TORM
Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 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. Words like “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 on various assumptions, many of which are, in turn, based on 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, the duration and severity of the ongoing COVID-19 pandemic, including its impact on the demand for petroleum products and the seaborne transportation of these, the operations of our customers and our business in general, 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 of terrorism. In light of these risks and uncertainties, undue reliance should not be placed 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 2020 SAFE HARBOUR STATEMENT 2 Safe Harbour Statement KEY FIGURES TCE EARNINGS (USD/DAY) EBITDA (USDM) ADJUSTED ROIC (%) DIVIDEND/SHARE (USD) 19,800 16,526 14,621 16,050 12,982 25,000 20,000 15,000 10,000 5,000 0 272 300 200 100 0 202 200 158 121 9.3 10 8 6 4 2 0 5.2 4.9 0.3 2.4 0.85 1.00 0.80 0.60 0.40 0.20 0.00 0.40 0.10 0.00 0.02 2020 2019 2018 2017 2016 2020 2019 2018 2017 2016 2020 2019 2018 2017 2016 2020 2019 2018 2017 2016 2020 2019 2018 2017 2016 2020 2019 2018 2017 2016 INCOME STATEMENT (USDM) KEY FINANCIAL FIGURES ¹ Revenue 747 693 635 657 680 Gross margins: ⁾ Time charter equivalent earnings (TCE) ¹ 520 425 352 397 458 EBITDA 36.4% 29.2% 19.1% 24.0% 29.4% Gross profit ¹ EBITDA ¹ ⁾ Operating profit/(loss) (EBIT) ⁾ Financial items Profit/(loss) before tax Net profit/(loss) for the year ⁾ 341 252 169 200 242 Operating profit/(loss) (EBIT) 18.6% 29.7% 0.5% 6.1% -15.7% 272 202 121 158 200 Return on Equity (RoE) 139 206 3 40 -107 Return on Invested Capital (RoIC) -49 -39 90 88 167 166 -36 -33 -35 -31 -36 -35 Adjusted RoIC 3 2 3 -142 -142 43 Equity ratio TCE per day (USD) OPEX per day (USD) 8.7% 7.8% 9.3% 17.9% -4.3% 0.3% -16.2% 12.6% 5.2% 0.1% 0.3% 2.8% 2.4% -7.2% 4.9% 50.9% 50.3% 49.4% 48.0% 49.7% 19,800 16,526 12,982 14,621 16,050 6,398 6,371 6,389 6,673 6,771 Loan-to-value (LTV) ratio 50.8% 46.1% 52.9% 55.8% 52.4% Net profit/(loss) ex. non-recurrent items¹ 122 51 BALANCE SHEET (USDM) ⁾ Non-current assets Total assets Equity Total liabilities Invested capital ¹ Net interest-bearing debt ¹ ⁾ Net Asset Value (NAV) (USDm) ² ⁾ 1,755 1,788 1,445 1,385 1,390 SHARE-RELATED KEY FIGURES ¹ 1,999 2,004 1,714 1,647 1,571 Basic earnings/(loss) per share (USD) ⁾ 1.19 2.24 -0.48 0.04 -2.27 1,017 1,008 847 791 781 Diluted earnings/(loss) per share (USD) 1.19 2.24 -0.48 0.04 -2.27 981 996 867 856 790 Dividend per share (USD) 0.85 0.10 - 0.02 0.40 1,719 1,786 1,469 1,406 1,388 Net Asset Value per share (NAV/share) ² 10.8 13.6 11.6 12.8 11.8 713 786 627 620 609 801 1,016 856 796 733 Stock price in DKK (per share of USD 0.01)³ ⁾ Number of shares ex. treasury shares (mill.)³ ⁾ 45.0 74.5 43.9 53.5 63.5 74.4 74.4 73.9 62.0 62.0 Cash and cash equivalents, incl. restricted cash ⁾ 136 72 127 134 76 ¹ ² ³ For a definition of the calculated key figures (the APMs), please refer to the glossary on pages 165-170. Based on broker valuations as of 31 December, excluding charter commitments. ⁾ End of period ⁾ ⁾ ⁾ TORM ANNUAL REPORT 2020 KEY FIGURES 3 Key Figures CONTENTS STRATEGIC REPORT AT A GLANCE TORM at a Glance CSR Highlights Chairman’s Statement Statement by the Executive Director 2020 HIGHLIGHTS The Year in Review Key Performance Indicators Navigating COVID-19 challenges The Product Tanker Market Unconventional Fuels Outlook 2021 BUSINESS MODEL AND STRATEGIC CHOICES Value Chain in Oil Transportation The Torm Fleet Strategic Ambitions and Business Model OUR RESPONSIBILITY Our Principles Environmental Efforts Greenhouse Gas Emissions Data Supporting Quality Education Health, Safety and Security Employees and Human Rights REVIEW & RISK Financial Review 2020 Risk Management S172 Engagement and Decision Making 5 6 8 9 10 14 15 16 20 22 25 26 27 32 34 36 37 39 41 44 54 59 GOVERNANCE GOVERNANCE INTRODUCTION Chairman’s Introduction GOVERNANCE STRUCTURE TORM’s Governance Structure Board of Directors Board and Committee Meeting Attendance COMMITTEE REPORTS Audit Committee Report Risk Committee Report Nomination Committee Report Remuneration Committee Report Remuneration Policy OTHER Investor Information Directors’ Report Statement of Directors’ Responsibilities FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes Consolidated PARENT COMPANY FINANCIAL STATEMENTS Parent Company 2020 Balance Sheet Changes in Equity Notes to Parent Company Financial Statements OTHER Independent Auditor’s Report TORM Fleet Overview Glossary and APM 106 106 107 108 110 111 149 150 151 152 157 162 165 63 64 67 68 69 74 76 78 88 97 99 103 2020 Highlights 10 Business Model 25 Corporate Governance 62 Income Statement 106 TORM ANNUAL REPORT 2020 CONTENTS 4 Contents TORM ANNUAL REPORT 2020 TORM ANNUAL REPORT 2020 AT A GLANCE AT A GLANCE 5 5 At a glance CORPORATE SOCIAL RESPONSIBILITY HIGHLIGHTS TORM remains committed to taking an active role in caring for communities and our environment. It is not just our shared duty, but our shared responsibility. Therefore, TORM continues the work to combat carbon, sulfur and other emissions and remains committed to enabling quality education, as this is a matter of concern for TORM and its employees. We believe that by having all involved stakeholders working together on this, great results can be achieved. GENDER DIVERSITY 36% WOMEN IN THE SHORE-BASED WORKFORCE 21% WOMEN IN LEADERSHIP POSITIONS 2030 CLIMATE TARGET REDUCTION 22% compared to 2008 baseline (AER) 100 SCHOLARS SUPPORTED BY TORM AND OUR EDUCATION FOUNDATION 0.65 LOST TIME ACCIDENT FREQUENCY IN 2020 TARGET 40% AER reduction by 2030 TORM ANNUAL REPORT 2020 AT A GLANCE 6 In this highly unusual year, I am very pleased that TORM can report solid EBITDA of USD 272m for the year and on the back of the strong performance has returned USD 71m in dividends to shareholders. It further pleases me that TORM has continued to forge the path to a greener future by committing to ambitious CO2 reduction targets. Mr. Christopher H. Boehringer, Chairman of the Board TORM ANNUAL REPORT 2020 TORM ANNUAL REPORT 2020 AT A GLANCE AT A GLANCE 7 7 SUCCESFULLY NAVIGATING A HIGHLY UNUSUAL YEAR LETTER FROM THE CHAIRMAN The pandemic caused a sharp decline in demand for oil products and led to stock build-up at an unprecedented scale. With limited inventory space ashore, a significant share of the global fleet of product tankers became tied up in floating storage and freight rates temporarily jumped to all-time high levels. The market was further heated by prolonged oil output discussions between OPEC and Russia that led to a continued high level of oil supply. Continued efforts to contain the pandemic in the second half of the year stalled the otherwise recovering oil demand and kept trade flows at low levels which continued into 2021. STRATEGY REVIEW During the year, TORM performed a review of its key strategic choices, business model and organization. The review substantiated that the integrated nature of the operating platform offers intrinsic added value across TORM and is a vital element in TORM’s ability to outperform the product tanker market. A GREENER FUTURE In a year as extraordinary as 2020, it pleases me to note that TORM has continued and even further intensified its integration of environmental measures. At TORM, the green agenda has been an integral part of the Company since it signed up for the UN Global Compact in 2009, and to quantify its future ambitions TORM has set targets to reduce its relative CO2 emissions by a minimum of 40% by 2030 compared to 2008. We will pursue the targets by continuing the behavioral and technical optimizations that have enabled us to realize a 22% reduction as well as engage in the development of next generation fuel efficient vessel design with selected partners. SHAREHOLDER RETURN I am also very pleased to note that on the back of an extremely strong financial performance in the first half of the year and based on the Company’s strong liquidity and capital structure, TORM was able to pay out USD 71m in dividends during the year. 71m Returned to investors in dividends TORM continued to maintain its robust financial position in 2020 and following the refinancing of five term loans during 2020, TORM has no material debt maturities until 2026. On this basis, I am confident that the Company is well positioned to deliver value to its shareholders also in the coming years. Mr. Christopher H. Boehringer, Chairman of the Board -40% CO2 reduction target by 2030 TORM ANNUAL REPORT 2020 AT A GLANCE 8 THE POWER OF TORM’S INTEGRATED PLATFORM LETTER FROM THE EXECUTIVE DIRECTOR The year 2020 presented many operational and commercial challenges, and I am pleased to note that TORM’s integrated operational platform was a key factor for the Company to successfully navigate the extraordinary market for product tankers over the year. The embedded ties between TORM’s commercial, technical and support departments ensured an operational flexibility that was critical to handle the many issues created by the COVID-19 pandemic, for example the extremely challenging crew change conditions caused by global travel bans and other restrictions. HIGH EARNINGS Again in 2020, TORM was able to deliver best-in-class commercial performance and with TORM’s focus on optimal geographical positioning of the fleet and strategic priority of trading in the spot market, the fleet was well positioned to capture the sudden market strength in the second quarter of the year. For the full year 2020, TORM realized average Time Charter Equivalent (TCE) earnings of USD/day 19,800 vs. USD/day 16,526 last year. This was considerably above TORM’s low fleet-wide profit before tax break- even level of USD/day 15,100 and in the top range compared to industry peers. CONTINUED AND WELL-TIMED FLEET RENEWAL During the year, TORM continued to renew the fleet and took delivery of four vessels under its newbuilding program, purchased two 2010-built MRs and ordered two fuel-efficient, dual-fuel ready LR2 newbuildings. TORM also acted fast and decisively as the market for older product tankers turned out favorable especially towards the end of the second quarter and sold eight vessels built between 1997-2003. In the first quarter of 2021, TORM has further purchased eight MR product tankers with chemical trading capabilities in a partly share-based transaction. INDUSTRY LEADING Adding all up, I am extremely satisfied that our strong earnings in relation to the capital invested in TORM show that TORM is delivering industry-leading results for our investors. For the full year, TORM achieved an adjusted return on invested capital (ROIC) of 9.3% vs. 5.2% last year. 9.3% Adjusted Return on Invested Capital (ROIC) I would like to thank our seafarers and onshore staff for their hard work and the dedication they have shown every day through this challenging year and I am confident that, based on the One TORM mindset and the strong safety-first principles, TORM will continue to deliver on its promises to its customers and other stakeholders in 2021 and for many years to come. Mr. Jacob Meldgaard, Executive Director 19,800 Average TCE/Day TORM ANNUAL REPORT 2020 AT A GLANCE 9 THE YEAR IN REVIEW 2020 RESULTS MARKET CONDITIONS VESSEL TRANSACTIONS In 2020, TORM realized an EBITDA of USD 272m (2019: USD 202m). The 2020 profit before tax amounted to USD 90m (2019: USD 167m). Net profit adjusted for non-recurring items was USD 122m (2019: USD 51m) and Adjusted Return on Invested Capital (RoIC) was a very strong 9.3% (2019: 5.2%). For the full year 2020, TORM achieved TCE rates of USD/day 19,800 (2019: USD/day 16,526). In the first half of the year product tanker rates reached all-time high levels following the significant market disruption caused by the COVID-19 outbreak and OPEC+ oil price war. In the second half of the year, the product tanker market went into a downturn and together with substantial draws on global oil stocks, product tanker rates declined as product stocks normalized. In 2020, TORM contracted two LR2 newbuildings, purchased two 2010-built MR vessels and sold eight older vessels. The two LR2 newbuildings are scheduled to be delivered in the fourth quarter of 2021 and the first quarter of 2022. One of the 2010-built MR vessels was delivered in 2020 and one was delivered in January 2021. Further, TORM took delivery of four vessels under its newbuilding program in 2020. As of 31 December 2020, TORM’s order book consisted of the two LR2 newbuildings and the remaining 2010-built MR vessel. The total outstanding CAPEX related to the order book, including costs related to the installation of scrubbers, amounted to USD 101m. The vessel sales cover two LR2s and six MRs for a total consideration of USD 77m. The vessels were delivered to their new owners in 2020 and debt of USD 41m has been repaid. As of 31 December 2020, TORM’s fleet consisted of 64 owned vessels, eight vessels under sale and leaseback agreements, two vessels on order and one second-hand vessel to be delivered to TORM. In the first quarter of 2021, TORM has entered into an agreement to purchase eight 2007-2012 built MR product tanker vessels for a total cash consideration of USD 82.5m and the issuance of 5.97 million shares. Subject to documentation, TORM has obtained financing of up to USD 94m for the vessels that are scheduled to be delivered to TORM in the second and third quarter of 2021. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 10 2020 Highlights THE YEAR IN REVIEW COVID-19 OPERATIONAL IMPLICATIONS During the COVID-19 pandemic, TORM has fully maintained its excellent operations thanks to the One TORM platform. This is especially due to extraordinary and very professional efforts from our crew members. While crew changes remain an issue due to travel bans and quarantine rules in several countries around the world, TORM has reduced the percentage of crew with overdue employment from approximately 35% in May and June to the current level of 1% of the total crew on board TORM’s vessels. TORM is very satisfied with this achievement and maintains the safety and welfare of our seafarers as a key focus area – especially during the COVID-19 pandemic. FINANCING UPDATE USD 602m debt refinanced extending all material debt maturities to 2026 or later. In the first quarter of 2020, TORM closed the refinancing of four term loans and an existing revolving credit facility. The term loans and the revolving credit facility were replaced by two separate term facilities and a new revolving credit facility covering up to USD 496m. In the fourth quarter, TORM refinanced its existing facility with Danish Ship Finance with a new facility of USD 180m in senior secured debt covering ten vessels including the two MR vessels purchased in the fourth quarter. In connection with the transaction, five vessels were transferred for refinancing under the Hamburg Commercial Bank facility for USD 35m. Lastly, TORM has obtained financing of USD 12m related to the installation of scrubbers and Ballast Water Treatment Systems on four vessels. Following the refinancing, TORM has extended all material debt maturities until 2026, ensuring annual scheduled repayments over the term which supports the Company’s financial flexibility. In connection with the refinancing a CO2 emission-linked pricing mechanism was included in the Danish Ship Finance facility. Accordingly, the pricing is linked to the reductions in CO2 emissions year on year, aligning it with TORM’s and the International Maritime Organization’s industry target of a 40% reduction in greenhouse gas emissions by 2030. The key performance indicator and the decarbonization target are consistent with the Poseidon Principles, the global framework by which a number of leading financial institutions assess the climate alignment of their ship finance portfolios. The agreement is TORM’s first loan agreement that includes a CO2 emission-linked price adjustment mechanism. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 11 THE YEAR IN REVIEW LIQUIDITY SCRUBBER UPDATE NAV, EQUITY AND VESSEL VALUES IMPAIRMENT AND BOOK VALUE As of 31 December 2020, TORM’s available liquidity was USD 268m and consisted of USD 136m in cash and restricted cash and USD 132m in undrawn financing and committed facilities. Undrawn and committed facilities includes USD 45m in undrawn working capital facilities, USD 76m of sale and leaseback financing and USD 11m of financing related to the installation of scrubber and Ballast Water Treatment Systems. Cash and restricted cash include USD 46m in restricted cash, primarily related to collateral for financial instruments. As of 31 December 2020, net interest-bearing debt1 amounted to USD 713m, and the net loan-to-value (LTV)2 ratio was estimated at 51%. TORM has committed to install 50 scrubbers. As of 1 March 2021, TORM has installed 46 scrubbers. The remaining four are expected to be installed in 2021 and the first quarter of 2022, including the two scrubbers for the LR2 newbuildings. Based on broker valuations, the market value of TORM’s fleet, including newbuildings, was USD 1,585m as of 31 December 2020. TORM’s NAV3, excluding charter commitments, was estimated at USD 801m, corresponding to a NAV/share of USD 10.8 or DKK 65.3. As of 31 December 2020, TORM’s book equity amounted to USD 1,017m. This corresponds to a book equity/share of USD 13.6 or DKK 82.3. The book value of the fleet was USD 1,723m as of 31 December 2020 excluding outstanding installments on the LR2 newbuildings and the 2010-built MR vessel of USD 101m. As of 31 December 2020, TORM tested the carrying amount of its fleet for impairment within three CGUs, being the Main Fleet and the two Handysize vessels. Based on this review, Management has recognized impairment losses related to TORM’s two Handysize vessels with a total charge of USD 5.5m. No impairment was recorded for the Main Fleet covering TORM’s LR2, LR1 and MR vessels, since the value in use is in line with the carrying amount at 31 December 2020. See note in note 8 to the financial statements for further details. 1 See Glossary on page 162 for a definition of net interest-bearing debt. 2 See Glossary on page 164 for a definition of loan-to-value. 3 See Glossary on page 165 for a definition of NAV. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 12 THE YEAR IN REVIEW NEW DIRECTOR INTRODUCING ESG REPORTING COVERAGE DIVIDEND At the 2020 AGM, Ms. Annette Malm Justad was appointed as Director of the Company replacing Mr. Torben Janholt. Ms. Justad has more than 20 years of executive experience and has previously served as CEO of Oslo listed Eitzen Maritime Services ASA, amongst other. To supplement the Annual Report and TORM’s CSR report, TORM has published its first dedicated ESG Report to provide easy access to data specifically within Environmental, Social and Governance aspects. The ESG Report documents the results of TORM’s efforts within the environment, its commitment to the UN’s Sustainable Development Goals including social and governance aspects, and the targets set for 2030 onwards. As of 31 December 2020, 28% of total earning days4 in 2021 were covered at USD/day 15,049. As of 23 February 2021, the total coverage for the first quarter of 2021 was 85% at USD/day 12,914. For the individual vessel classes, the coverage was 89% at USD/day 16,506 for LR2, 67% at USD/day 13,400 for LR1, 88% at USD/day 12,355 for MR and 84% at USD/day 6,725 for Handysize. USD 72m shareholder distribution in 2020, but no dividends for the second half of 2020. TORM made a total shareholder distribution of USD 72.0m in 2020 covering earnings in the second half of 2019 and the first half of 2020. The majority of the payment was made in September 2020, where TORM paid an ordinary dividend of USD 63m, or USD 0.85 per share. In line with the Company’s Distribution Policy the payment corresponded to 50% of net income for the six months ended 30 June 2020. The net income for the second half of 2020 was USD -39m and in line with TORM’s Distribution Policy the Board of Directors has decided to recommend that no dividends be paid for that period. 4 See Glossary on page 165 for a definition of earning days. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 13 KEY PERFORMANCE INDICATORS For TORM to be considered the Reference Company, TORM assesses the Company’s performance across a wide range of measures and indicators against strategic targets. TCE Earnings USD/day 2020: 19,800 2019: 16,526 In 2020, TORM’s commercial performance was again among the best compared with peers in the product tanker industry. This can be accredited to the Company’s scale, quality fleet and 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 earnings benchmarks. In 2020, TORM achieved average TCE earnings of USD/day 19,800 up from USD/day 16,526 in 2020. Lost Time Accident Frequency (LTAF) 2020: 0.65 2019: 0.42 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. 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. Following two years of continued improvement, TORM had nine accidents during 2020 and as a consequence LTAF increased to 0.65 compared to 0.42 in 2019. Adjusted Return on Invested 2030 Climate target Capital (RoIC) 2020: 9.3% 2019: 5.2% Adjusted RoIC illustrates TORM’s ability to generate shareholder value from the capital invested in TORM. It is defined as net operating profit after tax (excluding non-recurring items) divided by the invested capital over the same period (excluding impairment charges). In 2020, TORM achieved an adjusted RoIC of 9.3% compared to 5.2% in 2019. The increase in RoIC from 2019 to 2020 is driven by higher freight rates. This KPI reflects that with an average age of TORM’s fleet of approximately 10 years, TORM is able to generate a very attractive RoIC compared to its peers. 2020: 22% 2019: 24% TORM continues its path towards achieving a 40% reduction in CO2 emissions by 2030. This performance is measured by Fleet AER (Annual Efficiency Ratio) compared to the 2008 baseline figure. In 2020, TORM continued its efforts and compared to the 2008 baseline, achieved a 22% reduction in Co2 emissions. The corresponding number in 2019 was 24%. TORM is motivated more than ever to create a more environmentally friendly future and to develop innovative solutions to reduce CO2 emissions in order to fulfil its target by 2030. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 14 FULLY MAINTAINED OPERATIONS DURING COVID-19 Although COVID-19 imposed challenges both at sea and ashore, TORM has continued to serve its customers as usual but has taken several safety measures to manage the situation. During the COVID-19 pandemic, TORM has fully maintained its operations at sea and ashore thanks to the One TORM platform, but especially due to the extraordinary and very professional efforts of our crew members. At their peak, the travel restrictions caused an almost complete shutdown of crew changes. Crew were not allowed to leave their home countries as international air travel virtually stopped and ports around the world refused crew changes to take place. of command. For one thing, TORM has moved its crew management closer to its commercial department and implemented swift, efficient and predictive crew change rules of procedures. SEAFARERS The COVID-19-imposed travel restrictions complicated crew movements throughout the year and led to crew overdue employment across the fleet. CREW MOVEMENTS AND OVERDUE EMPLOYMENT Source: TORM Overdue (%) Crew movements This led to a sharp increase in overdue crew employment, reaching 35% of TORM’s working crew in May and June. As the travel ban for seafarers eased, TORM conducted up to 900 crew movements per month to reduce the overdue level. This is 2-3 times the normal level for TORM. At the end of the year, TORM managed to bring the overdue employment down to normalized pre-COVID- 19 levels. 50 40 30 20 10 0 Apr May Jun Jul Aug Sep Oct Nov Dec Crew movements Overdue (%) TORM ANNUAL REPORT 2020 1000 800 600 400 200 0 LAND-BASED EMPLOYEES In line with the relevant authorities, TORM has on several occasions chosen to close part of its offices and recommend that land-based employees work from home. TORM has been able to conduct its business almost unaffected of these measures due to the integrated nature of its operating platform ensuring cohesive lines 2020 HIGHLIGHTS 15 THE PRODUCT TANKER MARKET The COVID-19 pandemic led to unprecedented changes in the oil market, sending product tanker freight rates on a rollercoaster ride. Looking ahead, the product tanker market is supported by positive demand developments and limited supply growth. 2020 PRODUCT MARKET The COVID-19 pandemic generated considerable volatility in the product tanker market, temporarily sending freight rates to all-time highs. An unprecedented decline in oil demand and an increase in product stockpiles affected trade patterns and led to a significant share of the fleet being tied up in floating storage. Following the initial COVID-19 outbreak in China and the spread of the virus to the rest of the world, the impact of the measures taken to contain the COVID-19 pandemic considerably gained momentum in the second quarter. With most of the world in some type of lockdown, the global oil demand declined at an unprecedented rate. The crude and product supply did not respond as swiftly and sharply and this was even exaggerated by the OPEC+ price war in March and early April, leading to a stock build-up at an unprecedented scale. For the product tanker market, this provided a temporary boost from several export regions, leading to longer and more inefficient trading patterns, such as vessels sailing around the Cape of Good Hope in order to take advantage of contango or trying to find new buyers further away. Secondly, an increased oil oversupply gave rise to floating storage, which at its peak in early May tied up 14% of clean-trading tonnage. This sent freight rates for product tankers to unprecedented levels, with rates for the LR2 vessels reaching an all-time high of around USD/day 170,000, double the all-time peak. Rates in the MR class similarly reached all-time highs at above USD/day 70,000. As the global economies slowly started to recover from various stages of lockdown, the oil market rebalanced resulting in product tanker freight rates coming off as tonnage in floating storage was released back into the market. The returning demand for oil products was largely met by drawing on local stocks rather than water-way imports. This sent MR benchmark rates to levels below USD/day 10,000 by the end of the second quarter. FLOATING STORAGE REACHED 14% OF THE FLEET Source: TORM CPP INVENTORIES AT MAIN TRADING HUBS REACHED UNPRECEDENTED LEVELS Source: EIA, Reuters Percentage 15 12 9 6 3 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 16 THE PRODUCT TANKER MARKET During the third quarter, freight rates generally continued to decline, albeit with historically large regional differences and significant premiums in the West relative to the eastern regions. The underlying oil demand continued to improve, but the historically weak refinery margins kept refinery output below the level of consumption and with that, the draw on inventories continued. Despite OPEC’s crude production cuts being partially released in the third quarter, crude tanker freight rates fell and caused an increase in newbuilt crude carriers, cannibalizing the clean product trade from North Asia into the Atlantic. At the start of the fourth quarter, the increasing number of COVID-19 cases led to renewed mobility restrictions in several countries, stalling the recovery in oil demand and keeping refineries from ramping up their runs. This kept trade flows at low levels and freight rates under pressure. The level of vessels remaining in floating storage stood at around 4% of the fleet at the end of the year. Weak freight rates carried over into the start of 2021, as the increasing number of new cases led to a tightening of mobility restrictions not only in North America and Europe, but also in several Asian countries. Colder than average winter weather in some Asian countries, however partly mitigated the negative effect on oil demand, which is expected to be further supported by advancing vaccine rollouts. TORM The value of TORM’s fleet measured by broker values decreased by 15% during 2020 (when adjusted for vessels acquired and sold during 2020). In 2020, TORM achieved a gross profit of USD 341m (2019: USD 252m). The increase from 2019 was primarily driven by higher freight rates. TORM’s product tanker fleet realized TCE earnings of USD/day 19,800, up 20% year on year, with the LR2 vessels at USD/day 26,637, the LR1 vessels at USD/day 22,839, the MR vessels at USD/day 18,098 and the Handysize vessels at USD/day 13,416. During 2020, TORM contracted two fuel-efficient, dual- fuel-ready LR2 newbuildings from Guangzhou Shipyard International (GSI) and additionally two 2010-built MR vessels. The two LR2 newbuildings are scheduled to be delivered during the fourth quarter of 2021 and the first quarter of 2022. One of the two 2010-built MR vessels was delivered to TORM during the fourth quarter of 2020 and one was delivered in January 2021. Further, TORM took delivery of four vessels from its newbuilding program during 2020. At the end of 2020, TORM operated a fleet of 72 vessels on the water, of which 64 are fully owned and eight are operated under sale and leaseback arrangements. ASSET PRICES OF FIVE-YEAR-OLD SECOND-HAND PRODUCT TANKERS IN 2020 Source: Clarksons TANKER FREIGHT RATES IN 2020 Source: Clarksons USDm 30 25 20 15 10 5 0 Average TCE in USD/day 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec LR2 LR1 MR Handysize LR1 Ras Tanura - Chiba MR Average LR2 Ras Tanura - Chiba TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 17 THE PRODUCT TANKER MARKET MARKET DRIVERS AND OUTLOOK Tonnage supply In 2020, the global product tanker fleet grew by 2.8% in terms of capacity (2.9% in terms of number of vessels), down from 4.6% in 2019.The slower fleet growth was mainly driven by fewer LR2 deliveries, as fleet growth decreased from 7% in 2019 to less than 2% in 2020. However, effective fleet growth was further reduced both by LR2s migrating to dirty trade, mainly early in the year, and especially by widespread floating storage of oil. At the peak in the second quarter, 14% of the fleet was tied up in floating storage. While the majority of the affected MRs were released by the end of the second quarter, contango-related floating storage on LR2s lasted into the fourth quarter. However, by the end of the year, the vast majority of all volumes in floating storage had been discharged and as such had a negative impact on freight rates in the FLEET AND ORDER BOOK As of 31 December 2020 second half of the year. Taking floating storage and vessel migration between clean and dirty markets into account, the effective fleet capacity is estimated to have declined by 1.2% in 2020 from the previous year. The number of newbuilding orders placed in 2020 was 84 vessels, slightly above the level seen in the previous year, remaining significantly below the average of 125 vessels ordered per year in the past decade. The MR vessels accounted for the majority of orders with 53 units contracted, while the number of LR2 vessels ordered was 23. At the end of 2020, the existing order book for deliveries in 2021-2023 totaled 211 units (corresponding to 7.3% of the existing fleet, in terms of capacity), including 47 LR2 vessels, 3 LR1 vessels, 134 MR vessels and 27 Handysize vessels. Taking into account the lead time in production, TORM anticipates the ordering of new product tankers with delivery before the end of 2022 to be limited. Given the uncertainty around the requirements for vessel propulsion systems in the future, TORM expects the newbuilding ordering activity to remain relatively limited in the next couple of years. Around 0.9m dwt of product tanker capacity was recycled in 2020, corresponding to approximately 0.5% of the fleet capacity as of the end of 2019. This was down from 1.2m dwt in the previous year. TORM estimates that approximately 3% of the existing capacity of the global fleet will be phased out or recycled during 2021-2023, as these vessels reach an age where the trading possibilities are limited. 2021-2023 Order book Fleet Delivered in Scrapped in Fleet Order book as % of end- 31.12.2019 2020 2020 31.12.2020 for 2021-2023 2020 fleet 385 372 1,707 750 3,214 8 3 76 27 114 2 0 8 10 20 391 375 1,775 767 47 3 134 27 3,308 211 12% 1% 8% 4% 6% LR2 LR1 MR Handysize Total ~2% Expected fleet growth 2021-2023 (CAGR) With a historically low order book and newbuilding ordering activity expected to be limited in the coming years, TORM expects the net product tanker fleet capacity to grow by a compound annual rate of approximately 2% during 2021-2023. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 18 THE PRODUCT TANKER MARKET Tonnage demand The COVID-19 pandemic and the associated lockdowns are estimated to have lowered the global oil demand by almost 9% in 2020, with jet fuel being especially hard hit by travel restrictions. Despite an expected demand rebound in 2021, supported by an earlier-than- expected breakthrough in vaccines, global oil demand is not expected to reach pre-COVID-19 levels until 2022. Demand destruction also led to a strong inventory build-up in the first half of 2020, with clean petroleum product stocks at main trading hubs climbing to 17% above the 5-year average by June. Nevertheless, stocks started to draw as the oil market began to rebalance in the second half of the year. By the end of 2020, oil DEMAND FOR JET FUEL FELL BY 40% IN 2020 Source: WoodMackenzie -1% -7% -12% -41% Index 100 80 60 40 20 0 Naphtha Diesel Gasoline Jet fuel 2019 2020 product inventories still stood at around 6% above the 5-year average, with middle distillates in particular being significantly oversupplied. High inventories generally mean headwinds for the product tanker market as demand is supplied by local inventories rather than imports. However, this negative impact is partially offset by the fact that a large share of inventories is located in regions that are net exporters of oil products, such as China, entailing that a large share of stocks are either trade neutral or even trade supportive. An important effect of the COVID-19 pandemic was the historical pressure on refinery margins, which kept refinery runs down, but also has a more long-lasting effect as several refineries announced closures in 2020. Consequently, around 3 mb/d of refining capacity will potentially be removed from the market in the next three years, with most of it located in regions which are already large importers of refined oil products, such as Europe, US West Coast, US East Coast, Australia, New Zealand, and South Africa. These refineries account for 5% of the total refining capacity in Europe, the world’s largest diesel importing region, 12% of the US West Coast and 28% of the US East Coast capacity. For Australia and New Zealand, the figures are even more significant – it has been announced that two out of four refineries in Australia will be closed down, with another one at risk of closure, while the sole remaining refinery in New Zealand could similarly be shut down. At the same time, approximately 5 mb/d of new refining capacity is scheduled to come online during the same period. New capacity is mainly situated in the Middle East and China – the regions that are already today large exporters of oil products. Both these developments are positive for trade flows and ton-mile in the post-COVID-19 world. Only a few projects are less positive for trade, most notably the large-scale Dangote refinery in Nigeria, which is expected to come online in 2022 at the earliest. ~4% Expected ton-mile growth 2021-2023 (CAGR) Subsequently, TORM expects the product tanker ton- mile demand on main trade routes to grow by a compound annual rate of around 4% during 2021-2023, driven by recovery in global oil demand from COVID-19 and refinery dislocation induced by recent refinery closure announcements. Generally, positive trends on the product tanker demand side combined with limited tonnage supply growth support a positive freight market development in the next three-year period, although market volatility is expected. For further details on factors that are most likely to change this outlook in either a negative or a positive direction, please see the “Outlook” section on pages 22-23. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 19 UNCONVENTIONAL FUELS The uptake of alternative fuel systems in the global fleet remains limited. The number of newbuilding orders placed for vessels with an unconventional fuel system is constrained by uncertainty around the new technologies. Current viable unconventional fuels are primarily biofuels and LNG, which on a smaller scale have been introduced outside the product tanker market. In the product and chemical tanker fleet the uptake of alternative fuel systems remains very limited and takes up less than 1% of the global fleet. Approximately 19% of the product and chemical tankers on order are equipped with a dual fuel system. It is notable that the methanol dual fuel vessels are mainly dedicated methanol carriers. For shipping companies at large to reach the IMO 2030 CO2 reduction target, increased fuel efficiency of the existing global fleet and operational optimization is required. Potential future viable fuel systems are expected to be decisive factors to reach TORM’s ambitious climate agenda for 2050. At this point, the future fuel type is associated with great uncertainty. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 20 OPTIMIZING PERFORMANCE TORM follows the development in alternative fuel systems closely and at the same time applies a broad set of actions to cut down the fuel consumption of its existing fleet. Voyage optimization Behavioral optimization Technology improvement There are many factors involved in setting the ideal speed, and TORM works closely with its stakeholders to ensure the optimal speed of its vessels. To support this, TORM utilizes predictive quantitative modelling and multiple data sources for real time surveillance and recommendation. Measures to achieve operational savings, including optimal route planning, enhanced energy management onboard and rigid anti-fouling monitoring. TORM applies a range of new and updated technologies to enhance the fuel efficiency of its current fleet. In the longer–term, TORM is also engaged in developing next generation ship design and technology together with selected partners. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 21 OUTLOOK 2021 As of 31 December 2020, TORM had covered 7,346 earning days (28% of total earning days) for 2021 at an average rate of USD/day 15,049. As of 23 February 2021, the coverage for the first quarter of 2021 was 85% at USD/day 12,914. OUTLOOK TORM expects the supply and demand balance in the product tanker market to improve in the period 2021- 2023. On the supply side, limited fleet ordering activity and a historically low order book ensure that fleet growth remains limited, with net fleet growth currently estimated at approximately 2%. This is considerably lower than the five-year average fleet growth of 4%. TORM projects the product tanker ton-mile demand on main trade routes to grow by a compound annual rate of around 4% during 2021-2023, driven by a recovery in global oil demand from the COVID-19 pandemic and refinery dislocation induced by increasing competitive pressure on older refineries and recent refinery closure announcements. In line with common practice for most UK companies and other major shipping companies, TORM does not provide guidance on earnings. To support the 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 is included in the Annual Report. COVERAGE FOR 2021 As of 31 December 2020, TORM had covered 7,346 earning days (28% of total earning days) for 2021 at an average rate of USD/day 15,049. This means that a change in freight rates of USD/day 1,000 for the duration of 2021 would impact the full-year EBITDA by approximately USD 18.8m. As of 23 February 2021, the coverage for the first quarter of 2021 was 85% at USD/day 12,914. For the individual segments, the coverage was 89% at USD/day 16,506 for LR2, 67% at USD/day 13,400 for LR1, 88% at USD/day 12,355 for MR and 84% at USD/day 6,725 for Handysize. 