TORM Annual Report 2018 | Quarterlytics

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FY2018 Annual Report · TORM

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ANNUAL REPORT 2018

CONTENTS

CHAIRMAN’S
STATEMENT

HIGHLIGHTS

PRODUCT TANKER
MARKET

CORPORATE
GOVERNANCE

FINANCIAL
STATEMENTS

STRATEGIC REPORT

GOVERNANCE

FINANCIAL STATEMENTS

Chairman’s Introduction

Audit Committee Report

Risk Committee Report

Nomination Committee Report

Remuneration Committee Report

Investor Information

Directors’ Report

Statement of Directors’ Responsibilities

55
61
66
69
71
81
84
88

Chairman’s Statement

Key Figures

Highlights

Outlook 2019

Statement by the Executive Director

Strategic Ambition and Business Model

Value Chain in Oil Transportation

The Product Tanker Market

IMO 2020 sulfur regulation

Key Performance Indicators

Corporate Social Responsibility

Risk Management

130 Years and looking ahead

Financial Review 2018

5
7
9
12
15
17
21
22
27
29
30
40
44
45

Consolidated Balance Sheet

Consolidated Cash Flow Statement

Consolidated Statement of Changes in Equity

91
Consolidated Income Statement
Consolidated Statement of Comprehensive Income 91
92
93
95
96
130
131
132
133

Notes to Consolidated Financial Statements

Company Statement of Changes in Equity

Notes to Parent Financial Statements

Company Balance Sheet

Parent Company 2018

Independent Auditor’s Report to the Members of

TORM plc

TORM Fleet Overview

Glossary

137
143
146

TORM ANNUAL REPORT 2018

CONTENTS

Contents

TORM ANNUAL REPORT 2018
TORM ANNUAL REPORT 2018

CONTENTS

3
3

TORM ANNUAL REPORT 2018

CONTENTS

CHAIRMAN’S STATEMENT

Following challenging market conditions for the majority of 2018, product tanker rates have rebounded significantly towards the end of the
year, and positive dynamics continue to be present. In particular, the implementation of new restrictions on sulfur emissions is expected to
positively impact the product tanker market by increasing demand for clean petroleum products. Looking ahead, I believe TORM will continue
to derive significant benefit from the scale of its operations, the integrated One TORM platform and the strong company values developed over
the past 130 years.

Christopher H. Boehringer, Chairman of the Board

The underlying product tanker market was challenging
throughout most of 2018 but recovered significantly
during the final months of the year and early 2019.
TORM remains well-positioned to leverage the positive
market development due to our spot-oriented
chartering strategy, our continued strong operational
performance and the preparations made ahead of the
implementation of the new IMO 2020 sulfur regulation.

NEWBUILDING PROGRAM BEING EFFECTUATED
During 2018, TORM took delivery of four LR2 vessels
from Guangzhou Shipyard International (“GSI”). As
part of our ongoing efforts to modernize our fleet, we
ordered an additional three MR vessels from GSI in
2018, bringing the total remaining newbuilding
program to two LR1s and seven MRs that are
expected to be delivered in 2019 and through the first
quarter of 2020. The nine newbuildings have all been
ordered with scrubbers installed and at attractive
prices.

Maintaining a solid capital structure remains a key
priority for TORM, and I am pleased that the

newbuildings are all fully financed. In 2018, TORM
completed an equity raise of USD 100m and secured
debt financing and loan extension for a total of USD
203m, leveraging TORM’s strong relationship with
debt financing providers.

STRONG OPERATIONAL PERFORMANCE IN A
TOUGH PRODUCT TANKER MARKET
Throughout most of 2018, the product tanker market
was challenging and reached a low point during the
third quarter with MR benchmark freight rates
reaching all-time historical low levels. Towards the end
of the year, however, the market experienced a
significant recovery with rates reaching levels not seen
since 2015. As a testament to the One TORM platform,
TORM has continued to deliver TCE earnings and cash
flow at the top end of what comparable industry
players delivered throughout the year and under
difficult market conditions.

TORM’s medium to long-term outlook for the product
tanker market remains positive. We believe that the
reduction in the global limit for sulfur emissions from

3.5% to 0.5% and the accompanying shift in marine
fuel consumption will lead to increased trade volumes
of clean petroleum products, which will benefit the
product tanker market. TORM currently expects the
IMO 2020 sulfur regulation to lead to an incremental
increase in product tanker trade during 2019 and 2020.

TORM IS WELL-PREPARED FOR IMO 2020
TORM has been proactively preparing for the new
regulations limiting sulfur emissions and has thus far
committed to order 21 scrubbers for the fleet with
options to order an additional 18 scrubbers. TORM has
also entered into a joint venture with the scrubber
manufacturer ME Production and the Chinese yard GSI
to manufacture scrubbers in China and deliver them to
a range of maritime industry customers for both
newbuildings and retrofitting. This comes at a time
when demand for scrubbers is expected to increase
significantly. This strategic move provides us with a
substantial economic interest in a venture that has the
potential to be a large-scale international scrubber
manufacturer whilst at the same time securing the

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

Strategic Report

CHAIRMAN’S STATEMENT

availability of high-quality scrubbers for TORM’s fleet,
a challenge to some owners as the 2020 deadline
approaches.

US LISTING AND SARBANES-OXLEY REPORTING
On 11 December 2017, TORM plc was listed on Nasdaq
in New York, thereby providing investors with the
opportunity to trade their Class A common share via
the Nasdaq platform in both Copenhagen and New
York. Supporting this journey, and in compliance with
US regulations, TORM has developed the Annual
Report 2018 under the Sarbanes-Oxley (SOX) control
requirements providing investors with additional
comfort on the accuracy of TORM’s market
disclosures. All future market disclosures will continue
to be compliant with the SOX control regime.

On 12 February 2019, TORM plc’s USD 250m universal
shelf registration statement on Form F-3 became
effective with the Securities and Exchange
Commission. This new registration statement is
intended to provide TORM with flexibility to raise
capital over the next three years, from the offering of
common shares, debt or other traded securities, in one
or more future offerings.

On 14 January 2019, TORM celebrated its 130-year
anniversary, and I am confident that the Company will
continue to leverage the organizational knowledge

gained throughout its long-standing history within
shipping and maintain a strong operational
performance aided by the One TORM platform.

Mr. Christopher H. Boehringer, Chairman of the Board

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

KEY FIGURES

2018

2017

2016

2018

2017

2016

INCOME STATEMENT (USDM)

Revenue

Time charter equivalent earnings (TCE) ¹

⁾

Gross profit ¹

EBITDA ¹

⁾

Operating profit/(loss) (EBIT)

⁾

Financial items

Profit/(loss) before tax

Net profit/(loss) for the year

635

352

169

121

-36

-33

-35

657

397

200

158

-36

680

458

242

200

-107

-35

-142

KEY FINANCIAL FIGURES ¹

Gross margins:

TCE

Gross profit

EBITDA

⁾

Operating profit/(loss)

Return on Equity (RoE)

Return on Invested Capital (RoIC)

Adjusted Return on Invested Capital (Adjusted RoIC)

55.4%

26.6%

19.1%

0.5%

-4.3%

0.1%

60.4%

30.4%

24.0%

6.1%

0.3%

2.8%

2.4%

Net profit/(loss) for the year excluding impairment

charges

-35

Equity ratio

49.4%

48.0%

67.4%

35.6%

29.4%

-15.7%

-16.2%

-7.2%

4.9%

49.7%

BALANCE SHEET (USDM)

Non-current assets

Total assets

Equity

Total liabilities

Invested capital ¹

Net interest-bearing debt ¹

⁾

Cash and cash equivalents
⁾

1,445

1,385

1,390

1,714

1,647

1,571

847

867

791

856

781

790

1,469

1,406

1,388

627

127

620

134

609

SHARE-RELATED KEY FIGURES ¹

Basic earnings/(loss) per share (USD)

⁾

Diluted earnings/(loss) per share (USD)

Dividend per share (USD)

Net Asset Value per share (NAV/share) ²

Stock price in DKK, end of period (per share of USD 0.01)

⁾

Number of shares (excluding treasury shares), end of

-0.48

11.6

43.9

0.04

0.02

12.8

53.5

-2.27

0.40

11.8

63.5

period (million)

73.9

62.0

Number of shares (excluding treasury shares), weighted

average (million)

73.1

62.0

62.9

For definition of the calculated key figures, please refer to the glossary on pages 147-151.
Based on broker valuations as of 31 December 2018, excluding charter commitments.

¹
²
⁾
⁾

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

SAFE HARBOR STATEMENTS AS TO THE
FUTURE

Matters discussed in this release may constitute
forward-looking statements. Forward-looking
statements reflect our current views with respect to
future events and financial performance and may
include statements concerning plans, objectives, goals,
strategies, future events or performance, and
underlying assumptions and statements other than
statements of historical facts. The words “believe,”
“anticipate,” “intend,” “estimate,” “forecast,” “project,”
“plan,” “potential,” “may,” “should,” “expect,” “pending”
and similar expressions generally identify forward-
looking statements.

The forward-looking statements in this release are
based upon various assumptions, many of which are
based, in turn, upon further assumptions, including
without limitation, management’s examination of
historical operating trends, data contained in our
records and other data available from third parties.
Although the Company believes that these
assumptions were reasonable when made, because
these assumptions are inherently subject to significant
uncertainties and contingencies that are difficult or
impossible to predict and are beyond our control, the
Company cannot guarantee that it will achieve or
accomplish these expectations, beliefs or projections.

Important factors that, in our view, could cause actual
results to differ materially from those discussed in the
forward-looking statements include the strength of
the world economy and currencies, general market
conditions, including fluctuations in charter hire rates
and vessel values, changes in demand for “ton-miles”
of oil carried by oil tankers and changes in demand for
tanker vessel capacity, the effect of changes in
OPEC’s petroleum production levels and worldwide oil
consumption and storage, changes in demand that
may affect attitudes of time charterers to scheduled
and unscheduled dry-docking, changes in TORM’s
operating expenses, including bunker prices, dry-
docking and insurance costs, changes in the regulation
of shipping operations, including actions taken by
regulatory authorities, potential liability from pending
or future litigation, domestic and international political
conditions, potential disruption of shipping routes due
to accidents, political events including “trade wars,” or
acts by terrorists.

In light of these risks and uncertainties, you should not
place undue reliance on forward-looking statements
contained in this release because they are statements
about events that are not certain to occur as
described or at all. These forward-looking statements
are not guarantees of our future performance, and
actual results and future developments may vary
materially from those projected in the forward-looking
statements.

Except to the extent required by applicable law or
regulation, the Company undertakes no obligation to
release publicly any revisions or updates to these
forward-looking statements to reflect events or
circumstances after the date of this release or to
reflect the occurrence of unanticipated events. Please
see TORM’s filings with the U.S. Securities and
Exchange Commission for a more complete discussion
of certain of these and other risks and uncertainties.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

HIGHLIGHTS

2018 RESULT

MARKET
CONDITIONS

VESSEL
TRANSACTIONS

In 2018, TORM realized an EBITDA of USD 121m (2017: USD 158m). The 2018 profit before tax amounted
to USD -33m (2017: USD 3m).
Despite negative results, TORM’s performance has been strong compared to industry peers. Return on
Invested Capital (RoIC) was 0.1% (2017: 2.8%).

For the full year 2018, TORM achieved TCE rates of USD/day 12,982 (2017: USD/day 14,621).
The first half of 2018 continued a trend from 2017 with healthy consumer-driven demand for refined oil
products offset by inventory drawdown. The drawdowns resulted in a loss of potential trade of 4% over
the period. In the third quarter of 2018, freight rates reached historically low levels due to reduced trading
volumes and continued cargo cannibalization by newbuilt crude tankers opting for clean cargos on their
maiden voyage. Towards the end of 2018 and early 2019, the broader tanker markets experienced a
significant recovery with freight rates reaching levels last seen in the winter period towards the end of
2015 and beginning of 2016.

During 2018, TORM took delivery of four LR2 newbuildings and executed newbuilding options for three
MR vessels, bringing the current newbuilding program up to nine vessels.
In 2018, TORM executed newbuilding options for three MR vessels for a total commitment of USD 93m
from Guangzhou Shipyard International1. This brings the total number of newbuilding deliveries in the
2017-2020 period up to 15 of which TORM took delivery of four LR2 vessels during 2018. The remaining
newbuilding program covers two LR1 and seven MR vessels with expected deliveries in 2019 and the first
quarter of 2020.

In 2018, TORM sold four older vessels (two MR vessels and two Handysize vessels) for a total
consideration of USD 27m. Three of the vessels were delivered to their new owners in 2018, and one vessel
was delivered in the first quarter of 2019. In the first quarter of 2019, TORM sold and delivered one older
MR vessel.

As of 31 December 2018, TORM’s fleet consists of 72 owned vessels, three chartered vessels and nine
vessels on order, including vessels for which a sale has been agreed,

1 Guangzhou Shipyard International Company Limited (GSI).

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

HIGHLIGHTS

CORPORATE
EVENTS

USD 100m Private Placement completed in 2018.
On 26 January 2018, TORM completed an equity raise of USD 100m. The new equity increased TORM’s
ability to pursue attractively priced growth opportunities, including the ongoing newbuilding program.

IMO 2020 SULFUR
REGULATION

TORM has committed to install 21 scrubbers and entered into a joint venture to manufacture scrubbers
and secure scrubber availability for TORM’s fleet.
In the fourth quarter of 2018, TORM established a joint venture with ME Production, a leading scrubber
manufacturer, and Guangzhou Shipyard International, which is part of the China State Shipbuilding
Corporation group. The joint venture, named ME Production China, will manufacture scrubbers in China
and deliver them to a range of maritime industry customers for both newbuildings and retrofitting. TORM
holds an ownership stake of 27.5% in the new joint venture. In connection with the establishment of the
joint venture, TORM has ordered a number of scrubbers from ME Production China. With these orders,
TORM has committed to install scrubbers on 21 vessels and signed a letter of intent for installations up to a
total of 39 vessels, or approximately half of TORM’s fleet.

During 2018, TORM successfully conducted its first retrofit scrubber installation on the MR ice-class vessel
TORM Lene. On 15 October 2018, TORM took delivery of the first newbuilding outfitted with a scrubber,
the LR2 vessel TORM Hilde.

LIQUIDITY

As of 31 December 2018, TORM’s available liquidity was USD 406m and consisted of USD 127m in cash,
USD 233m in undrawn credit facilities and USD 46m in undrawn credit facilities subject to
documentation.
During 2018, TORM secured bank financing for five newbuildings, ensuring that the newbuilding program is
fully financed. In addition, TORM has extended one credit facility with original maturity in 2019. As of 31
December 2018, the net interest-bearing debt2 amounted to USD 627m, and the net loan-to-value (LTV)3
ratio was estimated at 53%.

2 See Glossary on page 148 for a definition of net interest-bearing debt.
3 See Glossary on page 150 for a definition of loan-to-value.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

HIGHLIGHTS

NAV AND EQUITY

Based on broker valuations, TORM’s NAV4 excluding charter commitments is estimated at USD 856m.
This corresponds to a NAV/share of USD 11.6 or DKK 75.5.
As of 31 December 2018, TORM’s book equity amounted to USD 847m. This corresponds to a book
equity/share of USD 11.5 or DKK 74.9.

VESSEL VALUES,

Based on broker valuations, TORM’s fleet including newbuildings had a market value of USD 1,675m as
of 31 December 2018.

ORDER BOOK AND
CAPEX

As of 31 December 2018, TORM’s order book stood at nine newbuildings, consisting of two LR1 and
seven MR vessels, all to be delivered from Guangzhou Shipyard International.
These newbuildings are expected to be delivered in 2019 and throughout the first quarter of 2020.
Outstanding CAPEX5 relating to the order book, including costs related to the installation of scrubbers,
amounted to USD 281m as of 31 December 2018.

As of 31 December 2018, TORM performed a review of the recoverable amount of its assets by assessing
the recoverable amount for the most significant assets. Based on this review, Management concluded that
the assets were not impaired as the value in use approximates the carrying value.

The book value of the fleet was USD 1,442m as of 31 December 2018 excluding outstanding installments on
the newbuildings of USD 258m.

COVERAGE

DISTRIBUTION
POLICY

As of 31 December 2018, 10% of the total earning days6 in 2019 were covered at USD/day 17,306.
As of 5 March 2019, 24% of the total earning days in 2019 were covered at USD/day 18,193.

TORM intends to distribute 25-50% of net income semi-annually.
For the first half of 2018, TORM did not distribute dividends, and for the second half of 2018 the Board of
Directors also proposes that no dividend be distributed.

4 See Glossary on pages 146-151 for a definition of NAV.
5 See Glossary on pages 146-151 for a definition of CAPEX.
6 See Glossary on pages 146-151 for a definition of earning days.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

OUTLOOK 2019

As of 31 December 2018, TORM had covered 2,695 earning days (10% of the total earning days) for 2019 at an average rate of USD/day 17,306.
As of the same date, the interest-bearing bank debt totaled USD 729m, and TORM had fixed 66% of the interest exposure for 2019.

OUTLOOK
Taking economic and political uncertainty into account,
TORM expects the supply and demand balance within
the product tanker market to gradually improve. TORM
also expects increasing oil consumption and the ton-
mile effect of continued dislocation of refinery activity
from consumption to have a positive impact on the
demand for product tankers.

Within the period 2019-2021, product tanker ton-mile
demand is estimated to grow at a compound annual
rate of approximately 5% compared to an estimated
net growth in tonnage supply of approximately 3%.
Expectations are that the market will improve
throughout this period, supported by an increasing
demand for transportation. In particular, the reduction
in the global limit for sulfur emissions from 3.5% to
0.5% and the accompanying shift in marine fuel
consumption is expected to lead to increased trade
with clean petroleum products. Please see "The
Product Tanker Market" section on pages 22-26.

In line with common practice for most UK companies
and other major shipping companies, TORM does not
provide guidance on earnings. To support the
investors’ assessment of TORM, information on
covered days, interest-bearing bank debt, the one-year
time charter (T/C) market and EBITDA sensitivity to
freight rates are included in the Annual Report.

COVERAGE FOR 2019
As of 31 December 2018, TORM had covered 2,695
earning days (10% of the total earning days) for 2019 at
an average rate of USD/day 17,306, which is above the
available benchmarks. This means that a change in

freight rates of USD/day 1,000 for the duration of 2019
would impact the full-year EBITDA by USD 25m.
As of 5 March 2019, 24% of the total earning days in
2019 were covered at USD/day 18,193.

As of 31 December 2018, the interest-bearing bank
debt totaled USD 729m, and TORM had fixed 66% of
the interest exposure for 2019. A change in interest
rates of 25 basis points for the duration of 2019 would
impact the result before tax by USD 0.6m.

2019 EBITDA SENSITIVITY TO CHANGES IN FREIGHT RATES - AS OF 31 DECEMBER 2018

USDm

LR2

LR1

Handysize

Total

Change in freight rates (USD/day)

-5,000

-2,500

-1,000

1,000

2,500

5,000

-15

-12

-87

-8

-123

-8

-6

-44

-4

-61

-3

-2

-17

-2

-25

123

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

OUTLOOK 2019

As of 5 March 2019, the one-year T/C market, shown in
the table to the right, corresponds to a weighted
average one-year T/C rate for TORM’s vessels of
USD/day 14,522.

The most important factors affecting TORM’s earnings
in 2019 are expected to be:

• Global economic growth
• Consumption of refined oil products
• Developments in inventory levels of refined oil

products

• Oil trading activity and developments in ton-mile

trends

• Fleet growth, recycling of vessels and delays to

deliveries from the order book

• Bunker price developments
• One-off market-shaping events such as strikes,

embargoes, political instability, weather conditions,
etc.

ONE-YEAR TIME CHARTER MARKET

Source: Average of selected broker assessments.

USD/day

LR2

LR1

Handysize

Note: The time charter market has limited liquidity.

One-year T/C

rate as of 5

March 2019

19,650

14,425

13,525

12,969

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

COVERED AND CHARTERED-IN DAYS IN TORM
– AS OF 31 DECEMBER 2018

2019

2020

2021

2019

2020

2021

Owned days

LR2

LR1

Handysize

Total

3,865

2,506

17,999

1,789

3,962

3,242

19,478

1,795

Covered, %

3,934

3,271

19,677

LR2

LR1

1,815

Handysize

26,159

28,477

28,697

Total

28%

10%

16%

Chartered-in and leaseback days at fixed rate

Covered days

2019

2020

2021

2019

2020

2021

LR2

LR1

Handysize

Total

363

726

1,089

324

668

992

363

726

LR2

LR1

Handysize

1,089

Total

1,192

147

1,263

2,695

694

Total physical days

Coverage rates, USD/day

2019

2020

2021

2019

2020

2021

LR2

LR1

Handysize

Total

4,228

2,506

18,725

1,789

4,286

3,242

20,146

1,795

4,297

3,271

20,403

LR2

LR1

1,815

Handysize

27,248

29,470

29,786

Total

15,985

22,721

17,821

18,657

17,306

16,225

15,098

16,225

15,098

Fair value of freight rate contracts that are mark-to-market in the income statement (USDm):
Contracts not included above: USD -1.2m
Contracts included above: USD 0.5m

Actual no. of days can vary from projected no. of days primarily due to vessel sales and delays of vessel deliveries.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

STATEMENT BY THE EXECUTIVE DIRECTOR

In 2018, TORM’s results were impacted by a challenging
product tanker market. TORM generated a small
positive profit before tax for the first five months of
2018, but as the market reached a low point during the
third quarter with MR benchmark freight rates reaching
all-time historical low levels, TORM’s earnings turned
negative. The last two months of 2018 have provided a
significant recovery for the broader tanker market
supporting TORM’s earnings. For the full-year 2018,
TORM’s product tanker fleet realized average Time
Charter Equivalent (TCE) earnings of USD/day 12,982.

The first half of 2018 continued a trend from 2017 that
saw healthy consumer-driven demand for refined oil
products offset by inventory drawdown. The
drawdowns resulted in a loss of potential trade of 4%
over the period. In the third quarter of 2018, freight
rates reached historically low levels due to reduced
trading volumes and continued cargo cannibalization
by newbuilt crude tankers opting for clean cargos on
their maiden voyage. Towards the end of 2018 and
early 2019, the broader tanker markets have
experienced a significant recovery with freight rates
reaching levels last seen in the winter period towards
the end of 2015 and beginning of 2016.

Throughout 2018, TORM has continued to focus on
optimizing our operational performance to further
pursue our goal of serving as the Reference Company
in the product tanker industry. To that end, TORM has
reduced the expenditure related to the operation of the
vessels (OPEX) through a continued focus on

optimization and planning of the vessels’ repair and
maintenance schedules. This has been achieved, while
remaining very competitive on a TCE level through
focus on the geographical positioning of the vessels.

The strong relative operational performance is
supported by the ongoing development of the One
TORM platform. The One TORM platform leverages
TORM’s integrated in-house commercial and technical
management to ensure a flexible business approach
that optimizes performance while maintaining a proper
trade-off between maximizing TCE and minimizing
cost. Further, the integrated nature of TORM's business
model provides transparency and additional alignment
of management and shareholder interests, thereby
mitigating the potential for actual or perceived
conflicts of interest with related parties, and it allows
for close control over operating expenses.

I am pleased that TORM’s commercial
performance over the past year has
continuously been among the best within its
peer group. I am further convinced that the
demand effects of the IMO 2020 sulfur
regulation combined with our strategic steps
ahead of the implementation date on
1 January 2020 will prove beneficial for
TORM. To prepare our fleet, we have
established a new joint venture with a leading
scrubber manufacturer and a shipyard,
committed to install scrubbers on a large
number of vessels, and conducted pilot
installations on two vessels. With these steps
and the delivery of our newbuildings in 2018
and over the coming year, TORM is well-
prepared to continue its strong commercial
performance.

Mr. Jacob Meldgaard, Executive Director

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

STATEMENT BY THE EXECUTIVE DIRECTOR

Preparing for the IMO 2020 sulfur regulation, TORM
has committed to order 21 scrubbers and signed a
letter of intent to order an additional 18 scrubbers. To
reduce the uncertainty related to the delivery and
installation of scrubbers, TORM established a joint
venture with the scrubber manufacturer ME Production
and the Chinese yard Guangzhou Shipyard
International.

To further ensure readiness for the IMO 2020 sulfur
regulation, TORM has successfully conducted its first
retrofit scrubber installation on the MR ice-class vessel
TORM Lene. In addition, TORM took delivery of its first
newbuilding outfitted with a scrubber, the LR2 vessel
TORM Hilde, in 2018. These two vessels are expected to
provide valuable operational insight in advance of the
remaining scrubber installations planned for 2019 and
the first half of 2020.

Given the projected market improvements in
connection with the implementation of the IMO 2020
sulfur regulation and TORM’s proactive preparations
ahead of the implementation date, it is expected that
the regulatory changes will be beneficial for TORM.

In line with the Company’s strategic focus on safety
performance, TORM continued to promote the safety
culture program One TORM Safety Culture – driving
resilience in 2018. The purpose of the program is to
continuously strengthen TORM’s safety culture beyond
mere compliance.

In 2009, TORM signed the UN Global Compact as the
first shipping company in Denmark to commit to the
internationally recognized set of principles regarding
health, safety, labor rights, environmental protection
and anti-corruption. In 2018, TORM decided to extend
its support to the UN Sustainable Development Goals
(SDGs) and assessed how best to contribute to their
achievement by 2030. TORM has decided to focus on
SDG no. 4 Quality Education and on SDG no. 13 Climate
Action, as these directly link to the Company’s current
CSR activities. These two areas are not only material to
the Company and its stakeholders, the efforts and
initiatives also make good business sense to TORM. As
such, TORM sees its commitment to contributing to
and reporting on the SDGs as a natural progression of
its commitment to the UN Global Compact.

The Strategic Report on pages 5-53 has been prepared
in accordance with the requirements of the Companies
Act 2006 and is approved and signed on behalf of the
Board of Directors.

Mr. Jacob Meldgaard, Executive Director

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

STRATEGIC AMBITION AND BUSINESS MODEL

TORM’s focus on operational improvement and integration is illustrated by TORM’s higher MR TCE earnings when compared to peers.
Good industry relationships and a strong capital structure drive fleet renewal and upgrades with a fully funded newbuilding program.
TORM’s proactive actions prior to the upcoming IMO 2020 sulfur regulation include significant scrubber investments and the establishment of a
scrubber joint venture with a leading scrubber manufacturer and a shipyard.

PURE-PLAY PRODUCT TANKER OWNER
AND OPERATOR
TORM is a leading product tanker company with an
owned fleet of 70 vessels on the water, three vessels
on charter-in and nine newbuildings as of 12 March
2019. TORM is active within all larger product tanker
segments (LR2, LR1, MR and Handysize). This enables
TORM to meet customer demand, as global customers
have transportation requirements across various vessel
classes. TORM is a pure-play product tanker company
well-positioned to take advantage of the promising
long-term market supply-and-demand fundamentals
by utilizing its extensive experience and expertise as a
product tanker operator. In particular, the reduction in
the global limit for sulfur emissions from 3.5% to 0.5%
and the accompanying shift in marine fuel consumption
are expected to lead to increased trade with clean
petroleum products.

TORM’s chartering strategy is to employ the fleet
primarily in the spot market, where the Company can
optimize earnings from voyage to voyage. TORM may
seek to employ some of its vessels on longer-term time
charter-out contracts if customer needs and expected
returns are compelling. Due to the large scale of
TORM’s fleet, TORM will only enter into long-term

charter-in commitments on a case-by-case assessment
and only to the extent they are likely to result in profit.

The Company believes that ownership of vessels
combined with TORM’s integrated platform provides a
level of control that is essential for ensuring the
maximum amount of flexibility and earning power. At
the same time, short-term charter-in agreements (less
than 12 months) are consistently evaluated on an
opportunistic basis as part of TORM’s active spot-
oriented market approach.

SELECTIVE FLEET RENEWAL AND GROWTH
TORM may selectively grow its product tanker fleet
and serve as a consolidator in the product tanker
segment if the right opportunities arise. TORM’s sale
and purchase activities are conducted by an in-house
team that leverages relationships with shipbrokers,
shipyards, financial institutions and shipowners.

TORM is continuously assessing opportunities to
optimize asset management through acquiring
attractive high-specification second-hand product
tankers that will be franchise enhancing and financially
accretive. TORM also selectively pursues newbuilding
programs with high-quality shipyards when
newbuilding contracts provide higher expected return,

or if the second-hand market has insufficient supply of
vessels that meet TORM’s customer requirements. In
2018, TORM acquired three new vessels at attractive
price points below the market benchmarks.

The specific acquisition criteria for newbuildings or
second-hand vessels include:
• Price point attractiveness
• Complementarity to the current fleet
• Vessel quality level and origin (quality yard)
• Operational characteristics including main engine
design, bunker consumption and cargo intake

TORM will from time to time sell vessels that no longer
fit the commercial strategy, or if the price point is
deemed attractive. During 2018, TORM sold four older
vessels.

TORM’s in-house technical management has significant
experience in newbuilding projects from design to
delivery. As of 12 March 2019, TORM’s newbuilding
program consists of two LR1 and seven MR vessels. The
vessels are expected to be delivered in the period
between the second quarter of 2019 and the first
quarter of 2020. In addition, TORM has taken delivery
of four LR2 newbuildings since January 2018.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

STRATEGIC AMBITION AND BUSINESS MODEL

SOLID CAPITAL STRUCTURE
TORM has a solid capital structure with a strong
liquidity position, a fully funded newbuilding program,
no near-term debt maturities and no off-balance sheet
charter-in commitments. The Company has an
attractive debt profile with favorable interest rates,
amortization schedules and covenants.

TORM’s capital structure supports a spot employment
strategy and also enhances the Company’s financial
and strategic flexibility. In addition, balance sheet
strength creates a competitive advantage when
pursuing vessel acquisitions, as counterparties prefer
well-capitalized companies. TORM plans to finance its
business and fleet growth with a combination of
operating cash flows, cash-on-hand as well as financing
from lenders and the capital markets. During 2018,
TORM secured new loan facilities and loan extension
with Danish Ship Finance, ABN AMRO and KfW of
approximately USD 203m and raised equity capital of
USD 100m through a Private Placement. Secured bank
financing remains the preferred source of debt funding
for TORM, but recent alternative structures reflect
TORM’s broad access to various sources of competitive
financing.

To support the capital structure, TORM works towards
improving the liquidity in the Company’s share to
attract a broader investor base. TORM is continuously
marketing the share towards investors via investor
roadshow activities, conference participation and panel
discussions. In addition, TORM listed its share on

Nasdaq in New York in 2017, thereby providing access
to a broader base of potential investors. Finally, on 12
February 2019 TORM plc’s USD 250m universal shelf
registration on Form F-3 became effective with the
Securities and Exchange Commission.

ONE TORM – STRONG INTEGRATED
OPERATING PLATFORM
TORM’s fleet is managed cost-efficiently and effectively
by the in-house commercial and technical management
team, which has an industry reputation for strong
commercial performance, safety and operational
expertise. Within the One TORM platform, TORM’s
employees ensure the high quality of the fleet that is
required by our customers under their strict vetting
criteria. TORM believes that the world’s largest
customers prefer an integrated operating model as it
provides them with better accountability and insight
into safety and vessel performance.

The integrated nature of TORM’s operating platform
provides transparency and additional alignment of
management and shareholder interests, which
mitigates the potential for actual or perceived conflicts
of interest with related parties. In addition, it allows for
closer control over operating expenses.

TORM’s large diverse fleet of well-maintained product
tankers gives the Company the advantages of scale
both commercially and in terms of cost-efficiency
compared to smaller product tanker owners.

The Company’s Management believes that the
combination of well-maintained vessels, a presence in
all product tanker classes and an integrated operating
platform provides the commercial management team
with enhanced flexibility and responsiveness to
customer demands. As a result, TORM has consistently
delivered MR TCE earnings and cash flows above
industry average.

TORM’s integrated model includes a strategic focus on
safety performance. In line with the Company’s
strategic focus on safety performance, TORM
continued to promote the safety culture program One
TORM Safety Culture – driving resilience in 2018. The
purpose of the program is to continuously strengthen
TORM’s safety culture beyond mere compliance. This
reflects TORM’s belief that profitability and safety are
not mutually exclusive.

TORM’s integrated platform and commercial and
technical knowledge also enabled the Company to
pursue a scrubber joint venture in advance of the
upcoming IMO 2020 sulfur regulation, which represents
a unique business opportunity and may provide TORM
with an additional revenue stream.

TORM has identified a number of strategic Key
Performance Indicators (“KPIs”) that the Company
believes are vital for the fulfillment of its strategic
goals. These strategic KPIs are described on page 29.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

VALUE CHAIN IN OIL TRANSPORTATION

The global oil industry includes a range of activities and
processes which contribute to the transformation of
primary petroleum resources into usable end products
for industrial and private customers.

The value chain begins with the identification and
subsequent exploration of productive petroleum fields.
The unrefined crude oil is transported from the
production area to refinery facilities by crude oil
tankers, pipelines, road and rail.

TORM is primarily involved in the transportation of
refined oil products from the refineries to the end user.
In addition to clean products, TORM uses some of its
vessels for transportation of residual fuels from the
refineries as well as crude oil directly from the
production field to the refinery.

These fuel types are commonly referred to as dirty
petroleum products, as extensive cleaning of the
vessel’s cargo tanks is required before a vessel can
transport clean products again. In 2018, 93% of TORM's
turnover was generated from clean products
transportation.

TORM’s integrated operating platform with in-house
technical and commercial management enhances
responsiveness to customers’ demands and allows
TORM to generate value for stakeholders as well as for
the Company.

intellectual property of the workforce at TORM and the
relationship and cooperation with external stakeholders
such as oil traders, state-owned oil companies, oil
majors, financial institutions, shipyards, brokers and
governmental agencies.

TORM values the relationship with its key stakeholders
and aims at conducting business for the benefit of the
Company’s shareholders and other stakeholders. TORM
has supported the UN Global Compact since 2009, and
is committed to supporting the UN Sustainable
Development Goals.

The long-term success of the Company is dependent
on TORM’s ability to provide safe and reliable
transportation services. In addition to the items
explicitly stated in the financial statements, the long-
term success of the Company further builds on the

The interaction with key stakeholders is described on
pages 17-19 under “Strategic Ambition and Business
Model”. For more information on broader value
generation and TORM’s Corporate Social Responsibility
(CSR) policy, please see pages 30-39.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

THE PRODUCT TANKER MARKET

The market worsened throughout the first three quarters of the year. Nevertheless, the year ended with a significant recovery.
Looking ahead, the product tanker market is supported by positive demand developments and limited supply growth.

weighed negatively on oil demand and reduced trading
volumes. Crude cannibalization continued at a high
level in the third quarter. On top of the pressure from
crude tankers, a backwardated oil price structure
favoured shorter hauls throughout the first three
quarters of the year.

Key interregional product arbitrage spreads, which had
been closed for most of the year, widened and lifted
demand for product tankers. Both the price spreads for
gasoline and naphtha between West and East as well
as spreads for diesel and jet fuel between East and
West became supportive for product flows.

From the middle of the fourth quarter, product tanker
freight rates started to pick up and reached levels not
seen since the end of 2015 and beginning of 2016.

Product prices also turned from backwardation into
contango, incentivizing trades of products. In addition,
a stronger crude tanker market led to lower

2018 MARKET
The majority of 2018 was challenging for the product
tanker segment, although the year ended with a
significant recovery across the broader tanker market.

During the first half of the year, product tanker freight
rates remained at a level similar to the rates seen in the
same period in 2017. The year started out with healthy
trading volumes. Exports from the US Gulf showed
particularly strong growth, supported by increasing
demand from Mexico and South America. Nevertheless,
the positive impact of higher trading volumes was
offset by shorter trading distances, partly as a result of
the continued stock draw in some of the key importing
regions.

In addition, an increasing number of newbuilt crude
tankers opted for a clean cargo on their maiden
voyage, reducing demand for product tankers in the
East. Crude cannibalization intensified in the second
quarter, driven by a depressed crude tanker market.

In the third quarter, product tanker freight rates
declined further, and some of the benchmarks reached
historically low levels, as higher oil prices and weaker
currencies in several emerging market economies

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

THE PRODUCT TANKER MARKET

market cannibalization and encouraged a significant
number of LR2s to shift from the clean market to the
dirty market, effectively reducing tonnage supply.

At the end of 2018, TORM operated a fleet of 75 vessels
on the water of which 72 are fully owned and three are
financial leaseback.

Asset prices on second-hand product tankers remained
relatively flat during 2018 but saw an increase towards
the end of the year (source: Clarksons). The end-of-
year increase in asset prices was mainly driven by a
combination of improved freight rates, a relatively low
supply of vessels for sale and a shrinking order book.
The value of TORM's fleet measured by broker values
decreased by 5% during 2018 (when excluding vessels
acquired and sold during 2018).

In 2018, TORM achieved a gross profit of USD 169m
(2017: USD 200m) with the reduction from 2017 driven
by lower freight rates. TORM’s product tanker fleet
realized TCE earnings of USD/day 12,982, down 11%
year on year, with the LR2 class at USD/day 15,425, the
LR1 class at USD/day 12,982, the MR class at USD/day
12,847 and the Handysize class at USD/day 9,970.

During 2018, TORM took delivery of four LR2 vessels
from GSI with the last of the four vessels being
equipped with a scrubber. During 2018, TORM ordered
an additional three MR vessels from GSI, thereby
bringing the total newbuilding program to nine vessels
covering seven MR and two LR1 vessels. The
newbuildings are expected to be delivered through
2019 and the first quarter of 2020.

MARKET OUTLOOK
For the 2019-2021 period, product tanker ton-mile
demand is estimated to grow at a compound annual
rate of approximately 5% compared to an estimated
net growth in tonnage supply of approximately 3%.
Compared to the average 2018 market, it is expected
that the market will improve throughout this period,
supported by an increasing demand for transportation.
In particular, the reduction in the global limit for sulfur
emissions from 3.5% to 0.5% and the accompanying
shift in marine fuel consumption are expected to lead
to increased trade with clean petroleum products.

TONNAGE SUPPLY
In 2018, the global product tanker fleet grew by 2.4% in
terms of capacity and 1.8% in terms of number of
vessels. This marked the lowest growth rate in more
than 20 years. All segments saw slower fleet growth
than in recent years, as deliveries slowed while
recycling picked up. The LR1 and LR2 fleet growth
dropped by 50% compared to 2017, as vessel deliveries
slowed. In the MR segment, vessel deliveries remained
at similar levels as in 2017, but an increase in recycling
activity led to slower fleet growth. Fleet growth ranged
from -0.8% for the Handysize segment to 4.3% for the
LR2 segment. 2019 is expected to see a global fleet
growth of 4.3% with the LR2 and MR segments leading
the growth. However, effective tonnage supply growth
is likely to be reduced somewhat due to increased off-
hire time in connection with tank cleaning and scrubber
retrofitting as the fleet is being prepared for the IMO
2020 sulfur regulation.

ORDER BOOK
As of 31 December 2018

LR2

LR1

Handysize

Total

Order book

Fleet

Delivered in

Recycled in

Fleet

Order book

as % of end-

31.12.2017

2018

31.12.2018

for 2019-2021

2018 fleet

348

357

1,611

726

3,042

103

363

366

1,647

720

3,096

172

269

12%

10%

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

THE PRODUCT TANKER MARKET

The 74 product tanker newbuilding orders placed in 2018
remained relatively unchanged compared to 2017 and thus
significantly lower than the ten-year average level of 116.
The MR class accounted for most orders with 61 units
contracted. At the end of 2018, the existing order book for
deliveries in 2019-2021 totaled 269 units, including 44 LR2
vessels, 18 LR1 vessels, 172 MR vessels and 35 Handysize
vessels.

TORM anticipates limited ordering of new product tankers
with delivery before the end of 2020. The Company
expects ordering activity in 2019 to remain at a similar level
as in 2018 but to increase in 2020 as a result of improved
freight market conditions.

In 2018, only 66% of the deliveries scheduled for the year
actually materialized. TORM also expects to see some
slippage in 2019.

Around 2.2m dwt of product tanker capacity was recycled
in 2018, corresponding to approximately 1.4% of the fleet
capacity as of January 2018. This was an increase from
2017, when 1.9m dwt were recycled and marked the highest
level of recycling since 2012. TORM estimates that
approximately 2% of the existing capacity of the global
fleet will be phased out or recycled during 2019-2021.
During 2019-2021, net product tanker fleet capacity is
estimated to grow by a compound annual rate of
approximately 3%.

TONNAGE DEMAND
The global oil demand started 2018 with strong momentum
before decelerating as the year progressed, as the impact
of increasing oil prices was amplified by weakening
currencies in several emerging market economies. The
result was a global oil demand growth of 1.3 mb/d (1.3%) for
the full year, down from a growth of 1.5 mb/d (1.6%) in 2017
(source: IEA OMR January 2019). Growth nevertheless
remained higher than the historical average of around 1.2
mb/d. Looking at individual products, the demand for light
distillates including gasoline experienced the largest
decrease in growth, while diesel demand was supported by
generally robust economic activity, particularly in North
America. Brent benchmark crude oil increased throughout
the first nine months of 2018, climbing to around USD
80/bbl by the end of the third quarter. In the fourth quarter,
the trend in the oil price reversed, and Brent dropped to
below USD 60/bbl, supporting an increase in oil demand
towards the end of the year.

In 2019, global oil demand is projected to grow at a slightly
faster pace of 1.4 mb/d (1.4%), as the impact of weaker
economic activity is expected to be offset by lower oil
prices (source: IEA OMR January 2019).

During the first half of 2018, global clean petroleum product
inventory drawdowns continued, with the volume of stock
draws being equivalent to a loss of potential trade of 4%
over the period. After falling below 5-year average levels in
the second quarter, global product stocks started to build
again in the third quarter as oil product demand slowed. At
the same time, 2018 saw 1.0 mb/d of net new refinery

capacity coming online globally. Several of these new
projects were configured to maximize gasoline output,
which together with the lightening of the global crude
supply led to an increase in global gasoline output and
subsequently a build-up in stockpiles. Diesel inventories
remained tight globally throughout the first three quarters
of the year but normalized in some key exporting areas in
the second half of the year, opening up several arbitrage
spreads that had been closed throughout most of the year.

Refinery margins hovered around 5-year averages until the
third quarter when higher crude oil prices and weak
demand for gasoline caused some of the refining margin
benchmarks to drop to levels not seen since 2014. Margins
recovered, however, with crude oil prices returning to
around USD/bbl 60 towards the end of the year.

