A n n u a l R e p o r t 2 0 1 7 Contents 1 Ocean Wilsons Holdings Limited 2 Chairman’s Statement 6 Financial Review 11 Wilson Sons Limited 12 Investment Portfolio 13 Investment Manager’s Report 17 Directors and Advisers 18 Report of the Directors 26 Independent Auditors’ Report 34 Consolidated Statement of Comprehensive Income 35 Consolidated Balance Sheet 36 Consolidated Statement of Changes in Equity 37 Consolidated Cash Flow Statement 38 Notes to the Accounts 83 Statistical Statement 2013 – 2017 84 Notice of Annual General Meeting 85 Form of Proxy Ocean Wilsons Holdings Limited Ocean Wilsons Holdings Limited/Annual Report 2017 Highlights Wilson Sons Limited (“Wilson Sons”) is a Bermuda company listed on the São • Profit after tax for the year increased 36% to US$109.4 million (2016: Paulo Stock Exchange (BOVESPA) and Luxembourg Stock Exchange. Ocean US$80.7 million) principally due to improved returns from the investment Wilsons holds a 58.19% interest in Wilson Sons which is fully consolidated in portfolio and higher operating profit. the Group accounts with a 41.81% non-controlling interest. Wilson Sons is one of the largest providers of maritime services in Brazil. Wilson Sons’ activities • The valuation of the Investment portfolio (including cash under include harbour and ocean towage, container terminal operation, offshore oil management) increased US$35.8 million to US$274.7 million (2016: and gas support services, small vessel construction, logistics and ship agency. US$238.9 million). Wilson Sons has over four thousand employees. Ocean Wilsons (Investments) Limited is a wholly owned Bermuda investment company. The company holds • • • • Operating profit growth of 13% to US$109.5 million (2016: US$96.8 a portfolio of international investments. million) and improved operating margin from 21.2% to 22.1%. Objective Revenue grew 9% to US$496.3 million (2016: US$457.2 million). Ocean Wilsons is run with a long-term outlook. This applies to both the Earnings per share for the year up by 74% to 221.5 cents taken by the Board enables Wilson Sons to grow and develop its businesses investment portfolio and our investment in Wilson Sons. The long-term view (2016: 127.4 cents). without pressure to produce short-term results at the expense of long-term value creation. The same view allows our Investment Managers to make Proposed dividend increased by 11% to 70 cents per share (2016: investment decisions that create long-term capital growth. 63 cents per share). 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”). 1 Ocean Wilsons Holdings Limited/Annual Report 2017 Chairman’s Statement Introduction the suspension. During the first quarter of 2018 five of the six suspended The Group delivered a strong performance in 2017 from both our Brazilian vessels have recommenced operations with the remaining vessel expected to and investment portfolio businesses. After enduring its worse economic resume in July 2018. At the year end, the joint venture operated a fleet of 23 recession on record, the Brazilian economy grew 1% in 2017 improved by the PSVs of which 19 were under long-term contract, with the remainder available performance of the agricultural sector with both exports and imports growing in the Brazilian spot market or laid up until market conditions improve. On a 5% in the year. The key operational indicators at our container terminal and positive note, there were some important advances in the Brazilian oil and gas towage businesses increased against their 2016 comparatives although our industry during the year, with an improved regulatory framework that offshore businesses suffered in the depressed offshore oil and and gas market. removed the Petrobras monopoly on operating the pre-salt offshore oilfields, Operating volumes Container Terminals (container movements in TEU ’000) 1,068.1 1,029.8 3.7% Towage 2017 2016 % Change renewed interest by the major international oil companies who actively opening them up to foreign investment. This positive move was reflected in participated in the recent round of pre-salt auctions. (number of harbour manoeuvres performed) 59,796 58,376 Offshore Vessels (operating days own vessels) 6,035 6,428 2.4% (6.1%) During the year the shipyard successfully delivered the first two of a four tugboat order to third parties and continued to perform maintenance on our 1 March 2017 marked the 20th anniversary of the commencement of operations at the Tecon Rio Grande container terminal concession. The As at 31 December 2017, the investment portfolio including cash under terminal has grown significantly in this time through the Group’s substantial management was valued at US$274.74 million, representing US$7.73 per ongoing capital investments and management efforts. From a modest share (2016: US$238.8 million and US$6.76 per share). tugboat and offshore fleets. beginning in 1997 (the terminal moved 90,975 “TEUs” (twenty-foot equivalent units) in the first 10 months) the terminal has become one of the largest and Group Results most modern container terminals in the country. Container volumes in 2017 Profit before tax for the year increased US$28.0 million to US$145.5 million grew 6% over prior year to 760,900 TEUs (2016: 719,500 TEUs) driven compared to US$117.5 million in 2016. The improvement is principally due to principally by higher import, cabotage and transhipment movements. a US$36.9 million movement in other gains and losses from the investment Transhipment volumes benefited from the new Santa Clara terminal which portfolio, a US$12.7 million increase in operating profit and US$3.9 million enables the waterway transport of containers between the Triunfo increase in investment income. These gains were partially offset by a US$21.4 Petrochemical hub in the state of Rio Grande do Sul and Tecon Rio Grande. million increase in finance costs, as the prior year benefited from a US$12.8 Container volumes handled at our other container terminal, Tecon Salvador, at million exchange gain on foreign currency borrowings compared with a 307,100 TEUs, were marginally lower than prior year, (2016: 310,300 TEUs) US$0.8 million loss in the current period. Operating profit for the period was mainly due to lower export and empty container volumes. Last year we were US$12.7 million higher than the comparative period in 2016 at US$109.5 pleased to announce that the Group had signed an amendment to the Tecon million (2016: US$96.8 million) reflecting an increase in revenue and Salvador concession agreement extending the term of the concession until improved operating margins. Group operating margins* for the year at 22% 13 March 2050. Under the terms of the extension, the Group is required to were marginally ahead of prior year (21%). Revenue for the full year grew 9% complete minimum expansion and maintenance capital expenditure. We are to US$496.3 million (2016: US$457.2 million), principally due to higher port currently awaiting environmental licences to begin civil works which we terminal and logistics revenue. Earnings per share for the year were 221.5 expect to start in the fourth quarter of 2018. cents compared with 127.4 cents in 2016. Towage continued to perform well with the number of harbour manoeuvres increasing 2% to 59,796 (2016: 58,376) In addition to the higher volumes, results also benefitted from the market trend towards larger vessels, as harbour towage pricing is linked to vessel size. Special towage operations revenue declined reflecting the reduced demand from the Brazilian offshore oil and gas industry and the more volatile nature of this activity which includes salvage, firefighting and other operations. The Group remains the leading towage operator in Brazil with a fleet of seventy-four tugboats operating in over 30 ports throughout the country. Operating days at our offshore joint venture, Wilson Sons Ultratug Offshore decreased 6% in the year due to market pressures. During the third quarter Petrobras negotiated new contract terms with our joint venture for eight platform supply vessels (“PSVs”). The agreement temporarily suspended six of these contracts due to current suppressed demand and reduced the vessels’ daily rates, but the original contract term was extended by a period equal to * Operating margins are defined as operating profit divided by revenue. Investment portfolio performance The investment portfolio produced a strong performance in the year growing US$35.8 million to US$274.7 million at year end (2016: US$238.9 million) driven by the rise in global equity markets. The portfolio produced a time weighted net return of 16.5% in the year compared with the performance benchmark of 5.1% . Over the three-year period of the performance benchmark the portfolio produced a time-weighted return of 5% per annum compared with the performance benchmark of 4.6% per annum resulting in a US$0.1 million performance fee payable to the Investment Manager. At year end the investment portfolio was invested 56% in global equities (US$152.9 million), 34% in private assets (US$94.1 million) with the balance invested in market neutral funds, cash and bonds. The US$9.9 million increase in private assets at year end (2016: US$84.2 million) is due to new capital 2 Ocean Wilsons Holdings Limited/Annual Report 2017 drawdowns of US$10.0 million, less distributions received of US$10.3 million USD. Based on the current share price and exchange rates a dividend of 70 and an increase in net value of US$10.2 million. The investment portfolio cents per share represents a healthy dividend yield of approximately 4.7%. maintains an overwewight exposure to emerging markets which account for 36% of the investment portfolio net asset value at year end but 60% of the Dividends are set in US Dollars and paid annually. The Ocean Wilsons private equity value. At 31 December 2017, the top ten investments account Holdings Limited dividend policy is to pay a percentage of the average capital for 39% of the investment portfolio valuation (US$108.4 million). Ocean employed in the investment portfolio determined annually by the Board and Wilsons (Investments) Limited paid dividends of US$3.5 million to Ocean the Company’s full dividend received from Wilson Sons in the period after Wilsons Holdings Limited in the year. deducting funding for the parent company costs. The Board of Directors may review and amend the dividend policy from time to time in light of our future Investment Manager plans and other factors. Ocean Wilson (Investments) Limited (“OWIL”), a wholly owned subsidiary registered in Bermuda, holds the Group’s investment portfolio. OWIL has Charitable donations appointed Hanseatic Asset Management LBG, a Guernsey registered and The Group’s subsidiary Wilson Sons continues to support several local regulated investment group, as its Investment Manager. charities and causes in Brazil. Group donations for charitable purposes in the year amounted to US$715,000 (2016: US$136,000). The focus of the Group’s Investment management fee charitable donations are young people, promoting social inclusion and The Investment Manager receives an investment management fee of 1% of development. Among the charities the Group supports are Brigada Mirim da the valuation of funds under management and an annual performance fee of Ilha Grande, Escola de Gente, Passporte da Cidadania and Sonhar Acordado. 10% of the net investment return which exceeds the benchmark, provided that the high-water mark has been exceeded. The portfolio performance is Health, safety and environmental practices (HSE) measured against a benchmark calculated by reference to US CPI plus 3% per The Group continues to invest in the training, development and safety of our annum over rolling three-year periods. Payment of performance fees are staff. The Group has run the WS+ safety programme in partnership with subject to a high-water mark and are capped at a maximum of 2% of DuPont since 2011 to promote improved safety throughout the Wilson Sons portfolio NAV. The Board considers a three-year measurement period Group. The programme is based on the establishment and revision of work appropriate due to the investment mandate’s long-term horizon and an processes and procedures, operational discipline, management of deviations, absolute return inflation-linked benchmark appropriately reflects the organisational responsibility, behavioural approach and the engagement of company’s investment objectives while having a linkage to economic factors. leadership. Since its implementation the lost time injury frequency rate has decreased by 94%. In 2017 the Group achieved a world-class level of safety The current benchmark was introduced on 1 January 2015 and 2017 marks with a lost time injury frequency rate of 0.45 per one million man-hours the completion of the first three-year cycle under the current benchmark. In worked. Wilson Sons is one of the most consistent winners of the DuPont 2017 the investment management fee paid was US$2.6 million and a US$0.1 award on Occupation, Health and Safety Management in Brazil having million performance fee is payable to the Investment Manager. received four awards in the last five years. Net asset value Corporate governance At the close of business on 31 December 2017, the Wilson Sons’ share price The Board has put in place corporate governance arrangements which it was R$40.00, resulting in a market value for the Ocean Wilsons holding of believes are appropriate for the operation of your Company. The Board has 41,444,000 shares (58.19% of Wilson Sons) totalling approximately US$500.8 considered the principles and recommendations of the 2016 UK Corporate million which is the equivalent of US$14.16 (£10.48) per Ocean Wilsons share. Governance Code (“the Code”) issued by the Financial Reporting Council and decided to apply those aspects which are appropriate to the business. This Adding the market value per share of Wilsons Sons of US$14.16 and the reflects the fact that Ocean Wilsons is an investment holding company investment portfolio at 31 December 2017 per share of US$7.73 results in a incorporated in Bermuda with significant operations in Brazil. The Company net asset value per Ocean Wilsons Holdings Limited share of US$21.89 complies with the Code where it is beneficial for both its shareholders and its (£16.21) per share. The Ocean Wilsons Holdings Limited share price of £10.95 business to do so. It has done so throughout the year and up to the date of at 31 December 2017 represented an implied discount of 32% which is this report but it does not fully comply with the Code. The areas where the higher than the historic long-term discount. Company does not comply with the Code, and an explanation of why, are Dividend contained in the section on corporate governance in the Annual Report. The position is regularly reviewed and monitored by the Board. The Board is recommending a dividend of 70 cents per share (2016: 63 cents per share) to be paid on 8 June 2018, to shareholders of the Company as of Outlook the close of business on 11 May 2018. This represents an 11% increase over The Brazilian economy is forecast to grow between 2.5 – 3% in 2018 with the 2016 dividend. Shareholders will receive dividends in Sterling by reference stronger growth from 2019. The container terminals business continues to to the exchange rate applicable to the USD on the dividend record date perform well benefitting from the increased trade volumes that are beginning (11 May 2018) except for those shareholders who elect to receive dividends in to appear. We are still awaiting the necessary environmental license approval 3 Ocean Wilsons Holdings Limited/Annual Report 2017 Chairman’s Statement to begin the expansion of the Tecon Salvador container terminal and do not expect to be able to start construction before the fourth quarter of 2018. Demand for towage services remains healthy despite recent increased competition in the segment. The Brazilian offshore oil and gas market will face another challenging year in 2018 although prospects for the longer-term are brighter following the investment friendly reforms implemented during 2017. Market over-capacity continues to dampen demand for both offshore vessel hire and new vessel construction although we continue to explore alternative revenue streams for our excess supply vessel capacity. Our joint venture is currently modifing one PSV to provide oil spill recovery services and two other PSVs to provide shallow-water diving support services under contracts that will start in 2018. The shipyard new buildings order book currently consists of two tugboats for third parties and two tugboats for our own fleet. In addition there are 15 dry-docking operations scheduled in the year for third parties and our own fleet. We remain confident of the strength of our businesses and look forward to the opportunities that a growing Brazilian economy will bring. 2017 was a robust year for global stock markets and, rather surprisingly, one where volatility was low. In contrast 2018 has got off to a much more turbulent start, rising strongly for most of January before giving up most of these gains in the beginning of February. We would expect this pattern to continue, reflecting the maturing nature of the current cycle. Nonetheless we continue to see upside in equity markets although one must be increasingly discerning as to positioning both from a geographic and sector perspective. Encouragingly for your investment portfolio, we believe emerging markets are looking more attractive than their developed market counterparts. Risks are however undoubtedly rising. Valuations are full in many cases, geo-political risks high and inflation appears to be rearing its head again with implications for global interest rates and bond yields. This backdrop is likely to mean that more defensive assets increasingly have a role to play in portfolios. Management and staff On behalf of the Board and shareholders, I would like to thank our management and staff for their efforts and hard work during the year. J F Gouvêa Vieira Chairman 16 March 2018 4 Ocean Wilsons Holdings Limited/Annual Report 2017 Tecon Rio Grande in Rio Grande, Rio Grande do Sul. In 2017 Tecon Rio Grande moved 760,900 TEUs (twenty-foot equivalent units). 5 Ocean Wilsons Holdings Limited/Annual Report 2017 Financial Review Operating profit demand from the offshore oil and gas industry and the more volatile nature of Operating profit for the period was US$12.7 million higher than the this activity, which includes salvage, firefighting and other operations. Ship comparative period in 2016 at US$109.5 million (2016: US$96.8 million) agency revenue declined US$2.6 million to US$11.3 million (2016: US$13.9 reflecting the increase in revenue and improved operating margins. Group million). operating margins for the year at 22% were marginally ahead of prior year (21%). Raw materials and consumables used in the year at US$37.7 million were the million, (2016: US$26.4 million) impacted by the weak market for vessel same as the prior year (2016: US$37.7 million). Employee expenses were 15% construction in Brazil. In addition to work performed for third-parties, the higher at US$166.4 million (2016: US$144.3 million) due to the effect of the shipyard continued to provide important vessel construction and maintenance Third-party shipyard revenue for the year was US$5.2 million lower at US$21.2 lower average USD/BRL exchange rate, redundancy costs associated with services for the Group. corporate restructuring and additional provisions to cover potential labour claims. Employee costs were also impacted by the rollback by the Brazilian All Group revenue is derived from Wilson Sons’ operations in Brazil. government of a temporary payroll tax exemption granted to some business sectors in Brazil on the 1 July 2017. The rollback was repealed in August Share of results of joint ventures following a judicial decision. Other operating expenses were 3% lower at The share of results of joint ventures is Wilson Sons’ 50% share of net profit US$122.3 million (2016: US$126.5 million), with exchange rate impacts offset for the period from our offshore joint venture. The Group’s share of results of by a US$4.9 million tax credit arising in the logistics busines, reduced tug joint ventures fell US$4.7 million from US$8.1 million in 2016 to US$3.4 rental costs (following the acquisition of six tugboats in 2016 that were million in the current year, largely due to lower operating profits and previously leased) and a non-recurring US$3.9 million provision reversal. exchange losses on monetary items in the period. Operating profit for the Depreciation and amortisation for the year increased US$4.9 million to US$15.9 million, principally due to fewer operating days which were 6% US$57.5 million from US$52.6 million in 2016 mainly due to the lower lower at 6,035 days against 6,428 days in 2016. At year end our joint 50% share in the joint venture in the year was US$3.4 million lower at average USD/BRL exchange rate and larger towage fleet. Loss on disposal of venture has 23 PSVs. property, plant and equipment of US$2.9 million includes a US$2.3 million write down on leasehold improvements no longer used by the Group (2016: Investment income US$0.7 million profit). Investment revenue for the year was US$3.9 million higher at US$19.0 million (2016: US$15.1 million) principally due to higher income from underlying Revenue from Maritime Services investment vehicles of US$9.3 million (2016: US$4.8 million) and higher other Revenue for the year increased 9% to US$496.3 million (2016: US$457.2 interest of US$3.8 million (2016: US$2.3 million). million), principally due to higher port terminal and logistics revenue. Port terminals and logistics revenue grew 22% to US$257.8 million (2016: Investment gains and losses US$211.1 million), mainly due to the lower average USD/BRL exchange rate Other investment gains of US$32.8 million arose from the Group’s portfolio of used to convert revenue into our reporting currency and higher container trading investments (2016: US$4.1 million loss) and are comprised of profits terminal and logistics revenue. The average USD/BRL exchange rate in the on the disposal of trading investments of US$6.9 million (2016: US$1.9 period was 8% lower than the comparative period in 2016, (3.19 v 3.48). million) and unrealised gains on trading investments of US$25.9 million Container terminal revenue in the year was 26% higher at US$187.4 million (2016: US$6.0 million loss). (2016: US$148.3 million) benefitting from a more favourable sales mix with increases in import and cabotage volumes. Warehouse revenue increased Finance costs driven by the higher import volumes. Container volumes handled at our Finance costs for the year were US$21.4 million higher at US$22.0 million container terminals were 4% higher than prior year at 1,068,100 TEUs (2016: compared with US$0.6 million for 2016, as 2016 benefitted from a US$12.8 1,029,800 TEUs). Logistics revenue rose 26% to US$54.7 million (2016: million exchange gain on foreign currency borrowings, whilst 2017 resulted in US$43.3 million) driven by improved bonded warehouse revenue. Revenue at a US$0.8 million loss. Interest on overdrafts and loans were US$ 1.0 million Brasco fell 19% to US$15.7 million (2016: US$19.4 million) as the downturn higher than prior year at US$13.3 million, (2016: US$12.3 million). Other in the Brazilian offshore oil and gas industry continues to reduce demand for interest of US$7.7 million (2016: US$0.7 million) mainly related to interest on its services. Revenues were supported by an increase in vessel lay-up outstanding tax balances. The large increase in 2017 is because Wilson Sons, operations during the year reflecting the excess capacity available in the market. under a Brazilian tax amnesty programme, paid US$1.0 million of cash, obtained US$7.2 million of tax relief and used US$6.9 million of unrecognised Towage and ship agency revenue for the year at US$218.0 million was slightly tax losses to settle US$15.1 milllion of disputed federal tax debts. lower than 2016 (US$219.7 million). Harbour towage continued to perform well with higher volumes and handling of larger sized vessels offsetting the Exchange rates weaker demand for special towage operations in the period. Harbour towage The Group reports in USD and has revenues, costs, assets and liabilities in manoeuvres performed in the period were 2% higher at 59,796 (2016: both BRL and USD. Therefore movements in the USD/BRL exchange rate 58,376). Towage special operations revenue in the year were US$9.2 million influence the Group’s results both positively and negatively from year to year. lower than 2016 at US$11.2 million (2016: US$25.1 million) reflecting lower During 2017 the BRL depreciated 2% against the USD from R$3.26 at 6 Ocean Wilsons Holdings Limited/Annual Report 2017 The tugboat Procyon built at our shipyard in Guaruja is equipped for external firefighting enabling it to tackle fires on other vessels or waterfront property. 