2021 EBITDA SENSITIVITY TO CHANGES IN FREIGHT RATES - AS OF 31 DECEMBER 2020 Subsequently, TORM believes that the positive trends on the product tanker demand side combined with limited tonnage supply growth provide fundamental support to a positive freight market development in the next three-year period, although market volatility is expected. See also the “The Product Tanker Market” section on pages 16-19. USDm LR2 LR1 MR Handysize Total Change in freight rates (USD/day) -5,000 -2,500 -1,000 1,000 2,500 5,000 -4 -11 -2 -6 -76 -38 -3 -2 -94 -47 -1 -2 -15 -1 -19 1 2 15 1 19 2 6 38 2 47 4 11 76 3 94 TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 22 ONE-YEAR TIME CHARTER MARKET Source: Average of selected broker assessments. USD/day LR2 LR1 MR Handysize Note: The time charter market has limited liquidity. One-year T/C rate as of 23 February 2021 16,100 13,500 12,375 11,188 OUTLOOK 2021 As of 31 December 2020, the interest-bearing bank debt totaled USD 713m, and TORM had fixed 75% of the interest exposure for 2021. A change in interest rates of 25 basis points for the duration of 2021 would impact pre-tax profit or loss by USD 0.9m. As of 23 February 2021, 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 12,991. Last year, as of 5 March 2020, the weighted average one-year T/C rate for TORM’s vessels was assessed at USD/day 16,226. The most important factors affecting TORM’s earnings in 2021 are expected to be: • Continued COVID-19 restrictions and associated lockdowns lowering oil demand and causing operational obstacles Speed and efficiency of COVID-19 vaccines rollout • • Global economic growth and consumption of refined oil products • Refinery closures and maintenance • Oil trading activity and developments in ton-mile trends Fleet growth and newbuilding ordering activity • • Bunker price developments • One-off market-shaping events such as strikes, embargoes, political instability, weather conditions etc. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 23 COVERED AND CHARTERED-IN DAYS AT TORM – AS OF 31 DECEMBER 2020 2021 2022 2023 2021 2022 2023 Owned days LR2 LR1 MR Handysize Total Covered, % 3,497 3,235 3,630 3,093 3,485 3,234 15,703 15,814 15,798 LR2 LR1 MR 726 725 726 Handysize 23,161 23,262 23,243 Total 80% 32% 18% 16% 28% 3% 0% 0% 0% 1% 0% 0% 0% 0% 0% Chartered-in and leaseback days at fixed rate Covered days 2021 2022 2023 2021 2022 2023 LR2 LR1 MR Handysize Total 61 - 726 - 726 - 2,905 2,903 2,899 LR2 LR1 MR - - - Handysize 2,965 3,629 3,625 Total 2,843 1,025 3,360 118 7,346 136 - - - 136 - - - - - Total physical days Coverage rates, USD/day 2021 2022 2023 2021 2022 2023 LR2 LR1 MR Handysize Total 3,557 3,235 18,608 726 26,126 4,356 3,093 18,717 725 4,211 3,234 18,697 LR2 LR1 MR 726 Handysize 26,891 26,868 Total 16,321 14,812 14,196 10,737 15,049 16,778 - - - 16,778 - - - - - Fair value of freight rate contracts that are mark-to-market in the income statement (USDm): Contracts not included above: USD 2.5m Contracts included above: USD 2.1m Actual no. of days can vary from projected no. of days primarily due to vessel sales and delays of vessel deliveries. TORM ANNUAL REPORT 2020 2020 HIGHLIGHTS 24 VALUE CHAIN IN OIL TRANSPORTATION The global oil industry covers a range of activities and processes which contribute to the transformation of primary petroleum resources into usable end products for industrial and private customers. 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 2020, 94.5% of TORM’s turnover was generated from clean products transportation. 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. 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 the transportation of residual fuels from the refineries as well as crude oil directly from the production field to the refinery. These fuel types are TORM’s integrated operating platform with in-house technical and commercial management enhances the response to customer demands and allows TORM to generate value for stakeholders as well as for the Company. 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 TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 25 Business model and strategic choices THE TORM FLEET as of 1 March 2021 LR2 Long Range 2 vessels are the largest vessels in TORM’s fleet. They are typically employed on long trade routes, including naphtha transportation from the Middle East to the Far East and diesel from the eastern hemisphere into the Atlantic. Ten vessels are currently on the water, and two newbuildings are expected to be delivered in the fourth quarter of 2021 and the first quarter of 2022. LR1 Long Range 1 vessels are typically employed on the same routes as LR2 vessels, but they also have the flexibility to cover trades and routes that are traditionally dominated by the smaller MR vessels. A typical LR1 trade could be diesel or jet fuel from the Middle East to Europe. 10 Vessels 90-114,000 dwt 9 Vessels 72-75,000 dwt MR Medium Range vessels are often referred to as the “workhorses” of the product tanker fleet. They cover more trade routes and, compared to the larger LR vessels, this vessel type has the flexibility to enter into more ports and cover shorter and coastal trades. A typical trade for MR vessels would be gasoline from Europe to the US East Coast. TORM has 52 MR vessels currently on the water. In the first quarter of 2021, TORM has purchased eight MR product tankers with expected delivery during the second and third quarter of 2021. Handysize Handysize vessels are the smallest vessels in TORM’s fleet. They are involved in more varied and typically shorter and coastal trade routes. Typical trades for a Handysize vessel include transportation of various clean petroleum products within Europe and in the Mediterranean. 52 Vessels 45-50,000 dwt 2 Vessels 35-37,000 dwt TORM is present in all large vessel classes in the product tanker market with specific focus on the LR2, LR1 and MR vessel classes as these three segments offer the greatest synergies. TORM’s fleet has decreased from 76 vessels in December 2019 to 73 vessels on the water in March 2020. Two LR2 vessels are scheduled to be delivered in the fourth quarter of 2021 and the first quarter of 2022 and eight MR vessels are scheduled to be delivered in the second and third quarter of 2021. The change is primarily driven by our opportunistic approach to fleet renewal through disposal of older tonnage, acquisition of younger tonnage and modern second-hand vessels and contracting of newbuildings. TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 26 STRATEGIC AMBITION AND BUSINESS MODEL TORM is a leading product tanker owner with a large, diverse fleet of high-quality vessels and a solid capital structure. TORM’s integrated operating platform provides superior commercial performance and earnings potential. TORM actively pursues a greener future and has set an ambitious emission reduction agenda for 2030 and 2050. LEADING PRODUCT TANKER OWNER TORM is an international leading product tanker company and one of the largest owners of product tankers in the world. TORM primarily employs its fleet of 73 vessels in the spot market. With its presence in all the large product tanker segments and across all regional supply and demand hubs, TORM is well positioned to meet its customers’ transport and storage requirements. The Company seeks to selectively grow its fleet and to serve as a consolidator in the product tanker segment if the right opportunities arise. TORM continuously assesses opportunities to optimize its fleet by acquiring attractive high-specification second-hand product tankers or selectively pursuing newbuilding programs with high- quality shipyards. quarter of 2021, TORM has further purchased eight MR product tankers with chemical trading capabilities in a partly share-based transaction. From time to time, TORM will also sell vessels that no longer fit with the commercial strategy, or if the price point is deemed attractive. In 2020, TORM sold eight older vessels, capitalizing on the strong market during the first half of the year that provided attractive opportunities to dispose of older tonnage. BEST IN CLASS PERFORMANCE (Q4 2019 – Q3 2020) Source: TORM In this way, the Company serves as a consolidator while at the same time optimizing elevating its invested capital to enable the highest possible ROIC. TORM’s scalable business platform is a supportive and required enabler for this strategic objective. In 2020, TORM acquired two second-hand vessels and made additional purchases of two fuel-efficient, dual-fuel- ready LR2 newbuildings with scrubbers. In the first 25 20 15 10 5 0 TCE per day X 1.14 ROIC X 1.91 19.694 17.253 11.6 6.1 TORM Peer group TORM Peer group TORM’s solid capital structure balances the spot-based employment profile with low leverage, a strong liquidity position, a fully funded newbuilding program and limited off-balance sheet charter-in commitments. Further, in 2020, TORM refinanced debt of USD 602m, postponing all material maturities until 2026 or later. Secured bank financing remains the preferred source of debt funding for TORM, but the use of leasing structures reflects TORM’s broad access to various sources of competitive financing. To support the Company’s shares and to attract a broad investor base, TORM frequently markets its shares towards investors through investor roadshow activities, conference participation and panel discussions. Further, TORM believes that its transparent company structure and corporate governance principles enhance the attractiveness of its shares. TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 27 STRATEGIC AMBITION AND BUSINESS MODEL optimal position of the fleet in the global basins, where differences in earnings can be significant during a year. TORM’s fleet is managed by its in-house technical management. The department is responsible for maintaining the high quality of our vessels and the delivery of an environmentally friendly, safe, and cost- efficiently technical operation. Our technical management also has extensive experience in vessel design and construction and provides essential knowledge for TORM to execute newbuilding programs. Apart from the office staff, more than 3,000 seafarers are employed in our technical department. TORM’s sale and purchase activities are conducted by an in-house team. The sale and purchase team leverages relationships with shipbrokers, shipyards, financial institutions and shipowners to ensure fleet renewal and actively pursue lucrative opportunities in the second- hand and newbuilding markets. The support division is an integral part of TORM’s day- to-day operations and provides optimized business practices, reporting and payment processes, proactive business partnering, stringent risk management, liquidity and funding management etc. The support division has for years built a strong data and digitalized business support function. By means of significant, advanced analytics and applied AI competences, this function has created an analytical model to further support the commercial performance of the Company. TORM has identified several strategic Key Performance Indicators (KPIs) that the Company believes are vital to fulfill its strategic goals. These strategic KPIs are described on page 14. SUPERIOR OPERATING PLATFORM TORM’s fleet is effectively managed on the in-house integrated operating platform known as One TORM. Operations are conducted combined for the entire fleet to reap synergies across vessel classes. The integrated nature of TORM’s operating platform provides transparency and clear alignment of management and shareholder interests, which mitigates the potential for actual or perceived conflicts of interest with related parties. TORM also believes that the largest customers prefer an integrated operating model as it provides them with better accountability and insight into safety and vessel performance. In line with the Company’s strategic focus on safety, the One TORM platform features its One TORM Safety Culture program. The purpose of the program is to continuously strengthen TORM’s safety culture beyond mere compliance and reflects the belief that profitability and safety are not mutually exclusive. On the One TORM platform the commercial, technical, sale and purchase and support divisions work towards common goals in a network-based organization. TORM’s commercial team is responsible for employment and operation of our fleet and has continuously demonstrated superior performance compared to peers and market benchmarks. One of the key elements for the commercial team to succeed is the ability to ensure an TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 28 STRATEGIC AMBITION AND BUSINESS MODEL FOR A GREENER FUTURE TORM strives to utilize its market position and strength to lead the product tanker industry into a more environmentally friendly future and to develop innovative solutions for a greener future, and the Company has reduced its CO2 impact by 22% since 2008. TORM believes that both the CO2 and the ESG agendas will be integral and determining elements of the future of the product tanker business. At the same time, TORM acknowledge that oil and refined oil products are essential resources that the world will continue to rely on for the foreseeable future. It is a key priority for TORM to contribute to combatting the accelerating global climate change and to minimizing pollution of the seas and the atmosphere. Thus, TORM has strong focus on reducing fuel consumption and CO2 emissions. This is achieved through a committed focus on optimal performance, and industry collaboration. TORM embraces the climate combat and is dedicated to developing innovative solutions for our industry and easing the impact of our vessels on the environment. To quantify our ambition, TORM has set a target to reduce its relative CO2 emissions by 40% by 2030 compared to 2008 and an ambition to have zero CO2 emissions from operating our fleet by the year 2050 TOWARDS DECARBONIZING SHIPPING 2030 TARGET 40% relative CO2 reduction Reduce fuel usage in current fleet Develop fuel efficient design Utilize new technology 2050 AMBITION Zero CO2 emissions from operating our fleet Next generation fuel technology Pursue industry cooperation Influence decision makers TORM believes that its integrated focus on its environmental impact will be beneficial both from an environmental and an investment point of view. TORM will therefore investigate the potential of green business adjacencies that can co-create long-term value and optionality for the company. TORM has already formed a successful partnership with a scrubber producer, supporting the company’s scrubber investments. To reach the CO2 target set for 2030, optimization and improvement of the existing fleet are paramount, and TORM is applying a broad set of actions to enhance the fuel efficiency of its fleet. This includes both operational and technical improvements. TORM is also engaged in developing next generation ship design and new energy improving technologies with selected partners. To support the target TORM will incorporate the impact on the reduction trajectory when assessing future fleet renewal options. In the longer term and to meet its ambition for 2050, TORM believes that new alternative fuels in shipping will be required on a global scale. TORM will seek to influence this development and pursue broad industry cooperation on this important journey. These new technologies are still in the developing stages and what will be the technology of the future is so far associated with great uncertainty. TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 29 STRATEGIC AMBITION AND BUSINESS MODEL TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 30 ONE TORM, A WORLD-CLASS PLATFORM PURE-PLAY PRODUCT TANKER EXPOSURE SUPERIOR COMMERCIAL PERFORMANCE SOLID CAPITAL STRUCTURE ~73 vessels deployed in the spot market across all four large product tanker classes One TORM approach with in-house commercial and technical management provides superior earnings while maintaining a balanced cost structure Conservative balance sheet and a strong liquidity position provide room for potential growth while maintaining break-even rates at low levels and no near-term debt maturities SIGNIFICANT OPERATING LEVERAGE Significant operating leverage through spot orientation allowing TORM to benefit from increases in TCE rates PROVEN ESG COMMITMENT ESG is embedded in our culture. TORM has ambitious targets to reduce its CO2 emissions, continued social commitment through educational support in rural areas, and a clear governance structure without leakage POSITIVE MARKET FUNDAMENTALS Despite market volatility caused by the COVID-19 pandemic, the market fundamentals remain intact and the market outlook is positive TORM ANNUAL REPORT 2020 BUSINESS MODEL AND STRATEGIC CHOICES 31 OUR RESPONSIBILITY Responsible behavior is embedded in the way TORM conducts its business and in the mindset of our employees. TORM remains committed to protecting our employees, the environment, our reputation, and our assets by maintaining the highest possible standards. 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. PRINCIPLES Transparency and accountability are key to TORM’s way of doing business, and these values play a central role in the Company’s corporate social responsibility (CSR) approach. TORM’s approach to responsible behavior is further rooted in the Company’s Business Principles which have the following five objectives: • Maintaining a good and safe workplace • Reducing environmental impact • Respecting people • Doing business responsibly • Ensuring transparency For further information on TORM’s Business Principles, please visit: www.torm.com/uploads/media_items/torm-business- priciples.original.pdf. 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 an active member of Danish Shipping and a number of committees within that organization and as co- founder and member of the Maritime Anti-Corruption Network, TORM strives to increase transparency and accountability and to minimize corruption. In 2020, TORM continued to extend its support to the UN Sustainable Development Goals (SDGs) and its targets for 2030. In order to ensure ample contribution, TORM continues to focus on specifically SDG 4 Quality Education and SDG 13 Climate Action which are closely linked to our value chain, business practices, and company values. This is seen as a natural progression of our commitment to the UN Global Compact. This section, Our Responsibility, constitutes TORM’s CSR reporting according to the requirements of UK law. Read more about TORM and our CSR efforts at www.torm.com/csr-at-torm. Data specifically within Environmental, Social and Governance aspects can be found in TORM’s ESG report which will be published on www.torm.com. As part of the Company’s commitment to the UN Global Compact, TORM submits its communication on progress every year. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 32 Our Responsibility TORM’S ESG TARGETS 2030 CLIMATE TARGET (FLEET AER1) 2050 CLIMATE AMBITION -22% 6.74 -40% 5.24 4.04 2008 2020 2030 target TORM is pursuing an ambitious climate agenda, whereby we will have zero CO2 emissions from operating our fleet by 2050. 2030 SAFETY TARGET (LTAF2) 2030 LEADERSHIP DIVERSITY TARGET (PERCENTAGE OF FEMALE LEADERS3) -54% 0.65 0.30 2020 2030 target +67% 35 2030 target 21 2020 1 Unit of measure: CO2 g / dwt nm. 2 Accidents per one million exposure hours. 3 % of women in leadership positions onshore compared to all leadership positions. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 33 ENVIRONMENTAL EFFORTS TORM supports SDG 13 Climate Action as marine pollution constitutes the largest environmental risk in the shipping industry. It is therefore a key priority for TORM as a Reference Company to minimize pollution of the seas and the atmosphere. To actively contribute to the industry emissions reduction plans, TORM continued its involvement in industry collaborations such as the innovation partnership, ShippingLab. A non-profit platform for maritime research, development and innovation with 30 partners from across the maritime industry to drive smart shipping of the future. In 2019, TORM joined the Getting to Zero Coalition along with other powerful industry leaders. The purpose of this alliance is to lead the push for the decarbonization of shipping with the mutual goal of having commercially viable zero- emission vessels operating along deep-sea trade routes by 2030. FUEL CONSUMPTION AND ENERGY EFFICIENCY 2020 offered significant changes to the fuel picture in international shipping. The IMO 2020 Sulphur cap required many changes in reporting and systems to measure and evaluate consumption. This is caused by the change from 3.5% Heavy Fuel Oil (HFO) and 0.1% Marine Gas Oil to a worldwide limit of 0.5%. Some vessels with scrubbers may still use 3.5% HFO, but not all ports allow it. TORM’s solution is to move from two fuel types to five. Irrespective of the challenges of managing the fuels and evaluating the propulsion performance, the One TORM platform has continued to have a strong and dedicated focus on reducing fuel consumption. The efforts made within this area generated a positive result as can be seen in the Greenhouse gas emissions table on page 36. TORM’s Operational Performance Team continues to share the performance of each vessel with the respective vessel managers and the vessels on a monthly basis. To encourage and support best practice behavior with regard to energy consumption, daily engagement with the vessels continue to create significant value. The efforts ensure that corrective actions can be taken swiftly, when needed. Fuel consumption for cargo operations remain a focus area that has been developed during 2019 and 2020. It is clear that the subject is very complex, and studies reveal that we are in need of much stronger data – this data is scheduled to become available through the Connected Vessels and Connected Machinery internal subprojects. Investing in and implementing well-proven technologies will allow TORM to concentrate its efforts on unlocking the potential that lies outside the boundaries of behavioral activities. TORM is also testing several innovative projects regarding optimizing machinery and use of the latest technology is prioritized in our effort to reduce the energy consumption of our fleet. TORM continues to focus on continuously improving the hull condition of its vessels. During 2020, three 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 the environmental impact and making good business sense. By maintaining its strong focus on fuel consumption reductions in 2020, TORM achieved fuel efficiency improvements of 12.8% compared to the 2015 baseline 22% Relative CO2 reduction since 2008 Our energy efficiency focus and operational performance is a vital part of our efforts to achieve our target of reducing CO2 emissions by 40% by 2030 compared to 2008 using the AER calculation method. In 2020 we had reduced our CO2 emissions by 22% since 2008. More information can be found in TORM’s ESG report. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 34 ENVIRONMENT – REPORTING CO2 emissions (ton) The 2020 greenhouse gas emissions (GHG) reporting covers scope 1 (direct emissions from own production) and scope 2 (emissions from own production but others’ emissions) of the Greenhouse Gas Protocol except for the activities listed below. Environmental data applies to owned vessels with its respective shares of ownership. Bareboat-in vessels are included while T/C-in vessels are excluded. Similarly, vessels on bareboat-out contracts are excluded while vessels on all other employments are included. Scope 1 Co2 emissions have been calculated based on the consumption of heavy fuel oil and marine gas oil according on IMO’s conversion factor for emission per ton. 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 CO2 emissions generated indirectly from operational activities at the TORM offices are calculated using Danish and World Resources Institute emission factors. Only offices where data is available are included. AER (g/dwtxnm) AER (g/dwtxnm) is a measure of efficiency using the total fuel consumption, distance travelled and design deadweight. The measure is defined as grams CO2 emissions per deadweight-ton-nautical mile. AER is affected by vessel size, speed, duration of waiting time and port stays. EEOI (g/cargoxnm) EEOI is a measure of efficiency using the total fuel consumption, distance travelled and cargo intake. The measure is defined as grams CO2 emissions per cargo- ton-nautical mile. EEOI is affected by vessel size, speed, cargo availability, duration of ballast voyages, waiting time and port stays. SOX emissions (ton) SOx emissions are calculated based on average sulfur content for the different fuel types. A comprehensive study for TORM by an independent specialist which compared the emissions from vessels fitted with exhaust gas cleaning systems (scrubbers) to emissions from vessels using low-sulfur fuel found that the sulfur emissions are reduced to an average of just 0.025% when using the exhaust gas cleaning system compared to 0.45% when using low sulfur fuel. Energy consumption (TJ) All fuel burned on board the vessels has been converted into energy based on fuel oil analysis results. Office electricity consumption (kWh) Electricity consumed indirectly in operational activities at the TORM offices excluding the London and Houston offices. Office water consumption (m3) Water consumed indirectly in operational activities at the TORM offices excluding London, Houston, Mumbai and New Delhi offices. Ballast Water Treatment Systems Ballast water is taken on by the vessel to stabilize trim and optimize operational efficiency. The discharge of ballast water may introduce non-native species into the recipient marine ecosystem. To alleviate this threat and to prevent the invasion of non-indigenous species in alien waters, TORM complies with the stipulations of the IMO Ballast Water Management Convention. TORM has installed Ballast Water Treatment Systems which eliminate this impact to 65% of its fleet. A further 13 vessels will have Ballast Water Treatment Systems installed by the end of 2022. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 35 GREENHOUSE GAS EMISSIONS DATA Thanks to the installation of exhaust gas cleaning systems, also known as scrubbers, on 62.5% of the fleet and the use of low-sulfur compliant fuel in 2020, TORM achieved a notable reduction in SOx emissions in 2020. Further information on TORM’s environmental efforts can be found in our ESG report which is located on TORM’s homepage. Indicator Greenhouse gas (GHG) emissions Direct GHG emissions (scope 1) Indirect GHG emissions (scope 2) CO2 emissions, AER – total fleet CO2 emissions, EEOI – total fleet Total GHG emissions Sulfur emissions SOx emissions Energy consumption Heavy fuel Low-sulfur heavy fuel Marine Gas Oil Total energy consumption for vessels Office consumption Electricity consumption Water consumption Ballast Water Unit 2020 2019 2018 Ton CO2 1,335,896 1,302,390 1,374,835 Ton CO2 g/dwtxnm g/cargoxnm 434 5.24 11.18 488 5.13 11.31 525 5.42 12.28 Ton CO2 1,336,330 1,302,878 1,375,360 Ton 1,760 18,112 18,367 Ton Ton Ton TJ kWh M3 170,907 349,056 375,196 174,836 12,174 80,865 17,665 55,371 16,921 152 64,255 17,747 445,093 702,850 823,844 3,268 - 33 - 16 % of fleet with Ballast Water Treatment Systems % 65 TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 36 SUPPORTING QUALITY EDUCATION employees and strengthen the overall competence level among seafarers in these regions. Foundation graduated from scholarships with the other current scholars still working hard in the 2nd and 3rd years at school. EDUCATION FOUNDATION IN THE PHILIPPINES TORM Philippines runs educational development actions through the TORM Philippines Education Foundation (TPEF) which has been helping Philippine communities since 2007. In 2020, two students supported by the TORM Philippines Education For the school year 2020/2021, the foundation supports 64 students (34% being females) across the Philippines of whom 35 are scholars at various colleges and universities and the remaining 29 are apprentices at maritime courses. 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 4 Quality 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 and where many of the Company’s seafarers come from. 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 4 Quality Education and cooperates with several educational institutions and universities internationally. In Denmark and Singapore, the efforts include offering internships and trainee and student assistant positions at TORM’s offices to students from Copenhagen Business School, the Copenhagen School of Marine Engineering & Technology Management and the Nanyang Technological University Singapore. The majority of TORM’s seafarers are of Indian or Filipino nationality, and the Company’s activities in these areas thus support potential future TORM TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 37 SUPPORTING QUALITY EDUCATION constructed and the facilities furnished with donations from the Company. to renovating the town hall and library at SAMPARC Bhaje. Through SAMPARC, TORM is sponsoring 36 students attending the school. Apart from tuition, TORM also assists them with their basic needs, such as school equipment and certain living expenses. The pandemic has restricted movements in India, however in November 2020, a team from TORM India visited SAMPARC Bhaje to celebrate the Deepawali Festival with the students. As a token, dresses, sweets, and masks were distributed to them. TORM has committed This will enhance the extra-curricular activities for the girls living there and augment the infrastructure for multiuse. This will be completed by March 2021. Earlier this year, TORM India pledged to construct three classrooms at Nalasopara, Mumbai. This project is expected to be completed in 2021 instead of the original timeline of September 2020 due to the COVID- 19 pandemic. In addition to the scholarships and apprenticeships, the education foundation also runs a number of social development initiatives. In 2020, this involved the provision and distribution of IT equipment, personal protective equipment, and school supplies. The beneficiaries of this equipment were four public elementary schools in Pandan, Catanduanes. TORM also has an Employee Committee (TEC) which also performs activities with an educational focus. In 2020, and in partnership with TPEF, TEC sent portable WIFI connections to 16 selected scholars who cannot afford one for themselves. An Internet connection ensures that our scholars have access to the rest of world and can complete their studies to the best of their ability. EDUCATION FOUNDATION IN INDIA In India, TORM has funded specific projects that it undertakes towards social causes. Since 2018, TORM India has engaged with three organizations to achieve this. Firstly, SAMPARC, an organization caring for disadvantaged children across India. Secondly, BAIF, an organization dedicated to upgrading and providing rural infrastructure. Lastly, Akshayshakti, which is dedicated to improving the lives of students, the development of women, and care for abandoned children, for various CSR initiatives. In previous years, TORM has supported the construction of the ZP Prathmik School in Zadgewadi in Kurkumbh, near Pune, India. The school was TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 38 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 that support this are outlined in TORM’s Business Principles. The Company’s safety policy is rooted in the rules and regulations issued by the Danish Maritime Occupational Health Service. INSPECTION AND AUDITS In order to maintain Company standards and exceed the targets set by its customers despite the COVID-19 pandemic, TORM developed a robust remote audit scheme at the beginning of 2020. With travel restrictions significantly reducing the possibilities of visiting our vessels, our first-rate tools and data collection processes made it possible to create a robust remote audit system. The number of visits has declined during the year, however by using the One TORM platform, the interaction with all stakeholders, internal as well as external, has shown that audits, inspections, change of flag etc. are achievable and successful despite the pandemic. SIRE INSPECTIONS The main body responsible for managing the overarching processes and requirements of these vessel inspections is OCIMF (Oil Companies International Marine Forum). In 2020, due to the travel restrictions caused by the COVID-19 pandemic, new avenues like remote documentation review and inspection were introduced by OCMIF. The challenges experienced in connection with physical SIRE (Ship Inspection Report Program) arrangements were mitigated by close co-operation among internal stakeholders as well as among oil majors. in 2020. The purpose of the program is to continuously strengthen TORM’s safety culture beyond compliance. TORM continued to conduct Safety Leadership courses for Senior Officers on board the Company’s vessels. Nine courses were conducted for all crew nationalities. One course was conducted onsite at the Manila office, while the remaining courses were conducted online due to the lockdown of offices. A total of 93 Senior Officers and 24 Junior Officers participated in 2020. In total, 699 officers have completed the course since it was introduced in 2017. Safety Leadership courses are mandatory, involving two-and-a-half days of 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. SAFETY DELTA We also continued with the Safety Delta tool, which was launched in 2018 and 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. All vessels have been scheduled to complete three Safety Delta cycles in 2020. 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 Since 2018, TORM has used a revised performance appraisal program as a way to systematically enhance work behavior and leadership to ensure excellent safety performance. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 39 HEALTH, SAFETY AND SECURITY Through the One TORM Safety Culture – driving resilience program, TORM has defined standards and expectations for excellent performance. A key element of leadership is to evaluate employee performance with a view to managing the development and motivating employees to develop. TORM believes this will facilitate the best possible means for developing performance as an individual and as a company. In 2020, TORM introduced a new induction framework for its Junior Officers as well as ratings. The induction program focuses on enhancing work behavior and safety leadership to ensure excellent performance for newly hired seafarers. A revised induction framework for Senior Officers is being implemented in January 2021. In 2020, TORM continued to promote the One TORM Safety Culture – driving resilience program. In the fourth quarter, we launched our new Virtual Senior Officers Conference program. The content of the Virtual Senior Officers concept is focused on Safety Culture, Mental Health, Work Culture, and Social Culture in order to support and ensure that TORM’s safety culture is anchored across the organization, ashore as well as on board the vessels. LOST TIME ACCIDENT FREQUENCY AND NEAR-MISS INCIDENTS 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 the standard practice among shipping companies. During 2020, TORM’s LTAF measure increased to 0.65 (2019: 0.42). by the vessel crew and the TORM emergency response team. The crew retreated to the citadel and no crew were harmed or injured during the incident. Each injury has been investigated and corrective measures have been taken as required. We have not detected any definitive causes of the declined performance. To improve safety especially during the pandemic, we have introduced new measures for TORM’s seafarers, e.g. virtual town halls. 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 proactively monitors and responds to risks. In 2020, TORM’s focus on near-miss incidents shifted from the number of near-miss incidents to the quality of the incident reports. The total for 2020 was 5,991. (2019: 6,099, 2018: 6,310) 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 2020, TORM experienced one incident when a vessel was boarded by pirates, two incidents when thieves or robbers came on board and two incidents of stowaways found on board the Company’s vessels. The pirates incident was handled professionally Throughout the year, the security situation and developments in the various risk areas have been monitored closely, and actions have been taken to safeguard TORM’s seafarers and vessels. The security situation in some regions has changed due to the COVID-19 pandemic. TORM has adapted its procedures to the changing threat levels across the areas called at by TORM vessels. The Company will continue to monitor the risk situation and pre-empt hijacking and robbery attempts by following security procedures and industry guidelines. LOST TIME ACCIDENT FREQUENCY (LTAF) Source: TORM 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.2 0.96 1.0 0.8 0.8 0.7 0.65 0.67 0.47 0.42 0.6 0.65 2015 2016 2017 2018 2019 2020 LTAF Target< TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 40 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. To drive high employee engagement and improve the sense of belonging, the company has been working on a strategy to modernize internal communication. In light of the pandemic, this strategy was accelerated and an employee app was introduced to all employees, both at sea and ashore. AT SEA In 2020, TORM continued its strategy to employ seafarers with different nationalities as the Company believes that diversity on board is an important foundation for cooperation, high performance, and a safe working environment. Throughout the year, TORM’s main priority was to relieve seafarers on time despite the heavy constraints caused by the COVID-19 pandemic. The One TORM platform proved its strength by enabling the organization to conduct crew changes better than the industry average, and by the end of 2020, the number of overdue seafarers on board was normalized. For further details, please refer to page 15. importantly, health. Despite the COVID-19 limitations, TORM continued its efforts to strengthen the relationship between seafarers and the shore-based organization. In 2020, this involved a transition from physical meetings and gatherings to a more virtual form which included seminars, trainings, and general gatherings. As part of TORM’s continued focus on the promotion of its employees, seafarers completed the “Promotion assessment training” prior to being promoted to the highest ranks. Officers visit one of TORM’s offices for an introduction and training with key stakeholders. In 2020, this was maintained through virtual tools. TORM maintains an ongoing focus on seafarer commitment and engagement. In 2020, the retention rate for Senior Officers remained 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). Following a pilot in 2019, TORM rolled out the Well at TORM program in 2020. The program focuses on well- being by increasing engagement, mental resilience, physical health, and embracing socialization among crew members. During these times, focus was on supporting both staff on board as well as our seafarers at home and their relatives, with all aspects of such unprecedented times. This support included both financial, and most At the end of 2020, TORM employed a total of 3,023 seafarers of whom 108 were permanently employed, with the remaining seafarers being on time-bound contracts. GEOGRAPHICAL DISTRIBUTION OF SEAFARERS IN % Total number of seafarers at the end of 2020: 3,023 Denmark Croatia 4% 5% India 41% 50% The Philippines ASHORE In 2020, 97% of all shore-based employees responded to the annual employee motivation and satisfaction survey. This is an increase on last year’s rate of 95%. TORM continued the survey introduced in 2019 which provides real time data. The outcome of the survey showed the continuous high engagement among our employees across categories ranging from engagement, freedom of opinion, management support, work environment and safety. In order to strengthen and develop TORM’s leading position as the Reference Company, continuous development is a key criterion for success. On this background leadership training has been identified as a focus area for 2021. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 41 EMPLOYEES The high scores were evenly spread across divisions and locations which is a testament to the strength of the unified One TORM approach. The overall outcome of the survey improved slightly on the previous year and positions TORM among the top 10% of companies across all industries using the same platform. TORM’s ambition of investing in this engagement survey combined with such a high response rate is to help the Company improve, build the culture needed to fulfill the Company’s strategy and develop initiatives that matter to the employees. By the end of 2020, the retention rate for all shore-based employees was 92%, the same rate as in 2019. In 2020, TORM included a number of questions to understand how our shore-based employees cope with the changes to work conditions caused by the COVID- 19 pandemic. The survey showed that the measures introduced were highly appreciated by the employees. TORM aims to attract and retain the best employees by exemplifying the four values of the TORM Leadership Philosophy and by ensuring that the Company’s leaders motivate their employees. At the end of 2020, the shore-based organization had 345 employees: 141 in Hellerup, 136 in Mumbai, 4 in New Delhi, 34 in Manila, 3 in Cebu, 17 in Singapore, 9 in Houston, and 1 in London. DIVERSITY TORM has an obligation to develop the Company’s talent pool irrespective of gender, religion, sexuality, nationality, ethnicity or disabilities etc. As stated in TORM’s Business Principles, the Company works towards a diverse workforce in every aspect and an inclusive environment that respects and supports all our people and helps improve business performance. TORM believes that diverse teams led by diverse leaders deliver better business performance. The Company provides equal opportunity in recruitment, career development, promotion, training and rewards for all employees. In 2020, TORM continued its participation in and was driving the aim of Danish Shipping’s work group “More Women at Sea”. TORM has incorporated the 10 recommendations into processes and procedures as best practice. TORM actively monitors the representation of females in the workforce and in leadership positions. At the end of 2020, the proportion of females in the shore-based workforce was 35.8%, while women in leadership positions, defined as having one or more direct reports, constituted 20.9%. By 2021, the Company aims to have 35% women in the shore-based workforce in line with the industry average, and 25% women in leadership positions. Additionally, TORM has a target for 2030 of 35%. At the end of 2020, the Board of Directors consisted of four male members and one female member elected at the Annual General Meeting. In 2020, the Board of Directors fulfilled its target of 20% female Board members (1 out of 5). The Company embraces diversity in every aspect, and it has been stated as a fundamental part of TORM’s Business Principles since 2012. The Company will continue on this path at all levels of the Company. EMPLOYEE GENDER DIVERSITY Permanently employed 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 five Non-Executive Directors are not included as employees of the Group. ⁾ Male Female 4 3 147 173 327 1 - 11 118 130 TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 42 HUMAN RIGHTS ANTI-CORRUPTION AND ANTI-BRIBERY Corruption and bribery impede global trade and can restrict non-corrupt companies’ access to 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. 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. It is TORM’s policy to conduct all business in an honest and ethical manner. TORM has a “zero tolerance” 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. TORM has three elements which it leverages to continue a high level of transparency and accountability of its anti-corruption and anti-bribery policy. One being strict employee guidelines and processes to prevent and manage anti-corruption and anti-bribery, the second being specific reporting processes, and the last being compulsory e-learning courses. TORM further complies with SOX regulations according to which employees must confirm adherence to the policies and guidelines, as well as training completion, ensuring 100% compliance. No further corrective action has been required. Since 2011 when TORM co-founded the Maritime Anti- Corruption Network (MACN), TORM has been taking a joint stand with the industry against the request for facilitation payments that exists in many parts of the world where TORM conducts business. Best practice is 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 in 2020 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 2021. Since 2006, TORM’s Board of Directors has provided a whistleblower facility with an independent lawyer as part of the internal control system. In 2020, the whistleblower facility received three notifications, two of which were investigated and closed without any critique or requirements for new measures. The third claim is under investigation with the whistleblower service facilitating a dialogue between TORM Management and the whistleblower, HUMAN RIGHTS With the TORM Leadership Philosophy, TORM’s Business Principles and commitment to the UN Global Compact, TORM is committed to respecting 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 are audited and certified as required under the Maritime Labor Convention of 2006. TORM respects employees’ right to associate freely, to join – or not to 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 2020. TORM ANNUAL REPORT 2020 OUR RESPONSIBILITY 43 FINANCIAL REVIEW 2020 FINANCIAL REVIEW FOR THE YEAR ENDED 31 DECEMBER 2020 TORM’s 2020 results were positively impacted by our strong commercial performance and TORM generated industry-leading results for our investors. TORM achieved an adjusted return on invested capital (ROIC) of 9.3%, generated cash from operations of USD 236m and was able to return USD 72m to its shareholders during the year while maintaining a solid capital structure. Kim Balle, CFO In 2020, total revenue was USD 747m compared to USD 693m in 2019, and TCE earnings increased from USD 425m to USD 520m, a total increase of 22%. The increase in TCE earnings was primarily attributable to a stronger freight market in 2020 compared to 2019. The increase was achieved on the basis of an approximately 20% higher TCE per day and 2% more available earning days (509 days) in 2020 compared to 2019, underlining the strong performance. FINANCIAL RESULTS In 2020, TORM recorded a net profit of USD 88m compared to USD 166m in 2019 resulting in earnings per share (EPS) of USD 1.19 compared to earnings per share (EPS) of USD 2.24 in 2019. When excluding the impact of impairment in both 2020 and 2019, net profit reached USD 94m in 2020, an increase of USD 48m from USD 46m in 2019. The higher result in 2020 was mainly due to increasing freight rates following a strong freight market for product tankers in the first two quarters of 2020. In 2020, operating profit decreased by USD 67m to USD 139m, primarily reflecting the impairment reversal in 2019 of USD 120m, which was partly offset by the higher revenue. TORM ANNUAL REPORT 2020 REVIEW & RISK 44 Review & Risk Capital (RoIC) decreased by 4.8% points from 12.6% to 7.8%. Adjusted RoIC in 2020 reached 9.3%, an increase of 4.1%-points from 2019. mainly due to the sale of vessels in 2020 and decreasing broker values. In 2020, the Net Asset Value per share based on broker value decreased to USD 10.8 from USD 13.6 in 2019 FINANCIAL REVIEW 2020 TORM’s total assets decreased by USD 5m in 2020 to USD 1,999m. The carrying amount of vessels, capitalized dry-docking and prepayments on vessels amounted to USD 1,734m compared to USD 1,770m in 2019. During the year, TORM sold eight older vessels, covering two LR2s and six MRs. In addition, TORM purchased two LR2 newbuilding and two 2010-built MR vessels. One MR vessel was delivered in 2020 and one was delivered in January 2021. The two LR2 newbuilding are scheduled to be delivered in the fourth quarter of 2021 and the first quarter of 2022. Further, TORM took delivery of four vessels under its newbuilding program in 2020. In 2020, total equity increased by USD 9m to USD 1,017m from USD 1,008m in 2019. The increase primarily relates to the positive net profit result for the period and is offset by a dividend pay-out. The market value adjustments on derivatives held for hedge accounting had a negative effect on equity of USD 21m, mainly related to the decreasing market values of TORM’s interest rate swaps. The Return on Equity (RoE) decreased from 17.9% in 2019 to 8.7% in 2020, due to impairment reversal of USD 120m in 2019. TORM’s total liabilities decreased by USD 15m to USD 981m in 2020 and borrowings decreased by USD 13m to USD 842m. 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 Key figures Invested capital in USDm Net Asset Value per share (NAV) (USD) Return on Invested Capital (RoIC) In 2020, invested capital decreased by USD 67m to USD 1,719m as of 31 December 2020, mainly due to the sale of vessels in 2020. In addition, Return on Invested Adjusted RoIC Return on Equity (RoE) Basic earnings per share (EPS) TORM ANNUAL REPORT 2020 2020 2019 Change 747 520 341 272 139 -49 88 1,755 1,999 1,017 981 1,719 10.8 7.8% 9.3% 8.7% 1.19 693 425 252 202 206 -39 166 1,788 2,004 1,008 996 1,786 13.6 54 95 89 70 -67 -10 -78 -33 -5 9 -15 -67 -2.8 12.6% -4.8%points 5.2% 4.1%points 17.9% -9.2%points 2.24 -1.05 REVIEW & RISK 45 FINANCIAL REVIEW 2020 LIQUIDITY AND CASH FLOW Total cash and cash equivalents, including restricted cash, amounted to USD 136m at the end of 2020, resulting in a net increase in cash and cash equivalents, including restricted cash, for the year of USD 64m compared to 2019. As of 31 December 2020, TORM had closed the refinancing of four term loans and an existing revolving credit facility, the term loans and the revolving credit facility were replaced by two separate term facilities and a new revolving credit facility covering up to USD 496m. Furthermore, TORM refinanced its existing facility with Danish Ship Finance with a new facility of USD 180m in senior secured debt covering ten vessels. Lastly, TORM has obtained financing of USD 12m related to the installation of scrubbers and Ballast Water Treatment Systems on four vessels. Following the refinancing, TORM does not have any material debt maturities until 2026, which supports the Company’s financial flexibility. As of 31 December 2020, TORM had CAPEX commitments of USD 101m related to the outstanding two LR2 new buildings under construction and one MR second-hand vessel to be delivered. In 2020, net cash inflow from operating activities increased from USD 171m in 2019 to USD 236m due to the higher freight rates combined with lower bunkers, receivables and payables. Net cash outflow from investing activities amounted to USD 120m in 2020 compared to USD 335m in 2019. The cash outflow was used for tangible fixed assets, primarily related to the newbuilding delivered during 2020. CAPEX investments on scrubbers decreased in 2020 compared with 2019 and contributed to the decrease in investment activities. The decrease was further enhanced by the sale of eight vessels during 2020. Furthermore, total restricted cash increased by USD 30m, mainly due to initial margin calls. Net cash outflow from financing activities amounted to USD 83m in 2020 compared to a cash inflow of USD 96m in 2019. Repayment on borrowings amounted to USD 746m in connection with scheduled repayments and vessel sales during the year. Additional borrowings generated a cash inflow of USD 734m. TORM paid out dividends amounting to USD 71m during 2020. 236m Cash flow from operating activities -120m Cash flow from investing activities -83m Cash flow from financing activities TORM ANNUAL REPORT 2020 REVIEW & RISK 46 FINANCIAL REVIEW 2020 TANKER FLEET Revenue in the tanker fleet increased by 8% to USD 747m in 2020, up from USD 693m in 2019, and TCE earnings increased by 22% to USD 520m from USD 425m in 2019. The increase in TCE earnings was primarily due to a stronger product tanker freight market in 2020 compared to 2019. The OPEC+ price war and the COVID-19 pandemic generated considerable volatility in the product tanker market, temporarily sending freight rates to all-time highs. An unprecedented decline in oil demand and an increase in product stockpiles affected trade patterns and led to a significant share of the fleet being tied up in floating storage. For the LR2s, the average TCE rates increased by 35% between 2019 and 2020. The increasing freight rates is partly offset by a decrease of 10% in available earning days resulting in an increase in total earnings from 2019 to 2020 of USD 17m. In 2020, the available earning days of MR vessels increased by 793 days, equalling an increase of 4% compared to 2019. The TCE rates increased by 14%, resulting in total earnings of USD 336m, an increase of USD 55m. The average TCE rates for the LR1s were 34% higher than in 2019. The increasing freight rates combined with an increase of 50% in available earning days. In combination, this resulted in a total increase in earnings of USD 38m from 2019 to 2020. For the Handysize vessels, the TCE rates decreased by 10% in 2020 compared to 2019. With a significant decrease in available earning days of 59% in 2020 due to vessel sales in 2019 the total earnings for the Handysize vessels ended at USD 9m, a decrease of USD 15m. CHANGE IN TIME CHARTER EQUIVALENT EARNINGS IN THE TANKER FLEET USDm Time charter equivalent earnings 2019 Change in number of earning days Change in freight rates Other Time charter equivalent earnings 2020 TORM ANNUAL REPORT 2020 Handysize MR 24.2 281.4 -14.3 -1.0 - 12.6 41.8 -0.2 LR1 36.5 18.4 18.5 1.5 LR2 82.8 -7.9 26.2 -1.0 Total 424.9 8.8 85.5 0.3 8.9 335.6 74.9 100.1 519.5 REVIEW & RISK 47 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 TCE per earning day ² ¹ ² ⁾ 2019 % change Full year Q1 Q2 Q3 Q4 Full year full year 2020 4,198 1,019 1,002 3,907 928 291 91 911 91 901 886 15 873 873 - 3,795 3,598 197 21,783 31,013 37,677 21,495 18,510 29,030 19,730 29,108 32,732 23,854 19,632 26,637 2,153 2,153 - 779 779 - 812 812 - 811 811 - 826 826 - 3,228 3,228 - 17,912 25,421 30,116 20,703 13,081 22,424 17,102 24,329 31,655 20,629 14,931 22,839 17,736 16,145 1,591 4,703 3,868 835 4,791 3,997 794 4,663 3,900 763 4,372 18,529 3,675 15,440 697 3,089 16,063 22,974 23,297 15,259 11,082 18,229 15,840 22,461 23,012 15,077 11,243 18,098 1,620 1,620 - 183 183 - 182 182 - 183 183 - 116 116 - 664 664 - 14,945 19,535 15,872 7,193 9,051 13,116 14,965 20,649 15,270 7,628 8,257 13,416 25,707 23,825 1,882 6,684 5,758 926 6,787 5,902 885 6,558 5,780 778 6,187 26,216 5,490 22,930 697 3,286 16,875 24,116 25,528 16,220 11,717 19,619 16,526 23,643 25,274 16,762 12,863 19,800 -10% -8% -32% 33% 35% 50% 50% - 25% 34% 4% -4% 94% 13% 14% -59% -59% - -12% -10% 2% -4% 75% 16% 20% Spot rate = Time Charter Equivalent Earnings for all charters with less than six months’ duration = Gross freight income less bunker, commissions and port expenses. TCE = Time Charter Equivalent Earnings = Gross freight income less bunker, commissions and port expenses. ⁾ ⁾ TORM ANNUAL REPORT 2020 ⁾ REVIEW & RISK 48 FINANCIAL REVIEW 2020 OPERATION OF VESSELS 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. Operating expenses (OPEX) for the fleet increased by USD 5m to USD 178m in 2020 compared to USD 173m in 2019, mainly due to an increasing number of operating days. On a per-day-basis, OPEX remained at the same level in 2020 compared to 2019. The total fleet of owned vessels had 1,332 off-hire and dry-docking days, corresponding to 5% of the operating days in 2020. This compares to 1,267 off- hire days in 2019 or 5% of the number of operating days. CHANGE IN OPERATING EXPENSES USDm Operating expenses 2019 Change in operating days Change in operating expenses per day Other Operating expenses 2020 OPERATING DATA USD/day Operating expenses per operating day in 2019 Operating expenses per operating day in 2020 Change in the operating expenses per operating day in % Operating days in 2020 ¹ Offhire Dry-docking ⁾ Bareboat contracts in/out Vessels chartered-in Available earning days 2020 ¹ Including bareboat charters. ⁾ TORM ANNUAL REPORT 2020 Handysize MR 10.4 117.6 -5.8 0.0 -0.0 7.9 -1.2 0.0 4.6 124.3 LR1 16.9 4.8 -0.8 -0.0 20.9 LR2 Total 28.1 -1.9 2.4 0.1 173.0 5.0 0.4 0.1 28.7 178.5 Handysize 6,124 6,163 1% MR 6,350 6,287 -1% LR1 6,597 6,355 -4% LR2 Total 6,427 7,013 9% 6,371 6,398 0% 740 19,763 3,287 4,088 27,878 -7 -69 - - -266 -659 -3,398 3,089 -27 -32 - - -164 -108 -218 197 -464 -868 -3,616 3,286 664 18,529 3,228 3,795 26,216 ADMINISTRATIVE EXPENSES AND OTHER OPERATING EXPENSES Total administrative expenses and other operating expenses amounted to USD 70m in 2020 compared to USD 51m in 2019. The increase was mainly due to higher number of employees and a one-off provision covering an exposure related to cargo claims of USD 18m. FINANCIAL INCOME AND EXPENSES Net financial expenses in 2020 were USD 49m compared to USD 39m in 2019. The increase in borrowings obtained during the year and write-off of capitalized bank fees relating to the refinanced facilities increased the net financial expenses in 2020. TAX Tax for the year amounted to an expense of USD 1m compared to an expense of USD 1m in 2019. REVIEW & RISK 49 FINANCIAL REVIEW 2020 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 in 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 2020, Management tested the carrying amount of its fleet for impairment within 3 CGUs, being the Main Fleet (LR2/LR1 and MR vessels) and the two Handysize vessels. In 2020, the recoverable amount of the Main Fleet and the Handy vessels was based on its value in use. Based on this review, Management concluded that: • Assets within the Main Fleet were not impaired as the value in use was in line with the carrying amount. The two Handy vessels were impaired with USD 5.5m in total as the calculated value in use was lower than the carrying amount on a vessel by vessel basis • The assessment of the value in use of the Main Fleet and the Handy vessels was based on the present value of the expected future cash flows. The freight rate estimates in the period 2021-2023 are based on the Company’s business plans. Beyond 2023, the freight rates are based on the Company’s 10-year historical average rates adjusted for the anticipated beneficial impact of scrubber installations. The impairment testing is sensitive to changes in the key assumptions applied. Note 8 provides additional details of the impairment assessment as well as sensitivity analysis in respect of freight and discount rates. 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 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 primarily bases its financial decisions on expected TCE rates rather than expected revenue. The analysis of revenue is therefore primarily based on developments in TCE earnings. TORM ANNUAL REPORT 2020 REVIEW & RISK 50 FINANCIAL REVIEW 2020 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 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 freight 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 that 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. ACQUISITIONS AND CAPITAL EXPENDITURE As of 31 December 2020, TORM had two LR2 newbuildings under construction and one MR second- hand vessel to be delivered. The MR second-hand (TORM Philippines) was delivered in January 2021, and the two LR2 newbuildings are expected to be delivered in Q4 2021 and Q1 2022. The value of the prepayments included in the total asset value amounts to USD 12m compared to USD 95m in 2019. The decrease is due to the delivery of one MR second- hand vessel in January 2021, compared with two LR1 and one MR vessels delivered at the beginning of January 2020. TORM ANNUAL REPORT 2020 REVIEW & RISK 51 FINANCIAL REVIEW 2020 RETURNS TO SHAREHOLDERS In line with the Company’s semi-annual Distribution Policy TORM made a total shareholder distribution of USD 72.0m in 2020. In the first half of 2020, TORM made a total shareholder distribution of USD 8.8m. The distribution related to a dividend distribution of USD 7.4m for the second half of 2019, equivalent to USD 0.10 per share, and a repurchase of 180,500 A-shares in the open market. In the second half of 2020, TORM paid an ordinary dividend of USD 63.2m for the first half of 2020, equivalent to USD 0.85 per share. The Board of Directors has decided to recommend that no dividends be paid for the second half of 2020. GOING CONCERN As of 31 December 2020, TORM’s available liquidity including undrawn and committed facilities was USD 267.8m, including a total cash position of USD 135.6m (including restricted cash of USD 46.1m). TORM’s net interest-bearing debt was USD 713.1m, and the net debt loan-to-value ratio was 51%. 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 20 to the financial statements. The principal risks and uncertainties facing the Group are set out on pages 54-58 and details on the refinancing are described in note 2. 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 in its loan facilities, details of which are available in note 2 to the financial statements. A key element for TORM’s financial performance in the going concern period relates to the development of the COVID-19 pandemic and the associated lockdowns in the different economies. TORM’s base case assumes an economic rebound during the second half of 2021, however neither freight rates nor vessel values will reach 2020 levels. In the base case, TORM has sufficient liquidity and headroom above all the covenant limits. TORM performs sensitivity calculations to reflect downside 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 downside scenarios cover the principal risks and uncertainties facing the Group as set out on pages 57-58 and include different distressed outlook for the product tanker market. In a low case scenario management have assumed freight rates that on average are 15% below those in the base case and a similar decline in vessel values. In the low case scenario there remains sufficient headroom on liquidity and covenants. In a stress case scenario management have further stressed the freight rates to the lowest rolling four quarter average since 2000. In the stress case scenario there remains sufficient liquidity, but limited headroom on covenants. The Board of Directors has considered the Group’s cash flow forecasts and the expected compliance with the Company’s financial covenants for the period until 31 March 2022. The Group’s cash flow forecast and expected covenant compliance is based on the Board approved business plan. Based on this review, the Board of Directors has a reasonable expectation that taking reasonably possible changes in trading performance and vessel valuations into account, the Group will be able to continue the operational existence and comply with its financial covenants for the next 12 months. Accordingly, the Group continues to adopt the going concern basis in preparing its financial statements. LONG-TERM VIABILITY STATEMENT In accordance with provision 31 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 ending 31 December 2023. This period has been selected for the following reasons: • Three years is generally in line with the forecast horizon for external equity analysts covering the shipping sector TORM ANNUAL REPORT 2020 REVIEW & RISK 52 FINANCIAL REVIEW 2020 • TORM will have paid its commitments relating to the Company’s remaining newbuildings and will as of 31 December 2023 not have any currently known off-balance sheet liabilities • The current key uncertainty in the product tanker market relating to the rebound of global oil demand is expected to be determined by the development of the COVID-19 pandemic and is expected to be resolved within the three-year horizon 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 for: • Demand-supply picture in the product tanker sector including the expected vessel values and freight rates achieved by the Group • Development of the fleet • Operating and administrative expenses • Capital expenditures covering newbuildings and maintenance of the existing fleet including installations of scrubbers and Ballast Water Treatment Systems • Changes in 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, further details of which are provided in note 8 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 then 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. Management has assumed that low case and stress case freight rate assumptions as per the going concern assessment continue throughout the viability period and have further sensitized the vessel values downward over the period to reflect a continued downturn. In the base and low case scenario sufficient liquidity and headroom on all covenants are maintained. In the stress case scenario management actions will be required to maintain compliance with covenants and 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 going concern period, which would require mitigating actions, including cost savings, sale of vessels or increased leverage which are considered within management’s control and achievable. Management would also consider obtaining appropriate waivers and although they would be confident of obtaining them these are not within management’s control. The Board of Directors monitors if TORM is moving towards a covenant breach in order to incorporate any mitigating actions in due course on an ongoing basis. Based on the sensitivity analysis, the Board of Directors does not currently expect that TORM will breach its financial covenants or experience a liquidity shortfall over the three-year forecast period. The Board of Directors has also considered the longer- term prospects of the Group beyond the three-year forecast viability horizon. In doing so, the Directors have taken the longer term risks and opportunities for the Group discussed elsewhere in the strategic report and the potential impact of economic volatility, new regulations, technological disruption and general changes in the utilization of energy sources into consideration. Based on this assessment and taking the current capital structure and the Company’s operational platform into account, the Directors believe that the Company is well positioned both to respond to these risks and to take advantage of any positive market developments for a period beyond the three-year forecast horizon. On behalf of TORM plc Mr. Kim Balle, Chief Financial Officer, TORM A/S 1 March 2021 TORM ANNUAL REPORT 2020 REVIEW & RISK 53 RISK MANAGEMENT Prolonged periods of subdued freight rates and volatile vessel values remain a risk for TORM. A solid capital structure ensures that TORM is well-positioned to pursue opportunities and face down-side risks. Uncertainty persists over how climate change and the related legislation will impact TORM. 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 deciding how best to manage and mitigate them. TORM believes that a strong risk management framework is vital to protect the Company. 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. TORM’s Risk Assessment Process Risk types Risk assessment is made of the potential financial, reputational and compliance impact of individual risks. Risks are assessed as to whether they are of a Short-term, Recurring or Long- term (Emerging Risks) nature. Risk appetite The Senior Management Team and the Risk Committee decide on TORM’s risk appetite for the Company’s principal risk exposures. The objective is for TORM and its shareholders to be 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 desired. TORM’S CURRENT RISK PROFILE The Board of Directors and the Senior Management Team confirm that they have carried out a robust assessment, under the Corporate Governance Code, of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity and reputation. The majority of risks are repeated from last year, albeit with slight adjustments. The key aspects of TORM’s current risk profile are summarized below: Coming into 2021, TORM has experienced continued volatility in the product tanker market. Given TORM’s spot-orientated trading strategy, the Company is exposed to potentially adverse market conditions including those relating to the impact on freight rates caused by the COVID-19 pandemic; consequently, the market risk remains high. To mitigate the risk TORM has taken on more than usual coverage via time- charters and forward freight agreements. Market risks associated with unexpected changes in vessel values have a significant impact on the value of TORM. Potential additional environmental legislation may lead to a decline in the price curve of vessel values with particular vulnerability for older vessels. TORM has focused on sustaining a healthy capital structure to maintain adequate flexibility in the asset market. TORM has proven its ability to execute in the second-hand and newbuilding markets. Risks within the Company’s immediate sphere of control, including legal compliance and oil major approval, have remained stable at a low level due to strong continued focus and efficient controls. TORM ANNUAL REPORT 2020 REVIEW & RISK 54 RISK MANAGEMENT The risk of a severe vessel accident such as an environmental disaster or material damage and personal injury is deemed to be at the same level as last year. TORM operates in high-risk geographies with politically motivated terrorism and piracy. The risk became a reality in November 2020 when TORM Alexandra was boarded by pirates in the Gulf of Guinea. The crew followed TORM’s safety procedures and the situation was controlled without injuries. TORM maintains a Trading Restrictions Committee with oversight and mandate to advise vessels and Management on how best to avoid and mitigate security threats. The liquidity risks are a consequence of the cyclical nature of the shipping industry that can put pressure on TORM’s liquidity and hence result in a breach of covenants if not managed to withstand periods of low profitability. This risk is deemed high, and mitigating activities include TORM’s conservative financial leverage and strong focus on liquidity requirements. The terms and sources of funding risk are the inability to obtain equity or debt financing on attractive terms due to a narrower range of banks and investors being willing to support the shipping industry with the usual funding structures. Banks and investors are increasingly focused on exposures with a perceived link to CO2 emissions. This risk is currently considered to be relatively low but is expected to develop as new regulation are introduced over the coming years. IT and cyber security has been included as a top risk. The risk is system unavailability and data loss due to cyber attack. Increasing interconnectivity and “commercialization” of cyber crime are driving a higher frequency and severity of incidents. In addition to damages paid due to loss of customer data and the impact of business interruption, loss of reputation can be a significant cause of financial loss for businesses after a cyber incident. The cyber risk continues to be acknowledged by TORM as a business risk and not only an IT risk. Mitigating activities include business continuity plans and assessment of critical systems. TORM considers the risk to be limited due to its business model and current mitigating activities. TOP RISK HEAT MAP TORM TOP RISKS WITHIN THE COMING 12 MONTHS – POST-MITIGATION ACTIVITIES: 2019 2020 Unchanged Worst case Major s e c n e u q e s n o C Moderate E Minor Min. effect I D G J D H C A A B F A Tanker freight rates B Bunker price C Asset management risk D Oil major approval E Severe vessel accident F Maritime safety threats G Legal compliance H IT and cyber security I Liquidity risk J Terms and sources of funding Rare Unlikely Possible Likely Frequent Likelihood TORM ANNUAL REPORT 2020 REVIEW & RISK 55 RISK MANAGEMENT TORM has removed the risk of adverse developments in technical costs from the top risks as the risk is deemed limited due to TORM’s proven ability to maintain stable operating costs. A detailed description of each of the top risks is available on the next page. For a more in-depth description of mandates and sensitivity analyses of the various risks, please see note 20 on pages 140-143. EMERGING RISKS As part of the Enterprise Risk Management process, long-term (emerging) risks are reported to the Risk Committee, facilitating a discussion and evaluation of mitigating activities to reduce the uncertainty. These are often initiatives with a long-term impact. TORM considers the main long-term risks to be: Climate change Like other ship operators TORM is subject to the impact of climate change on its business model. Independent studies generally forecast that demand for the products that TORM transports will remain robust over the short to medium term. However, it is difficult to predict the longer-term future given the wide range of potential outcomes associated with the many variables and varying emissions pathways. At the more extreme end, the consequences are potentially severe, with society likely to face transformational change across all scenarios. This makes climate change and the risk faced by TORM broad in nature. Climate change is likely to have far- reaching consequences for TORM in the long term and to impact several areas of core business activities. Below we have outlined additional emerging risk. All have elements directly related to climate change. management risk and is likely to benefit from its strong operating model when transitioning to new technologies. Peak oil demand Industry-changing risks such as the substitution of oil for other energy sources and technological changes have the possibility to alter the landscape of the markets that TORM serves and as such radically change transportation patterns. In the longer term, this will likely have a negative impact on the tanker markets. The time at which oil demand will peak is highly uncertain. According to several prominent oil market observers, such as the International Energy Agency and WoodMackenzie, there is little reason to believe that once it does peak, oil demand will fall sharply. However, TORM believes that the demand for oil and oil-related products will phase out over a longer period of time, which leaves TORM with time to adjust its business. Technology of vessels External requirements from society to operate more environmentally friendly vessels pose a transition risk to TORM and other vessel owners as existing vessels may become obsolete earlier than initially expected. Potential changes to regulation such as a CO2 tax or maximum emission requirements will affect the need for a transition towards cleaner technologies. TORM’s stakeholders are expected to demand more clean vessels. This demand for transition will put pressure on vessel values and may render vessels redundant. TORM is already focusing on how to treat this asset Insufficient access to financing The challenges of new regulation, such as the IMO 2020 sulfur regulation, IMO’s commitment to a 50% reduction of CO2 emissions and other current initiatives, such as the EU Taxonomy are probably just the first steps. Such regulation may result in a reduced ability to obtain equity or debt financing and may affect pricing, due to a potential reallocation of funds with banks and investors available to shipping. Equity investors are selective and are increasingly seeking “green” investments. Banks have adopted the “Poseidon Principles” to ensure that lenders disclose and confront climate change. Navigating these new complex issues may turn out to be an opportunity for TORM to position itself as a Reference Company with an attractive profile for investors and banks. As TORM’s emerging risks develop and become more tangible to the industry, they may impact several of the top risks outlined in the top risk heat map. In particular, reduction or acceleration of peak oil demand could impact the risk related to freight rates. The technology of vessels could impact the risk related to asset management as vessel values may decline, and the trend towards TORM’s stakeholder becoming increasingly affected by climate change may increase the risk of insufficient access to financing. TORM ANNUAL REPORT 2020 REVIEW & RISK 56 RISK MANAGEMENT Description of top risks Industry or market-related risks Operational risks Tanker freight rate Bunker price Asset Management Oil major approval Severe vessel accident Maritime safety threats Sustained low tanker freight rates or inability to predict and respond timely and accurately to freight rate developments Unexpected bunker price increases that are not covered by corresponding freight rate increases TORM’s profitability will be negatively impacted in case of a distressed product tanker market. Vulnerability to a sustained increase in the bunker price and pass-through to charterers may not have an immediate effect, meaning that TORM may bear the full effect of price increases. Unexpected value depreciation of vessels, the most exposed vessels are older vessels due to new legislation driven by the climate change agenda A drop in TORMs net asset value, which can lead to a requirement from banks to provide additional security. TORM is also exposed to cyclical asset prices and contracted at too high prices A sudden and unexpected breach in quality requirements of a single vessel or continuous decrease in quality across the fleet A severe vessel accident such as an environmental disaster or material damage or personal injury. A maritime venture has inherent hazards. Events such as piracy and terrorism are considered main security risks The risk of a partial ban of the TORM tanker fleet by one or more oil majors. TORM’s involvement in an environmental disaster will damage the Company’s reputation and impair the tradability with oil majors. Events such as piracy and terrorism could result in kidnapping of or injury to seafarers or vessel damage. TORM’s spot-oriented strategy limits possible mitigation. Time charter-outs and FFA coverage are considered when terms and pricing are deemed attractive. In general, TORM does not hedge future bunker expenses. In case freight income is fixed, TORM hedges future bunker exposures With a conservative capital structure, focus on loan-to-value and close view of the market TORM maintains flexibility and an ability to act on the asset market TORM’s integrated platform with in-house safety, technical and operational staff secures continued focus on quality and high vetting standards Disaster recovery plans for emergency situations are in place. Ongoing safety resilience program to enhance safety culture, including officers being trained as “safety ambassadors”. TORM’s Trading Restrictions Committee has oversight of security threats and decides how best to avoid and mitigate the risk. TORM follows all industry best practices and has procedures in case of an incident. Risk Potential impact Mitigating activities TORM ANNUAL REPORT 2020 REVIEW & RISK 57 RISK MANAGEMENT Description of top risks Compliance risks Financial risks Legal compliance IT and cyber security Liquidity risk Terms and sources of funding Legal or policy non-compliance or ethical misconduct. The risk consists of competition law, corruption, fraud and sanctions. System unavailability and data loss due to cyber attack due to increasing interconnectivity and “commercialization” of cyber crime are driving higher frequency and severity of incidents Liquidity risk is driven by financial gearing, liquidity reserve, distribution policy, maintenance requirements, fleet employment strategy and required vessel investments. Inability to obtain equity or debt financing on attractive terms due to a narrower range of banks and investors being willing to support the shipping industry with the usual funding structures. TORM’s inability to comply with rules and regulations could lead to penalties, reputational damage or the inability to operate in key markets. Business interruption and disruption to trading resulting in loss of business or theft of money. Sustained low freight rates or another unforeseen adverse development could jeopardize the liquidity, lead to covenant breaches and hence inflict costs and lack of operational maneuverability. Inability to grow the business or maintain the current average fleet age. TORM’s long-term profitability will be negatively impacted. Compliance and awareness training is mandatory for all employees. In connection with sanctions, a know- your-customer screening system is implemented. Business continuity plans implemented covering the entire group. Plan includes assessment and contingency of critical systems in case of business interruption Conservative financial leverage guided by short-and long-term cash flow forecasting with stress-testing of critical assumptions. Constantly maintaining a tangible catalogue of available liquidity enhancing initiatives TORM has a conservative capital structure profile and has access to multiple funding sources. TORM has no larger debt repayments until 2026 Risk Potential impact Mitigating activities TORM ANNUAL REPORT 2020 REVIEW & RISK 58 ENGAGEMENT AND DECISION-MAKING The following information comprises our section 172 statement, setting out how, in performing their duties over the course of the year, Directors have had regard to the matters set out in section 172(1) (a-f) of the UK Companies Act 2006. We have integrated our reporting on how our stakeholders have been considered in terms of our business model and governance throughout this report. The Board of Directors of TORM considers, both individually and together, that they have acted in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole during the year ended 31 December 2020 Who? How? Outcomes and actions Why is it important to engage How did Management and Directors engage? What was the impact of the engagement? SHAREHOLDERS Transparent and open shareholder communication is expected to support the price of TORM shares and future funding opportunities in the capital markets. TORM’s integrated operating model without perceived or actual leakage and a continuous focus on RoIC generation is developed with the aim of maximizing the long-term value for TORM’s shareholders. EMPLOYEES TORM’s employees are fundamental to enable the Company to do business, and their continued engagement is an integral part of the decision-making across the organization. The Board supports an open dialogue between the Board and the workforce. TORM regards responsible behavior as a central part of the Company, our business and the mindset of our people. 