity risk. The Group may use derivative financial instruments to hedge these risk exposures with Board approval. The Group does not enter into trading financial instruments including derivative financial instruments for speculative purposes. 66 Ocean Wilsons Holdings Limited/Annual Report 2016 36 Financial instruments (continued) Credit risk The Group’s principal financial assets are cash, trade and other receivables and trading investments. The Group’s credit risk is primarily attributable to its bank balances, trade receivables and investments. The amounts presented as receivables in the balance sheet are net of allowances for doubtful receivables. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. The credit risk on investments held for trading is limited because the counterparties with whom the Group transacts are regulated institutions or banks with high credit ratings. The Company’s appointed Investment Manager, Hanseatic Asset Management LBG, evaluates the credit risk on trading investments prior to and during the investment period. In addition the Company invests in Limited Partnerships and other similar investment vehicles. The level of credit risk associated with such investments is dependent upon the terms and conditions and the management of the investment structures. The Board reviews all investments at its regular meetings from reports prepared by the Company's Investment Manager. The Group has no significant concentration of credit risk. Ongoing credit evaluation is performed on the financial condition of accounts receivable. Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates, interest rates and market prices. Foreign currency risk management The Group undertakes certain transactions denominated or linked to foreign currencies and therefore exposures to exchange rate fluctuations arise. The Group operates principally in Brazil with a substantial proportion of the Group’s revenue, expenses, assets and liabilities denominated in the Real. Due to the high cost of hedging the Real, the Group does not normally hedge its net exposure to the Real, as the Board does not consider it economically viable. Cash flows from investments in fixed assets are denominated in Real and US Dollars. These investments are subject to currency fluctuations between the time that the price of goods or services are settled and the actual payment date. The resources and their application are monitored with purpose of matching the currency cash flows and due dates. The Group has contracted US Dollar-denominated and Real-denominated debt, and the cash and cash equivalents balances are also US Dollar-denominated and Real-denominated. In general terms, for operating cash flows, the Group seeks to neutralise the currency risk by matching assets (receivables) and liabilities (payments). Furthermore the Group seeks to generate an operating cash surplus in the same currency in which the debt service of each business is denominated. The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Real Sterling Euro Liabilities Assets 2016 US$’000 2015 US$’000 2016 US$’000 2015 US$’000 206,286 315,553 259,336 372,009 17 – 26 – 1,430 17,576 1,975 5,522 206,303 315,579 278,342 379,506 67 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 36 Financial instruments (continued) Foreign currency sensitivity analysis The Group is primarily exposed to unfavourable movements in the Real on its Brazilian liabilities held by US Dollar functional currency entities. The sensitivity analysis presented in the following sections, which refer to the position on 31 December 2016, estimates the impacts of the Real devaluation against the US Dollar. Three exchange rate scenarios are contemplated: the likely scenario (Probable) and two possible scenarios of deterioration of 25% (Possible) and 50% (Remote) in the exchange rate. The Group uses the Brazilian Central Bank’s “Focus” report to determine the probable scenario. Operation Risk Amount US Dollars Result Total assets Total liabilities BRL BRL 256,549 Exchange Effects 206,286 Exchange Effects Net Effect Operation Risk Amount US Dollars Result Total assets Total liabilities BRL BRL 370,096 Exchange Effects 315,553 Exchange Effects Net Effect 31 December 2016 Exchange rates Possible scenario (25%) 4.37 US$’000 (65,436) 52,616 (12,820) 31 December 2015 Exchange rates Possible scenario (25%) 5.38 US$’000 (101,231) 86,312 (14,919) Probable scenario 3.50 US$’000 (17,658) 14,198 (3,460) Probable scenario 4.30 US$’000 (34,014) 29,001 (5,013) Remote scenario (50%) 5.25 US$’000 (97,288) 78,288 (19,060) Remote scenario (50%) 6.45 US$’000 (146,042) 124,519 (21,523) The Real foreign currency