7 Ocean Wilsons Holdings Limited/Annual Report 2017 Financial Review 1 January 2017 to R$3.31 at the year end. In 2016 the BRL appreciated 17% Taxation against the USD from R$3.90 at 1 January 2016 to R$3.26 at the year end. Income tax expense for the year at US$36.1 million was in line with prior year The principal effects from the movement of the BRL against the USD on the (2016: US$36.8 million). This represents an effective tax rate for the period of income statement are set out in the table below: 24.8% (2016: 31.3%) compared with the corporate tax rate prevailing in Brazil Exchange gains on monetary items (i) Exchange losses/gains on foreign currency borrowings Deferred tax on retranslation of fixed assets (ii) Deferred tax on exchange variance on loans (iii) Total 2017 2016 US$ million US$ million 2.8 (0.8) 1.4 (1.2) 2.2 2.3 12.8 22.4 (14.3) 23.2 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. In 2016 net expenses were incurred outside of Brazil. The principal impacts from these items on the tax charge in the income statement are set out in the table below US$ 2017 % of US$ 2016 % of million taxable profit million taxable profit Deferred tax items not included (i) This arises from the translation of BRL denominated monetary items in USD functional in determining taxable profit (i) (5.3) (3.6%) (2.9) (2.5%) currency entities. Income/expenses not included (ii) The Group’s fixed assets are located in Brazil and therefore future tax deductions from in determining taxable profit (ii) 3.4 2.4% (3.0) (2.6%) 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. Net (income)/expenses incurred outside Brazil Total (11.6) (13.4) (7.9%) (9.2%) 2.8 (3.1) 2.4% (2.7%) The movement of the BRL against the USD in 2017 resulted in a positive Charge/(credit) to the current period tax charge impact of US$2.2 million on the income statement in the year compared with a US$23.2 million positive impact in 2016 caused by the appreciation of the BRL against the USD. A currency translation adjustment loss of US$6.5 million (2016: US$32.7 million gain) on the translation of operations with a functional currency other than USD is included in other comprehensive income and recognised directly in equity. The positive currency translation adjustment in 2016 is due to the appreciation of the BRL against the USD. The average USD/BRL exchange rate during 2017 was 8% lower at 3.19 than prior year (2016: 3.48). A lower average exchange rate positively affects BRL denominated revenues and adversly impacts BRL denominated costs when converted into our USD reporting currency. Foreign exchange gains/(losses) on monetary items (i) The principal deferred tax items not included in determining taxable profit are a deferred tax credit arising on the retranslation of BRL denominated fixed assets in Brazil, the deferred tax charge on the exchange losses on USD denominated borrowings and tax losses at our Brazilian subsidiaries not recognised in deferred tax. (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. A more detailed breakdown is provided in note 10. Profit for the year Profit attributable to equity holders of the parent is US$78.3 million (2016: US$45.1 million) after deducting profit attributable to non-controlling interests of US$31.1 million (2016: US$35.6 million). Non-controlling interests at 28% are a lower percentage of the Group profit for the period (2016: 44%) because the improved returns from the investment portfolio accrue solely to the equity holders of the parent company. Foreign exchange gains on monetary items of US$2.8 million (2016: US$2.3 million) arise from the Group’s foreign currency monetary items and principally Earnings per share reflect the movement of the BRL against the USD during the period. Earnings per share for the year were 221.5 cents compared with 127.4 cents Profit before tax Profit before tax for the year increased US$28.0 million to US$145.5 million compared to US$117.5 million in 2016. The improvement was principally due to the US$36.9 million movement in other gains and losses from the investment portfolio, the US$12.7 million increase in operating profit and US$3.9 million increase in investment income. These gains were partially offset by a US$21.4 million increase in finance costs, as the prior year benefitted from a US$12.8 million exchange gain on foreign currency borrowings compared with a US$0.8 million loss in the current period and tax interest of US$7.7 million.. Share of results from joint ventures was US$4.7 million lower and foreign exchange gains on monetary items was US$0.5 million higher. in 2016. Cash flow Net cash inflow from operating activities for the year at US$103.0 million was US$9.2 million higher than prior year. (2016: $93.8 million) principally due to higher operating profit generated in the period. Capital expenditure in the year was US$65.5 million lower at US$30.7 million (2016: US$96.2 million) principally due due to less vessel construction and US$21.1 million of container terminal equipment delivered in the year where the financier directly paid the supplier. Capital additions per note 15 were US$51.1 million (2016: US$ 97.1 million). New loans to finance capital expenditure of US$12.6 million (2016: US$46.6 million) were raised during 8 Ocean Wilsons Holdings Limited/Annual Report 2017 The bridge of one of our tugboats. The Group remains the leading towage operator in Brazil with a fleet of seventy-four tugboats operating in over 30 ports throughout the country. 9 Ocean Wilsons Holdings Limited/Annual Report 2017 Financial Review the year while capital repayments of US$54.7 million (2016: US$41.0 million) Borrowings are long-term with defined repayment schedules repayable over were made on existing loans. Dividends of US$22.3 million were paid to different periods up to 18 years of which 20% is variable rate debt and 80% shareholders in the period (2016: US$22.3 million) with a further US$16.8 million fixed rate debt. The Group’s borrowings are principally USD related with 93% paid to non-controlling interests in our subsidiaries (2016: US$15.2 million). of borrowings USD denominated or linked to the USD. As a significant portion At 31 December 2017, the Group had US$83.8 million in cash and cash our long-term exchange rate exposure. At 31 December 2017 the Group had equivalents (2016: US$77.3 million). Trading investments includes US$31.6 net debt of US$239.2 million (2016: US$260.8 million): of the Group’s pricing is denominated in USD this acts as a natural hedge to million (2016: US$37.4 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 intended to fund Wilson Sons Limited operations in Brazil. Balance sheet Debt Short-term Long-term Total debt Equity attributable to shareholders of the parent company increased US$52.8 million to US$588.2 million at the year end (2016: US$535.3 million) due to Cash and cash equivalents* profits for the year of US$78.3 million, less a negative currency translation Net debt adjustment of US$3.8 million and dividends paid of US$22.3 million. On a per 2017 2016 US$ million US$ million 54.3 300.4 354.7 (115.5) 239.2 49.8 325.8 375.5 (114.7) 260.8 share basis equity attributable to shareholders was the equivalent of US$16.63 * Included in cash and cash equivalents are short-term investments in Wilson Sons Limited which per share (31 December 2016: US$15.14 per share). are intended to fund Wilson Sons Limited operations in Brazil. Net debt and financing All debt at the year end was held in the Wilson Sons Limited Group and has The Group’s reported borrowings do not include US$234.1 million of debt from the Company’s 50% share of borrowings in our Offshore Vessel joint no recourse to the parent company, Ocean Wilsons Holdings Limited, or the venture. 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 Finance Corporation. The FMM is funded by a levy on inbound freight to Brazil and the BNDES and Banco do Brasil act as lending agents for the FMM. Keith Middleton Finance Director 16 March 2018 10 Wilson Sons Limited Ocean Wilsons Holdings Limited/Annual Report 2017 The Wilson Sons 2017 Earnings Report released on 16 March 2018 is Maximising capacity utilisation of our Oil and Gas Support Terminals available on the Wilson Sons Limited website: www.wilsonsons.com.br (Brasco). In addition to our operations at Brasco Niterói, we have 500 metres In it Cezãr Baião, CEO of Operations in Brazil, said: vessels, with excellent access to the Campos and Santos petroleum basins. This expanded capacity positions Brasco as one of the largest operators of “In 2017, we celebrated Wilson Sons’ 180th anniversary and delivered robust offshore support terminals in Brazil. We are continuously monitoring offshore results in a challenging economic environment. The Company reported annual operations across the Brazilian coast to meet the demand for such services. of linear quay at the Brasco Rio base to provide logistics support for offshore EBITDA of US$172.4 milion, an increase of 11.8% YoY. Container Terminals reached record annual volumes as Brazilian trade flow the Brazilian market. We will continue to modernise and expand our tugboat demonstrated some early indications of recovery by the end of the year. Both fleet in order to consistently provide high-quality services to our customers terminals deployed new equipment and upgraded their operating systems. Rio and consolidate our leading position in the Brazilian towage market. We Grande posted a 39% increase in productivity, and by January 2018 its inland regularly review our fleet deployment to optimise efficiency and to seek out waterway service had sufficient volume to commence a second weekly call new market niches where we may be able to provide additional services or linking the north of the State directly to the Port of Rio Grande. After the year expand our geographical footprint to new ports in Brazil. Strengthening our position as the leading provider of towage services in end, Tecon Salvador achieved a record 102 movements per hour following recent investments. We continue to take all the necessary measures to ensure the Maximising potential of our shipyard facilities through a mix of in-house expansion of Salvador and are currently awaiting environmental licensing to and third-party vessel construction, repair, maintenance and dry-docking begin civil works. services to meet the demand of local and international shipowners operating The Towage business reported higher harbour manoeuvres, despite increased in Brazil. competition. The division signed US$62 million in financing agreements with the Solidifying our Offshore Support Vessel services to oil and natural gas Brazilian Development Bank (BNDES) for the construction and maintenance of platforms. Using our knowledge and experience, we intend to continue to tugboats in the coming years. consolidate our activities through the delivery of contracted vessels and maintain our position amongst the leading suppliers of services to the Despite continued stress throughout the oil industry, our Offshore Support offshore oil and gas industry in Brazil. Vessels’ joint venture was awarded three new long-term contracts. Brazil’s recent success in pre-salt oilfield auctions reinforces a more favourable long-term Exploring new opportunities and strategies to provide the best and most outlook, however, the short term remains challenging. complete set of services to our customers. We are always looking to Once more we would like to thank all our stakeholders, but in particular the needs. We intend to continue our strategy with shipping companies in order efforts of all our staff for their contribution to these solid results and their to provide a complete set of domestic and international trade-related services continued commitment to safety.” across a nationwide network. We also seek to make these services more provide new and innovative services to our customers, and to anticipate their efficient and cost-effective, in order to maintain our strong customer base and The Wilson Sons Strategy is: strengthen our relationships. To grow our existing assets while strengthening the businesses and looking for new opportunities, focusing on Brazil and Latin America. We continue to Increasing economies of scale and productivity, realisation of potential consolidate our position in all the segments in which we operate, maximising synergies and cost savings across our business segments. We continuously economies of scale and efficiency, quality and the range of our services we seek to optimise our operations, productivity and reduce costs through provide to customers. synergies and knowledge exchange among our businesses and administrative areas. We are and will continue to be focused on integrating similar activities Fulfilling capacity in our expanded container terminals. In order to meet in order to realise savings in administrative and back-office areas, especially in demand from domestic and international trade, we have expanded both our branch offices. We seek to achieve economies of scale and reduce costs container terminals since the beginning of the concessions. By maximising wherever possible. We demand that our managers continually develop new installed capacity utilisation, we are best able to continue increases in strategies to improve our operations and explore new businesses. productivity and level of service to our clients with economies of scale. We will diligently pursue this objective. The early extension of the Salvador Health, Safety and the Environment are priorities for the execution of our terminal through to 2050 includes investments in quay extension and overall strategy of sustainable and ethical businesses. We continue to offer equipment to be installed in the coming years, further enhancing the terminal programmes to promote safety best practices throughout the Group by productivity. Additionally, we will evaluate new concessions and the training our staff, as well as fostering a safety-oriented environment and development of new terminals, and their ability to provide a strong return on culture. shareholders’ equity. 11 Ocean Wilsons Holdings Limited/Annual Report 2017 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 fearing 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 2017 Market backdrop corporate profitability with many companies beating analyst forecasts, and 2017 was a year that promised much to the bears but in practice saw the bulls whilst the monetary cycle did indeed turn, it did so in a controlled fashion win through. The geopolitical potholes were largely avoided with the newly helped by a subdued inflationary backdrop. elected US president, Donald Trump, and North Korea’s leader, Kim Jong-un, content to verbally insult one another and not, as yet, engage in action. Asian In terms of the numbers, equities, reflecting their geared nature to global trade wars have failed to materialise and, perversely, China’s President Xi has economies, saw the strongest performance with world markets rising by taken on the mantle of chief advocate for the benefits of globalisation at a 24.0% in US dollar terms. Within this US equities rose by 20.9%, Europe by time when America has become more inward looking. 25.5% and Japan by 24.0%. The standout performers, however, were the emerging markets, which rose by some 37.3% with China up 54.1%, India In Europe, whilst the populist parties grew in strength they failed in their 38.8% and Brazil 24.1%. This is particularly positive for the portfolio with its efforts to gain power in France, the Netherlands and Germany. The region is emerging market bias. not out of the woods though, with Germany still to agree a coalition government, the prospect of a coalition government in Italy and the ongoing Bonds, unsurprisingly, were more muted with global treasuries up 7.3% and threat of a Catalonian breakaway in Spain. US treasuries 2.3%. Credit and local currency emerging market debt fared better, rising by 9.1% and 15.2%, respectively. Rather than representing areas of disappointment, the business and economic cycles turned out to be significant positives during the year. Having been Alternatives and commodity investments were a more mixed bag with the rather lacklustre post the Global Financial Crisis most economies did rather composite hedge fund index rising by 8.7%, oil (WTI) by 12.5% and industrial better in 2017 and, for the first time in this cycle, we actually experienced a metals by some 31%. backdrop of synchronised growth. This in turn fed through to an uptick in Asset class performance (in USD) n r u t e r % 60% 50% 40% 30% 20% 10% 0% -10% -20% Glo bal M arkets (D 37% 32% 24% 22% 22% 21% 28% 28% 26% 24% 24% 54% 39% 35% 31% 15% 13% 12% 9% 10% 9% 7% 8% 2% 0% 2% -4% -4% -9% -12% M /E M /F M) Fro ntier M arkets D evelo ped M arkets E m ergin g M arkets N orth A m erica U K Japa n Euro pe G er m a ny Fra nce Brazil R ussia In dia Equities Commodities Fixed Income Currencies G old Africa C hin a E M BI Glo bal E M Glo bal Diversified m o dity In dex Glo bal Hig h Yield C E M BI Diversified Glo bal A ggregate C orp orate B o n d Glo bal Treasury Blo o m berg C o m C o p per W TI C ushin g 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 YTD to end December 2017 Represent 3 month returns to end Source: Bloomberg Cumulative portfolio returns OWIL (Gross time-weighted) OWIL (Net) Performance benchmark* MSCI ACWI + FM NR MSCI Emerging Markets NR 2017 17.6% 16.5% 5.1% 24.0% 37.3% 3 years p.a. 5 years p.a. 10 years p.a. 6.0% 5.0% 4.6% 9.3% 9.1% 6.2% 5.1% 3.9% 10.8% 4.3% 3.1% 2.0% 3.9% 4.6% 1.7% 13 * The OWIL Performance Benchmark which came in to effect on the 1st January 2015 is US CPI Urban Consumers NSA +3% p.a. This has been combined with the old benchmark (USD 12 Month LIBOR +2%) for periods prior to the adoption of the current benchmark. Ocean Wilsons Holdings Limited/Annual Report 2017 Investment Manager’s Report Performance 10 Year Cumulative Indexed Returns 160 150 140 130 120 110 100 90 80 70 60 50 40 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Ocean Wilson (Investments) Limited Performance MSCI ACWI FM NR USD Ocean Wilson (Investments) Limited Benchmark MSCI Emerging Markets NR USD Source: OWIL internal, unaudited data; MSCI Portfolio Commentary technology exposure and used the proceeds to add to Hong Kong property The portfolio returned some 16.5%, on a net basis, over the past 12 months, which he believes to be attractive from a risk/return perspective. significantly outperforming its benchmark over the same period which rose by 5.1%. The portfolio saw good performances from many of its investments, Amongst the detractors, Pershing Square Holdings, an activist US hedge including positions in Japan, Asia, North America and Frontier Markets. fund run by Bill Ackman, fell 5.7% in the past 12 months in spite of positive performance in the last quarter of 5.7%. Pershing Square saw a number of A significant contributor to performance over the year was Findlay Park stock specific challenges and whilst we keep a close eye on this fund and its American Fund, which rose by 23.0%. The investment environment has been portfolio, we recognise that it is not normally sensible to sell good investment favourable for the fund as its large allocations to financial services and managers following a period of poor performance. technology stocks have benefited from the continued growth of the US equity market. The fund’s performance in beating the market this year has been As the market cycle matures we have been introducing a number of more particularly impressive given the manager’s cautious view on valuation levels, defensive investments into the portfolio to manage the risk profile. Whilst which has led the fund to have a 15% allocation to cash. equities remain the favoured asset class and have performed well during the year, there are risks associated with being fully invested in equities with Prominent among the strongest performers this year have been the portfolio’s valuations rising. In August 2017, we switched our position from Cantab CCP Japanese long-only equity funds. Goodhart Partners: Hanjo Fund which has Core Macro Fund into GAM Systematic Core Macro Fund, which is run by risen by 47.3% over the year. The manager is encouraged by recent the same manager. This latter fund is UCITS compliant with daily liquidity, and government proposals to reform corporate tax, which will attempt to stop runs the same strategy as the Cantab fund by trading algorithmically and companies hoarding cash. The government will find it challenging to seeks to exploit persistent statistical relationships between markets. Whilst the implement these changes, but Prime Minister Abe has been strengthened by performance figures across diversified funds have been mixed the combined his convincing victory in the recent general election. Indus Japan Long Only holdings in this strategy have performed well this year producing a 15.4% Fund also produced a good performance, rising by 32.7% over the year. return for the year. Another strong performer was Schroder ISF Asian Total Return Fund, an The private asset holdings had generally positive performances over the year. Asian focused fund which has