Over the next three years, TORM expects positive
underlying developments in the product tanker market,
although volatility is expected. In 2019, a net of 2.6 mb/d of
new refining capacity will be added globally with several
new refineries coming online in Asia and the Middle East
(source: IEA OMR January 2019). TORM expects this to
reinforce the role of the Middle East as a key clean product
exporter, contributing positively to product tanker ton-mile
demand in the coming years. On the negative side, OPEC’s
decision to cut crude production, agreed upon at the end
of 2018, might potentially have a dampening effect on the
crude tanker market in 2019, which may spill over to the
product tanker market as well.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

THE PRODUCT
TANKER MARKET

In the medium and longer term, the tightening of marine
bunker sulfur rules from 1 January 2020 and the
accompanying shift in the type of compliant fuels (so-called
IMO 2020) are expected to lead to increased interregional
and intraregional trade with clean petroleum products,
which will support the product tanker market. TORM
currently expects the IMO 2020 sulfur regulation to lead to
an incremental increase of around 5% in product tanker
trade in 2020. Also crude tankers are expected to gain
from IMO 2020 due to increased refinery runs and the need
to store excess high-sulfur fuel oil. The effects of IMO 2020
are likely to start emerging from the second half of 2019.

Fuel efficiency gains in the transportation sector, increasing
gasoline supply in the Middle East and new refining
capacity coming online in West Africa will especially have a
negative impact on the European market, where refineries
will face increased difficulties in finding markets for their
excess gasoline and may need to cut runs. On a global
scale, this will nevertheless be offset by increased tonnage
demand created by IMO 2020 and refinery dislocation.
Consequently, TORM expects the product tanker ton-mile
demand on main trade routes to grow by a compound
annual rate of around 5% during 2019-2021.

For further details on factors most likely to change this
outlook in either a negative or a positive direction, please
see “Outlook” section on pages 12-14.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

IMO 2020 SULFUR REGULATION

REGULATION
In October 2016, IMO’s Marine Environment Protection
Committee (MEPC) announced that as of 1 January
2020, the global limit for sulfur emissions from fuel oil
used on board vessels operating outside designated
emission control areas will be reduced from 3.5% to
0.5%. This will significantly reduce the amount of sulfur
oxides emanating from vessels and should have major
health and environmental benefits for the world.

There are two relevant methods for TORM vessels to
comply with the new sulfur regulation: 1) Install an
exhaust gas cleaning system, also known as a
“scrubber”, which is designed to remove sulfur oxides
from a vessel’s engine and boiler exhaust gases, or 2)
use so-called compliant fuel with a sulfur content level
below 0.5%.

TORM IMO 2020 SULFUR LIMIT PREPARATIONS
TORM has been preparing for the upcoming sulfur
regulation since 2016, when the first internal sulfur
compliance working team was established. To date, the
work has resulted in 21 committed scrubber
installations, two pilot scrubber installations and a
scrubber joint venture.

Committed scrubber installations
In 2018, TORM committed to install 21 scrubbers on
both newbuildings and second-hand vessels. These
scrubbers will be installed on selected LR2, LR1 and MR
vessels based on business case and technical and
commercial considerations. Further, TORM has signed a

letter of intent for another 18 scrubbers with the new
joint venture, ME Production China. With these orders,
TORM will potentially install scrubbers on up to 39
vessels or approximately half of the fleet.

Scrubber pilot projects
Thus far, two scrubber pilot projects have been
established. One scrubber has been installed on the
LR2 newbuilding TORM Hilde in order to trial the
scrubber installation process and operation on a
newbuilding. To better understand the same process
for a retrofit vessel, TORM has also installed a scrubber
on the MR vessel TORM Lene.

Both installations have provided valuable information in
advance of the installation and operation of further
scrubbers on a significant part of the remaining fleet
later in 2019 and early 2020.

Scrubber joint venture
In the latter half of 2018, there was a significant
industry push towards scrubber adoption, and many
shipping companies announced planned scrubber
installations. As a result, yard and scrubber production
capacity ahead of 1 January 2020 has been absorbed.
In order to secure the availability of scrubbers and to
forge a closer relationship with the China State
Shipbuilding Corporation (CSSC) yard group, TORM
established a joint venture in 2018 with Guangzhou
Shipyard International, which is part of the CSSC group,
and ME Production, a leading scrubber manufacturer.

Scrubber fitted on TORM Lene.

The joint venture, ME Production China, will
manufacture scrubbers in China and deliver them to a
range of maritime industry customers for both
newbuildings and retrofitting. TORM holds an
ownership stake of 27.5% in the new joint venture.

The main benefits to TORM include supporting
availability of capacity and priority at the shipyard for
scrubber installations as well as securing scrubber
production slots. In addition, if the joint venture proves
successful, TORM will generate an additional revenue
stream.

Production of the scrubbers by ME Production China
commenced in November 2018, and TORM has ordered
16 scrubbers from the joint venture.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

Strategic Report

IMO 2020 SULFUR REGULATION

EXHAUST GAS CLEANING SYSTEM IN BRIEF
An exhaust gas cleaning system, often referred to as a
scrubber, removes sulfur dioxide (SO2) from the
vessel's exhaust gas.

The scrubber washes the exhaust gas stream by
forcing it into contact with seawater. In this process,
the SOx is first dissolved and ionized, then oxidized into
sulphates.

Sulphates are a natural part of both seawater and
aquatic organisms, which means they are harmless to
the environment.

To ensure that there is no adverse impact on the
environment, both exhaust gas and the discharge
water from the scrubber are continuously monitored
on board.

The results are stored in a tamper-free format, enabling
authorities to board the vessel and verify that the
scrubber has been operating within the regulations.

The vessel's exhaust gas is measured for compliance
with regard to SO2/CO2 ratio, while the discharge
water is measured for PH, PAH and turbidity.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

KEY PERFORMANCE INDICATORS

TORM assesses the Company’s performance across a wide range of measures and indicators against strategic targets.
TORM reviews the metrics and tests the relevance of these KPIs to the strategy on an ongoing basis.

MR TCE Earnings
USD/day
2018: 12,847
2017: 14,850

In 2018, TORM’s commercial
performance has consistently been
among the best within its peer group.
This can be accredited to the
Company’s well-maintained ﬂeet and
the integrated operating platform.

This combination provides TORM’s
commercial management team with the
ﬂexibility and responsiveness to meet
customer demands, thereby enabling
TORM to outperform available earning
benchmarks.

In 2018, TORM achieved MR TCE
earnings of USD/day 12,847, down from
USD/day 14,850 in 2017 due to the
general market development.

Lost Time Accident
Frequency (LTAF)
2018: 0.47
2017: 0.67

In line with the Company’s strategic
focus on safety performance, TORM
continued to promote the safety
culture program One TORM Safety
Culture – driving resilience in 2018.

LTAF is an indicator of serious work-
related personal injuries that result in
more than one day off work per million
work hours. The deﬁnition of LTAF
follows standard practice among
shipping companies.

During 2018, TORM had an
improvement of LTAF to 0.47
compared to 0.67 in 2017.

Return on Invested Capital

Fuel Efficiency Improvements

2018: 6.9%
2017: 5.2%

Fuel efficiency improvement illustrates
TORM's continued strong focus on
reducing fuel consumption and the
efforts made in this area.

In 2017, TORM improved fuel efficiency
by 5.2% compared to a 2015 baseline
figure. In 2018, TORM has continued its
efforts and achieved further
improvements bringing the fuel
efficiency to 6.9% compared to the
2015 baseline.

(RoIC)
2018: 0.1%
2017: 2.8%

RoIC illustrates TORM’s ability to

generate shareholder value from the
capital invested in TORM. It is deﬁned
as the net operating proﬁt after tax
(excluding impairment charges)
divided by the invested capital over the
same period (excluding impairment
charges).

In 2018, TORM achieved a RoIC of 0.1%
compared to 2.8% in 2017. The
decrease in RoIC from 2017 to 2018 is
driven by lower freight rates.

This KPI reﬂects that although the
average age of TORM’s ﬂeet is
approximately 11 years, TORM is still
able to generate a very attractive RoIC
compared to its peers.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

CORPORATE SOCIAL RESPONSIBILITY

TORM extends its support to the UN Global Compact to also include the UN Sustainable Development Goals.
In preparation for the IMO 2020 Sulfur Directive, TORM joins the Clean Shipping Alliance 2020.
TORM has improved fuel efficiency by 6.9% since 2015.

REPORTING PRINCIPLES AND TRANSPARENCY
Transparency and accountability are central parts of
TORM’s way of doing business, and these values play a
central role in the Company’s corporate social
responsibility (CSR) approach.

TORM remains committed to protecting its employees,
assets, reputation and the environment by maintaining
the highest possible standards.

After a comprehensive review of
the shipping industry, TORM's value
chain and business practices, the
Company decided in the beginning
of 2018 to extend its support to the
UN Sustainable Development Goals

(SDGs) and assessed how best to contribute to their
achievement by 2030. TORM sees this support as a
natural progression of its commitment to the UN Global
Compact.

Going forward, TORM will focus on specific SDGs,
which are linked to the Company’s current CSR
activities and are material to TORM and its
stakeholders. At the same time, the activities and
efforts made within these areas also make good
business sense for the Company. The two goals which
TORM will primarily focus on are SDG no. 4 Quality
Education and no. 13 Climate Action.

TORM is a long-standing supporter of maritime
education in Denmark, India and the Philippines, and it
is therefore natural for the Company to support SDG
no. 4 Quality Education. Through the initiatives in the
TORM Philippines Education Foundation and through
different initiatives in India, TORM continues to work
towards better opportunities for quality education in
these regions, where many of the Company’s seafarers
come from. See more about how TORM supports SDG
no. 4 Quality Education in the section about Social
Matters on page 31.

not only good for the environment but also for TORM’s
business. Read more about TORM-specific initiatives in
this area in the section about Environment and Climate
Performance on page 32.

BUSINESS PRINCIPLES
TORM’s approach to responsible behavior is further
rooted in the Company’s Business Principles and has
the following five objectives:

• Comply with statutory rules and regulations to

ensure that all employees can execute their work
under safe, healthy and proper working conditions
• Strive to eliminate all known risks that may result in
accidents, injuries, illness, damage to property or to
the environment
Integrate sustainability into TORM’s business
operations

•

• Avoid any form of corruption or bribery
• Make TORM’s CSR performance transparent to all

stakeholders

Marine pollution constitutes the largest environmental
risk in shipping and, as a Reference Company in the
industry, TORM is dedicated to supporting the goal for
climate action. Thus, TORM has a strong focus on
reducing fuel consumption and CO2 emissions as this is

For further information on TORM’s Business Principles,
please visit:
http://www.torm.com/uploads/media_items/torm-
business-priciples.original.pdf.

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RESPONSIBILITY
TORM’s CSR commitment is not limited to the
Company’s own business practices, as real impact
often requires industry collaboration. Thus, TORM
cooperates with peers and stakeholders to increase
responsibility in the shipping industry and the supply
chain, and to mitigate protectionism and support
progressive trade agreements. This is performed via
TORM’s cooperation with Danish Shipping and
companies all over the world to support global trade
and economic growth.

As member of Danish Shipping’s CSR work group and
as co-founder and member of the Maritime Anti-
Corruption Network, TORM strives to increase
transparency and accountability and to minimize
corruption.

INSPECTIONS AND AUDITS
In order to maintain Company standards and exceed
the targets set by its customers, TORM has enhanced
the vetting preparations and increased the number of
internal audits on its vessels carried out by Safety
Quality and Environment (SQE) officers. On average,
each vessel is subject to 10 inspections per year.
Inspections are carried out by customers, terminals,
internal auditors, ports and classification societies.
TORM is committed to meeting the ever-increasing
standards set both internally and by its customers. In
2018, TORM increased its focus on on-board training
conducted by the SQE officers.

SOCIAL MATTERS

TORM is a long-standing supporter of
maritime education. This commitment
reflects the Company’s ties to local
communities and has a positive effect
on the needs of the societies in which

TORM operates. In addition, TORM believes that
supporting education has positive effects on its core
business in terms of developing the pipeline of
competences in the industry and in terms of higher
employee retention and a positive brand recognition.

TORM is therefore dedicated to supporting SDG no. 4
Quality Education and cooperates with several
educational institutions and universities internationally.
Efforts include offering trainee positions and
internships in TORM’s offices to students from e.g.
Copenhagen Business School, the Copenhagen School
of Marine Engineering & Technology Management and
the Nanyang Technological University Singapore.

The majority of TORM’s seafaring staff are of Indian or
Filipino nationality, and the Company’s activities in this
area are thus supporting potential future TORM
employees and strengthening the overall competence
level among seafarers in these regions.

In 2018, 21 students supported by the TORM Philippines
Education Foundation graduated. For the school year
2018/2019, the Foundation supports 51 scholars across
the Philippines. Apart from maritime and general
education, the program includes training courses for

teachers and a four-year training program for scholars.
In addition, the program encompasses the distribution
of IT equipment and school kits for students in rural
schools.

TORM has supported the building of the ZP Prathmik
School in Zadgewadi near Kurkumbh, Pune, in India.
The school was constructed and the facilities furnished
with donations from the Company. In 2018, TORM
continued its support for the school and is currently
sponsoring 36 students attending the school.

In 2018, TORM joined hands with the 'Akshaya Shakti
Welfare Association', a non-governmental organization,
working to promote education across 350 schools in
the Wada district in India.

As part of TORM’s support to the Wada district, the
Company funded the construction of an additional
toilet and bathing block for the female students of
'Swami Vivekananda School Girls' hostel'. The school
has a total of about 1,200 students and only one toilet
block. The addition of eight extra toilets will greatly
improve the infrastructure and encourage more girls to
attend school. In addition, TORM supported the 'V
Promote Education' project with the distribution of
100,000 notebooks to nearly 350 schools in 2018.

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ENVIRONMENT AND CLIMATE PERFORMANCE

TORM supports SDG no. 13 Climate
Action, as marine pollution constitutes
the largest environmental risk within the
shipping industry. It is therefore a key
priority for TORM to avoid pollution of

the seas and the atmosphere.

In 2018, TORM joined the Clean Shipping Alliance 2020
(CSA 2020) as one of its founding members along with
other industry leaders to support the scheduled
implementation and enforcement of the IMO
requirement for a 0.5% global sulfur limit in fuel oil as of
1 January 2020. The purpose of this alliance is to
support information and knowledge sharing about
exhaust gas cleaning systems.

CSA 2020 members believe that exhaust gas cleaning
systems will make a substantial difference to the ports
and ocean environments in which they operate. This
will also promote global environmental progress,
especially the goal of reducing the health impact of
airborne sources, which is at the heart of the IMO 2020
sulfur regulation.

Throughout 2018, TORM continued to have a strong
and dedicated focus on reducing fuel consumption.
The efforts made within this area generated a positive
result.

As in previous years, TORM’s Operational Performance
Team shares the performance of each vessel with the
respective vessel managers and vessels on a monthly
basis.

In 2018, TORM continued and further expanded an
initiative introduced in 2017 to engage the vessels on a
daily basis to encourage best practice behavior with
regard to power and fuel consumption. The efforts in
this area ensure that corrective actions can be taken
swiftly, when needed.

TORM also implemented a new system used for
generating emission data from vessels taking carried
cargo into account. This is part of the Company’s
continued efforts to improve data quality and
transparency in order to minimize CO2 emissions. The
new reporting scheme is in line with regulatory
requirements for EU Monitoring, Reporting, Verification
(MRV) reporting and for IMO Data Collection System
(DCS).

In addition to the tasks initially in scope, fuel
consumption for cargo operations has become a focus
area that will be further developed during 2019.

In 2019, TORM will put additional focus on energy-
efficient voyage execution by including weather
conditions and timing of arrival in a more holistic
evaluation.

Investing in and implementing well-proven
technologies will allow TORM to concentrate its efforts
on achieving the potential that lies outside the
boundaries of behavioral activities, such as frequency-
controlled cooling water pumps and automating
energy-heavy equipment.

TORM continues to focus on continuously improving
the hull condition of its vessels. During 2018, seven
vessels were taken out of service between scheduled
dry-dockings for short four-to-six-day dockings. During
these dockings, the hull coatings were renewed,
resulting in significant fuel consumption reductions.

TORM maintains a constant focus on fuel efficiency
across the fleet. This serves the dual purpose of
minimizing environmental impact and making good
business sense. By maintaining the strong focus on fuel
consumption reductions in 2018, TORM achieved fuel
efficiency improvements of 6.9% compared to the 2015
baseline. The target for 2019 is to improve fuel
efficiency by another 1.0%.

Efforts to reduce the Company’s carbon footprint also
cover emissions from air travel by the shore
organization. TORM strives to minimize this by using
available technologies such as video conferencing to
the extent possible, e.g. in connection with meetings
across the Company’s eight offices.

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GREEN HOUSE GAS EMISSIONS DATA

VESSEL EMISSIONS AND INDICATORS*

Number of vessels in operation at the end of the year (in technical management)

Number of vessel months (one vessel one year equals 12 vessel months)

Usage of oil and the generated CO2 emissions

Used heavy fuel oil (ton)

Used low-sulfur heavy fuel oil (ton)

Used marine gas oil (ton)

Generated CO2 emissions from vessels (ton)

NOx (ton)

SOx (ton)

Distance sailed (nautical miles)

Average cargo on board (ton)

Cargo transport work (ton-km)

CO2 emissions in grams per ton-km (one ton of cargo transported one km)

OFFICE EMISSIONS AND INDICATORS (ELECTRICITY AND HEATING)

Electricity used in office locations (kWh)

District heating (Gj)

Generated CO2 emissions from office locations (ton)

Number of office employees at the end of the year

CO2 emissions per employee (ton)

FLIGHT EMISSIONS AND INDICATORS

Air mileage (km)

Number of travels

CO2 emissions (ton)

2018

2017

2016

931

359,357

152

58.453

1,306,909

31,091

17,799

4,101,929

36,613

914

236,505

45,470

882,253

20,800

11,728

3,207,147

34,721

910

308,467

56,549

1,141,862

26,992

15,289

3,279,977

37,433

204,801,864,788

207,597,070,516

251,946,149,526

6.4 g/ton-km

4.3 g/ton-km

4.5 g/ton-km

823,844

1,326

525

309

1.7

849,644

1,293

524

296

1.8

924,951

1,619

562

277

2.0

80,192,490

76,832,985

77,284,100

13,401

6,486

12,354

6,650

13,056

6,750

* Vessel emissions data for 2018 reflect that TORM has changed its data collection system to be in line with EU MRV and IMO DCS specifications.

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REPORTING SCOPE
Environmental and social data is based on all vessels
under TORM’s technical management (vessels for
which TORM holds the Document of Compliance).
Having the technical management of a vessel implies
having control over the vessel in terms of
environmental performance and crew. As of 1 January
2019, TORM had 76 vessels under technical
management compared to 74 vessels as of 1 January
2018. The three vessels not in technical management
are thus not included in this data set.

Office emissions are included from TORM’s offices in
Copenhagen, Mumbai, New Delhi, Singapore, Manila,
Cebu and Houston. Emissions from TORM’s office in
London are not included as data is currently
unavailable. Emissions from air travel are included for
all office staff and crew. Data from vessels is collected
according to a specific reporting routine, mainly on a
monthly basis but for certain data with less frequency.
Other environmental data is collected on an annual
basis. Safety data is based on reporting made to
TORM’s Safety, Quality and Environmental Department
whenever an incident occurs.

REPORTING GUIDELINES
The 2018 greenhouse gas emissions (GHG) reporting
covers scope 1 (direct emissions from own production),
scope 2 (emissions from own production but others’
emissions) of the Greenhouse Gas Protocol except for
the activities listed below and selected aspects of

scope 3 (others' production and emissions services)
activities.
• Scope 1

Consumption of bunker oil has been calculated to
CO2 emissions using IMO’s factors for heavy fuel oil
and marine gas oil. SOx and NOx emissions are
calculated using the third IMO GHG Study from
2014. Emissions are calculated for each single vessel
and then consolidated. Numbers under the scope 1
data sheet have been collected on board the
vessels or at the offices. The collection is based on
actual usage or disposals.

• Scope 2

Emissions from heating (district heating) in the
Copenhagen and US offices are calculated using
Danish and World Resources Institute emission
factors.

• Scope 3

Emissions from air travel are provided by TORM's
travel agent.

• Other principles

2018 greenhouse gas emissions are calculated for
vessels in technical management (vessels for which
TORM holds the Document of Compliance) in
TORM, amounting to a total of 931 vessel months of
operation.

Cargo transport work (ton-km) is calculated using the
actual cargo multiplied by the distance with actual
cargo; thus, a ballast voyage will give 0 (zero) in ton-
km. CO2 emission per ton-km is the full CO2 emissions
on board all vessels divided by the ton-km for all
voyages; thus, it includes emissions from ballast
voyages, electricity production, inerting, cargo
operations, etc.

HEALTH, SAFETY AND SECURITY
Approximately 90% of TORM’s employees work at sea,
and providing healthy, safe and secure working
conditions for them is an essential part of TORM’s
business. In addition, it is TORM’s belief that a safe and
secure working environment supports the overall
performance level and employee retention. Respecting
employees’ human rights is pivotal to the Company.
TORM's policies are outlined in TORM’s Business
Principles and the commitment to the UN Global
Compact. The Company’s safety policy is rooted in the
rules and regulations issued by the Danish Maritime
Occupational Health Service.

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PERFORMANCE EVALUATION
In 2018, TORM launched a revised performance
development concept for its seafarers. The new
concept is TORM’s way of systematically enhancing
work behavior and leadership to ensure excellent
performance. Through the One TORM Safety Culture –
driving resilience program, TORM has defined
standards and expectations for excellent performance.
A key element in leadership is to evaluate employees’
performance with a view to manage development and
motivate employees to develop. TORM believes this
will facilitate the best possible means for developing
performance as an individual and as a company.

TORM will continue promoting the One TORM Safety
Culture – driving resilience program in 2019. Focus will
be on supporting and ensuring that TORM’s safety
culture is anchored across the organization, ashore as
well as on board the vessels.

In 2019, TORM will introduce a new induction
framework for its seafarers. The purpose is to ensure
that new employees at sea are introduced to the safety
culture in TORM as soon as possible when joining the
Company.

ONE TORM SAFETY CULTURE
In line with the Company’s strategic focus on safety
performance, TORM continued the safety culture
program One TORM Safety Culture – driving resilience
in 2018. The purpose of the program is to continuously
strengthen TORM’s safety culture beyond compliance.

In 2018, TORM continued conducting Safety Leadership
courses for Senior Officers on board the Company’s
vessels. A total of 14 courses were conducted, including
five in India, five in the Philippines, two in Denmark and
two in Croatia with a total of 274 officers attending in
2018. In total, 464 officers have completed the course
since it was introduced in 2017. Safety Leadership
courses are mandatory, two-and-a-half-day workshops
for all Senior Officers and key marine shore staff. The
focus of these courses is on how to be a good leader
when it comes to safety and how to positively influence
and support colleagues on TORM’s journey to be the
Reference Company in the product tanker market.

SAFETY DELTA
In June 2018, TORM launched the Safety Delta, which is
a tool used across the fleet to track and monitor the
safety culture on board the individual vessels. The
Safety Delta concept supports processes and activities
and helps to build and maintain a proactive safety
culture based on continuous crew evaluation, dialogue,
reflection and development.

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safeguard TORM’s seafarers and vessels. The Company
will continue to monitor the risk situation and pre-empt
hijacking and robbery attempts by following security
procedures and industry guidelines.

believes that diversity on board is an important
foundation for cooperation, high performance and a safe
working environment.

EMPLOYEES
The employees constitute the true quality of TORM and
are the Company’s most valuable assets. TORM
continues to grow and thrive due to the efforts and
dedication of its staff both at sea and ashore.

AT SEA
In 2018, TORM continued its strategy to employ
seafarers with different nationalities, as the Company

Throughout the year, TORM continued its efforts to
relieve seafarers on time and to build strong teams that
rotate back to the same vessels whenever possible. This
will reinforce vessel-specific knowledge and the
foundation for a safe working environment.

TORM also continued its efforts to strengthen the
relations between seafarers and the shore-based
organization. This included seminars and other
opportunities where colleagues can share best practices
regarding the operation of TORM’s vessels.

LOST TIME ACCIDENT FREQUENCY AND NEAR-MISS
Lost Time Accident Frequency (LTAF) is an indicator
of serious work-related personal injuries that result in
more than one day off work per million hours of work.
The definition of LTAF follows standard practice
among shipping companies. During 2018, TORM had an
improvement LTAF of 0.47 (2017: 0.67), which is a
decrease compared to 2017.

Each injury has been investigated and corrective
measures have been taken as required.

Near-miss reports provide TORM with an opportunity
to analyze conditions that might lead to accidents and
ultimately prevent potential future accidents. A high
number of near-miss reports indicate that the
organization is proactively monitoring and responding
to risks. In 2018, TORM exceeded the target of 6.0
near-miss reports per month per vessel on average by
reaching 7.1 (2017: 6.7) due to continued focus on this
area.

SECURITY
TORM’s response to piracy is founded on the Best
Management Practice, which is the industry guideline
for companies and vessels sailing in areas with
increased risk. In 2018, TORM experienced four
situations where thieves came on board and two cases
of stowaways found on board the Company’s vessels.
Throughout the year, the security situation and
developments in the various risk areas have been
monitored closely, and actions have been taken to

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As part of TORM’s continued focus on the promotion
process for its employees, seafarers completed the so-
called ‘promotion assessment training’ prior to being
promoted to the highest ranks on board the
Company’s vessels in 2018. As part of this training,
officers visit one of TORM’s offices for an introduction
and training with key stakeholders.

TORM maintains an ongoing focus on seafarer
commitment and engagement. At year-end 2018, the
retention rate for Senior Officers was above 90%, and
TORM demonstrated 100% compliance with customer
requirements when it comes to ensuring the right level
of experience among Senior Officers per vessel across
the fleet (the so-called officer matrix compliance).

In 2019, TORM will continue its focus on a safe working
environment for its seagoing employees. In recognition
that life at sea can be challenging, TORM has introduced
a support line available for seafarers and their relatives
ashore 24 hours a day/365 days a year.

At the end of 2018, TORM employed a total of 3,118
seafarers of which 138 were permanently employed,
with the remaining seafarers on time-bound contracts.

ASHORE
The TORM employee motivation and satisfaction
survey is conducted after the third quarter every year
and is important to the Company. In 2018, 93% of all
shore-based employees responded to the annual
survey.

During 2018, an additional short employee engagement
survey was launched following each of the first and
second quarters with a view to identify focus areas on
a more frequent basis.

The outcome of all 2018 surveys repeated the high-
level result of the 2017 engagement survey with regard
to all measured categories, ranging from employee
motivation and loyalty to satisfaction with immediate
superior, welfare, safety and work environment. The
continued high scores were evenly spread across
countries and divisions, which is a testament to the
strength of the unified One TORM approach. By the
end of 2018, the retention rate for shore-based
employees was above 90%.

TORM aims to attract and retain the best employees by
exemplifying the four values in the TORM Leadership
Philosophy and by ensuring that the Company’s
leaders motivate their employees. Through the One
TORM platform, the Company strives to continuously
develop the employees’ abilities to do what they do
best.

At the end of 2018, the shore-based organization had
309 employees: 129 in Hellerup, 116 in Mumbai, 3 in New
Delhi, 37 in Manila, 2 in Cebu, 14 in Singapore, 7 in
Houston and 1 at the Company’s office in London.

TORM Leadership Philosophy with the four values.

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GENDER DIVERSITY
TORM has an obligation to its customers, shareholders,
employees and other stakeholders to develop the
Company’s talent pool irrespective of attributes such
as gender, religion, sexuality, nationality, ethnicity or
disabilities. As stated in TORM’s Business Principles
under "Respecting People", the Company does not
accept discrimination with respect to any of the above.
TORM works towards a diverse workplace, in which
everyone is included and respected, and in which well-
being at work is regarded as a shared responsibility.

For further information on TORM’s Business Principles,
please visit:
http://www.torm.com/uploads/media_items/torm-
business-priciples.original.pdf.

TORM aims at a gender diverse workforce and an
inclusive environment that respects and supports all of
our people and helps improve our business
performance.

TORM’s gender diversity approach focuses on talent
attraction, promotion and retention. The Company’s
leaders aim at assuming accountability for continuous
progress. TORM believes that gender diverse teams,
led by gender diverse leaders, deliver better business
performance. The Company provides equal
opportunity in recruitment, career development,
promotion, training and rewards for all employees.

TORM actively monitors the representation of women
in the workforce and in leadership positions. At the end
of 2018, the proportion of women in the shore-based
workforce was 32%, while females in leadership
positions, defined as having one or more direct reports,
constituted 19%.

By 2020, the Company aims at having 35% women in
the shore-based workforce in line with industry
average, and with 25% women in leadership positions.

ANTI-CORRUPTION AND ANTI-BRIBERY
Corruption and bribery impede global trade and can
restrict non-corrupt companies’ access to international
markets. In this way, corruption and bribery have a
negative impact on economic and social development.
For TORM, the risk of corruption does not mean
increased costs alone. Corruption also exposes TORM’s
seafarers to safety and security risks and poses a
potential risk to the Company’s legal standing and
reputation.

At the end of 2018, the Board of Directors consisted of
five male members elected at the Annual General
Meeting.

TORM does not accept corrupt business practices and
as part of its compliance program, TORM has a policy
on anti-bribery and anti-corruption, which supports the
Company’s Business Principles.

In 2020, the Board of Directors has set a target of 20%
female board members elected at the Annual General
Meeting (1 out of 5) or 17% provided that the Board of
Directors is extended with one additional member (1
out of 6).

EMPLOYEE GENDER DIVERSITY

Permanently employed

It is TORM’s policy to conduct all business in an honest
and ethical manner. TORM has a “zero tolerance”

Directors of the Company¹

Employees in other senior executive positions

⁾

Total management other than directors of the Company (VPs, GMs, Marine Officers)

Other permanent employees of the Group

Total permanent employees of the Group
¹

The four Non-Executive Directors are not included as employees of the Group.

⁾

Male

Female

168

171

343

104

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approach to bribery and corruption, and the Company
is committed to acting professionally, fairly and with
integrity in all business dealings and relationships,
wherever the Company operates. TORM will uphold all
laws relevant to countering bribery and corruption in all
the jurisdictions in which the Company operates.

in 2018 to mitigate the risk of bribery and corruption.
TORM has continued its anti-corruption training
program, which includes mandatory anti-corruption
courses for all shore-based staff and all officers on
board TORM’s vessels. The training targets new hires as
well as existing employees and must be repeated
annually. TORM will continue these efforts in 2019.

To continue a high level of transparency and
accountability, due diligence, monitoring and control as
well as training of TORM’s staff are central parts of
implementing the anti-corruption and anti-bribery
policy.

In 2011, TORM co-founded the Maritime Anti-Corruption
Network (MACN) to take a joint stand within the
industry towards the request for facilitation payments
that exists in many parts of the world where TORM
conducts business. Best practices are shared between
members of the network, and members align their
approach to minimizing facilitation payments.

The MACN seeks support from government bodies and
international organizations to eliminate the root causes
of corruption. TORM is committed to addressing
corrupt business practices among stakeholders by
supporting this cross-sector approach.

In addition to its efforts within MACN, TORM continued
to strengthen its companywide anti-corruption policies

Since 2006, TORM’s Board of Directors has provided a
whistleblower facility with an independent lawyer as
part of the internal control system. In 2018, the
whistleblower facility received three notifications,
which were investigated and closed without any
critique or requirements for new measures.

HUMAN RIGHTS
With the TORM Leadership Philosophy, TORM’s
Business Principles and commitment to the UN Global
Compact, TORM is committed to respecting
internationally recognized human rights as outlined in
the United Nations Guiding Principles on Business and
Human Rights.

TORM recognizes that implementing the necessary
policies and respective processes to be in line with the
requirements of the UN Global Principles is part of an
ongoing effort. Going forward, TORM will continue to
promote its human rights-related policies and
processes.

TORM complies with the International Labor
Organization’s Maritime Labor Convention, an
international set of standards on labor conditions at
sea, which was ratified by 30 countries in 2012. All
vessels under TORM’s technical management were
audited and certified as required under the Maritime
Labor Convention of 2006 when it took effect in
August 2013. TORM respects employees’ right to
associate freely, to join – or not join – unions and to
bargain collectively. TORM offers equal opportunities
for its employees as stated in TORM’s Business
Principles.

No claims or offenses have been reported regarding
human rights in 2018.

This section constitutes TORM’s CSR reporting
according to the requirements of UK law. Read more
about TORM and the CSR efforts at
http://www.torm.com/csr-at-torm.

As part of the Company’s commitment to the UN
Global Compact, TORM submits its communication on
progress every year. Please visit
www.unglobalcompact.org to see the reports.

TORM ANNUAL REPORT 2018

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RISK MANAGEMENT

Freight rates and vessel value volatility remain a risk for TORM.
The cyclical nature of the industry can pressure capital structure, if not managed, and harm TORM’s ability to withstand periods of low
profitability.
Uncertainty persists around 2020 sulfur emission regulation compliance.

RISK MANAGEMENT FRAMEWORK
TORM acknowledges that the Company faces a range
of risks in doing business, and that the Company’s
success depends on identifying, balancing and
mitigating these risks as early as possible. TORM
believes that a strong risk management framework is
vital to protect the Company and to ensure that the
Company is well-positioned in key markets. Risk
management is an integrated part of doing business in
TORM. It enables insight and transparency into the risks
facing the Company and provides a common risk
language, making it simpler to communicate and take
decisions.

On an annual basis, TORM conducts an Enterprise Risk
Management process, during which the critical risks
facing the Company are identified, assessed and
discussed by TORM’s Senior Management Team and
subsequently approved by the Risk Committee. In
between the annual Enterprise Risk Management
processes, TORM conducts an assessment of the
identified critical risks to reconfirm and iterate TORM’s
view on the risks.

The objective is that TORM and its shareholders are
adequately rewarded for accepting risk, and that the

governance structure tailored to oversee risk
management is in place. This is to ensure that risks
related to core and non-core activities are mitigated to
the extent possible. TORM’s risk management
framework seeks to provide reasonable assurance that
business objectives can be achieved and obligations
towards customers, shareholders and employees can
be met.

RISK MEASURE
Risks are defined as all events or developments that
could significantly reduce TORM’s ability to sustain the
long-term value of the Company and to meet
expectations of investors and lenders.

Risks are assessed based on a two-dimensional heat
map rating system that estimates the consequence of a
risk based on financials or reputation and the likelihood
of that risk materializing.

GOVERNANCE
TORM’s risk management approach emphasizes
Management accountability and oversight. Identified
risks are discussed, and responsibility is assigned to the
Senior Management Team member most suited to
manage the risk. Assigned owners are required to

continually monitor risk, implement mitigating actions
and evaluate and report on risks for which they bear
responsibility.

If the consequence of a risk exceeds the agreed risk
tolerance, Management is required to assess if
implementation of additional mitigation controls is
necessary until the desired risk level is achieved.

TORM’S MAIN RISK EXPOSURE AND TOLERENCE
The Senior Management Team and the Risk Committee
discuss and decide on TORM’s risk tolerance to the
Company’s main exposures. TORM’s overall risk
tolerance and inherited exposure to risks is divided into
four main categories, detailed below:

LONG-TERM STRATEGIC RISKS (“RISK-SEEKING”)
TORM aspires to be a sustainable company, which
requires a long-term perspective on value creation. In
the context of risk management, it means taking an
active role in addressing risks related to long-term
value creation. Risks and opportunities beyond the
immediate strategy window are monitored by TORM’s
Senior Management Team and incorporated in
corporate strategic planning. Industry-changing risks
such as the substitution of oil for other energy sources

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

RISK MANAGEMENT

and technological changes have the possibility to alter
the landscape of the markets that TORM serves and
radically change transportation patterns. These risks
are considered to have a relatively high potential
impact but are considered as long-term risks.

INDUSTRY AND MARKET-RELATED RISKS
(“RISK-TOLERANT”)
TORM’s business is sensitive to changes in market-
related risks such as changes in the global economic
situation, changes in product tanker freight rates and
changes in bunker prices. It remains a cornerstone of
the Company’s strategy to actively pursue this type of
risk by taking positions to benefit from fluctuations in
freight rates.

OPERATIONAL AND COMPLIANCE RISKS (“RISK-
AVERSE”)
Adequate management of operational and compliance
risks within TORM’s risk tolerance limits is a
prerequisite for TORM to succeed as a tanker owner
and operator.

TORM aims to maintain its position as a quality
operator with high focus on operating vessels in a safe
and reliable manner. TORM constantly focuses on
reducing potentially severe risks with respect to
environment, health, safety and compliance. This is
achieved by a strong integrated platform, where cross-
functional collaboration ensures that rigorous
procedures and standardized controls are maintained
to the highest quality.

FINANCIAL RISKS (“MODERATELY RISK-
AVERSE/RISK NEUTRAL”)
Management believes that a prudent approach to
financial risks benefits the Company the most. TORM’s
global presence means that its financial position is
exposed to a number of risk factors including interest
rate, foreign exchange, credit and liquidity risks.

TORM’S CURRENT RISK ROFILE
The Risk Committee and the Senior Management Team
of TORM confirm that they have carried out a robust
assessment of the principal risks facing the Company.

All risks are repeated from 2017, albeit with slight
changes. TORM’s Top Risks are depicted in the heat
map on page 42. When quantifying the risks, the
measure is near-term effects, typically related to a 12 to
24-month horizon.

Throughout 2018, TORM saw continued volatility in the
product tanker market. With a low coverage ratio
going into 2019, the Company is exposed to potentially
adverse market conditions; consequently, the market
risk related to freight rates and bunker prices remains
high.

The cyclical nature of TORM’s industry may pressure
the capital structure, if not managed, and harm TORM’s
ability to withstand periods of low profitability. TORM
has strong focus on leverage levels and the liquidity
reserve. Likelihood increases slightly, as capital

expenditure related to newbuildings for 2019 are higher
compared to 2018.

TORM is exposed to cyclical asset prices, and
consequently the market risk remains high within vessel
sale and purchase activities. This risk is closely related
to freight rate risk and capital structure risk. The
likelihood of subdued freight rates is considered
slightly higher today due to the freight rate volatility
seen during 2018. The consequence of this risk is
considered to be lower today due to TORM’s proven
ability to execute in the second-hand and newbuilding
markets.

Risks within the Company’s immediate sphere of
control, including technical costs and legal compliance,
have remained stable at a low level due to strong
continuous focus, an integrated platform and efficient
controls. The risk of not meeting quality requirements
from oil majors is deemed to increase slightly due to
the introduction of a new vetting regime at the end
of 2018.

The risk of a severe vessel accident such as an
environmental disaster or material and personal
damage is deemed to be at the same level as last year.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

RISK MANAGEMENT

Uncertainty persists on compliance with the IMO 2020
sulfur regulation and the inherent investment
opportunity of installing scrubbers on vessels versus
using a low-sulfur fuel alternative.

For a more in-depth description of mandates and
sensitivity analysis of the various risks, please see note
19 on pages 121-124.

Please see table on page 43 for a description of each of
the risks in the heat map.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

RISK MANAGEMENT

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

130 YEARS AND LOOKING AHEAD

TORM ANNUAL REPORT 2018
TORM ANNUAL REPORT 2018

STRATEGIC REPORT
STRATEGIC REPORT

44
44

FINANCIAL REVIEW 2018

FINANCIAL REVIEW FOR THE YEAR ENDED 31 DECEMBER 2018

TORM’s continued improvements and
cost containment enabled us to
withstand a challenging product
tanker market in 2018, and at the
same time, to secure additional debt
and equity financing for investments.
We also achieved compliance with the
US Sarbanes-Oxley Act in 2018,
thereby enhancing our corporate
governance.

Christian Søgaard-Christensen, CFO

FINANCIAL RESULTS
In 2018, TORM activities resulted in a net loss of USD
35m resulting in a loss per share (EPS) of USD 0.48 in
2018 compared with a positive EPS of USD 0.04 in
2017. The lower result in 2018 was mainly due to a
reduction in freight rates following a subdued freight
market for product tankers.

In 2018, the operating profit decreased by USD 37m to
USD 3m. This decrease was also primarily due to the
lower freight rates.

In 2018, total revenue was USD 635m compared to
USD 657m in 2017, and TCE earnings decreased from
USD 397m to USD 352m. The decrease in TCE earnings
was primarily attributable to a softer freight market in
2018 compared to 2017. In 2018, TORM had
approximately the same amount of available earning
days compared to 2017.

Mr. Christian Søgaard-Christensen
Chief Financial Officer, TORM A/S

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

FINANCIAL REVIEW 2018

TORM’s total assets increased by USD 67m in 2018 to
USD 1,714m, of which the carrying amount of vessels,
capitalized dry-docking and prepayments on vessels
amounted to USD 1,442m compared to USD 1,383m
in 2017. During the year, TORM took delivery of four
LR2 vessels and sold two older Handysize vessels and
two older MR vessels as a part of the ongoing renewal
of the tanker fleet. Furthermore the two chartered-in
vessels TORM Marie and TORM Margrethe were
redelivered during the year.

In 2018, total equity increased by USD 56m to USD
847m from USD 791m in 2017. The increase is primarily
related to the Private Placement in January 2018 where
TORM raised USD 100m in new Class A common
shares. The negative result for the year had an
offsetting effect on the equity. The market value
adjustments on derivatives held for hedge accounting
also had a negative effect on the equity of USD 7m.
The Return on Equity (RoE) decreased from 0.3% in
2017 to -4.3% in 2018.

KEY HIGHLIGHTS

USDm

Income Statement

Revenue

Time charter equivalent (TCE)

Gross profit

EBITDA

Operating profit/(loss) (EBIT)

Financial items

Net profit/(loss) for the year

Balance Sheet

Non-current assets

Total assets

Equity

Total liabilities

2018

2017

Change

635

352

169

121

-36

-35

1,445

1,714

847

867

657

397

200

158

-36

1,385

1,647

791

856

-22

-45

-31

-37

In 2018, TORM’s total liabilities increased by USD 11m
to USD 867m. In 2018, the mortgage debt and bank
debt related to the vessels were kept at the same level
as in 2017 due to scheduled repayments and
drawdowns on loan agreements and new loan facilities
following the delivery of the newbuildings delivered in
2018.

In 2018, invested capital increased by USD 63m to USD
1,469m as of 31 December 2018. In addition, Return on
Invested Capital (RoIC) decreased by 2.7%-points from
2.8% to 0.1%.

In 2018, the Net Asset Value per share based on broker
values decreased to USD 11.6 from USD 12.8 in 2017
mainly due to decreasing vessel prices.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

FINANCIAL REVIEW 2018

LIQUIDITY AND CASH FLOW
Total cash and cash equivalents amounted to USD
127m at the end of 2018, resulting in a net decrease in
cash and cash equivalents for the year of USD 7m
compared to 2017.

As of 31 December 2018, TORM had undrawn credit
facilities totalling USD 279m, consisting of a USD 75m
Working Capital Facility, a USD 70m facility financing
the Company’s LR1 newbuildings and one MR
newbuilding, a USD 88m facility financing the MR
vessels under construction, and a USD 46m facility
subject to documentation.