impact is mainly attributable to the exposure of outstanding Real receivables and payables of the Group at year end. In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk, as the year end exposure does not reflect the exposure during the year. Interest rate risk management The Group is exposed to interest rate risk as entities in the Group borrow funds at both fixed and floating interest rates. The Group holds most of its debts linked to fixed rates. Most of the Group's fixed rates loans are with the FMM (Fundo da Marinha Mercante). Other loans exposed to floating rates are as follows: TJLP (Brazilian Long-Term Interest Rate) for Brazilian Real denominated funding through FINAME credit line to Port and Logistics operations. DI (Brazilian Interbank Interest Rate) for Brazilian Real denominated funding in Logistics operations, and 6-month LIBOR (London Interbank Offered Rate) for US Dollar denominated funding for Port Operations. (Eximbank) The Real-denominated investments yield interest rates corresponding to the DI daily fluctuation for privately issued securities and/or “Selic-Over” government- issued bonds. The US Dollar-denominated investments are part in time deposits, with short-term maturities. The Group’s strategy for managing interest rate risk is to maintain a balanced portfolio of fixed and floating interest rates in order to balance both cost and volatility. The Group may use cash flow hedges to limit its exposure that may result from the variation of floating interest rates. The Group has floating rate financial assets consisting of bank balances principally denominated in US Dollars and Real that bear interest at rates based on the banks floating interest rate. 68 Ocean Wilsons Holdings Limited/Annual Report 2016 36 Financial instruments (continued) Interest rate sensitivity analysis The Group uses two important information sources to estimate the probable scenarios in determining interest rate scenarios, BM&F (Bolsa de Mercadorias e Futuros) and Bloomberg. The following analysis concerns a possible fluctuation of revenue or expenses linked to the transactions and scenarios shown, without considering their fair value. For floating rate liabilities and investments, the analysis is prepared assuming the amount of the liability outstanding or cash invested at balance sheet date was outstanding or invested for the whole year. 31 December 2016 Transaction Loans – LIBOR Loans – CDI Loans – TJLP Investments – LIBOR Investments – CDI Transaction Risk Loans – LIBOR Loans – TJLP Loans – Fixed Total loans Investments – LIBOR Investments – CDI Total investments LIBOR TJLP None LIBOR CDI Probable scenario 1.70% 11.14% 7.50% 1.88% 11.14% Probable scenario US$’000 (217) – – (217) – (1,650) (1,650) (1,867) Possible scenario 25% 2.13% 13.93% 9.38% 2.31% 13.93% Possible scenario (25%) US$’000 (420) (324) – (744) 195 (232) (37) (781) Remote scenario 50% 2.55% 16.71% 11.25% 2.73% 16.71% Remote scenario (50%) US$’000 (623) (643) – (1,266) 390 1,187 1,577 311 Amount US Dollars 88,041 27,441 260,026 375,508 51,500 51,112 102,612 Result Interest Interest None Income Income Net Income The net effect was obtained by assuming a 12-month period starting 31 December 2016 in which interest rates vary and all other variables are held constant. The scenarios express the difference between the scenario rate and actual rate. The interest rate risk mix in Brazil is 46,49% at LIBOR and 46,14% at CDI. 31 December 2015 Transaction Loans – LIBOR Loans – CDI Loans – TJLP Investments – LIBOR Investments – CDI Transaction Risk Loans – LIBOR Loans – TJLP Loans – Fixed Total loans Investments – LIBOR Investments – CDI Total investments LIBOR TJLP None LIBOR CDI Probable scenario 1.03% 15.20% 7.50% 1.04% 15.20% Probable scenario US$’000 (239) – – (239) US$’000 – 1,420 1,420 1,181 Possible scenario 25% 1.29% 19.00% 9.38% 1.30% 19.00% Possible scenario (25%) US$’000 (362) (303) – (665) US$’000 108 4,650 4,758 4,093 Remote scenario 50% 1.55% 22.80% 11.25% 1.56% 22.80% Remote scenario (50%) US$’000 (485) (601) – (1,086) US$’000 217 7,880 8,097 7,011 69 Amount US Dollars 69,830 25,329 268,596 363,755 43,639 80,387 124,026 Result Interest Interest None Income Income Net Income Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 36 Financial instruments (continued) The net effect was obtained by assuming a 12-month period starting 31 December 2015 in which interest rates vary and all other variables are held constant. The scenarios express the difference between the scenario rate and actual rate. The interest rate risk mix in Brazil is 37.34% at LIBOR and 62.66% at CDI. Investment portfolio Interest rate changes will always