seen a 40.8% increase over the year. This Fund Top contributers for the year were L Capital Asia II, Pangaea II and Navegar I. has benefited from its exposure to large technology stocks including These three funds were able to capitalise on the growth in emerging markets Samsung, Tencent and Alibaba which account for circa 15% of its portfolio. In and are currently held at 1.37x, 1.34x and 1.44x (multiples of their original recent months, however, the manager has trimmed its internet and investment costs), respectively. Among the detractors in private assets in 2017 14 Ocean Wilsons Holdings Limited/Annual Report 2017 was NYLIM Jacobs Ballas India III which experienced unfavourable currency and IV, we believe the team, with a proven record of controlled buyout conditions and faced legal challenges relating to Religare Finvest. The fund is investing in resilient, non-cyclical and niche US mid-market businesses, is still held at a 0.81x multiple. able to invest in attractive opportunities. Other new commitments in 2017 were made to Apollo Overseas Partners IX ($2.3m), Greenspring Global In terms of new commitments, a $3m investment was made in Windjammer Partners VIII ($750k), KKR Americas XII ($4.0m) and Silver Lake Partners V Senior Equity Fund V at the end of 2017. Following the successes of funds III ($3.0m). Private equity commitments by sector and vintage %12 12% 1% 1% 8% 8% 39% 7% 4% 4% 4% 4% %16 16% 4% 4% 7% 7% Commodities/Natural Resources Commodities/Natural Resources Commodities/Natural Resources EM Growth Equity EM Growth Equity EM Buyout EM Buyout EM Distressed EM Distressed DM Buyout DM Buyout DM Senior Secured Debt DM Senior Secured Debt DM Distressed DM Distressed Special Situations – GEM Special Situations – GEM Venture Capital Venture Capital Global Growth Equity Global Growth Equity 9% 9% 13% 13% 4% 2% 11% 11% 16% 1 17% 17% % 11% 14% 14% 4% 2007 2007 2008 2008 2009 2009 2010 2010 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 Source: OW Source: OWIL internal, unaudited data a L internal, unaudited dat I Outlook A more aggressive tightening in monetary policy may also kill off the Looking to 2018, we see no reason why the current economic picture should recovery. As highlighted above, policymakers are currently not under pressure deteriorate in the near-term. Admittedly the scope for positive surprises is now to raise interest rates due to the muted inflationary backdrop. They may, more limited which in itself should cap returns from here and there will however, be behind the curve. With unemployment low and falling in many undoubtedly be some blackspots (the UK?) but on the whole there are no countries the seeds for future inflation may already be in place. Having been obvious warning signs of an impending downturn. Valuations are certainly not too pessimistic on inflation for a number of years it would not be surprising if cheap but equally they are not in must sell territory. Again they are also policymakers ended up being too optimistic. Looking back through history, varied across regions with the US looking relatively fully valued but Europe, inflation has a nasty habit of being a persistent and enduring feature of both Japan and Emerging Markets being somewhat cheaper. We also reiterate the developed and developing economies. point that whilst high valuations make markets more vulnerable to disappointments, they are not sufficient in themselves to cause a downturn. Perversely, there is also a risk that stock markets surge up from here. Stock market cycles rarely end in a whimper. Rather, the animal spirits of investors From a policy perspective, we expect monetary policy to continue tightening typically take hold, exuberance comes to the fore and valuations become very but not so aggressively that it kills off the recovery (yet!). Overall monetary expensive. We do not think we have seen this yet. Yes, there are some policy is still incredibly accommodative and policymakers appear to be erring pockets of exuberance – most notably in the bitcoin frenzy – but the scars of on the side of not tightening too soon, helped by an inflation backdrop that is the previous bear markets have tempered excesses at this stage. Our still subdued. approach is to progressively sell down equity exposure as valuations become unjustifiable and increase exposure to diversified assets that display lower In terms of what could derail this scenario, clearly the Trump/Kim Jong-un axis correlation to the wider markets. remains a wildcard, as do developments in the Middle East. Unfortunately, positioning for geopolitical problems is challenging for fund managers given their rather binary nature. They typically don’t escalate into real action but if they do they can be catastrophic. 15 Market value US$000 21,542 13,265 12,189 10,890 10,398 9,966 8,533 7,284 7,178 7,141 % of NAV 7.8 4.8 4.4 4.0 3.8 3.6 3.1 2.7 2.6 2.6 108,386 39.4 6,806 6,740 6,458 6,373 6,249 6,212 6,017 5,897 5,311 5,110 2.5 2.5 2.4 2.3 2.3 2.3 2.2 2.1 1.9 1.9 169,559 61.8 5,035 4,819 4,476 4,310 4,237 4,145 3,732 3,410 3,345 3,144 210,212 57,438 7,009 274,659 1.8 1.8 1.6 1.6 1.5 1.5 1.4 1.2 1.2 1.1 76.5 21.0 2.5 100.0 Primary Focus US equities – long only Europe equities – long only Europe/US equities – hedge Asia ex-Japan equities – long only Japan equities – long only Europe equities – hedge Europe/US equities – hedge Asia ex-Japan equities – long only Japan equities – long only Private Assets – Africa Private Assets – GEM Private Assets – Asia (Consumer) Emerging Markets equities – long only US equities – long only Technology – long only Private Assets – China US equities – long only Private Assets – US Venture Capital Global equities – long/short Private Assets – Philippines Market Neutral – multi-strategy Private Assets – distressed debt Private Assets – Latin America Private Assets – China Private Assets – Africa Private Assets – distressed debt Private Assets – Asia (Consumer) Private Assets – Global Technology Frontier Markets – long only Private Assets – European Credit Ocean Wilsons Holdings Limited/Annual Report 2017 Investment Manager’s Report Investment Portfolio at 31 December 2017 Findlay Park American Fund Adelphi European Select Equity Fund Egerton Long – Short Fund Limited NTAsian Discovery Fund Goodhart Partners: Hanjo Fund BlackRock European Hedge Fund Lansdowne Developed Markets Fund Schroder ISF Asian Total Return Fund Indus Japan Long Only Fund Helios Investors II, LP Top 10 Holdings Pangaea II, LP L Capital Asia 2, LP Prince Street Opportunities Fund Select Equity Offshore, Ltd GAM Star Fund PLC – Technology Hony Capital Fund V, LP Vulcan Value Equity Fund Greenspring Global Partners IV, LP Global Event Partners Ltd Navegar I, LP Top 20 Holdings Hudson Bay International Fund Ltd Gramercy Distressed Opportunity Fund II, LP NG Capital Partners II, LP China Harvest II, LP AMED Fund, SICAR KKR Special Situations Fund, LP L Capital Asia, LP Silver Lake Partners IV, LP BlackRock Frontiers Investment Trust PLC MCP Private Capital Fund II, LP Top 30 Holdings 37 Remaining Holdings Cash TOTAL Hanseatic Asset Management LBG March 2018 16 Ocean Wilsons Holdings Limited/Annual Report 2017 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 Conyers Corporate Services (Bermuda) Limited Clarendon House Church Street Hamilton HM 11 Bermuda Profiles of Non-executive Directors Mr J F Gouvêa Vieira is Brazilian, aged 68 and joined the Group in 1991. He is UK Transfer Agent a partner of the Brazilian law firm of Gouvêa Vieira Advogados. He is Link 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 60 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. Link Asset Services The Registry Mr A Berzins is aged 58, British and resident in Singapore and joined the 34 Beckenham Road Group in 2014. He is a non-executive director of Aberdeen Global SICAV, Beckenham Aberdeen Global II SICAV, Aberdeen Islamic SICAV, Aberdeen Liquidity Fund Kent BR3 4TU (Lux) SICAV and Aberdeen Alpha SICAV- FIS. Auditor Mr C Maltby is aged 67, British and resident in Switzerland. He is a Director of Ernst & Young LLP Abingworth BioEquities Fund Limited, B H Macro Limited and a member of the 1 More London Place Supervisory Board of BBGI SICAV SA. London SE1 2AF Mr A Rozental is Mexican, aged 72 and is the founding partner of Rozental & Bankers Asociados. He is a non-executive director of Wilson Sons Limited and HSBC Deutsche Bank International Limited Bank Mexico. He is chairman of ArcelorMittal Mexico. He is an external Jersey advisor to AT&T, Airbus Mexico, Toyota de México and Canada's Brookfield Asset Management. Investment Manager Hanseatic Asset Management LBG Mr C Townsend is German and British and resident in Switzerland. He is aged Guernsey, Channel Islands 44, is a solicitor, and has an MBA from the London Business School. He is investment director of Hansa Capital GmbH. 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 17 Ocean Wilsons Holdings Limited/Annual Report 2017 Report of the Directors The Directors submit herewith their Report and Accounts for the year ended The Directors who held office at 31 December 2017 had the following interest 31 December 2017. in the Company shares: The Group accounts, presented under International Financial Reporting Interest 2017 2016 Standards (IFRS), comprise the Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and the related notes 1-38. J F Gouvêa Vieira Beneficial 170,100 170,100 K Middleton Beneficial 30,000 30,000 Profits and Dividends As permitted by Section 84(1A) of the Bermuda Companies Act 1981 the 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$78,315,000 (2016: US$45,060,000). The Directors are recommending the payment of a dividend for the year of 70.0c (2016: 63.0c) gross per share. The dividend will be paid on 8 June 2018 to all shareholders who are on the register at close of business on 11 May 2018. 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 180 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 16. Directors and Directors’ Interests The present Members of the Board are as shown on page 17. In accordance with the Company’s (Ocean Wilsons Holdings Limited) bye-laws, Mr C Townsend and Mr A Berzins retire at the next Annual General Meeting and, being eligible, offer themselves for re-election. 18 W Salomon* Beneficial 4,659,349 4,659,349 C Townsend* Beneficial 3,969,049 3,969,049 C Maltby A Berzins Beneficial Beneficial 9,000 5,000 9,000 5,000 * Additional indirect interests of Mr W Salomon and Mr C Townsend in the Company are set out in substantial shareholdings below. Mr W Salomon is Chairman of Hanseatic Asset Management LBG. Mr C Townsend is a director of Hansa Capital GmbH, a wholly owned subsidiary of Hanseatic Asset Management LBG. Fees paid to Hanseatic Asset Management LBG amounted to US$2,597,000 (2016: US$ 2,385,000) for acting as investment managers of the Group’s investment portfolio. A US$113,000 performance fee is payable to the Investment Manager in 2017. Service Contracts Regarding the Directors proposed for re-election at the Annual General Meeting there are no service contracts between Mr C Townsend or Mr A Berzins and the Company. Employees The average number of persons, including Directors, employed by the Group was 4,164 (2016: 4,436). Share option plan On 13 November 2013, the board of Wilson Sons Limited approved a Share Option Plan, which allowed for the grant of options to eligible participants to be selected by the board. The shareholders in special general meeting approved the plan on the 8 January 2014 including an increase in the authorized capital of the company through the creation of up to 4,410,927 new shares. The options provide participants with the right to acquire shares via Brazilian Depositary Receipts (“BDR”) in Wilson Sons Limited at a pre- determined fixed price not less than the three-day average mid-price for the days preceding the date of option issuance. The following grants have been issued under the Stock Option Plan. Date of Grant January 2014 November 2014 August 2016 May 2017 November 2017 Further details are provided in note 31. Number of options Exercise price 2,914,100 R$ 31.23 139,000 R$ 33.98 250,000 R$ 34.03 61,000 R$ 38.00 72,000 R$ 40.33 Ocean Wilsons Holdings Limited/Annual Report 2017 Auditor conduct a search for appropriate candidates with the right blend of skills Ernst & Young LLP were appointed auditor at the 2017 Annual General and experience which are then submitted to the Board for evaluation. Meeting and have expressed their willingness to continue on office as auditor and a resolution to reappoint Ernst & Young LLP under the provisions of • The Code states that non-executive directors who have served longer Section 89 of the Bermuda Companies Act 1981 will be proposed at the than nine years should be subject to annual re-election. forthcoming Annual General Meeting. Substantial Shareholdings Directors serving more than nine years are not subject to annual re- election as the Board considers continuity and knowledge of the As at 31 December 2017 the Company was aware of the following holdings of Company’s investments and business acquired over time is of great value. its shares, in excess of 3% of the issued ordinary share capital: The non-executive Directors who have served longer than nine years are Name of holder Hansa Trust PLC Victualia Limited Partnership C Townsend Utilico Emerging Markets Utilities Limited Dynamo Adminisração de Recurso BlackRock Investment Management (UK) Mr J F Gouvêa Vieira and Mr W Salomon. Number of shares % held 9,352,770 26.45 The Board 4,435,064 12.54 3,969,049 11.22 2,471,044 1,820,354 1,263,127 6.99 5.15 3.57 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 on page 17. The Company has been advised that Mr W Salomon is interested in 4,435,064 shares registered in the name of Victualia Limited Partnership. The Company has also been advised that Mr W Salomon has an interest in 26.4% and Mr C Townsend an interest in 25.9% of the voting shares of Hansa Trust PLC. Contracts and agreements with substantial shareholders No contracts existed at the end of the year in which a substantial shareholder of the Company is or was materially interested. 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 2016 UK Corporate Governance Code (“the Code”) issued by the Financial Reporting Council (available on the FRC website www.frc.org.uk) and 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 Code. The position is regularly reviewed and monitored by the Board. Below are the areas where Ocean Wilsons Holdings Limited does not comply with the 2016 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, independence and knowledge on the Board and, in the light of this evaluation, prepares a description of the role and capabilities required for a particular appointment. An independent external search consultant will 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 once every three years. Mr C Townsend and A Berzins are offering themselves for re-election at the next AGM. The Board considers on a regular basis how to refresh itself. Non-executive directors hold letters of appointment. The other commitments of directors appear on page 17 as part of their biographies and the Board is satisfied that these commitments do not conflict with their ability to carry out effectively their duties as directors of the Company. 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 Holding Company. Our 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 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. 19 Ocean Wilsons Holdings Limited/Annual Report 2017 Report of the Directors 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 • • • 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. ratification by the Board of Ocean Wilsons Holdings Limited. The schedule of The Board of Ocean Wilsons (Investments) Limited is currently constituted by matters reserved for the Board of Ocean Wilsons Holdings Limited includes: the same directors as the Board of Ocean Wilsons Holdings Limited. Mr C Determining the overall strategy of the Group; 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 Determining the responsibilities of the chairman and directors; Investment Manager within certain guidelines. The Board of Ocean Wilsons (Investments) Limited has a formal schedule of matters specifically reserved for Approving changes to the capital structure of the Company or other its attention which include: matters relevant to its status as a listed Company; 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; Proposing 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; 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 Establishing the finance committee and their terms of reference; perform its duties. The Company has directors and officers insurance in place. The Company has a procedure in place by which directors can seek Determining membership and Chairmanship of Board Committees; The executive director is responsible for advising the Board on all corporate matters. Each director has access to the advice and services of the company To approve any agreements or amendments to agreements between secretary Mr M Mitchell and the executive director. Ocean Wilsons Holdings Limited and Wilson Sons Limited including the relationship agreement; During 2017, four scheduled meetings of the Ocean Wilsons Holdings Limited Board were held at different locations. Details of attendance at Board To vote the shares in Wilson Sons Limited on matters presented to meetings and meetings of the Board committees are set out below. In addition shareholders of Wilson Sons for shareholder approval; to scheduled Board meetings if matters arise at short notice requiring urgent Appointment of Ocean Wilsons Holdings Limited directors to the Board of attention a telephone Board meeting is arranged. During 2017 no telephone Wilson Sons Limited; Board meetings were held. To approve changes in Wilson Sons Limited auditor or accounting • • • • • • • • • • • • • • • • • • policies; 20 Ocean Wilsons Holdings Limited/Annual Report 2017 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 participate in an induction program 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. Directors make periodic operational site visits. 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 gender diversity, the Board considers that a merit based approach is the only appropriate approach for determining the composition of the Board and as such has not set specific targets for gender diversity. Finance Committee report The finance committee comprises all non-executive directors, three of whom are considered by the Board to be independent during 2017. The Board is satisfied that during 2017 four directors, Mr C Maltby, Mr W Salomon, Mr A Berzins and Mr A Rozental, have recent and relevant financial experience as all have served on the audit committees of other listed companies. Mr W Salomon also has considerable experience in finance and investment banking and Mr C Maltby and Mr A Berzins both hold accounting qualifications. Remuneration 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 21 Ocean Wilsons Holdings Limited/Annual Report 2017 Report of the Directors The finance committee met four times in 2017. At the request of the finance Overview of the actions taken by the Finance Committee to discharge its committee the chief executive of Wilson Sons Limited, the finance director of duties Wilson Sons Limited and the executive director of Ocean Wilsons Holdings Since the beginning of 2017 the finance committee has: Limited attended each of these meetings. The external auditor attended one meeting. The finance committee meets with the external auditor without the • reviewed the December 2016 report and financial statements, the June executive present. 