As of 31 December 2018, TORM had CAPEX
commitments of USD 258m related to the LR1 and MR
newbuildings.

In 2018, net cash inflow from operations decreased
from USD 110m in 2017 to USD 71m due to the lower
freight rates and an increase in port expenses, bunkers
and commissions.

Net cash outflow from investing activities amounted to
USD 176m in 2018. The cash was used on tangible fixed
assets, primarily related to the four delivered LR2
vessels (TORM Herdis, TORM Hermia, TORM Hellerup
and TORM Hilde), prepayments in relation to the MR
and LR1 newbuildings to be delivered in 2019 and early
2020 as well as capitalized dry-docking, partly offset
by sale of vessels during 2018. In 2017, the net cash
outflow from investments was USD 114m.

Net cash inflow from financing activities amounted to
USD 96m in 2018, compared to a cash inflow of USD
63m in 2017. Repayment on mortgage debt, bank loans
and financial leases amounted to USD 114m in
connection with scheduled repayments and vessel
sales during the year. Additional borrowings generated
a cash inflow of USD 115m. The Private Placement in
January 2018 contributed with USD 97m in net
proceeds. TORM did not pay out any dividends during
2018.

KEY HIGHLIGHTS

Key figures

Invested capital in USDm

Net Asset Value (NAV) per share

Return on Invested Capital (RoIC)

Return on Equity (RoE)

Basic earnings per share (EPS)

2018

2017

Change

1,469

11.6

0.1%

-4.3%

1,406

12.8

-1.4

2.8%

-2.7%-points

0.3%

-4.6%-points

-0.48

0.04

-0.52

STRATEGIC REPORT

TORM ANNUAL REPORT 2018

FINANCIAL REVIEW 2018

TANKER FLEET
Revenue in the tanker fleet decreased by 3.3% to USD
635.4m in 2018 from USD 657.0m in 2017, and TCE
earnings decreased by 11.3% to USD 352.3m in 2018
from USD 397.1m in 2017. The decrease in TCE earnings
was primarily due to a subdued product tanker freight
market in 2018 compared to 2017.

early 2019, the broader tanker markets have
experienced a significant recovery with freight rates
reaching levels last seen in the winter period towards
the end of 2015 and beginning of 2016.

In 2018, the available earning days in the MR fleet
increased by 187 days, equaling an increase of 1%
compared with 2017. The TCE rates decreased by 13%,
resulting in total earnings of USD 233.6m, a decrease of
USD 33.6m.

In the LR2 fleet, the average TCE rates decreased by
5% between 2018 and 2017, resulting in a decrease in
earnings of USD 3.5m. The available earning days in the
LR2 fleet increased by 18% in 2018 compared to 2017
due to the delivery of the four LR2 vessels during the
year, resulting in an increase in TCE earnings of USD
9.9m.

In the Handysize fleet, the TCE rates were 19% lower in
2018 compared to 2017, resulting in a decrease in
earnings of USD 5.6m. There was a decrease in
available earning days of 25% in 2018 due to vessel
sales in 2017 and 2018, resulting in a decrease of
earnings of USD 10.0m.

The average TCE rates in the LR1 fleet were 6% lower
than in 2017, resulting in a decrease in the TCE of USD
2.0m. The available earning days in the LR1 fleet were
unchanged during the year.

CHANGE IN TIME CHARTER EQUIVALENT EARNINGS IN THE TANKER FLEET
USDm

Time charter equivalent earnings 2017

Change in number of earning days

Change in freight rates

Time charter equivalent earnings 2018

TORM ANNUAL REPORT 2018

Handysize

39.9

267.2

-10.0

-5.6

24.3

2.8

-36.4

233.6

LR1

34.2

-2.0

32.2

LR2

55.8

9.9

-3.5

62.2

Total

397.1

2.7

-47.5

352.3

STRATEGIC REPORT

EARNINGS DATA

USDm

LR2 vessels

Available earning days

Owned

T/C

Spot rates ¹

TCE per earning day ²
⁾
LR1 vessels

⁾
Available earning days

Owned

T/C

Spot rates ¹

TCE per earning day ²
⁾
MR vessels

⁾
Available earning days

Owned

T/C

Spot rates ¹

TCE per earning day ²
⁾

Handysize vessels

⁾
Available earning days

Owned

T/C

Spot rates ¹

TCE per earning day ²
⁾

Total

⁾
Available earning days

Owned

T/C

Spot rates ¹

2017

% change

Full year

full year

2018

3,419

1,012

1,089

917

1,009

2,461

958

742

270

847

242

824

920

4,027

3,333

694

13,158

11,714

11,393

12,930

15,492

12,893

16,304

15,026

14,190

15,420

17,162

15,425

2,483

629

628

640

587

2,484

13,881

14,638

11,805

10,126

15,403

13,063

13,771

14,635

11,403

11,485

14,534

12,982

17,995

4,492

17,561

4,312

432

180

4,624

4,442

182

4,502

4,564

18,182

4,318

4,389

17,461

184

175

721

14,604

14,083

12,272

9,569

14,072

12,689

14,850

14,320

13,005

10,051

13,993

12,847

3,263

646

637

12,020

11,540

11,708

12,239

11,905

11,887

27,160

25,768

1,390

6,778

6,329

450

6,978

6,554

424

643

7,070

6,669

6,702

6,425

277

524

9,497

9,306

2,450

9,939

9,970

6,684

27,141

6,420

25,726

264

1,415

14,058

13,770

12,193

9,919

13,961

12,479

12,944

10,598

14,152

12,982

18%

35%

-28%

-2%

-5%

-6%

-1%

67%

-13%

-25%

-17%

-19%

-11%

TCE per earning day ²
⁾
Spot rate = Time Charter Equivalent Earnings for all charters with less than six months’ duration = Gross freight income less bunker, commissions and port expenses.
¹
TCE = Time Charter Equivalent Earnings = Gross freight income less bunker, commissions and port expenses.
²
⁾
⁾
TORM ANNUAL REPORT 2018

14,621

⁾

14,225

STRATEGIC REPORT

FINANCIAL REVIEW 2018

OPERATION OF VESSELS
In 2018, the charter hire cost in the tanker fleet
decreased by USD 6.0m to USD 2.5m compared to
USD 8.5m in 2017. The decrease in the charter hire
cost was caused by the redelivery of two vessels in
2018.

The development in operating expenses is
summarized in the table below. The table also
summarizes the operating data for the Company’s
fleet of owned and bareboat-chartered vessels.

CHANGE IN OPERATING EXPENSES

USDm

Operating expenses 2017

Change in operating days

Change in operating expenses per day

Operating expenses 2018

OPERATING DATA

USD/day

Operating expenses per operating day in 2017

Operating expenses per operating day in 2018

Change in the operating expenses per operating day in %

Operating days in 2018 ¹

- Offhire

- Dry-docking

⁾

+/- Bareboat contracts in/out

+ Vessels chartered-in

Available earning days 2018

Including bareboat charters.

⁾

TORM ANNUAL REPORT 2018

Handysize

22.5

-6.2

-0.8

119.5

2.0

-1.7

15.5

119.8

LR1

18.6

-1.3

17.3

LR2

27.8

5.0

-5.0

Total

188.4

0.8

-8.8

27.8

180.4

Handysize

6,508

6,201

-5%

6,435

6,344

-1%

LR1

7,286

6,787

-7%

LR2

7,608

6,462

-15%

Total

6,673

6,389

-4%

2,499

18,879

2,555

4,308

28,241

159

529

-730

721

206

224

822

-739

-1,469

694

1,415

2,449

18,182

2,483

4,028

27,141

Operating expenses (OPEX) for the fleet decreased by
USD 8.0m to USD 180.4m in 2018 compared to USD
188.4m in 2017, mainly due to a strong focus on
reducing the OPEX. On a per-day-basis, OPEX
decreased by 4% in 2018.

The total fleet of owned vessels had 1,046 off-hire and
dry-docking days, corresponding to 4% of the
operating days in 2018. This compares to 914 off-hire
days in 2017, or 3% of the number of operating days.

ADMINISTRATIVE EXPENSES AND OTHER
OPERATING EXPENSES
Total administrative expenses and other operating
expenses amounted to USD 49.8m in 2018, compared
with USD 45.4m in 2017. The increase was mainly due
to an increasing number of employees and expenses
related to redelivery of vessels.

FINANCIAL INCOME AND EXPENSES
Net financial expenses in 2018 were USD 36.0m
compared to USD 36.3m in 2017. New mortgage debt
and bank loans obtained during the year have
replaced the repayments, causing both the level of
mortgage debt and bank loans and the net financial
expenses to be at the same level as in 2017.

TAX
Tax for the year amounted to an expense of USD 1.6m
compared to an expense of USD 0.8m in 2017. The
increase was mainly due to adjustments of deferred
tax assets and tax on intra group dividends.

STRATEGIC REPORT

FINANCIAL REVIEW 2018

ASSESSMENT OF IMPAIRMENT OF ASSETS
Management has followed the usual practice of
performing a review of impairment indicators every
quarter and presenting the outcome to the Audit
Committee. The Audit Committee evaluates the
impairment indicator assessment and prepares a
recommendation to the Board of Directors. The
recoverable amount of the assets is calculated by
assessing the fair value less costs to sell and the value
in use of the significant assets within the tanker fleet.

When assessing the fair value less costs to sell,
Management included a review of market values
calculated as the average of two internationally
recognized shipbrokers’ valuations. The shipbrokers’
primary input is deadweight tonnage, yard and age of
the vessel. The assessment of the value in use was
based on the net present value of the expected future
cash flows. The key assumptions are related to future
developments in freight rates, operating expenses and
to the weighted average cost of capital (WACC)
applied as discounting factor in the calculations.

As of 31 December 2018, Management performed a
review of the recoverable amount of the assets by
calculating the recoverable amount (being higher of
fair value less costs to sell and value in use) of the
significant assets including goodwill within the tanker
fleet. As of 31 December 2018, the recoverable amount
of the Tanker Segment was based on the value in use.
Based on this review, Management concluded that the

value in use of the assets within the Tanker Segment
was materially equivalent to the carrying amount.

The assessment of the value in use of the Tanker
Segment was based on the present value of the
expected future cash flows. The freight rate estimates
in the period 2019-2021 are based on the Company’s
business plans. Beyond 2021, the freight rates are
based on the Company’s 10-year historical average
rates. Please refer to Note 7 for further details.

The Company will continue to monitor developments
on a quarterly basis for indications of impairment.

PRIMARY FACTORS AFFECTING RESULTS OF
OPERATIONS
TORM generates revenue by charging customers for
the transportation of refined oil products and crude
oil, using the Company’s tankers. The Company’s
focus is on maintaining a high quality fleet, and TORM
actively manages the deployment of the fleet between
spot market voyage charters, which generally last
from several days to several weeks, and time charters.

TORM believes that the important measures for
analyzing trends in the results of its operations of
tankers consist of the following:

Time charter equivalent (TCE) earnings per available
earning day
TCE earnings per available earning day is defined as
revenue less voyage expenses divided by the number

of available earning days. Voyage expenses primarily
consist of port and bunker expenses that are unique
to a particular voyage, which would otherwise be paid
by a charterer under a time charter, as well as
commissions, freight and bunker derivatives. TORM
believes that presenting revenue net of voyage
expenses neutralizes the variability created by unique
costs associated with particular voyages or the
deployment of vessels on the spot market and
facilitates comparisons between periods on a
consistent basis. Under time charter contracts, the
charterer pays the voyage expenses, while under
voyage charter contracts the shipowner pays these
expenses. A charterer has the choice of entering into a
time charter (which may be a one-trip time charter) or
a voyage charter. TORM is neutral as to the charterer’s
choice, because the Company will primarily base its
financial decisions on expected TCE rates rather than
expected revenue. The analysis of revenue is therefore
primarily based on developments in TCE earnings.

Spot charter rates
A spot market voyage charter is generally a contract
to carry a specific cargo from a load port to a
discharge port for an agreed freight rate per ton of
cargo or a specified total amount. Under spot market
voyage charters, TORM pays voyage expenses such as
port, canal and bunker costs. Spot charter rates are
volatile and fluctuate on a seasonal and year-to-year
basis. Fluctuations derive from imbalances in the
availability of cargos for shipment and the number of
vessels available at any given time to transport these

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

FINANCIAL REVIEW 2018

cargos. Vessels operating in the spot market generate
revenue that is less predictable but may enable the
Company to capture increased profit margins during
periods of improvements in tanker rates.

Time charter rates
A time charter is generally a contract to charter a
vessel for a fixed period of time at a set daily or
monthly rate. Under time charters, the charterer pays
voyage expenses such as port, canal and bunker costs.
Vessels operating on time charters provide more
predictable cash flows but can yield lower profit
margins than vessels operating in the spot market
during periods characterized by favourable market
conditions.

Available earning days
Available earning days are the total number of days in
a period when a vessel is ready and available to
perform a voyage, meaning the vessel is not off-hire or
in dry-dock. For the owned vessels, this is calculated
by taking operating days and subtracting off-hire days
and days in dry-dock. For the chartered-in vessels, no
such calculation is required, because charter hire is
only paid on earning days and not for off-hire days or
days in dry-dock.

Operating days
Operating days are the total number of available days
in a period with respect to the owned vessels, before
deducting unavailable days due to off-hire days and
days in dry-dock. Operating days is a measurement

that is only applicable to the owned vessels, not to the
time chartered-in vessels.

Operating expenses per operating day
Operating expenses per operating day are defined as
crew wages and related costs, the costs of spares and
consumable stores, expenses relating to repairs and
maintenance (excluding capitalized dry-docking), the
cost of insurance and other expenses on a per-
operating-day basis. Operating expenses are only paid
for owned vessels. The Company does not pay such
costs for the time chartered-in vessels, as they are
paid by the vessel owner and instead factored into the
charter hire cost.

GOING CONCERN
The financial position of the Group, its cash flows,
liquidity position and borrowing facilities are set out
on pages 45-51. As of 31 December 2018, TORM’s
available liquidity including undrawn facilities was USD
406m, hereof a cash position of USD 127m. TORM’s
net interest-bearing debt was USD 627m, and the net
debt loan-to-value ratio was 53%. Further information
on the Group’s objectives and policies for managing
its capital, its financial risk management objectives
and its exposure to credit and liquidity risk can be
found in Note 19 to the financial statements. The
principal risks and uncertainties facing the Group are
set out on pages 121-124.

ACQUISITIONS AND CAPITAL EXPENDITURE
As of 31 December 2018, TORM had a total of nine
vessels under construction: two LR1 newbuildings and
seven MR vessels. The LR1s are expected to be
delivered in the fourth quarter of 2019, and the MRs
are expected to be delivered in 2019 and in the first
quarter of 2020. The value of the prepayments
included in the total asset value amounts to USD
45.5m compared to USD 88.4m in 2017. The decrease
is due to the delivery of the four LR2 vessels (TORM
Herdis, TORM Hermia, TORM Hellerup and TORM
Hilde) in 2018.

The Group monitors its funding position throughout
the year to ensure that it has access to sufficient funds
to meet its forecast cash requirements, including
newbuilding and loan commitments, and to monitor
compliance with the financial covenants within its loan
facilities, details of which are in Note 2 to the financial
statements. Sensitivity calculations are run to reflect
different scenarios including, but not limited to, future
freight rates and vessel valuations, in order to identify
risks to future liquidity and covenant compliance and
to enable Management to take corrective actions, if
required.

RETURNS TO SHAREHOLDERS
The Board of Directors proposes that no dividend be
declared for 2018.

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

FINANCIAL REVIEW 2018

The Board of Directors has considered the Group’s
cash flow forecasts and the expected compliance with
the Company’s financial covenants for a period of not
less than 12 months from the date of approval of these
financial statements. Based on this review, the Board
of Directors has a reasonable expectation that, taking
into account reasonably possible changes in trading
performance and vessel valuations, the Group will be
able to continue in operational existence and comply
with its financial covenants for the foreseeable future.
Accordingly, the Group continues to adopt the going
concern basis in preparing its financial statements.

LONG-TERM VIABILITY STATEMENT
In accordance with provision C.2.2 of the UK
Corporate Governance Code, the Board of Directors
confirms that they have a reasonable expectation that
the Group will continue in operation and meet its
liabilities as they fall due for the three-year period
ended 31 December 2021. This period has been
selected for the following reasons:
• The general volatility and uncertainty in the
product tanker market leads to a significant
increase in the degree of judgement and
uncertainty beyond a three-year period

• Three years is generally in line with the forecast
horizon for external equity analysts covering the
shipping sector

• TORM will have paid its commitments relating to
the Company’s nine newbuildings and will as of 31
December 2021 not have any currently known off-
balance sheet liabilities

• TORM will within the period need to refinance the
majority of its current outstanding debt facilities

The assessment of the Board of Directors has been
made with reference to the Group’s current financial
position and prospects. The assessment of financial
performance and cash flows is primarily dependent on
the expectations to:
• Successful refinancing of debt with maturity

payment of USD 283m in the second half of 2021

• Demand-supply picture in the product tanker

sector including the expected vessel values and
freight rates achieved by the Group

• Development of the fleet
• Operational expenditure
• Capital expenditure covering newbuildings and
maintenance of the existing fleet including
installation of scrubbers and ballast water
management systems
Interest rates

•

The expected financial performance and cash flows
are based on the same underlying assumptions as
used in TORM’s general financial planning. These
assumptions are consistent with those used in the
Group’s impairment calculations. Further details are
provided in Note 7 to the financial statements. Vessel
values used in forecasting compliance with financial
covenants are based on the latest market valuations
from independent recognized shipbrokers. The
expected outlook has been subject to a stress test and
sensitivity analysis over the three-year period, using a
conservative outlook for the product tanker sector
with sensitivities including freight rates and vessel
values. The Board of Directors has also considered the
risks associated with the above-mentioned refinancing
of the debt facilities that mature within the three-year

period. Further details on TORM’s principal risks and
uncertainties are set out on pages 121-124.

The Board of Directors monitors on an ongoing basis
if TORM is moving towards a covenant breach in order
to incorporate any mitigating actions in due course.
Based on the sensitivity analysis, the Board of
Directors does not currently expect that TORM will
breach its financial covenants including experience a
liquidity shortfall over the three-year forecast period.
However, should the product tanker market (in terms
of either freight rates or vessel values) materialize
significantly below TORM’s expectations for a
prolonged period, there is a risk of a covenant breach
after the 12-month Going Concern period, which
would require mitigating actions and appropriate
waivers.

On behalf of TORM plc

Christian Søgaard-Christensen
Chief Financial Officer, TORM A/S
12 March 2019

TORM ANNUAL REPORT 2018

STRATEGIC REPORT

GOVERNANCE

Chairman’s Introduction ........................................................... 55
Audit Committee Report ......................................................... 61
Risk Committee Report ............................................................ 66
Nomination Committee Report ............................................. 69
Remuneration Committee Report ....................................... 71
Investor Information ................................................................... 81
Directors’ Report .......................................................................... 84
Statement of Directors’ Responsibilities ........................... 88

TORM ANNUAL REPORT 2018
TORM ANNUAL REPORT 2018

STRATEGIC REPORT
STRATEGIC REPORT

54
54

CHAIRMAN’S INTRODUCTION

Board of Directors has been to ensure compliance with
the Sarbanes-Oxley Act. An Act to protect investors by
improving the accuracy and reliability of corporate
reporting, to enhance financial disclosures and combat
corporate and accounting fraud. To achieve the
comprehensive requirements, TORM has throughout the
year had a significant focus on the Internal Control over
Financial Reporting across all levels in the organization
and stressed the importance hereof. Controls in place to
support the management certification have been subject
to independent assessment and provided another
dimension to the Board oversight.

Throughout 2018 TORM has tested the Company’s digital
infrastructure resilience against potential breaches or
failures through intentional actions such as attacks on the
Company’s cyber security. In doing so TORM was able to
increase awareness and establish business continuity and
emergency plans to combat future cyber security
threats. In line with the General Data Protection
regulation which entered into force in May 2018, TORM
increased its Cyber Awareness Training, enhancing the
competences of all employees.

THE UK CORPORATE GOVERNANCE CODE
This year, TORM is reporting against the 2016 UK
Corporate Governance Code (the Code) available at
www.frc.org.uk. The Company complies with 52 out of
55 provisions.

DIVERSITY
TORM recognizes that it has an obligation to its
customers, shareholders, employees and other

stakeholders to develop the Company’s talent pool
irrespective of attributes such as gender, religion,
sexuality, nationality, ethnicity or disabilities. As stated in
TORM’s Business Principles under "Respecting People",
the Company does not accept discrimination with
respect to any of the above. TORM works towards a
diverse workplace, in which everyone is included and
respected, and in which well-being at work is regarded
as a shared responsibility.

TORM’s largest shareholder, OCM Njord Holdings S.a.r.l.
(Oaktree), holds 64.4% of TORM’s A-shares. However,
TORM’s key minority shareholder protection rights imply
that TORM’s Minority Director maintains approval rights
over Reserved Matters such as related party transactions,
larger business acquisitions and the issuance of certain
share, warrant or convertible debt instruments.

TORM has a distribution policy with the intention to
distribute 25-50% of net income semi-annually via
dividends or share repurchases. The Board of Directors
believes that this policy strikes a balance between
retaining financial and strategic flexibility and allowing
shareholders to benefit directly from TORM’s positive
financial results.

For the first half of 2018, TORM did not distribute any
dividend payments to its shareholders. The Board of
Directors further proposes that no dividend be declared
for the second half of 2018. For further details on
distributions to shareholders in 2018, please see the
“Investor Information” section on pages 81-83.

Mr. Christopher H. Boehringer, Chairman of TORM’s
Board of Directors

For TORM, good corporate governance represents the
framework and guidelines for business management and
aims to ensure that the Company is managed in a proper
and orderly manner, consistent with applicable laws and
regulations.

It is important for the Board of Directors that TORM
maintains a transparent governance structure and
operational set-up with all elements of the operating
platform integrated under the One TORM strategy. The
Board of Directors believes this is in the best interests of
all key stakeholders and will support TORM as the
Reference Company in the product tanker industry.

ACHIEVEMENTS
Following the successful listing of TORM plc on Nasdaq
in New York in December 2017, a primary focus for the

TORM ANNUAL REPORT 2018

GOVERNANCE

Governance

CORPORATE GOVERNANCE

THE BOARD OF DIRECTORS
The Board of Directors is entrusted with the overall
responsibility for the Company. The duties of the
Directors include establishing policies for strategy,
accounting, organization, finance and the appointment
of executive officers. The Board of Directors governs
the Company in accordance with the limits prescribed
by the Articles of Association or by any special
resolution of the shareholders. The Board of Directors
is also overall responsible for the Company’s internal
controls and risk assessment. This is described in
further detail in the “Risk Management” section of the
“Strategic Report” and in the “Audit and Risk
Committee Reports”.

The Board delegates day-to-day responsibility for
running the Company to the Executive Director and
passes certain responsibilities to various Board
committees.

The Board of Directors has six prescheduled meetings
on an annual basis held in connection with the
quarterly result announcements, the approval of the
annual budget and the Annual General Meeting. The
actual meeting frequency is in general higher, as
extraordinary meetings are held to account for
specific matters. In 2018, the Board of Directors had 15
meetings.

TORM has a one-tier management system in place.
This means that Executive Director Mr. Jacob
Meldgaard serves on TORM plc’s Board of Directors
and as the Chief Executive Officer of TORM A/S – the
main subsidiary within the TORM Group

The Board of Directors of TORM plc consists of Mr.
Christopher H. Boehringer as Chairman and Non-
Executive Director, Mr. David N. Weinstein as Deputy
Chairman, Senior Independent Director, Minority
Director and Non-Executive Director, Mr. Torben
Janholt as Non-Executive Director, Mr. Göran Trapp as
Non-Executive Director and Mr. Jacob Meldgaard as
Executive Director. In addition, TORM plc has three
Board Observers who attend most of the Board
meetings. The Board Observers are Mr. Lars Bjørn
Rasmussen, Mr. Rasmus J. Skaun Hoffmann (both
employee-elected in TORM A/S) and Mr. Jeffrey S.
Stein (Deputy Minority Director).

COMPOSITION OF THE BOARD OF DIRECTORS
Members and attendance at meetings held during 2018

In accordance with the Corporate Governance Code
Provision C.3.1, the Directors, with the exception of the
B-Director who is not appointed for a specified term
but will continue until removed by the B-shareholder,
all retired and were re-elected for a period of two
years at TORM plc’s Annual General Meeting on 12
April 2018. Mr. Christopher H. Boehringer, Mr. Torben
Janholt and Mr. Göran Trapp were all elected for a
two-year period until 2020.

BOARD EVALUATION
In 2018, the Board of Directors conducted a self-
evaluation. The evaluation focused on Board
accountability and composition, the Board’s role in
setting strategy, risk management and succession
planning and the effectiveness of the Board
committees. The evaluation is in the form of a survey.
In line with the Board of Directors’ focus in 2018, the
evaluation was extended to cover cyber security, crisis
management, gender diversity, succession planning

Board of Directors

Mr. Christopher H. Boehringer (Chairman)

Mr. David N. Weinstein (Deputy Chairman and Senior Independent Director)

Mr. Göran Trapp

Mr. Torben Janholt

Mr. Jacob Meldgaard (Executive Director)
Mr. David Weinstein, Mr. Göran Trapp and Mr. Torben Janholt are considered Independent Directors.

Meetings

attended/

held

14/15

15/15

13/15

15/15

TORM ANNUAL REPORT 2018

GOVERNANCE

CORPORATE GOVERNANCE

and talent strategy. In addition to the formal Board
evaluation, the Board Chairman met each Non-
Executive Director individually during the year to
discuss their contribution to the Board. The Board will
continue to perform an evaluation on an annual basis.

BOARD COMMITTEES
The Board of Directors has established four
committees for which formal Terms of Reference have
been approved by the Board of Directors and can be
found on TORM’s website.

The Audit Committee assists the Board of Directors in
supervising and enhancing financial reporting, internal
controls and auditing processes.

The Risk Committee is responsible for supervisory
oversight and monitors responsibilities with respect to
internal controls and risk management.

The Remuneration Committee assists the Board of
Directors in reviewing Management’s performance and
remuneration as well as the Company’s general
remuneration policies.

MANAGEMENT STRUCTURE AND DELEGATION
OF AUTHORITY
The Board of Directors has delegated the day-to-day
management of the business to the Executive
Director, Mr. Jacob Meldgaard. This includes the
Company’s operational development and
responsibility for implementing the strategies and
overall decisions approved by the Board of Directors.
The Executive Director also serves as Chief Executive
Officer in the Group’s largest subsidiary, TORM A/S.

Transactions of an unusual nature or of major
importance may only be effected by the Executive
Director based on a special authorization granted by
the Board of Directors. If certain transactions cannot
await approval by the Board of Directors due to their
urgency, the Executive Director shall, taking into
consideration the interests of the Company to the
extent possible, obtain the approval by the Chairman
and ensure that the Board of Directors is subsequently
informed. Any transaction shall always be subject to
the authorizations stated in the Company’s Articles of
Association, including any required approvals by the
Minority Director.

The Nomination Committee is responsible for
maintaining and developing a number of governance
procedures and evaluation processes in relation to the
Board of Directors.

Further details on the work in the four committees can
be found in the individual committee reports.

The Executive Director is assisted by the Senior
Management Team in the day-to-day management of
the business. The Senior Management Team consists
of the following employees in TORM A/S (in addition
to the Executive Director): Mr. Christian Søgaard-
Christensen (Chief Financial Officer), Mr. Lars
Christensen (Senior Vice President and Head of
Projects) and Mr. Jesper S. Jensen (Senior Vice

President and Head of Technical Division). The Senior
Management Team holds weekly meetings. In
December 2018, Mr. Christian Søgaard-Christensen
tendered his resignation as Chief Financial Officer
(CFO) in TORM A/S; however, he will continue his
normal duties as CFO during a transition period and
will continue to attend the Board meetings.

The Senior Management Team members are
individually responsible for further authority
delegation within the organization. TORM maintains an
overview of mandates and authorities for different
levels within the organization.

SHAREHOLDER COMMUNICATION
To ensure consistent communication to all investors,
quarterly and annual financial statements and other
stock exchange announcements are the main channels
of communication. In 2018, TORM maintained regular
capital market contact through analyst and industry
presentations, investor meetings and conference calls.
Roadshows are primarily held in Copenhagen and in
the major European and US financial centers.

TORM ANNUAL REPORT 2018

GOVERNANCE

CORPORATE GOVERNANCE

SELECTED MINORITY PROTECTION PROVISIONS IN
TORM’S ARTICLES OF ASSOCIATION
TORM’s central corporate governance provisions aim
to ensure appropriate minority shareholder protection.
The key provisions include:

• The appointment of a Minority Trustee who shall

hold a B-share giving the Minority Trustee the right
to appoint a Minority Director, namely the Deputy
Chairman of the Board. The Minority Director has
approval rights over Reserved Matters such as
related party transactions, larger business
acquisitions and the issuance of certain share,
warrant or convertible debt instruments
• The appointment of a Board Observer and

alternates for the Minority Director

The B-share has no other rights than the right to elect
one member of the Board of Directors and one Board
Observer in TORM. The Minority Trustee will exercise
this voting right on behalf of all A-shareholders other
than Oaktree Capital Management (Oaktree) and its
affiliates. Further, a single redeemable and non-
transferable C-share has been issued to Oaktree in
order to give Oaktree sufficient voting rights to elect
all Board members other than the Minority Director
(and employee representatives) and to vote for
amendments to TORM’s Articles of Association with
the exception of certain minority protection rights.
The C-share has no voting rights on any other matters.

Both the B-share and the C-share will be redeemed
by TORM upon a reduction in Oaktree’s shareholding
below 1/3 of the issued and outstanding shares
in TORM.

The Articles of Association are available on TORM’s
website www.torm.com/about-torm.

specified term but will continue until removed by
the B-shareholder. The Company believes that
continuity in the B-Director role is important, as
this Director serves as a representative for the
minority shareholders. The B-shareholder, who
represents the minority shareholders, can replace
the B-Director at any time.

CORPORATE GOVERNANCE CODE
This year, TORM is reporting against the 2016 UK
Corporate Governance Code (the Code) available at
www.frc.org.uk. The Code sets out principles to apply
and provisions which operate on a “comply or explain”
basis. TORM’s Corporate Governance Statement is
available at http://www.torm.com/about-torm. The
following Corporate Governance Report, including the
reports of the Audit, Risk, Nomination and
Remuneration Committees, outlines how the Company
has applied the Code’s principles and provisions.

TORM has considered the individual provisions and is
compliant with 52 out of 55 provisions. TORM is not in
compliance with the provisions outlined below
because of business decisions taken after careful
consideration by the Board of Directors. Based on the
explanations provided below, no plan is currently in
place to attain compliance with the below
recommendations.

• Provision B.2.3 and Provision B.7.1 – The Non-

Executive Directors should be appointed for a
specified term, and no longer than a three-year
term. The B-Director is not appointed for a

• Provision D2.1 – The board should establish a
remuneration committee of at least three
independent non-executive directors. In addition,
the company chairman may also be a member of,
but not chair, the committee if he or she was
considered independent on appointment as
chairman. The Chairman, Mr. Boehringer, has been
appointed as Chairman of the Remuneration
Committee. However, given his association with
the controlling shareholder and their alignment of
interest with regard to remuneration, the Board
believes it to be appropriate for Mr. Boehringer to
chair that Committee.

From 2019, TORM will adopt the newly released
UK Corporate Governance Code which applies
to accounting periods beginning on or after
1 January 2019.

An overview of TORM’s position on the individual
provisions is available on TORM’s website
www.torm.com/about-torm.

TORM ANNUAL REPORT 2018

GOVERNANCE

BOARD OF DIRECTORS

MR. CHRISTOPHER H. BOEHRINGER
Non-Executive Director and Chairman of TORM’s Board of
Directors.

MR. DAVID NEIL WEINSTEIN
Senior Independent Director and Deputy Chairman of TORM’s
Board of Directors.

MR. GÖRAN TRAPP
Non-Executive Director.

Born: 01-01-1971.
Nationality: Canadian.
Employment: Managing Director, Oaktree Capital
Management (Intl) Limited.
Education: BA degree in Economics from Harvard University,
CFA Charterholder and an MBA from INSEAD in France,
where he graduated with Distinction.

Mr. Boehringer is Chairman of TORM’s Nomination Committee
and the Remuneration Committee and a member of the Risk
Committee.

Prior to joining Oaktree in March 2006, Mr. Boehringer
worked at Goldman Sachs, FITravel Corporation, Warburg
Dillon Read/SG Warburg and LTU GmbH & Co.

Other Board directorships: Eolia Renovables de Inversiones
and Life Company Consolidation Group Limited.

Born: 22-08-1959.
Nationality: US citizen.
Employment: Senior Investment Banking, Governance and
Reorganization Specialist.
Education: Brandeis University, BA Economics and Columbia
University School of Law, Juris Doctor.

Born: 31-01-1962.
Nationality: Swedish.
Employment: Board member.
Education: Stockholm School of Economics,
MSc Economics and Business Administration (Majoring in
Finance, 1983-1987).

Mr. Weinstein is a member of TORM’s Audit Committee,
Nomination Committee and Remuneration Committee.

Mr. Trapp is Chairman of TORM’s Audit Committee and Risk
Committee.

Mr. Weinstein has had a number of Board leadership positions
in inter alia Seadrill Ltd., The Oneida Group, Deep Ocean
Group Holdings AS, Horizon Lines, Inc., Interstate Bakeries
Corporation, Pioneer Companies, Inc. and York Research
Corporation and has served as Managing Director of Calyon
Securities Inc., BNP Paribas, Bank of Boston and Chase
Securities Inc.

Other Board directorships: Pacific Drilling S.A.

Mr. Trapp was with Morgan Stanley from 1992 to 2013 where
he started as crude oil trader, then became Head of Oil
Products Trading Europe & Asia, Global Head of Oil Trading
and Head of Commodities EMEA. Prior to joining Morgan
Stanley, Mr. Trapp was crude oil trader at Statoil.

Other Board directorships: Chairman of Madrague Capital
Partners AB and Energex Partners Ltd.

TORM ANNUAL REPORT 2018

GOVERNANCE

BOARD OF DIRECTORS

MR. TORBEN JANHOLT
Non-Executive Director.

MR. JACOB MELDGAARD
Executive Director.

Born: 11-10-1946.
Nationality: Danish.
Employment: CEO of Pioneer Marine Inc., Pioneer Marine
Hellas S.A. and Just Water ApS.
Education: IESE, Barcelona (2012/2008), Harvard,
Copenhagen (Board of Directors Program) (2011), IMD,
Lausanne (2010/2007/2003/2000/1999), CEDEP/INSEAD
Management School, Fontainebleau (1990), Niels Brock
Business College, Copenhagen (Certificate in Business
Administration, 1974).

Mr. Janholt is a member of TORM’s Audit Committee, Risk
Committee and Remuneration Committee.

Mr. Janholt has been the CEO and President for J. Lauritzen
A/S from 1998 to 2013 and Chairman of the Danish
Shipowners’ Association from 2005 to 2009 and holds a
number of management duties/directorships.

Other Board directorships: Chairman of Otto Suenson & Co.
A/S, Board member of Pioneer Marine Inc. Singapore, Pioneer
Marine Hellas S.A., A/S United Shipping & Trading Company,
Bunker Holding A/S, Uni-Chartering A/S, Uni-Tankers A/S.

Born: 24-06-1968.
Nationality: Danish.
Education: Copenhagen Business School, Denmark
(Bachelor’s degree in International Trade), Wharton Business
School and Harvard Business School, USA (Advanced
Management Program).

Mr. Jacob Meldgaard has been Chief Executive Officer since 1
April 2010. Before this, Mr. Meldgaard served as Executive
Vice President at Dampskibsselskabet NORDEN A/S and held
a number of management positions in J. Lauritzen A/S and
A. P. Møller-Mærsk.

Other Board directorships: Board member of Danish Ship
Finance, SYFOGLOMAD Ltd., Danish Shipping and The TORM
Foundation.

TORM ANNUAL REPORT 2018

GOVERNANCE

AUDIT COMMITTEE REPORT

The Company applies the requirements of the UK
Corporate Governance Code (April 2016) for TORM
plc’s year ended 31 December 2018.

In discharging its duties, the Audit Committee seeks to
balance independent oversight of the matters within
its remit with providing support and guidance to
Management.

The Board is satisfied that the Audit Committee meets
the independence requirements established and
applicable laws, regulations and listing requirements,
including the UK Corporate Governance Code.
Members of the Audit Committee have the necessary
qualifications and competences relevant to the
shipping sector - please see the members’ biographies
on pages 59-60. The Chairman of the Audit
Committee, Mr. Göran Trapp, has in the judgement of
the Board recent and relevant financial experience in

order to have the ability to make an independent
assessment of the appropriateness of the Company’s
financial statements and internal controls as well as
the planning and execution of the external audit. The
Audit Committee also has access to the financial
expertise of the Group and its independent auditors
and can seek further professional advice at the
Company’s expense, if required.

Nasdaq in New York requires that the Audit
Committee of a US-listed company is comprised
entirely of Directors who the Board of Directors has
determined to be independent. This term is defined
under Rule 10A-3 promulgated under the Exchange
Act and under the rules of Nasdaq in New York. Mr.
Christopher H. Boehringer, a member of the Audit
Committee, is not considered independent.

COMPOSITION OF THE AUDIT COMMITTEE
Members and attendance at meetings held during 2018

Committee members

Mr. Göran Trapp (Chairman)

Mr. Christopher H. Boehringer (resigned 14 August 2018)

Mr. David N. Weinstein (appointed 14 August 2018)

Mr. Torben Janholt

Senior Independent Director Mr. David N. Weinstein attended five meetings in total, three as an Observer and two as a member.

Company Chairman Mr. Christopher H. Boehringer attended five meetings in total, two as an Observer and three as a member.

Meetings

attended/

held

5/5

3/5

2/5

5/5

Mr. Göran Trapp
Chairman of TORM’s Audit Committee

CHAIRMAN’S STATEMENT
Dear Shareholder

The Audit Committee is pleased to present its report
for 2018.

The purpose of this report is to describe how the
Audit Committee has carried out its responsibilities
during the year. Overall, the role of the Audit
Committee is to monitor and review the integrity and
quality of the Company’s financial statements, internal
control and risk management, audit and risk programs,
business conduct and ethics, "whistleblowing" and the
appointment and findings of the independent auditor.

TORM ANNUAL REPORT 2018

GOVERNANCE

AUDIT COMMITTEE REPORT

Pursuant to phase-in periods for newly listed
companies allowed under the rules of Nasdaq in New
York, the Company is required to have a fully
independent Audit Committee within one year from
the date of the listing in New York. As a result, Mr.
Christopher H. Boehringer resigned from the Audit
Committee on 14 August 2018. The Deputy Chairman
and Senior Independent Director Mr. David Weinstein,
who has been deemed to meet the independence
requirements, was appointed as new independent
member of the Audit Committee.

The Board of Directors has determined that Mr. Göran
Trapp, who serves as Chairman of the Audit
Committee, qualifies as an “Audit Committee financial
expert” and that he is “independent” in accordance
with SEC rules.

SUMMARY OF THE ROLE OF THE AUDIT
COMMITTEE
The purpose of the Audit Committee is to assist the
Board of Directors in fulfilling its responsibilities
relating to the oversight of the quality and integrity of
the accounting, auditing, financial reporting and risk
management of the Company and such other duties
as may from time to time be assigned to the Audit
Committee by the Board and are required by the rules
and regulations of the UK Corporate Governance
Code or any securities exchange on which the
Company’s securities are traded.

The Audit Committee’s function is one of oversight
only and does not relieve the Board of Directors of its
responsibilities for preparing financial statements that
accurately and fairly present the Company’s financial
results and condition, nor the auditors of their
responsibilities relating to the audit or review of
financial statements. The Audit Committee shall
oversee the accounting, financial reporting, risk
management processes and the audits of the
Company’s financial statements. It also provides
advice to the Board on whether the Annual Report as
a whole is fair, balanced and understandable. The
Audit Committee shall oversee and control the
qualifications, independence and performance of the
appointed independent auditors.

The formal role of the Audit Committee is set out in its
Terms of Reference, which are available at
http://www.torm.com/uploads/media_items/terms-
of-reference-audit-committee.original.pdf.

MEETINGS
The Audit Committee meets at least four times a year,
and the Chief Financial Officer of TORM A/S, the Head
of Group Finance at TORM A/S as well as the
Company’s independent auditor will normally attend
these meetings by invitation. During 2018, the
Committee met five times. Mr. Göran Trapp and Mr.
Torben Janholt attended all meetings held in 2018 in
person. Mr. Christopher H. Boehringer attended all
meetings held in 2018 in person. Three were attended
in his capacity as a Committee member and two as an

Observer. Mr. David N. Weinstein attended all
meetings held in 2018 in person or by telephone. Two
were attended in his capacity as a Committee member
and three as an Observer.

In 2018, the Audit Committee particularly discussed
accounting policies and estimates, including the
quarterly impairment indicator test of the vessels in
the Tanker Segment, the quarterly going concern
statement as well as the treatment and impact of the
revised IFRS standards. Furthermore, the Audit
Committee discussed the internal control
environment, the new finance system MS Dynamics
NAV 2018 and business ethics compliance.

FINANCIAL REPORTING AND SIGNIFICANT
FINANCIAL JUDGEMENTS
The principal matter of judgement considered as
significant by the Audit Committee in relation to the
2018 financial statements was the impairment of the
vessels in the Tanker Segment. This issue was
discussed and reviewed with Management and the
independent auditors, and the Audit Committee
challenged judgements and sought clarification where
necessary.

As explained in note 7 to the financial statements on
pages 110-111, it was concluded that neither an
additional impairment nor a reversal of the 2016
impairment was necessary, as the value in use was
materially equivalent to the carrying amount.

TORM ANNUAL REPORT 2018

GOVERNANCE

AUDIT COMMITTEE REPORT

In order to determine whether a cash-generating unit
(CGU) is impaired, management assesses whether
there are any indicators for impairment of the vessels
in the Tanker Segment. If such indicators exist, the
future discounted net cash flow deriving from the
CGU must be estimated. These estimates are based on
a number of assumptions including future freight
rates, estimated operating expenses, weighted
average cost of capital (WACC) and level of inflation.

In view of the softening product tanker market,
Management prepared a detailed impairment test for
the Audit Committee setting out the key assumptions
for the CGU. The Audit Committee challenged these
assumptions and judgements to ensure that all
material factors were included.

The Audit Committee noted in particular that the
freight rates in the years 2019-2021 are consistent with
the long-term planning assumptions used by the
Company. Further, the Audit Committee discussed
with Management on the freight rates beyond 2021
that are based on the Company’s 10-year historical
average spot rates consistent with last year. The Audit
Committee was satisfied with the freight rates applied.