impact equity prices. The level and direction of change in equity prices is subject to prevailing local and world economics as well as market sentiment all of which are very difficult to predict with any certainty. Derivative financial instruments The Group may enter into derivatives contracts to manage risks arising from interest rate fluctuations. All such transactions are carried out within the guidelines set by the Wilson Sons Limited Risk Management Committee. Generally the Group seeks to apply hedge accounting in order to manage volatility in profit or loss. The Group uses cash flow hedges to limit its exposure that may result from the variation of floating interest rates. On 16 September 2013, Tecon Salvador entered into an interest rate swap agreement with an initial notional amount of US$74.4 million to hedge a portion of its outstanding floating-rate debt with IFC. On 31 December 2016 the notional amount was US$48.6 million, equivalent to the outstanding debt amount on that date. This swap converts floating interest rate based on the London Interbank Offered Rate, or LIBOR, into fixed-rate interest and expires in March 2020. The derivatives were entered into with Santander Brasil as counterparty and its credit rating was AA, as of 31 December 2016, according to Standard & Poor’s Brazilian local rating scale. Tecon Salvador is required to pay the counterparty a stream of fixed interest payments at rates fixed from 0.553% to 4.250%, according to the schedule agreement, and in turn, receives variable interest payments based on 6-month LIBOR. The net receipts or payments from the swap are recorded as financial expense. Within one year In the second year In the third to fifth years (including) After five years Fair Value Outflows US$’000 (712) (787) (395) – (1,894) Net effect US$’000 (712) (787) (395) – (1,894) (1,894) The fair value of the swap was estimated based on the yield curve as of 31 December 2016, and represents its carrying value. As of 31 December 2016, the interest rate swap balance in other non-current liabilities was US$1.9 million and the balance in accumulated other comprehensive income on the consolidated balance sheet was US$2.4 million. The net change in fair value of the interest rate swap recorded as other comprehensive income for the year ended 31 December 2016 was an after-tax loss of US$1.4 million. 31 December 2016 Financial Assets Interest Rates Swap Total Derivative Sensitivity Analysis Amount US$’000’s Maturity 48,571 March 2020 Fair Value US$’000’s (1,894) (1,894) This analysis is based on 6-month LIBOR interest rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular foreign exchange rates, remain constant and ignores any impact of forecast sales and purchases. Three scenarios were simulated: the likely scenario (Probable) and two possible scenarios of reduction of 25% (Possible) and 50% (Remote) in the interest rate. 31 December 2016 Remote Possible scenario (25%) scenario (50%) US$’000 (2,221) US$’000 (2,558) Probable scenario US$’000 (1,889) 70 Ocean Wilsons Holdings Limited/Annual Report 2016 36 Financial instruments (continued) Cash Flow Hedge The Group applies hedge accounting for transactions in order to manage the volatility in earnings. The swap is designated and qualifies as a cash flow hedge. As such, the swap is accounted for as an asset or a liability in the accompanying consolidated balance sheets at fair value. The effective portion of changes in fair value of the derivative is recognised in other comprehensive income and presented as an asset revaluation reserve in equity. Any ineffective portion of changes in fair value of the derivative is recognised immediately in the profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting operations, expires or is sold, terminated or exercised, or the designation is revoked, the model accounting hedges (hedge accounting) is discontinued prospectively when there is no more expectation for the forecasted transaction and any amount included in equity is reclassified to the profit or loss. On the initial designation of the derivative as a hedging instrument, the Group formally documents the relationship between the hedging instrument and the hedged transaction, including the risk management objective and strategy on the implementation of the hedge and the hedged risk, together with the methods that will be used to evaluate the effectiveness of the hedging relationship. The Group is utilising the dollar offset method to assess the effectiveness of the swap, analysing whether the hedging instruments are highly effective in offsetting changes in fair values or cash flows of the respective hedged items