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. TORM issued 30 stock exchange announcements during 2020. The COVID-19 pandemic challenged the possibility to conduct physical meetings with investors and instead TORM organized several conference calls and presentations via digital platforms with investors through e.g. analysts. Further, TORM was represented on a number of industry panels. In connection with the development of TORM’s updated ESG reporting, equity analysts and investors have been consulted about their requirements for such reporting. Full details can be found on pages 32- 43. The Board oversees the mechanisms we have in place to help ensure that employees can raise any matters of concern, how such matters are considered and, when necessary, investigated, through the whistleblower facility. Two employee-elected representatives attended all Board meetings as observers, The current observers include one office- based employee and one sea-based employee. Observers are permitted to participate but are not permitted to formally vote on matters submitted to a vote. Since 2006, TORM’s Board of Directors has provided a whistleblower facility with an independent lawyer as part of the internal control system. Full details can be found on page 73. The observers on TORM’s Board allow TORM’s employees to have a direct line of questioning to and receive feedback from the Board. Full details of attendance can be found on page 68. The Board has agreed on focus areas to be followed up on with regard to TORMs Employee Engagement Survey. Full details can be found on pages 77. TORM ANNUAL REPORT 2020 ENGAGEMENT AND DECISION-MAKING 59 Engagement and Decision-making Who? How? Outcomes and actions Why is it important to engage How did Management and Directors engage? What was the impact of the engagement? SUPPLIERS & CUSTOMERS Managing the relationship with suppliers and customers is an integral part of the way TORM conducts business. The COVID-19 pandemic highlighted the importance of maintaining a dialogue as well as a good relationship with both suppliers and customers. TORM depends on them as much as they on TORM. The Board receives and follows up on the Employee Engagement Survey performed twice a year. Mr. Goran Trapp, Chairman of the Audit Committee, engaged directly with employees in the Finance area through a town hall meeting. Throughout the COVID-19 pandemic, the Company has ensured that every employee is provided with the required equipment to work safely from home when required. Throughout the year, a main priority was to relieve seafarers on time despite the heavy constraints caused by the COVID-19 pandemic. At the beginning of the COVID-19 pandemic, TORM reviewed the supplier chain to search for critical vendors, ensuring that a dialogue took place to pre-empt any unforeseen problems that might occur. Beyond national and international regulation, TORM’s largest customers have their own compliance criteria that TORM and other product tanker operators have to comply with. Ensuring quality in everything TORM does, is part of the one TORM KPI Framework. Within this framework, the Board includes a Tradability KPI ensuring that TORM vessels are available to meet our customers’ demands. In order to maintain Company standards and exceed the targets set by its customers despite the COVID-19 pandemic, TORM developed a robust remote audit scheme at the beginning of 2020. TORM encourages feedback from its customers and suppliers. Whilst working from home during the COVID-19 pandemic, employees received and continued to receive regular updates , and measures were taken to enable our employees to continue to perform their work in the best possible way. The One TORM platform proved its strength by enabling the organization to conduct crew changes better than the industry average, and by the end of 2020, the number of overdue seafarers onboard was normalized. See pages 15 and 41 for more details The Board’s pre-emptive actions enabled TORM to ensure smooth continuation of operations throughout 2020. TORM has a high degree of approval by oil majors and regularly receives feedback from our customers. TORM utilizes this feedback in solving future logistical demands, understanding our customers’ difficulties and requirements and to help resolve issues each time they are encountered. See pages 39 for more detail on how TORM meets customers’ requirements. During 2020, TORM received notification of its fifth successful Tanker Management and Self Assessment (TMSA) carried out in the last two years LENDERS Strong relationships with our banks, financial institutions and investors supports the Company’s ability to be financially flexible. TORM maintains an ongoing dialogue with several funding providers. This dialogue was intensified with several providers in 2020 in connection with the refinancing conducted by TORM throughout the year. Some of TORM’s existing debt was refinanced, postponing debt maturity and providing the Company with additional financial flexibility and liquidity to allow the Company to continue the fleet renewal program. One refinancing included a CO2-linked pricing mechanism. The adjustment in pricing is linked to the reductions in CO2 emissions year on year, so that it aligns with the International Maritime Organization’s 40% TORM ANNUAL REPORT 2020 ENGAGEMENT AND DECISION-MAKING 60 Who? How? Outcomes and actions Why is it important to engage How did Management and Directors engage? What was the impact of the engagement? REGULATORS As a company incorporated in the UK and listed on Nasdaq both in Copenhagen and New York, the Company must ensure that the high standards required by the local regulatory bodies are met. Through close dialogue with Management, its committees and through its compliance systems, the Board ensures that the Company remains up to date with the latest regulatory changes. Examples of matters discussed this year by the Board or the committees include: • • • • • Brexit and the effect on the home state Sanctions due to China’s COSCO Shipping IMO regulations on CO2 emissions Danish Shipping and the Charter for more women in shipping The Modern Slavery Act industry reduction target for greenhouse gas emissions by 2030. More information on TORM’s CO2 targets can be found on pages 33-36. TORM’s Business Principles, see Our Responsibility on pages 32-43 ensure that TORM is always in compliance with legislation and lives up to the commitment to responsible business practices. TORM’s Corporate Social Responsibility Statement and Corporate Governance statement can be found at www.torm.com/about-torm TORM’s Modern Slavery Act Statement can be found at www.modernslaveryregistry.org To find out more about TORM’s participation in the Danish Shipping work group “More Women at Sea”, see page 42. COMMUNITY & ENVIRONMENT TORM remains committed to taking an active role in caring for communities and our environment. It is not just our shared duty, but our shared responsibility. Therefore, TORM continues the work to combat carbon, sulfur and other emissions and remains committed to enabling quality education, as this is a matter of concern for TORM and its employees. We believe that by having all involved stakeholders working together on this, great results can be achieved. TORM is engaged in several local and global initiatives supporting the different communities in which the Company operates and also the overarching climate issues faced by the world. Different initiatives include our education foundation, our commitment to the UN SDGs 4 and 13 and our climate engagement supporting initiatives. More information on TORM’s SDGs can be found on page 32. Encouraged and supported with funding by the Board and the TORM Foundation, TORM Philippines runs educational development actions through the TORM Philippines Education Foundation which has been helping Philippine communities since 2007. Since 2016, through TORM India, the Board has supported the construction of the ZP Prathmik School in Zadgewadi, near Pune, India. For more details of these and the Board’s ongoing support for community projects see page 37-38. To quantify our ambition, TORM has set a target to reduce its relative CO2 emissions. More information on TORM’s CO2 targets can be found on page 33. TORM has set a target to reduce its relative CO2 emissions by 40% by 2030 and is pursuing an ambitious climate agenda, whereby we will have zero CO2 emissions from operating our fleet by the year 2050. TORM strives to utilize its market position and strength to lead the product tanker industry into a more environmentally friendly future and develop innovative solutions for a greener future. For more information on our strategy, see page 27-30. TORM ANNUAL REPORT 2020 ENGAGEMENT AND DECISION-MAKING 61 GOVERNANCE GOVERNANCE GOVERNANCE INTRODUCTION Chairman’s Introduction GOVERNANCE STRUCTURE TORM’s Governance Structure Board of Directors Board and Committee Meeting Attendance COMMITTEE REPORTS Audit Committee Report Risk Committee Report Nomination Committee Report Remuneration Committee Report Remuneration Policy OTHER Investor Information Directors’ Report Statement of Directors’ Responsibilities 63 64 67 68 69 74 76 78 88 97 99 103 TORM ANNUAL REPORT 2020 TORM ANNUAL REPORT 2020 ENGAGEMENT AND DECISION-MAKING GOVERNANCE 62 62  CHAIRMAN’S INTRODUCTION being able to quickly respond to the changing needs of our stakeholders. I am once again pleased to announce that we are able to confirm compliance in 39 out of 41 provisions of the 2018 UK Corporate Governance Code. A summary of how we have complied with the Code during the year is presented on page 66. At the AGM held in April 2020, we welcomed Ms. Annette Malm Justad as a new member of the Board of Directors. Ms. Annette Malm Justad is considered an independent Non-Executive Director and has since 2019 been engaged as a Board Observer. In connection with the AGM, Non- Executive Director Mr. Torben Janholt also stepped down and now holds a role as a Board Observer. Mr. Torben Janholt has been a Non-Executive Director and Committee member of TORM since 2015 and I would like to thank Torben for his contribution to the development of TORM. Following the appointment of Ms. Annette Malm Justad, female Board members now make up 20% of TORM’s Board of Directors, which is in line with our target. A summary of the Board and Committee meetings held during the year is presented on page 68. 35% of the shore-based employees at TORM are currently females and to support a continued increase in diversity, the Board has set a target of 35% of shore-based managers being female by 2030. More information on our diversity targets can be found on page 33. In order to supplement the Annual Report and TORM’s CSR report, TORM is very pleased to have published its first dedicated ESG report, providing easy access to data specifically within Environmental, Social and Governance aspects. This ESG report documents the results of TORM’s efforts within the environment, our commitment to the UN’s Sustainable Development Goals, and social and governance aspects, and the targets that TORM as a company has set towards 2030 onwards. In order to further increase the independence of the Board’s work, I have decided to step down as a member of the Risk Committee as of 1 January 2021. Senior Independent Director and Deputy Chairman David Weinstein will replace me. Mr. Christopher H. Boehringer Chairman of the Board Mr. Christopher H. Boehringer, Chairman of TORM’s Board of Directors CHAIRMAN’S STATEMENT Dear Shareholder On behalf of the Board of Directors, I am pleased to present the Corporate Governance Report for the year ended 31 December 2020. The Board is committed to delivering strong corporate governance for the benefit of our shareholders, employees, customers, suppliers and other stakeholders, especially during these times of uncertainty and instability presented by the COVID- 19 pandemic. Despite this uncertainty, the Board has continued to work closely, however remotely, with the Senior Management ensuring that we continue to make good progress on our strategic priorities whilst TORM ANNUAL REPORT 2020 GOVERNANCE INTRODUCTION 63 Governance Introduction TORM’S GOVERNANCE STRUCTURE The Board: Chaired by Mr. Christopher H. Boehringer. The Board of Directors holds six prescheduled meetings on an annual basis, but usually holds several ad hoc meetings. 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. Chairman Senior Independent Director Non-Executive Directors Executive Directors Board Observers Leads the Board, sets the agenda and promotes a culture of open debate between Executive and Non-Executive Directors. Regularly meets with the Chief Executive Officer, the other Executive Directors and other senior management executives to stay informed. Ensures that the views of each Non-Executive Director are given due consideration. Available to both Non-Executive Directors and shareholders if they have concerns. On an annual basis, meets with each Non-Executive Director to appraise the performance of the Chair. Committed to contribute constructively, challenge and help develop proposals on strategy. Responsible for the day-to-day management of the Company, Responsible for the Company’s operational development, results and internal development. Implements the strategies and overall decisions approved by the Board. Three types. Employee-elected, providing a communication platform between the employees and the Board. Minority Board Observer appointed by the B Shareholder and Board Member elected. All observers are entitled to attend and speak at Board meetings. Audit Committee Risk Committee Nomination Committee Remuneration Committee Chaired by Mr. Göran Trapp Meets a minimum of four times a year. Assists 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 The Audit Committee report on pages 69-73 describes in detail the committees roles and activities Chaired by Mr. Göran Trapp Meets a minimum of three times a year. Responsible for supervisory oversight and monitors responsibilities with respect to internal controls and risk management The Risk Committee report on pages 74-75 describes in detail the committees roles and activities Chaired by Mr. Christopher H. Boehringer Meets a minimum of two times a year. Reviews the structure, size and composition (including skills, knowledge, experience and diversity) of the Board of Directors and makes recommendations to the Board of Directors with regard to any changes. Considers succession planning for Directors and the Chief Executive Officer and others. The Nominations Committee report on pages 76-77 describes in detail the committees roles and activities Chaired by Christopher H. Boehringer Meets a minimum of two times a year. Assists the Board of Directors in reviewing Management’s performance and remuneration as well as the Company’s general remuneration policies The Remuneration Committee report on page 78-87 describes in detail the committees roles and activities Senior Management Team Consists of the following employees of TORM A/S (in addition to the Executive Director, Mr. Jacob B Meldgaard): Mr. Kim Balle (Chief Financial Officer – CFO), 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. Assists the Executive Director in the day-to-day management of the business. TORM ANNUAL REPORT 2020 GOVERNANCE STRUCTURE 64 Governance Structure TORM’S GOVERNANCE STRUCTURE MANAGEMENT STRUCTURE AND DELEGATION OF AUTHORITY TORM’s Board sets the strategy of the Company and ensures that Management operates the business in accordance with this strategy. Details of the strategy and purpose are set out in the strategic report on pages 5-61. The Board of Directors has delegated the day-to-day management of the business to 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 of 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 must, taking into consideration the interests of the Company to the extent possible, obtain the approval of the Chairman and ensure that the Board of Directors is subsequently informed. Any transaction must always be subject to the authorizations stated in the Company’s Articles of Association, including any approvals required by the Minority Director. The Executive Director is assisted by the Senior Management Team in the day-to-day management of the business. The Senior Management Team holds weekly meetings. The Senior Management Team members are individually responsible for further delegation of authority in the organization. TORM maintains an overview of mandates and authorities for different levels in the organization. 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 must 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, major business acquisitions and the issuance of certain shares, warrants or convertible debt instruments and 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 at 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 one third of the issued and outstanding shares in TORM. TORM ANNUAL REPORT 2020 GOVERNANCE STRUCTURE 65 TORM’S GOVERNANCE STRUCTURE COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE The Board is committed to high standards of Governance and has applied the principles set out in the UK Corporate Governance Code 2018 (Code) throughout the period under review. TORM has considered the individual provisions and is compliant with 39 out of 41 provisions. TORM is not in compliance with provisions 18 and 32 because of business decisions taken after careful consideration by the Board of Directors. Based on the explanations provided in the individual committee reports, no plan is currently in place to attain compliance with the recommendations below. 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 www.torm.com/about-torm Board leadership and company purpose Fully compliant with the Code. See pages 63-66 for details on our culture, purpose and values. Division of responsibilities Fully compliant with the Code. For details on the Board and Committee composition, see pages 63- 66. Composition, succession and evaluation For details on the activities of the Nomination Committee and its compliance with the Code, see pages 76-77. Audit, risk and internal control Fully compliant with the Code. See pages 69-73 for details on our Audit Committee and pages 74-75 for details on our Risk Committee. For more information on our Risk Management Structure, see pages 54-58. Remuneration For details on the Remuneration Committee and its compliance with the Code, see pages 78-87. To view the proposed Remuneration Policy for 2021, see pages 88-96. The Financial Reporting Council (FRC) is responsible for the publication and periodic review of the UK Corporate Governance Code. This is available at www.frc.org.uk TORM ANNUAL REPORT 2020 GOVERNANCE STRUCTURE 66 BOARD OF DIRECTORS Christopher H Boehringer Non-Executive Director and Chairman of TORM’s Board of Directors David Neil Weinstein Senior Independent Director and Deputy Chairman of TORM’s Board of Directors Nationality: Canadian Nationality: US citizen Tenure: 4 years Employment: Managing Director and Head of Europe, Oaktree Capital Management (International) Limited Skills & experience: Shipping, Strategy, Capital Investment, Tenure: 4 years, continues until removed by the B-shareholder Employment: Senior Investment Banking, Governance and Reorganization Specialist Göran Trapp Non-Executive Director Annette Malm Justad Non-Executive Director Jacob B Meldgaard Executive Director and Chief Executive Officer Torben Janholt Former Non-Executive Director Nationality: Swedish Tenure: 4 years Nationality: Norwegian Tenure: <1 year. Appointed at the 2020 AGM Nationality: Danish Tenure: 4 years Employment: Board member Employment: Board member Employment: Chief Executive Officer TORM plc since 1 April 2010 Nationality: Danish Tenure: 4 years Resigned from the Board and its Committees at the 2020 AGM Employment: Board member Skills & experience: Strategy, Capital, M&A, US listings. Inter alia Skills & experience: Shipping, Strategy, Customers, Finance. Skills & experience: Shipping, Customers, Strategy, Capital, Skills & experience: Shipping, Customers, Strategy, Capital, M&A, Skills & experience: Shipping, Strategy, Customers, International Mergers & Acquisitions. Goldman Sachs, FI Travel Corporation, Seadrill, Ltd., Stone Energy Corp, Tru Taj LLC, Deep Ocean Group, Morgan Stanley crude oil trader, Head of Oil Products Trading Finance. More than 20 years of executive experience from US listing. Previously served as Executive Vice President of markets, Executive Management, Leadership. Previously CEO and Warburg Dillon Read/SG Warburg Axiall Corporation, The Oneida Europe & Asia, Global Head of Oil shipping and industry including Dampskibsselskabet NORDEN A/S President of J. Laurtizen 1998-2012, and LTU GmbH & Co Group, Horizon Lines, Inc., Trading and Head of Commodities CEO of Oslo listed Eitzen Maritime and held a number of management Chairman of Danish Shipowners Interstate Bakeries Corp, Pioneer EMEA. Crude oil trader at Statoil. Services ASA from 2006-2010 positions in J. Lauritzen A/S and A. Association 2005-2009 and Companies Inc. and York Research Founding director of energy Corp and as MD of Calyon advisory boutique Energex P. Møller-Maersk Managing director Pioneer Marine 2017-2020. External appointments: Utmost Group Limited and Oaktree Capital Management (International) Limited Securities Inc., BNP Paribas, Bank of Boston and Chase Securities Inc. External appointments: Pacific Drilling S.A External appointments: Board member of Energex Partners Ltd. External appointments: Partner at Recore Norway AS. Chair of the External appointments: Chairman of the Board of Danish Shipping External appointments: Board member of United Shipping and Board of Directors of Store Norske and Board member of Danish Ship Trading, Unitankers and Bunker Spitsbergen Kulkompani AS, Finance, SYFOGLOMAD Ltd, Grant Holding. American Shipping Company ASA, Compass A/S and The TORM RECSilicon ASA and Norske tog Foundation AS. Board member of Awilco LNG ASA, PowerCell Sweden AB Committees: C` C Committees: ` Committees: C C Committees: ` Committees: None Committees: ` Key: Audit: / Remuneration: ` / Nomination: / Risk: / Chairman: C TORM ANNUAL REPORT 2020 GOVERNANCE STRUCTURE 67 BOARD AND COMMITTEE MEETING ATTENDANCE Audit Remuneration Nomination Risk Board Committee Committee Committee Committee C C C C C Meetings held in 2020 Chairman of the Board Christopher Boehringer Senior Independent Non-Executive Director David N. Weinstein Executive Director Jacob Meldgaard Non-Executive Independent Directors Annette Malm Justad ¹ Göran Trapp Torben Janholt ² Board Observers ⁾ Annette Malm Justad ¹ Christian Gorrissen ⁴ ⁾ ⁾ Jeffrey S. Stein ⁾ Lars Bjørn Rasmussen ³ Torben Janholt ² ⁾ Rasmus J. Skaun Hoffmann ⁾ 10 5 4 3 5 2 8 9 10 8 10 2 2 6 6 4 7 9 3 3 3 2 1 2 2 2 1 1 3 0 3 3 0 ¹ ² ³ ⁴ Resigned as an Observer and appointed as Director, 12 April 2020 at the Annual General Meeting Resigned as Director and appointed as an Observer, 12 April 2020 at the Annual General Meeting Resigned as employee-elected Observer, 27 May 2020 ⁾ Appointed as employee-elected Observer, 27 May 2020 ⁾ ⁾ ⁾ Key: Board of Directors: Remuneration: Nomination: Audit: ` Risk: Chairman: C TORM ANNUAL REPORT 2020 GOVERNANCE STRUCTURE 68 AUDIT COMMITTEE REPORT AT A GLANCE Chairman Göran Trapp Members Annette Malm Justad appointed on 12 April 2020 David Weinstein Torben Janholt resigned on 12 April 2020 Composition The Committee is composed solely of independent Non Executive Directors ‑ Meetings The Committee had five scheduled meetings during 2020. Attendance by members at Committee meetings can be seen on page 68. 2020 Highlights • Onboarding of EY as new independent auditors • Quarterly impairment indicator test • Annual impairment testing of the CGUs CHAIRMAN’S STATEMENT Dear Shareholder risk management, audit and risk programs, business conduct and ethics, “whistleblowing” and the appointment and findings of the independent auditor. 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. MEETINGS The Audit Committee meets at least four times a year and the Chief Financial Officer of TORM A/S, the Head of Group Reporting, Compliance and Tax of TORM A/S as well as the Company’s independent auditor will normally attend these meetings by invitation. During 2020, the Audit Committee met five times. Mr. Göran Trapp attended all meetings and Mr. David N. Weinstein attended four meetings held in 2020 in person or by telephone. Mr. Christopher H. Boehringer attended two meetings held in 2020 as an Observer. Mr. Torben Janholt was replaced on the Audit Committee at the AGM on 12 April 2020 by Ms. Annette Malm Justad. The Audit Committee is pleased to present its report for 2020. The purpose of the 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 controls and MEMBERSHIP 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 page 67. In the judgement of the Board, the Chairman of the Audit Committee, Mr. Göran Trapp, has 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. The Audit Committee is considered to be fully independent. 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. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 69 Committees Report AUDIT COMMITTEE REPORT SUMMARY OF THE ROLE OF THE AUDIT COMMITTEE The purpose of the Audit Committee (the “Committee”) is to assist the Board of Directors (the “Board”) 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 Committee by the Board and are required by the rules and regulations of the Securities and Exchange Commission (the “SEC”), the New York Stock Exchange (the “NYSE”) or any other securities exchange on which the Company’s securities are traded. The Committee advises the Board on whether the annual report and accounts are fair, balanced, and understandable. The Committee’s function is one of oversight only and does not relieve Management 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 Committee oversees the accounting, financial reporting, risk management processes related to the financial reporting of the Company and the audits of the Company’s financial statements. The Committee oversees and controls 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 www.torm.com/uploads/media_items/terms-of- reference-audit-committee.original.pdf. 2020 IN REVIEW The Committee reviewed the quarterly, half-year and annual financial statements with Management, focusing on the: • Integrity of the Group’s financial reporting process • Clarity of disclosure • Compliance with relevant legal and financial reporting As explained in note 8 to the financial statements, it was concluded that an impairment was not identified for the Main Fleet, as the value in use was in line with the carrying amount. The two Handy vessels were impaired with USD 5.5m in total as the calculated value in use was lower than the carrying amount on a vessel by vessel basis. standards • Application of accounting policies and judgements In 2020, the Audit Committee particularly discussed the quarterly impairment indicator test of the vessels in the fleet, the quarterly going concern statement as well as the Seafarers Taxation, Internal transfer of Vessel Ownership, Tax Policy and Controls to mitigate the risk of Management override of controls. Furthermore, the Audit Committee discussed the internal control environment, the new finance system, Dynamics 365 Business Central, 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 2020 financial statements was the impairment testing of the carrying amount of its fleet within 3 CGUs, being the Main Fleet (LR2/LR1 and MR vessels) and the two Handysize vessels. This issue was discussed and reviewed with Management and the independent auditors, and the Audit Committee challenged judgements and sought clarification where necessary. In order to determine whether a cash-generating unit (CGU) is impaired, Management assesses whether there are any indicators for impairment or reversal of impairment of the vessels in the CGUs. If such indicators exist, the future discounted net cash flow deriving from the CGUs 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. Management has assessed that TORM has 3 CGUs within its single reporting segment – The Tanker Segment – the largest of which is its Main Fleet (comprising LR1/LR2 and MR vessels). The Main Fleet is considered to be a single cash generating unit because the vessels in the Main Fleet are largely interchangeable and the cash flows generated by them are interdependent. These vessels are operated collectively as a combined internal pool, employed principally in the spot market and actively managed to meet the needs of our customers in that market, particularly regarding the location of vessels meeting required specifications and the price of transport rather than vessel type. Given the technical specifications and TORM ANNUAL REPORT 2020 COMMITTEES REPORT 70 AUDIT COMMITTEE REPORT capacity of vessels, the Main Fleet is relatively homogenous with a very high degree of interoperability. All vessels in the Main Fleet are able to handle multiple sizes of cargoes and sail all seas and oceans, over both shorter and long distances. The Main Fleet is monitored and managed on an aggregated level as one pool, i.e. each vessel or vessel class does not generate cash inflows that are largely independent of those from other vessels or vessel classes. The other groups of CGUs outside the Main Fleet comprise the two Handysize vessels (which are typically used for shorter and coastal trade routes and more frequent port calls, including for transportation of various clean petroleum products within Europe and in the Mediterranean). Management prepared a detailed impairment test for the Audit Committee setting out the key assumptions for the CGUs. The Audit Committee challenged these assumptions and judgements to ensure that all material factors were included. Further, the Audit Committee discussed the sensitivity analysis and the other disclosures in the Annual Report. The Audit Committee noted in particular that the freight rates in the years 2021-2023 are consistent with the long-term planning assumptions used by the Company. Further, the Audit Committee discussed with Management the freight rates beyond 2023 that are based on the Company’s 10-year historical average spot rates adjusted for estimated scrubber premiums consistent with last year. The Audit Committee was satisfied with the freight rates applied. The Audit Committee reviewed the key parameters in the standard Weighted Average Costs of Capital model and 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 CGUs concerned. It was a key objective of the Committee to ensure that EY became fully familiar with all aspects of TORM that were relevant to the external audit process as part of its audit planning. Subsequently, EY performed detailed planning activities and reviewed Deloitte audit files. The Audit Committee was satisfied that future cash flows related to operating expenses appropriately reflected current market assessments. 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 8 in the financial statements on page 129. Effectiveness In 2020, the Audit Committee carried out a detailed self-assessment by way of a questionnaire and discussions facilitated by the Head of Group Reporting, Compliance and Tax. Based on the self-assessment, no material concerns arose. Auditor appointment and tendering Following a formal tender process in the previous financial year and the Committee’s recommendation to the Board, TORM’s shareholders appointed Ernst & Young LLP (EY) as the Group’s external auditor in April 2020. EY replaced Deloitte LLP (UK). The lead audit partner is Lloyd Brown who has held the role since the appointment of EY. Following this work, EY presented to the Committee its detailed audit plan for the 2020 financial year, which outlined its audit scope, planning materiality and its assessment of key audit risks. The audit plan was a key output from the transition process and was reviewed in detail by the Committee. Independent audit During the year, EY 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 August 2020, the Audit Committee reviewed and approved the terms, areas of responsibility and scope of the 2020 audit as set out in the independent auditors’ engagement letter. During the year, EY provided the Audit Committee with recommendations and updates regarding audit-related services on subjects such as regulatory and statutory reporting, etc. The independent auditors are expected to perform the audit according to relevant auditing standards. The Independent Audit Plan was approved in August 2020 and has been successfully completed at the date of this report. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 71 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. The independent auditors may be contracted to perform certain non-audit activities. The Audit Committee believes this can be performed without compromising the auditors’ 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. Auditor independence and objectivity The Company has policies and procedures in place to ensure that the independence and objectivity of the independent auditor are 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 at the November 2020 Audit Committee meeting. 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 2020 can be found in note 4 to the consolidated financial statements. Audit fees: Non-audit fees: USD 0.6m USD 0.1m TORM ANNUAL REPORT 2020 Fees relating to the provision of non-audit services by EY amounted to USD 0.1m corresponding to 14% of the total cost and related primarily to the review of quarterly statements and legacy tax service immaterial to the Group. 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 2021. 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. In the absence of an internal audit function, internal assurance is achieved through the work of the Group Internal Control function and Price Waterhouse Coopers testing of the internal controls. This has not affected the work of the external audit. 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 2020, the Audit Committee was given a presentation by the risk management team covering the enterprise risk management set-up. The principal risks and uncertainties are outlined in the “Risk Management” section on pages 54-58. COMMITTEES REPORT 72 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) 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 on pages 54-58. Approval On behalf of the Audit Committee Mr. Göran Trapp Chairman of the Audit Committee 1 March 2021 Whistleblowing The Group’s Whistleblower Policy, which supports the groupwide Business Principles, is monitored by the Audit Committee. The Group’s Business Principles are available on TORM plc’s website: 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. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 73 RISK COMMITTEE REPORT AT A GLANCE Chairman Göran Trapp Members Annette Malm Justad appointed on 12 April 2020 David Weinstein Torben Janholt resigned on 12 April 2020 Christopher Boehringer resigned in January 2021 Composition The Committee is composed solely of independent Non Executive Directors. ‑ Meetings The Committee had three scheduled meetings in 2020. Attendance by members at Committee meetings can be seen on page 68. 2020 highlights • • • • Risk Management review of TORM’s policies on Insurance, IT, financial Instruments and its financial policy; Review of TORM’s capital structure risk; Review of TORM’s compliance with sanctions; Review and approval of Enterprise Risk Management report. CHAIRMAN’S STATEMENT Dear Shareholder The Risk Committee is pleased to present its report for 2020. In 2020, the Risk Committee had special focus on TORM’s risk in relation to the ongoing COVID-19 pandemic and TORM’s activities to cope with challenges. Another special focus areas was the risks related to derivatives trading. Another focus area was the risks related to strategic decisions on the Company’s capital structure with particular focus on funding and liquidity management. ROLE OF THE RISK COMMITTEE An overview of the Committee’s areas of responsibility is set out on page 64 and the Committee’s Terms of Reference are available at www.torm.com/uploads/media_items/terms-of- reference-audit-committee.original.pdf . ACTIVITIES DURING THE YEAR At each meeting, the Risk Committee follows up on key risk indicators to ensure alignment of risk tolerance and actual risk level. These measures include the risks described in the Risk Management section and monitoring of the compliance with internal mandates. A liquidity forecast is presented at each meeting and refinance risk was included as an ongoing focus area presented at each Risk Committee meeting. Special focus areas covered in 2020 were: COVID-19 The COVID-19 pandemic has had a significant impact on society and shipping, including product tankers. During the spring of 2020, TORM made an extraordinary assessment of our most vulnerable areas. To mitigate the changed risk picture, the frequency of credit assessment of top customers has increased and the impact of potential liquidity enhancing initiatives is reviewed periodically. Forward Freight Agreements (FFAs) and Liquidity Risk In April 2020, as freight rates surged to record highs, the liquidity risk associated with the current FFA mandate was reviewed. To account for a potential increase in liquidity risk, liquidity stress tests are periodically reviewed together with TORM’s liquidity forecast and more frequent reporting has been implemented. Sanctions The Risk Committee reviewed TORM’s compliance set- up, designed to avoid that TORM is engaging with sanctioned counterparties thereby violating sanctions. Maritime safety threats TORM was the target of a piracy attack in the Gulf of Guinea. TORM averted the attack as the crew made it to safety in the ship’s citadel. The Risk Committee reviewed the measures taken by TORM to assess, manage and mitigate future attacks. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 74 RISK COMMITTEE REPORT 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. Review policies The Risk Committee reviewed TORM’s IT Policy, Financial Policy, FFA and Bunker Policy, Credit Risk Policy and Insurance Policy. These policies outline core activities and risks and the measures that TORM has taken to mitigate these risks. Letter of indemnity The Risk Committee reviewed two cargo claims, both relating to one of TORM’s customers having issued indemnities to allow TORM A/S for the discharge of cargo, without the customer being able to honor those indemnity obligations. Both cases involved irregular activities by the customer in relation to the handling of bills of lading. Legal action has been initiated by the Group in the UK and in India against the customer and a number of individual owners and management representatives. The proceedings are ongoing. TORM’s mitigation activities include, but are not limited to, credit assessment of all customers and contract clauses requiring documentation of the receiver stated in the bill of lading. TORM has adopted a policy that in some cases will require the customer to document that a discharge to a party other than the receiver/consignee stated in the bill of lading is in agreement with such receiver/consignee. 