The Audit Committee was satisfied that the rates used
to discount future cash flows appropriately reflected
current market assessments of the time value of
money and the risk associated with the CGU
concerned.

The Audit Committee was satisfied that future cash
flows related to operating expenses in the Tanker fleet
appropriately reflected current market assessments.

audit appointment at the latest after completion of the
2020 audit.

Independent audit
During the year, Deloitte undertook the independent
audit and certain non-audit work. They provided the
Audit Committee with information and
recommendations on the financial statements and
internal controls.

In May 2018, the Audit Committee reviewed and
approved the terms, areas of responsibility and scope
of the 2018 audit as set out in the independent
auditors’ engagement letter. During the year, Deloitte
provided the Audit Committee with recommendations
and updates regarding audit-related services on
subjects such as regulatory and statutory reporting,
Audit Committee training, etc. The independent
auditors are expected to perform the audit according
to relevant auditing standards. The Independent Audit
Plan was approved in August 2018 and has been
successfully completed at the date of this report.

The Audit Committee was satisfied that the most
material assumptions on which the impairment
assessment is based are appropriate.

For further description please refer to note 7 in the
Financial Statements on pages 110-111.

Effectiveness
In 2018, the Audit Committee carried out a detailed
self-assessment by way of questionnaire and
discussions facilitated by the Head of Group Finance.
Based on the self-assessment, no material concerns
arose.

AUDITOR APPOINTMENT AND TENDERING
In 2016, TORM plc, which was newly incorporated,
became the holding company of the Group, and
Deloitte LLP (UK) has been its independent auditors
since then. Prior to that, Deloitte Statsautoriseret
Revisionspartnerselskab (Denmark) had been the
independent auditors of TORM A/S (now a subsidiary
of TORM plc). From a Group perspective, Deloitte
Denmark was elected in April 2003 replacing Arthur
Andersen, and there has not been an audit tender
since that date.

Due to UK transitional provisions, TORM plc will
undertake a tender and rotation of the independent

TORM ANNUAL REPORT 2018

GOVERNANCE

AUDIT COMMITTEE REPORT

Auditor quality assessment
The Audit Committee conducts an annual review of
the performance of the independent auditors by a
combination of discussions with Management, the
quality of written deliverables to the Audit Committee
and the quality of dialogue and insights provided
during Audit Committee meetings. Having completed
this review, the Audit Committee agreed that the audit
process, independence and quality of the external
audit were satisfactory, and accordingly they will be
proposed for reappointment at the forthcoming
Annual General Meeting.

Auditor independence and objectivity
The Company has policies and procedures in place to
ensure that the independence and objectivity of the
independent auditor is not impaired. These include
restrictions on the types of services which the
independent auditor can provide, in line with the
Ethical Standard published by the UK Financial
Reporting Council (FRC). Details of the services that
the independent auditors cannot be engaged to
perform were provided to the Audit Committee in the
November 2018 Audit Committee meeting
documentation. The policy regarding pre-approval of
audit and non-audit fees will be available on request.

Audit and non-audit fees
Full disclosure of the audit and non-audit fees paid
during 2018 can be found in note 4 to the
consolidated financial statements.

Audit fees:
Non-audit fees:

USD 0.6m
USD 0.2m

The independent auditors may be contracted to
perform certain non-audit activities. The Audit
Committee believes this can be performed without
compromising the auditor’s independence and
objectivity. The Audit Committee will allocate the non-
audit work after considering the Company’s policy on
the provision of non-audit services by the Company’s
auditors. Copies of the pre-approval procedures are
available on request.

Fees relating to the provision of non-audit services by
Deloitte amounted to USD 0.1m corresponding to 17%
and related primarily to the review of quarterly
statements and the filing of Form F-3. The Audit
Committee considered that such services were most
efficiently provided by the external auditors, as much
of the information used in performing such work was
derived from audited financial information. In order to
maintain the external auditors’ independence and
objectivity, the external auditors did not make any
decisions on behalf of Management.

Internal audit
The Audit Committee assesses the need for an internal
audit function on an annual basis and makes a
recommendation to the Board of Directors. The Audit
Committee was satisfied that based on the Company’s
size, complexity and its internal control environment,
the Company can defer the establishment of an
internal audit function but must revisit the decision in
2019. Further, the Audit Committee supported the use
of an audit firm to review selected areas when needed
or requested by the Audit Committee and/or TORM’s
Management.

RISK MANAGEMENT AND INTERNAL CONTROLS
Risk management
The Audit Committee regularly discusses the
principles for risk assessment and risk management
related to the financial reporting and reviews the
Company’s significant risks, including fraud, and their
impact on the financial reporting, including stress
testing, when relevant. During 2018, the Audit
Committee was given a presentation by the risk
management team.

The principal risks and uncertainties are outlined in the
“Risk Management” section of the “Strategic Report”
on pages 40-43.

TORM ANNUAL REPORT 2018

GOVERNANCE

AUDIT COMMITTEE REPORT

Internal controls
The Board of Directors fulfills its responsibility
regarding effectiveness of the risk management and
Internal Controls over Financial Reporting (ICFR)
through the Audit Committee. As a result of the US
listing on Nasdaq in 2017, TORM was required to
become compliant with the Sarbanes-Oxley Act
(SOX) as of the end of 2018, resulting in increased
regulatory requirements. Therefore, Management has,
together with the Audit Committee, focused on
ensuring that the ICFR meet all relevant requirements.

The ICFR are based on the Internal Control –
Integrated Framework 2013 issued by the Committee
of Sponsoring Organizations of the Treadway
Commission (COSO), which ensures enabling of best
practice and strong control environment. The
oversight by the Audit Committee includes the
recurring reporting, including management oversight
and the outcome of management testing.

Full details of how the business implements its
enterprise risk management on a Group basis are set
out in the “Risk Management” section of the “Strategic
Report” on pages 40-43.

Whistleblowing
The Group’s whistleblower policy, which supports the
groupwide Business Principles, is monitored by the
Audit Committee. A copy of the Group’s Business
Principles is available on TORM plc’s website
http://www.torm.com/uploads/media_items/torm-
business-priciples.original.pdf.

The Audit Committee received reports providing
details of matters reported through the Group’s
international, confidential telephone reporting lines
and secure e-mail reporting facility, which is operated
on its behalf by an independent third party, Holst,
Advokater. All matters reported are investigated by
Holst, Advokater and reported to the Board of
Directors as well as the Audit Committee together
with details of any corrective actions taken. The Audit
Committee also received reports at each Audit
Committee meeting providing details of any fraud
losses during the quarter.

Approval
On behalf of the Audit Committee

Mr. Göran Trapp
Chairman of the Audit Committee
12 March 2019

TORM ANNUAL REPORT 2018

GOVERNANCE

RISK COMMITTEE REPORT

The Risk Committee’s Terms of Reference are
available at:
http://www.torm.com/uploads/media_items/terms-
of-reference-risk-committee-13-nov-2018.original.pdf

In 2018, the Risk Committee had focus on
understanding risks related to digital infrastructure, IT
security and business continuity. The operation of our
business processes depends on reliable IT systems. A
breach or failure of our digital infrastructure due to
intentional actions such as attacks on our cyber
security could disrupt our operations. This could
damage our operations, result in additional operational
costs and have reputational consequences. To
mitigate the risk of cyber-attacks, TORM continuously
monitors and implements key security procedures and
behaviours aimed at preventing recurrence. Moreover,
the Risk Committee focused on the risks related to
derivatives trading and financial risks as well as risks
related to strategic decisions around the Company’s
capital structure.

The Risk Committee seeks to balance independent
oversight of matters within the scope of the Risk
Committee with providing support and guidance to
Management. The Risk Committee is confident that
the Committee, supported by members of TORM’s
Senior Management, has carried out its duties
effectively and to a high standard in 2018.

MEETINGS
The Risk Committee normally meets no less than three
times a year. The Risk Committee is confident that
three annual meetings enable the Committee to
effectively carry out its responsibilities. The
appropriateness of the frequency will be evaluated
annually.

Senior Independent Director Mr. David N. Weinstein
attended all Risk Committee meetings in 2018.
Ordinarily, the Executive Director, the Chief Financial
Officer of TORM A/S and TORM A/S’ Head of Group
Treasury attend the Risk Committee meetings.

COMPOSITION OF THE RISK COMMITTEE
Members and attendance at meetings held during 2018

Committee members

Mr. Göran Trapp (Chairman)

Mr. Christopher H. Boehringer

Mr. Torben Janholt

Meetings

attended/held

3/3

GOVERNANCE

Mr. Göran Trapp
Chairman of TORM’s Risk Committee

CHAIRMAN’S STATEMENT
Dear Shareholder

The Risk Committee is pleased to present its report
for 2018.

The Risk Committee is delegated by the Board of
Directors to oversee TORM’s risk management and to
advise the Board on risk-related matters. The Risk
Committee is also responsible for endorsing TORM’s
risk policies for Board approval and assessing quality
and effectiveness of the companywide risk
management program.

TORM ANNUAL REPORT 2018

RISK COMMITTEE REPORT

MEMBERSHIP
The Risk Committee assesses that the committee
members have sufficient qualifications within risk
management and capital market knowledge and
abilities to make an independent assessment of risks
applied consistently throughout the organization, the
appropriateness of the Company’s risk management
and control environment as well as the planning and
execution of the risk management policies and
funding activities. The Risk Committee has access to
the financial and risk management competencies
within the TORM Group and its external advisors. The
Risk Committee is also authorized to seek further
external advice at the Company’s expense, if required.

SUMMARY OF THE ROLE OF THE COMMITTEE
The purpose of the Risk Committee is to assist the
Board of Directors in fulfilling its responsibilities in
relation to the oversight of the quality and
effectiveness of the Company’s risk management
program.

This is an ongoing process of refinement and
embedding of risk management practice throughout
the organization. The risk management framework
builds on policies and procedures that are applied
throughout the organization.

The Risk Committee oversees the risk management
processes and reporting of the Company and
discusses relevant risk management policies, capital
structure targets and planned funding initiatives. The

Risk Committee is responsible for providing
recommendations to the Board of Directors with
respect to these targets and initiatives.

These policies outline core activities and risks within IT
and insurance and what measures TORM has taken to
mitigate these risks.

ACTIVITIES DURING THE YEAR
At each meeting, the Risk Committee follows up on
key risk indicators to ensure alignment between risk
tolerance, actual risk level and business objectives.
These measures include: Monitoring of credit lines,
monitoring of compliance with internal mandates and
exposure to financial derivatives.

TORM safety on board vessel
The Risk Committee reviewed the status and next
steps of the global One TORM safety culture program
aimed to enhance the overall safety performance for
employees, the environment, customers and maintain
a high safety awareness throughout TORM.

Disruptive technology risk
During 2018, the Risk Committee followed up on key
indicators assessing the uptake of electric vehicle
technologies in public and commercial transportation
and autonomous vehicles. These technologies have
over a long-term horizon the potential to impact
demand and trading patterns within the refined
products sector due to a reduction of transportation
requirements.

Review policies related to IT and insurances
The Risk Committee reviewed TORM’s IT Policy and
governance set-up as well as TORM’s Insurance Policy.

Cyber risk
The Risk Committee reviewed TORM’s preparedness
and resilience in case of a breach or failure of the
Company’s digital infrastructure due to intentional
actions such as attacks on the Company’s cyber
security. TORM has identified critical systems,
increased awareness and established business
continuity plans and emergency plans in case of cyber
incidents.

EU General Data Protection Regulation
The Risk Committee reviewed TORM’s preparations
towards the implementation of the EU General Data
Protection Regulation, which became effective in
May 2018.

Fuel availability following the IMO 2020
sulfur regulation
The Risk Committee received support from an
independent research consultancy to assess the
strategic risk related to scrubber installations. The
consultancy presented the Risk Committee with a
contrarian view on the attractiveness of having vessels
with scrubbers.

TORM ANNUAL REPORT 2018

GOVERNANCE

RISK COMMITTEE REPORT

Enterprise risk management
The Risk Committee reviewed the key risks faced by
TORM and the underlying drivers of those exposures.
The alignment of actual risk and desired risk was
discussed, and the Risk Committee approved the
Company’s risk profile based on these discussions.
Furthermore, the Risk Committee reviewed the
assigned management accountability, which highlights
current and planned risk mitigating activities. TORM’s
annual Enterprise Risk Management Report was
approved at the Board of Directors meeting in Q1
2019. TORM’s annual risk assessment is presented in
detail in the “Risk Management” section.

Approval
On behalf of the Risk Committee

Mr. Göran Trapp
Chairman of the Risk Committee
12 March 2019

Financial risk management and review of
Financial Policy
TORM uses financial derivatives to manage market
risks and to optimize earnings. In addition, the
Company uses derivatives to hedge exposures related
to interest rate and foreign exchange risks. During
2018, the Risk Committee reviewed and adjusted
TORM’s interest rate hedging policy to ensure
continued alignment with risk appetite.

The Risk Committee reviewed TORM’s exposures, the
relevant tolerance levels and appropriate hedging
instruments and subsequently approved the Financial
Policy that clearly outlines mandates.

Liquidity risk and counterparty risk
The Risk Committee monitored TORM’s current and
forecasted liquidity position and compliance with
financial covenants on borrowing facilities over the
coming 12 months. The Risk Committee performed a
review of counterparty risk related to TORM’s
customers.

Capital structure risks
The Risk Committee reviewed risk considerations
related to the Company’s capital structure including:
Liquidity position, loan-to-value, Distribution Policy,
off-balance sheet liabilities, terms and sources of
funding, vessel investments and fleet employment
strategy.

TORM ANNUAL REPORT 2018

GOVERNANCE

NOMINATION COMMITTEE REPORT

SUMMARY OF THE ROLE OF
THE NOMINATION COMMITTEE
It is the responsibility of the Nomination Committee to
regularly review the structure, size and composition
(including the skills, knowledge, experience and
diversity) of the Board of Directors and further to
make recommendations to the Board of Directors with
regard to any changes that may be deemed
necessary. The Nomination Committee will also
maintain an oversight of the operation and
effectiveness of the Board of Directors and the
corporate governance and management of the
Company.

In addition, the Nomination Committee considers
succession planning for Directors and the Chief
Executive Officer in the course of its work, considering
the challenges and opportunities facing the Company,
and the skills and expertise needed on the Board of
Directors in the future.

The Committee has set a target of 20% female
representatives on the Board in 2020 or 17% provided
that the Board of Directors is extended with one
additional member.

The Nomination Committee also reviews the
leadership needs of the organization, both Executive
and Non-Executive, with a view to ensuring the
continued ability of the organization to compete
effectively in the marketplace.

The Nomination Committee also establishes the
process for conducting the review of the performance
of the Executive Director of the Company.

The Nomination Committee’s Terms of Reference are
available at:
http://www.torm.com/uploads/media_items/terms-
of-reference-nomination-committee.original.pdf

COMPOSITION OF THE NOMINATION COMMITTEE
Members and attendance at meetings held during 2018

Committee members

Mr. Christopher H. Boehringer (Chairman)

Mr. Torben Janholt

Mr. David N. Weinstein

Meetings

attended/held

1/1

GOVERNANCE

Mr. Christopher H. Boehringer
Chairman of TORM’s Nomination Committee

CHAIRMAN’S STATEMENT
Dear Shareholder

The Nomination Committee is pleased to present its
report for 2018.

The purpose of this report is to describe how the
Nomination Committee has carried out its
responsibilities during the year.

TORM ANNUAL REPORT 2018

NOMINATION COMMITTEE REPORT

ACTIVITIES DURING THE YEAR
Assessment of effectiveness of the Board of
Directors
According to the recommendations of the UK
Corporate Governance Code, the Board is to review
and assess its performance annually. The review
focused on Board accountability and composition, the
Board’s role in setting strategy, risk management and
succession planning and the effectiveness of the
Board committees. The evaluation is in the form of a
survey. In line with the Board of Directors’ focus in
2018, the evaluation was extended to cover cyber
security, crisis management, gender diversity,
succession planning and talent strategy. The Board
will continue to perform an evaluation on an annual
basis.

Board composition
According to Nasdaq New York requirements, the
Audit Committee of a US-listed company has to
consist entirely of non-independent Directors. Mr.
Christopher Boehringer was not considered
independent, and during 2018 he stepped down from
the Audit Committee.

After considering various candidates, the Nomination
Committee decided to recommend to the Board of
Directors to appoint the Deputy Chairman, Mr. David
Weinstein, who was deemed to meet the
independence requirement and was willing to accept
the appointment, as new independent member of the
Audit Committee. The Board of Directors
subsequently approved the appointment.

Review of the Terms of Reference
In accordance with its Terms of reference, the
Nomination Committee reviewed and reassessed the
Terms of Reference to include updated text in relation
to the Financial Reporting Council, the revised UK
Corporate Governance Code 2018 and guidance from
The Institute of Chartered Secretaries and
Administrators.

This updated version was recommended to the Board
of Directors and subsequently approved.

Approval
On behalf of the Nomination Committee

Mr. Christopher H. Boehringer
Chairman of the Nomination Committee
12 March 2019

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

Schedule 8 of the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008
as amended in August 2013 (the “Regulations”).

The report is split into two main areas:
• The statement by the Chairman of the

Remuneration Committee

• The annual report on remuneration See pages 79-

The revised Remuneration Policy, approved by the
shareholders at the Annual General Meeting (AGM) on
12 April 2018, took effect from the date of that
meeting. As at the date of this Annual Report, TORM
plc is in compliance with the requirements of this
Remuneration Policy. The annual report on
remuneration provides details on remuneration in the
period and additional information required by the
Regulations.

The Companies Act 2006 requires the auditors to
report to the shareholders on certain parts of the
Directors’ Remuneration Report and to state whether,
in their opinion, those parts of the report have been
properly prepared in accordance with the Regulations.
The parts of the Annual Report on remuneration that
are subject to audit are indicated in that report. The
statement by the Chairman of the Remuneration
Committee and the policy report itself are not subject
to audit.

SUMMARY OF THE ROLE OF THE REMUNERATION
COMMITTEE
The Remuneration Committee assists the Board of
Directors in its responsibilities in relation to
remuneration. The main role of the Company’s
Remuneration Committee remains to ensure that the
remuneration arrangements for the Chief Executive
Officer offer appropriate incentives to enhance the
Company’s performance.

COMPOSITION OF THE REMUNERATION COMMITTEE
Members and attendance at meetings held during 2018

Mr. Christopher H. Boehringer
Chairman of TORM’s Remuneration Committee

STATEMENT BY THE CHAIRMAN OF THE
REMUNERATION COMMITTEE
Dear Shareholder

On behalf of the Remuneration Committee, the
Directors’ Remuneration Report is presented in
the following section for the year ended
31 December 2018.

This report is on the activities of the Remuneration
Committee for the period 1 January 2018 to
31 December 2018. It sets out the remuneration details
for the Executive and Non-Executive Directors of the
Company. It has been prepared in accordance with

Committee members

Mr. Christopher H. Boehringer (Chairman)

Mr. David N. Weinstein

Mr. Torben Janholt

TORM ANNUAL REPORT 2018

Meetings

attended/held

2/2

GOVERNANCE

REMUNERATION COMMITTEE REPORT

The Remuneration Committee’s responsibilities
include:
• Setting the strategy, structure and levels of

remuneration of the Company’s Directors and
Chief Executive Officer

• Ensuring compliance with policies while adhering

to legislative regulations

• Aligning the financial interests of the Chief
Executive Officer and other management
employees with the achievement of the Company’s
objectives

The overall remuneration structure comprises:
• Base salary, benefits and allowances, set at a level
appropriate to the sector and markets in which the
Company operates

• An annual bonus, based on measures of annual

financial and strategic performance

• A share-based long-term incentive plan, based on

growth in the share price

This Remuneration Report includes:
• The responsibilities of the Remuneration

Committee reflected in the Terms of Reference for
the Remuneration Committee

• The members of the Remuneration Committee
• Shareholder voting at the AGM
• The remuneration of the Board of Directors
• The remuneration of the Chief Executive Officer

ACTIVITIES DURING 2018
Chief Executive Officer’s KPIs
The Committee held two meetings in 2018. During
these meetings, the key elements discussed within the
Remuneration Committee included a review of the
Chief Executive Officer’s personal key performance
indicators (KPIs) for 2018 to ensure alignment with the
Group strategy. There were also discussions related to
the Chief Executive Officer’s performance in 2017 to
adjudicate on bonus outcomes.

The Remuneration Committee assessed the Chief
Executive Officer’s performance against long-term
and short-term targets. The Remuneration Committee
has assessed the Chief Executive Officer’s contribution
against his personal performance measures. As a
result, the performance bonus was calculated at 60%
of the yearly salary for the objective-based
contributions in 2017. Throughout this past year, the
Remuneration Committee maintained the link between
pay and performance and will continue to do so.

Remuneration Policy review
Ahead of the AGM held in April 2018 and in
accordance with its Terms of Reference, the
Remuneration Committee reviewed the Remuneration
Policy. The Policy was recommended to the Board of
Directors and subsequently approved at the AGM.

Terms of Reference review
Pursuant to its Terms of Reference, the Remuneration
Committee reviewed its Terms of Reference. Changes
were incorporated in relation to compliance with the
revised UK Corporate Governance Code 2018 and to
include updated model language from the Institute of
Chartered Secretaries and Administrators. TORM
follows the UK Corporate Governance Code as issued
by the Financial Reporting Council. The Code sets out
principles to apply and provisions which operate on a
“comply or explain” basis. The revised Terms of
Reference were recommended by the Remuneration
Committee to the Board of Directors and
subsequently approved.

Board of Directors Fees
The Remuneration Committee reviewed the Board
and Committee fees in light of TORM’s recent listing
on Nasdaq in New York. The Remuneration
Committee was in agreement that the Board and
Committee fees were in line with current trends and
did not require adjustment.

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

LTIP allocations
In February, the Remuneration Committee
recommended to the Board of Directors that a change
to the Company’s current Long-Term Incentive Plan
(LTIP) be considered as the current LTIP had very
limited retention effect within the Company. The
changes recommended included adjusting the strike
price to a more reasonable figure, calculated as the
average of 90 days before the AGM on 12 April 2018
plus a 15% premium. Furthermore, the exercise period
for any vested Restricted Share Units should be
increased from 180 to 360 days. This recommendation
was approved by the Board of Directors and
subsequently at the AGM held 12 April 2018. In further
discussions, the Remuneration Committee reviewed
the recommended LTIP 2018 allocations per individual.

General discussion
The Remuneration Committee also discussed
organization health including key metrics such as
hires, retention and demography. Additionally, the
2018 Remuneration Committee Report was discussed
and agreed ahead of publication.

The Remuneration Committee continues to monitor
developments in corporate governance and
remuneration and, where considered appropriate
based on the best interests of TORM plc and its
shareholders, the Remuneration Committee would
propose to adopt the developments.

During the year, the Remuneration Committee
received advice and/or services from the Head of
Group HR and the Chief Executive Officer together
with other senior group employees, as necessary.

On behalf of the Remuneration Committee, I thank
you for your continued support and trust that you find
the Directors’ Remuneration Report informative. I very
much hope that we will receive your support at the
2019 AGM, and the Board will be available at the
meeting to respond to your questions on any aspect
of this report.

Mr. Christopher H. Boehringer
Chairman of the Remuneration Committee

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

ANNUAL REPORT ON REMUNERATION
The information provided in the following part of the
Directors' Remuneration Report is subject to audit.

Chief Executive Officer’s remuneration table
(showing single total figure of pay for the year)
The table sets out the 2016-18 remuneration for Mr.
Jacob Meldgaard in his roles as Executive Director of
TORM plc and Chief Executive Officer (CEO) of TORM
A/S, a subsidiary of TORM plc.

Base salary
The CEO’s base salary was reviewed on the 7
February 2018 to determine the appropriate salary for
the coming year. Base salary as of 1 January 2017: DKK
6.0m. Base salary as of 1 January 2018: DKK 6.2m.

The base salary will be discussed and agreed with the
Chairman of the Board once a year. The next
discussion shall take place in early 2019 by the
Remuneration Committee. Unless otherwise agreed,

MR. JACOB MELDGAARD

2016 restated

2017

2018

Annual

Taxable

performance

USD '000

Salary¹

benefits

bonus²

873
⁾

1,004

1,063

559
⁾
580

425

Chief Executive Officer

Total

1,473

1,626

1,531

Employees

entire group

Salary and Directors Fees

Taxable benefits

Annual bonus

USD '000

2018

1,063

425

2017

% Change³

% change

1,004

580

6%
⁾
3%

-27%

4.1%

0.0%

-1.5%

any adjustment of the salary will take effect on 1
January 2019.

Taxable benefits
The Company can place a car costing no more than
DKK 1m at the CEO’s disposal; however, the CEO has
instead accepted to receive an amount of DKK 23t per
month, covering the running and maintenance
expenses associated with a private vehicle. For 2018,
the amount of DKK 276t (USD 44t) has been included
within the single figure amount.

Other benefits provided directly include two
newspapers, mobile phone which may be used for
both business and private purposes, a PC at the CEO’s
disposal at his home address which may be used for
both business and private purposes including ADSL
and call charges.

For 2019, changes in allowances and benefits are not
expected.

Total
The total salary of Jacob Meldgaard consists of both his salary as CEO of TORM A/S (USD 983t) and as Executive Director of TORM plc (USD 80t).
¹
The total annual performance bonus of the Executive Director of TORM plc for 2018 arising in the period 1 January 2018 to 31 December 2018 was DKK
²
⁾
2,790,000 (USD 425t).
⁾
% Change in DKK for Salary and Directors Fees is 3%, Taxable Benefits is 0% and Annual Bonus is (-23%).

1,626

1,531

-6%

⁾
TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

Performance bonus 2017
The Board of Directors provided the CEO with a
performance cash bonus for the financial year 2017 in
the following ranges and based upon the following
parameters:

Performance bonus 2018
The Board of Directors has provided the CEO with a
performance cash bonus opportunity for the financial
year 2018 in the following ranges and based upon the
following parameters:

Performance bonus 2019
The Remuneration Committee has provided the CEO
with a performance cash bonus for the financial year
2019 in the following ranges and based upon the
following parameters:

• The fulfilment of specific performance metrics set
by the Company (up to 50% of the CEO’s base
salary)

• TORM Price to Net Asset Value ratio versus peers
based on a weighted average Price to Net Asset
Value (up to 50% of the CEO’s base salary)

• Up to 20% of the CEO’s fixed annual salary based
on the sole discretion of the Company’s Board of
Directors

• The fulfilment of specific performance metrics set
by the Company (up to 50% of the CEO’s base
salary)

• The fulfilment of specific performance metrics set
by the Company (up to 70% of the CEO’s base
salary)

• The weighted average Price to Net Asset Value

• Up to 50% of the CEO’s base salary based on the

ratio of the Company’s shares versus peers (up to
50% of the CEO’s base salary)

sole discretion of the Company’s Board of
Directors

• Up to 20% of the CEO’s base salary based on the

sole discretion of the Company’s Board of
Directors

In aggregate, the maximum achievable cash bonus for
the financial year 2019 for the CEO is equal to 120% of
the CEO’s base salary in the financial year 2019. The
specific metrics and calculation methodology for each
of the parameters have been determined by the Board
of Directors.

In aggregate, the maximum achievable cash bonus for
the financial year 2017 for the CEO was equal to 120%
of the CEO’s fixed annual salary in 2017. The specific
metrics and calculation methodology for each of the
above parameters have been determined by the
Remuneration Committee.

In aggregate, the maximum achievable cash bonus for
the financial year 2018 for the CEO is equal to 120% of
the CEO’s base salary in the financial year 2018. The
specific metrics and calculation methodology for each
of the above parameters have been determined by the
Remuneration Committee.

Based on the specific measure and calculation
methodology for each of the above parameters, the
CEO’s performance cash bonus for 2017 was
determined to be a total of 60% (25% on parameter 1,
15 % on parameter 2 and 20 % on parameter 3) of the
2017 fixed annual salary of DKK 6m, resulting in an
amount of DKK 3.6m (USD 580t).

Based on the specific measure and calculation
methodology for each of the above parameters, the
CEO’s performance cash bonus for 2018 was
determined to be a total of 45% (25% on parameter 1
and 20% on parameter 3) of the 2018 fixed annual
salary of DKK 6.2m, resulting in an amount of DKK
2.8m (USD 425t).

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

Long-Term Incentive Plan – Restricted Share
Units granted
TORM has in accordance with its Remuneration Policy
granted the CEO a number of Restricted Share Units
(RSUs), which was communicated in company
announcement no. 2 dated 18 January 2016. A further
communication, announcement no. 10 issued on 25
April 2018, detailed changes to the grant of RSUs, as
agreed to at the AGM on 12 April 2018. There are no
performance conditions associated with this grant
of RSUs.

The original RSUs granted to the CEO in 2016
amounted to 1,276,725 and vested over a five-year
period, with one fifth of the grant amount vesting at
each anniversary during the five-year period. The
exercise price for the 2016 RSUs were DKK 96.3. As at
1 January 2017, one fifth of the original grant,
amounting to 255,345, vested with an exercise period
ending 31 December 2017. None of these RSUs were
exercised. As at 1 January 2018, one fifth of the original
grant, amounting to 255,345, vested with an exercise
period ending 31 December 2018. None of these RSUs
were exercised.

RSUs. The exercise price for each RSU is DKK 53.7,
corresponding to the average price of TORM shares
during 90 calendar days preceding the approval at
TORM plc’s AGM on 12 April 2018 plus a 15% premium.
Vested RSUs may be exercised for a period of 360
days from each vesting date.

End of service gratuity
The Company may terminate the CEO’s Service
Agreement with 12 months’ notice to expire on the last
day of a month. The CEO may terminate the Service
Agreement with six months’ written notice to expire
on the last day of a month.

The total value of the RSU allocation is calculated
based on the Black-Scholes model and is included in
the overall cost estimate for the Company’s Long-
Term Incentive Program (LTIP) (cf. company
announcements dated 18 January and 8 March 2016
and 25 April 2018).

The value of the 2018 grant, USD 0.9m, is estimated
taking into account that the CEO as part of the grant
will not exercise the unvested portion of the 2016
grant. The valuation is based on the Black-Scholes
model with an exercise price of DKK/share 53.7, a
market value of one TORM A-share of DKK 49.5 (the
closing price per A-share at the time of allocation and
assuming 100% vesting).

Post service salary
If the CEO dies during the employment, the Company
shall pay to the widow or any of his children below the
age of 18 the fixed salary including non-salary benefits
for the current month and post-service salary for three
months equal to the fixed salary. However, such post-
service salary will only be paid until the date of which
the employment would have terminated as a result of
termination of the Service Agreement.

LTIP element of Mr. Jacob Meldgaard's remuneration package 2018

grant¹

per share

100% vesting

RSU LTIP

Exercise price

value assuming

RSU grant

Mr. Jacob Meldgaard
USD 0.9m
LTIP award is fixed by the Board of Directors and was communicated via company announcement no. 10 of 25 April 2018, therefore there is no minimum or
¹
maximum for 2018.

DKK 53.7

766,035

⁾

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

Remuneration table Non-Executive Directors.
The 2018 remuneration table sets out the
remuneration paid to the Non-Executive Directors of
the Company in 2018. Therefore, fees shown include
any additional fees paid in respect of chairmanships of
committees or other roles such as Senior Independent
Director.

STATEMENT OF DIRECTORS’ SHAREHOLDING AND
SHARE INTEREST
The table to the right summarize the total interests of
the Directors in shares of TORM plc as of 31 December
2018. No changes took place in the interests of the
Directors between 31 December 2018 and 12 March
2019.

Annual bonuses and LTIPs
The Company’s remuneration policy stipulates that the
Non-Executive Directors’ remuneration cannot include
participation in share or warrant programs. The Non-
Executive Directors of TORM plc do not receive any
part of their compensation from the Company in
shares or warrants. The remuneration for the Non-
Executive Directors is determined by the Board of
Directors subject to limits in the Company’s Articles of
Association. During 2018, none of the Non-Executive
Directors received any part of their compensation in
shares or warrants.

2018 REMUNERATION TABLE NON-EXECUTIVE DIRECTORS

USD '000

Director

Mr. Christopher H. Boehringer

Mr. David Weinstein

Mr. Göran Trapp

Mr. Torben Janholt

SUMMARY OF DIRECTORS INTEREST IN SHARES¹

DIRECTOR

Mr. Christopher H. Boehringer

Mr. David Weinstein

Mr. Göran Trapp

Mr. Torben Janholt

Base fee

Committee Fees

2018

2017

2016

2018

2017

2016

172

174

114

116

158

105

104

116

114

116

105

114

116

⁾

Unvested

Vested

held

RSUs

31-12-2016

31-12-2017

7,566

31-12-2018

21,204

31-12-2016

31-12-2017

31-12-2018

31-12-2016

12,820

31-12-2017

12,820

31-12-2018

12,820

31-12-2016

31-12-2017

31-12-2018

Total

7,566

21,204

12,820

1,276,791

Mr. Jacob Meldgaard

31-12-2016

66 1,276,7252)

The above table shows, in relation to each Director, the total number of share interests with and without performance conditions, the total number of RSUs
with and without performance measures, those vested but unexercised and those exercised. It should be noted that Denmark-based Executive Director Jacob
Meldgaard, in his role as CEO of TORM A/S, has RSUs which are listed in the above table.
There are no performance conditions associated with Mr. Jacob Meldgaard's grant of RSUs.

⁾

²
3) Vested RSUs as of 31 December 2018 includes 255,345 expired RSUs.
⁾

31-12-2017

66 1,021,380

255,345 1,276,791

31-12-2018

766,035 510,6903) 1,276,791

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

Total pension entitlements
The Directors of TORM plc do not receive any pension
from the Company. In addition, Denmark-based
Executive Director Mr. Jacob Meldgaard, in his role as
CEO of TORM A/S, does not receive any pension.

Taxable benefits
As members of the Board of TORM plc, the Directors
do not receive any additional benefits.

Payments for loss of office
No payments for loss of office have been made in
2018.

The information provided in the following part of the
Annual Report on remuneration is not subject to audit.

The graph shows the Company’s performance since
the listing of TORM plc, measured by total shareholder
return, compared with the average of a selection of
the Company’s main peers in the industry and with the
performance of the Danish stock index KAX. The KAX
index is a market cap weighted index of all stocks
listed on Nasdaq in Copenhagen. The total
shareholder return is calculated in USD.

The table shows the total remuneration earned by the
Chief Executive Officer over the same period, along
with the proportion of maximum bonus opportunity
earned.

Mr. Jacob Meldgaard

Total remuneration (single figure)

2018

2017

2016

1,531

1,626

1,473

Annual bonus (% earned of base salary)
LTIP has not been disclosed within this table. The CEO only receives Restricted Share Units (RSUs) with no performance conditions

45%

60%

67%

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

CHANGE IN CHIEF EXECUTIVE OFFICER'S REMUNERATION COMPARED TO GROUP EMPLOYEES
WORLDWIDE

2017 - 2018 in %

Chief Executive Officer

Salary¹

Benefits²

Bonus

1,063

⁾
6%

44
⁾
3%

425

-27%

USD ('000)

% Change³

Average %
⁾

change
Employees entire group
The comparative figures used to determine the % change take into consideration the CEO's salary and benefits.
¹
Other benefits provided directly relates to company car benefit.
²
⁾
% Change in DKK for Salary and Directors Fees is 3%, Taxable Benefits is 0% and Annual Bonus is (-23%).
³
⁾
⁾
The table above shows the average percentage year-on-year change in base salary, benefits and annual bonus in
2018 for the Chief Executive Officer compared to the entire group employees.

0.0%

4.1%

-1.5%

Outside appointments
The Executive Director is entitled to retain the fees
earned from non-executive appointments outside the
Company. Jacob Meldgaard was appointed as a Non-
Executive Director of Danish Ship Finance A/S for
which he received DKK 350,000 and as a Non-
Executive Director of Syfoglomad Limited for which
he received Euro 5,000 for his services during 2018.

RELATIVE IMPORTANCE OF SPEND ON PAY

Expenditure USDm

Dividends paid

Purchase of outstanding treasury shares in TORM A/S

Purchase/disposals of treasury shares

Total

Staff costs

Retained earnings

2018

2017

2016

1.2

25.0

19.2

2.8

1.2

47.0

46.2

43.8

46.7

752.0

786.0

783.0

The table above shows the actual expenditure of the Group for employee pay and distributions to shareholders
compared to the retained earnings of the Group.

RESPONSE TO 2018 AGM SHAREHOLDER VOTING

Vote

Vote on 2018 implementation report

In %

For

Against

Abstain

49,339,496

2,319,342

133,294

95.3%

4.5%

0.3%

The table above shows the response to the 2018 AGM shareholder voting.

TORM ANNUAL REPORT 2018

GOVERNANCE

REMUNERATION COMMITTEE REPORT

Statement of voting at General Meeting
The Remuneration Policy was approved at the 2018
AGM of the Company and will continue to be subject
to a binding shareholder vote at least once every
three years thereafter.

Terms of Reference for the Remuneration Committee
of the Company
The Terms of Reference for the Remuneration
Committee can be found at
http://www.torm.com/uploads/media_items/terms-
of-reference-remuneration-committee-torm-plc-30-
nov-2018.original.pdf.

Approval of TORM plc Remuneration Report for 2018
This report was approved by the Board of Directors
on 12 March 2019 and signed on its behalf by:

Mr. Christopher H. Boehringer
Chairman of the Remuneration Committee
12 March 2019

REMUNERATION POLICY
The TORM plc Remuneration Policy approved at the
2018 AGM remains unchanged. While the
Remuneration Committee will consider the
appropriateness of the Remuneration Policy annually
to ensure it continues to align with the business
strategy, there is no current intention to revise the
Policy more often than every third year, unless
required due to changes to regulations or legislation.

Adoption and publication
The Board of Directors shall review the Remuneration
Policy at least once a year. Any changes to the
Remuneration Policy shall be adopted by the Board
of Directors and approved by the shareholders at
an AGM.

TORM’s Remuneration Report will be included in the
Company’s annual reports for all financial years
commencing with the financial year ended 31
December 2018 and will contain information on
remuneration paid to the Board of Directors and
Executive Management.

The Remuneration Policy is available at
http://www.torm.com/uploads/media_items/torm-
remuneration-policy-2017.original.pdf.

The Board of Directors has adopted the Remuneration
Policy.

TORM ANNUAL REPORT 2018

GOVERNANCE

INVESTOR INFORMATION

COMMUNICATION TO INVESTORS
To ensure consistent communication to all investors,
quarterly and annual financial statements and other
stock exchange announcements are the main vehicles
of communication. TORM maintains regular capital
market contact through analyst and industry
presentations, investor meetings and conference calls.
Investor meetings are primarily held in Copenhagen
and in the major European and US financial centers.

In 2018, TORM issued a total of 21 announcements to
the stock exchange. These announcements are
available in both Danish and English versions on
https://investors.torm.com/announcements/releases.
Interested stakeholders can sign up for TORM’s
investor relations mailing list there.

For a three-week period prior to the publication of
quarterly and annual financial statements,
communication is limited to issues of a general nature,
and no individual investor meetings are generally held.

CHANGES TO THE SHARE CAPITAL
As of 31 December 2017, TORM plc’s total share
capital was USD 622,988.48 consisting of 62,298,846
A-shares of USD 0.01 each, one B-share and one
C-share both of USD 0.01. On 26 January 2018,
TORM completed a Private Placement for gross
proceeds of USD 100m. The Private Placement
resulted in an issuance of 11,920,000 new A-shares.
As of 31 December 2018, TORM’s total share capital
was USD 742,188.48 consisting of 74,218,846 A-shares
of USD 0.01 each, one B-share and one C-share both
of USD 0.01.

DISTRIBUTION POLICY
TORM intends to distribute 25-50% of net income on a
semi-annual basis. The Distribution Policy will be
reviewed periodically, carefully considering TORM’s
capital structure, strategic developments, future
obligations, market trends and shareholder interests.

TORM’s Distribution Policy allows investors to benefit
directly from the earnings generated in TORM, while at
the same time enabling the Company to selectively
invest in the fleet. TORM did not make any
distributions to shareholders during 2018, and the
Board of Directors proposes that no dividend be
distributed for the second half of 2018.

DUAL LISTING AND TRADING
TORM’s A-shares are listed on Nasdaq in Copenhagen
under the ticker TRMD-A and on Nasdaq in New York
under the ticker TRMD. TORM’s A-shares can move
freely between the two Nasdaq exchanges.

In 2018, TORM had an average of 73,056,881 A-shares
outstanding. The average daily trading volume on
Nasdaq in Copenhagen has been approximately 70t
shares and approximately 2t shares on Nasdaq in New
York. During 2018, the share price declined from
approximately DKK 53.5 to DKK 43.9 on Nasdaq in
Copenhagen and from USD 7.6 as of 2 February 2018
which was the first day of trading on Nasdaq in New
York to USD 5.9 as of 31 December 2018. Throughout
2018, TORM has been part of the MidCap segment on
Nasdaq in Copenhagen.

TORM ANNUAL REPORT 2018

GOVERNANCE

INVESTOR INFORMATION

SHAREHOLDERS
As of 31 December 2018, TORM had approximately
8,800 registered shareholders representing
approximately 95% of the share capital.

In compliance with the UK Disclosure Guidance and
Transparency Rules, the following shareholders have
reported to TORM that they own more than 3% of the
share capital:

• OCM Njord Holdings S.à r.l. (Oaktree) (64%)
• DW Partners, LP (6%)

As of 31 December 2018, TORM’s treasury shares
represented approximately 0.4% of the total share
capital. The C-share is held by Oaktree, and the B-
share is held by the Minority Trustee, SFM Trustees
Limited, on behalf of TORM’s non-Oaktree
shareholders. The B and the C-share have certain
voting rights.

At the end of 2018, the members of the Board of
Directors held a total of 34,116 shares, equivalent to a
total market capitalization of DKK 1,495,987 or USD
229,749. The Board of Directors and certain
employees are limited to trading shares during a four-
week period after the publication of financial reports.

TORM’s Transfer Agent is Computershare Inc, Dept
CH 19228, Palatine, IL 60055, USA.

WARRANTS AND RESTRICTED SHARE UNITS
As of 31 December 2018, 4,711,953 warrants were
outstanding with each warrant being convertible into
one A-share with a nominal value of USD 0.01 against
payment of a subscription price in cash to TORM of
DKK 95.2. The warrants can be exercised until 13 July
2020. The warrants are not publicly listed but can be
transferred by submitting a warrant transfer notice to
the Company. The warrant transfer notice is available
at
http://www.torm.com/uploads/media_items/warrant-
transfer-notice-2016.original.docx.

During 2018, TORM has upon request from certain
warrant holders cancelled 126,874 warrants.

In accordance with TORM’s Remuneration Policy, the
Board of Directors has as part of the Long-Term
Incentive Program (LTIP) granted certain employees
Restricted Share Units (RSUs) in the form of restricted
stock options. The RSUs aim at retaining and
incentivizing the employees to seek to improve the
performance of TORM and thereby the TORM share
price for the mutual benefit of themselves and the
shareholders of TORM. Each RSU granted under the
LTIP entitles its holder to acquire one Class A common
share, subject to vesting.