attributable to the hedged risk and if the actual results for each coverage are within the range from 80–125%. Under this methodology, the swap was deemed to be highly effective for the period ended 31 December 2016. There was no hedge ineffectiveness recognised in profit or loss for the year ended 31 December 2016. Market price sensitivity By the nature of its activities, the Group's investments are exposed to market price fluctuations. However the portfolio as a whole does not correlate exactly to any Stock Exchange Index as it is invested in a diversified range of markets. The Investment Manager and the Board monitor the portfolio valuation on a regular basis and consideration is given to hedging the portfolio against large market movements. The sensitivity analysis below has been determined based on the exposure to market price risks at the year end and shows what the impact would be if market prices had been 10 per cent higher or lower at the end of the financial year. The amounts below indicate an increase in profit or loss and total equity where market prices increase by 10 per cent, assuming all other variables are constant. A fall in market prices of 10 per cent would give rise to an equal fall in profit or loss and total equity. Profit or loss Total equity Credit risk management 2016 US$’000 23,878 23,878 2015 US$’000 23,616 23,616 Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The Group’s sales policy is subordinated to the credit sales rules set by management, which seeks to mitigate any loss from customers’ delinquency. Trade receivables consist of a large number of customers. Ongoing credit evaluation is performed on the financial condition of accounts receivable. Trade and other receivables disclosed in the balance sheet are shown net of the allowance for doubtful debts. The allowance is booked whenever a loss is identified, which based on past experience is an indication of impaired cash flows. Ocean Wilsons (Investments) Limited primarily transacts with regulated institutions on normal market terms which are trade date plus one to three days. The levels of amounts outstanding from brokers are regularly reviewed by the Investment Manager. The duration of credit risk associated with the investment transaction is the period between the date the transaction took place, the trade date and the date the stock and cash are transferred, and the settlement date. The level of risk during the period is the difference between the value of the original transaction and its replacement with a new transaction. In addition Ocean Wilsons (Investments) Limited invests in Limited Partnerships and other similar investment vehicles. The level of credit risk associated with such investments is dependent upon the terms and conditions and the management of the investment structures. The Board reviews all investments at its regular meetings from reports prepared by the company's Investment Manager. 71 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 36 Financial instruments (continued) Liquidity risk management Liquidity risk is the risk that the Group will encounter difficulty in fulfilling obligations associated with its financial liabilities that are settled with cash payments or other financial asset. The Group's approach in managing liquidity is to ensure that the Group always has sufficient liquidity to fulfil the obligations that expire, under normal and stress conditions, without causing unacceptable losses or risk damage to the reputation of the Group. Ultimate responsibility for liquidity risk management rests with the Board of directors. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group uses costing based on activities to price the products and services which assist in monitoring cash flow requirements and optimizing the return on cash investments. Normally the Group ensures it has sufficient cash reserves to meet the expected operational expenses, including financial obligations. This practice excludes the potential impact of extreme circumstances that cannot be reasonably foreseen. The following tables detail the Group's remaining contractual maturity for its non-derivative financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. 