2017 half yearly financial report and the quarterly update issued in May and November 2017. As part of the review of the December 2016 report, The committee has defined terms of reference. The principal responsibilities of the committee received a report from the external auditor on their audit the committee are: of the annual report and financial statements; • to review the integrity of the interim and full year financial statements of • reviewed the assumptions used in the impairment test on Brasco goodwill the Company, reviewing significant financial reporting judgements including long-term operating assumptions, capital expenditure • • contained in them; assumptions and discount rate. The improved country risk perception and lower inflation will reduce the discount rates applied in the valuation of to review the Company’s internal control and risk management systems; Brasco. Based on these assumptions no impairment was made in 2016; to make recommendations to the Board, for it to put to the shareholders • reviewed a preliminary study carried out by the Group on potential for their approval in general meeting, in relation to the appointment, impacts resulting from the application of IFRS 15. If there are any impacts reappointment and removal of the external auditor and to approve the these will be disclosed before the adoption and implementation of the remuneration and terms of engagement of the external auditor; new policy; • to review and monitor the external auditor’s independence and • reviewed the economic useful life of of some Tecon Salvador assets which objectivity and the effectiveness of the audit process, taking into were changed to reflect the new terminal lease contract which has been consideration relevant professional and regulatory requirements; extended until March 2050; • to consult with the Group’s auditor and, where necessary the auditor of the subsidiary companies, regarding any matters arising in the course of the annual audit which should be brought to the attention of the Board; to monitor the Group’s risk exposure; to consider the need for an internal audit function; to determine the remuneration for all executives, the chairman and non- executive directors; to determine the level of awards made under the Company long-term incentive plan and performance conditions and vesting periods that apply; • • • • • 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 2017 financial statements including consideration of the levels of non-audit fees which the committee concluded were immaterial; assessed the qualification, expertise and resources, and independence of the external auditor; reviewed the need for an internal audit function; reviewed the Group’s policies in relation to compliance with the European union market abuse regulations. In particular the Finance Committee amended the closed period relating to results announcements. The new to determine bonuses payable under the Company Bonus scheme; and closed periods are 45 calendar days before the release of the preliminary announcement of the Company’s annual results and 30 calendar days to review arrangements by which staff of the Company may, in before the release of the Company’s half-yearly announcement; and confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. • received a report on the Wilson Sons Group approach to risk management which included the results from an enterprise-wide risk assessment heatmap of risks. To fulfil its responsibility regarding the independence of the external auditor, the finance committee reviewed: • the external auditor plan for the current year, noting the role of the audit partner, who signs the audit report and who, in accordance with professional rules, has not held office for more than five years and any changes in key audit staff; • • • • • • 22 Ocean Wilsons Holdings Limited/Annual Report 2017 • • a report from the external auditor describing their arrangements to revenue performance. The committee also discusses potential risks identify, report and manage any conflicts of interest; and surrounding revenue recognition with the external auditor and reviews the overall extent of non-audit services provided by the external auditor, their audit findings. in addition to approving the provision of significant non-audit services by • Investment valuation – The investment valuation risk arises from the the external auditor. valuation of the Level 2 and 3 investments which requires significant judgements and estimates by management and external inputs. The In addition the Group does not currently employ any former external audit staff. committee receives quarterly reports from the investment manager on After discussion with management, the Board of Wilson Sons Limited and the and management outlook for investment and market performance. The external auditor, the committee determined that the key risks of misstatement committee reviews and questions the investment manager and obtains of the Group’s financial statements relate to: explanations for investment performance and variations from market investment performance which includes historical performance analysis performance, investment expectations and potential risks to future • Provisions – Legal claims against the Brazilian operations comprise civil performance. This information is considered in the valuation of level 2 and environmental cases, tax cases and labour claims. The reporting risk and 3 investments. The committee examined and challenged relates to the completeness of claims recorded and the estimation of the management’s key assumptions used in the valuation of investments. The provisions held against these exposures. There remain a significant committee was satisfied that the significant assumptions used were number of contingent liabilities, particularly concerning labour and appropriate. The committee was further satisfied with the disclosures in taxation claims. Provisions are based on prior experience, management’s the financial statements. The committee also discusses potential risks best knowledge of the relevant facts and circumstances and expert legal surrounding investment valuation with the external auditor and reviews advice relative to each case. The committee questioned management on their audit findings. their assumptions used in determining provisions and the procedure for classification of legal liabilities as probable, possible or remote loss by the Internal Controls external lawyers. The committee reviewed quarterly legal reports from The Board is responsible for the system of internal control and reviewing its management on contingencies and asked questions on the background effectiveness. The internal controls are designed to cover material risks to and progress of material claims. The committee evaluated the current achieving the Group’s objectives and include business, operational, financial level of provisions in light of historical trends and claim history to ensure and compliance risks. These controls have been in place throughout the year. provisions were adequate. The committee further ensured that adequate The internal controls are designed to identify, evaluate and manage rather resources are allocated to recording, evaluating and monitoring legal than eliminate risk of failure to meet business objectives. The internal control claims to ensure the completeness of claims recorded and provisions process distinguishes between the parent group and the principal operating made. subsidiary, Wilson Sons Limited, which is managed by an autonomous board. • Impairment Risk to Goodwill and Intangibles – The Group has significant Wilson Sons Limited is listed on both the Sao Paulo Stock Exchange Goodwill and Intangibles balances. The reporting risk is that these “BOVESPA” and Luxembourg Stock Exchange, whose rules are different from balances may be overstated. Management perform impairment reviews the London Stock Exchange. The Wilson Sons Limited internal control for Intangibles and tests goodwill as required by IAS 36, Impairment of procedures, whilst sufficient for its board to identify, manage and control the Assets. The impairment test is performed by comparing the carrying value principal risks, may differ from the requirements of the Turnbull Committee. of goodwill to its value in use, calculated using the discounted cash flow The board of the principal operating subsidiary is responsible for identifying forecasts under the principles of IAS 36. The committee examined and key business risks and establishing and reviewing internal control procedures. challenged management’s key assumptions used in the impairment tests to understand their impact on the recoverable amounts. The committee The Board reviews the need for an internal audit department annually and was satisfied that the significant assumptions used were appropriate and considers that the parent group is not sufficiently large to justify an internal sufficiently robust. The committee was further satisfied with the audit function. Wilson Sons Limited operates an internal audit function and impairment disclosures in the financial statements. the Wilson Sons Limited board monitors their internal financial control systems through reports received from the internal audit function. • Revenue recognition – The revenue recognition risk could arise from inappropriate revenue recognition policies, the estimation of the In reviewing Wilson Sons Limited, the Board receives reports from the Wilson proportion of the stage of completion of construction contracts, incorrect Sons Limited legal department and the Wilson Sons Limited external auditor. application of policies or cut-off errors surrounding year end. The committee considered the Group’s revenue recognition policies and the The parent group (including Ocean Wilsons (Investments) Limited) has an level of transactions compared to previous periods. The committee ongoing process for identifying, evaluating and managing key risks including receives quarterly management reports on revenue and financial financial, operational and compliance controls. A risk register is maintained performance with comparisons to budget and prior year. The committee detailing business risks, together with controls and responsibilities. The risk reviews and questions management explanations for variances and register is regularly reviewed by the finance committee. 23 Ocean Wilsons Holdings Limited/Annual Report 2017 Report of the Directors 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 2020 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 There is no recourse from Wilson Sons to the Company or Ocean Wilsons report and stock exchange announcements. (Investments) Limited in respect of the Wilson Sons Limited borrowings. The Going Concern Wilson Sons Group is not reliant on one particular customer: its largest customer constituted approximately 4% of the Group’s revenue in 2017 (and The Group closely monitors and manages its liquidity risk. The Group has including joint venture revenue, 18%). In addition, Wilson Sons has considerable financial resources including US$83.8 million in cash and cash opportunities to mitigate any adverse impacts given the flexible cost base of equivalents and the Group’s borrowings have a long maturity profile. The 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, Ocean Wilsons (Investments) Limited Financial review and Investment Manager report on pages 1 to 16. The In making the assessment for the investment portfolio, the Board has financial position, cash flows and borrowings of the Group are set out in the considered matters such as significant stock market volatility, changes in Financial review in pages 6 to 10. In addition note 36 to the financial exchange rate and a significant reduction in the liquidity of the portfolio. The statements includes details of its financial instruments and hedging activities investment portfolio and cash under management at 31 December 2017 was and its exposure to credit risk and liquidity risk. Details of the Group’s US$274.7 million with outstanding capital commitments of US$35.6 million borrowings are set out in note 22. Based on the Group’s forecasts and and no external debt. sensitivities run, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational We believe that if severe but plausible downside scenarios were to crystalise, existence for the foreseeable future. For this reason, they continue to adopt many of the individual risks disclosed would be likely to be confined to either the going concern basis in preparing the accounts. Wilson Sons Limited or Ocean Wilsons (Investments) Limited. The risk is to the valuation of the Group’s balance sheet rather than the viability of the Group. Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors’ responsibilities directors have assessed the viability of the Group over a three year period to The Directors are responsible for preparing the annual report in accordance 31 December 2020, taking into account the Group’s current position and with applicable laws and regulations. potential impact of the principal risks and uncertainties. Based on this assessment, the directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2020. 24 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 are required to: • ensure suitable accounting policies have been adopted and applied consistently; • make judgements and estimates that are reasonable and prudent; and • • state that applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; Provide additional disclosure when compliance with the specific requirements of IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and Group financial position and financial performance; • Present information, including accounting policies in a manner that provides relevant, reliable, comparable and understandable information. 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 Malcolm Mitchell Company Secretary 16 March 2018 Ocean Wilsons Holdings Limited/Annual Report 2017 25 Ocean Wilsons Holdings Limited/Annual Report 2017 Independent Auditor’s Report to the Members of Ocean Wilsons Holdings Limited Only Opinion In our opinion: • Ocean Wilsons Holdings Limited financial statements give a true and fair • • the disclosures in the annual report that describe the principal risks and explain how they are being managed or mitigated; the directors’ confirmation in the annual report that they have carried out view of the state of the group’s affairs as at 31 December 2017 and of a robust assessment of the principal risks facing the entity, including the group’s profit for the year then ended; and those that would threaten its business model, future performance, solvency or liquidity; • the financial statements have been properly prepared in accordance with International Financial Reporting Standards as issued by the International • the directors’ statement set out on page 24 in the financial statements Accounting Standards Board. about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any We have audited the financial statements of Ocean Wilsons Holdings Limited material uncertainties to the entity’s ability to continue to do so over a which comprise: period of at least twelve months from the date of approval of the Consolidated balance sheet as at 31 December 2017 Consolidated statement of comprehensive income for the year then ended financial statements; • whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is Consolidated statement of changes in equity for the year then ended materially inconsistent with our knowledge obtained in the audit; or Consolidated statement of cash flows for the year then ended Related notes 1 to 38 to the financial statements, including a summary of significant accounting policies The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. • the directors’ explanation set out on page 24 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Basis for opinion Overview of our audit approach We conducted our audit in accordance with International Standards on Key audit matters • Revenue recognition Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Use of our report This report is made solely to the company’s members, as a body, in • Impairment risk to goodwill and intangible assets relating to business combinations • Provisions • Valuation of Level 2 and Level 3 investments Audit scope • We performed an audit of the complete financial information of 11 components and audit procedures on specific balances for a further 15 components. • The components where we performed full or specific audit procedures accounted for 95% of profit before tax, 88% of Revenue and 95% of Total assets. accordance with Sections 90 and 98B of the Bermuda Companies Act 1981. Materiality • Overall group materiality of $7.3m which Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not Key audit matters represents 5% of profit before tax. accept or assume responsibility to anyone other than the company and the Key audit matters are those matters that, in our professional judgement, were company’s members as a body, for our audit work, for this report, or for the of most significance in our audit of the financial statements of the current opinions we have formed. period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters Conclusions relating to principal risks, going concern and viability included those which had the greatest effect on: the overall audit strategy, the statement allocation of resources in the audit; and directing the efforts of the We have nothing to report in respect of the following information in the engagement team. These matters were addressed in the context of our audit annual report, in relation to which the ISAs (UK) require us to report to you of the financial statements as a whole, and in our opinion thereon, and we do whether we have anything material to add or draw attention to: not provide a separate opinion on these matters. 26 Ocean Wilsons Holdings Limited/Annual Report 2017 Risk Our response to the risk Key observations communicated to the Finance Committee Revenue recognition (US$496m , • We walked through and tested the controls We did not identify any significant matters with 2016 US$457m ). designed and operated by the group related respect to control deficiencies or misstatements, to revenue recognition. service revenues would appear to be appropriately Refer to the Finance Committee Report (page 23); recognised in the correct accounting period. With Accounting policies (page 44); and Note 3 of the • We inspected significant new or renewed regard shipbuilding contracts we consider that the Financial Statements (page 48). contracts, and/or changes to significant estimates and assumptions used to determine the existing contracts. percentage of completion, resultant revenue and Service revenue – The Group recognises revenue profits recognised, as well as the related when services in its terminals, towage operations, • We understood clauses such as those disclosures, are reasonable. logistics, offshore and agency services businesses containing minimum volumes guarantees, have been provided. The recognition of this surcharges, or rebate arrangements to revenue could be susceptible to timing errors in consider and challenge whether these are determining when services or obligations have appropriately accounted for including any been provided, particularly given the company’s estimation relevant to recognition decisions. many revenue streams and geographical spread and transactions in progress at year end. This • We used substantive analytical procedures to could cause recognition of fictitious revenue identify and investigate unusual trading or inappropriate timing related revenue recognition patterns and performing additional audit for towage, agency, containers handling, logistics, procedures where actual results are not in line vessels maintenance, warehousing and other with our expectations. services not rendered. • We tested the appropriateness of accounting Shipyard revenue – The group recognises treatment for a sample of revenue accrued shipbuilding revenue based on percentage of and deferred at year end, including completion, which is assessed by reference to performing cut-off testing procedures. proportion of total expected contract cost actually incurred for the work performed to the balance Specifically in addition for shipyard revenues we: sheet date. The recognition of revenue therefore relies on estimates of final costs on each contract. • reviewed a sample of contracts assessing the Changes to these estimates could give rise to most significant and complex contract material variances in the amount of revenue estimates, which are incorporated within recognized. There is therefore a degree of forecast contract out-turn costs. management judgement in estimating the amount of revenue to be recognized by the group with • obtained the detailed project budget/forecast respect to total estimated cost on the contract from the Company to support the estimates including the estimation of contingencies included made, and inquired senior operational, therein. commercial and financial management personnel and challenged the judgements applied. • evaluated the financial performance of the contracts as compared with the budget and historical trends to assess historical forecasting accuracy. • undertook a site visit to physically inspect the stage of completion of individual projects in progress at the balance sheet date including discussion with site personnel. • we tested, on a sample basis, actual costs incurred 27 Ocean Wilsons Holdings Limited/Annual Report 2017 Independent Auditor’s Report to the Members of Ocean Wilsons Holdings Limited Only Risk Our response to the risk Key observations communicated to the Finance Committee Impairment risk to goodwill and intangible • We walked through and understood the Based on the results of the audit procedures, we assets relating to business combinations. controls designed and implemented by the consider that the estimates criteria and group over the impairment review, but we did assumptions used to derive the recoverable (US$30.3m goodwill and US$17.9m lease rights not test the operating effectiveness of the amount of goodwill and intangible assets are respectively, 2016 US$30.6m goodwill and lease controls, adopting a substantive approach. reasonable. There is significant headroom when we rights US$18.6m respectively). compare the value in use with the carrying value • We obtained managements impairment model of the assets. We determined based on sensitivity analysis that no reasonable change in the key assumptions (being discount rate and forecast revenues) could give rise to an impairment. The valuation models used by the group have not been subject to change. We have also assessed adequacy of the disclosures made by management in the financial statements and found them to be appropriate. Refer to the Finance Committee Report (page 23); Accounting policies (page 41); and Note 13 of the Financial Statements (page 53). The group’s investment in Tecon Rio Grande, Tecon Salvador and Brasco (Caju location) all gave rise to goodwill and intangibles on acquisition. The recoverable amount of group’s goodwill and intangibles assets acquired from the acquisitions is tested at CGU level annually or when there is an indication of impairment. Due to inherent uncertainty involved in forecasting and discounting future cash flows, which are basis of assessing recoverability, this is one of the key judgemental areas that our audit is concentrated on. and reviewed and challenged the forecast discounted cash flows and assumptions. • We sensitised the assumptions to ascertain the most sensitive assumptions and as expected noted the future forecast revenues and the discount rate used to discount the cash flows to be the most sensitive assumptions. In doing so ascertained the extent of changes that individually, or in combination, would be required for goodwill to be impaired. • We tested whether the forecasts are in line with current approved budgets and forecasts. • We considered and assessed differences between past cash flow projections and actual cash flows (estimation reliability record) which might indicate management bias or excessive optimism in forecasting cash flows. • We involved our business valuation specialists to assist us in our impairment testing, including assessing specific inputs into the determination of the discount rate. Such inputs were benchmarked against those observable in the markets in which the group operates. • We tested the mathematical accuracy of the impairment models. • We reviewed the completeness of required disclosures. 28 Ocean Wilsons Holdings Limited/Annual Report 2017 Risk Provisions Our response to the risk Key observations communicated to the Finance Committee • We walked through and understood the Based on the results of our audit procedures controls designed and implemented by the performed, we consider that the judgements made (US$18m, 2016 US$20m). group over claims and litigation, but we did and estimates prepared by the Company and the not test the operating effectiveness of the related disclosures in are acceptable and in Refer to the Finance Committee Report (page 23); controls, adopting a substantive approach. accordance with IFRS. We consider the claims Accounting policies (page 43); and Note 26 of the provided and disclosed are supported by evidence Financial Statements (page 66). • We obtained a listing of all live claims and and capable of reasonably reliable estimation. In the normal course of business the Company receives legal claims from general civil proceedings, labour claims, changing tax legislation and environmental issues. Such claims are particularly prevalent in Brazil. The amounts involved are material and potentially material for un-provided amounts. The application of accounting standards to determine the amount, if any, to be provided or disclosed as a liability or potential liability is inherently subjective and requires management to make judgements and estimates. litigation, including details of quantum, appointed advisors, provided and disclosed amounts. • We obtained an understanding from management and in-house legal counsel of the basis for their judgements and best estimates of financial amounts. We challenged the basis of those judgements and estimates with reference to the latest available corroborative information, and assessed correspondence with the Company’s external counsel on all significant legal cases and held discussions with them when further clarity was deemed necessary. • We obtained direct formal confirmations from the Company’s external counsel for all litigation. • We engaged EY tax specialists to assist with assessing the reasonableness of the Company’s material tax positions including reviewing correspondence with the relevant tax authorities and determination of quantum. • We considered cases settled or litigation concluded in the year and whether management’s previous judgements and estimates were proven to be reasonable and materially correct. • We tested and reviewed the accuracy and completeness of disclosures in the financial statements. 