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 2021. TORM’s annual risk assessment is presented in detail in the “Risk Management” section on pages 54-58. Approval On behalf of the Risk Committee Mr. Göran Trapp Chairman of the Risk Committee 1 March 2021 TORM ANNUAL REPORT 2020 COMMITTEES REPORT 75 NOMINATION COMMITTEE REPORT AT A GLANCE Chairman Christopher Boehringer Members Annette Malm Justad appointed on 12 April 2020 David Weinstein Torben Janholt resigned on 12 April 2020 Composition With the exception of the Chairman, the Committee is composed solely of independent Non Executive Directors Meetings The Committee had two scheduled meetings in 2020. Attendance by members at Committee meetings can be seen on page 68. ‑ 2020 highlights • Annette Malm Justad joins TORM’s Board as first female Board and Committee member. • TORM joins Danish Shipping’s Charter for more women in shipping. • TORM ranks in top 10% in Employee Engagement Survey. • Succession Planning for critical roles • Employee population survey – progress on gender diversity. CHAIRMAN’S STATEMENT Dear Shareholder The Nomination Committee is pleased to present its report for 2020. This year, the main focus of the Nomination Committee has been on Board and Committee composition, diversity and succession planning. The Committee is delighted to welcome Ms. Annette Malm Justad who was duly elected at the Company’s Annual General Meeting on 15 April 2020. Annette brings a wealth of shipping experience, having served as CEO of ship management company Eitzen Maritime Services. In addition, Ms. Annette Malm Justad currently serves on the boards of Awilco LNG and American Shipping Company. Ms. Annette Malm Justad’s biography can be found on page 67. In 2020, Mr. Torben Janholt stepped down as a Non-Executive Director and Committee member of TORM since 2015. However, the Board of Directors is pleased that Mr. Torben Janholt has agreed to take on the role as a Board Observer. In order to further increase the independence of the Board of Directors, Mr. Christopher Boehringer will step down as a member of the Risk Committee on 1 January 2021. His position on the committee will be taken over by Senior Independent Director and Deputy Chairman David Weinstein, increasing the number of independent Non-Executive Directors on the Risk Committee from two to three. TORM’s policy for the composition of the Board is to support diversity in its widest sense. Our Board members have a diverse range of backgrounds contributing a wealth of knowledge, understanding and experience. The Nomination Committee strongly believes that a gender-diverse workforce led by gender-diverse leaders delivers better performance. The Nomination Committee supports equal opportunity in recruitment, career development, promotion, training and rewards for all employees. See pages 33 and 42 for more information. THE ROLE OF THE NOMINATION COMMITTEE An overview of the Committee’s areas of responsibility is set out on page 64 and the Committee’s Terms of Reference are available at www.torm.com/uploads/media_items/terms-of- reference-nomination-committee-6-november- 2019.original.pdf COMPLIANCE WITH THE CODE The Nomination committee is in compliance with the UK Corporate Governance Code with the exception of provision 18. The Corporate Governance Code states that all directors should be subject to annual re- election, however, TORM’s B-Director is not appointed for a 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 of the minority shareholders. The B-shareholder, who represents the minority shareholders, can replace the B-Director at any time. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 76 NOMINATION COMMITTEE REPORT The remaining Directors of TORM are elected on a bi- annual basis as defined in the Company’s Articles of Association. The Board has discussed whether to change to annual re-election of the remaining Directors, however, to ensure continuity in the Board of Directors, it has been decided to continue with a bi- annual election for now. ACTIVITIES DURING THE YEAR Assessment of effectiveness of the Board of Directors According to the recommendations of the UK Corporate Governance Code 2018, the Board is to review and assess its performance annually. Whilst the Committee keeps the composition of the Board under regular review, the annual review of Board effectiveness provides an opportunity for reflection on how we can continue to enhance the profile of the Board. This year, additional questions were included in the Board self-evaluation, which focused on ESG. The Board recognized the Company’s role in contributing to the wider society and that these values should be embedded in its business model and ESG framework, placing people, safety and environment at its core. The Chairman of the Nomination Committee is pleased to report the publishing of TORM’s first ESG report. in TORM’s ESG report which will be published on www.torm.com and more information can be found on page 32-43. Succession planning During the year, the Nomination Committee has continued to review and develop the composition of and succession plans for 14 roles at SVP and VP level who are deemed to have a critical impact on the execution of TORM’s strategy and keeping the business running. Employee Population Survey The Committee was presented with a summary of the Company’s employee population status. The presentation included highlights of FTE numbers, new hires, retention rates (voluntary and involuntary leavers), progress on gender diversity targets and outcome of the 2020 Employee Engagement Survey, see pages 41-42 for further details. The Committee is pleased to advise that there had been a significant improvement in the retention rate (voluntary leavers) in the 2016 to 2019 period. Periodical review of each Director In line with the UK Corporate Governance Code and following a formal evaluation, the Chairman of the Nomination Committee confirmed that the Directors’ performance continues to be effective and to make a valuable contribution to the Board, demonstrating full commitment to the role, including devoting an appropriate amount of time to the role. The Committee reviewed the independence of all the Non-Executive Directors. All with the exception of the Chairman are considered independent in accordance with UK requirements and they continue to make effective contributions and to effectively challenge Management. Diversity Great progress has also been made on TORM’s 2020 gender diversity targets. Within the Board of Directors, the target of having 20% female Board members elected by the shareholders was reached in April with the election of Ms. Annette Malm Justad. The Committee is also proud to announce that TORM has acceded to Danish Shipping’s “Charter for more women in shipping”. By 2020, the Company aims to have 35% women in the shore-based workforce in line with the industry average and 25% females in leadership positions. See page 33 for more information on our ESG targets. 2020 Employment Engagement Survey The Committee reviewed the results of the 2020 Employment Engagement Survey which, in general, was very positive and ranks TORM in the top 10% of companies across all industries utilizing the global Peakon platform, covering 145 million answers. The response rate was 97% and 1,598 comments were received from employees. In collaboration with Management, the Board of Directors will use this information to create focus points for 2021. Mr. Christopher H. Boehringer Chairman of the Nomination Committee 1 March 2021 TORM ANNUAL REPORT 2020 COMMITTEES REPORT 77 REMUNERATION COMMITTEE REPORT AT A GLANCE Chairman Christopher Boehringer Members Annette Malm Justad appointed on 12 April 2020 David Weinstein Torben Janholt resigned on 12 April 2020 Composition With the exception of the Chairman, the Committee is composed solely of independent Non Executive Directors Meetings The Committee had three scheduled meetings in 2020. Attendance by members at Committee meetings can be seen on page 68. ‑ 2020 highlights • • • • • Non-Executive Director remuneration review. Review of pay and conditions across the Company. LTIP - 2020 Restricted Share Unit allocation. Remuneration Committee assessment. Review and update of the Remuneration Policy for approval at the AGM. CONTENTS OF THE REMUNERATION REPORT Page 88 Remuneration Policy Page 84 Non-Executive Director Remuneration Page 80 Executive Director remuneration CHAIRMAN’S STATEMENT Dear Shareholder On behalf of the Remuneration Committee, the Directors’ Remuneration Report is presented in the following section for the year ended 31 December 2020. This report describes the activities of the Remuneration Committee for the period 1 January 2020 to 31 December 2020. It sets out the remuneration details for the Executive and Non-Executive Directors of the Company. It has been prepared in accordance with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended (the “Regulations”). The report is split into three main areas: • The statement by the Chairman of the Remuneration Committee; • The annual report on remuneration; • The revised Remuneration Policy The 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 of the date of this Annual Report, TORM plc is in compliance with the requirements of this Remuneration Policy. During 2020, the Committee wished to undertake a further review of the Remuneration Policy that was approved by the shareholders at the Annual General Meeting (AGM) on 12 April 2018. The Committee reviewed the policy and in particular the section related to fees paid to our Non-Executive Directors and CEO. Their conclusion was that it is appropriate to propose some amendments to the Company’s Remuneration Policy. The proposed changes include: • Non-Executive Directors whose UK income is above the threshold of GBP 100,000 per annum can, if required, use the services of the Company’s external tax advisors to prepare their UK personal tax return. The fees incurred by the Company for the service offered will be deducted from the Directors’ net board fees. Updating the performance measures related to • the CEO bonus, from 2017 to 2020. See Table 2 on page 90 for further details. • Update of the Indicative Executive Director Total Remuneration at different levels of performance shown under performance scenarios on page 92 using the 2020 remuneration figures for the current CEO. The annual report on remuneration provides details on remuneration in the period and additional information required by the Regulations. The Companies Act 2006 requires that auditors report to the shareholders on certain parts of the Directors’ Remuneration Report and 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. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 78 REMUNERATION COMMITTEE REPORT ROLE OF THE REMUNERATION COMMITTEE An overview of the Committee’s areas of responsibility is set out on page 64 and the Committee’s Terms of Reference are available at www.torm.com/uploads/media_items/terms-of- reference-remuneration-committee-6-november-2019- 1.original.pdf MEETINGS The Chairman and the Executive Director attend meetings of the Remuneration Committee except for matters relating to their own remuneration. The Head of Group Human Resources attends all meetings and other members of Management may attend when necessary. Annual Remuneration Committee reviews The Remuneration Committee reviewed the Remuneration Policy. Their conclusion was that it is appropriate to propose some amendments to the Remuneration Policy as identified on page 78. COMPLIANCE WITH THE CODE The Remuneration committee is in full compliance with the UK Corporation Governance Code with the exception of provision 32. The UK Corporate Governance Code states that the Board should establish a Remuneration Committee of Independent Non-Executive Directors, with a minimum membership of three. In addition, the Chairman of the Board can only be a member if he was independent on appointment, and he cannot chair the committee. TORM’s Chairman, Mr. Boehringer, has been appointed as Chairman of the Remuneration Committee. However, given his association with the controlling shareholder and the alignment of interest with regard to remuneration, the Board considers it appropriate for Mr. Boehringer to chair that Committee. ACTIVITIES DURING 2020 Assessment of effectiveness of the Remuneration Committee The Remuneration Committee reviewed its own performance using an online survey. The questions related to the Terms of Reference, composition, duties, meeting frequency and reporting responsibilities. Additional questions related to access to information and material supplied. The evaluation concluded that the Remuneration Committee had worked well and that there were no action points to follow up on. Chief Executive Officer’s KPIs The Remuneration Committee provided the CEO with his performance objectives framework for 2020. In addition to fulfilment of specific performance metrics, TORM’s Chief Executive Officer has a portion of his total potential yearly bonus payment linked to the Company’s year-on-year CO2 emission reductions. The reduction target is determined based on a trajectory towards TORM’s 2030 CO2 reduction target. Mr. Christopher H. Boehringer Chairman of the Remuneration Committee 1 March 2021 TORM ANNUAL REPORT 2020 COMMITTEES REPORT 79 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 2019-20 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 5 March 2020 to determine the appropriate salary for the coming year. Base salary as of 1 January 2019: DKK 6.55m. Base salary as of 1 January 2020: DKK 7.0m. The base salary is discussed and agreed with the Chairman of the Board and the Remuneration Committee once a year. The next discussion by the Remuneration Committee will take place in early 2021. Unless otherwise agreed, any adjustment of the salary will take effect on 1 January 2021. MR. JACOB MELDGAARD Annual USD '000 Salary¹ benefits bonus² Total remuneration remuneration Taxable performance Total fixed Total variable 2019 2020 1,041 ⁾ 1,129 41 41 1,126 ⁾ 1,262 2,208 2,432 1,082 1,170 1,126 1,262 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 an amount of DKK 23t per month, covering the running and maintenance expenses associated with a private vehicle. For 2020, the amount of DKK 276t (USD 41t) has been included in the single figure amount. Other benefits provided directly include two newspapers, a 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. No changes in allowances and benefits are expected for 2021. Salary and Directors Fees USD '000 Taxable benefits Annual bonus Total Chief Executive Officer 2019 1,041 41 1,126 2,208 2020 % Change³ 1,129 41 1,262 2,432 8% ⁾ 2% 12% 10% ¹ ² ³ The total salary consists of both salary as CEO of TORM A/S (USD 962t) and as Executive Director of TORM plc (USD 79t). The total annual performance bonus arising in the period from 1 January 2020 to 31 December 2020 was DKK 8,203t (USD1,262t). This is ⁾ an estimated amount as the final decision has yet to be made. ⁾ % change in DKK for salary is 7%, taxable benefits is 0% and annual bonus is 10%. ⁾ TORM ANNUAL REPORT 2020 Employees entire Group % change 4.6% 0.0% 23.4% COMMITTEES REPORT 80 REMUNERATION COMMITTEE REPORT Performance bonus 2020 The Remuneration Committee has provided the CEO with a performance cash bonus for the financial year 2020 in the following ranges and based on the following parameters: • The fulfilment of specific performance metrics set by the Company (up to 70% of the CEO’s base salary). These include but are not limited to, RoIC, cost structure and environmental footprint. • Up to 50% 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 2020 for the CEO is equal to 120% of the CEO’s base salary in the financial year 2020. The specific metrics and calculation methodology for each of the parameters have been determined by the Board of Directors. At the time of issue, the CEO’s bonus figures had yet to be set by the Remuneration Committee or agreed with the Chairman of the Remuneration Committee. This will be discussed at the next Remuneration Committee meeting in 2021. The Annual Report therefore includes an estimate of DKK 8.4m (USD 1.262m), equating to 120% of his base salary. Long-Term Incentive Program – Restricted Share Units granted to the Chief Executive Officer In accordance with its Remuneration Policy, TORM has granted the CEO a number of Restricted Share Units (RSUs), which was communicated in company announcement no. 2 dated 18 January 2016. A further LTIP element of Mr. Jacob Meldgaard’ s remuneration package 2020 grant¹ per share 100% vesting RSU LTIP Exercise price value assuming RSU grant Mr. Jacob Meldgaard LTIP award is fixed by the Board of Directors and was communicated via company announcement no. 10 of 25 April 2018, ¹ therefore there is no minimum or maximum for 2018. 766,035 ⁾ DKK 53.7 USD 0.9m ⁾ communication, announcement no. 10 issued on 25 April 2018, detailed changes to the grant of RSUs, as agreed 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 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. 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. As of 1 January 2019, one fifth of the grant, amounting to 255,345, vested with an exercise period ending 31 December 2019. These RSUs amounting to one third of the re-grant issued on 25 April 2018 were exercised. In November 2019, 255,345 RSUs were exercised by Executive Director Mr. Jacob Meldgaard. 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). 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 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). TORM ANNUAL REPORT 2020 COMMITTEES REPORT 81 REMUNERATION COMMITTEE REPORT The single figure remuneration table for the CEO does not include any amounts in relation to the RSU awards since, as of the date each tranche vested, the Company’s share price was less than the exercise price. In December 2019, the CEO was informed that he would receive two additional tranches of 255,200 RSUs in 2021 and 2022, respectively. The first would vest in equal installments over three years beginning on 1 January 2022. The second would vest in equal installments over three years beginning on 1 January 2023. The strike price for each tranche will be determined as the average of 90 days before publication of the TORM plc Annual Report plus a 15% premium. The first tranche will be based on the publication of the 2020 Annual Report and the second tranche on the publication of the 2021 Annual Report. The exercise period for vested RSUs will be 360 days. Long-Term Incentive Program – Restricted Share Units granted to the employees In accordance with TORM’s Remuneration Policy, the Board of Directors has as part of the Long-Term Incentive Program (LTIP) granted Restricted Share Units (RSUs) in the form of restricted stock options to certain employees. 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 TORM’s shareholders. Each RSU granted under the LTIP entitles its holder to acquire one Class A common share, subject to vesting. Below is a description of the RSUs that have not expired without exercise. In 2017, the Board agreed to grant a total of 866,617 RSUs to other management executives. The RSUs 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 DKK 93.6, and the exercise period is six months. In 2018, the Board agreed to grant a total of 944,468 RSUs to other management executives. The RSUs 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 during 90 calendar days before the date of the Annual General Meeting on 12 April 2018 plus a premium of 15% and reduced to DKK 53.0 corresponding to TORM’s dividend payment in May 2020, further reduced to DKK 47.4, corresponding to TORM’s dividend payment in September 2020. Vested RSUs may be exercised for a period of 360 days after each vesting date. In 2019, TORM announced a grant of a total of 1,001,050 RSUs to certain employees. The RSUs were subject to a three-year vesting period, with one third of the grant amount vesting at each anniversary date beginning on 1 January 2020. The exercise price of each vested RSU is DKK 49.7, which corresponds to an average of the 90 calendar days preceding the publication of TORM plc’s 2018 Annual Report plus a 15% premium and reduced to DKK 49.0 corresponding to TORM’s dividend payment in May 2020, further reduced to DKK 43.4, corresponding to TORM’s dividend payment in September 2020. Vested RSUs may be exercised for a period of 360 days after each vesting date. On 15 May 2020, TORM announced a grant of a total of 1,047,389 RSUs to certain employees. The RSUs were subject to a three-year vesting period, with one third of the grant amount vesting at each anniversary date beginning on 1 January 2021. The exercise price of each vested RSU is DKK 69.90, which corresponds to an average of the 90 calendar days preceding the publication of TORM plc’s 2019 Annual Report plus a 15% premium and reduced by DKK 0.7, corresponding to TORM’s dividend payment in May 2020, further reduced to DKK 64.3, corresponding to TORM’s dividend payment in September 2020. Vested RSUs may be exercised for a period of 360 days from each vesting date. As of 31 December 2020, 2,187,454 RSUs were outstanding, and none of the 2016 and 2017 RSUs had been exercised. A further 12,405 of the 2018 RSUs were exercised in 2020 bringing the total exercised RSUs to 541,807 and 95,276 of the 2019 RSUs were exercised in 2020. Based on the Black-Scholes model, the theoretical market value of the RSU allocations in 2016, 2017, 2018, 2019 and 2020 around the time of issuance was calculated at USD 5.0m, USD 1.0m, USD 2.3m, USD 1.7m and USD 1.3m, respectively. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 82 REMUNERATION COMMITTEE REPORT End of service gratuity The Company can terminate the CEO’s Service Agreement giving 12 months’ notice to expire on the last day of a month. The CEO can terminate the Service Agreement giving six months’ written notice to expire on the last day of a month. Total pension entitlements The Directors of TORM plc are not entitled to any pension contributions from the Company. In addition, Denmark-based Executive Director Mr. Jacob Meldgaard, in his role as CEO of TORM A/S, is not entitled to any pension contributions. Post-service salary If the CEO dies during his employment, the Company will 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 a post-service salary for three months equal to the fixed salary. However, such post-service salary will only be paid until the date on which the employment would have terminated as a result of termination of the Service Agreement. Taxable benefits In general, members of the Board of TORM plc do not receive any additional benefits. Payments for loss of office No payments for loss of office have been made in 2020. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 83 REMUNERATION COMMITTEE REPORT Remuneration table Non-Executive Directors. The 2020 remuneration table sets out the remuneration paid to the Non-Executive Directors of the Company in 2020. Therefore, fees shown include any additional fees paid in respect of chairmanships of committees or other roles such as Senior Independent Director. Board Observer fees are not shown in this report, however the fees payable can be found in the Remuneration Policy. Statement of Directors’ shareholdings and share interests The table to the right summarizes the total interests of the Directors in shares of TORM plc as of 31 December 2020. No changes took place in the Directors’ interests between 31 December 2020 and 1 March 2021. 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 remuneration 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 2020, none of the Non-Executive Directors received any part of their remuneration in shares or warrants. The table to the right summarizes the Restricted Share Units awarded to the Executive Director. 2020 REMUNERATION TABLE NON-EXECUTIVE DIRECTORS USD '000 Director Base fee Committee fees Total 2020 2019 2018 2020 2019 2018 2020 2019 2018 Mr. Christopher H. Boehringer 171 168 172 Mr. David Weinstein Mr. Göran Trapp Mr. Torben Janholt Ms. Annette Justad 114 113 114 57 57 57 57 57 - 57 57 - 85 86 84 85 104 256 252 276 68 200 198 182 114 113 114 172 170 171 32 82 113 114 89 170 171 - - 139 - - 2020 STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS DIRECTOR Mr. Christopher H. Boehringer Mr. David Weinstein Mr. Göran Trapp Ms. Annette Justad Mr. Jacob Meldgaard ¹ The above table shows each Director’s shareholding. ⁾ Changes from Ordinary Ordinary 31 Dec 2020 Ordinary shares as at 1 shares as at to 11 Mar shares as at Jan 2020 31 Dec 2020 2021 11 Mar 2021 21,204 21,204 5,000 5,000 12,820 12,820 - 2,700 255,411 255,411 - - - - - 21,204 5,000 12,820 2,700 255,411 STATEMENT OF EXECUTIVE DIRECTOR’S RESTRICTED SHARE UNIT HOLDINGS AS AT 31 DECEMBER 2020 Restricted Share Units 2016 2017 2018 2019 2020 Vested Agreed not not to Awarded exercised exercise Exercised 1,276,725 - - 255,345 - - 766,035 255,345 766,035 - - - - - - 255,345 - - 255,345 - TORM ANNUAL REPORT 2020 COMMITTEES REPORT 84 REMUNERATION COMMITTEE REPORT The information provided in the following part of the Annual Report on remuneration is not subject to audit. TORM PLC VS PEER AVERAGE AND THE KAX INDEX Source: Bloomberg, peer group consists of Scorpio, Ardmore and d’Amico. 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. 160 140 120 100 80 60 40 20 0 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. Managing executive pay TORM intends to focus on the relationship between executive pay and the wider workforce in the period ahead and to develop the disclosure of this topic further. Outside appointments The Executive Director is entitled to retain the fees earned from non-executive appointments outside the Company. Mr. 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 EUR 5,000 for his services in 2019. Mr. Jacob Meldgaard is also Chairman of Grant 6 1 0 2 - 4 0 - 9 1 6 1 0 2 - 8 0 - 9 1 6 1 0 2 - 2 1 - 9 1 7 1 0 2 - 4 0 - 9 1 7 1 0 2 - 8 0 - 9 1 7 1 0 2 - 2 1 - 9 1 8 1 0 2 - 4 0 - 9 1 8 1 0 2 - 8 0 - 9 1 8 1 0 2 - 2 1 - 9 1 9 1 0 2 - 4 0 - 9 1 9 1 0 2 - 8 0 - 9 1 9 1 0 2 - 2 1 - 9 1 0 2 0 2 - 4 0 - 9 1 0 2 0 2 - 8 0 - 9 1 0 2 0 2 - 2 1 - 9 1 TORM plc KAX Average of peers Mr. Jacob Meldgaard Total remuneration (single figure) 2016 1,473 2017 1,626 2018 1,531 Annual bonus (% earned of base salary) LTIP has not been disclosed in this table. The CEO only receives Restricted Share Units (RSUs) with no performance conditions 67.0% 60.0% 45.0% 2019 2,208 117.0% 2020 2,432 120.0% Compass A/S for which he receives no fee but has been granted warrants. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 85 REMUNERATION COMMITTEE REPORT CHANGE IN DIRECTORS REMUNERATION COMPARED TO GROUP EMPLOYEES WORLDWIDE 2019 - 2020 in % Chief Executive Officer Mr. Christopher H. Boehringer Mr. David Weinstein Mr. Göran Trapp Mr. Torben Janholt Ms. Annette Justad The table to the left shows the average percentage year-on-year change in base salary, benefits and annual bonus in 2020 for the Directors’ compared to the entire Group’s employees. Salary¹ Benefits² 8.4% ⁾ 1.6% 1.0% 1.0% -47.4% N/A 4.6% 2.3% ⁾ N/A N/A N/A N/A N/A 0.0% Bonus 12.1% N/A N/A N/A N/A N/A 23.4% Employees entire group ¹ ² ³ The comparative figures used to determine the % change take into consideration the CEO's salary and benefits. Other benefits provided relate directly to company car benefit. ⁾ % change in DKK for salary and Executive Directors fees is 7%, taxable benefits is 0% and annual bonus is 11%. % change for Non-Executive Directors fees in ⁾ Euro's is 0% other than for Mr. Torben Janholt who retired as a Non-Executive Director in 2020. ⁾ 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 STATEMENT OF VOTING The table to the left shows the actual expenditure of the Group for employee pay and distributions to shareholders compared to the retained earnings of the Group. 2020 70.6 - 1.3 71.9 50.7 2019 2018 - - - - - - - - 45.8 46.2 939.2 920.0 752.0 Annual Remuneration Report Votes for % Votes against % Total votes Abstentions 49,463,891 66.6 2,433,359 3.3 51,897,250 - Directors' Remuneration Policy Votes for % Votes against % Total votes Abstentions 49,356,868 66.8 2,418,586 3.3 51,775,454 16,678 The table to the left shows shareholder voting on the resolution to approve the annual Remuneration Report put to the 2020 AGM and the shareholder voting on the resolution to approve the Directors Remuneration Policy put to the 2018 AGM. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 86 REMUNERATION COMMITTEE REPORT For 2021, the Board of Directors has adopted the revised Remuneration Policy as detailed in the Chairman’s statement and included on page 88 of this Annual Report. The revised policy will be put before the shareholders for approval at the AGM on 14 April 2021. Statement of voting at General Meeting The current Remuneration Policy was re-approved at the 2020 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 www.torm.com/uploads/media_items/terms-of- reference-remuneration-committee-6-november-2019- 1.original.pdf Approval of TORM plc Remuneration Report for 2020 This report was approved by the Board of Directors on 1 March 2021 and signed on its behalf by: Mr. Christopher H. Boehringer Chairman of the Remuneration Committee 1 March 2021 REMUNERATION POLICY The TORM plc Remuneration Policy approved at the 2018 AGM remained unchanged during 2020. In accordance with the UK Corporate Governance Code, TORM’s Remuneration Policy and practices are designed to support the business strategy and promote the Company’s long-term sustainable success. The Remuneration Committee will continue to consider the appropriateness of the Remuneration Policy annually to ensure that it continues to align with the business strategy. At this point, there is no intention to revise the Remuneration Policy more often than every third year, unless required due to changes to regulations or legislation. Adoption and publication The Board of Directors must review the Remuneration Policy at least once a year. Any changes to the Remuneration Policy must 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 and will contain information on remuneration paid to the Board of Directors and the Executive Management. The Remuneration Policy is available at www.torm.com/uploads/media_items/torm- remuneration-policy-2017.original.pdf TORM ANNUAL REPORT 2020 COMMITTEES REPORT 87 REMUNERATION POLICY 1. INTRODUCTION The following pages set out the Remuneration Policy for the Directors of TORM plc which, if approved by the shareholders at the Annual General Meeting on 14 April 2021, will take effect from 1 January 2021. 2. BACKGROUND AND GENERAL OBJECTIVES The growth and future success of the Company depend on the efforts of the members of Management. Therefore, it is the overall objective of this Remuneration Policy to attract, motivate and retain qualified Management members. The Board of Directors (the “Board of Directors”) of TORM plc (“TORM” or the “Company”), has adopted this Remuneration Policy (the “Remuneration Policy”), including the overall guidelines on incentive pay. This Remuneration Policy provides the framework for remuneration paid to Non-Executive members of the Board of Directors and certain specified members of the Company’s Executive Management (the “Executive Management”; the Board of Directors and the Executive Management jointly referred to as “Management”). In accordance with the requirements of the UK Companies Act 2006, and as part of its Annual Report, the Company will be required to prepare a Remuneration Report for the financial year (the “Remuneration Report”). As part of the Remuneration Report, the Company is required to have a Remuneration Policy for the Company which complies with the requirements of the UK Companies Act. The Remuneration Policy will be proposed for approval at the Annual General Meeting of the Company and will continue to be subject to a binding shareholder vote at least once every three years thereafter. The remuneration of members of Management, including the size and composition of the Board of Directors, will be determined with a view to promoting value creation in the Company, to implementing its short-term as well as long-term strategic goals, and to creating common interests between members of Management and TORM shareholders. 2.1. CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN THE COMPANY The Company does not specifically consult with employees in relation to this Policy and no direct comparison metrics are applied between employees and the remuneration levels for the Executive Director(s). However, this Remuneration Policy seeks to ensure that the combined remuneration paid to members of Management for work performed in and for the Company is market competitive, not only in comparison with other industry groups, but also in comparison with peer companies in the global shipping industry. When considering salary increases for the Executive Director(s), the Company will seek to ensure comparison with other companies within the same market capitalization range. 2.2. STATEMENT OF CONSIDERATION OF SHAREHOLDER VIEWS The Chairman of the Annual General Meeting of the Company will inform the shareholders of any proposal made by the Board of Directors in relation to the level of Management remuneration. The Committee is strongly committed to an open and transparent dialogue with shareholders on remuneration matters, and the Chairman will invite comments from the shareholders before any level is agreed on. 3. REMUNERATION OF THE BOARD OF DIRECTORS Members of the Board of Directors receive a fixed annual fee in line with the amounts set out in Table 1 on the following page. The level of the fixed annual fee is proposed by the Board of Directors at the Annual General Meeting after comparison with other companies within the same market capitalization range. Members of the Board of Directors are not offered participation in any incentive schemes. However, the Executive Director participates in an incentive scheme of TORM plc’s subsidiary, TORM A/S, in his role as CEO of that Company. The Chairman and the Deputy Chairman of the Board of Directors, as well as the Chairman and members of the committees established by the Board of Directors, may receive additional fees in line with the amounts set out in Table 1 below. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 88 REMUNERATION POLICY TABLE 1: BOARD FEES Board fees Chairman Deputy Chairman Minority Board Observer Executive Director Director Board Observer ** Additional duties Chairman of the Audit Committee Other Audit Committee members Chairman of the Risk Committee Other Risk Committee members Chairman of the Nomination Committee* Other Nomination Committee members* Chairman of the Remuneration Committee Other Remuneration Committee members Director’s fee per annum (EUR) 150,000 100,000 70,000 70,000 50,000 50,000 Additional fees per annum (EUR) 50,000 25,000 50,000 25,000 25,000 25,000 25,000 25,000 * Only payable in the year in which the actual meetings are held. ** Not payable to TORM A/S employee-elected Board Observers. If a member of the Board of Directors is instructed to take on a specific ad hoc task that falls outside the scope of that member’s ordinary duties, such member may be offered an additional fee for the work carried out in relation to such a task, subject to the approval of the Board of Directors. Under the UK Companies Act 2006, the Company will be required to prepare a Remuneration Report for each financial year, which is made available to the shareholders as part of the Company’s Annual Report and which will set out the details of all payments made to the Board of Directors in the preceding financial year. The Remuneration Policy will be subject to a binding shareholder vote at least once every three years. TORM may reimburse relevant reasonable expenses, such as travel and accommodation, in connection with attendance at meetings of the Board of Directors (or duly appointed committees of the Board of Directors). The remuneration principles applicable to members of the Board of Directors also apply to any Board Observer appointed in accordance with article 74 or 76 of the Articles of Association of the Company. Any fees payable to the members of the Board of Directors and any Board Observer may be paid in cash or as share-based payments. Fees paid to tax advisors for the preparation of UK tax returns TORM plc Directors whose UK income is above the threshold of GBP 100,000 per annum can, if required, use the services of the Company’s external tax advisors to prepare their personal UK tax return. The fees incurred by the Company for the service offered will be deducted from the Director’s net board fees. 3.1. APPROACH TO THE REMUNERATION OF THE EXECUTIVE DIRECTOR When considering the appropriate remuneration for a new Executive Director, the Remuneration Committee will consider the level of the fixed annual fee proposed by the Board of Directors and adopted at the Annual General Meeting as detailed in Table 2 below. The aim is to provide a remuneration package which is sufficient to attract, retain and motivate key talents, while at all times ensuring that the Company pays no more than necessary with due regard to the best interests of the Company and our shareholders. The Remuneration Committee will provide full details of the recruitment package for any new Executive Director in the next annual report on remuneration and will provide shareholders with the rationale for any decisions taken. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 89 REMUNERATION POLICY TABLE 2: KEY ASPECTS OF THE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS Elements Purpose Operation and performance measures Directors’ fees To attract and retain high-calibre Executive Directors by offering market competitive fees. CEO base salary To recruit and retain high-calibre Executive(s) providing base level remuneration at a competitive market rate. CEO taxable benefits To provide market competitive benefits set at a level which the Committee considers appropriate for the role and individual circumstances. There are no performance measures associated with this benefit. CEO bonus To encourage and reward delivery of the Company’s strategic priorities. To provide a variable level of remuneration based on short-term performance against the annual plan. The level of the fixed annual fee is proposed by the Board of Directors at the Annual General Meeting after comparison with other companies within the same market capitalization range. Assessment of performance There are no performance measures associated with the Director’s fees. The salary will be discussed and agreed with the Chairman of the Board of Directors once a year in February, and take effect from 1 January that year. Assessment of performance There are no performance measures associated with the base salary. Executive Directors receive a competitive benefits package, which may include a company car, newspapers, a mobile phone, PC, ASDL and call charges. Other benefits may be introduced from time to time to ensure that the benefits package is appropriately competitive and reflects the circumstances of the individual Director. Assessment of performance There are no performance measures associated with this benefit. The Board of Directors will provide the CEO with a performance bonus for each financial year in the following range and based on the following parameters: Assessment of performance The fulfilment of specific performance metrics set by the Company (up to 70% of the CEO’s base salary). The performance metrics are specified at the start of the performance period; and up to 50% of the CEO’s base salary is based on the sole discretion of the Company’s Board of Directors. Maximum opportunity 120% of the base salary in the financial year. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 90 REMUNERATION POLICY TABLE 2: KEY ASPECTS OF THE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS (CONTINUED) Elements Purpose Operation and performance measures CEO LTIP To encourage and reward the generation of long-term shareholder returns and the delivery of financial or strategic priorities. To provide the largest potential remuneration for long-term performance. Incentives under the LTIP may be granted in any one or a combination of the following forms: • share options • restricted share units and • other share-based awards Maximum threshold The maximum threshold for the share-based LTIP grants applicable to the Executive Management as a group is expected to be approximately 7% of the Company's share capital from time to time. Minimum vesting requirements Incentives granted under the LTIP are generally subject to minimum vesting requirements of three years and must generally have a vesting period of five years for members of the Executive Management (with incremental vesting permitted over the vesting period). Performance measures Each type of award, including all relevant performance measures, is discussed in greater detail in 4.2 "Types of Incentives" below. Pension To offer market competitive levels The Directors of TORM plc do not receive any pension contributions from the Company. In addition, in the role as CEO of TORM A/S, of pension contribution. the Denmark-based Executive Director does not receive any pension contributions. 3.2. SERVICE CONTRACTS In accordance with the UK Companies Act 2006, Chapter 5, Section 228 (1) b, the Company has chosen to issue a written memorandum setting out the terms of the Non-Executive and Executive Directors’ contracts. The memorandum is available for viewing at the Company’s registered office on request. Under the Company’s Articles of Association, each Director must retire at the end of the second Annual General Meeting after his appointment or last reappointment, unless he has been reappointed at that Annual General Meeting. 3.3. PAYMENTS FOR LOSS OF OFFICE Non-Executive Directors – the Company does not consider making payments for loss of office to Non- Executive Directors. Executive Directors – a termination notice cannot exceed 24 months. Termination by the Executive Director must be subject to a minimum of six months' written notice. Any severance pay cannot exceed an amount corresponding to the remuneration paid for the preceding two years. The Remuneration Committee will maintain a discretionary approach to the treatment of leavers given that the facts and circumstances of each case are unique. In an exit situation, the Remuneration Committee will consider the individual circumstances, any mitigating factors that may be relevant, the appropriate statutory and contractual position, and the requirements of the business for speed of change. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 91 REMUNERATION POLICY The Company can terminate the CEO’s Service Agreement giving at least 12 months’ notice to expire on the last day of a month. The CEO can terminate his Service Agreement giving six months’ written notice to expire on the last day of a month. 4. REMUNERATION OF THE EXECUTIVE DIRECTOR 4.1. PERFORMANCE SCENARIOS The performance scenarios in Table 3 below show the estimated remuneration that could be received by the Executive Director, both in absolute terms and as a proportion of the total package under different performance scenarios. The assumptions underlying each performance scenario are detailed in the table below: The following chart gives an illustrative value of the remuneration package that the Executive Director could receive under three different performance scenarios, in accordance with this Remuneration Policy. INDICATIVE EXECUTIVE DIRECTOR TOTAL REMUNERATION AT DIFFERENT LEVELS OF PERFORMANCE USDm USDm 2.5 2.0 1.5 1.0 0.5 0.0 Minimum 1.1 93% 7% On Target 1.7 35% 61% 4% Maximum 2.3 52% 45% 3% Minimum On Target Maximum Directors Fees Fixed Pay Performance Bonus The annual bonus maximum is 120% of the CEO’s base salary in the financial year. Fixed pay is based on current values as set out in the table above. As it is a fixed figure, there is no minimum or maximum figure. TABLE 3 – INDICATIVE EXECUTIVE DIRECTOR TOTAL REMUNERATION LEVELS Pay element Above Target Below Directors fees Fixed pay Fixed fee EUR 70,000 Fixed fee EUR 70,000 Fixed fee EUR 70,000 Fixed salary DKK 7m and Fixed salary DKK 7m Fixed salary DKK 7m benefits DKK 276,000 and benefits DKK 276,000 and benefits DKK 276,000 Performance bonus 100% of maximum bonus 50% of maximum bonus Zero The Executive Director receives a fixed annual base salary based on an assessment of the overall objectives of the Remuneration Policy, market practice, scope and nature of the work performed, qualifications required, and the performance of each member. When the Executive Director is also the CEO of the Company’s subsidiary TORM A/S, his or her remuneration will include compensation from TORM A/S subject to the framework of this Remuneration Policy. The Executive Director’s terms of employment with the TORM Group, including salary, pension, and resignation terms, are determined by the Board of Directors. A termination notice cannot exceed 24 months. Resignation by the Executive Director must be subject to at least six months’ written notice. Any severance pay cannot exceed an amount corresponding to the remuneration paid for the preceding two years. In addition, the Executive Director may be offered to participate in management incentive plan(s) (“Plan(s)”) or be offered extraordinary bonuses as well as ordinary benefits, such as a company car, telephone, internet access, and newspapers. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 92 REMUNERATION POLICY 4.2. TORM'S MANAGEMENT INCENTIVE PLANS The Plans are established by the Board of Directors determining the terms and conditions of each Plan within the framework of this Remuneration Policy. When determining the composition of a Plan, including the elements of incentive pay as well as the ratio between fixed salary and incentive pay under the Plan, due consideration must be given to the overall objectives of this Remuneration Policy to avoid undesirable incentives. The Plan should combine an effective means of attracting and retaining qualified candidates with a long-term focus on maximizing shareholder value. Purpose of Plans A Plan may comprise a short-term incentive plan (“STIP”) and/or a long-term incentive plan (“LTIP”), both as described below. TORM believes that providing the members of the Executive Management with a proprietary interest in the growth and performance of TORM will stimulate the individual performance and enhance shareholder value. TORM also believes that a significant portion of a named Executive's compensation should be directly linked to TORM's performance. This Remuneration Policy has several provisions designed to protect shareholder interests and promote effective corporate governance in respect of the Plans, including the following: • Limitations on grants to the Executive Management and individual participants in a given calendar year. • Awards under the Plans are administered by the Eligibility. Members of the Executive Management will be eligible to receive incentives under a Plan when designated as participants. Remuneration Committee, an independent committee of the Board of Directors. Estimated Present Value. The estimated present value of the Plans will be disclosed in TORM’s Annual Report. Terms of Plans Administration. Based on the recommendations of the Remuneration Committee, the Board of Directors will generally administer a Plan and has the authority to grant incentives under any Plan and to set the terms of the awards, amend any outstanding incentives or accelerate the time at which any outstanding incentives may vest, correct any defect in the Plans or any incentive as it deems necessary, and establish rules or regulations relating to the administration of the Plans. See paragraph 4.4 “Adjustments” below. All provisions of the Plans and any actions taken in this respect will be subject to applicable law. Principal Conditions for Granting Incentive Pay. The attainment of performance targets based on TORM's strategic and operational initiatives, such as total shareholder return and cash flow metrics, may be used to determine allocations under the Plans in addition to discretionary allocations. Requirements. The Board of Directors has discretion to determine the times at which such incentives are to be made, the size of such incentives, the form of payment and all other conditions of such incentives, including any restrictions, deferral periods or performance requirements. Amendments or Discontinuation. The General Meeting must approve any amendments to or discontinuation of this Remuneration Policy, which provides the framework for the Plans. No amendment to nor discontinuation of this Remuneration Policy may materially impair any previously granted award under the Plans without the consent of the recipient. Term. No incentives may be granted under a Plan more than ten years after the date on which this Remuneration Policy was initially approved by the General Meeting. Incentive Agreements. Grants of incentives will be subject to the terms and conditions of the Plans and may also be subject to individual restrictions imposed by the Board of Directors and detailed in an incentive agreement between TORM and the relevant participant. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 93 REMUNERATION POLICY STIP. The STIP primarily supports the fulfilment of short-term objectives and goals. Based on the recommendations of the Remuneration Committee, the Board of Directors can decide to award annual cash bonuses to members of the Executive Management in order to meet the overall objectives of this Remuneration Policy. Such bonuses may be subject to the attainment of certain performance or other targets. LTIP. Incentives under the LTIP may be granted in any one or a combination of the following forms: • share options • restricted share units and • other share-based awards Each type of award is discussed in greater detail under “Types of Incentives” below. The LTIP primarily supports the fulfilment of long-term objectives and goals. Maximum threshold. The maximum threshold for the share-based LTIP grants applicable to the Executive Management as a group is expected to be approximately 7% of the Company's share capital from time to time. Minimum vesting requirements. Incentives granted under the LTIP are generally subject to minimum vesting requirements of three years and must generally have a vesting period of five years for members of the Executive Management (with incremental vesting permitted over the vesting period). Types of Incentives. Each type of award that may be granted under the LTIP is described below. • Share Options. A share option is a right to subscribe for A-shares in TORM. The Board of Directors will determine the number and exercise price of the options and when the options become exercisable. The term of an option may not exceed ten years. The Board of Directors may not decrease the exercise price for any outstanding options after the date of grant other than as provided for in the Plans or in accordance with the adjustment principles set out in paragraph 4.4 below. In addition, an outstanding option may not, as of any date that the option has a per share exercise price that is greater than the then current fair market value of a share, be surrendered to TORM as consideration for the grant of a new option with a lower exercise price, another award, a cash payment or A-shares, unless provided for in the Plans or in accordance with the adjustment principles set out in paragraph 4.4 below. The option exercise price may be paid in cash, by check, in A-shares, through a “cashless” exercise arrangement, through a net exercise procedure (if approved by the Board of Directors) or in any other manner authorized by the Board of Directors. TORM intends to make A-shares available upon exercise of any share options by way of a fresh issuance of A-shares out of capital and currently has allotment authorities in place in order to allow any such share issuances to be made by the Company. • Restricted Share Units. A Restricted Share Unit, or RSU, represents the right to receive one share on a respective vesting or settlement date from TORM. Subject to the restrictions provided in the applicable incentive agreement and the LTIP, a participant receiving RSUs has no rights as a shareholder to such units, until the RSUs vest and A-shares are issued to the participant. RSUs may be granted with dividend equivalent rights; however, unless determined by the Board of Directors to be paid currently, TORM must establish a bookkeeping account for the participant and reflect in that account any securities, cash or other property comprising any dividend or property distribution with respect to each share underlying each RSU. • Other share-based awards. The LTIP also permits the Board of Directors to grant eligible participants awards of A-shares and other awards that are denominated or payable in, valued in whole or in part by reference to, or are otherwise based on or related to A-shares, or the appreciation in value of A-shares. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 94 REMUNERATION POLICY Termination of employment or service. Each incentive agreement may, subject to applicable law, include provisions requiring the forfeiture of outstanding incentives in the event of the participant's termination of employment, if such participant is considered a voluntary leaver (as defined by the Board of Directors in the individual agreement) or, in the case of performance-based grants, if applicable goals or targets are not met. Claw back provisions. RSUs issued under the LTIP are subject to claw back in the event of material misstatement of the Company’s financial results, gross misconduct, or material error in the calculation of performance conditions. Change of control. If determined by the Board of Directors and if so provided in the incentive agreement, a change of control of TORM (as defined by the Board of Directors in the individual agreement) may require that: • all outstanding incentives will become fully vested and exercisable; • all restrictions or limitations on any outstanding incentives will lapse; • all performance criteria and other conditions relating to the payment of incentives will be deemed to have been achieved or waived by TORM; • all outstanding options are required to be exercised by a certain date; • the surrender to TORM of some or all outstanding options in exchange for a share or cash payment for each option equal in value to the per share change of control value, calculated as described in the LTIP, over the exercise price; Awards to be granted Grants of incentives to members of the Executive Management will be made by the Board of Directors as deemed necessary or appropriate considering the overall objectives of this Remuneration Policy. 4.3. EXTRAORDINARY BONUS The Board of Directors may in individual cases grant a one-off bonus or other extraordinary incentive-based pay, such as retention bonus, severance payment, sign- on bonus or other schemes in connection with the appointment, provided that it is deemed necessary by the Board of Directors in order to meet the overall objectives of this Remuneration Policy. A grant of extraordinary bonus may consist of cash and/or be share-based and may be subject to the attainment of certain performance targets. • any equitable adjustment will be made to outstanding incentives as deemed necessary to reflect TORM's corporate changes; and/or • an option will become an option relating to the number of A-shares or other securities or property (including cash) to which the participant would have been entitled in connection with the change of control transaction if the participant had been a shareholder. See paragraph 4.4 “Adjustments” below. Transferability of incentives. The Board of Directors may determine that the incentives granted under the LTIP may not be transferred except (a) by will, (b) by the laws of descent and distribution, (c) pursuant to any court order in connection with separation of domestic property or (d) as to options only, if permitted by the Board of Directors and so provided in the applicable incentive agreement, to immediate family members or to a partnership, limited liability company or trust for which the sole owners, members or beneficiaries are the participant or immediate family members. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 95 REMUNERATION POLICY 4.4. ADJUSTMENTS For the various types of incentive-based pay, the Board of Directors may lay down specific terms governing the lapse of the scheme or repayment of the incentive- based pay. In exceptional cases or in extraordinary circumstances, TORM may reclaim, in full or in part, incentive payments made to members of the Executive Management (claw back), e.g. in the event of manifest errors in the accounting figures or other basis for award or vesting. There is no specific provision on claw back in the CEO Service Agreement. Under Danish law, the principle of “condictio indebiti” may apply to payments made in error. Also, under the Danish Companies Act, a CEO may be held liable for damages to his employer, in case of negligence or willful misconduct. Furthermore, the Board of Directors may lay down provisions on accelerated vesting or exercise and adjustment of the incentive-based pay, exercise price, performance targets, etc., in the event of changes to the capital structure or other material events, which would otherwise adversely influence the value or effect of the incentive-based pay in contravention to the general objectives of this Remuneration Policy. In respect of the share limitations provided in the LTIP, including the number of A-shares subject to the LTIP, proportionate adjustments may be made by the Board of Directors in the event of any recapitalization, reclassification, share dividend, share split, combination of A-shares or other similar change in the A-shares. In addition, the exercise price of any outstanding options and any performance goals will be adjusted downwards for dividends and will also be subject to other adjustments if necessary to provide participants with the same relative rights before and after the occurrence of any such event. Adoption and publication The Board of Directors must review this Remuneration Policy at least once a year. Any changes to this Remuneration Policy will be adopted by the Board of Directors and approved by the shareholders at a General Meeting. TORM's Remuneration Report will be included in the Company’s Annual Report for all financial years and will contain information on remuneration paid to the Board of Directors and the Executive Management. This Remuneration Policy is available on TORM's website, www.torm.com . This Remuneration Policy has been adopted by the Board of Directors. This Remuneration Policy has been prepared in both a Danish and an English version. In the event of a conflict between the two versions or in case of difficulty of interpretation, the English version prevails. TORM ANNUAL REPORT 2020 COMMITTEES REPORT 96 INVESTOR INFORMATION SHARE INFORMATION Exchanges ISIN (CPH) CUSIP (NY) Tickers Year high (TRMD A) Year low (TRMD A) Number of A shares (end 2020) Number of treasury share Nasdaq CPH and NY GB00BZ3CNK81 G89479102 TRMD A and TRMD DKK 76.0 (2 Jan.) DKK 39.8 (29 Oct.) 74,855,929 493,371 FINANCIAL CALENDAR 2021 14 April 2021, Annual General Meeting 12 May 2021, First quarter 2021 results 10 August 2021, First half 2021 results 3 November 2021, Nine months 2021 results INVESTOR RELATIONS CONTACT Mr. Morten Agdrup Corporate Finance & Strategy Phone: +45 3917 9249 Email: ir@torm.com Mr. Finn Bjarke Petersen Investor Relations Phone: +45 3917 9225 Email: ir@torm.com ANALYST COVERAGE Danske Bank Mr. Anders Redigh Karlsen Phone: +45 8540 7072 Email: akarl@danskebank.dk Evercore ISI Mr. Jonathan B. Chappell Phone: +1 212-497-0827 Email: jonathan.chappell@evercoreisi.com Fearnley Securities Mr. Espen L. Fjermestad Phone: +47 2293 6484 Email: e.fjermestad@fearnleys.no Kepler Cheuvreux Mr. Petter Haugen Phone: +47 2313 9078 Email: phaugen@keplercheuvreux.com Skandinaviska Enskilda Banken AB Mr. Ulrik Bak Phone: +45 3328 3314 Email: ulrik.bak@seb.dk 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 2020, TORM issued a total of 30 announcements to the stock exchange. These announcements are available in both Danish and English versions on: https://investors.torm.com/announcements/releases 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 generally no individual investor meetings are held in that period. SHARE PRICE PERFORMANCE In 2020, TORM had an average of 74,799,580 A-shares outstanding. The average daily trading volume on Nasdaq in Copenhagen has been approximately 262t shares and approximately 52t shares on Nasdaq in New York. During 2020, the share price decreased from DKK 74.5 to DKK 45.0 on Nasdaq in Copenhagen and from USD 10.8 to USD 7.1 on Nasdaq in New York. Throughout 2020, TORM has been part of the MidCap segment on Nasdaq in Copenhagen. TORM ANNUAL REPORT 2020 OTHER 97 Other INVESTOR INFORMATION CHANGES TO THE SHARE CAPITAL As of 31 December 2019, TORM plc’s total share capital was USD 747,482.50 consisting of 74,748,248 A-shares of USD 0.01 each, one B-share and one C- share both of USD 0.01. As of 31 December 2020, TORM’s treasury shares represented approximately 0.7% 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- share and the C-share have certain voting rights. 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. During 2020, TORM has increased its share capital by 107,681 A-shares as a result of a corresponding number of Restricted Share Units being exercised. Following this, as of 31 December 2020, TORM plc’s total share capital was USD 748,559.31 with 74,855,929 A-shares, one B-share and one C-share. During 2020 TORM repurchased 180,500 A-shares and as of 31 December 2020, TORM holds 493,371 as treasury shares. SHAREHOLDERS As of 31 December 2020, TORM had approximately 10,800 registered shareholders representing approximately 94% of the share capital. In 2020, TORM has been subject to UK Disclosure Guidance and Transparency Rules under which shareholders have a 3% ownership notification requirement. From 1 January 2021, as a consequence of Brexit, TORM has changed its home member state in relation EU’s Prospectus Regulation and Transparency Directive to Denmark. This implies that shareholders now have a 5% ownership notification requirement. Based on notifications received during 2020 and 2021 to date OCM Njord Holdings S.à r.l. (Oaktree) is the only shareholder with more than 5% of the share capital holding 71% of the share capital. At the end of 2020, the members of the Board of Directors held a total of 297,135 shares, equivalent to a total market capitalization of DKK 13,371,075 or USD 2,109,659. The Board of Directors and certain employees are limited to trading shares during a four- week period after the publication of financial report. TORM’s Transfer Agent is Computershare Inc, Dept CH 19228, Palatine, IL 60055, USA. 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. For the first six months of 2020, TORM generated a net profit of USD 127.5m and the Board of Directors was pleased to declare an ordinary dividend of USD 63.2m, or USD 0.85 per share for the period. The material payment was possible due to TORM’s strong capital structure. In line with the Distribution Policy, the Board of Directors has decided not to recommend any distributions for the second half of 2020. WARRANTS AND RESTRICTED SHARE UNITS As of 31 December 2019, 4,701,864 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 expired on 13 July 2020 and none were exercised 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 TORM’s shareholders. Each RSU granted under the LTIP entitles its holder to acquire one Class A common share, subject to vesting. As of 31 December 2020, 2,187,454 RSUs were outstanding with 107,681 being exercised during 2020. The specific terms for the RSU’s are further described in the Remuneration Committee Report on page 82. For further information about investor relations, please visit https://investors.torm.com TORM ANNUAL REPORT 2020 OTHER 98 DIRECTORS’ REPORT The Directors are pleased to present the Annual Report on the affairs of the TORM Group for 2020, including the financial statements and the auditor’s report. Details on the Directors’ responsibilities are available in the Statement of Directors Responsibility on page 103. ANNUAL GENERAL MEETING TORM’s next Annual General Meeting (AGM) will be held on 14 April 2021. The notice of the AGM, including the complete proposals, will be available on TORM’s website, www.torm.com prior to the meeting. 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 page 44. For details on any significant events after 31 December 2020, please refer to note 2 on page 121. Details on financial risks are provided in note 20 of the financial statements on page 142. TORM’s section 172 statement can be found on pages 59-61. DIVIDENDS TORM made a total shareholder distribution of USD 72.0m in 2020 covering earnings in the second half of 2019 and the first half of 2020. The majority of the payment was made in September 2020, where TORM paid an ordinary dividend of USD 63.2m, or USD 0.85 per share. In line with the Company’s Distribution Policy the payment corresponded to 50% of net income for the six months ended 30 June 2020. In line with TORM’s Distribution Policy, the Board of Directors has decided to recommend that no dividends be paid for the second half of 2020 due to the negative results for the six months ended 31 December 2020. DIRECTORS Information on TORM’s Board of Directors as of 1 March 2021 is available on page 67. 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 84. 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, each Director, apart from the B-Director, must retire at the end of the second AGM after his or her appointment or last reappointment unless he or she has been reappointed at that AGM. The Company’s Directors were re-elected at the 2020 Annual General Meeting and will therefore be due to retire in 2022. The terms and conditions of the appointment of Non-Executive Directors are set out in the Company's Memorandum of Terms and Conditions which, in accordance with the UK Companies Act 2006, Chapter 5, Section 228, is available for inspection from the Company Secretary. SHARE CAPITAL TORM’s share capital amounts to USD 748,559.31 divided into 74,855,929 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 74,855,929 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 carries one vote on all resolutions proposed at the General Meetings of the Company except for the election or removal of the B-Director. Until the Threshold Date (the first time at which OCM Njord Holdings S.à r.l. Oaktree and its affiliates cease to beneficially own at least one third of the issued shares), 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. TORM ANNUAL REPORT 2020 OTHER 99 DIRECTORS’ REPORT The Company can 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 (who must include the Chairman and the B-Director) approve the relevant action or (ii) (a) in case of a supermajority 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 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 the 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”), must continue to hold the C-share as 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 if Oaktree 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 described in the “Investor information” section on pages 97-98. www.torm.com/uploads/media_items/articles-of- association-15-march-2016.original.pdf 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 U.S. Securities and 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: 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 granted at TORM plc’s AGM on 15 March 2016 (2016 AGM) and updated authorities granted at TORM plc’s AGM on 14 April 2020, 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 5,073,293 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 2020 OTHER 100 DIRECTORS’ REPORT • Up to an aggregate nominal amount of USD 1,372,283 which can be offered in connection with any proposed initial public offering of equity securities on certain US stock exchanges, of which none was issued from 1 January 2020 to 31 December 2020, leaving a current authority to issue up to 137,228,300 A-shares • Up to an aggregate nominal amount of USD 2,477,026 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 none was issued from 1 January 2020 to 31 December 2020, leaving a current authority to issue up to 247,702,600 A- shares. • Up to an aggregate nominal amount of USD 777,625 to Directors, officers or employees of the Company or any of its subsidiaries, of which USD 10,474 nominal value was used for the grant of Restricted Share Units during the period from 1 January 2020 to 31 December 2020, leaving a current authority to issue up to 77,225,513 A-shares Furthermore, the Board of Directors received authorization at the 2020 AGM to make market purchases up to a maximum of 7,476,065 A-shares within a certain price range. TORM has repurchased 180,500 A-shares in the period from 1 January 2020 to 31 December 2020, leaving a current authority to purchase up to 7,295,565 A-shares or approximately 10% of TORM's share capital excluding treasury shares. All of the above authorities to issue and purchase shares expire on 14 April 2025. SIGNIFICANT SHAREHOLDINGS Details on significant shareholdings are set out in the “Investor Information” section on page 98. Details of TORM’s employee share schemes and any rights attached to the shares under these schemes are set out on pages 81-82 of the Directors’ Remuneration Report. The U.K. Takeover Code, issued and administered by the U.K. Takeover Panel, applies to the Company. POLITICAL DONATIONS No political donations were made during 2020. 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 1 on page 114. RESEARCH AND DEVELOPMENT The Company continues to 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 are set out on page 5. 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 5-61 provides a review of TORM’s operations in 2020 and the potential future developments of those operations. Details on greenhouse gas emissions are included in the “Strategic Report” on page 36, and details on TORM’s general policy relating to recruitment, training, career development and disabled employees are included on page 41. Please refer to pages 59-61 for information on how the Directors have had regard to the need to foster the Company’s business relationship with suppliers, customers and other stakeholders. TORM ANNUAL REPORT 2020 OTHER 101 DIRECTORS’ REPORT STATEMENT BY THE DIRECTORS IN PERFORMANCE OF THEIR STATUTORY DUTIES IN ACCORDANCE WITH SECTION 172(1) OF THE UK COMPANIES ACT 2006 To see the full statement, please see page 59-61. REQUIREMENTS OF 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 must comply with the provisions of the UK Companies Act, including provisions for EEA-listed companies. RECENT DEVELOPMENTS AND POST-BALANCE SHEET EVENTS To see post-balance sheet events, please see the subsequent events disclosed in note 2 on page 121. INDEPENDENT AUDITORS Each person who is a Director at the date of approval of the Annual Report confirms that: Approval On behalf of the Board of Directors • 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 or she ought to have taken as a Director in order to make him or 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 section 418 of the UK Companies Act 2006. Mr. Christopher H. Boehringer Chairman of the Board of Directors 1 March 2021 TORM ANNUAL REPORT 2020 OTHER 102 STATEMENT OF DIRECTORS’ RESPONSIBILITIES • In respect of the parent company financial statements state whether applicable UK Accounting Standards, including FRS 101, have been followed, subject to any material departures disclosed and explained in the financial statements • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and regulations. In preparing these financial statements, the Directors are required to: • Select suitable accounting policies in accordance 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 (IFRS) in conformity with the Companies Act 2006 and IFRS as adopted pursuant to Regulation (EC) No. 1606/2002 as it applies to the European Union 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 Financial Reporting Standard 101 “Reduced Disclosure Framework” (FRS 101). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently • Make judgements and accounting estimates that are reasonable and prudent • 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 IFRS (or in respect of the parent company financial statements, FRS 101) is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance In respect of the group financial statements, state whether IFRSs in conformity with the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union have been followed, subject to any material departures disclosed and explained in the financial statements TORM ANNUAL REPORT 2020 OTHER 103 STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the company and the group financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance statement that comply with that law and those regulations. 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 1 March 2021 and is signed on its behalf by: • The financial statements, prepared in accordance with the Companies Act 2006 and IFRSs as adopted pursuant to Regulation (EC) No. 1606/2002 as it applies to the European Union, 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 annual report, including 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 • The annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy Mr. Jacob Meldgaard Executive Director 1 March 2021 TORM ANNUAL REPORT 2020 OTHER 104 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 2020 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes Consolidated PARENT COMPANY FINANCIAL STATEMENTS Parent Company 2020 Balance Sheet Changes in Equity Notes to Parent Company Financial Statements OTHER Independent Auditor’s Report TORM Fleet Overview Glossary and APM 106 106 107 108 110 111 149 150 151 152 157 162 165 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 105 Consolidated financial statements CONSOLIDATED INCOME STATEMENT 1 JANUARY-31 DECEMBER CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1 JANUARY-31 DECEMBER USD '000 Revenue Note 2020 2019 2018 USD '000 747,356 692,610 635,366 Net profit/(loss) for the year 2020 2019 2018 88,114 166,022 -34,779 Port expenses, bunkers and commissions -227,924 -267,739 -283,018 0 0 -2,506 Other comprehensive income/(loss): Charter hire Operating expenses Profit from sale of vessels Administrative expenses Other operating expenses 3 -178,376 -172,983 -180,443 Items that may be reclassified to profit or loss: 23 1,069 1,180 752 Exchange rate adjustment arising from translation of 3, 4 -50,773 -47,724 -47,826 entities using a functional currency different from USD 16 426 -316 -19,185 -2,911 -1,963 Fair value adjustment on hedging instruments -2,070 -13,289 -6,748 Share of profit/(loss) from joint ventures -242 -422 189 Fair value adjustment on hedging instruments transferred Impairment losses and reversal of impairment on to income statement -6,860 1,284 -307 tangible assets Depreciation 6, 8, 23 -11,096 114,004 -3,249 6,7 -121,922 -110,124 -114,480 Items that may not be reclassified to profit or loss: Remeasurements of net pension and other post-retirement Operating profit/(loss) (EBIT) 138,907 205,891 2,822 benefit liability or asset 103 -82 -48 Financial income Financial expenses 9 9 536 2,796 3,302 Other comprehensive income/(loss) after tax ¹ -8,811 -11,661 -7,419 -49,914 -41,881 -39,345 Total comprehensive income/(loss) for the year ⁾ 79,303 154,361 -42,198 Profit/(loss) before tax 89,529 166,806 -33,221 ¹ Tax 12 -1,415 -784 -1,558 Net profit/(loss) for the year 88,114 166,022 -34,779 EARNINGS PER SHARE Basic earnings/(loss) per share (USD) Diluted earnings/(loss) per share (USD) 27 27 1.19 1.19 2.24 2.24 -0.48 -0.48 No income tax was incurred relating to other comprehensive income/(loss) items due to the Danish tonnage tax scheme. ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 106 Note 2020 2019 USD '000 Note 2020 2019 CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER Vessels and capitalized dry-docking 6,7,8,16 1,722,465 1,674,795 6,7 7,098 8,127 USD '000 ASSETS NON-CURRENT ASSETS Tangible fixed assets Land and buildings Prepayments on vessels Other plant and operating equipment Total tangible fixed assets Financial assets Investments in joint ventures Loan receivables Deferred tax asset Other investments Total financial assets Total non-current assets CURRENT ASSETS Bunkers Freight receivables Other receivables Prepayments EQUITY AND LIABILITIES EQUITY Common shares Share premium Treasury shares 6 6 12,024 95,003 Hedging reserves 6,847 4,256 Translation reserves Retained profit 1,748,434 1,782,181 Total equity 1,588 1,169 NON-CURRENT LIABILITIES LIABILITIES 5 4,617 4,617 344 1 - 1 6,550 5,787 1,754,984 1,787,968 22,459 34,837 10 11 58,574 89,830 24,881 6,168 2,181 3,468 CURRENT LIABILITIES Borrowings Trade payables Current tax liabilities Other liabilities Provisions Deferred income Total current liabilities Cash and cash equivalents, including restricted cash 28 135,564 72,483 Current assets, excluding assets held for sale 243,659 206,786 Total liabilities Assets held for sale Total current assets TOTAL ASSETS 23 - 9,127 TOTAL EQUITY AND LIABILITIES 243,659 215,913 1,998,643 2,003,881 Non-current tax liability related to held over gains 12 44,923 44,901 Borrowings Total non-current liabilities 7,15,16,18 739,543 756,352 784,466 801,253 13 748 747 102,044 101,289 13 -4,235 -2,887 -20,681 -11,751 346 330 939,247 919,959 1,017,469 1,007,687 7,15,16,18 102,858 99,025 18 14,350 47,120 1,418 1,476 14,18 59,782 47,316 26 18,300 - - 4 196,708 194,941 981,174 996,194 1,998,643 2,003,881 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 107 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 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 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 Equity as of 1 January 2019 Comprehensive income/loss for the year: Net profit/(loss) for the year Other comprehensive income/(loss) for the year ² Total comprehensive income/(loss) for the year ⁾ Capital increase Share-based compensation Total changes in equity 2019 Equity as of 31 December 2019 Common Share Treasury Hedging Translation Retained shares premium shares ¹ reserves reserves profit Total 623 - 623 - - - - - - - - - 119 99.880 - - -2.788 - 119 97.092 -2.887 ⁾ - 7.309 - -2.887 7.309 220 - 220 785.785 791.050 -878 -878 784.907 790.172 - - - - - - - - -7.055 -7.055 - - - - -34.779 -34.779 -316 -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 -2.887 742 97.092 -2.887 - - - 5 - 5 - - - 4.197 - 4.197 - - - - - - 254 254 - -12.005 -12.005 - - -96 752.106 847.211 -96 752.106 847.211 - 426 426 - - 166.022 166.022 -82 -11.661 165.940 154.361 - 1.913 4.202 1.913 -12.005 426 167.853 160.476 747 101.289 -2.887 -11.751 330 919.959 1.007.687 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 108 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1 JANUARY-31 DECEMBER USD '000 Equity as of 1 January 2020 Comprehensive income/(loss) for the year: Net profit/(loss) for the year Other comprehensive income/(loss) for the year ² Total comprehensive income/(loss) for the year ⁾ Capital increase Transaction cost of capital increase Acquisition of treasury shares Share-based compensation Dividend paid Total changes in equity 2020 Equity as of 31 December 2020 ¹ ² Please refer to note 13 for further information on treasury shares. Please refer to "Consolidated Statement of Comprehensive Income". ⁾ ⁾ Common Share Treasury Hedging Translation Retained shares premium shares ¹ reserves reserves profit Total 747 101,289 -2,887 ⁾ -11,751 330 919,959 1,007,687 - - - 1 - - - - 1 - - - 787 -32 - - - - - - - - -1,348 - - - -8,930 -8,930 - - - - - - 16 16 - - - - - 88,114 103 88,114 -8,811 88,217 79,303 - - - 1,682 788 -32 -1,348 1,682 -70,611 -70,611 755 -1,348 -8,930 16 19,288 9,782 748 102,044 -4,235 -20,681 346 939,247 1,017,469 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 109 CONSOLIDATED CASH FLOW STATEMENT 1 JANUARY-31 DECEMBER USD '000 Note 2020 2019 2018 USD '000 Note 2020 2019 2018 CASH FLOW FROM OPERATING ACTIVITIES CASH FLOW FROM INVESTING ACTIVITIES Net profit/(loss) for the year 88,114 166,022 -34,779 Investment in tangible and intangible fixed Reversals: Profit from sale of vessels Depreciation Impairment losses and reversal of impairment -1,069 -1,180 -752 6 121,922 110,124 114,480 assets Investments in joint ventures Sale of tangible fixed assets Change in restricted cash -173,050 -384,349 -202,439 - -275 - 23 83,662 61,801 26,847 -30,414 - - losses on tangible assets 6, 8, 23 11,096 -114,004 3,249 Net cash flow from investing activities -119,802 -322,823 -175,592 Share of profit/(loss) from joint ventures 242 422 -189 Financial income Financial expenses Tax expenses Other non-cash movements Dividends received from joint ventures Interest received and realized exchange gains 9 9 12 24 -536 -2,796 -3,302 49,914 41,881 39,345 1,415 1,093 275 583 784 925 19 2,535 1,558 2,039 440 2,720 CASH FLOW FROM FINANCING ACTIVITIES Proceeds, borrowings Repayment, borrowings Dividend paid Capital increase Transaction costs share issue Purchase/disposal of treasury shares Interest paid and realized exchange losses -52,905 -45,283 -39,792 Change in restricted cash Income taxes paid -252 -216 -1,611 5, 18 734,346 261,830 114,530 18 -746,475 -169,177 -113,733 -70,611 - - 788 -32 -1,348 4,202 99,999 - - -2,788 - - -12,364 -2,014 Change in bunkers, receivables and payables, Net cash flow from financing activities -83,332 84,491 95,994 etc. 24 15,909 11,858 -12,668 Net cash flow from operating, investing and Net cash flow from operating activities 235,801 171,091 70,738 financing activities 32,667 -67,241 -8,860 Cash and cash equivalents as of 1 January 56,847 124,088 132,948 Cash and cash equivalents as of 31 December 89,514 56,847 124,088 Restricted cash as of 31 December 46,050 15,636 3,273 Cash and cash equivalents, including restricted cash as of 31 December 135,564 72,483 127,361 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Accounting policies, critical accounting estimates and judgements Note 2 – Liquidity, capital resources and subsequent events Note 3 – Staff costs Note 4 – Remuneration to auditors appointed at the parent company’s annual general meeting Note 5 – Loan receivables Note 6 – Tangible fixed assets Note 7 – Leasing Note 8 – Impairment testing Note 9 – Financial items Note 10 – Freight receivables Note 11 – Other receivables Note 12 – Tax Note 13 – Common shares and Treasury shares Note 14 – Other liabilities Note 15 - Effective Interest Rate, Outstanding Borrowings Note 16 – Collateral security for Borrowings Note 17 – Guarantee commitments and contingent liabilities Note 18 – Contractual rights and obligations Note 19 – Derivative financial instruments Note 20 – Risks associated with TORM’s activities Note 21 – Financial instruments Note 22 – Related party transactions Note 23 – Assets held for sale and Non-current assets sold during the year Note 24 – Cash flows Note 25 – Entities in the group Note 26 - Provisions Note 27 – Earnings per share and Dividend per share Note 28 – Cash and cash equivalents, including restricted cash 112 121 122 124 125 125 127 129 130 131 131 131 132 133 134 135 135 135 137 140 144 145 145 145 146 147 148 148 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 111 NOTE 1 – ACCOUNTING POLICIES, CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS NOTE 1 – continued OVERVIEW OF BUSINESS TORM plc is a shipping company, which owns and operates a fleet of product tankers. TORM plc is a public company limited by shares and is incorporated in England and Wales. Its registered number is 09818726 and its registered address is Birchin Court, 20 Birchin Lane, London, EC3V 9DU. 