31 December 2016 Non-interest bearing Finance lease liability Variable interest rate instruments Fixed interest rate instruments 31 December 2015 Non-interest bearing Finance lease liability Variable interest rate instruments Fixed interest rate instruments Weighted average effective interest rate % – 16.43% 3.73% 2.85% – 16.75% 3.22% 2.91% Less than 12 months US$’000 71,556 1,211 27,762 22,018 1-5 years US$’000 – 1,085 75,307 79,675 122,547 156,067 82,621 1,192 17,292 24,198 – 1,536 68,460 79,767 125,303 149,763 5+ years US$’000 Total US$’000 – – 12,435 158,333 170,768 – – 9,407 164,631 174,038 71,556 2,296 115,504 260,026 449,382 82,621 2,728 95,159 268,596 449,104 The Group expects to meet its other obligations from operating cash flows and proceeds of maturing financial assets. Fair value of financial instruments The fair value of non-derivative financial assets traded on active liquid markets are determined with reference to quoted market prices. The carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair value. The fair value of financial assets and liabilities traded in active markets are based on quoted market prices at the close of trading on 31 December 2016. The quoted market price used for financial assets held by the Company utilise the last traded market prices. 72 Ocean Wilsons Holdings Limited/Annual Report 2016 36 Financial instruments (continued) Fair value measurements recognised in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which fair value is observable: Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 Inputs for the asset that are not based on observable market data. Fair value measurements are those derived from valuation techniques that include inputs for the assets or liability that are not based on observable data (unobservable inputs). The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one of more of the significant inputs is not based on observable market data, the instrument is included in level 3. 31 December 2016 Financial assets at FVTPL Level 1 US$’000 Level 2 US$’000 Level 3 US$’000 Total US$’000 Non-derivative financial assets for trading 10,028 128,229 100,524 238,781 31 December 2015 Financial assets at FVTPL Level 1 US$’000 Level 2 US$’000 Level 3 US$’000 Total US$’000 Non-derivative financial assets for trading 3,885 138,100 94,170 236,155 Valuation Process Investments whose values are based on quoted market prices in active markets and are classified within Level I include active listed equities. The Group does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. These include certain private investments that are traded over the counter. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Investments classified within Level 3 have significant unobservable inputs as they trade infrequently. Level 3 instruments include holdings in Limited Partnerships and other funds. As observable prices are not available for these securities, the Company values these based on an estimate of their fair value, which is determined as follows: (i) For entities that have recently begun trading and for which detailed financial information is not available, the valuation will be determined with reference to the original cost plus any further drawdowns less any distributions received. This will be adjusted by reference to more recent benchmark subscriptions and investments which give a guide to fair value or where there are other factors that indicate there has been a significant change in fair value. (ii) For more established investments, the valuation will be determined by reference to recent financial information received from the underlying entity. This underlying information is determined in accordance with International Private Equity and Venture Capital Guidelines and is determined using methodologies that include applying an average sector earnings multiple to operating profits, reference to the valuation of the underlying net asset base and discounted cash flows. Level 3 valuations are reviewed on a quarterly basis by the Investment Manager who reports to the Board quarterly. The Investment Manager considers the appropriateness of the valuation model inputs used and the basis of the techniques used to ensure they are in line with industry standards. In selecting the most appropriate valuation model the Investment Manager considers historical alignment to actual market transactions. 73 Ocean Wilsons Holdings Limited/Annual Report 2016 Notes to the Accounts 36 Financial instruments (continued) None of the Group’s investments have moved between classification levels in the year and therefore no reconciliation is necessary. Sensitivity analysis in relation to Level 3 investments has been included in the market price risk management analysis where the Group has shown impacts to the value of investments if markets prices had been 10% higher or lower at the end of the financial year. Reconciliation of Level 3 fair value measurements of financial assets: Balance at 1 January Total losses in the Statement of Comprehensive Income Purchases and drawdowns of financial commitments Sales and