29 Ocean Wilsons Holdings Limited/Annual Report 2017 Independent Auditor’s Report to the Members of Ocean Wilsons Holdings Limited Only Risk Our response to the risk Key observations communicated to the Finance Committee Valuation of Level 2 and 3 investments. • We walked through and understood the Based on the results of our audit procedures (2017: US$258m, 2016: US$229m). group over valuation of level 2 and 3 and estimates prepared by the Company in valuing controls designed and implemented by the performed, we consider that the judgements made Refer to the Finance Committee Report (page 23); effectiveness of the controls, adopting a Accounting policies (page 43); and Notes 18 and substantive approach. Management provide disclosures in the financial investments, but we did not test the operating level 2 and level 3 investments are acceptable. statements related to level 3 investments to comply with the requirements of IFRS. 36 of the Financial Statements (pages 60 and 73) Valuation of the Level 2 and 3 investments requires significant judgements and estimates by management and external inputs. Any input inaccuracies or unreasonable basis used in these judgements could result in a misstatement of the income statement and balance sheet. • We assessed the accounting policy for investment valuation for compliance with IFRS and performed testing to check that investment valuation had been accounted for in accordance with the stated accounting policy had been consistently applied. • We have determined and challenged the appropriateness of the valuation methodology and techniques applied to the unquoted level 2 and 3 investments and where available obtained independent support to corroborate the stated values for the same. • We have agreed the valuation inputs to supporting documentation and tested the arithmetical accuracy of the Company’s calculation for its unquoted investments. • Where appropriate we tested the mathematical accuracy of any models used. • We tested and reviewed the accuracy and completeness of disclosures in the financial statements. An overview of the scope of our audit Of the 16 components selected, we performed an audit of the complete Tailoring the scope financial information of 11 components (“full scope components”) which were selected based on their size or risk characteristics. For the remaining 5 Our assessment of audit risk, our evaluation of materiality and our allocation components (“specific scope components”), we performed audit procedures on of performance materiality determine our audit scope for each entity within specific accounts within that component that we considered had the potential the Group. Taken together, this enables us to form an opinion on the financial for the greatest impact on the significant accounts in the financial statements statements. We take into account size, risk profile, the organisation of the either because of the size of these accounts or their risk profile. group and effectiveness of group-wide controls, changes in the business environment and other factors such as recent Internal audit results when The components where we performed full or specific scope audit procedures assessing the level of work to be performed at each entity. accounted for 95% of the Group’s Profit before tax, 88% of the Group’s Revenue and 95% of the Group’s Total assets. For the current year, the full In assessing the risk of material misstatement to the financial statements, and scope components contributed 95% of the Group’s Profit before tax, 81% of to ensure we had adequate quantitative coverage of significant accounts in the Group’s Revenue and 92% of the Group’s Total assets. The specific scope the financial statements, of the 26 reporting components of the Group, we components contributed 7% of the Group’s Revenue and 3% of the Group’s selected 16 components covering entities in Bermuda, Panama and Brazil, Total assets. The audit scope of these components may not have included which represent the principal business units within the Group. testing of all significant accounts of the component but will have contributed to the coverage of significant tested for the Group. 30 Ocean Wilsons Holdings Limited/Annual Report 2017 Of the remaining 10 components that together represent 5% of the Group’s Materiality Profit before tax, none are individually greater than 5% of the Group’s Profit The magnitude of an omission or misstatement that, individually or in the before tax. For these components, we performed other procedures, including aggregate, could reasonably be expected to influence the economic decisions of risk focused analytical review, testing of consolidation journals and the users of the financial statements. Materiality provides a basis for determining intercompany eliminations and foreign currency translation recalculations to the nature and extent of our audit procedures. respond to any potential risks of material misstatement to the Group financial statements. The table below illustrates the coverage obtained from the work We determined materiality for the Group to be US$6.5 million, which is 5% of performed by our audit teams: profit before tax. During the course of our audit, we reassessed initial Group audit scope locations before tax % of Revenue assets Number of % of Profit % of Total US$7.3m due to higher than anticipated actual results for the year. materiality and increased materiality from original assessment at planning to Full Specific scope Other procedures Total coverage 11 5 10 (total 26 locations) 95% 81% 92% Performance materiality 0% 5% 7% 12% 3% 5% 100% 100% 100% The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% of our planning materiality, namely US$3.65m. We have Involvement with component teams set performance materiality at this percentage due to this being an initial In establishing our overall approach to the Group audit, we determined the audit. We did not revise performance materiality upwards in line with our final type of work that needed to be undertaken at each of the components by us, assessment of materiality noted above. as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Of the 11 full Audit work at component locations for the purpose of obtaining audit scope components, audit procedures were performed on 2 of these directly by coverage over significant financial statement accounts is undertaken based on the primary audit team, for the remaining 9 full scope components and the a percentage of total performance materiality. The performance materiality set 4 specific scope components, where the work was performed by component for each component is based on the relative scale and risk of the component auditors, we determined the appropriate level of involvement to enable us to to the Group as a whole and our assessment of the risk of misstatement at determine that sufficient audit evidence had been obtained as a basis for our that component. In the current year, the range of performance materiality opinion on the Group as a whole. allocated to components was US$0.6m to US$1.9m. The Group audit team followed a programme of planned visits that has been Reporting threshold designed to ensure that the primary auditor engagement team visits Brazil, An amount below which identified misstatements are considered as being clearly being the key country of operation, three times during the audit process. trivial. During the current year’s audit cycle, visits were undertaken by the primary audit team to the principal component team in Rio de Janeiro. These visits We agreed with the Finance Committee that we would report to them all included involvement in planning and discussing the audit approach with the uncorrected audit differences in excess of US$0.36m which is set at 5% of component team and any issues arising from their work, meetings with local final materiality, as well as differences below that threshold that, in our view, management, attending planning and closing meetings, and reviewing key warranted reporting on qualitative grounds. audit working papers on risk areas. In addition the primary team visited 2 of the operational locations in Brazil during the audit process, being Brasco and We evaluate any uncorrected misstatements against both the quantitative Tecon Rio Grande in addition to the head office in Rio De Janeiro. The primary measures of materiality discussed above and in light of other relevant team interacted regularly with the component teams where appropriate during qualitative considerations in forming our opinion. various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together Other information with the additional procedures performed at Group level, gave us appropriate The other information comprises the information included in the annual report evidence for our opinion on the Group financial statements. set out on pages 1 to 16 including: Highlights, Chairman’s Statement, Financial Review, Wilson Sons Limited, Investment Portfolio and Investment Our application of materiality Manager’s Report, other than the financial statements and our auditor’s report We apply the concept of materiality in planning and performing the audit, in thereon. The directors are responsible for the other information. evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. 31 Ocean Wilsons Holdings Limited/Annual Report 2017 Independent Auditor’s Report to the Members of Ocean Wilsons Holdings Limited Only In connection with our audit of the financial statements, our responsibility is Auditor’s responsibilities for the audit of the financial statements to read the other information and, in doing so, consider whether the other Our objectives are to obtain reasonable assurance about whether the financial information is materially inconsistent with the financial statements or our statements as a whole are free from material misstatement, whether due to knowledge obtained in the audit or otherwise appears to be materially fraud or error, and to issue an auditor’s report that includes our opinion. misstated. If we identify such material inconsistencies or apparent material Reasonable assurance is a high level of assurance, but is not a guarantee that misstatements, we are required to determine whether there is a material an audit conducted in accordance with ISAs (UK) will always detect a material misstatement in the financial statements or a material misstatement of the misstatement when it exists. Misstatements can arise from fraud or error and other information. If, based on the work we have performed, we conclude that are considered material if, individually or in the aggregate, they could there is a material misstatement of the other information, we are required to reasonably be expected to influence the economic decisions of users taken on report that fact. the basis of these financial statements. We have nothing to report in this regard. Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud In this context, we also have nothing to report in regard to our responsibility The objectives of our audit, in respect to fraud, are; to identify and assess the to specifically address the following items in the other information and to risks of material misstatement of the financial statements due to fraud; to report as uncorrected material misstatements of the other information where obtain sufficient appropriate audit evidence regarding the assessed risks of we conclude that those items meet the following conditions: material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or • Fair, balanced and understandable set out on page 25 – the statement suspected fraud identified during the audit. However, the primary given by the directors that they consider the annual report and financial responsibility for the prevention and detection of fraud rests with both those statements taken as a whole is fair, balanced and understandable and charged with governance of the entity and management. provides the information necessary for shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with Our approach was as follows: our knowledge obtained in the audit; or • Finance committee reporting set out on pages 21 to 24 – the section • We obtained an understanding of the legal and regulatory frameworks that are applicable to the group and determined that the most significant describing the work of the audit committee does not appropriately are: address matters communicated by us to the audit committee; or • Directors’ statement of compliance with the UK Corporate Governance Code set out on pages 19 to 24 – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on pages 24 and 25, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. – those that relate to the form and content of the financial statements, such as the Group accounting policies, International Financial Reporting Standards (IFRS), Brazilian and Bermuda Company Law and the UK Corporate Governance Code; – those that relate to the taxation law, labour law, and civil and environmental law in Brazil where the Group has the majority of its operations; • We understood how Ocean Wilsons Holdings Limited is complying with those frameworks by considering the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability, the culture of honesty and ethical behaviour and whether a strong emphasis is placed on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. • We assessed the susceptibility of the group’s financial statements to material misstatement, including how fraud might occur by making an assessment of the key fraud risks to the group and the manner in which such risks may manifest themselves in practice, including considering management incentive schemes, areas of judgement and estimation, and internal controls. Based on this understanding we designed our audit 32 procedures to identify non-compliance with such laws and regulations. Our procedures included testing journals and were designed to provide reasonable assurance that the financial statements were free of fraud or error. We evaluated the design and operational effectiveness of controls put in place to address the risks identified, or that otherwise prevent, deter and detect fraud. We also considered performance targets and their influence on efforts made by management to manage earnings. • No instances of non-compliance or alleged non-compliance with laws were communicated by components teams other than those dealt with in note 26 to the financial statements, in responding to those matters the details of our audit work are set out earlier in this report. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters we are required to address • We were appointed by the company on 31 August 2017 to audit the financial statements for the year ending 31 December 2017 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is one year, covering the year ended 31 December 2017. • The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group and we remain independent of the group in conducting the audit. • The audit opinion is consistent with the additional report to the Finance Committee. Steven Lunn for and on behalf of Ernst & Young LLP London 16 March 2018 Notes: 1. The maintenance and integrity of the Ocean Wilsons Holdings Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in Bermuda and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Ocean Wilsons Holdings Limited/Annual Report 2017 33 Ocean Wilsons Holdings Limited/Annual Report 2017 Consolidated Statement of Comprehensive Income for the year ended 31 December 2017 Revenue Raw materials and consumables used Employee benefits expense Depreciation & amortisation expense Other operating expenses (Loss)/profit on disposal of property, plant and equipment Operating profit Share of results of joint venture Investment income Other gains and losses Finance costs Foreign exchange gains on monetary items Profit before tax Income tax expense Profit for the year Other comprehensive income: Items that will never be reclassified subsequently to profit and loss Employee benefits Items that are or may be reclassified subsequently to profit and loss Effective portion of changes in fair value of derivatives Exchange differences arising on translation of foreign operations Other comprehensive (expense)/income for the year Total comprehensive income for the year Profit for the period attributable to: Equity holders of parent Non-controlling interests Total comprehensive income for the period attributable to: Equity holders of parent Non-controlling interests Earnings per share Basic and diluted 34 Notes 3 6 5 17 7 8 9 5 10 5 Year to Year to 31 December 31 December 2017 US$’000 496,340 (37,679) 2016 US$’000 457,161 (37,741) (166,395) (144,274) (57,481) (122,310) (2,930) 109,545 3,366 19,004 32,775 (21,976) 2,750 145,464 (36,056) 109,408 (52,585) (126,470) 745 96,836 8,073 15,065 (4,134) (599) 2,286 117,527 (36,836) 80,691 (374) 1,130 557 (6,485) (6,302) 103,106 78,315 31,093 109,408 74,667 28,439 103,106 1,513 32,679 35,322 116,013 45,060 35,631 80,691 65,576 50,437 116,013 12 221.5c 127.4c Consolidated Balance Sheet as at 31 December 2017 Ocean Wilsons Holdings Limited/Annual Report 2017 Non-current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax assets Trade and other receivables Investment in joint venture Other non-current assets Current assets Inventories Trading investments Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Derivatives Current tax liabilities Obligations under finance leases Bank overdrafts and loans Net current assets Non-current liabilities Bank loans Derivatives Employee benefits Deferred tax liabilities Provisions Obligations under finance leases Total liabilities Net assets Capital and reserves Share capital Retained earnings Capital reserves Translation and hedging reserve Equity attributable to equity holders of the parent Non-controlling interests Total equity Notes 13 14 15 23 21 17 26 19 18 21 25 36 24 22 22 36 23 26 24 27 The accounts on pages 34 to 82 were approved by the Board on 16 March 2018. The accompanying notes are part of this Consolidated Balance Sheet. J. F. Gouvêa Vieira Chairman K. W. Middleton Director As at As at 31 December 31 December 2017 US$’000 30,319 30,592 2016 US$’000 30,607 30,444 634,881 646,926 28,639 58,104 26,644 9,535 818,714 13,773 305,070 98,570 83,827 501,240 29,055 55,070 22,230 13,408 827,740 15,427 276,181 81,265 77,314 450,187 1,319,954 1,277,927 (64,465) (68,257) (1,108) (3,201) (846) (712) (3,299) (1,211) (54,288) (49,780) (123,908) (123,259) 377,332 326,928 (300,436) (325,750) (395) (1,083) (51,531) (18,232) (309) (371,896) (495,894) 824,060 11,390 578,126 31,760 (33,115) 588,161 235,899 824,060 (1,182) (648) (48,974) (20,037) (1,085) (397,676) (520,935) 756,992 11,390 521,878 31,760 (29,685) 535,343 221,649 756,992 35 Ocean Wilsons Holdings Limited/Annual Report 2017 Consolidated Statement of Changes in Equity as at 31 December 2017 For the year ended 31 December 2016 Balance at 1 January 2016 Currency translation adjustment Employee benefits (note 37) Effective portion of changes in fair value of derivatives Profit for the year Total income and expense for the period Dividends Acquisition of non-controlling interest Share based payment expense Balance at 31 December 2016 For the year ended 31 December 2017 Balance at 1 January 2017 Currency translation adjustment Employee benefits (note 37) Effective portion of changes in fair value of derivatives Profit for the year Total income and expense for the period Dividends Share options exercised in subsidiary Share based payment expense Balance at 31 December 2017 Share capital Attributable Hedging and to equity Non- Share capital US$’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 11,390 501,426 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 11,390 521,878 31,760 (29,685) 535,343 221,649 756,992 – – – – – – – – – (218) – 78,315 78,097 (22,279) 430 – – – – – – – – – (3,754) (3,754) (2,731) (6,485) – 324 – (218) 324 (156) 233 (374) 557 78,315 31,093 109,408 (3,430) 74,667 28,439 103,106 – – – (22,279) (16,836) (39,115) 430 – 316 2,331 746 2,331 11,390 578,126 31,760 (33,115) 588,161 235,899 824,060 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. 36 Consolidated Cash Flow Statement for the year ended 31 December 2017 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 inflow arising from sale of non-controlling interest Net cash used in financing activities Net increase/(decrease) 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 2017 Notes 29 38 11 28 Year to Year to 31 December 31 December 2017 US$’000 102,968 – 7,008 9,289 81,161 (77,275) 1,431 (30,746) (4,196) (13,328) (22,279) (16,836) (54,690) (847) 12,611 (529) 746 2016 US$’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) – (81,824) (33,977) 7,816 (31,498) 77,314 97,561 (1,303) 11,251 83,827 77,314 37 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts for the year ended 31 December 2017 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 17. The nature of the Group’s operations and its principal activities are set out in the operating and financial review on pages 1 to 16. 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$83.8 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 16. 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. Basis of consolidation 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. 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. 38 Ocean Wilsons Holdings Limited/Annual Report 2017 2 Significant accounting policies and critical accounting judgements (continued) 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. 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. 39 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) The calculation of the liability of the defined health benefit plan is performed annually by a qualified actuary using the projected unit credit method. Remeasurements of the net defined health benefit obligation, which include: actuarial gains and losses, are immediately recognised in other comprehensive income. The Group determines the net interest on the net amount of defined benefit liabilities for the period by multiplying them by the discount rate used to measure the defined health benefit obligation. Defined benefit liabilities 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 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. When the benefits of a plan are increased, the portion of the increased benefit relating to past services rendered by employees is recognised immediately in income. The Group recognises gains and losses on the settlement of a defined health benefit plan when settlement occurs. 