In 2016, the Board agreed to grant a total of 850,667
RSUs to other management and an additional
1,276,725 RSUs to the Executive Director. The RSUs to
other management were subject to a three-year

vesting period, with one third of the grant amount
vesting at each anniversary date beginning on 1
January 2017. The exercise price of each vested RSU is
following certain adjustments for dividends at DKK
93.6 and an exercise period of six months. For the
Executive Director, the grant was subject to a five-
year vesting period and the exercise period was one
year with the remaining terms being similar.

In 2017, the Board agreed to grant a total of 866,617
RSUs to other management on similar terms as the
2016 grant with a three-year vesting period, an
exercise price of DKK 93.6 and an exercise period of
six months.

In 2018, the Board agreed to grant a total of 944,468
RSUs to other management and an additional 766,035
RSUs to the Executive Director. The RSUs to both
other management and the Executive Director were
subject to a three-year vesting period, with one third
of the grant amount vesting at each anniversary date
beginning on 1 January 2019. The exercise price of
each vested RSU is DKK 53.7, which corresponds to
the daily average closing price on Nasdaq in
Copenhagen across the 90-calendar day period
before the date of the General Meeting on 12 April
2018 plus a premium of 15%. Vested RSUs may be
exercised for a period of 360 days months after each
vesting date. The grant to the Executive Director
represented the unvested portion, or approximately
60%, of the RSUs that he was granted in 2016, which

TORM ANNUAL REPORT 2018

GOVERNANCE

INVESTOR INFORMATION

were subject to a five-year vesting period, which Mr.
Meldgaard has agreed not to exercise.

INVESTOR RELATIONS CONTACT

ANALYST COVERAGE

As of 31 December 2018 2,719,042 RSUs were
outstanding, and zero of the 2016, 2017 and 2018 RSUs
had been exercised.

Mr. Morten Agdrup, Vice President,
Head of Corporate Finance & Strategy
Phone: +45 3917 9249
Email: ir@torm.com

Based on the Black-Scholes model, the theoretical
market value of the RSU allocations in 2016, 2017 and
2018 was around the time of issuance calculated at
USD 5.0m, USD 1.0m, USD 2.3m respectively.

NET ASSET VALUE
TORM’s net asset value (NAV) as of 31 December 2018
is estimated at USD 856m based on i) broker values of
USD 1,675m, ii) Other plant and operating equipment
of USD 3.0m iii) outstanding debt of USD 755m, iv)
outstanding newbuilding installments of USD 258m, v)
a cash position of USD 127m, vi) other current assets
of USD 136m and vii) current liabilities of USD 73m.
Based on 73,905,975 outstanding A-shares, excluding
treasury shares as of 31 December 2018, this
corresponds to a NAV/share of USD 11.6 or DKK 75.5.

For further information about investor relations, please
visit https://investors.torm.com/.

FINANCIAL CALENDAR 2019

11 April 2019, Annual General Meeting

14 May 2019, First quarter 2019 results

15 August 2019, First half 2019 results

12 November 2019, Nine months 2019 results

Carnegie Investment Bank
Mr. Dan Togo Jensen
Phone: +45 3288 0245
Email: dan.togo@carnegie.dk

Danske Bank
Mr. Finn Bjarke Pedersen
Phone: +45 4512 8036
Email: finpe@danskebank.dk

Evercore ISI
Mr. Jonathan B. Chappell
Phone: +001 212-497-0827
Email: jonathan.chappell@evercoreisi.com

Fearnley Securities
Mr. Espen L. Fjermestad
Phone: +47 2293 6484
Email: e.fjermestad@fearnleys.no

Skandinaviska Enskilda Banken AB
Mr. Ole G. Stenhagen
Phone: +47 2100 8527
Email: ole.g.stenhagen@seb.no

TORM ANNUAL REPORT 2018

GOVERNANCE

DIRECTORS’ REPORT

The Directors are pleased to present the Annual
Report on the affairs of the TORM Group, including
the financial statements and the auditor’s report, for
2018. Details on the Directors’ responsibilities are
available in the Directors Responsibility Statement on
pages 88-89.

Other disclosure requirements, which form part of the
Directors’ Report, are included in other sections of this
Annual Report. Details on information incorporated by
reference are generally set out under the relevant
topics in the Directors’ Report. For TORM’s Going
Concern Statement and Viability Statement, please
see the “Financial Review” section on pages 52-53. For
details on any significant events after 31 December
2018, please refer to note 2 on page 106. Details on
financial risks are provided in note 19 of the financial
statements.

DIVIDENDS
The Board of Directors proposes that no dividend be
distributed for the second half of 2018. TORM made
no dividend distribution to shareholders in the first
half of 2018. For further details on distributions to
shareholders in 2018, please see the “Investor
Information” section on page 81.

ANNUAL GENERAL MEETING
TORM’s next Annual General Meeting (AGM) will be
held on 11 April 2019. The notice of the AGM including
the complete proposals will be available on TORM’s
website www.torm.com prior to the meeting.

DIRECTORS
Information on TORM’s Board of Directors as of 12
March 2019 are available on pages 59-60.

accordance with Companies Act 2006, Chapter 5,
Section 228, are available for inspection from the
Company Secretary.

DIRECTORS’ INTERESTS
The interests (in shares of the Company or calculated
equivalents) of the Directors in office at the end of the
year can be found in the “Remuneration Report” on
page 77.

INDEMNIFICATION OF DIRECTORS AND INSURANCE
TORM has not granted any indemnity for the benefit
of the Directors but has a general Directors’ and
Officers’ Liability Insurance and a Public Offering of
Securities Insurance covering the Prospectus and the
Exchange Offer documentation related to the
Corporate Reorganization.

RETIREMENT, REAPPOINTMENT AND
APPOINTMENT OF DIRECTORS
In line with the Company’s Articles of Association on
file at Companies House, apart from the B-director,
each director must retire at the end of the second
AGM after his appointment or last re-appointment
unless he has been re-appointed at that AGM The
Company’s Directors were re-elected at the 2018
Annual General Meeting and will therefore be due to
retire in 2020.

The Terms and Conditions of appointment of Non-
Executive Directors are set out in Memorandum of
Terms and Conditions with the Company which, in

SHARE CAPITAL
TORM’s share capital as of 12 March 2019 amounts to a
total nominal value of USD 742,188.48 divided into
74,218,846 A-shares of USD 0.01 each, one B-share of
USD 0.01 and one C-share of USD 0.01. A total of
74,218,846 votes are attached to the A-shares. Only
the A-shares are admitted to trading and official listing
on Nasdaq in Copenhagen and Nasdaq in New York.

Each A-share has one vote on all resolutions proposed
at general meetings of the Company except for the
election or removal of the B-Director. Until the
Threshold Date, the sole B-share has one vote at the
general meeting and special administrative rights,
including the right to appoint the Deputy Chairman of
the Board of Directors. After the Threshold Date, all
Directors can be appointed or removed by passing an
ordinary resolution. The B-shareholder also has the
right to appoint one Board Observer. Pursuant to the
Articles of Association, no more than one B-share can
be issued by the Company.

The Company may only take certain material actions
relating to supermajority matters and Reserved
Matters (as specified in its Articles of Association) if
either (i) the majority of the Directors (which must
include the Chairman and the B-Director) approve the
relevant action or (ii) (a) in case of a supermajority

TORM ANNUAL REPORT 2018

GOVERNANCE

DIRECTORS’ REPORT

action, if the B-Director did not approve such action
or attend the relevant Board meeting, such action is
approved by a shareholder resolution approved by at
least 86% of the votes capable of being cast on such
supermajority action or (ii) (b) in the case of a
Reserved Matter action, if the B-Director did not
approve such action or attend the relevant Board
meeting, such action is approved by a shareholder
resolution approved by at least 70% of the votes
capable of being cast on such Reserved Matter action.

Until the Threshold Date, the sole TORM C-share has
350,000,000 votes at the general meeting in respect
of certain Specified Matters only, including election of
members to the Board of Directors of TORM
(including the Chairman, but excluding the B-Director)
and certain amendments to the Articles of
Association. The sole C-shareholder, OCM Njord
Holdings S.à r.l. (“Oaktree”), shall continue to hold the
C-share so long as it or its affiliates beneficially own at
least one third of the issued shares (”Threshold Date”).
Accordingly, Oaktree may continue to operate as the
Company’s controlling shareholder, even where it
does not own a majority of the A-shares. Pursuant to
the Articles of Association, no more than one C-share
can be issued by the Company.

Further details and movements in the share capital
during the year are shown in note 12 and described in
the “Investor information” section on pages 81-83.

A number of the A-shares are issued subject to
restrictions on transfer (“Restricted Shares”) imposed
by US securities laws. These Restricted Shares may
only be transferred pursuant to an effective
registration statement filed with the United States
Securities Exchange Commission or an exemption
from the registration requirements of the United
States Securities Act of 1933 as amended. There are
no specific restrictions on the size of a holding of the
A-shares nor the transfer of the A-shares (except for
the Restricted Shares as detailed above), which are
both governed by the general provisions of the
Articles of Association and prevailing legislation.

The B-share can only be transferred to (i) another
trustee (it is currently held by SFM Trustee Limited on
behalf of the minority shareholders), or (ii) the
Company if the B-share is redeemed or (iii) any
person who has acquired 100% of the issued A-shares.
The B-share cannot be encumbered.

The C-share is held by Oaktree and can only be
transferred (i) to one of Oaktree’s affiliates or (ii) to
the Company if the C-share is redeemed or (iii) any
person who has acquired 100% of the issued A-shares.
The C-Share cannot be encumbered. For further
details on the transferability, please see the Articles of
Association on TORM’s website,
http://www.torm.com/uploads/media_items/articles-
of-association-15-march-2016.original.pdf.

The B-share and the C-share do not have any rights to
receive dividends or other distributions which the
Company decides to pay.

The Company must redeem the B-share and the C-
share at the same time as soon as possible after the
Threshold Date for USD 0.01 each. Once redeemed,
the B-share and the C-share must be cancelled, and
no further B-shares or C-shares can be issued by the
Company.

Pursuant to TORM’s Articles of Association and
authorities passed at TORM plc’s AGM on 15 March
2016 (2016 AGM), the Board of Directors was granted
authority to allot shares or rights relating to shares for
cash free from pre-emption up to an aggregate
nominal amount of USD 5,493,160 comprising:

• Up to an aggregate nominal amount of USD

686,142 in connection with the Exchange Offer (of
which USD 622,988.48 nominal value was issued
(62,298,846 A-shares, one B-share and one C-
share) during the period ended 31 December 2016.
As the Exchange Offer has been completed, no
further shares will be issued under this authority

TORM ANNUAL REPORT 2018

GOVERNANCE

DIRECTORS’ REPORT

• Up to an aggregate nominal amount of USD

1,372,283 and which can be offered in connection
with any proposed initial public offering of equity
securities on certain US stock exchanges (of which
zero was issued from 1 January 2018 to 31
December 2018), leaving a current authority to
issue up to 137,228,300 A-shares)

December 2018, leaving a current authority to
purchase up to 6,548,542 A-shares or approximately
9% of TORM's share capital excluding treasury shares.

All the above share authorities expire on 14 March
2021. The Board of Directors will not be seeking any
new authorities at the 2019 AGM.

• Up to an aggregate nominal amount of USD
2,596,226 in general equity issues including
warrants, convertible debt and general equity with
the issue being at fair value as determined by the
Board of Directors (of which USD 119,200 was used
in connection with the Private Placement from 1
January 2018 to 31 December 2018), leaving a
current authority to issue up to 247,702,600 A-
shares

Details of TORM’s employee share schemes and any
rights attaching to the shares under the employee
share schemes are set out in note 3. Details of the
warrants issued by TORM giving the right to buy A-
shares are set out in the “Investor information” section
on pages 81-83.

The U.K. Takeover Code, issued and administered by
the U.K. Takeover Panel, applies to the Company.

• Up to an aggregate nominal amount of USD

838,509 to directors, officers or employees of the
Company or any of its subsidiaries (of which USD
17,105 nominal value was used for the grant of
restricted share units during the period from 1
January 2018 to 31 December 2018), leaving a
current authority to issue up to 79,273,997 A-
shares

Furthermore, the Board of Directors received
authorization at the 2016 AGM to make market
purchases up to a maximum of 6,861,413 A-shares
within a certain pricing range. TORM has not
repurchased any A-shares during the period ended 31

POLITICAL DONATIONS
No political donations were made during 2018.

FINANCIAL INSTRUMENTS
The Company uses financial instruments to manage
risks related to freight rates, bunker fuels, interest
rates and foreign exchange. For further information on
the use of financial instruments, please refer to note
20 on pages 125-126.

RESEARCH AND DEVELOPMENT
The Company has a continuous focus on optimization
but does not allocate specific costs to research and
development.

COMPANY BRANCHES
The TORM Group has offices in Denmark, India, the
Philippines, Singapore, the UK and the USA. Further
details on the Company's global presence is set out on
pages 26.

SIGNIFICANT SHAREHOLDINGS
Details on significant shareholdings are set out in the
“Investor Information” section on pages 81-83.

CONTROLLING SHAREHOLDER
TORM’s controlling shareholder, Oaktree, owns TORM
plc’s sole C-share, which carries 350,000,000 votes at
the general meeting in respect of Specified Matters,
including election of members to the Board of
Directors of TORM plc (including the Chairman, but
excluding the Deputy Chairman) and certain
amendments to the Articles of Association.

OTHER INFORMATION INCLUDED IN THE
STRATEGIC REPORT
The “Strategic Report” set out on pages 5-53 provides
a review of TORM’s operations in 2018 and the
potential future developments on those operations.
Details on greenhouse gas emissions are included in
the “Strategic Report” on page 33, and details on
TORM’s general policy relating to recruitment, training,
career development and disabled employees are
included on pages 36-38.

TORM ANNUAL REPORT 2018

GOVERNANCE

DIRECTORS’ REPORT

REQUIREMENTS TO THE LISTING RULES
TORM plc is listed on Nasdaq in Copenhagen and
Nasdaq in New York. The only listing rule requirement
regarding the content of the Annual Report is that
TORM’s Annual Report follows the requirements
according to the UK Companies Act, including
provisions for EEA-listed companies.

RECENT DEVELOPMENTS AND POST BALANCE
SHEET EVENTS
There are no material recent developments or post-
balance sheet events to report.

INDEPENDENT AUDITORS
Each person who is a Director at the date of approval
of the Annual Report confirms that:

• As far as the Director is aware, there is no relevant

audit information of which the Company’s
independent auditor is unaware

• The Director has taken all reasonable steps that

he/she ought to have taken as a Director in order
to make him/herself aware of any relevant audit
information and to establish that the Company’s
independent auditor is aware of that information

This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the
Companies Act 2006.

On 12 April 2018, Deloitte LLP was reappointed as
auditors for TORM plc. Deloitte LLP has expressed
willingness to continue in office as auditors, and a
resolution to reappoint them will be proposed at the
forthcoming AGM on 11 April 2019.

Approval
On behalf of the Board of Directors

Mr. Christopher H. Boehringer
Chairman of the Board of Directors
12 March 2019

TORM ANNUAL REPORT 2018

GOVERNANCE

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The directors are responsible for preparing the Annual
Report and the financial statements in accordance
with applicable law and regulations.

In preparing the parent company financial statements,
the directors are required to:
• Select suitable accounting policies and then apply

them consistently;

• Make judgments and accounting estimates that are

reasonable and prudent;

• State whether applicable UK Accounting

Standards have been followed, subject to any
material departures disclosed and explained in the
financial statements; and

• Prepare the financial statements on the going

concern basis unless it is inappropriate to presume
that the company will continue in business.

Company law requires the directors to prepare
financial statements for each financial year. Under that
law the directors are required to prepare the group
financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by
the European Union and Article 4 of the IAS
Regulation and have elected to prepare the parent
company financial statements in accordance with
United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and
applicable law), including FRS 101 “Reduced Disclosure
Framework”. Under company law the directors must
not approve the accounts unless they are satisfied
that they give a true and fair view of the state of
affairs of the company and of the profit or loss of the
company for that period.

In preparing the group financial statements,
International Accounting Standard 1 requires that
directors:
• Properly select and apply accounting policies;
• Present information, including accounting policies,

in a manner that provides relevant, reliable,
comparable and understandable information;
• Provide additional disclosures when compliance
with the specific requirements in IFRSs are
insufficient to enable users to understand the
impact of particular transactions, other events and
conditions on the entity's financial position and
financial performance; and

• Make an assessment of the company's ability to

continue as a going concern.

TORM ANNUAL REPORT 2018

GOVERNANCE

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the company and enable them to ensure that the
financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the
assets of the company and hence for taking
reasonable steps for the prevention and detection of
fraud and other irregularities.

The directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the company’s website. Legislation in the
United Kingdom governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.

Directors’ responsibility statement
We confirm that to the best of our knowledge:

This responsibility statement was approved by the
board of directors on 12 March 2019 and is signed on
its behalf by:

• The financial statements, prepared in accordance
with the relevant financial reporting framework,
give a true and fair view of the assets, liabilities,
financial position and profit or loss of the company
and the undertakings included in the consolidation
taken as a whole;

• The strategic report includes a fair review of the

development and performance of the business and
the position of the company and the undertakings
included in the consolidation taken as a whole,
together with a description of the principal risks
and uncertainties that they face; and

• The annual report and financial statements, taken
as a whole, are fair, balanced and understandable
and provide the information necessary for
shareholders to assess the company’s position and
performance, business model and strategy.

Mr. Jacob Meldgaard
Executive Director
12 March 2019

TORM ANNUAL REPORT 2018

GOVERNANCE

FINANCIAL
STATEMENTS

FINANCIAL STATEMENTS 2018

Consolidated Income Statement .......................................................................................................... 91
Consolidated Statement of Comprehensive Income .................................................................. 91
Consolidated Balance Sheet ................................................................................................................... 92
Consolidated Statement of Changes in Equity ............................................................................. 93
Consolidated Cash Flow Statement ................................................................................................... 95
Notes to Consolidated Financial Statements ................................................................................. 96
Parent Company 2018 ............................................................................................................................. 130
Company Balance Sheet ........................................................................................................................ 131
Company Statement of Changes in Equity ................................................................................... 132
Notes to Parent Financial Statements ............................................................................................. 133
Independent Auditor’s Report to the Members of TORM plc .............................................. 137
TORM Fleet Overview ............................................................................................................................. 143
Glossary .......................................................................................................................................................... 146

TORM ANNUAL REPORT 2018
TORM ANNUAL REPORT 2018

GOVERNANCE
GOVERNANCE

90
90

CONSOLIDATED INCOME STATEMENT
1 JANUARY-31 DECEMBER

CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
1 JANUARY-31 DECEMBER

USD '000

Revenue

Note

2018

2017

2016

USD '000

635,366

656,991

680,143

Net profit/(loss) for the year

2018

2017

2016

-34,779

2,407

-142,491

Port expenses, bunkers and commissions

-283,018

-259,888 -221,859

-2,506

-8,517

-21,498

Other comprehensive income/(loss):

Charter hire

Operating expenses

Profit from sale of vessels

Administrative expenses

Other operating expenses

Share of profit/(loss) from joint ventures

Impairment losses on tangible and intangible

assets

Depreciation

3 -180,443 -188,374 -195,249

Items that may be reclassified to profit or loss:

752

2,762

Exchange rate adjustment arising from translation of

3, 4

-47,826

-45,007

-41,406

entities using a functional currency different from USD

-316

240

-180

-1,963

-418

-304

Fair value adjustment on hedging instruments

-6,748

9,181

-2,675

189

176

Fair value adjustment on hedging instruments transferred

to income statement

-307

-2,262

1,665

6, 7, 22

-3,249

-3,572 -185,000

6 -114,480

-114,451

-122,215

Items that may not be reclassified to profit or loss:

Remeasurements of net pension and other post-retirement

Operating profit/(loss) (EBIT)

2,822

39,529

-107,212

benefit liability or asset

-48

120

-60

Financial income

Financial expenses

3,302

4,255

2,814

Other comprehensive income/(loss) after tax ¹

-7,419

7,279

-1,250

-39,345

-40,601

-37,333

Total comprehensive income/(loss) for the year

⁾

-42,198

9,686

-143,741

Profit/(loss) before tax

-33,221

3,184

-141,731

No income tax was incurred relating to other comprehensive income/(loss) items.

Tax

-1,558

-777

-760

⁾

Net profit/(loss) for the year

-34,779

2,407

-142,491

EARNINGS PER SHARE

Basic earnings/(loss) per share (USD)

Diluted earnings/(loss) per share (USD)

-0.48

0.04

-2.27

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements

CONSOLIDATED BALANCE SHEET
AS OF 31 DECEMBER

Vessels and capitalized dry-docking

6,7,15 1,396,558 1,294,472

Note

2018

2017

USD '000

Note

2018

2017

USD '000

ASSETS

NON-CURRENT ASSETS

Tangible fixed assets

Prepayments on vessels

Other plant and operating equipment

Total tangible fixed assets

Financial assets

Investments in joint ventures

Other investments

Total financial assets

Total non-current assets

CURRENT ASSETS

Bunkers

Freight receivables

Other receivables

Prepayments

Cash and cash equivalents

Current assets, excluding assets held-for-sale

Assets held-for-sale

Total current assets

TOTAL ASSETS

EQUITY AND LIABILITIES

EQUITY

Common shares

Share premium

Treasury shares

45,491

88,378

2,973

1,945

Hedging reserves

1,445,022 1,384,795

Translation reserves

324

329

1,445,098 1,385,124

39,404

33,204

85,997

71,281

7,488

11,787

2,855

4,422

127,361

134,207

263,105

254,901

6,197

6,550

269,302

261,451

Retained profit

Total equity

LIABILITIES

NON-CURRENT LIABILITIES

Deferred tax liability

Mortgage debt and bank loans

Finance lease liabilities

Total non-current liabilities

CURRENT LIABILITIES

Mortgage debt and bank loans

Finance lease liabilities

Trade payables

Current tax liabilities

Other liabilities

Deferred income

Total current liabilities

1,714,400 1,646,575

Total liabilities

TOTAL EQUITY AND LIABILITIES

The financial statements of TORM plc, company number 09818726, have been approved by the
Board of Directors and signed on their behalf by:

Mr. Jacob Meldgaard, Executive Director
12 March 2019

TORM ANNUAL REPORT 2018

742

623

97,092

-2,887

254

-96

7,309

280

752,106

785,725

847,211

791,050

44,909

44,906

2,14,15,17 633,026

629,198

17,22

22,138

25,294

700,073

699,398

2,14,15,17

91,266

91,720

17,22

3,156

2,899

35,122

26,150

1,010

1,393

13,17

36,503

33,822

143

167,116

156,127

867,189

855,525

1,714,400 1,646,575

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
1 JANUARY-31 DECEMBER

USD '000

Equity as of 1 January 2016

Comprehensive income/loss for the year:

Net profit/(loss) for the year

Other comprehensive income/(loss) for the year

Total comprehensive income/(loss) for the year

Corporate Reorganization TORM plc

Acquisition of outstanding shares in TORM A/S, cost¹

Acquisition of treasury shares, cost

⁾

Share-based compensation

Dividend paid

Total changes in equity 2016

Equity as of 31 December 2016

Comprehensive income/loss for the year:

Net profit/(loss) for the year

Other comprehensive income/(loss) for the year

Total comprehensive income/(loss) for the year

Corporate Reorganization TORM plc

Share-based compensation

Dividend paid

Total changes in equity 2017

Equity as of 31 December 2017

Common

Treasury

Hedging

Translation

Retained

premium

shares ²

reserves

profit

Total

638

-15

623

-176

⁾

1,400

160

973,954

975,976

176

-2,887

-1,010

-142,491

-180

-60

-1,250

-180

-142,551

-143,741

-6,564

-19,396

2,029

-6,564

-19,235

-2,887

2,029

-25,000

-2,711

-1,010

-180

-191,482

-195,398

-2,887

390

-20

782,472

780,578

6,919

240

6,919

240

2,407

120

2,527

146

1,880

-1,240

3,313

2,407

7,279

9,686

146

1,880

-1,240

10,472

-2,887

7,309

220

785,785

791,050

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
1 JANUARY-31 DECEMBER

USD '000

Equity as of 1 January 2018

Effect as of 1 January 2018 of new IFRS standards implemented ⁴

Adjusted equity as of 1 January 2018

⁾

Comprehensive income/(loss) for the year:

Net profit/(loss) for the year

Other comprehensive income/(loss) for the year ³

Total comprehensive income/(loss) for the year

⁾

Capital increase

Transaction costs capital increase

Share-based compensation

Total changes in equity 2018

Equity as of 31 December 2018

¹
Relates to the squeeze-out of remaining minority shareholders in TORM A/S.
Please refer to note 12 for further information on treasury shares.
²
⁾
³
Please refer to "Consolidated Statement of Comprehensive Income".
⁾
Please refer to note 1 for description of new IFRS standards implemented.
⁴
⁾
⁾

Common

Treasury

Hedging

Translation

Retained

premium

shares ²

reserves

profit

Total

623

119

99,880

-2,788

119

97,092

-2,887

⁾

7,309

220

785,785

-878

791,050

-878

-2,887

7,309

220

784,907

790,172

-7,055

-34,779

-316

-48

-7,419

-34,827

-42,198

2,026

99,999

-2,788

2,026

-7,055

-316

-32,801

57,039

742

97,092

-2,887

254

-96

752,106

847,211

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENT
1 JANUARY-31 DECEMBER

USD '000

Note

2018

2017

2016

USD '000

Note

2018

2017

2016

CASH FLOW FROM OPERATING ACTIVITIES

CASH FLOW FROM INVESTING ACTIVITIES

Net profit/(loss) for the year

-34,779

2,407

-142,491

Investment in tangible fixed assets

-202,439

-145,112

-119,408

Adjustments:

Sale of tangible fixed assets

26,847

31,382

Reversal of profit from sale of vessels

-752

-2,762

Net cash flow from investing activities

-175,592

-113,730

-119,408

Reversal of depreciation

6 114,480

114,451

122,215

Reversal of impairment loss on tangible and

CASH FLOW FROM FINANCING ACTIVITIES

intangible assets

6, 7, 22

3,249

3,572

185,000

Borrowing, mortgage debt

114,530

175,377

49,256

Reversal of share of profit/(loss) from joint

Borrowing, sale and leaseback transactions

30,195

ventures

Reversal of financial income

Reversal of financial expenses

Reversal of tax expenses

Reversal of other non-cash movements

-189

-3

-176

Repayment/redemption, mortgage debt

-110,834 -125,487 -142,740

-3,302

-4,255

-2,814

Repayment/redemption, finance lease liabilities

-2,899

-16,724

-3,410

39,345

40,601

37,333

Dividend paid

1,558

777

760

Acquisition of outstanding shares in TORM A/S

2,039

3,696

-7,114

Capital increase

Transaction costs share issue

Purchase/disposal of treasury shares

99,999

-2,788

-1,240

-25,000

-19,241

-2,887

Change in restricted cash

-2,014

594

-1,588

Dividends received from joint ventures

440

188

Interest received and realized exchange gains

2,720

1,641

2,735

Interest paid and realized exchange losses

-39,792

-36,698

-31,385

Income taxes paid

-1,611

-586

-1,430

Net cash flow from financing activities

95,994

62,715

-145,610

Change in bunkers, receivables and payables,

etc.

-12,668

-12,996

8,322

Net cash flow from operating activities

70,738

109,845

171,143

Net cash flow from operating, investing and

financing activities

-8,860

58,830

-93,875

Cash and cash equivalents as of 1 January

132,948

74,118

167,993

Cash and cash equivalents as of 31 December

124,088

132,948

74,118

Restricted cash as of 31 December

3,273

1,259

1,853

Cash and cash equivalents including restricted

cash as of 31 December

127,361

134,207

75,971

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Accounting policies, critical accounting estimates and judgements ............................................... 97
Note 2 – Liquidity, capital resources and subsequent events ............................................................................ 106
Note 3 – Staff costs ................................................................................................................................................................. 106
Note 4 – Remuneration to auditors appointed at the parent company’s annual general meeting ... 108
Note 5 – Intangible assets .................................................................................................................................................... 109
Note 6 – Tangible fixed assets ........................................................................................................................................... 109
Note 7 – Impairment testing ................................................................................................................................................ 110
Note 8 – Financial items ........................................................................................................................................................ 111
Note 9 – Freight receivables ............................................................................................................................................... 112
Note 10 – Other receivables................................................................................................................................................. 112
Note 11 – Tax ................................................................................................................................................................................ 113
Note 12 – Common shares and Treasury shares ........................................................................................................ 114
Note 13 – Other liabilities ....................................................................................................................................................... 115
Note 14 - Effective Interest Rate, Outstanding Mortgage Debt And Bank Loans .................................... 116
Note 15 – Collateral security for mortgage debt and bank loans ...................................................................... 117
Note 16 – Guarantee commitments and contingent liabilities ............................................................................. 117
Note 17 – Contractual obligations ..................................................................................................................................... 117
Note 18 – Derivative financial instruments .................................................................................................................... 119
Note 19 – Risks associated with TORM’s activities ................................................................................................... 121
Note 20 – Financial instruments ........................................................................................................................................ 125
Note 21 – Related party transactions .............................................................................................................................. 126
Note 22 – Assets held for sale and Non-current assets sold during the year .............................................. 126
Note 23 – Cash flows .............................................................................................................................................................. 126
Note 24 – Entities in the group .......................................................................................................................................... 127
Note 25 – Earnings per share and Dividend per share ........................................................................................... 129

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ACCOUNTING POLICIES, CRITICAL ACCOUNTING ESTIMATES
AND JUDGEMENTS

NOTE 1 – continued

OVERVIEW OF BUSINESS
TORM plc is a shipping company, incorporated in the United Kingdom, which owns and
operates a fleet of product tankers. Unless otherwise indicated, the terms "TORM plc," "we," "us,"
"our," the "Company" and the "Group" refer to TORM plc and its consolidated subsidiaries, which
includes TORM A/S and its consolidated subsidiaries following the closing of the Exchange Offer
(defined below). When used herein to describe events prior to the closing of the Exchange
Offer, the terms “TORM A/S," "we," "us," "our," the "Company" and the "Group" refer to TORM
A/S and its consolidated subsidiaries before such time.

On 15 April 2016, a new corporate structure was established, whereby TORM plc effectively
acquired all of the outstanding A-shares of TORM A/S (referred to herein as Danish A-shares) in
exchange for TORM plc’s securities. A total of 97.6% of TORM A/S’ shareholders exchanged
their shareholdings to TORM plc, and TORM plc acquired the remaining 2.4% shares from TORM
A/S’ minority shareholders in a statutory squeeze-out transaction under the Danish Companies
Act for a total cash consideration of USD 19.2m.

In addition, and in connection with the exchange of the Danish A-shares in 2016, all TORM A/S
warrant holders exchanged their warrants on a one-for-one basis for TORM plc warrants. We
refer to these transactions collectively as the "Exchange Offer." On 19 April 2016, upon the
closing of the Exchange Offer, TORM plc became the Group’s publicly-held parent company
incorporated under the laws of England and Wales. We refer to this as the "Redomiciliation”.
The Redomiciliation was accounted for as an internal reorganization of entities under common
control and, therefore, the assets and liabilities of TORM A/S were accounted for at their
historical cost basis and not revalued in the transaction.

The impact on equity in 2016 reflected the accumulated deficit of TORM plc at that date and the
squeeze-out transaction impact of USD 19.2m.

The consolidated financial statements for the TORM Group are presented in the legal name of
TORM plc, but they are a continuation of the financial statements of TORM A/S with a
retroactive adjustment of the legal capital of the legal parent (TORM plc). The consolidated
financial results reflect the activities for TORM A/S only for the period from 1 January 2016 until
15 April 2016, whereas the remaining period of 2016 and going forward reflects the combined
activity of TORM plc and TORM A/S.

TORM plc is listed on the stock exchange Nasdaq in Copenhagen, Denmark and on Nasdaq in
New York, United States.

BASIS OF PREPARATION
The consolidated financial statements of the Group have been prepared in accordance with the
International Financial Reporting Standards (“IFRS”) as adopted by the EU and as issued by the
International Accounting Standards Board (“IASB”).

The consolidated financial statements have been prepared on a going concern basis and under
the historical cost convention except where fair value accounting is specifically required by
IFRS.

The functional currency is USD, and the Company applies USD as presentation currency in the
preparation of the consolidated financial statements.

GOING CONCERN
As of 31 December 2018, TORM’s available liquidity including undrawn facilities was USD 406m,
hereof a cash position of USD 127m. TORM’s net interest-bearing debt was USD 627m and the
net debt loan-to-value ratio was 53%. Further information on the Group’s objectives and policies
for managing its capital, its financial risk management objectives and its exposure to credit and
liquidity risk can be found in note 19 to the financial statements.

The Group monitors its funding position throughout the year to ensure that it has access to
sufficient funds to meet its forecast cash requirements, including newbuilding and loan
commitments, and to monitor compliance with the financial covenants within its loan facilities,
details of which are in note 2 to the financial statements. Sensitivity calculations are run to
reflect different scenarios including, but not limited to, future freight rates and vessel valuations
in order to identify risks to future liquidity and covenant compliance and to enable Management
to take corrective actions, if required.

The Board of Directors has considered the Group’s cash flow forecasts and the expected
compliance with the Company’s financial covenants for a period of not less than 12 months from
the date of approval of these financial statements. Based on this review, the Board of Directors
has a reasonable expectation that, taking into account reasonably possible changes in trading
performance and vessel valuations, the Group will be able to continue in operational existence
and comply with its financial covenants for the foreseeable future. Accordingly, the Group
continues to adopt the going concern basis in preparing its financial statements.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - continued

ADOPTION OF NEW OR AMENDED IFRS STANDARDS
TORM has implemented the following standards and amendments issued by the IASB and
adopted by the EU in the consolidated financial statements for 2018:

•

Amendments to IFRS 2 “Classification and Measurement of Share-based Payment
Transactions”
IFRS 9: On 1 January 2018, TORM adopted IFRS 9 “Financial Instruments”, which is
mandatory for accounting periods beginning 1 January 2018 or later. The standard and
subsequent amendments has substantially changed the classification and
measurement of financial instruments and hedging requirements and introduced a
new hedge-accounting model enabling companies to better reflect their risk
management activities in the financial statements. We have assessed that the Group’s
hedging activities also in 2018, qualify for hedge accounting, and there have been no
changes in the classifications of financial assets and financial liabilities as at the date of
the initial application of IFRS 9. There have been no changes in the carrying amounts
on the basis of their measurement categories and there have been no changes in the
carrying amounts arising from a change in measurement in connection with the
transition to IFRS 9. The standard has thus been implemented without adjusting the
opening balance as of 1 January 2018.
The implementation of IFRS 9 has also entailed that impairment of receivables must be
based on expected losses and not incurred losses as under IAS 39. The transition had
no significant effect on either the income statement or the statement of financial
position, as TORM historically has had very limited actual incurred losses on
receivables, and the standard has thus been implemented without adjusting the
opening balance as of 1 January 2018. Please see note 19 for further disclosures as of 31
December 2018.
IFRS 15: On 1 January 2018, TORM also adopted IFRS 15, “Revenue from Contracts with
Customers”, which replaces IAS 11, IAS 18 and associated interpretations. TORM has
implemented IFRS 15 with retrospective effect, however, elected to utilize the relief
from restating comparative figures (modified retrospective method). The standard has
changed the recognition pattern of revenue. The change in revenue recognition has
gone from recognizing from “discharge-to-discharge” to “load-to-discharge”. The
effect of the implementation as of 1 January 2018 amounts to USD 0.9m, recorded as
an adjustment to the opening balance of retained profit in the consolidated statement
of changes in equity.

The implementation of the above standards and amendments had no significant impact on the
Group’s financial statements.

It is assessed that application of other new interpretations effective on 1 January 2018 has not
had any material impact on the consolidated financial statements in 2018. Further, it has been
anticipated that there will not be any significant impact from the adoption of these new
interpretations on future periods.

•
•
•

ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
IASB has issued a number of new or amended accounting standards (IFRS) and interpretations
(IFRIC) that have not yet come into effect. In general, the following standards are expected to
have the most significant impact on current accounting regulation:

•

IFRS 16 “Leases”. The effective date is 1 January 2019, and the standard will be
implemented using the modified retrospective approach, where comparative
information is not restated. The impact of the standard in TORM is limited to leasing
agreements regarding office buildings and other administrative contracts such as cars,
office equipment, etc. The change requires capitalization of the operating lease
agreements, and the effect in the financials as of 1 January 2019 is a recognition of a
right-of-use asset and leasing liability of USD 11.4m. The future reclassification from the
line item “Administrative expenses” to “Depreciation” of approx. USD 2.6m and
“Financial expenses” (interest) approx. USD 0.3m, amounts to approx. USD 2.9m in
2019. The reclassification will have a minor negative effect on the Profit and Loss in
2019 but will improve the Alternative Performance Measure (APM) “EBITDA”.

ACCOUNTING POLICIES

Consolidation principles
The consolidated financial statements comprise the financial statements of the Parent Company,
TORM plc and entities controlled by the Company and its subsidiaries. Control is achieved when
the Company has all the following:
power over the investee;
exposure, or rights, to variable returns from its involvement with the investee; and
the ability to use its power over the investee to affect the amounts of the investor’s
returns

•
•
•

The Company should reassess whether it controls an investee if facts and circumstances
indicate that there are changes to one or more of the three elements of control listed above.

When the Company has less than a majority of the voting rights of an investee, it has power
over the investee when the voting rights are sufficient to give it the practical ability to direct the
relevant activities unilaterally. The Company considers all facts and circumstances in assessing
whether or not the Company’s voting rights in an investee are sufficient to give it power,
including:
•

The size of the Company’s holding of voting rights relative to the size and dispersion
of holdings of the other vote holders
Potential voting rights held by the Company, other vote holders or other parties
Rights arising from other contractual arrangements, and
Any additional facts and circumstances that indicate that the Company has, or does
not have, the current ability to direct the relevant activities at the time when decisions
need to be made, including voting pattern at previous shareholders’ meetings

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - continued

Entities in which the Group exercises significant but not controlling influence are regarded as
associated companies and are accounted for using the equity method.

Companies which are managed jointly by agreement with one or more companies and therefore
are subject to joint control (joint ventures) are accounted for using the equity method.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and
ends when the Company loses control over the subsidiary. Specifically, income and expenses of
a subsidiary acquired or disposed of during the year are included in the consolidated income
statement and other comprehensive income from the date on which the Company obtains
control until the date when the Company loses control over the subsidiary.

The consolidated financial statements are prepared on the basis of the financial statements of
the Parent Company, its subsidiaries and the Company’s share of the income statement and
balance sheet of joint operations by combining items of a uniform nature and eliminating
intercompany transactions, balances and shareholdings as well as realized and unrealized gains
and losses on transactions between the consolidated entities. The financial statements used for
consolidation purposes are prepared in accordance with the Company’s accounting policies.

The consolidated financial statements following a reverse acquisition are issued under the name
of the legal parent (accounting acquiree) but as a continuation of the financial statements of the
legal subsidiary (accounting acquirer). The accounting acquirer’s legal capital is adjusted
retrospectively to reflect the legal capital of the accounting acquiree. Comparative information
is adjusted accordingly.

Business combinations
Newly acquired or formed entities are recognized in the consolidated financial statements from
the date of acquisition or formation. The date of acquisition is the date on which control over
the entity is effectively transferred.

Business combinations are accounted for by applying the purchase method, whereby the
acquired entities’ identifiable assets, liabilities and contingent liabilities are measured at fair value
at the acquisition date. The tax effect of the revaluation activities is also taken into account.
When a business combination agreement provides for an adjustment to the cost of the
combination contingent on future events, the amount of that adjustment is included in the cost
of the combination if the event is probable and the adjustment can be measured reliably. Costs
of issuing debt or equity instruments in connection with a business combination are accounted
for together with the debt or equity issuance. All other costs associated with the acquisition are
expensed in the income statement.

The excess of the cost of the business combination over the fair value of the acquired assets,
liabilities and contingent liabilities is recognized as goodwill under intangible assets and is tested
for impairment at least once a year. Upon acquisition, goodwill is allocated to the cash
generating units, which subsequently form the basis for the impairment test. If the fair value of
the acquired assets, liabilities and contingent liabilities exceeds the cost of the business
combination, the identification of assets and liabilities and the processes of measuring the fair
value of the assets and liabilities and the cost of the business combination are reassessed. If the
fair value of the business combination continues to exceed the cost, the resulting gain is
recognized in the income statement.

Foreign currencies
The functional currency of all significant entities, including subsidiaries and associated
companies, is United State dollars (USD), because the Company’s vessels operate in
international shipping markets, in which income and expenses are settled in USD, and because
the Company’s most significant assets and liabilities in the form of vessels and related liabilities
are denominated in USD. Transactions in currencies other than the functional currency are
translated into the functional currency at the transaction date. Cash, receivables and payables
and other monetary items denominated in currencies other than the functional currency are
translated into the functional currency at the exchange rate at the balance sheet date. Gains or
losses due to differences between the exchange rate at the transaction date and the exchange
rate at the settlement date or the balance sheet date are recognized in the income statement
under “Financial income” and “Financial expenses”.

The reporting currency of the Company is USD. Upon recognition of entities with functional
currencies other than USD, the financial statements are translated into USD. Income statement
items are translated into USD at the average exchange rate for the year, whereas balance sheet
items are translated at the exchange rate as of the balance sheet date. Exchange differences
arising from the translation of financial statements into USD are recognized as a separate
component through other comprehensive income. On the disposal of an entity, the cumulative
amount of the exchange differences recognized in the separate component of equity relating to
that entity is transferred to the income statement as part of the gain or loss on disposal.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - continued

Derivative financial instruments and hedge accounting
Derivative financial instruments, primarily forward currency exchange contracts, forward freight
agreements, interest rate hedges and forward contracts regarding bunker purchases, are
entered into hedge future committed or anticipated transactions. TORM applies hedge
accounting under the specific rules on cash flow hedges when appropriate.

Employee benefits
Wages, salaries, social security contributions, holiday and sick leave, bonuses and other
monetary and non-monetary benefits are recognized in the year in which the employees render
the associated services. Please also refer to the accounting policy for share-based payment.

Derivative financial instruments are initially recognized in the balance sheet at fair value at the
date when the derivative contract is entered into and are subsequently measured at their fair
value as other receivables or other liabilities, respectively.