repayments of capital Balance at 31 December 37 Post-employment benefits 2016 US$’000 94,170 (2,264) 10,372 (1,754) 100,524 2015 US$’000 75,207 (5,950) 27,366 (2,453) 94,170 The Group operates a private medical insurance scheme for its employees which require the eligible employees to pay fixed monthly contributions. In accordance with Brazilian law, eligible employees with greater than ten years service acquire the right to remain in the plan following retirement or termination of employment, generating a post-employment commitment for the Group. Ex-employees remaining in the plan will be liable for paying the full cost of their continued scheme membership. The future actuarial liability for the Group relates to the potential increase in plan costs resulting from additional claims as a result of the expanded membership of the scheme. Present value of actuarial liabilities Actuarial assumptions 31 December 31 December 2016 US$’000 600 2015 US$’000 1,300 The calculation of the liability generated by the post-employment commitment involves actuarial assumptions. The following are the principal actuarial assumptions at the reporting date: Economic and Financial Assumptions Annual interest rate Estimated inflation rate in the long-term Ageing Factor Medical cost trend rate Biometric and Demographic Assumptions Employee turnover Mortality table Mortality table for disabled Disability table Retirement Age Employees who opt to keep the health plan after retirement and termination Family composition before retirement Probability of marriage Age difference for active participants Family composition after retirement 74 31 December 31 December 2016 11.35% 5.00% 2015 14.17% 6.50% 2.50% p.a. 2.50% p.a 2.50% p.a. 2.50% p.a 31 December 2015 22.7% AT-2000 IAPB-1957 Álvaro Vindas 100% at 62 23% 31 December 2016 22.7% AT-2000 IAPB-1957 Álvaro Vindas 100% at 62 23% 90% of the participants 90% of the participants Men 4 years older than the woman Men 4 years older than the woman Composition of the family group Composition of the family group Ocean Wilsons Holdings Limited/Annual Report 2016 36 Financial instruments (continued) Sensitivity analysis The present value of future liabilities may change depending on market conditions and actuarial assumptions. Changes on a relevant actuarial assumption, keeping the other assumptions constant, would have affected the defined benefit obligation as shown below: CiPBO (*) – discount rate + 0.5% CiPBO (*) – discount rate – 0.5% CiPBO (*) – Health Care Cost Trend Rate + 1.0%(*) CiPBO (*) – Health Care Cost Trend Rate – 1.0% (*) CiPBO means Change in projected benefit obligation. 31 December 31 December 2016 US$ (41) 52 112 (84) 2015 US$ (96) 108 239 (190) 75 Ocean Wilsons Holdings Limited/Annual Report 2016 Statistical Statement (Unaudited) 2012 – 2016 (in US$’000) Closing rates of exchange – R$ to US$ Income Statement Group revenue Raw materials and consumables used Employee benefits expense Depreciation & amortisation expense Other operating expenses Profit/(loss) on disposal of property, plant and equipment Group operating profit Share of results of joint venture Investment revenue Other gains and losses Finance costs Foreign exchange losses on monetary items Profit before tax Income tax expense Profit for the year Profit for the period attributable to: Equity holders of parent Non-controlling interests Balance Sheet Net assets Brazilian interests Investments held for trading Other net assets Attributable net assets – per share Brazilian interests – book amount Other assets – book and market amount Key Statistics Earnings per share Cash dividends per share paid Mid-market quotation at end of period Mid-market quotation at end of period in US Dollars 76 Year to Year to Year to 31 December Year to 31 December 31 December 31 December 2013 31 December Year to 2016 US$’000 3.26 457,161 (37,741) (144,274) (52,585) (126,470) 745 96,836 8,073 15,065 (4,134) (599) 2,286 117,527 (36,836) 80,691 45,060 35,631 80,691 2015 US$’000 3.90 2014 US$’000 2.66 (Restated) US$’000 2.34 2012 US$’000 2.04 509,268 633,520 (55,760) (100,588) 660,106 (94,330) 610,354 (72,207) (147,279) (195,893) (209,459) (223,031) (53,214) (142,175) (1,294) 109,546 4,843 16,908 (1,388) (45,403) (15,792) 68,714 (39,455) 29,259 15,470 13,789 29,259 (65,120) (58,674) (182,819) (188,569) (55,897) (173,951) 326 89,426 7,090 16,975 6,233 (23,607) (17,621) 78,496 (41,928) 36,568 23,182 13,386 36,568 9,966 119,040 2,392 17,838 13,684 (21,863) (30,589) 100,502 (42,216) 58,286 37,873 20,413 58,286 534 84,734 689 18,255 16,394 (9,948) (11,572) 98,552 (33,671) 64,881 41,264 23,617 64,881 US$’000 US$’000 US$’000 US$’000 US$’000 464,988 238,781 53,223 756,992 13.15 8.26 21.41 127.4c 63c £10.22 $12.50 394,807 236,155 49,520 680,482 11.16 8.08 19.24 43.7c 63c £7.65 $11.27 474,127 236,491 56,726 767,344 13.41 8.29 21.70 65.6c 60c £10.00 $15.58 476,626 244,969 48,480 770,075 13.48 8.30 21.78 107.1c 42c £10.42 $17.25 461,479 221,582 60,507 743,568 13.05 7.98 21.03 116.7c 33c £9.70 $15.12 Notice of Annual General Meeting Ocean Wilsons Holdings Limited/Annual Report 2016 Notice is hereby given that the 24th Annual General Meeting of the Company will be held at the offices of Conyers Dill & Pearman Limited, Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda on 6 June 2017 at 10:00 am for the following purposes. 