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. 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. 40 Ocean Wilsons Holdings Limited/Annual Report 2017 2 Significant accounting policies and critical accounting judgements (continued) 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 and borrowing costs 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 Group 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. 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. 41 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) 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. 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. 42 Ocean Wilsons Holdings Limited/Annual Report 2017 2 • • • Significant accounting policies and critical accounting judgements (continued) Investments: (Financial assets at fair value through profit and loss) 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 instruments traded in active markets are based on their quoted price (bid price for long only positions) without any deduction for transaction costs. 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. The financial assets held by the company are categorised as financial instruments designated as at FVPL upon initial recognition on the basis that they are part of a group of financial assets that are managed and have their performance evaluated on a fair value basis, in accordance with risk management and investment strategies of the Company. Cash and Cash Equivalents: Cash and cash equivalents comprise cash on hand and other short-term highly liquid investments with an original maturity of less than 3 months 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 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. 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. Variations in contract work, claims and incentive payments are included to the extent that the amount can be measured reliably, has been agreed with the customer and consequently is considered probable. 43 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) 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 income 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 The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. 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. Provisions for tax, labour and civil risks - Judgement 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. 44 Ocean Wilsons Holdings Limited/Annual Report 2017 2 Significant accounting policies and critical accounting judgements (continued) Impairment of goodwill – Judgement and Estimation Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The recoverable amount calculation requires the entity’s management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the end of the reporting period was US$30.3 million (2016: US$30.6 million). Details are disclosed in Note 13. There are no impairment losses recognised for the years presented. Fair value of derivatives – Estimation The Company may use derivative contracts to manage risk. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for specific features of the instruments. 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 The Group has listed all new standards and interpretations issued by the IASB, but not yet effective, regardless of whether these have any material impact on the Group’s financial statement. Based on a preliminary assessment made by the Company, the impacts are detailed below: IFRS 9 – Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. The Group plans to adopt the new standard on the required effective date and will not restate comparative information. During 2017, the Group has performed a detailed impact assessment of all three aspects of IFRS 9. This assessment is based on currently available information and may be subject to changes arising from further reasonable and supportable information being made available to the Group in 2018 when the Group will adopt IFRS 9. Overall, the Group expects no significant impact on its statement of financial position and equity. Classification and measurement The Group does not expect a significant impact on its balance sheet or equity on applying the classification and measurement requirements of IFRS 9. It expects to continue measuring at fair value all financial assets currently held at fair value. Loans as well as trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required. 45 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 2 Significant accounting policies and critical accounting judgements (continued) The assessment of financial assets and the comparative between classification applied to IAS 39 and IFRS 9 are detailed in the table below: Financial Assets FS Group Asset category IAS 39 Asset category IFRS 9 Cash and bank Cash and cash equivalents Loans and receivables Amortised Cost Fixed income investments Cash and cash equivalents Exchange funds Cash and cash equivalents FVPL FVPL FVPL FVPL Time deposits Time deposits Short-term investments Loans and receivables Amortised Cost Cash and cash equivalents Loans and receivables Amortised Cost Receivable for services rendered Operational trade receivables Loans and receivables Amortised Cost Related parties loans Other trade receivables Loans and receivables Amortised Cost Impairment IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Group will apply the simplified approach and record lifetime expected losses on all debt securities, loans and trade receivables. The Group assessed changes introduced by IFRS 9 with respect to the loss allowance and concluded that potential impacts will not be material. Hedge accounting The Group has chosen to defer applying the IFRS 9 general hedging model until the standard resulting from the IASB’s project on accounting for dynamic risk management is completed. The Group will continue to apply IAS 39’s hedge accounting requirements in their entirety to all of their hedging relationships. IFRS 15 – Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Group plans to adopt the new standard on the required effective date using the full retrospective method. The Group assessed the principles and changes introduced by the new standard and concluded that its adoption will not bring significant impacts on the timing for the revenue recognition from contracts with customers, as well on the measurement. The existing impacts are related to requirements of the presentation and disclosure in the financial statements. Further considerations about these impacts are detailed below: Disaggregation of revenue The Group will disaggregate revenue recognised from contracts with customers into categories that depict the nature, amount, timing and uncertainty of revenue and cash flows. In addition, the Group will provide information about the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment. 46 Ocean Wilsons Holdings Limited/Annual Report 2017 2 Significant accounting policies and critical accounting judgements (continued) Considering the currently available information, the Group summarises a proposal of disaggregated revenue as below: Current disclosure Proposed disclosure (IFRS 15) Segment information Sales of services Container Handling Sales of services Warehousing Sales of services O&G Support Base Port Terminals Port Terminals Port Terminals Sales of services Harbour Manoeuvres Towage and agency services Sales of services Special Operations Towage and agency services Sales of services Ship Agency Towage and agency services Sales of services Logistics Logistics Sales of services Other services Several segments Construction contracts Ship construction contracts Shipyards Performance obligations The Group will disclose information about its performance obligations in contracts with customers, including a description of the following items: (i) when the entity typically satisfies its performance obligations, (ii) the significant payment terms, (iii) the nature of the goods or services that the entity has promised to transfer, (iv) obligations for returns, refunds and other similar obligations and (v) types of warranties and related obligations. 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. The assessment is being conducted in several areas of the Group in order to identify the existing contracts, as well as the environment of internal controls and systems impacted by the adoption of the new standard. The Group expects a potential impact in the consolidated financial statement, but Group has not yet quantified the impact of adopting IFRS 16 on its assets and liabilities. The quantitative effect of the adoption of IFRS 16 will depend specifically on the Group’s decision related to the method of transition, the use of practical expedients approach and exemptions for recognition, and any additional leases that Company will hold. The Group expects to disclose its transition approach and quantitative information prior to adoption, planned for 1 January 2019. Other amendments The following new or amended standards are not expected to have a significant impact on the Group’s consolidated financial statements: • • • • • • • • • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2); Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28); Insurance Contracts (IFRS 17); Transfers of Investment Property (Amendments to IAS 40); Foreign Currency Transactions and Advance Consideration (IFRIC 22); Uncertainty over Income Tax Treatments (IFRIC 23); Amendments to IFRS 9; Amendments to IAS 19; and Annual Improvement of IFRS 2015 to 2017 cycle. 47 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 3 Revenue An analysis of the Group’s revenue is as follows: Sales of services Revenue from construction contracts (note 20) Investment income (note 7) All revenue is derived from continuing operations. 4 Business and geographical segments Business segments Year ended Year ended 31 December 31 December 2017 US$’000 475,106 21,234 496,340 19,004 515,344 2016 US$’000 430,753 26,408 457,161 15,065 472,226 Ocean Wilsons has two reportable segments: maritime services and investments. The maritime services segment provides towage, port terminals, ship agency, offshore, logistics and shipyard services in Brazil. The investment segment holds a portfolio of international investments. Segment information relating to these businesses is presented below. For the year ended 31 December 2017 Revenue Result Segment result Share of results of joint ventures Investment revenue Other gains and losses Finance costs Foreign exchange losses on monetary items Profit/(loss) before tax Tax Profit/(loss) after tax Other information Capital additions Depreciation and amortisation Balance Sheet Assets Segment assets Liabilities Segment liabilities 48 Maritime Services Investment Unallocated Consolidated Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2017 US$’000 496,340 2017 US$’000 – 2017 US$’000 2017 US$’000 – 496,340 114,875 (2,949) (2,381) 109,545 3,366 9,687 – (21,976) 2,876 108,828 (36,056) 72,772 (55,345) (57,480) – 9,294 32,775 – (63) 39,057 – 39,057 – – – 23 – – (63) (2,421) – (2,421) – (1) 3,366 19,004 32,775 (21,976) 2,750 145,464 (36,056) 109,408 (55,345) (57,481) 1,042,782 274,659 2,513 1,319,954 (495,134) (388) (372) (495,894) Ocean Wilsons Holdings Limited/Annual Report 2017 4 Business and geographical segments (continued) For the year ended 31 December 2016 Maritime Services Year ended Investment Year ended Unallocated Consolidated Year ended Year ended 31 December 31 December 31 December 31 December Revenue Result Segment result Share of results of joint ventures Investment revenue Other gains and losses Finance costs Foreign exchange losses on monetary items Profit before tax Tax Profit after tax Other information Capital additions Depreciation and amortisation Balance Sheet Assets Segment assets Liabilities Segment liabilities 2016 US$’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 2016 US$’000 – 457,161 (2,141) – 5 – – (372) (2,508) – 96,836 8,073 15,065 (4,134) (599) 2,286 (117,527) (36,836) 80,691 (102,418) (52,585) (1,834) (2,508) – – – (1) 1,036,829 238,898 2,200 1,277,927 (520,341) (244) (350) (520,935) Finance costs and associated liabilities have been allocated to reporting segments where interest costs arise from loans used to finance the construction of fixed assets in that segment. Geographical Segments The Group’s operations are located in Bermuda, Brazil, Panama and Uruguay. All of the Group’s sales are derived in Brazil. The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and intangible assets, analysed by the geographical area in which the assets are located. Brazil Bermuda Additions to Carrying amount of property, plant and equipment segment assets and intangible assets Year ended Year ended 31 December 31 December 31 December 31 December 2017 US$’000 990,689 329,265 2016 US$’000 985,329 292,598 2017 US$’000 55,345 – 2016 US$’000 102,418 – 1,319,954 1,277,927 55,345 102,418 49 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 5 Profit for the year Profit for the year has been arrived at after charging: Depreciation of property, plant and equipment Amortisation of intangible assets Operating lease rentals Auditor’s remuneration for audit services (see below) Non-executive directors emoluments 2016 auditors remuneration was paid to KPMG LLP and 2017 remuneration paid to Ernst & Young LLP. 6 Employee benefits expense Aggregate remuneration comprised: Wages and salaries Share based payments Social security costs Other pension costs 7 Investment income Interest on bank deposits Income from underlying investment vehicles Other interest 8 Other gains and losses Unrealised gains/(losses) on trading investments held at year end Profit on disposal of trading investments Other gains and losses form part of the movement in trading investments as outlined in note 18. 50 Year ended Year ended 31 December 31 December 2017 US$’000 53,851 3,630 19,231 653 536 2016 US$’000 47,337 5,248 17,178 460 491 Year ended Year ended 31 December 31 December 2017 US$’000 2016 US$’000 133,524 117,597 2,386 29,405 1,080 3,420 22,253 1,004 166,395 144,274 Year ended Year ended 31 December 31 December 2017 US$’000 5,916 9,289 3,799 19,004 2016 US$’000 7,919 4,811 2,335 15,065 Year ended Year ended 31 December 31 December 2017 US$’000 25,886 6,889 32,775 2016 US$’000 (6,030) 1,896 (4,134) 9 Finance costs Interest on bank overdrafts and loans Exchange loss/(gain) on foreign currency borrowings Interest on obligations under finance leases Other interest Ocean Wilsons Holdings Limited/Annual Report 2017 Year ended Year ended 31 December 31 December 2017 US$’000 13,274 774 200 7,728 21,976 2016 US$’000 12,277 (12,806) 414 714 599 In 2017 other interest includes US$7.4 million of fines and interest relating to taxes. Borrowing costs incurred on qualifying assets of US$0.4 million (2016: US$0.8 million) were capitalised in the year at an average interest rate of 3.38% (2016: 3.12%). 10 Taxation Current Brazilian taxation Corporation tax Social contribution Total current tax Deferred tax Charge for the year in respect of deferred tax liabilities Credit for the year in respect of deferred tax assets Total deferred tax Total taxation charge Year ended Year ended 31 December 31 December 2017 US$’000 2016 US$’000 27,794 9,978 37,772 19,933 (21,649) (1,716) 36,056 26,900 10,924 37,824 20,661 (21,649) (988) 36,836 Brazilian corporation tax is calculated at 25% (2016: 25%) of the assessable profit for the year. Brazilian social contribution tax is calculated at 9% (2016: 9%) of the assessable profit for the year. At the present time, no income, profit, capital or capital gains taxes are levied in Bermuda and accordingly, no provision for such taxes has been recorded by the Company. In the event that such taxes are levied, the company has received an undertaking from the Bermuda Government exempting it from all such taxes until 31 March 2035. 51 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 10 Taxation (continued) The charge for the year can be reconciled to the profit per the statement of comprehensive income as follows: Profit before tax Tax at the aggregate Brazilian tax rate of 34% (2016: 34%) Utilisation of net operating losses Net operating losses in the period Amortisation of goodwill Exchange variance on loans Tax effect of share of results of joint ventures Tax effect of foreign exchange gain or losses on monetary items Retranslation of non-current asset valuation Share option scheme Non-deductible expenses Termination of tax litigation Other Effect of different tax rates of subsidiaries operating in other jurisdictions Tax expense for the year Effective rate for the year Year ended Year ended 31 December 31 December 2017 US$’000 145,464 49,458 (11,367) 7,932 (1,818) (454) (1,144) (454) (1,372) 793 1,340 3,290 2,209 (12,357) 36,056 25% 2016 US$’000 117,527 39,959 (2,363) 7,442 (1,672) 14,397 (2,745) (2,325) (22,376) 1,159 638 (138) 3,190 1,670 36,836 31% The Group earns its profits primarily in Brazil. Therefore, the tax rate used for tax on profit on ordinary activities is the standard rate in Brazil of 34%, consisting of corporation tax, (25%) and social contribution (9%). 11 Dividends Amounts recognised as distributions to equity holders in the period: Final dividend paid for the year ended 31 December 2016 of 63c (2015: 63c) per share Proposed final dividend for the year ended 31 December 2017 of 70c (2016: 63c) per share 12 Earnings per share The calculation of the basic and diluted earnings per share is based on the following data: Year ended Year ended 31 December 31 December 2017 US$’000 22,279 24,754 2016 US$’000 22,279 22,279 Year ended Year ended 31 December 31 December 2017 US$’000 2016 US$’000 Earnings: Earnings for the purposes of basic earnings per share being net profit attributable to equity holders of the parent 78,315 45,060 Number of shares: Weighted average number of ordinary shares for the purposes of basic and diluted earnings per share 35,363,040 35,363,040 52 Ocean Wilsons Holdings Limited/Annual Report 2017 31 December 31 December 2017 US$’000 15,587 12,252 2,480 30,319 2016 US$’000 15,821 12,306 2,480 30,607 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, the carrying value of goodwill has been assessed with reference to its value in use reflecting the projected discounted cash flows of each cash-generating unit 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 the remaining period of the concession. The key assumptions used in determining value in use relate to growth rate, discount rate, inflation 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 cash-generating unit is assessed for impairment annually. Having completed the annual impairment test, the level of head room of the business unit is significant and no reasonable change in any of the forecast assumptions would give rise to any impairment. The estimated average growth rate used does not exceed the historical average for Tecon Rio Grande and Tecon Salvador. Growth rate of 6% has been estimated for Brasco, and a discount rate of 7.3% for all business units has been used. These growth rates reflect the products, industries and country in which the businesses operate. These medium to long-term growth rates have been reviewed by management during the annual impairment test for 2017 and are considered to be appropriate for the period. 53 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 14 Other intangible fixed assets Cost At 1 January 2016 Additions Write off Exchange differences At 1 January 2017 Additions Write off Exchange differences At 31 December 2017 Amortisation At 1 January 2016 Charge for the year Write off Exchange differences At 1 January 2017 Charge for the year Write off Exchange differences At 31 December 2017 Carrying amount 31 December 2017 31 December 2016 US$’000 53,949 5,277 (292) 5,988 64,922 4,196 (84) (644) 68,390 27,675 5,248 (291) 1,846 34,478 3,630 (84) (226) 37,798 30,592 30,444 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) and (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 2017 US$’000 13,133 4,825 1,042 11,484 108 30,592 2016 US$’000 13,853 5,049 1,970 9,371 201 30,444 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 15. 54 Ocean Wilsons Holdings Limited/Annual Report 2017 Land and buildings US$’000 Vehicles, plant Floating Craft and equipment US$’000 US$’000 Assets under construction US$’000 255,694 392,157 7,259 (187) 38,581 (209) 301,138 8,250 265 (3,692) (4,655) 29,874 53,071 – (17,227) 457,875 5,717 588 – (2,075) 177,198 36,602 (152) 30,148 (9,811) 233,985 34,011 (442) (4,573) (3,463) 29,326 23,406 (52,732) – – – 3,171 (411) – – Total US$’000 854,375 97,141 – 68,729 (27,247) 992,998 51,149 – (8,265) (10,193) 301,306 462,105 259,518 2,760 1,025,689 63,596 10,824 – 11,356 (169) 85,607 9,417 – (1,352) (1,753) 91,919 139,831 19,809 1,068 – (16,808) 143,900 24,644 81 – (1,467) 167,158 209,387 294,947 215,531 313,975 93,758 16,704 – 14,817 (8,714) 116,565 19,790 – (2,012) (2,612) 131,731 127,787 117,420 – – – – – – – – – – – 297,185 47,337 1,068 26,173 (25,691) 346,072 53,851 81 (3,364) (5,832) 390,808 2,760 – 634,881 646,926 15 Property, plant and equipment Cost or valuation At 1 January 2016 Additions Transfers Exchange differences Disposals At 1 January 2017 Additions Transfers Exchange differences Disposals At 31 December 2017 Accumulated depreciation and impairment At 1 January 2016 Charge for the year Elimination on construction contracts Exchange differences Disposals At 1 January 2017 Charge for the year Elimination on construction contracts Exchange differences Disposals At 31 December 2017 Carrying Amount At 31 December 2017 At 31 December 2016 The carrying amount of the Group’s vehicles, plant and equipment includes an amount of US$2.6 million (2016: US$3.2 million) in respect of assets held under finance leases. Land and buildings with a net book value of US$0.2 million (2016: US$0.2 million) and tugs with a value of US$0.2 million (2016: US$0.3 million) have been given in guarantee of various legal processes. The Group has pledged assets having a carrying amount of approximately US$279.7 million (2016: US$290.5 million) to secure loans granted to the Group. The amount of borrowing costs capitalised in 2017 is US$0.4 million (2016: US$0.8 million) at an average interest rate of 3.38% (2016: 3.12%). 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. The useful life of the ship to shore cranes is 20 years, according to management’s expectation and builder’s technical specifications. 