Changes in the fair value of derivative financial instruments that are designated as cash flow
hedges and deemed to be effective are recognized directly in “Other comprehensive income”.
When the hedged transaction is recognized in the income statement, the cumulative value
adjustment recognized in “Other comprehensive income” is transferred to the income statement
and included in the same line as the hedged transaction. However, when the hedged transaction
results in the recognition of a fixed asset, the gains and losses previously accumulated in “Other
comprehensive income” are transferred from “Other comprehensive income” and included in the
initial measurement of the cost of the fixed asset. Changes in the fair value of a portion of a
hedge deemed to be ineffective are recognized in the income statement.

Changes in the fair value of derivative financial instruments that are not designated as hedges
are recognized in the income statement. While effectively reducing cash flow risk in accordance
with the Company’s risk management policy, interest rate swaps with cap features and certain
forward freight agreements and forward contracts regarding bunker purchases do not qualify
for hedge accounting. Changes in fair value of these derivate financial instruments are therefore
recognized in the income statement under “Financial income” or “Financial expenses” for
interest rate swaps with cap features, under “Revenue” for forward freight agreements and
under “Port expenses, bunkers and commissions” for forward bunker contracts.

Segment information
The segmentation is based on the Group’s internal management and reporting structure. In the
Tanker Segment, the services provided primarily comprise transportation of refined oil products
such as gasoline, jet fuel and naphtha.

The Group has only one geographical segment, because the Company considers the global
market as a whole, and as the individual vessels are not limited to specific parts of the world.
Furthermore, the internal management reporting does not provide such information.
Consequently, it is not possible to provide geographical segment information on revenue from
external customers or non-current segment assets.

Pension plans
The Group has entered into defined contribution plans only. Pension costs related to defined
contribution plans are recorded in the income statement in the year to which they relate.

Leases
Agreements to charter in vessels and to lease other plant and operating equipment for which
TORM substantially has all the risks and rewards of ownership are recognized in the balance
sheet as finance leases. Lease assets are measured at the lower of fair value and the present
value of minimum lease payments determined in the leases.

For the purpose of calculating the present value, the interest rate implicit in the lease or an
incremental borrowing rate is used as discount factor. The lease assets are depreciated and
written down under the same accounting policy as the vessels owned by the Company or over
the lease period depending on the lease terms.

The corresponding lease obligation is recognized as a liability in the balance sheet, and the
interest element of the lease payment is charged to the income statement as incurred.

Other charter agreements concerning vessels and other leases are classified as operating leases,
and lease payments are charged to the income statement on a straight-line basis over the lease
term. The obligation for the remaining lease term is disclosed in the notes to the financial
statements.

Sale and lease back
Following a sale transaction, agreements to charter-in vessels (sale-and-leaseback) for which
TORM maintains substantially all the risks and rewards incidental to economic ownership, are
recognized on the balance sheet as finance leases. Leased vessels are measured at the start of
the leasing contract at the lower of the present value of minimum lease payments determined in
the lease contract and the assets’ fair value, plus any incidental expense borne by the lessee. For
the purpose of calculating the present value, the interest rate implicit in the lease is used as
discount factor. Depreciation method and useful economic life correspond to those applied to
comparable purchased assets. Liabilities for financial leases are recognized on the balance sheet
and the interest included in the lease payment is charged to the income statement.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

100

NOTE 1 - continued

INCOME STATEMENT

Revenue
Income is recognized in the income statement when:

•

•
•

•

The income generating activities have been carried out on the basis of a binding
agreement
The income can be measured reliably
It is probable that the economic benefits associated with the transaction will flow to
the Company
Costs relating to the transaction can be measured reliably

Revenue comprises freight, charter hire and demurrage revenues from the vessels and gains and
losses on forward freight agreements designated as hedges. Revenue is recognized when or as
performance obligations are satisfied by transferring the promised goods or service s to the
customer, i.e. at a point in time or over time provided that the stage of completion can be
measured reliably. Revenue is measured at the consideration the Group expects to be entitled
to. Accordingly, freight, charter hire and demurrage revenue are recognized at selling price
upon delivery of the service as per the charter parties concluded.

Cross-over voyages
Revenue is recognized upon delivery of services in accordance with the terms and conditions of
the charter parties. For cross-over voyages (voyages in progress at the end of a reporting
period), the uncertainty and the dependence on estimates are greater than for finalized
voyages. The Company recognizes a percentage of the estimated revenue for the voyage equal
to the percentage of the estimated duration of the voyage completed at the balance sheet date.
The estimate of revenue is based on the expected duration and destination of the voyage.

When recognizing revenue, there is a risk that the actual number of days it takes to complete
the voyage will differ from the estimate, and for time charter parties a lower day rate may have
been agreed for additional days. The contract for a single voyage may state several alternative
destination ports. The destination port may change during the voyage, and the rate may vary
depending on the destination port. Changes to the estimated duration of the voyage as well as
changing destinations and weather conditions will affect the voyage expenses.

NOTE 1 - continued

The claim will often be met by counterclaims due to differences in the interpretation of the
agreement compared to the actual circumstances of the additional time used. Based on
previous experience, 95% of the demurrage claim submitted is recognized as demurrage
revenue upon initial recognition. The Company receives the demurrage payment upon reaching
final agreement on the amount, which on average is approximately 100 days after the original
demurrage claim was submitted. Any adjustments to the final agreement are recognized as
demurrage revenue.

Port expenses, bunkers and commissions
Port expenses, bunker fuel consumption and commissions are recognized as incurred. Gains and
losses on forward bunker contracts designated as hedges and write-down and provisions for
losses on freight receivables are included in this line.

Freight and bunker derivatives
Freight and bunker derivatives comprise fair value adjustments and gains and losses on forward
freight agreements, forward bunker contracts and other derivative financial instruments directly
relating to shipping activities which are not designated as hedges. The freight and bunker
derivatives that qualify for hedge accounting are recognized in Revenue and Port expense,
bunkers and commissions respectively, as the hedging instrument is realized.

Charter hire
Charter hire comprises expenses related to the chartering in of vessels under operating leases
which have been incurred in order to achieve the net revenue for the year.

Operating expenses
Operating expenses, which comprise crew expenses, repair and maintenance expenses and
tonnage duty, are expensed as incurred.

Profit from sale of vessels
Profit from sale of vessels is recognized when the significant risks and rewards of ownership
have been transferred to the buyer, representing the difference between the sales price less
costs to sell and the carrying value of the vessel.

Demurrage revenue
Freight contracts contain conditions regarding the amount of time available for loading and
discharging of the vessel. If these conditions are breached, TORM is compensated for the
additional time incurred in the form of demurrage revenue. Demurrage revenue is recognized
upon delivery of services in accordance with the terms and conditions of the charter parties.
Upon completion of the voyage, the Company assesses the time spent in port, and a demurrage
claim based on the relevant contractual conditions is submitted to the charterers.

Administrative expenses
Administrative expenses, which comprise administrative staff costs, management costs, office
expenses and other expenses relating to administration, are expensed as incurred.

Other operating expenses
Other operating expenses primarily comprise chartering commissions and management fees
paid to commercial and technical managers for managing the fleet and profits and losses
deriving from the disposal of fixed assets, etc.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

101

NOTE 1 - continued

Depreciation and impairment losses
Depreciation and impairment losses comprise depreciation of tangible fixed assets for the year
as well as the write-down of the value of assets by the amount by which the carrying amount of
the asset exceeds its recoverable amount. In the event of indication of impairment, the carrying
amount is assessed, and the value of the asset is written down to its recoverable amount equal
to the higher of value in use based on net present value of future earnings from the assets and
its fair value less costs to sell.

Financial income
Financial income comprises interest income, realized and unrealized exchange rate gains
relating to transactions in currencies other than the functional currency, realized gains from
other equity investments and securities, unrealized gains from securities, dividends received and
other financial income including value adjustments of certain financial instruments not
accounted for as hedges of future transactions.

NOTE 1 - continued

BALANCE SHEET

Vessels
Vessels are measured at cost less accumulated depreciation and accumulated impairment
losses. Cost comprises acquisition cost and costs directly related to the acquisition up until the
time when the asset is ready for use, including interest expenses incurred during the period of
construction based on the loans obtained for the vessels. All major components of vessels
except for dry-docking costs are depreciated on a straight-line basis to the estimated residual
value over their estimated useful lives, which TORM estimates to be 25 years. The Company
considers that a 25-year depreciable life is consistent with what is used by other shipowners
with comparable tonnage. Depreciation is based on cost less the estimated residual value.
Residual value is estimated as the lightweight tonnage of each vessel multiplied by scrap value
per ton. The useful life and the residual value of the vessels are reviewed at least at each
financial year-end based on market conditions, regulatory requirements and the Company’s
business plans.

Interest is recognized in accordance with the accrual basis of accounting taking into account
the effective interest rate. Dividends from other investments are recognized when the right to
receive payment has been decided, which is typically when the dividend has been declared and
can be received without conditions.

The Company also evaluates the carrying amounts to determine if events have occurred that
indicate impairment and would require a modification of the carrying amounts. Prepayment on
vessels is measured at costs incurred.

Financial expenses
Financial expenses comprise interest expenses, financing costs of finance leases, realized and
unrealized exchange rate losses relating to transactions in currencies other than the functional
currency, realized losses from other equity investments and securities, unrealized losses from
securities and other financial expenses including value adjustments of certain financial
instruments not accounted for as hedges of future transactions.

Interest is recognized in accordance with the accrual basis of accounting taking into account
the effective interest rate.

Tax
Tax expenses comprise the expected tax including tonnage tax on the taxable income for the
year for the Group, adjustments relating to previous years and the change in deferred tax for
the year. However, tax relating to items in other comprehensive income is recognized directly in
the statement of other comprehensive income.

Dry-docking
Approximately every 24 and 60 months, depending on the nature of work and external
requirements, the vessels are required to undergo planned dry-dockings for replacement of
certain components, major repairs and major maintenance of other components, which cannot
be carried out while the vessels are operating. These dry-docking costs are capitalized and
depreciated on a straight-line basis over the estimated period until the next dry-docking. The
residual value of such components is estimated at nil. The useful life of the dry-docking costs is
reviewed at least at each financial year-end based on market conditions, regulatory
requirements and TORM’s business plans. A portion of the cost of acquiring a new vessel is
allocated to the components expected to be replaced or refurbished at the next dry-docking.
Depreciation hereof is carried over the period until the next dry-docking. For newbuildings, the
initial dry-docking asset is estimated based on the expected costs related to the first-coming
dry-docking, which again is based on experience and past history of similar vessels. For second-
hand vessels, a dry-docking asset is also segregated and capitalized separately, taking into
account the normal docking intervals of the vessels.

At subsequent dry-dockings, the costs comprise the actual costs incurred at the dry-docking
yard. Dry-docking costs may include the cost of hiring crews to carry out replacements and
repairs, the cost of parts and materials used, The cost of travel, lodging and supervision of
Company personnel as well as the cost of hiring third-party personnel to oversee a dry-docking.
Dry-docking activities include, but are not limited to, the inspection, service on turbocharger,
replacement of shaft seals, service on boiler, replacement of hull anodes, applying of anti-fouling
and hull paint, steel repairs as well as refurbishment and replacement of other parts of the
vessel.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

102

NOTE 1 - continued

Prepayments on vessels
Prepayments consist of prepayments related to newbuilding contracts for vessels not yet
delivered and including a share of borrowing costs. When a vessel is delivered, the amount is
reallocated to the financial statement line “Vessels and capitalized dry-docking”.

Receivables are at initial recognition measured at at their transaction price less allowance for
expected credit losses over the lifetime of the receivable and are subsequent measured at
amortized cost adjusted for change in expected credit losses. Derivative financial instruments
included in other receivables are measured at fair value.

Other plant and operating equipment
Other plant and operating equipment consists of leasehold improvements, IT equipment and
software and is measured at historical cost less accumulated depreciation and any impairment
loss. Any subsequent cost is included in the asset’s carrying amount or recognized as a separate
asset only when it is probable that future economic benefits are associated with the item and
the cost of the item can be measured reliably. Depreciation is based on the straight-line method
over the estimated useful life of the assets:

Expected credit losses
Expected credit losses at initial recognition are determined on the basis of customers’ ability to
pay, considering historical information about payment patterns, credit risks, customer
concentrations, customer creditworthiness as well as prevailing economic conditions. The
estimates are updated subsequent and if the debtor’s ability to pay is becoming doubtful
expected credit losses are calculated at individual basis. When there are no reasonable
expectations of recovering the receivable is written off in part or entirely.

Leasehold improvements: estimated useful life
IT equipment: 3–5 years
Software: 3–5 years

•
•
•
• Other equipment 3–5 years

The depreciation commences when the asset is available for use, i.e. when it is in the location
and condition necessary for it to be capable of operating in the manner intended by
Management.

Financial assets
Financial assets are initially recognized at the settlement date at fair value plus transaction
costs, except for financial assets at fair value through profit or loss, which are recognized at fair
value. Financial assets are derecognized when the rights to receive cash flows from the assets
have expired or have been transferred.

Investments in joint ventures
Investments in joint ventures comprise investments in companies which by agreement are
managed jointly with one or more companies and therefore are subject to joint control and in
which the parties have rights to the net assets of the joint venture. Joint ventures are accounted
for using the equity method. Under the equity method, the investment in joint ventures is initially
recognized at cost and thereafter adjusted to recognize TORM’s share of the profit or loss in the
joint venture. When TORM’s share of losses in a joint venture exceeds the investment in the joint
venture, TORM discontinues recognizing its share of further losses. Additional losses are
recognized only to the extent that TORM has incurred legal or constructive obligations or made
payments on behalf of the joint venture.

Receivables
Outstanding freight receivables and other receivables that are expected to be realized within 12
months from the balance sheet date are classified as “Freight receivables” or “Other receivables”
and presented as current assets.

Provisions for bad debt
Allowances for bad debts are determined on the basis of customers’ ability to pay, considering
historical information about payment patterns, doubtful debts, customer concentrations,
customer creditworthiness as well as prevailing economic conditions. The estimates are updated
if the debtor’s ability to pay changes. It is estimated that the provisions made are sufficient to
cover any bad debts.

Impairment of assets
Non-current assets are reviewed at least annually to determine any indication of impairment due
to a significant decline in either the assets’ market value or in the cash flows generated by the
assets. In case of such indication, the recoverable amount of the asset is estimated as the higher
of the asset’s fair value less costs to sell and its value in use. The value in use is the present value
of the future cash flows expected to derive from a cash generating unit (CGU), utilizing a pre-
tax discount rate that reflects current market estimates of the time value of money and the risks
specific to the unit for which the estimates of future cash flows have not been adjusted. If the
recoverable amount is less than the carrying amount of the cash generating unit, the carrying
amount is reduced to the recoverable amount.

The impairment loss is recognized immediately in the income statement. Where an impairment
loss subsequently reverses, the carrying amount of the cash generating unit is increased to the
revised estimate of the recoverable amount, but so that the increased carrying amount does not
exceed the carrying amount that would have been determined, had no impairment loss been
recognized in prior years.

The management in TORM has assessed the inflow of cash in TORM to allocate these into
separate cash generating units (CGU). It has been assessed that the Group only have one CGU –
the product tanker segment.

For the purpose of assessing impairment, assets and time charter and bareboat contracts are
grouped at the lowest levels at which impairment is monitored for internal management
purposes.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

103

NOTE 1 - continued

Bunkers
Bunkers and lube oil are stated at the lower of cost and net realizable value. Cost is determined
using the FIFO method and includes expenditure incurred in acquiring the bunkers and lube oil
and delivery cost less discounts.

Deferred tax
Deferred tax is recognized in respect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes. In addition, the deferred tax also constitutes the reserve in relation to the transition
balance in connection with the Danish tonnage tax scheme.

Assets held-for-sale
Assets are classified as held-for-sale if the carrying amount will be recovered principally through
a sales transaction rather than through continuing use. This condition is regarded as met only
when the asset is available for immediate sale in its present condition subject to terms that are
usual and customary for sales of such assets, and when its sale is highly probable. Management
must be committed to the sale, which should be expected to qualify for recognition as a
completed sale within one year from the date of classification.

Assets held-for-sale mainly refer to vessels being sold and are measured at the lower of their
previous carrying amount and fair value less costs to sell.

Gains are recognized on delivery to the new owners in the income statement in the item “Profit
from sale of vessels”. Anticipated losses are recognized at the time when the asset is classified
as held-for-sale in the item “Impairment losses on tangible and intangible assets”.

Treasury shares
Treasury shares are recognized as a separate component of equity at cost. Upon subsequent
disposal of treasury shares, any consideration is also recognized directly in equity.

Share-based payments
The Group makes equity settled share-based payments to certain employees, which are
measured at fair value at the date of grant and expensed on a straight-line basis over the
vesting period, based on the Group’s estimate of shares that will eventually vest. The fair value
of the share schemes is calculated using the Black-Scholes model at the grant date.

Dividend
Dividend is recognized as a liability at the time of declaration. Dividend proposed for the year is
moved from “Retained profit” and presented as a separate component of equity.

Provisions
Provisions are recognized when the Group has a legal or constructive obligation as a result of
past events, and when it is probable that this will lead to an outflow of resources that can be
reliably estimated. Provisions are measured at the estimated liability that is expected to arise,
taking into account the time value of money.

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 realized, based on the laws that have been enacted at the
balance sheet date. The deferred tax is charged through the income statement except when it
relates to other comprehensive income items.

Mortgage debt and bank loans
At the time of borrowing, mortgage debt and bank loans are measured at fair value less
transaction costs. Mortgage debt and bank loans are subsequently measured at amortized cost.
This means that the difference between the net proceeds at the time of borrowing and the
nominal amount of the loan is recognized in the income statement as a financial expense over
the term of the loan applying the effective interest method.

When terms of existing financial liabilities are renegotiated, or other changes regarding the
effective interest rate occur, TORM performs a test to evaluate whether the new terms are
substantially different from the original terms. If the new terms are substantially different from
the original terms, TORM accounts for the change as an extinguishment of the original financial
liability and the recognition of a new financial liability. TORM considers the new terms to be
substantially different from the original terms if the present value of the cash flows under the
new terms, including any fees paid net of any fees received and discounted using the original
effective interest rate, is at least 10% different from the discounted present value of the
remaining cash flows of the original financial liability.

Other liabilities
Other liabilities are generally measured at amortized cost. Derivative financial instruments
included in other liabilities are measured at fair value.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

104

NOTE 1 - continued

CASH FLOW STATEMENT
The cash flow statement shows how income and changes in the balance sheet items affect cash
and cash equivalent, i.e. how cash is generated or used in the period. The cash flow statement is
presented in accordance with the indirect method commencing with “Net profit/(loss) for the
year”.

Cash flow from operating activities converts income statement items from the accrual basis of
accounting to cash basis. Starting with “Net profit/(loss) for the year”, non-cash items are
reversed and actual payments included. Further, the change in working capital is taken into
account, as this shows the development in money tied up in the balance sheet.

Cash flow from investing activities comprises the purchase and sale of tangible fixed assets and
financial assets as well as cash from business combinations.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of financial statements in accordance with IFRS requires Management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. These estimates and
assumptions are affected by the way TORM applies its accounting policies. An accounting
estimate is considered critical if the estimate requires Management to make assumptions about
matters subject to significant uncertainty, if different estimates could reasonably have been
used, or if changes in the estimate that would have a material impact on the Company’s financial
position or results of operations are reasonably likely to occur from period to period.
Management believes that the accounting estimates applied are appropriate and the resulting
balances are reasonable. However, actual results could differ from the original estimates
requiring adjustments to these balances in future periods.

Cash flow from financing activities comprises changes in long-term debt, bank loans, finance
lease liabilities, purchases or sales of treasury shares and dividend paid to shareholders.

Management believes that the following are the significant accounting estimates and
judgements used in the preparation of the consolidated financial statements:

Cash and cash equivalents comprise cash and short-term bank deposits with an original
maturity of three months or less, net of outstanding bank overdrafts. The carrying amount of
these assets is approximately equal to their fair value. Cash and cash equivalents at the end of
the reporting period are shown in the consolidated cash flow statement and can be reconciled
to the related items in the consolidated balance sheet.

The restricted cash balance primarily relates to cash provided as security for negative marked
values of derivatives and other cash positions.

EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the consolidated net profit/(loss) for the year
available to common shareholders by the weighted average number of common shares
outstanding during the period. Treasury shares are not included in the calculation. Purchases of
treasury shares during the period are weighted based on the remaining period.

Diluted earnings per share is calculated by adjusting the consolidated profit or loss available to
common shareholders and the weighted average number of common shares outstanding for the
effects of all potentially dilutive shares. Such potentially dilutive common shares are excluded
when the effect of including them would be to increase earnings per share or reduce a loss per
share.

Carrying amounts of vessels
The Company evaluates the carrying amounts of the vessels (including newbuildings) to
determine if events have occurred that would require a modification of their carrying amounts.
The valuation of vessels is reviewed based on events and changes in circumstances that would
indicate that the carrying amount of the assets might not be recoverable. In assessing the
recoverability of the vessels, the Company reviews certain indicators of potential impairment
such as reported sale and purchase prices, market demand and general market conditions.
Furthermore, market valuations from leading, independent and internationally recognized
shipbrokers are obtained on a quarterly basis as part of the review for potential impairment
indicators. If an indication of impairment is identified, the need for recognizing an impairment
loss is assessed by comparing the carrying amount of the vessels to the higher of the fair value
less costs to sell and the value in use.

The review for potential impairment indicators and projection of future discounted cash flows
related to the vessels is complex and requires the Company to make various estimates including
future freight rates, utilization, earnings from the vessels, future operating expenses- and capital
expenditure including dry-dock costs - and discount rates. For more information on key
assumptions and related sensitivities, please refer to note 7 in these financial statements. All
these factors have been historically volatile. The carrying amounts of TORM’s vessels may not
represent their fair market value at any point in time, as market prices of second-hand vessels to
a certain degree tend to fluctuate with changes in freight rates and the cost of newbuildings.
However, if the estimated future cash flow or related assumptions in the future experience
change, an impairment write-down or reversal of impairment may be required.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

105

2018

2017

2016

9.3

36.9

46.2

9.2

34.6

43.8

9.9

31.0

40.9

38.1

36.4

32.3

2.1

3.3

0.6

2.1

1.9

3.1

0.3

2.1

2.0

3.6

0.4

2.6

46.2

43.8

40.9

111.7

302.2

130.6

137.0

286.6

269.1

413.9

417.2

406.1

NOTE 2 – LIQUIDITY, CAPITAL RESOURCES AND SUBSEQUENT EVENTS

NOTE 3 – STAFF COSTS

LIQUIDITY AND CAPITAL RESOURCES
As of 31 December 2018, TORM’s cash position totaled USD 127m (2017: USD 134m; 2016: USD
76m) and undrawn credit facilities amounted to USD 279m (2017: USD 271m; 2016: USD 190m).
The undrawn credit facilities consisted of a USD 75m Working Capital Facility, a bilateral USD
70m facility with ABN AMRO Bank, a bilateral USD 88m facility with Danish Ship Finance and a
USD 46m facility with KfW. TORM had nine newbuildings on order for delivery in 2019-2020
(2017: ten; 2016: four). The total outstanding CAPEX related to these newbuildings was USD
258m (2017: USD 307m; 2016: USD 149m) and is mainly financed by the undrawn facilities with
ABN AMRO Bank and Danish Ship Finance.

USDm

Total staff costs

Staff costs included in operating expenses

Staff costs included in administrative expenses

Total

Staff costs comprise the following

TORM has a Term Facility I of USD 331m and an undrawn Working Capital Facility of USD 75m
both with maturity in 2021. In addition to the Term Facility I and the Working Capital Facility,
TORM has a Term Facility II of USD 104m with maturity in 2022 and bilateral loan agreements
with ING of USD 42m maturing in 2024, with China Export-Import Bank of USD 112m with
maturity in 2030 and with Danish Ship Finance of USD 141m maturing in 2022. The loan
agreement with Danish Ship Finance consists of three tranches, two of which expire in 2021 with
total balloon payments of USD 72m. As of 31 December 2018, the scheduled minimum payments
on mortgage debt and bank loans in 2019 were USD 92m.

TORM’s bank debt facilities include financial covenants related to:
• Minimum liquidity including committed credit lines
• Minimum cash
•
Loan-to-value
•
Equity ratio

During 2018, 2017 and 2016, TORM did not have any covenant breaches.

SUBSEQUENT EVENTS

Wages and salaries

Share-based compensation

Pension costs

Other social security costs

Other staff costs

Total

Average number of permanent employees

Seafarers

Land-based

Total

Employee information
The majority of the staff on vessels are not employed by TORM. Staff costs included in
operating expenses relate to the 112 seafarers (2017: 131, 2016: 137).

• On 4 January 2019, TORM delivered the Handysize tanker TORM Charente to its new

The average number of employees is calculated as a full-time equivalent (FTE).

owner. In the financial statements, TORM Charente is treated as an asset-held-for-sale.
The delivery results in a net loss from sale of vessels in TORM of USD 1.1m in 2019.

• On 19 January 2019, TORM entered into an agreement to sell the MR tanker TORM

Amazon, and the vessel was delivered to its new owner on 12 February 2019. The
delivery results in a net loss from sale of vessels in TORM of USD 1.6m in 2019.

The Executive Director is, in the event of termination by the Company, entitled to a severance
payment of up to 12 months' salary.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

106

NOTE 3 - continued

USD '000

2018

2017

2016

Long-Term Incentive Plan - RSUs granted in 2018:

NOTE 3 - continued

Non-Executive Board and Committee Remuneration, short term

Christopher H. Boehringer

276

290

237

David Weinstein

Torben Janholt

Göran Trapp

Total

Executive Management

182

171

800

174

812

131

132

158

658

Annual

perfor-

Taxable

mance

USD '000

Salary

benefits

bonus

Total

Executive Management Remuneration

Jacob Meldgaard

2016, TORM A/S - restated ¹

⁾

2016, TORM plc¹

2017, TORM A/S¹
⁾
2017, TORM plc¹

2018, TORM A/S¹
⁾
2018, TORM plc¹

⁾

Paid by legal entity as noted.

⁾

834

923

983

559

1,434

580

1,545

425

1,452

⁾
Key management personnel consists of the Boards of Directors and the Executive Director.

Senior Management Team
The aggregate compensation paid by the Group to the other members of the Senior
Management Team (excluding Mr. Meldgaard) was USD 2,186,679 (2017: USD 1,987,726, 2016:
USD 1,760,420), which includes an aggregate of USD 125,959 (2017: USD 112,236, 2016: USD
95,029) allocated for pensions for these individuals.

Exercise

RSU grant value

RSU LTIP

price per

assuming 100%

grant ¹

vesting

LTIP element of Jacob Meldgaard's remuneration

⁾

package 2018:

Jacob Meldgaard

766,035 DKK 53.7

USD 0.9m

The LTIP award is fixed by the Board of Directors and was communicated via company announcement no. 10 of 25

¹
April 2018. Therefore there is no minimum or maximum for 2018.

⁾

TORM operates an equity-settled, share-based compensation plan. The fair value of the
employee services received in exchange for the grant of shares is recognized as expense and
allocated over the vesting period. Employment in TORM throughout the period is in most cases
a prerequisite for upholding the full vesting rights in the RSU programme. For good leavers
subject to the Danish Stock Options Act, the RSU’s will vest in accordance with the vesting
schedule, but for all other leavers, all unvested RSU’s shall be immediately forfeited for no
consideration. Options are granted under the plan for no consideration and carry no dividend or
voting rights.

TORM has in accordance with its Remuneration Policy granted the CEO a number of Restricted
Share Units (RSUs), which was communicated in company announcement no. 2 dated 18
January 2016. A further communication, announcement no. 10 issued on 25 April 2018, detailed
changes to the grant of RSUs as agreed to at the Annual General Meeting on 12 April 2018. There
are no performance conditions associated with this grant of RSUs.

The original RSUs granted to the CEO in 2016 amounted to 1,276,725 units and vested over a
five-year period, with one fifth of the grant amount vesting at each anniversary during the five-
year period. The exercise price for the 2016 RSUs was DKK 96.3. As of 1 January 2017, one fifth
of the original grant, amounting to 255,345, vested with an exercise period ending 31 December
2017. None of these RSUs were exercised. As of 1 January 2018, one fifth of the original grant,
amounting to 255,345, vested with an exercise period ending 31 December 2018. None of these
RSUs were exercised.

As detailed in announcement no. 10 issued on 25 April 2018, the CEO was granted a total of
766,035 RSUs with effect as of 1 January 2018, which will vest in equal installments over the next
three years. The RSU grant corresponds to the unvested portion (60%) of the CEO’s original
five-year grant from 2016. It has been agreed that the CEO will not exercise the original RSUs.
The exercise price for each RSU granted in 2018 is DKK 53.7, corresponding to the average price
of TORM shares during 90 calendar days preceding the approval at TORM plc’s Annual General
Meeting on 12 April 2018 plus a 15% premium. Vested RSUs may be exercised for a period of 360
days from each vesting date.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

107

NOTE 3 - continued

NOTE 4 – REMUNERATION TO AUDITORS APPOINTED AT THE PARENT
COMPANY’S ANNUAL GENERAL MEETING

The total value of the RSU allocation is calculated based on the Black-Scholes model and is
included in the overall cost estimate for the Company’s Long-Term Incentive Program (LTIP) (cf.
company announcements dated 18 January 2016, 8 March 2016 and 25 April 2018).

USDm

Audit fees

2018

2017

2016

Fees payable to the Company's auditor for the audit of the

Company's annual accounts

Audit of the Company's subsidiaries pursuant to legislation

Total audit fees

Non-audit fees

Audit-related services

Tax services

Other services

Total non-audit fees

Total

0.4

0.2

0.6

0.2

0.0

0.2

0.4

0.2

0.6

0.4

0.1

0.5

0.4

0.6

0.4

0.3

0.1

1.0

1.5

0.8

1.0

Under SEC regulations, the remuneration of the auditor of USD 0.8m (2017: USD 1.0m, 2016: USD
1.5m) is required to be presented as follows: Audit USD 0.6m (2017: USD 0.6m, 2016: USD 0.5m),
other audit-related services USD 0.2m (2017: USD 0.4m, 2016: USD 0.6m), tax services USD
0.0m (2017: USD 0.0m, 2016: USD 0.3m) and all other fees USD 0.0m (2017: USD 0.0m, 2016:
USD 0.1).

Our Audit Committee pre-approves all audit, audit-related and non-audit services not prohibited
by law to be performed by our independent auditors and associated fees prior to the
engagement of the independent auditor with respect to such services.

The value of the 2018 grant, USD 0.9m, is estimated taking into account that the CEO as part of
the 2018-grant will not exercise the unvested portion of the 2016 grant. The valuation is based
on the Black-Scholes model with an exercise price of DKK/share 53.7, and a market value of one
TORM A-share of DKK 49.5 (the closing price per A-share at the time of the grant and assuming
100% vesting). The total value of the granted restricted shares was recognized in the income
statement in 2018 and in a corresponding adjustment to Equity.

Long-term employee benefit obligations
The obligation comprises an obligation under the incentive programs to deliver Restricted Share
Units in TORM plc at a determinable price to the entity's key personnel. The RSUs granted
entitle the holder to acquire one TORM A-share.

The program was established during the year and comprises the following number of shares in
TORM plc:

Number of shares (1,000)

2018

2017

2016

Outstanding as of 1 January

Granted during the period

Exercised during the period

Expired during the period

Forfeited during the period

2,611.2

1,999.8

907.3

866.6

2,127.4

-764.0

-233.9

-35.4

-21.3

-127.6

Outstanding as of 31 December

2,719.1

2,611.2

1,999.8

Exercisable as of 31 December

255.3

538.9

In 2017, the Board agreed to grant a total of 866.6 RSUs to other management. The RSUs to
other management were subject to a three-year vesting period, with one third of the grant
amount vesting at each anniversary date beginning on 1 January, 2018. The exercise price of
each vested RSU is following certain adjustments for dividends at DKK 93.6 and an exercise
period of six months.

In 2018, the Board agreed to grant a total of 944,468 RSU’s to other management. The vesting
period of the program is three years for key employees and three years for the Executive
Director. The exercise price is set to DKK 53.7. The exercise period is 12 months after the vesting
date for key employees and 12 months after the vesting date for the Executive Director. The fair
value of the options granted in 2018 was determined using the Black-Scholes model and is not
material. The average remaining contractual life for the restricted shares as per 31 December
2018 is 1.1 years (2017: 1.3 years).

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

108

NOTE 5 – INTANGIBLE ASSETS

NOTE 6 – TANGIBLE FIXED ASSETS

2018

2017

2016

USDm

2018

2017

2016

USDm

Goodwill

Cost:

Balance as of 1 January

Additions during the year

Balance as of 31 December

Impairment losses:

Balance as of 1 January

Impairment losses for the year

Balance as of 31 December

Carrying amount as of 31 December

-11.4

Vessels and capitalized dry-docking

Cost:

11.4

Balance as of 1 January

Additions

11.4

Disposals

Transferred to/from other items

Transferred to assets held-for-sale

Balance as of 31 December

Depreciation:

Balance as of 1 January

Disposals

Depreciation for the year

Transferred to assets held-for-sale

Balance as of 31 December

Impairment:

Balance as of 1 January

Impairment losses on tangible fixed assets

Transferred to assets held-for-sale

Balance as of 31 December

1,726.6

1,697.4

1,567.5

162.7

103.1

40.8

-30.2

-14.3

-16.3

81.8

105.4

-54.6

-59.6

1,886.3

1,726.6

1,697.4

264.8

180.0

75.5

-30.2

-14.3

-15.9

113.4

113.6

120.4

-20.4

-14.5

327.6

264.8

180.0

167.3

173.6

3.2

-8.4

3.6

173.6

-9.9

162.1

167.3

173.6

Carrying amount as of 31 December

1,396.6

1,294.5

1,343.8

Of which finance leases as of 31 December

26.5

28.6

12.4

Included in the carrying amount for "Vessels and capitalized dry-docking" are capitalized dry-
docking costs in the amount of USD 67.5m (2017: USD 68.1m, 2016: USD 80.4m).

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

109

NOTE 7 – IMPAIRMENT TESTING

2018

2017

2016

As of 31 December 2018, Management performed an impairment test of the recoverable amount
of significant assets within the cash-generating unit — the Tanker Segment.

In 2018, the recoverable amount of the Tanker Segment was based on its value in use.

As the value in use was in all material respects equivalent to the carrying amount, Management
concluded that the impairment test did not provide the basis for any impairment or reversal of
the impairment recorded in 2016.

The assessment of the value in use of the Tanker Segment was based on the net present value
of the expected future cash flows. The freight rate estimates in the period 2019-2021 are based
on the Company's business plans. Beyond 2021, the freight rates are based on TORM’s 10-year
historical average rates, adjusted for expected inflation.

From the year ended 31 December 2017 and going forward, TORM has decided to use its own
historical average rates, rather than the ones from Clarksons, as it has been concluded, following
detailed analysis, that they reflect TORM’s actual trading pattern and routes which differ to the
benchmarks used by Clarksons, in addition to reflecting operating efficiencies that TORM is able
to achieve due to the size and interdependency of its fleet. Historically, TORM has continuously
performed at or higher than the Clarksons benchmark.

The discount rate used in the value in use calculation is based on a Weighted Average Cost of
Capital (WACC) of 8.3% as of 31 December 2018 (2017: 8.7%, 2016: 8.8%) . WACC is calculated
by using a standard WACC model in which cost of equity, cost of debt and capital structure are
the key parameters.

As of 31 December 2018, the 10-year historical average spot freight rates used in the value in use
calculation are as follows:

•
LR2: USD/day 18,003 (2017: USD/day 17,216, 2016: USD/day 20,176 )
•
LR1: USD/day 16,907 (2017: USD/day 16,445, 2016: USD/day 17,124)
• MR: USD/day 15,349 (2017: USD/day 15,794, 2016: USD/day 15,118)
•

Handysize: USD/day 13,968 (2017: USD/day 14,416, 2016: USD/day 15,203)

NOTE 6 - continued

USDm

Prepayments on vessels

Cost:

Balance as of 1 January

Additions

Transferred to/from other items

Balance as of 31 December

88.4

38.9

44.1

44.3

72.6

76.9

-81.8

-105.4

45.5

88.4

44.1

Carrying amount as of 31 December

45.5

88.4

44.1

USDm

2018

2017

2016

Other plant and operating equipment

Cost:

Balance as of 1 January

Additions

Disposals

Balance as of 31 December

Depreciation:

Balance as of 1 January

Disposals

Depreciations for the year

Balance as of 31 December

Carrying amount as of 31 December

3.6

2.2

5.8

2.7

1.0

3.2

1.1

-0.1

-1.6

3.6

2.7

1.7

0.9

0.7

-0.1

-1.6

1.1

2.8

3.0

0.9

1.7

1.9

1.8

0.9

1.8

Of which finance leases as of 31 December

For information of assets provided as collateral security, please refer to note 15. Please refer to
note 7 for information on impairment testing.

The depreciation expense related to "Other plant and operating equipment" of USD 1.1m relates
to "Administrative expense" (2017: USD 0.9m, 2016: USD 1.8m). Depreciations and impairment
losses on tangible fixed assets on "Vessels and capitalized dry-docking" relate to operating
expenses.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

110

NOTE 7 - continued

NOTE 8 – FINANCIAL ITEMS

Operating expenses and administrative expenses are estimated based on TORM's business plans
for the period 2019-2021. Beyond 2021, operating expenses are adjusted for 2% (2017: 3%)
inflation and administrative expenses are adjusted for 2% inflation (2017: 2%).

USDm

Financial income

2018

2017

2016

Interest income from cash and cash equivalents ¹

2.7

1.6

0.2

The product tankers are expected to generate normal income for 25 years from delivery from
the shipyard. Given the current age profile of the tanker fleet, the average remaining life would
be approximately 15 years.

Exchange rate adjustments, including gain from forward

⁾

exchange rate contracts

0.6

3.3

2.7

4.3

2.6

2.8

The calculation of the value in use is sensitive to changes in the key assumptions which are
related to the future development in freight rates, the WACC applied as discounting factor in
the calculations and the development in operating expenses. All other things being equal, the
sensitivities to the value in use have been assessed as follows:

•

An increase/decrease in the tanker freight rates of USD/day 1,000 would result in an
increase/decrease in the value in use of USD 256m
An increase in WACC of 1.0% would result in a decrease in the value in use of USD 108
and a decrease in WACC of 1% would result in an increase in the value in use of USD
122m
An increase/decrease in operating expenses of 10.0% would result in a
decrease/increase in the value in use of USD 181m

However, if the downside sensitivities outlined above had been applied to the impairment test
as of 31 December 2018, the impairment charge arising in the current year would have been
capped at USD 39m based on the fair value less costs to sell of the Tanker Segment. If the
upside sensitivities outlined above had been applied, the impairment reversal would have been
capped at the impairment charge applied to the Group’s vessels in 2016 adjusted for the impact
of the incremental depreciation that would have been charged during the year and vessel
disposals that occurred during 2017 and 2018.

As outlined above, the impairment test has been prepared on the basis that the Company will
continue to operate its vessels as a fleet in the current set-up. The fair value based on broker
values of TORM's vessels including the order book and chartered-in vessels was USD 1,664m,
which is USD 39m below the carrying amount.

Total

Financial expenses

Interest expenses on mortgage and bank debt ¹

35.7

33.3

29.6

Exchange rate adjustments, including loss from forward

⁾

exchange rate contracts

Commitment fee

Other financial expenses

Total

0.1

2.6

0.9

3.2

2.4

1.7

2.5

1.6

3.6

39.3

40.6

37.3

Total financial items

-36.0

-36.3

-34.5

Interest for financial assets and liabilities not at fair value through profit and loss.

⁾

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

111

NOTE 9 – FREIGHT RECEIVABLES

NOTE 10 – OTHER RECEIVABLES

USDm

2018

2017

2016

USDm

Analysis as of 31 December of freight receivables:

Gross freight receivables:

Neither past due nor impaired

Past due not impaired:

Due < 30 days

Due between 30 and 180 days

Past due and impaired:

Due > 180 days

Total gross

Provision for impairment of freight receivables*

Total net
* All provisions are related to "Past due and impaired" freight receivables.

Derivative financial instruments

Tax receivables

44.0

25.5

28.7

Other

Balance as of 31 December

2018

2017

3.7

1.2

2.6

7.6

1.3

2.9

7.5

11.8

18.8

20.5

26.0

18.4

13.0

18.7

No significant other receivables are past due or credit impaired.

The carrying amount is a reasonable approximation of fair value due to the short-term nature of
the receivables. Please refer to note 20 for further information on fair value hierarchies.

4.4

87.7

1.7

86.0

2.7

72.6

1.3

4.7

65.1

2.6

71.3

62.5

As of 31 December 2018, freight receivables included receivables at a value of USD 0.0m (2017:
USD 0.0m, 2016: USD 0.6m) that are individually determined to be impaired to a value of USD
0.0m (2017: USD 0.0m, 2016: USD 0.5m).

From 1 January 2018, Management makes allowance for doubtful trade receivables based on the
simplified approach to provide for expected credit losses, which permits the use of the lifetime
expected loss provision for all trade receivables. This has not resulted in a material change in
loss allowance compared with previous policy.

Movements in provisions for impairment of freight receivables during the year are as follows:

USDm

2018

2017

2016

Provisions for impairment of Freight receivables

Balance as of 1 January

Provisions for the year

Provisions reversed during the year

Provisions utilized during the year

Balance as of 31 December

1.3

1.7

-1.0

-0.3

1.7

2.6

0.6

1.7

1.9

-1.9

-1.0

1.3

2.6

Provisions for impairment of freight receivables have been recognized in the income statement
under "Port expenses, bunkers and commissions".

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

112

NOTE 11 – TAX

USDm

Tax for the year

Current tax for the year

Adjustments related to previous years

Adjustment of deferred tax liability

Total

NOTE 11 - continued

2018

2017

2016

USDm

2018

2017

2016

1.6

-0.1

0.1

1.6

Deferred tax liability

1.0

-0.1

1.2

Balance as of 1 January

-0.3

Deferred tax for the year

-0.1

Adjustments related to previous years

0.8

Balance as of 31 December

44.9

0.1

-0.1

44.9

45.0

-0.1

45.1

-0.1

44.9

45.0

The majority of the Group's taxable income is located in Denmark, and therefore the majority of
the tax base is subject to Danish tax legislation. As such, the Group has elected to participate in
the Danish tonnage tax scheme; the participation is binding until 31 December 2025.

Essentially all deferred tax relates to vessels included in the transition account under the Danish
tonnage tax scheme at the time of entering the Danish tonnage tax scheme.

The Group expects to participate in the tonnage tax scheme after the binding period and, as a
minimum, to maintain an investing and activity level equivalent to the time of entering the
tonnage tax scheme.

Under the Danish tonnage tax scheme, income and expenses from shipping activities are not
subject to direct taxation, and accordingly an effective rate reconciliation has not been
provided, as it would not provide any meaningful information. Instead, the taxable income is
calculated from:

- The net tonnage of the vessels used to generate the income from shipping activities; and
- A rate applicable to the specific net tonnage of the vessel based on a sliding scale

Due to the provisions of the tonnage tax scheme, the effective tax rate of the Group is 4.7%
(2017: 24.4 %, 2016: -0.6 %).

