The Group's Brazilian subsidiaries have significant $Real denominated loans that are monetarily corrected by the movement in the US dollar/$Real exchange rate. While the liability in US dollars terms remains unchanged the devaluation of the $Real generates exchange losses, which under UK GAAP, the company is required to recognise in the Profit and Loss account in the period they occur. Included in interest payable and similar charges is approximately GBP7.6 million relating to the monetary correction of these loans. Of this GBP7.6 million approximately GBP50,000 was paid during the period, with the balance deferred over the life of the loans. (up to 14 years). These loans bear interest of between 1.5% and 4% in US dollars. The amount of monetary correction these loans will incur in the future will depend on the movement in the $Real / US dollar exchange rate during the relevant period.
During the period the Group held US dollar linked Brazilian government bonds that generated exchange gains of approximately GBP1.6 million. These gains are shown in the interest receivable and similar income line.
The Loss before taxation for the six months ended 30 June 1999 is (GBP200,000)(1998 - GBP7,016,000 profit) and loss after taxation of (357,000)(1998 - GBP4,296,000 profit). Earnings per share based on ordinary activities after taxation and minority interests of negative 1.59p (1998 - 10.40p positive) were 11.99p down on the same period in 1998. The board has resolved that an interim dividend of 1.00p per share be paid on the 19th of November, 1999 to shareholders on the register at close of business on 5th November 1999.
Group Net Assets. At 30th June 1999, Group net assets amounted to 142.80p per share (31 December, 1998 173.18p). The decrease in Group net assets per share is attributable to the devaluation of the $Real as the greater part of the Groups assets are $Real denominated.
Net assets held in Brazil at period end were 76.3p (3l December 1998 111.42p) and assets held outside Brazil, 66.5p (31 December 1998 61.76p). At the 30th September 1999 the total value of the investment portfolio was GBP10,7 million (27.2p per share) and the company held cash balances outside Brazil of approximately GBP18.9 million (48.2p per share).
Brazil. The Brazilian economy has demonstrated stronger than expected resilience following the maxi devaluation of the $Real in January. Initial forecasts of negative 3% growth in GNP 1999 have been replaced by 0 or 0.5% growth for this year. While the economy remains stagnant with both imports and exports down on 1998 there are encouraging signs that economic conditions are improving. The public sector posted a primary (or non-interest) surplus of 3.6% of GDP in the year through July, above the 2.8% target agreed with the IMF, although the measures required to eliminate the government's nominal deficit are still awaiting implementation. Interest rates October fell to 19%, having been as high as 37% in January this year and inflation remains within the Central Bank target of 8% for the year. Against this the trade balance continues to be negative and the exchange rate after several months of stability slipped in July and August so that the $Real is now trading at approximately 1.95 to the US dollar. The pressure on the currency reflects the uncertainty as to the political will to make the necessary structural adjustments to government spending.
Towage. Revenues and operating margins were down on the corresponding period in 1998 as a result of the increased competition that appeared at the end of last year. Due to market pressures we were unable to sustain our invoicing in US dollar terms after the devaluation and significant reductions in tariffs have occurred. The towage market is unlikely to improve this year. Port movements were slightly down as the devaluation of the $Real reduced imports in the first half of 1999.
Shipyard. The Shipyard had a poor first half in terms of third party revenue. The market for small vessel construction in Brazil remains weak. We continued the renewal of our tug fleet with a further 2 tugs delivered during the period.
Shipping Agency Division. Ship agency benefited from the devaluation as we managed to maintain most of our revenues In US dollar terms while our costs in US dollar terms fell by approximately 20%.
Port Operations. Container volume at Tecon Rio Grande continued to increase with 85,148 TEUs moved during the period, an increase of 51% over the first semester in 1998. Expansion of the terminal continues on schedule and is forecast for completion in March next year. As a result of the devaluation the estimated cost of the project has fallen from US$ 52 million to approximately US$ 48 million. The first instalment of US$ 17 million of project
financing from the International Finance Corporation (IFC) for the terminal expansion was drawn down in August.
The loss from the EADI Santo Andre was due to the reduction in imports following the devaluation of the $Real. Stevedoring continued to perform well.
Other Projects. Conerj continues to perform below forecast. In February as part of a consortium the company purchased two dredgers at public auction. These are currently in Dry-dock undergoing repairs and modernisation. The Dredgers will be operated by our associate company, Dragaport and should begin operations in February 2000.
Year 2000 The Company has now completed all work identified as necessary to rectify potential problems in its computer systems and associated risks in relation to the year 2000 issue. We have made enquiries of our major suppliers regarding year 2000 compliance but are unable to make any representations about supplier compliance.
Future Prospects. Since the period end, the $Real has devalued a further 18% against sterling to 3.30. While operating results for the third quarter in $Real are in line with the first six months, they declined when translated into sterling. The company continues to pursue privatisations in the port area. Delays have occurred in this process but we anticipate further opportunities by the end of the year. The Directors are implementing a long-term incentive plan to maintain and recruit quality management in its operating subsidiaries. Whilst we have been advised that this does not require shareholder approval we will seek shareholder ratification at the next annual general meeting. At the board meeting today Mr William Salomon was appointed Deputy Chairman of the Group.