55 Ocean Wilsons Holdings Limited/Annual Report 2017 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 Method used Effective to account interest* for investment Bermuda 100%** Consolidation Bermuda 58.19%** Consolidation WILSON SONS DE ADMINISTRAÇÃO E COMÉRCIO LTDA Brazil 58.19% Consolidation Holding company SAVEIROS CAMUYRANO SERVIÇOS MARÍTIMOS LTDA Brazil 58.19% Consolidation Tug operators WILSON, SONS S.A., COMÉRCIO, INDÚSTRIA, E AGÉNCIA DE NAVEGAÇÃO LTDA Brazil 58.19% Consolidation Shipbuilders WILSON, SONS ESTALEIRO LTDA Shipbuilders Brazil 58.19% Consolidation WILSON SONS AGENCIA MARÍTIMA LTDA Brazil 58.19% 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 PARTICIPA(cid:1)ÕES 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 58.19% Consolidation Brazil 58.19% Consolidation Brazil 58.19% Consolidation Brazil 58.19% Consolidation Brazil 58.19% Consolidation Uruguay 58.19% Consolidation Brazil 58.19% Consolidation Brazil 58.19% Consolidation Brazil 58.19% Consolidation Brazil 58.19% 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 58.19% 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. 56 Ocean Wilsons Holdings Limited/Annual Report 2017 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 2017 2016 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. Joint operations The following amounts are included in the Group’s financial information as a result of proportional consolidation of joint operations listed above: Income Expenses Net income Property, plant and equipment Intangible assets Inventories Trade and other receivables Cash and cash equivalents Total assets Trade and other payables Deferrred tax liabilities Total liabilities Year ended Year ended 31 December 31 December 2017 US$’000 18,126 (8,792) 9,334 2016 US$’000 14,190 (7,315) 7,175 31 December 31 December 2017 US$’000 2,841 35 353 2,054 904 6,187 (6,153) (34) (6,187) 2016 US$’000 2,798 47 340 2,615 614 6,414 (6,362) (52) (6,414) 57 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 17 Joint ventures (continued) The aggregated Group’s interests in joint ventures are equity accounted. Revenue Raw materials and consumables used Employee benefits expense Depreciation and amortisation expenses Other operating expenses Loss on disposals of property, plant and equipment Results from operating activities Finance income Finance costs Foreign exchange (losses)/gains on monetary items Profit before tax Income tax expense Profit for the year Participation Equity result Property, plant and equipment Long-term investment Other assets Trade and other receivables Derivatives Cash and cash equivalents Total assets Bank overdrafts and loans Other non-current liabilities Trade and other payables Equity Total liabilities Year ended Year ended 31 December 31 December 2017 US$’000 2016 US$’000 146,453 141,728 (9,152) (47,001) (39,606) (18,881) (1) 31,812 2,930 (20,408) (1,129) 13,205 (6,473) 6,732 50% 3,366 (7,522) (41,382) (34,912) (17,063) (2,202) 38,647 2,661 (21,218) 9,591 29,681 (13,535) 16,146 50% 8,073 31 December 31 December 2017 US$’000 2016 US$’000 647,659 674,476 2,142 4,740 26,302 381 30,575 711,799 500,987 35,604 82,654 92,554 2,066 3,752 42,494 261 10,859 733,908 533,771 30,295 82,114 87,728 711,799 733,908 We have not given separated disclosure of our material Joint Ventures because they belong to the same economic group. Wilson, Sons Limited holds a non- controlling interest in Wilson, Sons Ultratug Particpações S.A and Atlantic Offshore S.A. Wilson, Sons Ultratug Participações S.A is a controlling shareholder of Wilson, Sons Offshore S.A. and Magallanes Navegação Brasileira S.A, while the Atlantic Offshore S.A. is a controlling shareholder of South Patagonia S.A. Guarantees 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. 58 Ocean Wilsons Holdings Limited/Annual Report 2017 17 Joint ventures (continued) 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 S.A. 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 2017, 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 is in compliance with all loan covenants. Provisions for tax, labour and civil risks In the normal course of business in Brazil, the joint ventures remain 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. Wilson, Sons Ultratug Participações S.A booked provisions related to labour claims amounting to US$0.2 million (2016: US$0.02 million), whose probability of loss was estimated as probable. 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$17.5 million (2016: US$13.9 million), whose probability of loss was estimated by the legal counsel as possible. The breakdown of aggregated possible losses is described as follows: 31 December 31 December Tax cases Labour claims Civil cases Total At 1 January 2016 Share of result of joint ventures Elimination on construction contracts Derivatives At 1 January 2017 Share of result of joint ventures Capital increase Elimination on construction contracts Derivatives At 31 December 2017 2017 US$’000 10,639 5,625 1,230 17,494 2016 US$’000 10,066 3,784 – 13,850 US$’000 18,301 8,073 (4,278) 134 22,230 3,366 847 145 56 26,644 59 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 18 Investments Trading investments At 1 January Additions, at cost Disposals, at market value Increase/(decrease) 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 2017 US$’000 2016 US$’000 276.181 77,275 (81,161) 25,886 6,889 305,070 273,434 31,636 305,070 276,878 67,101 (63,664) (6,030) 1,896 276,181 238,781 37,400 276,181 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 on 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. 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 31 December 31 December 2017 US$’000 9,618 4,155 13,773 2016 US$’000 10,278 5,149 15,427 31 December 31 December 2017 US$’000 3,178 (5,323) (2,145) 2016 US$’000 3,925 (8,505) (4,580) 60 Ocean Wilsons Holdings Limited/Annual Report 2017 31 December 31 December 2017 US$’000 28,067 29,472 565 58,104 58,945 (958) 57,987 6,752 18,260 7,323 8,248 40,583 156,674 2016 US$’000 24,250 28,995 1,825 55,070 55,434 (1,187) 54,247 7,466 12,321 4,031 3,200 27,018 136,335 21 Trade and other receivables Trade and other receivables Recoverable taxes and levies Related party loans (note 35) Other trade receivables Total other non-current trade receivables Amount receivable for the sale of services Allowance for doubtful debts Total current trade receivables Income taxation recoverable Other recoverable taxes and levies Prepayments Other receivables Total other current trade receivables Total 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 has a plan to use its tax credits 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$12.7 million (2016: US$9.2 million) which are past due but not impaired at the reporting date for which the Group has not provided as there has not been a change in credit quality and the Group believes the amounts are still recoverable. The Group does not hold any collateral over these balances. Ageing of past due but not impaired trade receivables From 0 – 30 days From 31 – 90 days From 91 – 180 days More than 180 days Total 31 December 31 December 2017 US$’000 10,450 1,368 929 – 12,747 2016 US$’000 6,177 2,178 844 – 9,199 The average credit period taken on services ranges from zero to 30 days. Generally, interest of one percent per month plus a two-percent penalty is charged on overdue balances. 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. There are no expected material changes in the allowance for bad debts recognition due to the applicaton of IFRS 9 in January 2018. Details are disclosed in Note 2.3. Included in the Group’s allowance for doubtful debts are individually impaired trade receivables with a balance of US$1.0 million, which are aged greater than 180 days. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected settlement proceeds. 61 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 21 Trade and other receivables (continued) The Group does not hold any collateral over these balances. Ageing of impaired trade receivables From 0 – 30 days From 31 – 90 days From 91 – 180 days More than 180 days Total Movement in the allowance for doubtful debts Balance at 1 January 2017 Amounts written off as uncollectable Increase in allowance recognised in profit or loss Exchange differences Balance at 31 December 2017 31 December 31 December 2017 US$’000 2016 US$’000 – – – (958) (958) 2017 US$’000 1,187 (4,322) 4,096 (3) 958 – – – 1,187 1,187 2016 US$’000 846 (3,128) 3,291 178 1,187 In determining recoverability of trade receivables, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. The directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. The directors consider that the carrying amount of trade and other receivables approximates their fair value. 22 Bank loans and overdrafts Secured borrowings BNDES – FMM linked to US Dollar¹ BNDES – Real BNDES – FINAME Real BNDES – FMM Real¹ BNDES – linked to US Dollar Total BNDES Banco do Brasil – FMM linked to US Dollar¹ 2.00% – 3.00% IFC – US Dollar Santander – US Dollar China Construction Bank – US Dollar Eximbank – US Dollar Finimp – US Dollar Total others Total 1. As an agent of Fundo da Marinha Mercante’s (FMM), BNDES finances the construction of tugboats and shipyard facilities. 7.00% 3.59% 5.11% 3.36% 4.81% 62 Annual 31 December 31 December interest rate % 2017 US$’000 2016 US$’000 2.07% to 6% 7.50% to 9.19% 4.50% to 12.90% 8.40% to 10.21% 5.07% to 5.36% 156,831 20,982 1,834 1,635 – 168,385 25,466 1,133 1,838 5,069 181,282 201,891 90,750 35,640 31,173 12,708 3,171 – 85,576 48,571 14,005 19,047 5,270 1,170 173,442 173,639 354,724 375,530 Ocean Wilsons Holdings Limited/Annual Report 2017 31 December 31 December 2017 US$’000 54,288 52,123 93,745 154,568 354,724 54,288 300,436 2016 US$’000 49,780 49,029 105,953 170,768 375,530 49,780 325,750 BRL linked to US Dollars US$’000 247,581 247,581 BRL US$’000 24,451 24,451 US Dollars US$’000 Total US$’000 82,692 82,692 354,724 354,724 28,437 28,437 259,030 259,030 88,063 88,063 375,530 375,530 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 2017 Bank loans Total 31 December 2016 Bank loans Total Guarantees Loans with BNDES and Banco do Brasil 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. The loans that Tecon Salvador holds with the 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 2017, the Group had available US$51.0 million of undrawn borrowing facilities. For each disbursement there is a set of conditions precedent that must be satisfied. Covenants Wilson, Sons de Administração e Comércio Ltda. (“WSAC”) as corporate guarantor has to comply with annual loan covenants for both Wilson Sons Estaleiros and Brasco Logística Offshore in respect of loan agreements signed with BNDES. Tecon Salvador S.A. has to comply with loan covenants including the maintenance of specific liquidity and capital structure ratios in respect of its loan agreement with the International Finance Corporation (IFC). Tecon Rio Grande S.A. has to comply with loan covenants from Santander, including a minimum liquidity ratio and capital structure. At 31 December 2017, the Company was in compliance with all clauses in the above mentioned loan contracts. 63 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 22 Bank loans and overdrafts (continued) Fair value Management estimates the fair value of the Group's borrowings as follows: Bank loans BNDES Banco do Brasil IFC Santander China Construction Bank Eximbank China Finimp Total 23 Deferred tax 31 December 31 December 2017 US$’000 2016 US$’000 181,282 201,891 90,750 35,640 31,173 12,708 3,171 – 85,576 48,571 14,005 19,047 5,270 1,170 354,724 375,530 The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period. At 1 January 2016 (Charge)/credit to income Exchange differences At 1 January 2017 (Charge)/credit to income Compensation of tax losses Exchange differences At 31 December 2017 Accelerated tax variance on Other non-current asset Exchange Retranslation of depreciation US$’000 (19,087) (10,124) (900) (30,111) (8,743) – 746 loans US$’000 41,047 (14,305) 1,437 28,179 (1,175) – (320) differences US$’000 22,935 (727) (1,841) 28,325 10,263 (5,023) (92) valuation US$’000 (68,688) 22,376 – (46,312) 1,371 – – Total US$’000 (20,503) 988 (404) (19,919) 1,716 (5,023) 334 (38,108) 26,684 33,473 (44,941) (22,892) 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 2017 US$’000 (51,531) 28,639 (22,892) 2016 US$’000 (48,974) 29,055 (19,919) At the balance sheet date the Group had unused tax losses of US$47.6 million (2016: US$42.5 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$6.8 million (2016: US$12.4 million) due to the unpredictability of future profit streams. In Brazil a tax asset of one entity in the Group cannot be offset against a tax liability of another entity in the Group as there is no legally enforceable right to offset tax assets and liabilities between Group companies. 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. 64 Ocean Wilsons Holdings Limited/Annual Report 2017 23 Deferred tax (continued) Deferred taxes over the utilization of unrecognised net operating losses On 31 May 2017, the Brazilian Internal Revenue Service (“IRS”) and the Brazilian Attorney General of National Treasury (“PGFN”) published the Provisional Measure 783/2017 concerning a special tax amnesty programn known as PERT. Under this program, taxpayers are allowed to settle Federal tax debts. However as a condition they must abstain from administrative and judicial disputes with the Brazilian IRS regarding the tax debts settled in the PERT. The Group applied to the program under the following conditions: (i) a down payment in cash of 7.5% of the total tax debt; (ii) 90% reduction in late payment interest; (iii) 50% reduction in fines, and (iv) the balance by utilising the Group’s 31 December 2015 net operating losses carried forwards for companies that are directly or indirectly controlled and domiciled in Brazil. In 2017 the Group paid US$1.0 million in cash; obtained tax relief of US$7.2 million and used US$6.9 million of unrecognised tax losses to settle US$15.1 million in disputed federal tax debts. 24 Obligations under finance leases Amounts payable under finance leases Within one year In the second to fifth years inclusive After five years Less future finance charges Present value of lease obligations Less: Amounts due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Amounts payable under finance leases Within one year In the second to fifth years inclusive After five years Present value of lease obligations Less: Amounts due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Minimum lease payments 31 December 31 December 2017 US$’000 1,178 434 – 1,612 (457) 1,155 (846) 309 2016 US$’000 1,669 1,721 – 3,390 (1,094) 2,296 (1,211) 1,085 Present value of Minimum lease payments 31 December 31 December 2017 US$’000 846 309 – 1,155 (846) 309 2016 US$’000 1,211 1,085 – 2,296 1,211 1,085 It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 5 years. The average outstanding lease term at 31 December 2017 was 20 months. For the year ended 31 December 2017, the average effective borrowing rate was 9.79% (2016: 16.43%). Interest rates are set at contract date. All leases are denominated in Brazilian Real and include a fixed repayment and a variable finance charge linked to the Brazilian interest rate. Interest rates range from 9.12% to 11.29%. There is a non-significant difference between the fair value and the present value of the Group’s lease obligations. The present value is calculated with its own interest rate over the future installments of each contract. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets. 65 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 25 Trade and other payables Trade creditors Amounts due to construction contract customers (note 20) Other taxes Accruals and deferred income Share based payment liability Total 31 December 31 December 2017 US$’000 42,290 2,145 11,992 7,250 158 64,465 2016 US$’000 44,664 4,580 12,583 6,327 103 68,257 Trade creditors and accruals principally comprise amounts outstanding for trade purposes and ongoing costs. The average credit period for trade purchases is 50 days (2016: 58 days). For most suppliers interest is charged on outstanding trade payable balances at various interest rates. The Group has financial risk management policies in place to ensure that payables are paid within the credit timeframe. The directors consider that the carrying amount of trade payables approximates their fair value. 26 Provisions At 1 January 2016 Increase in provisions in the year Utilisation of provisions Exchange difference At 1 January 2017 Increase in provisions in the year Utilisation of provisions Exchange difference At 31 December 2017 US$’000 13,922 7,348 (3,987) 2,754 20,037 6,946 (8,402) (349) 18,232 The increase in provisions in the year was principally related to labour claims (US$6.1 million) and tax claims (US$0.9 million). Utilisation of provisions in the year relate to labour claims (US$4.5 million) and tax claims (US$3.3 million). Provisions comprise legal claims relating to civil cases, tax cases and legal claims by former employees. Analysis of provisions by type: Labour claims Tax cases Civil and environmental cases 31 December 31 December 2017 US$’000 14,942 2,468 822 18,232 2016 US$’000 13,612 4,816 1,609 20,037 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 liabilities can take a significant amount of time to resolve. Other non-current assets of US$9.5 million (2016: US$13.4 million) represent legal deposits required by the Brazilian legal authorities as security to contest legal actions. In addition to the cases for which the Group booked the provision, there are other tax, civil and labour disputes amounting to US$137.6 million (2016: US$129.9 million) where the probability of loss was estimated by the legal counsels as possible. 66 26 Provisions (continued) The analysis of possible losses by type: Tax cases Labour claims Civil and environmental cases Ocean Wilsons Holdings Limited/Annual Report 2017 31 December 31 December 2017 US$’000 96,890 28,931 14,686 2016 US$’000 93,271 25,232 11,411 140,507 129,914 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 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. Management are not able to give an indication when provisions are likely to be utilised as the majority of provisions involve litigation where the timing of resolution is highly uncertain. As a consequence of the application to the PERT (Tax Amnesty Program), as disclosed at note 23, there was a reduction of possible claims of US$14.2 million and probable claims of US$0.2 million in the year. 27 Share capital Authorised 50,060,000 ordinary shares of 20p each Issued and fully paid 35,363,040 ordinary shares of 20p each 2017 US$’000 2016 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$1.61 to £1. 28 Exercise of stock options in subsidiary During 2017 participants of the Wilson Sons Limited stock option scheme exercised 75,900 options. As a result the non-controlling interest in Wilson Sons Limited increased from 41.75% at 31 December 2016 to 41.81% at 31 December 2017. The following amounts have been recognised in equity Movement attributable to equity holders of parent Movement attributable to non-controlling interest US$’000 430 316 67 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 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 income 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 Gain/(loss) on disposal of property, plant and equipment (Decrease)/increase in provisions Operating cash flows before movements in working capital Decrease in inventories Increase in receivables Decrease in payables Decrease/(increase) in other non-current assets Cash generated by operations Income taxes paid Interest paid Net cash from operating activities Cash and cash equivalents Year ended Year ended 31 December 31 December 2017 US$’000 2016 US$’000 145,464 (3,366) (19,004) (32,775) 21,976 (2,750) 109,545 117,527 (8,073) (15,065) 4,134 599 (2,286) 96,836 53,851 47,337 3,630 2,386 2,930 (7,064) 165,278 1,654 (22,967) (1,699) 3,873 146,139 (29,698) (13,473) 102,698 5,248 3,420 (745) 6,456 158,552 12,858 (17,853) (7,187) (5,390) 140,980 (34,412) (12,756) 93,812 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 an exclusive investment fund called Hydrus Fixed Income Private Credit Investment Fund managed by Itaú bank that is consolidated in this financial information. The fund portfolio is marked to fair value on a daily basis against current earnings. This fund’s 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 is subjected to 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$59.6 million (2016: US$52.7 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$0.0 million (2016: US$0.2 million) were financed by new finance leases. Additions to plant and equipment during the year amounting to US$21.1 million (2016: US$0.0 million) were financed by bank loans paid direct to the supplier. 68 Ocean Wilsons Holdings Limited/Annual Report 2017 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 2017 are US$140.5 million (2016: US$129.9 million). These have not been provided for as the directors and the Group’s legal advisors do not consider that there are any probable losses. Contingent liabilities relate to labour, civil and environmental and tax claims. 