The Group operates in a wide variety of jurisdictions, in some of which the tax law is subject to
varying interpretations and potentially inconsistent enforcement. As a result, there can be
practical uncertainties in applying tax legislation to the Group's activities. Whilst the Group
considers that it operates in accordance with applicable tax law, there are potential tax
exposures in respect of its operations, the impact of which cannot be reliably estimated but
could be material.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

113

NOTE 12 – COMMON SHARES AND TREASURY SHARES

NOTE 12 - continued

Common shares

A-shares

B-shares

C-shares

Total

2018

2017

2016

Number of

Issued warrants
Key management participates in an LTIP program, which gives the right to buy TORM shares at
a predefined share price. Please refer to Note 3.

74,218,846

62,298,846

Treasury shares

2018

2017

2016

Number of shares ('000)

Balance as of 1 January

74,218,848

62,298,848

Additions

Cancellations

Disposals

312.9

15.3

312.9

-15.3

Balance as of 31 December

312.9

The A-shares are listed on Nasdaq in Copenhagen and Nasdaq in New York and are publicly
available for trading. Each A-share carries one vote at the Annual General Meeting and gives the
shareholders right to dividends, liquidation proceeds or other distributions. The A-shares carry
no other rights or obligations.

On 26 January, 2018 TORM completed an equity raise of USD 100m in new Class A common
shares. The Private Placement contributed net equity of USD 97m.

The B-share has one vote at the General Meeting, has no pre-emption rights in relation to any
issue of new shares of other classes and carries no right to receive dividends, liquidation
proceeds or other distributions from TORM. The holder of the B-share has the right to elect one
member to the Board of Directors (being the Deputy Chairman), up to three alternates as well
as one Board Observer. The B-share cannot be transferred or pledged, except for a transfer to a
replacement trustee.

The C-share represents 350,000,000 votes at the General Meeting in respect of certain
Specified Matters, including election of members to the Board of Directors (including the
Chairman but excluding the Deputy Chairman) and certain amendments to the Articles of
Association proposed by the Board of Directors. The C-share has no pre-emption rights in
relation to any issue of new shares of other classes and carries no right to receive dividends,
liquidation proceeds or other distributions from TORM. The C-share cannot be transferred or
pledged, except to an affiliate of Njord Luxco.

The B-share and the C-share are redeemable by TORM in the event that (i) TORM has received
written notification from Njord Luxco (or its affiliates) that Njord Luxco and its affiliates (as
defined in the Articles of Association) hold less than 1/3 in aggregate of TORM’s issued and
outstanding shares, (ii) five business days have elapsed from the Board of Directors’ receipt of
such written notice either without any Board member disputing such notice or with at least 2/3
of the Board members confirming such notice and (iii) both of the B-share and the C-share are
redeemed at the same time.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

114

NOTE 12 - continued

Treasury shares - continued

Nominal value USD '000

Balance as of 1 January

Additions

Cancellations

Disposals

Percentage of share capital

Balance as of 1 January

Additions

Cancellations

Disposals

Dilution, due to capital increases

Balance as of 31 December

NOTE 13 – OTHER LIABILITIES

2018

2017

2016

USDm

Partners and commercial managements

3.1

0.2

3.1

-0.2

Accrued operating expenses

Accrued interest

Wages and social expenses

Derivative financial instruments

Payables to joint ventures

Other

Balance as of 31 December

2018

2017

1.2

9.1

4.6

1.4

8.5

5.2

16.1

16.3

3.4

0.1

2.0

0.1

2.3

36.5

33.8

0.5%

0.2%

0.5%

-0.2%

The carrying amount is a reasonable approximation of fair value due to the short-term nature of
the receivables. Please refer to note 20 for further information on fair value hierarchies.

-0.1%

0.4%

0.5%

Balance as of 31 December

3.1

The total consideration for the treasury shares was USD 0.0m (2017: 0.0m and 2016: USD 2.9m).
As of 31 December 2018, the Company's holding of treasury shares represented 312,871 shares
(2017: 312,871 shares and 2016: 312,871 shares) of USD 0.01 each at a total nominal value of USD
0.0m (2017: USD 0.0m and 2016: USD 0.0m) and a market value of USD 2.1m (2017: USD 2.7m
2016: USD 2.8m).

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

115

NOTE 14 - EFFECTIVE INTEREST RATE, OUTSTANDING MORTGAGE DEBT AND BANK LOANS

As of 31 December 2018, no drawdowns had been made on the Working Capital Facility, the
ABN Facility or the DSF Facility 4.

The table below shows the effective interest and the value of the outstanding mortgage debt
and bank loans.

Please refer to note 2 for further information on the Company’s liquidity and capital resources
and note 19 and 20 for further information on interest rate swaps and financial risks.

USDm

LOAN

DSF Facility 1 (USD)

TFA Facility 1 (USD)

DSF Facility 2 (USD)

DSF Facility 3 (USD)

TFA Facility 2 (USD)

ING (USD)

CEXIM

Weighted average effective interest rate

Carrying value

Hereof non-current ²

Hereof current ²

⁾

2018

2017

2016

Fixed/

Effective

Carrying

Effective

Carrying

Effective

Carrying

floating Maturity

interest¹

value²

Maturity

interest¹

value²

Maturity

interest¹

value²

Floating

2021

Floating

2021

Floating

2021

Floating

2022

Floating

2022

Floating

2024

Floating

2030

⁾
5.6%

6.0%

5.6%

5.4%

4.6%

5.3%

5.6%

⁾

64.1 2021

331.3 2021

52.4 2021

24.3 2022

103.7 2022

42.0 2024

111.7 N/A

729.5

637.3

92.2

⁾
5.4%

5.0%

5.1%

5.4%

4.6%

N/A

5.1%

⁾

74.2 2019

400.8 2021

56.5 2021

26.8 2022

115.0 N/A

45.8 N/A

- N/A

719.1

633.1

86.0

⁾
4.6%

4.6%

4.8%

N/A

4.6%

⁾

109.4

470.0

62.2

30.0

671.6

595.7

75.9

Effective interest rate includes deferred and amortized bank fees.
The carrying value of the Group's mortgage debt and bank loans is, because of floating interest rate, approximate to fair value. The carrying value are excluding amortized bank fees recognized in the balance sheet.

⁾

¹
²
⁾
⁾

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

116

NOTE 15 – COLLATERAL SECURITY FOR MORTGAGE DEBT AND BANK LOANS

NOTE 16 – GUARANTEE COMMITMENTS AND CONTINGENT LIABILITIES

The total carrying amount for vessels that have been provided as security amounts to USD
1,314m as of 31 December 2018 (2017: USD 1,259m)

The guarantee commitments of the Group are less than USD 0.1m (2017: USD 0.1m) and relate to
guarantee commitments to Danish Shipping.

The Group is involved in certain legal proceedings and disputes. It is Management's opinion that
the outcome of these proceedings and disputes will not have any material impact on the
Group's financial position, results of operations and cash flows.

The Group operates in a wide variety of jurisdictions, in some of which the company and
individual tax law is subject to varying interpretations and potentially inconsistent enforcement.
As a result, there can be practical uncertainties in applying tax legislation to the Group’s
activities. Whilst the Group considers that it operates in accordance with applicable company
and individual tax law, there are concrete potential tax exposures in respect of its operations,
which are being investigated further. Based on current legal advice, these exposures are not
considered to be material.

NOTE 17 – CONTRACTUAL OBLIGATIONS

TORM has various contractual obligations and commercial commitments to make future payments including lease obligations, purchase commitments, interest payments and repayment of
mortgage debt and bank loans.

The following table summarizes the Group's contractual obligations as of 31 December 2018.

USDm

Mortgage debt and bank loans

Interest payments related to scheduled interest fixing

Estimated variable interest payments

Finance lease liabilities

Interest element regarding finance lease

Newbuilding instalments

Committed scrubber installations

Other operating leases

Trade payables and other obligations

Total

⁴

⁾

2019

92.2

21.9

11.2

3.2

2.0

2020

87.6

19.4

10.5

3.4

1.7

232.4

25.6

22.6

2.8

59.3

1.2

2021

343.4

16.0

8.8

3.7

1.4

0.9

2022

96.9

7.7

0.2

15.0

0.3

0.9

447.6

149.4

374.2

121.0

2023

Thereafter

10.0

6.2

-0.6

0.4

16.0

99.4

9.7

8.7

Total

729.5

80.9

38.8

25.3

5.4

258.0

22.6

6.2

59.3

117.8

1,226.0

⁾
²
³
⁴

The presented amounts to be repaid do not include directly related costs arising from the issuing of the loans of USD 5.1m (2017: USD 4.8m), which are amortized over the term of the loans. Borrowing costs capitalized during the year amount
to USD 1.1m (2017: USD 3.5m).
Variable interest payments are estimated based on the forward rates for each interest period including hedging instruments.
As of 31 December 2018, TORM had nine contracted newbuildings (2017: ten) to be delivered during 2019-2020.
⁾
Other operating leases primarily consist of contracts regarding office spaces, cars and apartments as well as IT-related contracts. The leasing expense for 2018 amounts to USD 2.5m (2017: USD 2.3m) and is recognized under "Administrative
⁾
expenses".
⁾

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

117

NOTE 17 - continued

The following table summarizes the reconciliation of liabilities arising from financing
activities:

USDm

Mortgage debt

Financial lease

Total

Cash

Non-cash

Opening

balance as of

1 January

End balance

as of 31

Changes in

Other

December

2018

Borrowings Repayments

fair value

changes

720.9

114.5

28.2

749.1

114.5

-110.8

-2.9

-113.7

-0.3

2018

724.3

25.3

749.6

TORM has contractual rights to receive future payments as lessor of vessels on time charter and bareboat charter.

The following table summarizes the Group's contractual rights as of 31 December 2018.

USDm

Contractual rights - as lessor:

Charter hire income for vessels

Total

2019

2020

2021

2022

2023

Thereafter

Total

⁶

⁾

21.5

11.3

0.8

33.6

⁶

Charter hire income for vessels on time charter and bareboat charter is recognized under "Revenue". The average period until redelivery of the vessels for the period ended 31 December 2018 is 0.8 year (2017: 1.1 years).

⁾

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

118

NOTE 18 – DERIVATIVE FINANCIAL INSTRUMENTS

USDm

Fair value of derivatives:

Derivative financial instruments regarding freight and bunkers:

Forward freight agreements

Bunker swaps

Derivative financial instruments regarding interest and currency

exchange rate:

Forward exchange contracts

Interest rate swaps

Fair value of derivatives as of 31 December

USDm

2018

Offsetting financial assets and financial liabilities:

Gross amount

Offsetting amount

Net amount presented in the statement of financial position

USDm

2017

Offsetting of financial assets and financial liabilities:

Gross amount

Offsetting amount

Net amount presented in the statement of financial position

2018

2017

Forward freight agreements with a fair value of USD -2.1m (net loss) of a previously fixed hedge
have been recognized in the income statement in 2018 (2017: USD 0.5m, 2016: USD -0.1m). FFAs
are used to hedge the freight rates of vessels with a duration of 0–36 months.

0.5

-1.2

-0.2

0.8

Bunker swap agreements with a fair value of USD 1.1m (net gain) of a previously fixed hedge
have been recognized in the income statement in 2018 (2017: USD 1.2m, 2016: USD 0.0m).
Bunker swaps with a duration similar to the period hedged are used to reduce the exposure to
fluctuations in bunker prices.

Forward exchange contracts with a fair value of USD -1.8m (net loss) are designated as hedge
accounting relationships to hedge a part of TORM's payments in 2019 regarding administrative
and operating expenses denominated in DKK with a notional value of DKK 250.0m (2017: DKK
257.0m, 2016: DKK 336.4m).

Interest rate swaps with a fair value of USD 2.8m (net gain) are designated as hedge accounting
relationships to fix a part of TORM's interest payments during the period 2019-2026 with a
notional value of USD 512.8m (2017: USD 406.4m, 2016: USD 373.8m).

The derivatives are not under central clearing but are settled on a bilateral basis with the
counterparties. All contracts are settled in a net amount per counterparty, and therefore the net
value per counterparty is presented in the financial statement.

Cash collateral of USD 3.5m (2017: USD 3.8m) has been provided security for the agreements
entered relating to derivate financial instruments, which does not meet the offsetting criteria in
IAS 32, but it can be offset against the net amount of the derivative asset and derivative liability
in case of default and insolvency or bankruptcy in accordance with associated collateral
arrangements.

The Group did not enter into any enforceable netting arrangements.

Further details of derivative financial instruments are provided in note 19.

-1.8

2.8

0.3

1.8

5.1

7.5

Financial

assets

liabilities

7.1

-3.4

3.7

-6.8

3.4

-3.4

Financial

assets

liabilities

8.2

-0.9

7.3

-0.4

0.6

0.2

Please refer to Note 20 “Financial Instruments” for further information on fair value hierarchies.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

119

NOTE 18 - continued

The table below shows realized amounts as well as fair value adjustments regarding derivative
financial instruments recognized in the income statements and equity in 2018, 2017 and 2016.

USDm

2018

Forward freight agreements

Bunker swaps

Forward exchange contracts

Interest rate swaps

Total

2017

Forward freight agreements

Bunker swaps

Forward exchange contracts

Interest rate swaps

Total

2016

Forward freight agreements

Bunker swaps

Forward exchange contracts

Interest rate swaps

Total

Income statement

Equity

Port

expenses,

bunkers and

Financial

Operating

Administrative

Hedging

Revenue

commissions

items

expenses

reserves

-2.1

0.5

-0.1

1.1

1.2

0.0

-0.1

0.0

1.0

-3.4

-2.8

0.1

0.3

0.6

0.2

0.4

0.9

-2.0

-2.4

-3.6

-7.1

-0.3

4.4

2.7

6.8

-0.2

1.0

-3.4

1.6

-1.0

The cash flow hedge reserve represents the cumulative amount of gains and losses on hedging instruments deemed effective in cash flow hedges. The cumulative deferred gain or loss on the
hedging instrument is recognized in profit or loss only when the hedged transaction impacts the profit or loss, or is included directly in the initial cost or other carrying amount of the hedged non-
financial items.

Please refer to Note 19 for further information on commercial and financial risks.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

120

NOTE 19 – RISKS ASSOCIATED WITH TORM’S ACTIVITIES

NOTE 19 - continued

TORM’s overall risk tolerance and inherited exposure to risks is divided into four main
categories:

•
•
•

long-term strategic risks
industry and market-related risks
operational and compliance risks
financial risks

The risks described below under each of the four categories are considered to be among the
most significant risks for TORM within each category.

LONG-TERM STRATEGIC RISKS
Industry-changing risks, such as the substitution of oil for other energy sources and radical
changes in transportation patterns, are considered to have a relatively high potential impact but
are long-term risks. Management continues to monitor long-term strategic risks to ensure the
earliest possible mitigation of potential risks and develop necessary capabilities to exploit
opportunities created by the same risks.

INDUSTRY AND MARKET-RELATED RISKS
Industry and market-related risk factors relate to changes in the markets and in the political,
economic and physical environment that Management cannot control such as freight rates and
vessel and bunker prices.

FREIGHT RATE FLUCTUATIONS
The Company’s income is principally generated from voyages carried out by its fleet of vessels.
As such, TORM is exposed to the considerable volatility that characterizes freight rates for such
voyages.

It is the Company’s strategy to seek a certain exposure to this risk, as volatility also represents
an opportunity because earnings historically have been higher in the day-to-day market
compared to time charters. The fluctuations in freight rates for different routes may vary
substantially. However, TORM is aiming at reducing the sensitivity to the volatility of such
specific freight rates by actively seeking the optimal geographical positioning of the fleet and by
optimizing the services offered to customers. Please refer to note 7 for details on impairment
testing.

Tanker freight income is to a certain extent covered against general fluctuations through the use
of physical contracts such as cargo contracts and time charter agreements with durations of 6-
36 months. In addition, TORM uses derivative financial instruments such as forward freight
agreements (FFAs) with coverage of typically 0-24 months forward, based on market
expectations and in accordance with the Company’s risk management policies. During 2018,
13.1% (2017: 11.6%; 2016: 10.4%) of freight earnings days equal to 27.141, deriving from the
Company’s tankers was hedged in this way. Physical time charter contracts accounted for 62.8%
(2017: 65.8%; 2016: 82.9%) of overall hedging. In 2018, the Company sold FFAs with a notional
contract value of USD 39.6m (2017: USD 44.2m; 2016: USD 11.7m) and bought FFAs with a
notional contract value of USD 18.8m (2017: USD 12.2m; 2016: USD 2.9m). The total notional
contract volume sold in 2018 was 2,683,000 metric tons (2017: 1,754,000 metric tons; 2016:
781,000 metric tons), and the total notional volume bought was 1,447,000 metric tons (2017:
530,000 metric tons; 2016: 190,000 metric tons). At the end of 2018, the coverage of available
earning days for 2019 was 9.9% through time charters, current spot voyages, cargo contracts
and FFAs (2017: 13.3%; 2016: 11.6%). No FFA had maturity beyond 2019.

FFA trade and other freight-related derivatives are subject to specific policies and guidelines
approved by the Risk Committee, including trading limits, stop-loss policies, segregation of
duties and other internal control procedures.

All things being equal and to the extent the Company’s vessels have not already been chartered
out at fixed rates, a freight rate change of USD/day 1,000 would lead to the following changes
in profit before tax based on the expected number of earning days for the coming financial year:

SENSITIVITY TO CHANGES IN FREIGHT RATES

USDm

2019

2018

2017

Decrease in freight rates of USD/day 1,000:

Changes in profit before tax, as of 31 December

Changes in equity, as of 31 December

-25.3

-24.1

-25.0

SALES AND PURCHASE PRICE FLUCTUATIONS
As an owner of vessels, TORM is exposed to risk associated with changes in the value of the
vessels, which can vary considerably during their useful lives. As of 31 December 2018, the
carrying value of the fleet was USD 1,396.5m (2017: USD 1,294.5m). Based on broker valuations,
TORM’s fleet excluding undelivered newbuildings had a market value of USD 1,322.1m as of 31
December 2018 (2017: USD 1,259.6m).

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

121

NOTE 19 - continued

BUNKER PRICE FLUCTUATIONS
The cost of fuel oil consumed by the vessels, known in the industry as bunkers, accounted for
60.8% (2017: 55.3%; 2016: 49.6%) of the total voyage costs in 2018 and is by far the biggest
single cost related to a voyage.

INSURANCE COVERAGE
In the course of the fleet’s operation, various casualties, accidents and other incidents may occur
that may result in financial losses for TORM. For example, national and international rules,
regulations and conventions mean that the Company may incur substantial liabilities if a vessel is
involved in an oil spill or emission of other environmentally hazardous agents.

TORM is exposed to fluctuations in bunker prices that are not reflected in the freight rates
achieved by the Company. To reduce this exposure, TORM hedges part of its bunker
requirements with oil derivatives.

Bunker trade is subject to specific risk policies and guidelines approved by the Risk Committee
including trading limits, stop-loss, stop-gain and stop-at-zero policies, segregation of duties and
other internal control procedures.

TORM applies hedge accounting to all bunker derivative contracts.

In 2018, 4.8% (2017: 3.3%; 2016: 0.9%) of TORM’s bunker consumption was hedged through
bunker hedging contracts. At the end of 2018, TORM had covered 2.0% equal to 10.199 metric
tons (2017: 2.1%; 2016: 1.6%) of its bunker requirements for 2019 using hedging instruments at an
average price of USD 440. No bunker derivatives had maturity beyond 2019. Total bunker
exposure is estimated to be approximately 516.449 metric tons.

All things being equal, a price change of 10% per ton of bunker oil (without subsequent changes
in freight rates) would lead to the following changes in expenditure based on the expected
bunker consumption in the spot market:

SENSITIVITY TO CHANGES IN THE BUNKER PRICES

USDm

2019

2018

2017

Increase in the bunker prices of 10% per ton:

Changes in profit before tax, as of 31 December

-20.7

-18.3

-15.6

Changes in equity, as of 31 December

-20.7

-18.3

-15.6

OPERATIONAL AND COMPLIANCE RISKS
Operational risks are risks associated with the ongoing operations of the business and include
risks such as safe operation of vessels, availability of experienced seafarers and staff, terrorism,
piracy as well as insurance and counterparty risk.

In order to reduce the exposure to these risks, the fleet is insured against such risks to the
extent possible. The total insurance program comprises a broad cover of risks in relation to the
operation of vessels and transportation of cargo, including personal injury, environmental
damage and pollution, cargo damage, third-party casualty and liability, hull and machinery
damage, total loss and war. All of TORM’s owned vessels are insured for an amount
corresponding to their market value plus a margin to cover any fluctuations. Liability risks are
covered in line with international standards. It is TORM’s policy to cooperate with financially
sound international insurance companies with a credit rating of BBB or better, presently some
14-16 companies, along with two P&I clubs, to diversify risk. The P&I clubs are member of the
internationally recognized collaboration, International Group of P&I clubs, and the Company’s
vessels are each insured for the maximum amount available in the P&I system. At the end of
2018, the aggregate insured value of hull and machinery and interest for TORM’s owned vessels
amounted to USD 1.5 billion (2017: USD 1.4 billion; 2016: USD 1.6 billion).

COUNTERPARTY RISK
Counterparty risk is an ever-present challenge demanding close monitoring to manage and
decide on actions to minimize possible losses. The maximum counterparty risk associated is
equal to the values recognized in the balance sheet. A consequential effect of the counterparty
risk is loss of income in future periods, e.g. counterparties not being able to fulfill their
responsibilities under a time charter, a contract of affreightment or an option. The main risk is
the difference between the fixed rates under a time charter or a contract of affreightment and
the market rates prevailing upon default.

The Company has a close focus on its risk policies and procedures to ensure that risks managed
in the day-to-day business are kept at agreed levels and that changes in the risk situations are
brought to Management’s attention.

The Company’s counterparty risks are primarily associated with:

•
•
•

receivables, cash and cash equivalents
contracts of affreightment with a positive fair value
derivative financial instruments and commodity instruments with positive fair value

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

122

NOTE 19 - continued

Counterparty risk is an ever-present challenge demanding close monitoring to manage and
decide on actions to minimize possible losses. The maximum counterparty risk associated is
equal to the values recognized in the balance sheet. A consequential effect of the counterparty
risk is loss of income in future periods, e.g. counterparties not being able to fulfill their
responsibilities under a time charter, a contract of affreightment or an option. The main risk is
the difference between the fixed rates under a time charter or a contract of affreightment and
the market rates prevailing upon default, this characterizes the method for identified the market
value of a derivative instruments.

Receivables, cash and cash equivalents
The majority of TORM’s customers are companies that operate in the oil industry. It is assessed
that these companies are, to a great extent, subject to the same risk factors as those identified
for TORM.

A major part of the Company’s freight revenues stems from a small group of customers. One
customer accounted for 17.0% (2017: 8.2%; 2016: 12.6%) of the freight revenues in 2018. The
concentration of earnings on a few customers requires extra attention to credit risk. TORM has a
credit policy under which continued credit evaluations of new and existing customers take
place. For long-standing customers, payment of freight normally takes place after a vessel’s
cargo has been discharged. For new and smaller customers, the Company’s credit risk is limited
as freight is usually paid prior to the cargo’s discharge, or, alternatively, that a suitable bank
guarantee is placed in lieu thereof.

As a consequence of the payment patterns mentioned above, the Company’s receivables
primarily consist of receivables from voyages in progress at year-end and outstanding
demurrage. For the past five years, the Company has not experienced any significant losses in
respect of charter payments or any other freight agreements. With regard to the collection of
original demurrage claimed, the Company’s average stands at 98.1% (2017: 97.0%; 2016: 96.8%),
which is considered to be satisfactory given the differences in interpretation of events. In 2018,
demurrage represented 14.6% (2017: 16.8%; 2016: 15.0%) of the total freight revenues. Please see
note 1 for more details on recognition of demurrage claim into revenue.

FINANCIAL RISKS
Financial risks relate to the Company’s financial position, financing and cash flows generated by
the business, including foreign exchange risk and interest rate risk. The Company’s liquidity and
capital resources are described in Note 2.

In 2018, 100.0% (2017: 100.0%; 2016: 100.0%) of TORM’s forward freight agreements (FFAs) and
fuel swaps were cleared through central clearing houses, effectively reducing counterparty
credit risk by daily clearing of balances. Over-the-counter fuel swaps have restrictively been
entered into with major oil companies, banks or highly reputed partners with a satisfactory
credit rating. TORM also trades FX and interest derivatives. All such derivatives were done with
investment grade counterparties.

FOREIGN EXCHANGE RISK
TORM uses USD as its functional currency because the majority of the Company’s transactions
are denominated in USD. The foreign exchange risk is thereby limited to cash flows not
denominated in USD. The primary risk relates to transactions denominated in DKK, EUR and
SGD and relates to administrative and operating expenses.

The part of the Company’s expenses that are denominated in currencies other than USD
accounts for approximately 98.3% (2017: 97.9%; 2016: 98.9%) for administrative expenses and
approximately 23.4% (2017: 24.5%; 2016: 26.7%) for operating expenses. TORM’s administrative
and operating expenses in DKK and EUR for 2019 is approximately USD 390.0m, whereof 64.1%
(2017: 62.0%; 2016: 73.8%) are hedged through FX forward contracts. All entered FX forward
contract has maturity within 2019 and TORM’s average hedge USDDKK currency rate is 6.5.
TORM assumes identical currency risks arising from exposures in DKK and EUR.

SENSITIVITY TO CHANGES IN THE USD/DKK AND USD/EUR EXCHANGE RATE
All things being equal, a change in the USD/DKK and USD/EUR exchange rate of 10% would
result in a change in profit before tax and equity as follows:

USDm

2019

2018

2017

Excess liquidity is placed on deposit accounts with major banks with strong and acceptable
credit ratings or invested in secure papers such as American or Danish government bonds. Cash
is invested with the aim of getting the highest possible yield while maintaining a low
counterparty risk and adequate liquidity reserves for possible investment opportunities or to
withstand a sudden drop in freight rates.

Effect of a 10% increase of DKK and EUR:

Changes in profit before tax, as of 31 December

Changes in equity, as of 31 December

-2.1

-2.5

-1.7

Derivative financial instruments and commodity instruments
In 2018, 100.0% (2017: 100.0%; 2016: 100.0%) of TORM’s forward freight agreements (FFAs) and
fuel swaps were cleared through clearing houses, effectively reducing counterparty credit risk
by daily clearing of balances. Over-the-counter fuel swaps have restrictively been entered into
with major oil companies, banks or highly reputed partners with a satisfactory credit rating.
TORM also trades FX and interest derivatives. All such derivatives were done with investment
grade counterparties.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

123

NOTE 19 - continued

LIQUIDITY RISK
TORM’s strategy is to ensure continuous access to funding sources by maintaining a robust
capital structure and a close relationship with several financial partners. As of 31 December 2018,
TORM’s loan portfolio was spread across ten different banks.

As of 31 December 2018, TORM maintains a liquidity reserve of USD 127m in cash combined with
USD 75m in undrawn revolving credit facilities. Cash is only placed in banks with a high credit
rating.

For further information on contractual obligations, including a maturity analysis, please refer to
Note 17.

INTEREST RATE RISK
TORM’s interest rate risk generally relates to interest-bearing mortgage debt and bank loans. All
of the Company’s loans for financing vessels are denominated in USD, and all are floating rate
loans. At the end of 2018, TORM has fixed 66.2% of the interest exposure for 2019 equal to a
total interest expense exposure of USD 33.1m (2017: 63.2%; 2016: 67.9%). As of December 31,
2018 TORM has interest rate hedges covering and with maturity in the period 2019-2026 with a
notional value of USD 512.8m, hedged at an interest rate of 2.04% plus margin. The fixing is a
result of floating rate loans where USD 3 months LIBOR was fixed in 2018 into 2019 and interest
hedging through interest rate swaps.

SENSITIVITY TO CHANGES IN INTEREST RATES
All things being equal, a change in the interest rate level of 1%-point would result in a change in
the interest rate expenses as follows:

USDm

2019

2018

2017

Effect of a 1% point increase in interest rates:

Changes in profit before tax, as of 31 December

Changes in equity, as of 31 December

-2.4

8.0

-3.2

3.6

-2.5

6.8

TORM’s mortgage debt and bank loans increased from year-end 2017 to year-end 2018 by USD
10.3m (2017: increase of USD 47.5m; 2016: decrease of USD 95.3m) to USD 729.4m (2017: USD
719.1m; 2016: USD 671.6m).

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

124

NOTE 20 – FINANCIAL INSTRUMENTS

Categories of financial assets and liabilities (USDm):

Quoted

Observable

Unobservable

prices

input

Fair value

Amortized

Carrying

(level 1)

(level 2)

(level 3)

Total

cost

value

2018:

Loans and receivables

Freight receivables

Other receivables

Cash and cash equivalents

Total

Financial liabilities

Mortgage debt and bank loans

Finance lease liabilities

Trade payables

Other liabilities

Total

2017:

Loans and receivables

Freight receivables

Other receivables

Cash and cash equivalents

Total

Financial liabilities

Mortgage debt and bank loans

Finance lease liabilities

Trade payables

Other liabilities

Total

⁾

3.7

3.4

7.6

-0.2

3.7

3.4

7.6

-0.2

86.0

3.8

127.4

217.2

86.0

7.5

127.4

220.9

724.3

25.3

35.1

33.1

817.8

71.3

4.2

134.2

209.7

25.3

35.1

36.5

821.2

71.3

11.8

134.2

217.3

720.9

28.2

26.2

34.0

28.2

26.2

33.8

809.3

809.1

Due to the short maturity, the carrying value is considered to be an appropriate expression of the fair value.
See note 14.

¹
²
⁾
⁾
There have been no transfers between level 1 and 2.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

125

NOTE 20 - continued

FAIR VALUE HIERARCHY FOR FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE IN
THE BALANCE SHEET
Below please find the fair value hierarchy for financial instruments measured at fair value in the
balance sheet. The financial instruments in question are grouped into levels 1 to 3 based on the
degree to which the fair value is observable.

•

level 1 fair value measurements are those derived from quoted prices (unadjusted) in
active markets for identical assets or liabilities
level 2 fair value measurements are those derived from input other than quoted prices
included within level 1 that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices)
level 3 fair value measurements are those derived from valuation techniques that
include input for the asset or liability that are not based on observable market data
(unobservable input)

METHODS AND ASSUMPTIONS IN DETERMINING FAIR VALUE OF FINANCIAL INSTRUMENTS

Derivative part of other receivables and other payables
The fair value of derivatives in other receivables and other payables is measured using accepted
valuation methods with input variables such as yield curves, forward curves, spreads, etc. and
compared to financial counterparties to ensure acceptable valuations. The valuation methods
discount the future fixed and estimated cash flows and valuation of any option elements. The
fair value of derivatives

NOTE 22 – ASSETS HELD FOR SALE AND NON-CURRENT ASSETS SOLD DURING
THE YEAR

During 2018, TORM sold four vessels, of which three were delivered to the new owners during
2018, and one vessel was delivered in Q1 2019 (presented as “assets held-for-sale” as of 31
December 2018). The sales resulted in a profit from sale of vessels of USD 0.8m and an
impairment loss on in tangible and intangible assets of USD 3.2m.

During 2017, TORM sold eight vessels, of which four were delivered to the new owners during
2017, one vessel was in Q1 2018 (presented as “assets held-for-sale” as of 31 December 2017),
and the remaining three vessels were sold and leased back to TORM as finance leases. The sales
resulted in a profit from sale of vessels of USD 2.8m and a total impairment loss on sold or held-
for-sale vessels of USD 3.6m.

There was no sale of vessels in 2016.

NOTE 23 – CASH FLOWS

USDm

2018

2017

2016

Reversal of other non-cash movements:

Amortization of acquired assets and liabilities

Exchange rate adjustments

Share-based payments

NOTE 21 – RELATED PARTY TRANSACTIONS

Equity transactions expensed in relation to the Corporate

The Company's ultimate controlling party is Oaktree Capital Group, LLC, a limited liability
company incorporated in the USA. The immediate controlling shareholder is Njord Luxco.

In connection with the USD 100m equity raise completed in January 2018, an entity affiliated
with TORM’s largest shareholder, OCM Njord Holdings S.à r.l. (Oaktree Capital Management),
received a fee of USD 1.25m in return for fully backstopping the transaction.

Shareholders' contribution and dividends paid are disclosed in the consolidated statement of
changes in equity.

The remuneration of key management personnel, which consists of the Board of Directors and
the Executive Director, is disclosed in Note 3.

Reorganization

Other adjustments

Total

USDm

Change in bunkers, receivables and payables:

Change in bunkers

Change in receivables

Change in prepayments

Change in trade payables and other liabilities

Other changes

Adjusted for fair value changes of derivative financial

instruments

Total

2.0

1.8

1.9

-0.1

-2.4

2.0

-6.4

-0.2

2.0

3.7

-7.1

2018

2017

2016

-6.2

-1.6

-10.4

-12.4

1.5

11.7

-2.2

-1.4

-1.6

-2.9

-6.1

18.2

2.7

-2.6

-2.9

-7.1

6.9

-1.0

-12.7

-13.0

8.3

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

126

NOTE 24 – ENTITIES IN THE GROUP

Entity

TORM plc

Country

United Kingdom

Investments in subsidiaries ⁸

Entity

TORM A/S

⁾

DK Vessel HoldCo GP ApS

DK Vessel HoldCo K/S

OCM (Gibraltar) Njord Midco Ltd.

OCM Njord Chartering Inc.

OCM Singapore Njord Holdings Agnes, Pte. Ltd ⁵

OCM Singapore Njord Holdings Alice, Pte. Ltd

⁾
OCM Singapore Njord Holdings Almena, Pte. Ltd

OCM Singapore Njord Holdings Amalie, Pte. Ltd ⁵

OCM Singapore Njord Holdings Aslaug, Pte. Ltd ⁵

⁾

OCM Singapore Njord Holdings Hardrada, Pte. Ltd

⁾

OCM Singapore Njord Holdings St.Michaelis Pte. Ltd

OCM Singapore Njord Holdings St. Gabriel Pte. Ltd

OCM Singapore Njord Holdings Harald Pte. Ltd ⁴

OCM Singapore Njord Holdings Gorm Pte. Ltd ⁵

OCM Singapore Njord Holdings Knut Pte. Ltd ⁵

⁾

OCM Singapore Njord Holdings Valdemar Pte. Ltd ⁵

⁾

OCM Singapore Njord Holdings Agnete, Pte. Ltd

⁾
OCM Singapore Njord Holdings Alexandra, Pte. Ltd

OCM Singapore Njord Holdings Anabel, Pte. Ltd ⁵

OCM Singapore Njord Holdings Arawa Pte. Ltd ⁵

⁾

OCM Singapore Njord Holdings Leif Pte. Ltd ⁵

⁾

OCM Singapore Njord Holdings Rolf Pte. Ltd ⁴
⁾

⁾

Country

Denmark

Gibraltar

Marshall Islands

Singapore

Investments in subsidiaries ⁸

- continued:

Ownership ⁷

Entity

⁾

Country

Ownership ⁷

100%
⁾
100%

100%

OCM Holdings Mrs Inc.

OCM Njord Anne Inc. ⁶

OCM Njord Freya Inc. ⁶
⁾

OCM Njord Gerd Inc. ⁶

⁾

OCM Njord Gertrud Inc. ⁶

⁾

OCM Njord Gunhild Inc. ⁶

OCM Njord Helene Inc. ⁶

⁾

OCM Njord Helvig Inc. ⁶

⁾

OCM Njord Ingeborg Inc. ⁶

⁾

OCM Njord Mary Inc. ⁶

⁾

OCM Njord Ragnhild Inc. ⁶

⁾
OCM Njord Thyra Inc. ⁶

⁾

OCM Njord Valborg Inc. ⁶

⁾

OCM Njord Vita Inc. ⁶

OMI Holding Ltd. ⁵

⁾

Torghatten & TORM Shipowning ApS ⁴
⁾

TORM Crewing Service Ltd.

⁾

TORM Shipping India Private Limited

TORM Singapore Pte. Ltd.

TORM USA LLC

TT Shipowning K/S ⁴

VesselCo 1 K/S

VesselCo 3 K/S

⁾

Marshall Islands

Mauritius

Denmark

Bermuda

India

Singapore

USA

Denmark

100%
⁾
100%

100%

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

127

NOTE 24 - continued

Investments in subsidiaries ⁸

- continued:

Entity

⁾

Country

Ownership ⁷

Tuborg Havnevej 18,

2nd Floor

Denmark

India

Philippines

7th Floor

Singapore

6 Battery Road #27-02

The table below shows the registered addresses for the companies mentioned above:

VesselCo 5 K/S ²

VesselCo 6 K/S ³

⁾

VesselCo 6 Pte. Ltd.

⁾

VesselCo 7 Pte. Ltd.

VesselCo 8 Pte. Ltd.

VesselCo 9 Pte. Ltd. ¹

VesselCo 10 Pte. Ltd. ¹
⁾
VesselCo 11 Pte. Ltd. ¹
⁾
VesselCo 12 Pte. Ltd. ²
⁾

TORM SHIPPING (PHILS.), INC.

⁾

VesselCo A ApS

VesselCo C ApS

VesselCo E ApS ²

VesselCo F ApS ³

⁾

Denmark

Singapore

Philippines

Denmark

⁾
100%

100%

25%

100%

⁾

1) Entities added in the financial year ended 31 December 2016.
2) Entities added in the financial year ended 31 December 2017.
3) Entities added in the financial year ended 31 December 2018.
4) Entities dissolved in the financial year ended 31 December 2016.
5) Entities dissolved in the financial year ended 31 December 2017.
6) Entities dissolved in the financial year ended 31 December 2018.
7) For all subsidiaries, ownership and voting rights are the same except for TORM SHIPPING (PHILS.), INC where voting

rights are 100%.

8) All subsidiaries are consolidated in full.

DK-2900 Hellerup

Leela Business Park

Salcedo Towers, 169

Singapore 049909

Denmark

Andheri-Kurla Road

HV dela Costa Street Singapore

Andheri (E)

Salcedo Village,

Mumbai 400059

Makati City

India

Philippines 1227

United Kingdom

USA

Marshall Islands

Mauritius

Birchin Court

Suite 710

c/o The Trust

c/o Temple Corporate

20 Birchin Lane

2500 City West

Company of

Services

London, EC3V 9DU

Boulevard

Marshall Islands, Inc.

Temple Court 2,

United Kingdom

77042, Houston, Texas P.O. Box 2095

Labourdonnais Street

USA

Reston VA 20195-0095 Port Louis

USA

Mauritius

Bermuda

Gibraltar

Hong Kong

c/o Estera Services

57/63 Line Wall Road Room A, 7/F

(Bermuda Limited)

GX11 1AA

China Overseas Bldg.

Canon's Court

Gibraltar

139 Hennessy Road

22 Victoria Street

PO Box 1624

Hamilton HM GX

Bermuda

Wanchai

Hong Kong

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

128

NOTE 24 - continued

NOTE 25 – EARNINGS PER SHARE AND DIVIDEND PER SHARE

Interest in legal entities included as joint ventures:

2018

2017

2016

2018

EARNINGS PER SHARE

Profit and

Other

Total

loss from

compre-

continuing

Entity

Country

% Control

operations

Long Range 2 A/S

Denmark

LR2 Management K/S Denmark

50%

Marine Exhaust

Technology Ltd.

Hong Kong

28%

hensive

income

hensive

income

For registered addresses, please refer to the table above.

Net profit/(loss) for the year (USDm)

-34.8

2.4

-142.5

Million shares

Weighted average number of shares

Weighted average number of treasury shares

73.4

-0.3

62.3

-0.3

63.1

-0.2

Weighted average number of shares outstanding

73.1

62.0

62.9

Dilutive effect of outstanding share options

Weighted average number of shares outstanding incl.

dilutive effect of share options

73.1

62.0

62.9

Basic earnings/(loss) per share (USD)

-0.48

0.04

-2.27

Diluted earnings/(loss) per share (USD)

-0.48

0.04

-2.27

When calculating diluted earnings per share for 2018, RSUs have been omitted as they are out-
of-the-money and thus anti-dilutive, but the RSUs may potentially dilute earnings per share in
the future. Please refer to Note 3 for information on the RSU share options.

DIVIDEND PER SHARE

Dividend for the year (USDm)

1.2

25.0

Number of shares, end of period (million)

Dividend per share

74.2

62.3

0.02

62.3

0.40

2018

2017

2016

There is no proposed dividend as of 31 December 2018.

TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS

129

PARENT COMPANY 2018

TORM ANNUAL REPORT 2018
TORM ANNUAL REPORT 2018

CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS

130
130

COMPANY BALANCE SHEET
AS OF 31 DECEMBER

- continued

USD '000

ASSETS

NON-CURRENT ASSETS

Tangible fixed assets

Vessels

Total tangible fixed assets

Financial assets

Investments in subsidiaries

Total financial assets

Total non-current assets

CURRENT ASSETS

Loans to subsidiaries

Other receivables

Prepayments

Cash and cash equivalents

Total current assets

TOTAL ASSETS

Note

2018

2017

USD '000

Note

2018

2017

26,412

28,764

26,412

28,764

6 876,280

933,115

876,280

933,115

902,692

961,879

EQUITY AND LIABILITIES

EQUITY

Common shares

Treasury shares

Hedging reserves

Share premium

Retained profit

Total equity

LIABILITIES

NON-CURRENT LIABILITIES

Mortgage debt and bank loans

105,876

36,039

Finance lease liabilities

490

1,031

621

439

73,035

66,181

180,022

103,690

1,082,714 1,065,569

Total non-current liabilities

CURRENT LIABILITIES

Mortgage debt and bank loans

Finance lease liabilities

Trade payables

Payables to subsidiaries

Other liabilities

Total current liabilities

Total liabilities

742

623

-2,887

-2,677

604

907,355

810,263

-55,095

16,014

847,438

824,617

146,877

167,550

22,138

25,294

169,015

192,844

19,606

17,009

3,155

103

2,899

293

39,476

26,356

3,921

1,551

66,261

48,108

235,276

240,952

The financial statements of TORM plc, company number 09818726, have been approved by the
Board of Directors and signed on their behalf by:

TOTAL EQUITY AND LIABILITIES

1,082,714 1,065,569

Mr. Jacob Meldgaard
Executive Director
12 March 2019

TORM ANNUAL REPORT 2018

Parent Company 2017

PARENT COMPANY 2017

131

COMPANY STATEMENT OF CHANGES IN EQUITY

USD '000

EQUITY

Equity as of 1 January 2017

Comprehensive income for the year:

Net profit for the year

Other comprehensive income for the year

Total comprehensive income for the year

Shareholders' contribution

Share-based compensation

Dividend paid

Total changes in equity 2017

Equity as of 31 December 2017

Comprehensive income for the year:

Net profit for the year

Other comprehensive income for the year

Total comprehensive income for the year

Capital increase

Transaction costs capital increase

Share-based compensation

Total changes in equity 2018

Equity as of 31 December 2018

Common

Treasury

Hedging

Retained

reserves

premium

profit

Total

623

-2,887

809,956

14,240

821,932

604

307

1,134

1,880

-1,240

1,774

1,134

604

1,738

307

1,880

-1,240

2,685

623

-2,887

604

810,263

16,014

824,617

119

-3,281

-73,135

-3,281

-73,135

-76,416

99,880

-2,788

97,092

2,026

99,999

-2,788

2,026

99,237

742

-2,887

-2,677

907,355

-55,095

847,438

TORM ANNUAL REPORT 2018

PARENT COMPANY 2017

132

NOTES TO PARENT FINANCIAL
STATEMENTS

Note 1 – Accounting policies – Supplementary for the Parent Company ..................... 134
Note 2 – Profit/loss and total comprehensive income for the year .................................. 134
Note 3 – Interests and borrowings .................................................................................................... 134
Note 4 – Staff costs .................................................................................................................................. 134
Note 5 – Tangible fixed assets ............................................................................................................. 135
Note 6 – Financial assets ........................................................................................................................ 135
Note 7 – Impairment testing ................................................................................................................. 136
Note 8 – Collateral security for mortgage debt and bank loans ......................................... 136
Note 9 – Guarantee commitments and contingent liabilities ............................................... 136
Note 10 – Related party transactions ............................................................................................... 136

TORM ANNUAL REPORT 2018

PARENT COMPANY 2017

133

NOTE 1 – ACCOUNTING POLICIES – SUPPLEMENTARY FOR
THE PARENT COMPANY

Basis of preparation
The Company meets the definition of a qualifying entity under Financial Reporting Standard 100
(“FRS 100”) issued by the Financial Reporting Council. Therefore, these financial statements
were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework.