1 2 3 4 5 6 7 To receive and, if approved, adopt the Directors’ Report and Accounts for the year ended 31 December 2016. To declare a dividend. To determine the maximum number of Directors for the ensuing year as eight and authorise the Board of Directors to elect or appoint on the Members’ behalf a person or persons to act as additional Directors up to such maximum number to serve until the conclusion of the next Annual General Meeting. To re-elect Mr K Middleton as a Director. To re-elect Mr W Salomon as a Director. To appoint Ernst & Young LLP as the Auditor and the Directors to fix the remuneration of the Auditor. Ratification and confirmation of all and any actions taken by the Board of Directors and the persons entrusted with Company’s management in the year ended 31 December 2016. By Order of the Board Codan Services Limited Assistant Secretary Clarendon House, Church Street, Hamilton HM 11, Bermuda 24 March 2017 Any member of the Company entitled to attend and vote at the meeting may appoint one or more proxies to attend and vote instead of him. A proxy need not be a member of the Company. 77 Ocean Wilsons Holdings Limited/Annual Report 2016 78 Ocean Wilsons Holdings Limited/Annual Report 2016 Form of Proxy *I/We *of being a Member of Ocean Wilsons Holdings Limited, hereby appoint Mr J F Gouvêa Vieira, or failing him Mr W Salomon both Directors of the Company as my/our proxy to vote for me/us and on my/our behalf at the Annual General Meeting of the company to be held on 6 June 2017 and at any adjournment thereof. The proxy will vote on the Resolutions as indicated opposite. Or as my/our proxy to vote for me/us and on my/our behalf at the Annual General Meeting of the company to be held on 6 June 2017 and at any adjournment thereof. The proxy will vote on the Resolutions as indicated opposite. For Against Withheld 1 To receive and, if approved, adopt the Directors’ Report and Accounts for the year ended 31 December 2016. 2 To declare a dividend. 3 To determine the maximum number of Directors for the ensuing year as eight and authorise the Board of Directors to elect or appoint on the Members’ behalf a person or persons to act as additional Directors up to such maximum number to serve until the conclusion of the next Annual General Meeting. 4 To re-elect Mr K Middleton as a Director. 5 To re-elect Mr W Salomon as a Director. 6 To appoint Ernst & Young LLP as the Auditor and authorise the Directors to fix the remuneration of the Auditor. 7 Ratification and confirmation of all and any actions taken by the Board of Directors and the persons entrusted with Company’s management in the year ended 31 December 2016. Signature Notes Dated 2017 1 2 3 4 5 If any other proxy is preferred, delete the names inserted above and add the name of the proxy whom you wish to appoint, and initial the alteration. Please indicate by a cross in the appropriate box how you wish your proxy to vote. If no indication is given your proxy will abstain or vote as he/she thinks fit. To be valid, the proxy should be deposited at the Transfer Agents of the Company, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU, no less than 48 hours before the time for the Meeting. In the case of a corporation, this proxy must be under its Common Seal or under that of an Officer or Attorney duly authorised in writing. In the case of joint holders the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register of Members, in respect of the joint holding. ✂ * Please insert your full name and address in BLOCK CAPITALS. Printed by Park Communications on FSC® certified paper. Park is a CarbonNeutral® company and its Environmental Management System is certified to ISO 14001. This document is printed on Chorus Silk, which can be disposed of by recycling, incineration for energy recovery or is biodegradable. The mill which makes chorus, sources 90% of its pulp fibre from within a 200km radius of the mill, reducing the carbon footprint for production.