31 Share options Stock option scheme On 13 November 2013 the board of Wilson Sons Limited approved a Stock Option Plan which allowed for the grant of options to eligible participants to be selected by the board. The shareholders in special general meeting approved such plan on the 8 January 2014 including an increase in the authorized capital of the company through the creation of up to 4,410,927 new shares. The options provide participants with the right to acquire shares via Brazilian Depositary Receipts (“BDR”) in Wilson Sons Limited at a predetermined fixed price not less than the three day average mid-price for the days preceding the date of option issuance. The Stock Option Plan is detailed below: Options series Grant date Original vesting date Expiry date Exercise price (R$) Number Expired Exercised Vested not Vested Subsisting Outstanding Total 07 ESO – 3 Year 10/1/2014 10/1/2017 10/1/2024 31.23 961,653 (178,695) (21,417) 761,541 – 761,541 07 ESO – 4 Year 10/1/2014 10/1/2018 10/1/2024 31.23 961,653 (178,695) (21,417) 07 ESO – 5 Year 10/1/2014 10/1/2019 10/1/2024 31.23 990,794 (184,110) (22,066) – – 761,541 761,541 784,618 784,618 07 ESO – 3 Year 13/11/2014 13/11/2017 13/11/2024 07 ESO – 4 Year 13/11/2014 13/11/2018 13/11/2024 07 ESO – 5 Year 13/11/2014 13/11/2019 13/11/2024 07 ESO – 3 Year 11/08/2016 11/08/2019 11/08/2026 07 ESO – 4 Year 11/08/2016 11/08/2020 11/08/2026 07 ESO – 5 Year 11/08/2016 11/08/2021 11/08/2026 07 ESO – 3 Year 16/05/2017 16/05/2020 15/05/2027 07 ESO – 4 Year 16/05/2017 16/05/2021 15/05/2027 07 ESO – 5 Year 16/05/2017 16/05/2022 15/05/2027 07 ESO – 3 Year 09/11/2017 09/11/2020 09/11/2027 07 ESO – 4 Year 09/11/2017 09/11/2021 09/11/2027 07 ESO – 5 Year 09/11/2017 09/11/2022 09/11/2027 33.98 33.98 33.98 34.03 34.03 34.03 38.00 38.00 38.00 40.33 40.33 40.33 45,870 (12,870) (3,630) 29,370 – 29,370 45,870 (12,870) 47,260 (13,260) (3,630) (3,740) 82,500 82,500 85,000 20,130 20,130 20,740 23,760 23,760 24,480 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 29,370 29,370 30,260 30,260 82,500 82,500 82,500 82,500 85,000 85,000 20,130 20,130 20,130 20,130 20,740 20,740 23,760 23,760 23,760 23,760 24,480 24,480 Total 3,436,100 (580,500) (75,900) 790,911 1,988,789 2,779,700 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 10 January 2022 Total Projected IFRS2 Fair Value expense US$’000 2,826 3,296 3,409 2,331 1,303 370 206 99 27 13,867 69 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 31 Share options (continued) Closing share price (in Real) Expected volatility Expected life Risk free rate Expected dividend yield 10 January 13 November 11 August 2014 R$30.05 28.00% 10 years 10.8% 1.7% 2014 R$33.50 29.75% 10 years 12.74% 4.8% 2016 R$32.15 31.56% 10 years 12.03% 4.8% 16 May 2017 R$38.00 31.82% 10 years 10.17% 4.8% 9 November 2017 R$38.01 31.82% 10 years 10.17% 4.8% 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 lease payments under operating leases recognised in net income at 31 December 2017 was US$19.2 million (2016: US$17.2 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$19.4 million (2016: $17.0 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 a 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 S.A signed the second amendment to the lease agreement which extends the term of the lease for an additional period of 25 years until March 2050. The Company is obligated to complete minimum expansion and maintenance capital expenditure through to the end of the concession. Minimum expansion civil work investments were budgeted at approximately R$398 million (US$122 million) using values of base date December 2013. These investments will be completed in three phases expanding the terminal’s dynamic capacity to 925,000 TEUs per year. The first phase construction is expected to commence as soon as the environmental licenses are granted after the Amendment signature and will be completed within twenty-four months after the commencement of the works (total gross investment of R$255 million (US$78 million) using values of base date December 2013). The limit for the second phase of construction is 2030 (total gross investment of R$29 million (US$9 million) using values of base date December 2013). And the third phase construction limit is by 2034 (total gross investment of R$114 million (US$35 million) using values of base date December 2013). Additionally, there are investments totalling R$317 million (US$97 million) related to the maintenance of the operating area and replacement of equipment that will be completed up to 2050. Tecon Salvador guaranteed payments consist of three elements: a fixed rental, a fee per container handled based on minimum forecast volumes and a fee per tonne of non-containerized cargo handled based on minimum forecast volumes. Brasco Brasco lease commitments mainly relate to a 30-year lease right to operate a sheltered area at Guanabara Bay, Rio de Janeiro, Brazil with privileged location to attend Campos and Santos oil producing basins. At the balance sheet date the Group had outstanding commitments for future minimum lease payments under operating leases, which fall due as follows: Within one year In the second to fifth year inclusive After five years 70 2017 US$'000 19,447 61,667 201,939 283,053 2016 US$'000 16,968 54,136 198,725 269,829 Ocean Wilsons Holdings Limited/Annual Report 2017 33 Commitments At 31 December 2017 the Group had entered into commitment agreements with respect to trading investments. These commitments relate to capital subscription agreements entered into by Ocean Wilsons (Investments) Limited. The expiry dates of the oustanding commitments in question may be analysed as follows: Within one year In the second to fifth year inclusive After five years 2017 US$'000 4,250 8,792 22,579 35,621 2016 US$'000 1,044 4,638 28,274 33,956 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. At 31 December 2017, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to US$14.1 million (2016: US$20.4 million). The amount mainly refers to investments in Tecon Salvador, Tecon Rio Grande and raw materials for shipyard construction. 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$1.1 million (2016: US$1.0 million) represents contributions payable to the scheme by the Group at rates specified in the rules of the plan. 35 Related party transactions Transactions between the company and its subsidiaries which are related parties have been eliminated on consolidation and are not disclosed in this note. Transactions between the group and its associates, joint ventures and other investments are disclosed below: Joint ventures 1. Allink Transportes Internacionais Limitada 2. Consórcio de Rebocadores Barra de Coqueiros 3. Consórcio de Rebocadores Baía de São Marcos 4. Wilson Sons Ultratug and subsidiaries 5. Atlantic offshore S.A. Others 6. Hanseatic Asset Management LBG 7. Gouvêa Vieira Advogados 8. CMMR Intermediacão Comercial Limitada 9. Jofran Services 10. Hansa Capital GMBH Revenue from services Amounts paid/ Cost of services 31 December 31 December 31 December 31 December 2017 US$’000 1 – 444 1,379 – – – – – – 2016 US$’000 9 – 623 19,640 – – – – – – 2017 US$’000 2016 US$’000 (19) (108) – – – – – (5) – – (2,597) (2,385) (73) (157) (173) (93) (79) (182) (169) (85) 71 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 35 Related party transactions (continued) Joint ventures 1. Allink Transportes Internacionais Limitada 2. Consórcio de Rebocadores Barra de Coqueiros 3. Consórcio de Rebocadores Baía de São Marcos 4. Wilson Sons Ultratug 5. Atlantic offshore S.A. Others 6. Hanseatic Asset Management LBG 7. Gouvêa Vieira Advogados 8. CMMR Intermediacão Comercial Limitada 9. Jofran Services 10. Hansa Capital GMBH Amounts owed by related parties Amounts owed to related parties 31 December 31 December 31 December 31 December 2017 US$’000 – 77 2,483 11,848 17,767 – – – – – 2016 US$’000 5 145 2,483 15,529 13,622 – – – – – 2017 US$’000 2016 US$’000 (2) – – – – – – – – – (347) (202) – – – – – – – – 1. Mr A C Baião is a shareholder and Director of Allink Transportes Internacionais Limitada. Allink Transportes Internacionais Limitada is 50% owned by the Group and rents office space from the Group. 2. Mr W H Salomon is chairman of Hanseatic Asset Management LBG. Fees were paid to Hanseatic Asset Management LBG for acting as Investment Managers of the Group’s investment portfolio and administration services. 3. Mr J F Gouvêa Vieira is a partner in the law firm Gouvêa Vieira Advogados. Fees were paid to Gouvêa Vieira Advogados for legal services. 4. Mr C M Marote is a shareholder and Director of CMMR Intermediacão Comercial Limitada. Fees were paid to CMMR Intermediacão Comercial Limitada for consultancy services. 5. Mr J F Gouvêa Vieira is a Director of Jofran Services. Directors’ fees were paid to Jofran Services. 6. Mr C Townsend is a Director of Hansa Capital GMBH. Directors’ fees were paid to Hansa Capital GMBH. 7. Related parties loan with Wilson, Sons Ultratug (interest - 0.3% per month with no maturity) and other trade payables and receivables from Wilson, Sons Offshore and Magallanes. 8. Related parties loan with Atlantic Offshore S.A. (with no interest and with no maturity). Remuneration of key management personnel The remuneration of the executive directors and other key management of the Group, is set out below in aggregate for the categories specified in IAS 24 Related Year ended Year ended 2017 US$’000 11,674 1,671 2,331 55 15,731 2016 US$’000 10,897 1,470 3,410 10 15,787 Party Disclosures. Short-term employee benefits Other long-term employee benefits Share options issued Share-based payment 72 Ocean Wilsons Holdings Limited/Annual Report 2017 36 Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 22, cash and cash equivalents and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings disclosed in the consolidated statement of changes in equity. The Group borrows to fund capital projects and looks to cash flow from these projects to meet repayments. Working capital is funded through cash generated by operating revenues. Externally imposed capital requirement The Group is not subject to externally imposed capital requirements. Significant accounting policies Details of significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expense are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the financial statements. Categories of financial instruments Financial assets Designated as fair value through profit or loss Receivables (including cash and cash equivalents) Financial liabilities Financial instruments classified as amortised cost Financial instruments classified as cash flow hedge (Derivatives) Financial risk management objectives Year ended Year ended 2017 US$’000 2016 US$’000 273,434 212,457 238,781 233,594 (408,352) (433,500) (1,503) (1,894) 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. Credit risk The Group’s principal financial assets are cash, trade and other receivables, related party loans and trading investments. The Group’s credit risk is primarily attributable to its bank balances, trade receivables, related party loans 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. 73 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 36 Financial instruments (continued) 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 2017 US$’000 2016 US$’000 2017 US$’000 2016 US$’000 180,468 206,286 212,457 233,594 18 – 17 – 10,934 21,177 1,430 17,576 180,486 206,303 244,568 252,600 Foreign currency sensitivity analysis The Group is primarily exposed to unfavourable movements in the Real on its Brazilian liabilities held by US Dollar functional currency entities. The sensitivity analysis presented in the following sections, which refer to the position on 31 December 2017, estimates the impacts of the Real devaluation against the US Dollar. Three exchange rate scenarios are contemplated: the likely scenario (Probable) and two possible scenarios of deterioration of 25% (Possible) and 50% (Remote) in the exchange rate. The Group uses the Brazilian Central Bank’s “Focus” report to determine the probable scenario. Operation Risk Amount US Dollars Result Total assets Total liabilities BRL BRL 244,568 Exchange Effects 180,468 Exchange Effects Net Effect Operation Risk Amount US Dollars Result Total assets Total liabilities BRL BRL 252,600 Exchange Effects 206,286 Exchange Effects Net Effect 31 December 2017 Exchange rates Possible scenario (25%) 4.17 US$’000 (55,209) 37,477 (17,732) 31 December 2016 Exchange rates Possible scenario (25%) 4.37 US$’000 (65,436) 52,616 (12,820) Probable scenario 3.34 US$’000 (2,545) 1,729 (816) Probable scenario 3.50 US$’000 (17,658) 14,198 (3,460) Remote scenario (50%) 5.01 US$’000 (98,306) 61,309 (36,997) Remote scenario (50%) 5.25 US$’000 (97,288) 78,288 (19,060) 74 Ocean Wilsons Holdings Limited/Annual Report 2017 36 Financial instruments (continued) 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 Group’s Brazilian 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. 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. Transaction Loans – LIBOR Loans – Selic Loans – TJLP Investments – LIBOR Investments – CDI Probable scenario 2.17% 6.90% 7.00% 2.17% 6.89% 31 December 2017 Possible scenario 25% 2.72% 8.61% 8.75% 2.71% 8.61% Remote scenario 50% 3.26% 10.34% 10.50% 3.25% 10.34% 75 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 36 Financial instruments (continued) Transaction Risk Loans – LIBOR Loans – Selic Loans – TJLP Loans – Fixed Total loans Investments – LIBOR Investments – CDI Total investments LIBOR Selic TJLP N/A LIBOR CDI Amount US Dollars 47,052 321 23,422 283,929 354,724 45,080 56,987 102,067 Result Interest Interest Interest None Income Income Net Income Probable scenario US$’000 (71) – – – (71) – (1,274) (1,274) (1,345) Possible scenario (25%) US$’000 (157) (4) (254) – (415) 236 (582) (346) (761) Remote scenario (50%) US$’000 (243) (8) (505) – (756) 471 111 582 (174) 1. LIBOR – Information source: Bloomberg, report from 16 January 2018. 2. CDI – Information source: BM&F (Bolsa de Mercadorias e Futuros), report from 15 January 2018. 3. Selic – Information source: BC (Banco Central do Brasil), report from 16 January 2018. The net effect was obtained by assuming a 12-month period starting 31 December 2017 in which interest rates vary and all other variables are held constant. The scenarios express the difference between the weighted scenario rate and actual rate. 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 1. 2. Information source: Bloomberg, report 11 January 2017. Information source: BM&F (Bolsa de Mercadorias e Futuros), report from 10 January 2017. 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 weighted scenario rate and actual rate. 76 Ocean Wilsons Holdings Limited/Annual Report 2017 36 Financial instruments (continued) 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 to hedge a portion of its outstanding floating-rate debt with IFC. On 31 December 2017 the notional amount was US$35.6 million. This swap converts floating interest rate based on the London Interbank Offered Rate (LIBOR) into fixed-rate interest and expires in March 2020. The derivatives were entered into with Santander Brasil as counterparty and its Standard & Poor’s credit rating was AA at 31 December 2017. Tecon Salvador is required to pay the counterparty interest at 4.250%, according to the schedule agreement and receives variable interest payments based on 6-month LIBOR. The net receipts or payments from the swap are recorded as financial expense. Within one year In the second year In the third to fifth years (including) After five years Fair Value Outflows US$’000 (1,108) (337) (58) – Net effect US$’000 (1,108) (337) (58) – (1,503) (1,503) The swap fair value was estimated based on the yield curve at 31 December 2017 and represents its carrying value. On 31 December 2017 the interest rate swap liability was US$1.5 million and the balance in accumulated other comprehensive income on the consolidated balance sheet was US$1.9 million. The net change in fair value of the interest rate swap recorded as other comprehensive income for the period ended 31 December 2017 was an after tax loss of US$0.5 million. 31 December 2017 Financial Liability Interest Rates Swap Total Derivative Sensitivity Analysis Amount US$’000’s Maturity 35,640 Mar/2020 Fair Value US$’000’s (1,503) (1,503) This analysis is based on 6-month LIBOR interest rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular foreign exchange rates, remain constant and ignores any impact of forecast sales and purchases. Three scenarios were simulated: the likely scenario (Probable) and two possible scenarios of reduction of 25% (Possible) and 50% (Remote) in the interest rate. 31 December 2017 Probable scenario US$’000 (1,500) Possible Remote scenario (25%) scenario (50%) US$’000 (1,748) US$’000 (2,004) 77 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 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 2017. There was no hedge ineffectiveness recognised in profit or loss for the year ended 31 December 2017. 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 2017 US$’000 27,343 27,343 2016 US$’000 23,878 23,878 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. 78 Ocean Wilsons Holdings Limited/Annual Report 2017 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 2017 Non-interest bearing Finance lease liability Variable interest rate instruments Fixed interest rate instruments 31 December 2016 Non-interest bearing Finance lease liability Variable interest rate instruments Fixed interest rate instruments Weighted average effective interest rate % – 9.79% 3.72% 3.29% – 16.43% 3.73% 2.85% Less than 12 months US$’000 67,666 846 19,090 35,198 122,800 71,556 1,211 27,762 22,018 1-5 years US$’000 – 399 47,192 98,676 146,177 – 1,085 75,307 79,675 122,547 156,067 5+ years US$’000 Total US$’000 – – 4,513 150,055 154,568 – – 12,435 158,333 170,768 67,666 1,155 70,795 283,929 423,545 71,556 2,296 115,504 260,026 449,382 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 financial assets and liabilities traded in active markets are based on quoted market prices at the close of trading on 31 December 2017. The quoted market price used for financial assets held by the Company utilise the last traded market prices. 79 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 36 Financial instruments (continued) Fair value measurements recognised in the statement of financial position IFRS 13 requires the disclosure of fair value measurements by the level of the following fair value measurement hierarchy: 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. The following table provides an analysis of financial instruments recognised in the statement of financial position by the level of hierarchy: 31 December 2017 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 15,831 145,515 112,088 273,434 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 Valuation Process Investments whose values are based on quoted market prices in active markets and are classified within Level 1 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: When considering the values of managed funds, including private equity funds, that are not quoted in an active market and that may be subject to restrictions or redemptions such as lock up periods, redemption gates and side pockets, the company’s Investment Manager considers the valuation techniques and inputs used in valuing these funds as part of its due diligence prior to investing to ensure they are reasonable and appropriate. Therefore, the NAV of these funds is used as an input into measuring their fair value. Depending on the nature and level of adjustments needed to the NAV and the level of trading in the fund, the Company classifies these funds as either level 2 or level 3. Our intention is to hold level 3 investments to maturity however in the unlikely event that we are required to liquidate these investments then the proceeds received may be less than the carrying value due to their illiquid nature. The following table summarises the sensitivity of the Company’s level 3 investments to changes in fair value due to illiquidity at 31 December. The analysis is based on the assumptions that the proceeds realised will be decreased by 10%, with all other variables held constant. This represents management’s best estimate of a reasonable possible impact that could arise from a disposal and illiquidity. 80 Ocean Wilsons Holdings Limited/Annual Report 2017 36 Financial instruments (continued) Profit or loss Total equity 2017 US$’000 11,208 11,208 2016 US$’000 10,052 10,052 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. 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 market 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 profits/(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 2017 US$’000 100,524 4,281 15,358 (8,075) 2016 US$’000 94,170 (2,264) 10,372 (1,754) 112,088 100,524 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 2017 US$’000 1,100 2016 US$’000 600 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 31 December 31 December 2017 10.46% 4.75% 2016 11.35% 5.00% 2.50% p.a. 2.50% p.a. 2.50% p.a. 2.50% p.a. 81 Ocean Wilsons Holdings Limited/Annual Report 2017 Notes to the Accounts 37 Post-employment benefits (continued) 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 38 Acquisition of non-controlling interest 31 December 2017 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 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$0.8 million payment that is conditional upon future contractual events which were subsequently fulfilled. Following completion of the transaction the Wilson Sons Group holds 100% of the shares of Tecon Salvador S.A. and the Ocean Wilsons Holdings Group has a 58.25% effective interest. The following amounts have been recognised in equity in 2016: Movement attributable to equity holders of parent Movement attributable to non-controlling interest US$’000 2,988 2,411 82 Statistical Statement (Unaudited) 2013 – 2017 (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 (Loss)/profit 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 Ocean Wilsons Holdings Limited/Annual Report 2017 Year to Year to Year to Year to 31 December 31 December 31 December 31 December 31 December 2017 US$’000 3.31 2016 US$’000 3.26 2015 US$’000 3.90 2014 US$’000 2.66 2013 (Restated) US$’000 2.34 Year to 496,340 (37,679) 457,161 (37,741) 509,268 633,520 (55,760) (100,588) 660,106 (94,330) (166,395) (144,274) (147,279) (195,893) (209,459) (57,481) (122,310) (2,930) 109,545 3,366 19,004 32,775 (21,976) 2,750 145,464 (36,056) 109,408 78,315 31,093 109,408 US$’000 494,745 273,434 55,881 824,060 13.99 9.31 23.30 221.5c 63c £10.95 $14.79 (52,585) (126,470) 745 96,836 8,073 15,065 (4,134) (599) 2,286 117,527 (36,836) 80,691 45,060 35,631 80,691 US$’000 464,988 238,781 53,223 756,992 13.15 8.26 21.41 127.4c 63c £10.22 $12.50 (53,214) (142,175) (1,294) 109,546 4,843 16,908 (1,388) (45,403) (15,792) 68,714 (39,455) 29,259 15,470 13,789 29,259 US$’000 394,807 236,155 49,520 680,482 11.16 8.08 19.24 43.7c 63c £7.65 $11.27 (65,120) (58,674) (182,819) (188,569) 326 89,426 7,090 16,975 6,233 (23,607) (17,621) 78,496 (41,928) 36,568 23,182 13,386 36,568 US$’000 474,127 236,491 56,726 767,344 13.41 8.29 21.70 65.6c 60c £10.00 $15.58 9,966 119,040 2,392 17,838 13,684 (21,863) (30,589) 100,502 (42,216) 58,286 37,873 20,413 58,286 US$’000 476,626 244,969 48,480 770,075 13.48 8.30 21.78 107.1c 42c £10.42 $17.25 83 Ocean Wilsons Holdings Limited/Annual Report 2017 Notice of Annual General Meeting Notice is hereby given that the 25th 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 4 June 2018 at 9:30 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 2017. 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 C Townsend as a Director. To re-elect Mr A Berzins as a Director. To re-appoint Ernst & Young LLP as the Auditor and the Directors to determine 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 2017. By Order of the Board Malcolm Mitchell Company Secretary Clarendon House, Church Street, Hamilton HM 11, Bermuda 16 March 2018 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. 84 Ocean Wilsons Holdings Limited/Annual Report 2017 Form of Proxy *I/We *of being a Member of Ocean Wilsons Holdings Limited, hereby appoint Mr J F Gouvêa Vieira, or failing him any Director 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 4 June 2018 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 4 June 2018 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 2017. 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 C Townsend as a Director. 5 To re-elect Mr A Berzins as a Director. 6 To re-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 2017. Signature Notes Dated 2018 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, Link 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. 85 Printed by Park Communications on FSC® certifi ed paper. Park is a CarbonNeutral® company and its Environmental Management System is certifi ed 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 fi bre from within a 200km radius of the mill, reducing the carbon footprint for production.