As permitted by FRS 101, the Company has taken advantages of the disclosure exemptions
available under that standard in relation to accounting standards issued but not yet effective or
implemented, share-based payment information, financial instruments, capital management,
presentation of comparative information in respect of certain assets, presentation of a cashflow
statement and certain related party transactions.

The financial statements have been prepared on a going concern basis. Further information
relating to the going concern assumption is provided in Note 1 of the Group consolidated
financial statements on page 97.

Where required, the equivalent disclosures are given in the Group's consolidated financial
statements. Key sources of estimation uncertainty disclosure are provided in the accounting
policies and in relevant notes to the Group consolidated financial statements as applicable.
Details of the Company's share-based payment schemes are provided in Note 3 of the Group
consolidated financial statements on pages 107-108.

Investment in subsidiaries and joint ventures
Investment in subsidiaries, associated companies and joint ventures are recognized and
measured in the financial statements of the Parent Company at cost and classified as "non-
current assets". Dividends are recognized under “Financial income".

The carrying amount of investment in subsidiaries and joint ventures is increased to its
recoverable amount, if there have been changes in the estimates used to determine the
recoverable amount since the last impairment loss was recognized.

Reversal of impairment losses on investment in subsidiaries and joint ventures is recognized in
“Financial income”.

NOTE 2 – PROFIT/LOSS AND TOTAL COMPREHENSIVE INCOME FOR THE YEAR

As permitted by section 408 of the Companies Act 2006, the statement of comprehensive
income of the Company is not presented as part of these financial statements.

The profit after tax for the year amounted to USD -73,135k (2017: USD 1,134k), and other
comprehensive income for the year of the Company amounted to USD -3,281k (2017: USD
604k).

NOTE 3 – INTERESTS AND BORROWINGS

As of 31 December 2018, the Company had borrowed USD 170.0m (31 December 2017: USD
187.5m). The loan proceeds was USD 3.6m lower (2017: USD 2.9m) due to borrowing fees. The
fees are amortized over the loan periods. In 2018, the Company had interest expenses of USD
8.5m (2017: USD 6.0m) regarding these loan facilities.

As of 31 December 2018, the Company had finance lease liabilities of USD 25.3m (31 December
2017: USD 28.2m). In 2018, the Company had interest expenses of USD 2.3m (2017: USD 1.8m)
regarding financial leases.

NOTE 4 – STAFF COSTS

USD'000

Total staff costs

Staff costs included in administrative expenses

Total staff costs

2018

2017

1,304

1,292

Average number of permanent employees.

Employee information
The average number of employees is calculated as a full-time equivalent (FTE).

TORM ANNUAL REPORT 2018

PARENT COMPANY 2017

134

NOTE 5 – TANGIBLE FIXED ASSETS

NOTE 6 – FINANCIAL ASSETS

2018

2017

USD'000

2018

2017

USD '000

Vessels

Cost:

Balance as of 1 January

Additions

Balance as of 31 December

Depreciation:

Balance as of 1 January

Depreciations for the year

Balance as of 31 December

Investments in subsidiaries

Cost:

30,500

Balance as of 1 January

30,500

Additions

30,500

Disposals

1,736

2,352

1,736

Capital increases in subsidiaries

Capital increases related to share-based payments

Balance as of 31 December

4,088

1,736

Impairment:

Carrying amount as of 31 December

26,412

28,764

Balance as of 1 January

Impairment losses for the year

Of which finance leases as of 31 December

26,412

28,764

Balance as of 31 December

Carrying amount as of 31 December

1,270,715 1,072,555

34,587

-728

-15,248

197,007

2,026

1,880

1,292,080 1,270,715

337,600

244,000

78,200

93,600

415,800

337,600

876,280

933,115

TORM ANNUAL REPORT 2018

PARENT COMPANY 2017

135

NOTE 7 – IMPAIRMENT TESTING

NOTE 9 – GUARANTEE COMMITMENTS AND CONTINGENT LIABILITIES

As of 31 December 2018, Management performed an impairment test of investments in
subsidiaries. The subsidiaries of TORM plc are the formal owners of the TORM vessels and
operate in the product tanker market.

The Company is guarantor for loan agreements established in the subsidiaries TORM A/S and
VesselCo 9 Pte. Ltd.

As of 31 December 2018, the recoverable amount of the investments in subsidiaries was based
on the value in use.

NOTE 10 – RELATED PARTY TRANSACTIONS

Based on this test, Management concluded that the investments in subsidiaries were impaired
by USD 78.2m, as the carrying amount exceeded the value in use. The impairment was
recognized in the profit and loss in "Financial income".

The assessment of the value in use of the subsidiaries was based on the present value of the
expected future cash flows, which is primarily influenced by the cash flows of the vessels owned
by each subsidiary.

The Company's ultimate controlling party is Oaktree Capital Group, LLC, a limited liability
company incorporated in the USA. The immediate controlling shareholder is Njord Luxco.

Shareholders' contribution, dividend paid and treasury shares are disclosed in the consolidated
statement of changes in equity.

The Company has received dividends from subsidiaries amounting to USD 12.1m (2017: USD
103.0m, 2016: USD 287.1m).

Please refer to Note 7 in the consolidated financial statements for further information in respect
of the value in use of these vessels.

The Company has income in the form of Management fee from its subsidiary TORM A/S of USD
0.0m (2017: USD 0.0m, 2016: USD 00.m).

NOTE 8 – COLLATERAL SECURITY FOR MORTGAGE DEBT AND BANK LOANS

The Company has income in form of bareboat hire from its subsidiary TORM A/S of USD 48.7m
(2017: USD 21.2m, 2016: USD 9.9m).

The carrying amount of investments in subsidiaries that have been provided as security for
mortgage debt and bank loans amounts to USD 228,084k (2017: USD 254,781k).

The Company has paid bareboat hire to its subsidiaries in the amount of USD 43.0m (2017: USD
17.1m, 2016: USD 9.7m).

There have been no or limited transactions with related parties during the financial year other
than the transactions disclosed above.

TORM ANNUAL REPORT 2018

PARENT COMPANY 2017

136

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

OPINION

In our opinion:
•

the financial statements of TORM plc (the ‘parent
company’) and its subsidiaries (the ‘group’) give a
true and fair view of the state of the group’s and
of the parent company’s affairs as at 31 December
2018 and of the group’s profit for the year then
ended;
the group financial statements have been properly
prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted
by the European Union;
the parent company financial statements have
been properly prepared in accordance with United
Kingdom generally accepted accounting practice,
including Financial Reporting Standard 101
“Reduced Disclosure Framework”; and
the financial statements have been prepared in
accordance with the requirements of the
Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS
Regulation.

•

We have audited the financial statements which comprise:

•
•

•

the consolidated income statement;
the consolidated statement of comprehensive
income;
the consolidated and parent company balance
sheets;
the consolidated and parent company statements of
changes in equity;
the consolidated cash flow statement; and

•

the related notes 1 to 25 in respect of the group
financial statements and notes 1 to 10 in respect of
the parent company financial statements.

SUMMARY OF OUR AUDIT APPROACH

Key audit matters
The key audit matter that we identified in the current year was:

•

Impairment of the Group’s Tanker Segment

The key audit matter is the same as the prior year.

Materiality
The materiality that we used for the group financial statements
was USD 10 million which was determined on the basis of 0.6%
of total assets as the primary metric. In addition to this primary
metric, we have also taken into consideration a number of
other income statement and balance sheet metrics.

Scoping
All operations of the group were subject to a full scope audit.

The financial reporting framework that has been applied in the
preparation of the group financial statements is applicable law
and IFRSs as adopted by the European Union. The financial
reporting framework that has been applied in the preparation
of the parent company financial statements is applicable law
and United Kingdom Accounting Standards, including FRS 101
“Reduced Disclosure Framework” (United Kingdom generally
accepted accounting practice).

BASIS FOR OPINION

We conducted our audit in accordance with International
Standards on 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.

We are independent of the group and the parent company in
accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the
Financial Reporting Council’s (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 confirm that the non-audit services
prohibited by the FRC’s Ethical Standard were not provided to
the group or the parent company.

We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.

TORM ANNUAL REPORT 2018

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137

Independent auditor’s report

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued

CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL
RISKS AND VIABILITY STATEMENT

Going concern
We have reviewed the directors’ statement in note 1 to the
financial statements about whether they considered it
appropriate to adopt the going concern basis of accounting in
preparing them and their identification of any material
uncertainties to the group’s and company’s ability to continue
to do so over a period of at least twelve months from the date
of approval of the financial statements.

We considered as part of our risk assessment the nature of the
group, its business model and related risks including where
relevant the impact of Brexit, the requirements of the
applicable financial reporting framework and the system of
internal control. We evaluated the directors’ assessment of the
group’s ability to continue as a going concern, including
challenging the underlying data and key assumptions used to
make the assessment, and evaluated the directors’ plans for
future actions in relation to their going concern assessment.

We also state whether we have anything material to add or
draw attention to in relation to the directors’ statement and
report if the statement is materially inconsistent with our
knowledge obtained in the audit.

•

the disclosures on pages 121-124 that describe the
principal risks and explain how they are being
managed or mitigated;
the directors' confirmation on page 53 that they
have carried out a robust assessment of the principal
risks facing the group, including those that would
threaten its business model, future performance,
solvency or liquidity; or
the directors’ explanation on page 53 as to how they
have assessed the prospects of the group, 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 group 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.

We also report whether the directors’ statement relating to the
prospects of the group is materially inconsistent with our
knowledge obtained in the audit.

We confirm that we have nothing material to report, add or
draw attention to in respect of these matters.

KEY AUDIT MATTERS

Principal risks and viability statement
Based solely on reading the directors’ statements and
considering whether they were consistent with the knowledge
we obtained in the course of the audit, including the
knowledge obtained in the evaluation of the directors’
assessment of the group’s and the company’s ability to
continue as a going concern, we are required to state whether
we have anything material to add or draw attention to in
relation to:

Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or
not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit
strategy, the allocation of resources in the audit; and directing
the efforts of the engagement team.

These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.

Impairment of the Group’s Tanker Segment

Key audit matter description
As a consequence of ongoing low prevailing freight rates
during 2018, the carrying value of the Group’s Tanker cash
generating unit (“CGU”) was considered to be a key audit
matter. Due to the high level of judgements involved, we have
determined that there was a potential for fraud through
possible manipulation of this balance. The carrying value of the
Tanker segment at 31 December 2018, which consists of
vessels and capitalized dry-docking and prepayments on
vessels, was USD 1,442 million (2017: USD 1,382 million), a
figure which incorporates the impact of a USD 185 million
impairment charge recorded in 2016. The recoverable amount
of the Tanker segment is highly sensitive to a number of key
assumptions, as outlined further below.

Management has performed a review of the CGU for indicators
of impairment and has subsequently conducted an impairment
test, on a value in use (discounted cash flow) basis, using the
following key assumptions:

•

•
•
•
•
•

future freight rates, which are based on the Group’s
most recent business plan for 2019-2021 and
thereafter the 10-year historical average rates as
achieved by the group, and also adjusted for
inflation;
utilisation;
discount rate;
inflation rate;
operating expenditure; and
capital expenditure, including dry-docking.

TORM ANNUAL REPORT 2018

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138

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued

As referenced on page 105 of the financial statements, the
carrying value of vessels is considered by management as a
critical accounting judgement and key source of estimation
uncertainty.

Management concluded that neither an impairment charge nor
an impairment reversal was required. Further details of the
amounts capitalized at 31 December 2018 and the related
assumptions and sensitivities considered by management are
provided in notes 6 and 7 of the financial statements and in
the Audit Committee report on pages 62 and 63.

How the scope of the audit responded to the key
audit matter
We have obtained management’s value in use calculations and
challenged the key assumptions by comparing them with
publicly available information, our knowledge of the Group and
industry and the Group’s most recent business plan. This
included:
•

assessing the design & implementation of
management’s controls to address the risk of
impairment of its CGU;
understanding the process by which management
has derived its value in use estimates;
understanding and evaluating the process used to
develop the Group’s business plan and comparing
the key assumptions used for 2018-2021 to those
applied in the value in use calculations;
challenging management’s assessment that the fleet
is a single cash generating unit;

•

challenging the freight rate assumptions used for
2018-2021 by comparing to third party forecasts for
those periods;
obtaining appropriate supporting evidence for the
freight rates used; understanding the basis by which
management believes TORM’s historical rates are a
more reliable estimate of long term future rates than
the rates published by Clarksons;
using our internal valuation specialists to perform an
independent recalculation of the discount rate used;
evaluating management’s historical ability to budget
for operating expenses per day;
completing an independent point estimate based on
our independent estimate of the key assumptions;
and
testing the clerical accuracy of the value in use
calculations.

Key observations
Based on our scenario analysis, we are satisfied with
management’s conclusion that neither an additional
impairment charge nor an impairment reversal are required.

OUR APPLICATION OF MATERIALITY
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be
changed or influenced. We use materiality both in planning the
scope of our audit work and in evaluating the results of our
work.

Based on our professional judgement, we determined
materiality for the financial statements as a whole as follows:

Group financial statements – Materiality:
USD 10 million (2017: USD 10million)

Basis for determining materiality
We determined materiality for the Group to be USD 10 million,
which represents 0.6% of total assets, 1.2% of net assets, 2.8%
of time charter equivalent earnings (TCE) and 8.3% of earnings
before interest, tax, depreciation and impairment (EBITDA).

Rationale for the benchmark applied
We have utilised total assets as our primary metric as we
consider this represents the most stable and appropriate
benchmark in a period of significant freight rate volatility.
However, in addition to this primary metric, we have have also
taken into consideration a number of other income statement
and balance sheet metrics, as outlined above.

TORM ANNUAL REPORT 2018

INDEPENDENT AUDITOR’S REPORT

139

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued

OUR APPLICATION OF MATERIALITY - CONTINUED

Parent company financial statements – Materiality:
USD 8.8 million (2017: USD 6.2 million)

Basis for determining materiality
1.00% of total equity

Rationale for the benchmark applied
The nature of the parent Company is to have investments in
subsidiaries and receive dividends from those subsidiaries.

As such, we find that the focus of the financial statement users
will be total equity based on the fact that equity in all material
regards expresses the investment made by the owners and is
used to measure the return of investment made through the
holding Company, and further indicates the Company´s ability
to continue operating.

Error reporting threshold
We agreed with the Audit Committee that we would report to
the Committee all audit differences in excess of USD 0.5
million (2017: USD 0.5 million), as well as differences below
that threshold that, in our view, warranted reporting on
qualitative grounds. We also report to the Audit Committee on
disclosure matters that we identified when assessing the
overall presentation of the financial statements.

AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Our group audit was scoped by obtaining an understanding of
the group and its environment, including group-wide controls,
and assessing the risks of material misstatement at the group
level. All significant elements of the group’s finance and
accounting function are situated and managed centrally in
Copenhagen, Denmark, and operate under one common
internal control environment; all operations of the group are
also managed from this location. Accordingly, we concluded
that the group’s business represented a single component and
therefore all operations of the group were subject to a full
scope audit.

During the course of the audit, senior members of the UK audit
team, including the Senior Statutory Auditor, directed and
supervised the members of the audit team who are based in
Copenhagen, Denmark, and senior members of the UK audit
team visited the Copenhagen operations during the interim
and completion stages of the audit.

OTHER INFORMATION
The directors are responsible for the other information. The
other information comprises the information included in the
annual report, other than the financial statements and our
auditor’s report thereon.

Our opinion on the financial statements does not cover the
other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of
assurance conclusion thereon.

•

group’s position and performance, business model
and strategy, is materially inconsistent with our
knowledge obtained in the audit; or
Audit committee reporting – the section describing
the work of the audit committee does not
appropriately address matters communicated by us
to the audit committee; or
Directors’ statement of compliance with the UK
Corporate Governance Code – the parts of the
directors’ statement relating to the company’s
compliance with the UK Corporate Governance Code
containing provisions that would be specified for
review by the auditor in accordance with Listing Rule
9.8.10R(2) if the company was premium listed on the
London Stock Exchange, do not properly disclose a
departure from a relevant provision of the UK
Corporate Governance Code.

In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially
misstated.

If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether
there is a material misstatement in the financial statements or
a material misstatement of the other information. If, based on
the work we have performed, we conclude that there is a
material misstatement of this other information, we are
required to report that fact.

In this context, matters that we are specifically required to
report to you as uncorrected material misstatements of the
other information include where we conclude that:

We have nothing to report in respect of these matters.

RESPONSIBILITIES OF DIRECTORS
As explained more fully in the statement of directors
responsibilities, 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’s and the 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.

•

Fair, balanced and understandable – the statement
given by the directors that they consider the annual
report and financial statements taken as a whole is
fair, balanced and understandable and provides the
information necessary for shareholders to assess the

TORM ANNUAL REPORT 2018

INDEPENDENT AUDITOR’S REPORT

140

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE
FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial
statements.

Details of the extent to which the audit was considered
capable of detecting irregularities, including fraud are set out
below.

A further description of our responsibilities for the audit of the
financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s report.

EXTENT TO WHICH THE AUDIT WAS CONSIDERED
CAPABLE OF DETECTING IRREGULARITIES, INCLUDING
FRAUD
We identify and assess the risks of material misstatement of
the financial statements, whether due to fraud or error, and
then design and perform audit procedures responsive to those
risks, including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.

Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance
with laws and regulations, our procedures included the
following:
•

enquiring of management and the audit committee,
including obtaining and reviewing supporting

•

documentation, concerning the group’s policies and
procedures relating to:
identifying, evaluating and complying with laws and
regulations and whether they were aware of any
instances of non-compliance;
detecting and responding to the risks of fraud and
whether they have knowledge of any actual,
suspected or alleged fraud;
the internal controls established to mitigate risks
related to fraud or non-compliance with laws and
regulations;
discussing among the engagement team and
involving relevant internal specialists, including tax,
valuations, and IT regarding how and where fraud
might occur in the financial statements and any
potential indicators of fraud. As part of this
discussion, we identified potential for fraud in the
following area: impairment of the Tankers CGU; and
obtaining an understanding of the legal and
regulatory frameworks that the group operates in,
focusing on those laws and regulations that had a
direct effect on the financial statements or that had a
fundamental effect on the operations of the group.
The key laws and regulations we considered in this
context included the UK Companies Act, Danish and
UK tax legislation.

•

compliance with relevant laws and regulations
discussed above;
enquiring of management, the audit committee and
external legal counsel concerning actual and
potential litigation and claims;
performing analytical procedures to identify any
unusual or unexpected relationships that may
indicate risks of material misstatement due to fraud;
reading minutes of meetings of those charged with
governance;
in addressing the risk of fraud through management
override of controls, testing the appropriateness of
journal entries and other adjustments; assessing
whether the judgements made in making accounting
estimates are indicative of a potential bias; and
evaluating the business rationale of any significant
transactions that are unusual or outside the normal
course of business.

We also communicated relevant identified laws and
regulations and potential fraud risks to all engagement team
members, including internal specialists, and remained alert to
any indications of fraud or non-compliance with laws and
regulations throughout the audit.

Audit response to risks identified
As a result of performing the above, we identified Impairment
of the Group’s tanker segment as a key audit matter.

The key audit matter section of our report explains the matter
in more detail and also describes the specific procedures we
performed in response to that key audit matter. As a result of
performing the above, we did not identify any key audit
matters related to the potential risk of fraud or non-
compliance with laws and regulations.

In addition to the above, our procedures to respond to risks
identified included the following:

•

reviewing the financial statement disclosures and
testing to supporting documentation to assess

TORM ANNUAL REPORT 2018

INDEPENDENT AUDITOR’S REPORT

141

REPORT ON OTHER LEGAL AND REGULATORY
REQUIREMENTS

OPINIONS ON OTHER MATTERS PRESCRIBED BY THE
COMPANIES ACT 2006
In our opinion the part of the directors’ remuneration report to
be audited has been properly prepared in accordance with the
Companies Act 2006.

Directors’ remuneration
Under the Companies Act 2006 we are also required to report
if in our opinion certain disclosures of directors’ remuneration
have not been made or the part of the directors’ remuneration
report to be audited is not in agreement with the accounting
records and returns.

We have nothing to report in respect of these matters.

OTHER MATTERS
Auditor tenure
Following the recommendation of the audit committee, we
were appointed by the Board of Directors following
incorporation of the new holding company on 14 December
2015 to audit the financial statements for the year ending 31
December 2015 and subsequent financial periods. The period
of total uninterrupted engagement including previous
renewals and reappointments of the firm is four years,
covering the years ending 31 December 2015 to 31 December
2018.

Consistency of the audit report with the additional report to
the audit committee
Our audit opinion is consistent with the additional report to
the audit committee we are required to provide in accordance
with ISAs (UK).

In our opinion, based on the work undertaken in the course of
the audit:
•

the information given in the strategic report and the
directors’ report for the financial year for which the
financial statements are prepared is consistent with
the financial statements; and
the strategic report and the directors’ report have
been prepared in accordance with applicable legal
requirements.

•

In the light of the knowledge and understanding of the group
and of the parent company and their environment obtained in
the course of the audit, we have not identified any material
misstatements in the strategic report or the directors’ report.

MATTERS ON WHICH WE ARE REQUIRED TO REPORT
BY EXCEPTION

Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to
you if, in our opinion:

•

• we have not received all the information and
explanations we require for our audit; or
adequate accounting records have not been kept by
the parent company, or returns adequate for our
audit have not been received from branches not
visited by us; or
the parent company financial statements are not in
agreement with the accounting records and returns.

•

USE OF OUR REPORT
This report is made solely to the company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. 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 accept or assume responsibility to anyone other than
the company and the company’s members as a body, for our
audit work, for this report, or for the opinions we have formed.

For and on behalf of Deloitte LLP:

Makhan Chahal, ACA (Senior statutory auditor)
Statutory Auditor
London, UK
12 March 2019

We have nothing to report in respect of these matters.

TORM ANNUAL REPORT 2018

INDEPENDENT AUDITOR’S REPORT

142

TORM FLEET OVERVIEW
AS OF 31 DECEMBER 2018

Vessel type

Vessel class

Vessel

Tanker

LR2

LR1

TORM GUDRUN

TORM HELENE ²

TORM HELLERUP

⁾

TORM HERMIA

TORM HERDIS

TORM HILDE

TORM INGEBORG

TORM KRISTINA

TORM MAREN

TORM MARINA

TORM MATHILDE

TORM VALBORG

TORM EMILIE

TORM ESTRID

TORM ISMINI

TORM SARA

TORM SIGNE

TORM SOFIA

TORM VENTURE

TORM AGNES

TORM AGNETE

TORM ALEXANDRA

TORM ALICE

TORM ALMENA

TORM AMALIE

TORM AMAZON

TORM ANABEL

DWT

99,965

99,999

114,000

99,999

109,672

99,999

74,999

72,718

72,660

73,700

49,999

47,275

49,999

Built

2000

1997

2018

2003

1999

2008

2007

2008

2003

2004

2003

2005

2007

2011

2010

2011

2002

2012

Carrying

Ownership

value (USDm)

100%

12³

8³

⁾

48³

⁾
48
⁾
49

53³

16³

⁾

10³
⁾
33³

⁾

30³
⁾
32³

⁾

17³

⁾

⁾
16³

16³
⁾
16³
⁾
16³
⁾

17³

⁾
19³
⁾
22³
⁾

⁾
18

21³

⁾
18
⁾
18

9³

21
⁾

TORM ANNUAL REPORT 2018

FLEET OVERVIEW

143

Fleet overview

TORM FLEET OVERVIEW
AS OF 31 DECEMBER 2018 - continued

Vessel type

Vessel class

Vessel

Tanker

TORM ARAWA

TORM ASLAUG

TORM ASTRID

TORM ATLANTIC

TORM CAMILLA

TORM CARINA

TORM CAROLINE

TORM CECILIE

TORM ERIC

TORM FREYA

TORM GERD

TORM GERTRUD

TORM GUNHILD

TORM HARDRADA

TORM HELVIG

TORM HORIZON

TORM KANSAS

TORM LAURA

TORM LENE

TORM LILLY

TORM LOKE

TORM LOTTE

TORM LOUISE

TORM MARY ²

TORM MOSELLE

⁾

DWT

49,999

44,990

46,219

44,999

51,266

45,990

45,960

45,990

44,999

45,983

46,187

46,955

49,999

51,372

49,999

44,990

47,024

Built

2012

2010

2012

2010

2003

2002

2001

2006

2003

2002

1999

2007

2005

2004

2006

2008

2009

2007

2009

2002

2003

Carrying

Ownership

value (USDm)

100%

20³

12³
⁾
13³

⁾

11³
⁾
8³

⁾

13³

⁾

13³
⁾
12³
⁾
12³

⁾

6³

⁾
13
⁾
15³

11³
⁾
15³

⁾

18³
⁾
20³

⁾
18
⁾
20³

20³
⁾
20³
⁾
11³
⁾
13³

⁾

TORM ANNUAL REPORT 2018

FLEET OVERVIEW

144

TORM FLEET OVERVIEW
AS OF 31 DECEMBER 2018 – continued

Vessel type

Vessel class

Vessel

Tanker

TORM PLATTE

TORM RAGNHILD

TORM REPUBLICAN

TORM RESILIENCE

TORM ROSETTA

TORM SAN JACINTO

TORM THAMES

TORM THOR

TORM THUNDER

TORM TIMOTHY

TORM TITAN

TORM TORINO

TORM TROILUS

TORM THYRA

TORM SOVEREIGN

TORM SUPREME

TORM VITA ²

Handysize

TORM CHARENTE ¹

⁾

Handysize

TORM GARONNE

⁾

Handysize

TORM GYDA

Handysize

TORM LOIRE

Handysize

TORM SAONE

Handysize

TORM TEVERE

Indicates that the vessels are assets held-for-sale.
¹
Finance leases.
²
⁾
Indicates vessels for which TORM believes that, as of 31 December 2018, the basic charter-free market value is lower than the vessel's carrying amount.
³
⁾
⁾

DWT

46,959

46,187

46,955

49,999

47,015

47,038

47,036

49,842

45,950

49,999

45,990

35,751

37,178

36,207

37,106

36,986

37,383

Built

2006

2005

2006

2005

2003

2002

2005

2015

2003

2017

2002

2001

2004

2009

2004

2005

Carrying

Ownership

value (USDm)

100%

15³

15³
⁾
15³
⁾
14³
⁾
10³

⁾

9³

⁾

14³
⁾
27
⁾
27

11³

31
⁾
31

11³

⁾
-

11³

19³

⁾

11³
⁾
10
⁾

13³

⁾

TORM ANNUAL REPORT 2018

FLEET OVERVIEW

145

GLOSSARY

Coverage: A measure of Covered days divided by Earning
days.

LTAF: Lost Time Accident Frequency. Work-related personal
injuries that result in more than one day off work per million
hours of work.

Available earning days: A measure of unfixed operating days
available for generating earnings.

B/B: Bareboat: A form of charter arrangement, where the
charterer is responsible for all costs and risks in connection
with the operation of the vessel.

Backwardation: A situation in which the spot price of a
commodity is higher than the forward price. The opposite is
known as contango.

Bunker hedge: A forward agreement used to reduce a
company’s exposure to fluctuating bunker costs.

Bunkers: Fuel with which to run a vessel’s engines.

CAPEX: Capital expenditure.

Charter-in and leaseback days: A measure of operating days
available for generating earnings from vessels that are not
owned by the Company.

Charter party: A lease or freight agreement between a
shipowner and a charterer for a longer period of time or for a
single voyage.

Classification society: Independent organization, which
ensures through verification of design, construction, building
process and operation of vessels that the vessels at all times
meet a long list of requirements to seaworthiness, etc. If the
vessels do not meet these requirements, insuring and
mortgaging the vessel will typically not be possible.

COA: Contract of Affreightment. A contract that involves a
number of consecutive cargos at previously agreed freight
rates.

Coating: The internal coatings applied to the tanks of a
product tanker enabling the vessel to load refined oil products.

Commercial management: An agreement to manage a vessel’s
commercial operations for the account and risk of the
shipowner.

Covered days: A measure of fixed operating days.
Demurrage: A charge against the charterer of a vessel for
delaying the vessel beyond the allowed free time. The
demurrage rate will typically be at a level equal to the earnings
in USD/day for the voyage.

DKK: Danish kroner.

Dwt: Deadweight ton. The cargo carrying capacity of a vessel.

EBIT/Operating profit/(loss): Earnings Before Interest
and Tax.

Earning days: A measure of operating days available for
generating earnings.

FFA: Forward freight agreement. A financial derivative
instrument enabling freight to be hedged forward at a fixed
price.

Handysize: A specific class of product tankers with a cargo
carrying capacity of 20,000–40,000 dwt.

IAS: International Accounting Standards.

IFRS: International Financial Reporting Standards.

IMO: International Maritime Organization.

KPI: Key Performance Indicator. A measure of performance
used to define and evaluate how the Company is making
progress towards its long-term organizational goals.

Loan-to-value (LTV): A measure of notional debt divided by
broker values of the encumbered vessels.

LR1: Long Range 1. A specific class of product tankers with a
cargo carrying capacity of 60,000–80,000 dwt.

LR2: Long Range 2. A specific class of product tankers with a
cargo carrying capacity of 80,000–110,000 dwt.

MR: Medium Range. A specific class of product tankers with a
cargo carrying capacity of 40,000–60,000 dwt.
MT: Metric ton.

Oaktree: Oaktree Capital Management, L.P.

Oil major: One of the world’s largest publicly owned oil and
gas companies. Examples of oil majors are BP, Chevron,
ExxonMobil, Shell and Total.

OPEC: Organization of the Petroleum Exporting Countries.

Owned days: A measure of operating days available for
generating earnings from vessels that are owned by the
Company.

P&I club: Protection & Indemnity club.

Product tanker: A vessel suitable for carrying clean petroleum
products such as gasoline, jet fuel and naphtha.

Spot market: Market in which vessels are contracted for a
single voyage for near-term delivery.

T/C: Time charter: An agreement covering the chartering out
of a vessel to an end user for a defined period of time, where
the owner is responsible for crewing the vessel, but the
charterer must pay port costs and bunkers.

Technical management: An agreement to manage a vessel’s
technical operations and crew for the account and risk of the
shipowner.

Ton-mile: A unit of freight transportation equivalent to a ton of
freight moved one mile.

UN Global Compact: The United Nation’s social charter for
enterprises, etc.

Vetting: An audit of the safety and performance status of a
tanker vessel made by oil majors.

TORM ANNUAL REPORT 2018

GLOSSARY

146

Glossary

GLOSSARY
KEY FINANCIAL FIGURES

TORM ANNUAL REPORT 2018

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147

GLOSSARY
ALTERNATIVE PERFORMANCE MEASURES

Net profit excluding impairment: Net profit excluding impairment is net profit less impairment
generated from impairment testing during the year (Please refer to Note 7). The table below
states the net profit without the impact of the impairment adjustment of 185m USD in 2016:

Gross profit: TORM defines Gross profit, a performance measure, as revenue less port expenses,
bunkers and commissions, charter hire and operating expenses. The Company reports Gross
profit because we believe it provides additional meaningful information to investors, as Gross
profit measures the net earnings from shipping activities. Gross profit is calculated as follows:

USDm

Reconciliation to net profit/(loss)

Net profit/(loss) for the year

2018

2017

2016

USDm

-34.8

2.4

-142.5

Reconciliation to revenue

2018

2017

2016

Reversal of impairment losses on tangible and intangible

assets

Net profit excluding impairment

185.0

-34.8

2.4

42.5

Time Charter Equivalent (TCE) earnings: TORM defines TCE earnings, a performance measure,
as revenue after port expenses, bunkers and commissions incl. freight and bunker derivatives.
The Company reports TCE earnings because we believe it provides additional meaningful
information to investors in relation to revenue, the most directly comparable IFRS measure. TCE
earnings is a standard shipping industry performance measure used primarily to compare
period-to-period changes in a shipping company’s performance irrespective of changes in the
mix of charter types (i.e. spot charters, time charters and bareboat charters) under which the
vessels may be employed between the periods. Below is presented a reconciliation from
Revenue to TCE earnings:

Revenue

635.4

657.0

680.1

Port expenses, bunkers and commissions

-283.0

-259.9

-221.9

Charter hire

Operating expenses

Gross profit

-2.5

-8.5

-21.5

-180.4

-188.4

-195.2

169.5

200.2

241.5

Net interest-bearing debt: Net interest-bearing debt is defined as mortgage debt and bank
loans (current and non-current), finance lease liabilities and amortized bank fees less cash and
cash equivalents. Net interest-bearing debt depicts the net capital resources, which cause net
interest expenditure and interest rate risk and which, together with equity, are used to finance
the Company’s investments. As such, TORM believes that net interest-bearing debt is a relevant
measure which Management uses to measure the overall development of the use of financing,
other than equity. Such measure may not be comparable to similarly titled measures of other
companies. Net interest-bearing debt is calculated as follows:

USDm

Reconciliation to revenue

Revenue

2018

2017

2016

635.4

657.0

680.1

Mortgage debt and bank loans (current and non-current)

724.3

720.9

USDm

2018

2017

Port expenses, bunkers and commissions

-283.0

-259.9

-221.9

Finance lease liabilities

TCE earnings

352.4

397.1

458.2

Amortized bank fees

25.3

5.1

28.2

4.8

2016

669.6

13.6

2.0

Cash and cash equivalents

Net interest-bearing debt

-127.4

-134.2

-76.0

627.3

619.7

609.2

TORM ANNUAL REPORT 2018

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148

GLOSSARY
ALTERNATIVE PERFORMANCE MEASURES
– continued

Return on Invested Capital (RoIC): TORM defines RoIC as earnings before interest and tax
(EBIT) less tax, divided by the average invested capital for the period. Invested capital is defined
below.

Adjusted Return on Invested Capital (Adjusted RoIC): TORM defines Adjusted RoIC as earnings
before interest and tax (EBIT) less tax and impairment, divided by the average invested capital
less average impairment for the period. Invested capital is defined below.

RoIC expresses the returns generated on capital invested in the Group. The progression of RoIC
is used by TORM to measure progress against our longer-term value creation goals outlined to
investors. RoIC is calculated as follows:

The Adjusted RoIC expresses the returns generated on capital invested in the Group adjusted
for impacts related to the impairment of the fleet. The progression of RoIC is used by TORM to
measure progress against our longer-term value creation goals outlined to investors. Adjusted
RoIC is calculated as follows:

USDm

Operating profit/(loss) (EBIT)

Tax

EBIT less Tax

Invested capital, opening balance

Invested capital, ending balance

2018

2017

2016

USDm

2.8

-1.6

1.2

39.5

-107.2

EBIT less Tax

-0.8

Impairment

38.8

-108.0

EBIT less tax and impairment

1,406.0

1,387.7

1,587.6

Average invested capital¹

1,469.4

1,406.0

1,387.7

Average impairment ²

⁾
Average invested capital less average impairment

⁾

2018

1.2

2017

2016

38.8

-108.0

185.0

1.2

38.8

77.0

1,437.7

1,396.9

1,487.7

185.0

92.5

1,622.7

1,581.9

1,580.2

Average invested capital for the year

1,437.7

1,396.9

1,487.7

Return on Invested Capital (RoIC)

0.1%

2.8%

-7.2%

Adjusted RoIC

0.1%

2.4%

4.9%

Average invested capital is calculated as the average of the opening and closing balance of invested capital.
Average impairment is calculated as the average of the opening and closing balances of impairment charges on
vessels and goodwill in the balance sheet.

¹
²
⁾
⁾

TORM ANNUAL REPORT 2018

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149

GLOSSARY
ALTERNATIVE PERFORMANCE MEASURES
– continued

EBITDA: TORM defines EBITDA as earnings before financial income and expenses,
depreciation, impairment, amortization and taxes. The computation of EBITDA refers to financial

income and expenses which the Company deems to be equivalent to “interest” for purposes of

presenting EBITDA. Financial expenses consist of interest on bank loans, losses on foreign

exchange transactions and bank charges. Financial income consists of interest income and gains

on foreign exchange transactions.

EBITDA is used as a supplemental financial measure by Management and external users of

financial statements, such as lenders, to assess TORM's operating performance as well as

USDm

Reconciliation to net profit/(loss)

Net profit/(loss) for the year

Tax

Financial expenses

Financial income

Depreciation

2018

2017

2016

-34.8

1.6

39.3

-3.3

2.4

0.8

40.6

-4.3

-142.5

0.8

37.3

-2.8

114.5

122.2

Impairment losses on tangible and intangible assets

3.2

3.6

185.0

compliance with the financial covenants and restrictions contained in the Company's financing

EBITDA

120.5

157.6

200.0

agreements. TORM believes that EBITDA assists Management and investors by increasing

comparability of the Company's performance from period to period. This increased

comparability is achieved by excluding the potentially disparate effects of interest, depreciation,

impairment, amortization and taxes. These are items that could be affected by various changing

financing methods and capital structure and which may significantly affect profit/(loss) between

periods. Including EBITDA as a measure benefits investors in selecting between investment

alternatives.

Loan-to-value (LTV): TORM defines Loan-to-value (LTV) ratio as Vessel values divided by net
borrowings on the vessels.

LTV describes the net debt ratio on the vessel, and is used by TORM to describe the financial
situation, the liquidity risk as well as to express the future possibilities to raise new capital by
new loan facilities.

EBITDA excludes some, but not all, items that affect profit/(loss), and these measures may vary

USDm

2018

2017

2016

among other companies and not be directly comparable. The following table reconciles EBITDA

to net profit/ (loss), the most directly comparable IFRS financial measure, for the periods

presented:

Vessel values including newbuildings (broker values)

1,675.1

1,661.1

1,445.8

Total (value)

Outstanding debt ¹

Committed CAPEX on newbuildings
⁾

Cash and cash equivalents

Total (loan)

1,675.1

1,661.1

1,445.8

754.7

258.0

753.9

306.9

685.2

148.8

-127.4

-134.2

-76.0

885.3

926.6

758.0

Loan-to-value (LTV) ratio

52.9%

55.8%

52.4%

Outstanding debt includes long-term and short-term mortgage, amortized bank fees and bank loans and finance
liabilities.

⁾

TORM ANNUAL REPORT 2018

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150

GLOSSARY
ALTERNATIVE PERFORMANCE MEASURES
- continued

Invested capital: TORM defines invested capital as the sum of intangible assets, tangible fixed
assets, investments in joint ventures, bunkers, accounts receivables, assets held-for-sale (when
applicable), deferred tax liability, trade payables, current tax liabilities and deferred income.
Invested capital measures the net investment used to achieve the Company’s operating profit.
The Company believes that invested capital is a relevant measure that Management uses to
measure the overall development of the assets and liabilities generating the net profit. Such
measure may not be comparable to similarly titled measures of other companies. Invested
capital is calculated as follows:

Net Asset Value per share (NAV/share): TORM believes that the NAV/share is a relevant
measure that Management uses to measure the overall development of the assets and liabilities
per share. Such measure may not be comparable to similarly titled measures of other
companies. NAV/share is calculated using broker values of vessels and excluding charter
commitments. NAV/share is calculated as follows:

USDm

Net Asset Value per share

2018

2017

2016

USDm

2018

2017

2016

Total vessel values including newbuildings (broker values)

1,675.1

1,661.1

1,445.8

Tangible and intangible fixed assets

1,445.0

1,384.8

1,389.7

Committed CAPEX on newbuildings

-258.0

-306.9

-148.8

Investments in joint ventures

Bunkers

Accounts receivables ¹

Assets held-for-sale

⁾

Deferred tax liability

Trade payables ²

Current tax liabilities

⁾
Deferred income

0.1

39.4

96.3

6.2

-44.9

-71.6

-1.0

-0.1

1,469.4
Invested capital
Accounts receivables includes Freight receivables, Other receivables and Prepayments.
¹
Trade payables includes Trade payables and Other liabilities.
²
⁾
⁾

0.3

33.2

87.5

6.6

-44.9

-60.0

-1.4

-0.1

0.3

31.6

73.7

-45.0

-61.6

-0.8

-0.2

1,406.0

1,387.7

Cash position

Bunkers

Freight receivables

Other receivables

Other plant and operating equipment

Investments in joint ventures

Prepayments

Outstanding debt ¹

Trade payables

Other liabilities

⁾

Current tax liabilities

Total Net Asset Value (NAV)

127.4

134.2

39.4

86.0

7.5

3.0

0.1

2.9

33.2

71.3

11.8

1.9

0.3

4.4

76.0

31.6

62.5

8.1

1.8

0.3

3.0

-754.7

-753.9

-685.2

-35.1

-36.5

-1.0

-26.2

-33.8

-1.4

-28.5

-33.0

-0.8

856.1

796.0

732.8

Total number of shares excluding treasury shares (million)

73.9

62.0

Total Net Asset Value per share (NAV/share)
Outstanding debt includes long-term and short-term Mortgage, amortized fees, bank loans and finance liabilities.
¹

11.6

12.8

11.8

⁾

TORM ANNUAL REPORT 2018

GLOSSARY

151