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. 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 International Financial Reporting Standards (“IFRS”) in conformity with the requirements of the Companies Act 2006 and as adopted pursuant to regulation (EC) No. 1606/2002 as it applies in the EU and as issued by the International Accounting Standards Board (“IASB”) as applied to financial periods beginning on or after 1January 2020. 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 of the Company is USD, and the Company applies USD as the presentation currency in the preparation of the consolidated financial statements. GOING CONCERN The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out on pages 44-53. As of 31 December 2020, TORM’s available liquidity including undrawn and committed facilities was USD 267.8m, including a total cash position of USD 135.6m (including restricted cash of USD 46.1m). TORM’s net interest-bearing debt was USD 713.1m, and the net debt loan-to-value ratio was 51%. 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 20 to the financial statements. The principal risks and uncertainties facing the Group are set out on pages 54-58, and details on the refinancing are described in note 2. 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 in its loan facilities, details of which are available in note 2 to the financial statements. A key element for TORM’s financial performance in the going concern period relates to the development of the COVID-19 pandemic and the associated lockdowns in the different economies. TORM’s base case assumes an economic rebound during the second half of 2021, however neither freight rates nor vessel values will reach 2020 levels. In the base case, TORM has sufficient liquidity and headroom above all the covenant limits. TORM performs sensitivity calculations to reflect downside 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 downside scenarios cover the principal risks and uncertainties facing the Group as set out on page 57-58 and include different distressed outlook for the product tanker market. In a low case scenario management have assumed freight rates that on average are 15% below those in the base case and a similar decline in vessel values. In the low case scenario there remains sufficient headroom on liquidity and covenants. In a stress case scenario management have further stressed the freight rates to the lowest rolling four quarter average since 2000. In the stress case scenario there remains sufficient liquidity, but limited headroom on covenants. The Board of Directors has considered the Group’s cash flow forecasts and the expected compliance with the Company’s financial covenants for the period until and including 31 March 2022. The Group’s cash flow forecast and expected covenant compliance is based on the Board approved business plan. Based on this review, the Board of Directors has a reasonable expectation that taking reasonably possible changes in trading performance and vessel valuations into account, the Group will be able to continue the operational existence and comply with its financial covenants for the next 12 months. Accordingly, the Group continues to adopt the going concern basis in preparing its financial statements. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 112 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 2020: • Amendments to IFRS 3 Business Combinations (issued on 22 October 2018) • Amendments to IAS 1 and IAS 8: Definition of Material (issued on 31 October 2018) • Amendments to References to the Conceptual Framework in IFRS Standards (issued on 29 March 2018) It is assessed that application of these effective on 1 January 2020 has not had any material impact on the consolidated financial statements in 2020. 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: • IFRS 10 and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture issued in September 2014 • Amendments to IFRS 3 Business Combinations; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets (all mandatory 1 Jan 2022) • Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current (1 Jan 2023) • Annual Improvements 2018-2020 (1 Jan 2022) TORM has assessed the accounting standards and interpretations not yet adopted and does not expect the new standards to have any material impact on neither TORM’s figures nor the disclosures. NOTE 1 - continued 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 • The ability to use its power over the investee to affect the amounts of the investor’s returns The Company 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 • 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 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 using consistent accounting policies and eliminating intercompany transactions, balances and shareholdings as well as gains and losses on transactions between the consolidated entities. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 113 NOTE 1 - continued NOTE 1 - continued 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. Foreign currencies The functional currency of all significant entities, including subsidiaries and associated companies, is United States 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 exchange rate for each transaction, 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 in “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. 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 to eliminate risks relating to future fluctuations in prices and interest rates, etc. on future committed or anticipated transactions. TORM applies hedge accounting under the specific rules on cash flow hedges when appropriate as described below for each type of derivative. 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, 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. The Group only has one operating segment which is the sole reportable segment, the Tanker Segment, for which 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. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 114 NOTE 1 - continued 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. 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. 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 Leases TORM assesses whether a contract is or contains a lease at inception of the contract and recognizes right-of-use assets and corresponding lease liabilities at the lease commencement date, except for short-term leases and leases of low value. For these leases, TORM recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease. Revenue comprises freight, charter hire and demurrage revenue from the vessels. Revenue is recognized when or as performance obligations are satisfied by transferring services to the customer, i.e. 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. Agreements to charter in vessels and to lease land and buildings and other plant and operating equipment for which TORM substantially has the control are recognized on the balance sheet as right-of-use assets and initially measured at cost, which comprises the initial amount of the lease liabilities adjusted for any lease payments made at or before the commencement date. Subsequently the right-of-use assets are measured at cost less accumulated depreciation and impairment losses. The right-of-use assets are depreciated and written down under the same accounting policy as the assets 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 under “Borrowings” and initially measured at the present value of the lease payments that are not paid at the commencement date, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable . Subsequently lease liabilities are measured at amortized cost using the effective interest method, where the lease liabilities are remeasured when there is a change in future lease payments. Sale and leaseback Following a sale transaction, for agreements to immediately charter-in the related vessels (sale and leaseback) but for which TORM maintains substantially all the risks and rewards incidental to economic ownership, the proceeds received are presented as a financial liability in “Borrowings”. No gain or loss is recorded, and the asset remains recognized on the balance sheet. Freight revenue, including charter hire and demurrage (and related voyage costs) are recognized in the income statement according to the entered charter parties from the date of load to the date of delivery of the cargo (discharge). The completion is determined using the load-to-discharge method based on the percentage of the estimated duration of the voyage completed at the reporting date. Cross-over voyages 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. 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. 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 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. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 115 NOTE 1 – continued NOTE 1 - continued 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. 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. Financial expenses Financial expenses comprise interest expenses, financing costs of leases liabilities, 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 payments under interest rate hedge instruments. Interest is recognized in accordance with the accrual basis of accounting taking into account the effective interest rate. Tax Tax expenses comprise the expected income tax charge for the year in accordance with IAS 12 as well as tonnage tax related to the Group’s vessels for the year. The income tax charge for the year includes adjustments relating to previous years and the change in deferred tax for the year. However, income tax relating to items in other comprehensive income is recognized directly in the statement of other comprehensive income. 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. To the extent the costs are recoverable, costs directly attributable to relocate the vessel to the load port are capitalized and amortized over the course of the transportation period. Gains and losses on forward bunker contracts and write-down for losses on freight receivables are included in this line. 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 at the time of delivery to the buyer, representing the difference between the sales price less costs to sell and the carrying value of the vessel. 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 management fees paid to commercial and technical managers for managing the fleet and profits and losses deriving from the disposal of fixed assets other than vessels. Depreciation and impairment losses and reversals of 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. Subsequent reversal of impairment losses are recognized if the recoverable amount exceeds the carrying amount to the extent that the carrying amount does not exceed the carrying amount without any historic impairment losses. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 116 NOTE 1 - continued BALANCE SHEET Vessels Vessels consist of owned vessels and leased vessels. The accounting policy for leased vessels is specified under “Leases” and “Sale and leaseback” above. Owned 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. All major components of vessels (scrubbers, etc.) 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. 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 at the reporting date. Prepayment on vessels is measured at costs incurred. 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. NOTE 1 - continued Prepayments on vessels Prepayments consist of prepayments related to newbuilding contracts for vessels not yet delivered and include the share of borrowing costs that is directly attributable to the acquisition of the underlying vessel. When a vessel is delivered, the prepaid amount is reallocated to the financial statement line “Vessels and capitalized dry-docking”. Land and buildings and other plant and operating equipment Land and buildings and other plant and operating equipment consist of leaseholds regarding office buildings, leasehold improvements, company cars, 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. The current estimates are: • Land and buildings • Office buildings : Over the shorter of the remaining leasing term and the estimated useful life • Leasehold improvements: Over the shorter of the remaining leasing term and the estimated useful life • Other plant and operating equipment IT equipment: 3–5 years • Company cars: Over the lease term, typically 3 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. For a right-of-use asset, depreciation commences at the commencement date of the lease. 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. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 117 NOTE 1 – continued NOTE 1 – continued 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. Loan receivables Loan receivables are initially recognized on the balance sheet as fair value less transaction costs. Subsequent to initial recognition, loan receivables are measured at amortized cost. Amortized cost is defined as the amount initially recognized reduced by principal repayments and allowances for the expected credit loss (ECL). 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. Receivables are at initial recognition measured at their transaction price less allowance for expected credit losses over the lifetime of the receivable and are subsequently measured at amortized cost adjusted for changes in expected credit losses. Derivative financial instruments included in other receivables are measured at fair value. Expected credit losses Expected credit losses at initial recognition are determined using an ageing factor as well as a specific customer knowledge, such as 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 subsequently, and if the debtor’s ability to pay is becoming doubtful, expected credit losses are calculated on an individual basis. When there are no reasonable expectations of recovering the carrying amount , the receivable is written off in part or entirely. Impairment of assets Non-current assets are reviewed at the reporting date to determine any indication of impairment including a significant decline in either the assets’ market value, increase to market rates of return or in the cash flows expected to be generated by the fleet. If impairment indicator(s) exists, an impairment test on a cash-generating unit (CGU) level will be performed. A cash-generating unit is determined as the smallest group of assets that generates independent cash inflows. An asset/CGU is impaired if the recoverable amount is below the carrying amount. The recoverable amount of the CGU is estimated as the higher of fair value less costs of disposal and value in use. The value in use is the present value of the future cash flows expected to be derived 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 that TORM has three CGUs, being the Main Fleet and the two Handysize vessels. 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. 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 cost of delivery less discounts. 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. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 118 NOTE 1 - continued NOTE 1 - continued 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”. Borrowings Borrowings consist of mortgage debt, bank loans and lease liabilities. 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 Interim dividends are recognized as a liability at the time of declaration. Any year-end dividend is recognized as a liability at the date of approval at the AGM. 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. Borrowings, are initially 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. Trade payables Trade payables are recognized at the fair value of the item purchased and are subsequently measured at amortized cost. Other liabilities Other liabilities are generally measured at amortized cost. Derivative financial instruments included in other liabilities are measured at fair value. 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 income tax purposes. Deferred tax is calculated at the income 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 or substantially enacted at the balance sheet date. The deferred tax is charged through the income statement except when it relates to other comprehensive income items. No deferred tax is recognised related to assets and liabilities, including vessels, which are subject to tonnage tax. Income tax balances The expected income tax payable on the taxable profits for the year is classified as current tax in the balance sheet. Income taxes expected to fall due after more than one year are classified as non-current liabilities or assets in the balance sheet. Income tax is measured using tax rates enacted or substantially enacted at the balance sheet date, and includes any adjustment to tax payable in respect of previous years. Current and non-current income tax balances are not discounted. 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. Cash flow from investing activities comprises the cash used or received in the purchase and sale of tangible fixed assets and financial assets as well as cash from business combinations. Cash flow from financing activities comprises changes in the cash used or received in borrowings (amount of new borrowings and repayments), purchases or sales of treasury shares and dividend paid to shareholders. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 119 NOTE 1 – continued NOTE 1 - continued Cash and cash equivalents including restricted cash comprise cash and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets is approximately equal to their fair value. Cash and cash equivalents including restricted cash 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 initial margin calls and negative market values on 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. 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. Management also makes various accounting judgements in the preparation of the consolidated financial statements that can affect the amounts recognised. Judgements Management has assessed that TORM has three CGUs within its single reportable segment product tanker segment – the largest of which is its Main Fleet (comprising LR1/LR2 and MR – vessels). The Main Fleet is considered to be a single cash generating unit because the vessels in the Main Fleet are largely interchangeable and the cash flows generated by them are interdependent. These vessels are operated collectively as a combined internal pool, employed principally in the spot market and actively managed to meet the needs of our customers in that market, particularly regarding the location of vessels meeting required specifications and the price of transport rather than vessel class. Given the technical specifications and capacity of vessels, the Main Fleet is relatively homogenous with a very high degree of interoperability. All vessels in the Main Fleet are able to handle multiple sizes of cargoes and sail all seas and oceans, over both shorter and long distances. The Main Fleet is monitored and managed on an aggregated level as one pool, i.e. each vessel or vessel class does not generate cash inflows that are largely independent of those from other vessels or vessel classes. the The other groups of CGUs outside the Main Fleet comprise the two Handysize vessels (which are typically used for shorter and coastal trade routes and more frequent port calls, including for transportation of various clean petroleum products within Europe and in the Mediterranean). Estimates 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 recoverable amount 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 or indication that past impairment losses should be reversed 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 at the reporting date as part of the review for potential impairment indicators. If an indication of impairment or reversal of past impairment is identified, the need for recognizing an impairment loss or a recognition of a reversal of a past impairment loss is assessed by comparing the carrying amount of the vessels to the higher of the fair value less costs of disposal 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-docking costs and discount rates. For more information on key assumptions and related sensitivities, please refer to note 8 in these financial statements. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 120 NOTE 1 - continued NOTE 2 - continued All these factors have been historically volatile, especially the freight rates. 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. SUBSEQUENT EVENTS • On 5 January 2021, TORM signed an Additional Facilities Agreement of USD 56.4m with Danish Ship Finance to finance two MR vessels and with option of financing one more vessel. • On 7 January 2021, the drawdown of USD 13.6m from the DSF Facilities Agreement was made to finance the purchase of the MR vessel TORM India. NOTE 2 – LIQUIDITY, CAPITAL RESOURCES AND SUBSEQUENT EVENTS LIQUIDITY AND CAPITAL RESOURCES As of 31 December 2020, TORM’s cash and cash equivalents including restricted cash totaled USD 136m (2019: USD 72m; 2018: USD 127m), and undrawn and committed credit facilities amounted to USD 132m (2019: USD 173m; 2018: USD 279m). The undrawn and committed credit facilities consisted of a USD 45m Working Capital Facility and two leasing facilities of USD 76m and USD 11m with BoComm Leasing. TORM had two newbuildings (2019: four; 2018: nine) and one secondhand vessel on order. The newbuildings are for delivery in late 2021 and early 2022 respectively and the secondhand vessel is for delivery in early 2021. The total outstanding CAPEX related to these newbuildings was USD 86m (2019: USD 51m; 2018: USD 258m) and is mainly financed by the committed BoComm Leasing facilities of USD 76m. The secondhand vessel will be financed by traditional bank mortgage financing. TORM has a Syndicated Facilities Agreement which includes a USD 299m Term Facility Agreement and an undrawn USD 45m Working Capital Facility both with maturity in 2026. The Term Facility Agreements were refinanced in 2020. In addition to the Syndicated Facilities, TORM has a USD 150m Term Facility Agreement with Danish Ship Finance with maturity in 2027. Furthermore, TORM has a USD 81m Term Facility Agreement and a USD 33m Term Facility Agreement with Hamburg Commercial Bank with maturity in 2025, with China Export-Import Bank of USD 96m with maturity in 2030 and with KfW-IPEX Bank of USD 44m with maturity in 2032. As of 31 December 2020, the scheduled minimum payments on mortgage debt and bank loans in 2021 were USD 89m. TORM has lease agreements of a total USD 83m with various Japanese leasing providers and a USD 58m lease agreement with BoComm Leasing expiring in 2025. Furthermore, TORM has two committed leasing facilities with BoComm Leasing, a leasing facility of USD 76m to finance the two newbuilding vessels on order, and a leasing facility of USD 11.2m to finance scrubber and ballast water treatment systems installations. As of 31 December 2020, the scheduled repayments on lease agreements in 2021 were USD 16m. TORM’s bank debt facilities include financial covenants related to: • Minimum liquidity (cash and cash equivalents minimum amount requirement at all times) • Minimum security value (loan-to-value for individual borrowings) • Equity ratio (minimum level) During 2020, 2019 and 2018, TORM did not have any covenant breaches. • On 29 January 2021, the drawdown of USD 13.6m from the DSF Facilities Agreement took place to finance the purchase of the MR vessel TORM Philippines. • On 25 January 2021, TORM carried out a capital increase due to the exercise of Restricted Share Units as part of the Company’s incentive program. TORM increased its share capital by 7,089 A-shares corresponding to a nominal value of USD 70.89. After the capital increase, TORM’s share capital amounts to USD 748,630.20 divided into 74,863,018 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 74,863,018 votes are attached to the A-shares. • On 5 February 2021, the drawdown of USD 11.2m from Bocomm Leasing took place to finance the installation of scrubbers for the four vessels financed by BoComm Leasing. • On 1 March 2021 TORM entered into an agreement to purchase eight 2007-2012 built MR product tanker vessels from TEAM Tankers Deep Sea Ltd. for a total cash consideration of USD 82.5m and the issuance of 5.97 million shares, corresponding to approximately 8% of TORM’s current outstanding shares. Six of the vessels have specialized cargo tank configurations and extended tank segregations (IMO 2), allowing for enhanced trading flexibility through chemical trading options. Based on broker valuations, the market value of the acquired vessels is assessed at USD 148m. TORM has obtained attractive terms on the financing with maturities in 2026.The 2009-2012 built vessels will be financed by increasing TORM’s existing Syndicated Term Facility with a new Revolving Facility of up to USD 67m provided pro rata by the existing syndicate banks (ABN AMRO, Danske Bank, ING, Nordea, Credit Agricole, Société Générale and Swedbank), and the 2007-2008 built vessels will be financed through a new term facility with Hamburg Commercial Bank amounting up to USD 28m. The financing is subject to finalization of the documentation. The vessels are scheduled to be delivered during the second and third quarter of 2021, and in connection with each delivery, TORM will issue the 5.97 million shares to TEAM Tankers in tranches based on the individual vessel’s relative value. The agreed individual share issuances are subject to adjustments related to potential capital increases and shareholder distributions, as applicable. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 121 NOTE 3 – STAFF COSTS Employee information The majority of the staff on vessels are not employed by TORM. Staff costs included in operating expenses relate to the 109 seafarers employed under Danish contract (2019: 108, 2018: 112). The average number of employees is calculated as a full-time equivalent (FTE). The Executive Director is, in the event of termination by the Company, entitled to a severance payment of up to 12 months' salary. USDm Total staff costs Staff costs included in operating expenses Staff costs included in administrative expenses Total Staff costs comprise the following Wages and salaries Share-based compensation Pension costs Other social security costs Other staff costs Total 2020 2019 2018 9.2 41.5 50.7 42.3 1.7 3.3 1.3 2.1 8.1 37.7 45.8 37.2 1.9 3.5 0.9 2.3 9.3 36.9 46.2 38.1 2.1 3.3 0.6 2.1 50.7 45.8 46.2 NOTE 3 - continued USD '000 2020 2019 2018 Non-Executive Board and Committee Remuneration, short term Christopher H. Boehringer David Weinstein Göran Trapp Torben Janholt Annette Justad Total Executive Management 256 200 172 89 139 252 276 198 170 170 - 182 171 171 - 856 790 800 Annual perfor- Taxable mance USD '000 Salary benefits bonus Total Executive Management Remuneration Jacob Meldgaard 2018, TORM A/S¹ 2018, TORM plc¹ 2019, TORM A/S¹ ⁾ 2019, TORM plc¹ 2020, TORM A/S¹ ⁾ 2020, TORM plc¹ ⁾ ⁾ ⁾ 983 80 962 79 1,052 77 44 425 1,452 - - 80 41 1,126 2,129 - 41 - - 1,262 - 79 2,355 77 Average number of permanent employees Seafarers Land-based Total 109 332 441 108 313 112 302 421 414 ¹ Paid by legal entity as noted. ⁾ Majority of the seafarers on vessels are on short term contracts. The number of seafarers on short term contracts in 2020 was on average 1,474 (2019: 1,510, 2018: 1,594). Total seafarers costs in 2020 was USD 80.5m (2019: USD 79.5m, 2018: USD 81.4m), which has been included in “Operating expenses”. ⁾ Key management personnel consists of the Board of Directors and the Executive Director. Senior Management Team The aggregate compensation paid by the Group to the 3 (2019: 3) other members of the Senior Management Team in 2020 (excluding Mr. Meldgaard) was USD 2,054,424 (2019: USD 1,736,750, 2018: USD 2,186,679), which includes an aggregate of USD 126,726 (2019: USD 115,880, 2018: USD 125,959) allocated for pensions (defined contribution plans) for these individuals. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 122 NOTE 3 - continued NOTE 3 - continued Long-Term Incentive Plan - RSUs granted in 2020: RSU grant value Exercise assuming RSU LTIP price per 100% grant ¹ share vesting LTIP element of Jacob Meldgaard's remuneration package 2018: ⁾ Jacob Meldgaard 766,035 DKK 53.7 USD 0.9m ¹ 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 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 program. For good leavers subject to the Danish Stock Options Act, the RSUs 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. In accordance with its Remuneration Policy, TORM has 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 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 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. As of 1 January 2019, one fifth of the grant, amounting to 255,345, vested with an exercise period ending 31 December 2019. These RSUs, amounting to one third of the re-grant issued on 25 April 2018, were exercised. In November 2019, 255,345 RSUs were exercised by Executive Director Mr. Jacob Meldgaard. 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). The single figure remuneration table for the CEO does not include any amounts in relation to the RSU awards since, as of the date each tranche vested, the Company’s share price was less than the exercise price. In December 2019, the CEO was informed that he would receive two additional tranches of 255,200 RSUs in 2021 and 2022 respectively. The first would vest in equal installments over three years beginning 1 January 2022. The second would vest in equal installments over three years beginning 1 January 2023. The strike price for each tranche will be determined as the average of 90 days before publication of the TORM plc Annual Report plus a 15% premium. The first tranche will be based on the publication of the Annual Report 2020 and the second tranche on the publication of the Annual Report 2021. The exercise period for vested RSUs will be 360 days. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 123 NOTE 3 - continued NOTE 4 – REMUNERATION TO AUDITORS APPOINTED AT THE PARENT COMPANY’S ANNUAL GENERAL MEETING 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. USDm Audit fees 2020 2019 2018 The program comprises the following number of shares in TORM plc: Number of shares (1,000) 2020 2019 2018 Outstanding as of 1 January Granted during the period Exercised during the period Expired during the period Forfeited during the period 2,228.3 2,719.1 2,611.2 1,047.4 1,001.1 907.3 -107.7 -529.4 - -980.5 -785.3 -764.0 - -177.2 -35.4 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 Total non-audit fees 0.4 0.2 0.6 0.0 0.1 0.1 0.4 0.2 0.6 0.1 - 0.1 Outstanding as of 31 December 2,187.5 2,228.3 2,719.1 Total 0.7 0.7 0.4 0.2 0.6 0.2 - 0.2 0.8 Exercisable as of 31 December - - 255.3 In 2018, the Board agreed to grant a total of 944,468 RSUs 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). In 2019, the Board agreed to grant a total of 1,001,100 RSUs to other management. The vesting period of the program is three years for key employees. The exercise price is set to DKK 49.7. The exercise period is 12 months after the vesting date. The fair value of the options granted in 2019 was determined using the Black-Scholes model and is not material. The average remaining contractual life for the restricted shares as per 31 December 2019 is 1.5 years. In 2020, the Board agreed to grant a total of 1,047,389 RSUs to other management. The vesting period of the program is three years for key employees. The exercise price is set to DKK 69.9. The exercise period is 12 months after the vesting date. The fair value of the options granted in 2020 was determined using the Black-Scholes model and is not material. The average remaining contractual life for the restricted shares as per 31 December 2020 is 1.5 years. Under SEC regulations, the remuneration of the auditor of USD 0.7m (2019: USD 0.7m, 2018: USD 0.8m) is required to be presented as follows: Audit USD 0.6m (2019: USD 0.6m, 2018: USD 0.6m) and tax services USD 0.1m (2019: other audit-related services USD 0.1m, 2018: other audit- related services USD 0.2m). EY were appointed as Group’s auditors for the year ended 31. December 2020. Accordingly comparative figures in the table above for the year ended 31 December 2019 and 31 December 2018 are in respect of remuneration paid to the Group’s previous auditor, Deloitte. 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. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 124 NOTE 5 – LOAN RECEIVABLES NOTE 6 – TANGIBLE FIXED ASSETS USDm Loan receivables Cost: Balance as of 1 January Additions during the year Balance as of 31 December Expected credit loss: Balance as of 1 January Additions during the year Balance as of 31 December 2020 2019 2018 USDm 2020 2019 2018 4.7 - 4.7 0.1 - 0.1 - 4.7 4.7 - 0.1 0.1 Land and buildings Cost: Balance as of 1 January Adjustment on transition to IFRS 16 Additions Balance as of 31 December Depreciation: Balance as of 1 January Depreciation for the year Balance as of 31 December 10.4 - 1.3 - 9.9 0.5 11.7 10.4 2.3 2.3 4.6 - 2.3 2.3 Carrying amount as of 31 December 7.1 8.1 - - - - - - - - - - - - - - - Carrying amount as of 31 December 4.6 4.6 These loans were issued as part of sale and leaseback transactions for two MR vessels. The loans mature in 2026 and have an interest rate applicable, fixed at 1% per annum. Expected credit loss is recognized based on the 12-month expected credit losses. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 125 2020 2019 2018 95.0 45.5 65.1 301.8 88.4 38.9 -148.1 -252.3 -81.8 12.0 95.0 45.5 NOTE 6 - continued Included in the carrying amount for “Vessels and capitalized dry-docking” are capitalized dry- docking costs in the amount of USD 66.1m (2019: USD 60.7m, 2018: USD 67.5m). NOTE 6 - continued USDm Prepayments on vessels 2020 2019 2018 Cost: USDm Vessels and capitalized dry-docking Cost: Balance as of 1 January Additions Disposals Transferred from prepayments Balance as of 1 January Additions Transferred to vessels Balance as of 31 December 2,064.2 1,886.3 1,726.6 102.5 -29.8 148.1 81.3 162.7 -25.6 252.3 -30.2 81.8 Carrying amount as of 31 December 12.0 95.0 45.5 Transferred to assets held for sale -124.9 -130.1 -54.6 Balance as of 31 December 2,160.1 2,064.2 1,886.3 USDm 2020 2019 2018 Depreciation: Balance as of 1 January Exchange rate adjustment 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 Reversal of impairment ¹ Transferred to assets held for sale ⁾ Balance as of 31 December Other plant and operating equipment 360.6 327.6 264.8 Cost: - - - Balance as of 1 January -29.8 -25.6 -30.2 Adjustment on transition to IFRS 16 118.4 106.5 113.4 -43.0 -47.9 -20.4 Additions Disposals 406.2 360.6 327.6 Balance as of 31 December 162.1 167.3 Balance as of 1 January Depreciation: 3.2 - Disposals Depreciation for the year 28.8 11.1 6.0 - -120.0 -8.5 -19.3 -8.4 Balance as of 31 December 31.4 28.8 162.1 Carrying amount as of 31 December 8.1 - 3.8 -4.3 7.6 3.8 -4.2 1.2 0.8 6.8 5.8 0.3 2.2 -0.2 8.1 2.8 - 1.0 3.8 4.3 3.6 - 2.2 - 5.8 1.7 - 1.1 2.8 3.0 Carrying amount as of 31 December 1,722.5 1,674.8 1,396.6 ¹ For additional information regarding impairment considerations, please refer to Note 8. ⁾ For information on assets provided as collateral security, please refer to note 16. Please refer to note 8 for information on impairment testing. The depreciation expense related to “Other plant and operating equipment” of USD 1.2m relates to “Administrative expense” (2019: USD 1.0m, 2018: USD 1.1m). Depreciation and impairment losses on tangible fixed assets on “Vessels and capitalized dry-docking” relate to operating expenses. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 126 NOTE 7 – LEASING NOTE 7 - continued TORM leases office buildings, some vehicles and other administrative equipment. With the exception of short-term leases and leases of low-value assets, each lease is reflected on the balance sheet as a right-of-use asset with a corresponding lease liability. The right-of-use assets are included in the financial statement line item in which the corresponding underlying assets would be presented if they were owned. Please refer to note 6. As of 31 December 2020, TORM had recognized the following right-of-use assets: USDm Cost: Balance as of 1 January Adjustment on transition to IFRS 16 Additions Disposals Balance as of 31 December Depreciation: Balance as of 1 January Disposals Depreciation for the year Balance as of 31 December Carrying amount as of 31 December Vessels and Other plant capitalized Land and and operating dry-docking buildings equipment USDm Vessels and Other plant capitalized Land and and operating dry-docking buildings equipment 42.4 - -42.4 - 15.5 -17.1 1.6 - - 10.4 - 1.3 -0.0 11.7 2.3 - 2.3 4.6 7.1 Cost: 0.6 Balance as of 1 January 2019 - Adjustment on transition to IFRS 16 0.0 Additions -0.0 Disposals 0.6 Balance as of 31 December 2019 Depreciation: 43.3 - 1.8 -2.7 42.4 - 9.9 0.5 - 10.4 0.2 Balance as of 1 January 2019 13.4 - -0.0 Disposals 0.2 0.4 Depreciation for the year Balance as of 31 December 2019 0.2 Carrying amount as of 31 December 2019 -2.7 4.8 15.5 26.9 - 2.3 2.3 8.1 - 0.3 0.4 -0.1 0.6 - - 0.2 0.2 0.4 The sale and leaseback transactions relating to vessels were all classified as financing arrangements prior to implementation of IFRS 16 and did not result in derecognition of the underlying assets as control was retained by the Group. During 2020, the vessels were disposed. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 127 NOTE 7 - continued NOTE 7 - continued Lease payments not recognized as a liability The Group has elected not to recognize a lease liability for short-term leases (leases of an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis. The expenses relating to payments not recognized as a lease liability are insignificant. Administrative expenses The total cash outflow for leases, USD 2.3m, is presented as “Depreciation” of USD 1.9m and “Financial expenses” (interest) of USD 0.4m,. Financial expenses Financial expenses for the reporting periods: USDm Interest expenses: Financial expenses arising from lease liabilities regarding right-of-use assets Other financial expenses Total 2020 2019 2018 1.5 48.4 49.9 2.4 39.5 41.9 2.3 37.0 39.3 The table below describes the nature of the Group’s leasing activities by type of right-of-use asset recognized on the balance sheet: Vessels and capitalized Other plant Land and and operating dry-docking buildings equipment No. of right-of-use assets leased Range of remaining term Average remaining lease term No. of leases with extension options No. of leases with options to purchase No. of leases with termination options 10 15 0-7 years 0-5 years 2.6 years 1.2 years 10 - 8 15 - 15 Lease liabilities regarding right-of-use assets are included on the balance sheet under “Borrowings”. USDm 2020 2019 Maturity analysis - contractual undiscounted cash flow Less than one year One to five years More than five years Total undiscounted lease liabilities as of 31 December Lease liabilities included under “Borrowings” as of 31 December Non-current Current 2.8 5.9 0.1 8.8 8.3 6.2 2.1 7.5 27.6 0.1 35.2 30.6 10.2 20.4 Extension and termination options are included in several leases in order to optimize operational flexibility in terms of managing contracts. The lease term determined by TORM is the non- cancellable period of a lease, together with any extension/termination options if these are/are not reasonably certain to be exercised. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 128 NOTE 8 – IMPAIRMENT TESTING NOTE 8 - continued As of 31 December 2020, Management tested the carrying amount of its fleet for impairment within CGUs, being the Main Fleet and the two Handysize vessels. Each CGU sits within a single reportable segment – the Tanker Segment and comprises the following groups of vessels: – Main Fleet: Comprising TORM’s LR1/LR2 and MR vessels, the Main Fleet is operated collectively as a combined internal pool, employed principally in the spot market and actively managed to meet the needs of our customers in that market, particularly regarding the location of vessels meeting required specifications. All vessels in the Main Fleet are able to handle multiple sizes of refined oil cargoes and sail all seas and oceans, over both shorter and long distances. Given the technical specifications and capacity of vessels, the Main Fleet is relatively homogenous with a very high degree of interoperability. Handysize: Comprising two product tankers with a cargo carrying capacity of 35,000–37,000 dwt, these smaller vessels are typically used in shorter and coastal trade routes, including for transportation of various clean petroleum products within Europe and in the Mediterranean. As of 31 December 2019, Management performed an impairment test of the recoverable amount of significant assets within a single cash-generating unit - the Tanker Segment. Management decided to split out the Handysize vessels into separate CGUs because the cash inflows generated by these vessels are now determined to be independent of the Main Fleet, which is predominantly deployed in the global spot market. In both years, the recoverable amount of the CGUs was based on their value in use. The results of impairment testing are summarized as follows: Impairment losses Recoverable amount Discount rate Reversals of impairment losses CGU Main Fleet Handysize Total 2020 USDm USDm 2019 2020 USDm 2019 USDm 2020 % 2019 % 2020 USDm 2019 USDm - 5.5 5.5 Nil - - - 7.0 7.0 120 7.5 1,717 27 1,744 1,883 Based on this review, Management concluded that as of 31 December 2020 • Assets within the Main Fleet were not impaired as the value in use was in line with the carrying amount • The two Handy vessels were impaired with USD 5.5m in total as the calculated value in use was lower than the carrying amount on a vessel by vessel basis Since there is no headroom between the value in use and carrying value of the Main Fleet, the impairment test is therefore sensitive to reasonably possible changes in key assumptions. These sensitivities are set out on the next page. As of 31 December 2019, the value in use exceeded the carrying amount and Management concluded that the impairment test provided the basis for a full reversal of the USD 185m impairment charge recorded in 2016, after excluding the portion of the 2016 charge that related to goodwill and vessels that have been subsequently sold. The impairment reversal has also been capped at USD 120m to ensure that the carrying value of the Tanker Segment does not exceed the carrying value that would have arisen, if the 2016 impairment charge had not been recorded. The reversal has arisen primarily due to improvements in prevailing freight rates and a reduction in discount rate. KEY ASSUMPTIONS USED IN THE DETERMINATION OF VALUE IN USE The assessment of the value in use of each CGU was based on the net present value of the expected future cash flows. The freight rate estimates in the period 2021-2023 are based on the Company's business plans. Beyond 2023, the freight rates are based on TORM’s 10-year historical average rates, adjusted for expected inflation of 2%. The Company believes that the approach used for long-term rates appropriately reflects the cyclical nature of the shipping industry and is the most reliable estimate for periods beyond those included in its three-year business plan. The Company’s business plans for 2021-2023 and beyond also include the anticipated benefit arising from the installation of scrubbers on certain of the Group’s vessels (the “scrubber premium”), based on current market differentials between the cost of heavy and low sulphur fuel oil. The discount rate used in the value in use calculation is based on a Weighted Average Cost of Capital (WACC) of 7.0% as of 31 December 2020 (2019: 7.5%, 2018: 8.3%). 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 2020, the 10-year historical average spot freight rates used in the value in use calculation are as follows: • LR2: USD/day 18,884 (2019: USD/day 17,986, 2018: USD/day 18,003) • LR1: USD/day 17,443 (2019: USD/day 17,060, 2018: USD/day 16,907) • MR: USD/day 16,076 (2019: USD/day 15,802, 2018: USD/day 15,349) • Handysize: USD/day 13,435 (2019: USD/day 13,601, 2018: USD/day 13,968) TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 129 NOTE 8 - continued NOTE 9 – FINANCIAL ITEMS Operating expenses and administrative expenses are estimated based on TORM's business plans for the period 2021-2023. Beyond 2023, operating expenses are adjusted for 2% inflation (2019: 2%) and administrative expenses are adjusted for 2% inflation (2019: 2%). USDm Financial income 2020 2019 2018 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 (2019: approximately 15 years). Since there is no headroom between the value in use and carrying value, the impairment test is sensitive to reasonably possible changes in the key assumptions, which may result in future impairments. These are related to the future development in freight rates, the WACC applied as discounting factor in the calculations, 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 248m and USD 6m for the Main Fleet and the two Handy vessels respectively. • A decrease in WACC of 1.0% would result in an increase in the value in use of USD 140m and USD 2m for the Main Fleet and the two Handy vessels respectively. An increase in WACC of 1% would result in a decrease in the value in use of USD 124m and USD 2m for the Main Fleet and the two Handy vessels respectively. • An increase/decrease in operating expenses of 10.0% would result in a decrease/increase in the value in use of USD 175m and USD 4m for the Main Fleet and the two Handy vessels respectively. 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 for vessels in the Main Fleet including the order book and chartered-in vessels was USD 1,577m (2019: USD 1.758m), which is USD 245m below the carrying amount (2019: which was USD 42m below the carrying amount). The fair value based on broker values for the Handy vessels was 22m (2019: USD 27m), which is USD 10m below the carrying amount (2019: which was USD 6m below the carrying amount). Interest income from cash and cash equivalents, including restricted cash ¹ 0.5 2.5 2.7 Exchange rate adjustments, including gain from forward ⁾ exchange rate contracts Total Financial expenses - 0.5 0.3 2.8 0.6 3.3 Interest expenses on mortgage and bank debt ¹ 47.1 39.3 35.7 Exchange rate adjustments, including loss from forward ⁾ exchange rate contracts Commitment fee Other financial expenses Total 1.0 1.5 0.3 0.2 1.9 0.5 0.1 2.6 0.9 49.9 41.9 39.3 Total financial items -49.4 -39.1 -36.0 ¹ Interest for financial assets and liabilities not at fair value through profit and loss. ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 130 NOTE 10 – FREIGHT RECEIVABLES NOTE 11 – OTHER RECEIVABLES USDm 2020 2019 2018 USDm Analysis as of 31 December of freight receivables: Gross freight receivables: Not due Due < 30 days Due between 30 and 180 days Due > 180 days Total gross Allowance for expected credit loss Total net 17.9 10.8 23.7 12.0 64.4 5.8 58.6 39.8 22.5 25.3 6.0 93.6 3.7 89.9 44.0 18.8 20.5 4.4 87.7 1.7 86.0 Partners and commercial managements Derivative financial instruments Other (2020: including escrow account USD 14.9m) Balance as of 31 December 2020 2019 2018 - 4.5 20.4 24.9 1.9 0.5 2.3 - 3.7 2.6 6.2 7.5 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 21 for further information on fair value hierarchies. As of 31 December 2020, freight receivables included receivables at a value of USD 0.0m (2019: USD 0.0m 2018: USD 0.0m) that are individually determined to be impaired to a value of USD 0.0m (2019: USD 0.0m, 2018: USD 0.0m). Management makes allowance for expected credit loss 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. Expected credit loss for receivables overdue more than 180 days is 25%-100%, depending on the category of the receivable. Expected credit loss for receivables overdue more than one year is 100%. Movements in provisions for impairment of freight receivables during the year are as follows: NOTE 12 – TAX USDm Tax for the year Current income tax for the year Adjustments related to previous years Adjustment of deferred tax liability Income tax charge for the year Tonnage tax charge for the year 2020 2019 2018 0.4 0.1 - 0.5 0.9 1.4 0.9 -0.4 - 0.5 0.3 0.8 0.8 -0.1 0.1 0.8 0.8 1.6 USDm Allowance for expected credit loss Balance as of 1 January Adjustment to prior years Provisions for the year Provisions reversed during the year Provisions utilized during the year Balance as of 31 December 2020 2019 2018 Total 3.7 - 3.1 1.7 1.5 2.4 -1.0 -1.9 - 5.8 - 3.7 1.3 - 1.7 -1.0 -0.3 1.7 Allowance for expected credit loss of freight receivables have been recognized in the income statement under “Port expenses, bunkers and commissions”. Allowance for expected credit loss of freight receivables is calculated using an ageing factor as well as a specific customer knowledge and is based on a provision matrix on days past due. All allowance for expected credit loss relates to receivables Due > 180 days. 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 2024. 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 that at 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 • A rate applicable to the specific net tonnage of the vessel based on a sliding scale Corporate income tax is primarily levied on the Group’s non-vessel related activities outside Denmark. The effective tax rate of the Group is 1.6% (2019: 0.5%, 2018: 4.7%). TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 131 NOTE 12 - continued USDm Deferred tax liability Balance as of 1 January Deferred tax for the year Adjustments related to previous years Balance as of 31 December NOTE 13 – COMMON SHARES AND TREASURY SHARES 2020 2019 2018 Common shares 2020 2019 2018 - - - - - - - - - 0.1 Nominal value per Number of Number of Number of share (USD) shares shares shares -0.1 A-shares 0.01 74,855,929 74,748,248 74,218,846 - B-shares C-shares Total 0.01 0.01 1 1 1 1 1 1 74,855,931 74,748,250 74,218,848 No deferred tax is recognized related to assets and liabilities, including vessels, which are subject to tonnage taxation. The A-shares are listed on Nasdaq OMX Copenhagen and Nasdaq in New York and are publicly available for trading. Each A-share carries one vote at the general meeting and gives the shareholders right to dividends, liquidation proceeds or other distributions. The A-shares carry no other rights or obligations. 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. USDm 2020 2019 2018 Non-current tax liability related to held over gains Balance as of 1 January Balance as of 31 December 44.9 44.9 44.9 44.9 44.9 44.9 The non-current tax liability related to held over gains is the undiscounted income tax payable calculated on the realized gain on sale of vessels that came from corporate income taxation into the Danish tonnage tax scheme upon initial application in 2001 (the held over gain reflected in the transition account under the Danish tonnage tax scheme). This tax liability will become payable, in part or in full, if the Danish owned fleet of vessels is significantly or fully disposed of, or if operated to end of useful life and sold for scrap. If TORM discontinues its participation in the Danish tonnage tax scheme, a deferred tax liability would arise in relation to the vessels held by the Group and taken out of the tonnage tax scheme. Management considers this to be a remote scenario. 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 2020 CONSOLIDATED FINANCIAL STATEMENTS 132 NOTE 13 - continued 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. 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. Treasury shares Number of shares ('000) Balance as of 1 January Additions Cancellations Disposals 2020 2019 2018 312.9 312.9 312.9 180.5 - - - - - - - - Balance as of 31 December 493.4 312.9 312.9 NOTE 13 - continued Treasury shares - continued Nominal value USD '000 Balance as of 1 January Additions Cancellations Disposals 2020 2019 2018 3.1 1.8 - - 3.1 3.1 - - - - - - Balance as of 31 December 4.9 3.1 3.1 Percentage of share capital Balance as of 1 January Additions Cancellations Disposals Dilution, due to capital increases Balance as of 31 December 0.4% 0.2% - - 0.1% 0.7% 0.4% 0.5% - - - 0.0% 0.4% - - - -0.1% 0.4% The total consideration for the treasury shares was USD 1.4m (2019: USD 0.0m, 2018: USD 0.0m). As of 31 December 2020, the Company's holding of treasury shares represented 493,371 shares (2019: 312,871 shares, 2018: 312,871 shares) of USD 0.01 each at a total nominal value of USD 0.0m (2019: USD 0.0m, 2018: USD 0.0m) and a market value of USD 3.7m (2019: USD 3.5m, 2018: USD 2.1m). NOTE 14 – OTHER LIABILITIES USDm Partners and commercial managements Accrued operating expenses Accrued interest Wages and social expenses Derivative financial instruments Payables to joint ventures Other Balance as of 31 December 2020 2019 - 0,5 14,3 14,1 3,1 16,8 24,7 - 0,9 59,8 4,0 14,3 12,3 0,1 2,0 47,3 The carrying amount is a reasonable approximation of fair value due to the short-term nature of the receivables. Please refer to note 21 for further information on fair value hierarchies. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 133 NOTE 15 - EFFECTIVE INTEREST RATE, OUTSTANDING BORROWINGS As of 31 December 2020, no drawdown had been made on the USD 45m Working Capital Term Facility and USD 87.2 is undrawn on the BoComm Facility. Please refer to note 2 for further information on the Company’s liquidity and capital resources and notes 20 and 21 for further information on interest rate swaps and financial risks. USDm BORROWINGS DSF Facility 1 (USD) TFA Facility 1 (USD) DSF Facility 2 (USD) DSF Facility 3 (USD) TFA Facility 2 (USD) ING (USD) ABN AMRO (USD) DSF Facility 4 (USD) CEXIM (USD) Term Facility DSF Facility HCOB Facility HCOB Facility 2 KFW Facility KFW Facility 2 Bocomm (USD)⁴ Springliner (USD)⁴ ⁾ Eifuku (USD)⁴ Showa (USD)⁴ ⁾ ⁾ Weighted average effective interest rate ⁾ Carrying value Hereof non-current ³ Hereof current ³ ⁾ 2020 2019 2018 Fixed/ Effective Carrying Effective Carrying Effective Carrying floating Maturity interest¹ value² Maturity interest¹ value² Maturity interest¹ value² Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Floating Fixed Floating Floating - - - - - - - - 2030 2026 2027 2025 2025 2032 2032 2025 2026 2026 2024 2021 2021 2021 2022 2022 2024 2024 2026 2030 - - - - - - 2025 2026 2026 2024 ⁾ - - - - - - - - 3.2% 3.0% 2.9% 4.3% 3.9% 3.3% 3.3% 4.1% 4.8% 3.9% 3.3% 3.4% ⁾ - - - - - - - - 96.4 299.1 150.3 81.2 33.3 22.0 22.0 57.8 36.0 24.1 23.0 845.2 742.6 102.6 ⁾ 4.7% 5.1% 4.7% 4.7% 5.1% 4.1% 4.2% 4.4% 4.4% - - - - - - 5.5% 5.5% 5.3% 5.1% 4.9% ⁾ 50.0 237.3 48.2 21.8 75.2 35.5 21.1 86.5 2021 2021 2021 2022 2022 2024 - - ⁾ 5.6% 6.0% 5.6% 5.6% 5.4% 4.6% - - ⁾ 64.1 331.3 52.4 24.3 103.7 42.0 - - 104.0 2030 5.3% 111.7 - - - - - - 63.9 60.3 25.7 25.2 854.7 756.0 98.7 - - - - - - - - - - - - - - - - - - - - - 2022 8.9% 25.3 - - - - 5.8% - - 754.8 659.4 95.4 ¹ ² ³ ⁴ ⁾ Effective interest rate includes deferred and amortized bank fees. Because of the floating interest rate, the carrying value of the Group's borrowings is approximately equal to the fair value. The carrying value is excluding capitalized bank fees recognized in the balance sheet as well as lease liabilities regarding ⁾ right-of-use assets recognized under Land and buildings and Other plant and equipment. ⁾ Split between current and non-current is based on terms in effect at 31 December 2019, without consideration to the refinancing taking place in 2020. Financial lease. ⁾ ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 134 NOTE 16 – COLLATERAL SECURITY FOR BORROWINGS NOTE 17 – GUARANTEE COMMITMENTS AND CONTINGENT LIABILITIES The total carrying amount for vessels that have been provided as security amounts to USD 1,711m as of 31 December 2020 (2019: USD 1,675m), including transferred ownership under sale and leaseback arrangements, where the vessels are not derecognized and where vessels are provided as security for the leasing financing. Please refer to note 1 for further information. The guarantee commitments of the Group are less than USD 0.1m (2019: USD 0.1m) and relate to guarantee commitments to Danish Shipping Finance. In 2020 the Group was involved in two cargo claims please refer to note 26 for further information. The Group is involved in certain other 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. NOTE 18 – CONTRACTUAL RIGHTS AND 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 2020. USDm Borrowings ¹ Interest payments related to scheduled interest fixing ⁾ Estimated variable interest payments ² Newbuilding installments ³ ⁾ Committed scrubber installations ⁾ Trade payables and other obligations Total 2021 101.8 32.3 0.2 62.5 4.9 - 42.7 - 2022 101.9 25.3 0.4 38.1 - - - 2023 102.1 21.1 0.6 2024 114.4 17.6 0.9 2025 Thereafter 106.9 12.4 1.4 315.3 12.4 6.1 - - - - - - - - - Total 842.4 121.1 9.6 100.6 4.9 42.7 244.4 165.7 123.8 132.9 120.7 333.8 1,121.3 ¹ ² ³ The presented amounts to be repaid do not include directly related costs arising from the issuing of the loans of USD 10.9m (2019: USD 8.0m), which are amortized over the term of the loans. Borrowing costs capitalized during the year amount to USD 7.5m (2019: USD 5.8m). ⁾ Variable interest payments are estimated based on the forward rates for each interest period including hedging instruments. As of 31 December 2020, TORM had two contracted newbuildings to be delivered during 2021 -2022; (2019: four) ; 3 delivered during 2020 and 1 to be delivered during 2021. Commitments regarding newbuilding installments are in excess of ⁾ the prepayments included in note 6. ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 135 NOTE 18 – continued The following table summarizes the Group's contractual obligations as of 31 December 2019. USDm Borrowings Interest payments related to scheduled interest fixing Estimated variable interest payments Newbuilding installments Committed scrubber installations Trade payables and other obligations Total 2020 101,2 33,8 4,3 51,2 32,0 76,3 2021 326,9 25,4 6,7 - - - 2022 119,5 13,1 4,4 - - - 2023 30,8 10,0 3,6 - - - 2024 Thereafter 82,8 8,0 3,5 - - - 202,2 6,9 11,6 - - - Total 863,4 97,2 34,1 51,2 32,0 76,3 298,8 359,0 137,0 44,4 94,3 220,7 1.154,2 The following table summarizes the reconciliation of liabilities arising from financing activities: USDm Borrowings Total Cash Non-cash Non-cash Opening balance as of 1 January End balance as of 31 Changes in Other December 2020 Borrowings Repayments fair value changes¹ 855.4 855.4 734.3 734.3 -746.5 -746.5 - - -0.8 ⁾ -0.8 2020 842.4 842.4 ¹ ² Primarily due to implementation of IFRS 16. The contractual obligations relating to lease liabilities arising from land and buildings and other plant and operating equipment amount to USD 8.3m (2019: USD 8.7m) and the contractual value of lease liabilities relating to vessels and ⁾ capitalized dry-dockings amount to USD 0.0m (2019: USD 21.9m). For further detail please refer to note 7. ⁾ 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 2020 USDm Contractual rights - as lessor: Charter hire income for vessels ⁵ Total ⁾ 2021 2022 2023 2024 2025 Thereafter Total 29.8 29.8 2.3 2.3 - - - - - - - - 32.1 32.1 ⁵ 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 2020 is 1.0 year (2019: 1.0year). ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 136 NOTE 19 – DERIVATIVE FINANCIAL INSTRUMENTS NOTE 19 – continued Please refer to note 21 “Financial Instruments” for further information on fair value hierarchies. 2020 2019 Hedging of risks with derivative financial instruments are made with a ratio of 1:1. Sources of ineffectiveness are mainly derived from differences in timing and credit risk adjustments. Any ineffective portions of the cash flow hedges are recognized in the income statement as financial items. Value adjustments of the effective part of cash flow hedges are recognized directly in comprehensive income. Gains and losses on cash flow hedges are upon realization transferred from the equity hedging reserve into the income statement. -3.2 4.5 -0.3 0.0 TORM held at year end 2020 and 2019 the following derivative financial instruments designated as hedge accounting: 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 2.0 -0.4 -23.5 -11.1 -20.2 -11.8 Derivative financial instruments are presented as below on the balance sheet: USDm 2020 Offsetting financial assets and financial liabilities: Gross amount Offsetting amount Net amount presented in the statement of financial position USDm 2019 Offsetting financial assets and financial liabilities: Gross amount Offsetting amount Net amount presented in the statement of financial position Financial Financial assets liabilities 9.9 -30.1 -5.4 5.4 4.5 -24.7 Financial Financial assets liabilities 0.7 -12.5 -0.2 0.2 0.5 -12.3 Hedge accounting Expected maturity 2020 value Unit 2021 2022 Notional After 2022 Forward exchange contracts (USD/DKK) ¹ Interest rate swaps ² ⁾ Bunker swaps ³ ⁾ 231.5 DKKm 231.5 - - 757.5 USDm 318.0 84.0 355.5 19,783 MT 19,783 - - ⁾ ¹ ² ² The average hedge of USD/DKK currency was 6,4. The average interest rate was 2.11% plus margin. ⁾ The average price of the hedging instruments was USD 326.9. ⁾ ⁾ Hedge accounting Expected maturity 2019 value Unit 2020 2021 Notional After 2021 Forward exchange contracts (USD/DKK) ¹ Interest rate swaps ² ⁾ Bunker swaps ³ ⁾ 222.5 DKKm 222.5 - - 597.8 USDm 120.5 239.5 237.8 4,725 MT 4,725 - - ¹ ² ² ⁾ The average hedge of USD/DKK currency was 6,5. The average interest rate was 2.33% plus margin. ⁾ The average price of the hedging instruments was USD 652.0 ⁾ ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 137 NOTE 19 - continued Interest rate swaps with a fair value of USD 23.5m (net loss) are designated as hedge accounting relationships to fix a part of TORM's interest payments during the period 2021-2026 with a notional value of USD 757.5m (2019: USD 597.8m, 2018: USD 512.8m). 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 43.8m (2019: USD 13.0m) has been provided as security for the agreements relating to derivative 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. TORM did not enter into any enforceable netting arrangements. Further details on derivative financial instruments are provided in note 20 and note 21. Forward freight agreements of USD 1.9m (net gain) have been recognized in the income statement in 2020 (2019: USD 0.4m, 2018: USD -2.1m). FFAs are used to mitigate fluctuations in the freight rates of vessels with a duration of 0–24 months. The FFAs are not designated for hedge accounting. Bunker swap agreements of USD 2.9m (net gain) have been recognized in the income statement in 2020 (2019: USD -0.1m, 2018: USD 1.1m). Bunker swaps with a duration similar to the period hedged are used to reduce the exposure to fluctuations in bunker prices for fixed voyages. Bunker swap agreements are designated as hedge accounting when appropriate. Forward exchange contracts with a fair value of USD 2.0m (net gain) are designated as hedge accounting relationships to hedge a part of TORM's payments in 2020 regarding administrative and operating expenses denominated in DKK with a notional value of DKK 231.5m (2019: DKK 222.5m, 2018: DKK 250.0m). TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 138 NOTE 19 - 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 2020, 2019 and 2018. USDm 2020 Forward freight agreements Bunker swaps Forward exchange contracts Interest rate swaps Total 2019 Forward freight agreements Bunker swaps Forward exchange contracts Interest rate swaps Total 2018 Forward freight agreements Bunker swaps Forward exchange contracts Interest rate swaps Total Other comprehensive Income statement income Equity Port expenses, Adjustment Hedging bunkers and Financial Operating Administrativ to hedging reserves as of Revenue commissions items expenses e expenses reserve 31 December 1.9 2.9 1.9 2.9 0.4 - - - 0.4 -2.1 - - - -2.1 - -0.1 - - -0.1 - 1.1 - - 1.1 -5.7 -5.7 - - - 2.1 2.1 - - - 1.0 1.0 -0.1 -0.1 - - -2.0 - -2.0 - - 0.1 - 0.1 0.1 0.1 - - -1.5 - -1.5 - - 0.2 - 0.2 - 1.1 2.4 -12.4 -8.9 -0.5 0.9 1.4 -13.8 -12.0 0.9 -2.0 -3.7 -2.3 -7.1 - 0.8 2.0 -23.5 -20.7 - -0.3 -0.4 -11.1 -11.8 0.5 -1.2 -1.8 2.8 0.3 Fair value adjustments on hedging instruments added to the hedging reserves for interest rate swaps, are for 2020 USD -18.1, for 2019 -11.7m and for 2018 USD -1.3m. The hedging reserves as of 31 December of the derivatives used for cash flow hedge is equal to the entire fair value of the hedge instruments as no ineffectiveness has been identified and the ¹ ² ⁾ reserve includes open hedge instruments, only. ⁾ Please refer to note 20 for further information on commercial and financial risks. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 139 NOTE 20 – RISKS ASSOCIATED WITH TORM’S ACTIVITIES NOTE 20 - 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. During 2020, 14.4% (2019: 9.5%; 2018: 13.1%) of earning days equal to 26.216 deriving from the Company’s tankers was hedged in this way. Physical time charter contracts accounted for 41.9% (2019: 59.3%; 2018: 62.8%) of overall hedging. In 2020, the Company sold FFAs with a notional contract value of USD 165m (2019: USD 34.9m; 2018: USD 39.6m) and bought FFAs with a notional contract value of USD 52.7 m (2019: USD 22.5m; 2018: USD 18.8m). The total notional contract volume sold in 2020 was 8,799,000 metric tons (2019: 1,585,190 metric tons; 2018: 2,683,000 metric tons), and the total notional volume bought was 2,714,000 metric tons (2019: 1,295,000 metric tons; 2018: 1,447,000 metric tons). At the end of 2020, the coverage of available earning days for 2021 was 28.1% through time charters, current spot voyages, cargo contracts and FFAs (2019: 8.6%; 2018: 9.9%). No FFA had maturity beyond 2021. 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 2021 2020 2019 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. Decrease in freight rates of USD/day 1,000: Changes in profit/loss before tax for the following year Changes in equity for the following year -18.8 -18.8 -25.4 -25.4 -25.3 -25.3 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 8 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. 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 2020, the carrying value of the fleet was USD 1,722.5m (2019: USD 1,674.8m; 2018: USD 1,396.5m). Based on broker valuations, TORM’s fleet excluding undelivered newbuildings had a market value of USD 1,475.8m as of 31 December 2020 (2019: USD 1,632.6m; 2018: USD 1,322.1m). TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 140 NOTE 20 - continued NOTE 20 - continued Bunker price fluctuations The cost of fuel oil consumed by the vessels, known in the industry as bunkers, accounted for 52.5% (2019: 61.1%; 2018: 60.8%) of the total voyage costs in 2020 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 in its entirety for all risks. 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. In 2020, 14.6% (2019: 6.5%; 2018: 4.8%) of TORM’s bunker purchase was hedged through bunker hedging contracts. At the end of 2020, TORM had covered 15.6% equal to 88,339 metric tons (2019: 2.6%; 2018: 2.0%) of its bunker requirements for 2021 using hedging instruments at an average price of USD 388. No bunker derivatives had maturity beyond 2021. Total bunker exposure is estimated to be approximately 565,882 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 price USDm 2021 2020 2019 Increase in the bunker prices of 10% per ton: Changes in profit/loss before tax for the following year Changes in equity for the following year -22.0 -22.0 -19.8 -19.8 -20.7 -20.7 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 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 2020, the aggregate insured value of hull and machinery and interest for TORM’s owned vessels amounted to USD 1.9bn (2019: USD 1.8bn; 2018: USD 1.5bn). 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. This characterizes the method for identifying the market value of a derivative instruments. 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 situation are brought to Management’s attention. 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. The Company’s counterparty risks are primarily associated with: • Receivables, cash and cash equivalents, including restricted cash • Contracts of affreightment with a positive fair value • Derivative financial instruments and commodity instruments with positive fair value TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 141 NOTE 20 - continued NOTE 20 - continued Receivables, cash and cash equivalents, including restricted cash 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. 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 is denominated in currencies other than USD accounts for approximately 80.9% (2019: 83.2%; 2018: 81.2%) for administrative expenses and approximately 23.8% (2019: 20.1%; 2018: 23.4%) for operating expenses. TORM’s expected administrative and operating expenses in DKK and EUR for 2021 are approximately DKK 393.5m, whereof 66.1% (2019: 63.0%; 2018: 64.1%) are hedged through FX forward contracts. All FX forward contracts have maturity within 2021, and TORM’s average hedge USD/DKK currency rate is 6.36. FX exposure is hedged in its entirety for all risks. 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/loss before tax and equity as follows: USDm 2021 2020 2019 Effect of a 10% increase of DKK and EUR: Changes in profit before tax Changes in equity -2.2 -2.2 -2.0 -2.0 -2.1 -2.1 A major part of the Company’s freight revenues stems from a small group of customers. In 2020, one customer accounted for 11% of the Company’s freight revenues (2019: one accounted for more than 10%; 2018: one customer accounted for 17%). 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, 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 96.9% (2019: 98.7%; 2018: 98.1%), which is considered to be satisfactory given the differences in interpretation of events. In 2020, demurrage represented 17.3% (2019: 13.1%; 2018: 13.3%) of the total freight revenues. Please see Note 1 for more details on recognition of demurrage claim into revenue. 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. Derivative financial instruments and commodity instruments In 2020, 100.0% (2019: 100.0%; 2018: 100.0%) of TORM’s forward freight agreements (FFAs) 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. 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. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 142 NOTE 20 - continued NOTE 20 - 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 2020, TORM’s loan portfolio was spread across eleven different banks. As of 31 December 2020, TORM maintains a liquidity reserve of USD 136m in cash and cash equivalents including restricted cash combined with USD 132m in undrawn and committed 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 18. Interest rate risk TORM’s interest rate risk generally relates to interest-bearing borrowings. All the Company’s loans for financing vessels are denominated in USD. Please refer to Note 15 for additional information on borrowings. At the end of 2020, TORM has fixed 67.6% (2019: 61.6%; 2018: 70.3%) of the debt with interest rate swaps and fixed rate leasing corresponding to an amount of USD 571m. USD 537m of this amount is hedged at an interest rate of 2.11% plus margin with interest rate swaps with maturity in the period 2021-2026. Most of TORM’s debt and interest hedging is based on USD LIBOR which was set to expire by the end of 2021, however, currently a proposal is under consultation that would postpone the cessation of some USD LIBOR settings to 30 June 2023. As the expiration of LIBOR affects money market transactions worth trillions of dollars and preparations are being made by leading trade organizations, a smooth transition with insignificant risk to TORM is expected. TORM continues to monitor the progress of the negotiations towards a new reference rate. Most of TORM’s debt and interest hedging is based on USD LIBOR which was set to expire by the end of 2021, however, currently a proposal is under consultation that would postpone the cessation of some USD LIBOR settings to 30 June 2023. As the expiration of LIBOR affects money market transactions worth trillions of dollars and preparations are being made by leading trade organizations, a smooth transition with insignificant risk to TORM is expected. TORM continues to monitor the progress of the negotiations towards a new reference rate. 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 2021 2020 2019 Effect of a 1%-point increase in interest rates: Changes in profit/loss before tax for the following -3.7 year -3.0 -2.4 Changes in equity for the following year 11.3 7.9 8.0 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 143 NOTE 21 – FINANCIAL INSTRUMENTS Categories of financial assets and liabilities (USDm): 2020: Financial assets Loan receivables Freight receivables Other receivables Cash and cash equivalents, including restricted cash Total Financial liabilities Borrowings Trade payables Other liabilities Total 2019: Financial assets Loan receivables Freight receivables Other receivables Cash and cash equivalents, including restricted cash Total Financial liabilities Borrowings Trade payables Other liabilities Total ¹ ² ³ Due to the short maturity, the carrying value is considered to be an appropriate expression of the fair value. See note 15. ⁾ Derivative financial instruments are presented within the balance sheet line Other receivables and Other liabilities. ⁾ ⁾ Financial Financial instruments Observable instruments measured at input measured at amortized Total carrying (level 2) fair value cost value - - 4.5 - 4.5 - - 24.7 24.7 - 0.5 - 0.5 - - 12.3 12.3 - - 4.5 - 4.5 - - 24.7 24.7 - - 0.5 - 0.5 - - 12.3 12.3 4.6 58.6 20.4 135.6 219.2 4.6 58.6 24.9 135.6 223.7 842.4 842.4 14.4 35.1 891.9 4.6 89.8 5.7 72.5 172.6 855.4 47.1 35.0 14.4 59.8 916.6 4.6 89.8 6.2 72.5 173.1 855.4 47.1 47.3 937.5 949.8 ⁾ ¹ ¹ ⁾ ⁾ ¹ ⁾ ¹ ² ¹ ⁾ ¹ ⁾ ⁾ ¹ ¹ ⁾ ⁾ ¹ ⁾ ⁾ ¹ ² ¹ ⁾ ¹ ⁾ ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 144 NOTE 21 - 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 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) 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. NOTE 23 – ASSETS HELD FOR SALE AND NON-CURRENT ASSETS SOLD DURING THE YEAR During 2020, TORM sold eight vessels all of which were delivered to the new owners during the year. The sales resulted in a profit from sale of vessels of USD 1.1m and impairment losses on tangible assets of USD 5.5m. No assets were held for sale as at 31 December 2020. During 2019, TORM sold eight vessels, of which seven were delivered to the new owners during 2019, and one vessel was delivered in Q1 2020 (presented as “assets held for sale” as of 31 December 2019). The sales resulted in a profit from sale of vessels of USD 1.2m and impairment losses on tangible assets of USD 6.0m. During 2019, TORM sold eight vessels that were leased back to TORM and which have not been derecognized and where the proceeds provided of USD 157.8m have been presented as financial liabilities. 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 tangible assets of USD 3.2m. NOTE 22 – RELATED PARTY TRANSACTIONS NOTE 24 – CASH FLOWS 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. USDm Shareholders' contribution and dividends paid are disclosed in the consolidated statement of changes in equity. Dividends to related parties are paid out on the basis of the related parties’ ownership of shares. Reversal of other non-cash movements: Exchange rate adjustments Share-based payments Other adjustments The remuneration of key management personnel, which consists of the Board of Directors and the Executive Director, is disclosed in note 3. Total USDm During 2020, TORM did transactions with its joint venture producing scrubbers for the TORM fleet amounting to USD 11.7m in total (2019: 26.1m). The joint venture will continue to assist TORM in installing scrubbers in 2021. Change in bunkers, receivables and payables: Change in bunkers Change in receivables Change in prepayments Change in trade payables and other liabilities Other changes 2020 2019 2018 -0.2 -0.9 1.7 -0.4 1.9 -0.1 - 2.0 - 1.1 0.9 2.0 2020 2019 2018 12.4 5.1 -6.2 12.5 -2.5 -10.4 1.3 -0.7 -20.3 22.8 1.5 11.7 18.9 -0.8 -2.2 Adjusted for fair value changes of derivative financial instruments -8.9 -12.0 -7.1 Total 15.9 11.9 -12.7 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 145 NOTE 25 – ENTITIES IN THE GROUP Entity TORM plc Country United Kingdom Investments in subsidiaries ⁶ : Entity TORM A/S ⁾ DK Vessel HoldCo GP ApS DK Vessel HoldCo K/S OCM (Gibraltar) Njord Midco Ltd ² OCM Njord Chartering Inc ² ⁾ OCM Singapore Njord Holdings Alice, Pte. Ltd ⁾ OCM Singapore Njord Holdings Almena, Pte. Ltd 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 Agnete, Pte. Ltd OCM Singapore Njord Holdings Alexandra, Pte. Ltd OCM Holdings Mrs Inc. ² OCM Njord Anne Inc. ² ⁾ OCM Njord Freya Inc. ² ⁾ OCM Njord Gerd Inc. ² ⁾ OCM Njord Gertrud Inc. ² ⁾ OCM Njord Gunhild Inc. ² ⁾ OCM Njord Helene Inc. ² OCM Njord Helvig Inc. ² ⁾ ⁾ OCM Njord Ingeborg Inc. ² ⁾ OCM Njord Mary Inc. ² ⁾ OCM Njord Ragnhild Inc. ² ⁾ ⁾ Country Denmark Denmark Denmark Gibraltar Marshall Islands Singapore Singapore Singapore Singapore Singapore Singapore Singapore Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Marshall Islands Ownership ⁵ 100% ⁾ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Investments in subsidiaries ⁶ - continued: Entity ⁾ OCM Njord Thyra Inc.² OCM Njord Valborg Inc. ² ⁾ OCM Njord Vita Inc. ² OMI Holding Ltd. ⁾ ⁾ TORM Crewing Service Ltd. TORM Shipping India Private Limited ⁴ TORM Singapore Pte. Ltd. ⁾ TORM USA LLC VesselCo 1 K/S ³ VesselCo 3 K/S ³ VesselCo 5 K/S ³ VesselCo 6 K/S ¹ ⁾ ⁾ ³ ⁾ VesselCo 6 Pte. Ltd. ⁾ ⁾ VesselCo 7 Pte. Ltd. ³ VesselCo 8 Pte. Ltd. ⁾ VesselCo 9 Pte. Ltd. VesselCo 10 Pte. Ltd. VesselCo 11 Pte. Ltd. TORM SHIPPING (PHILS.), INC. VesselCo A ApS ³ VesselCo C ApS ³ ⁾ VesselCo E ApS ³ VesselCo F ApS ¹ ⁾ ,³ ⁾ Country Ownership ⁵ Marshall Islands Marshall Islands Marshall Islands Mauritius Bermuda India Singapore USA Denmark Denmark Denmark Denmark Singapore Singapore Singapore Singapore Singapore Singapore Philippines Denmark Denmark Denmark Denmark 100% ⁾ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 25% 100% 100% 100% 100% ¹ ² ³ ⁴ ⁵ ⁶ ⁾ ⁾ Entities added in the financial year ended 31 December 2018. Entities dissolved in the financial year ended 31 December 2018. ⁾ Entities dissolved in the financial year ended 31 December 2020. ⁾ Entities with different reporting periods: TORM Shipping India have a Financial reporting period that runs from 1.April ⁾ to 31. March as required by Indian laws and legislations ⁾ For all subsidiaries, ownership and voting rights are the same except for TORM SHIPPING (PHILS.), INC where voting rights are 100%. ⁾ All subsidiaries are consolidated in full. ⁾ TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 146 NOTE 25 - continued NOTE 25 - continued The table below shows the registered addresses for the companies mentioned above: Denmark India Tuborg Havnevej 18 2nd Floor Philippines 7th Floor 6 Battery Road #27-02 Singapore Interest in legal entities included as joint ventures: 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 Entity (USDm) Country % Control operations Long Range 2 A/S Denmark LR2 Management K/S Denmark 50% 50% - - continuing Birchin Court Suite 710 c/o The Trust c/o Temple Corporate Marine Exhaust 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 Technology Ltd. Hong Kong 28% 2.1 For registered addresses, please refer to the table above. USA Mauritius NOTE 26 - PROVISIONS 2020 Profit and Other Total loss from compre- compre- hensive income hensive income - - - - - 2.1 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 In 2020 the Group was involved in two cargo claims, both relating to one customer having issued indemnities to TORM for safe discharge of cargoes, and not being able to honor those indemnity obligations. Both cases involved irregular activities by the customer in relation to the handling of bills of lading. Legal action has been initiated by the Group in the UK and in India against the customer and a number of individual owners and management representatives. The Group has recognized provisions in the total amount of USD 18.3m relating to the two claims. The proceedings are ongoing and therefore the provisions recognized are subject to uncertainty related to both timing and amount. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 147 NOTE 27 – EARNINGS PER SHARE AND DIVIDEND PER SHARE NOTE 28 – CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH EARNINGS PER SHARE Cash at banks and on hand Net profit/(loss) for the year (USDm) 88.1 166.0 -34.8 Cash and cash equivalents 2020 2019 2018 2020 2019 2018 89.5 56.9 123.9 89.5 56.9 123.9 Million shares Weighted average number of shares Weighted average number of treasury shares Weighted average number of shares outstanding Dilutive effect of outstanding share options Weighted average number of shares outstanding incl. 74.8 -0.5 74.3 - 74.3 -0.3 74.0 0.0 73.4 -0.3 73.1 - Cash provided as security for initial margin calls and negative market values on derivatives etc. Restricted cash 46.1 15.6 3.5 46.1 15.6 3.5 Cash and cash equivalents, including restricted cash 135.6 72.5 127.4 The counterparties have an obligation to return any excess cash provided as security to the Group upon settlement or early termination of the contracts. dilutive effect of share options 74.3 74.0 73.1 Basic earnings/(loss) per share (USD) 1.19 2.24 -0.48 Diluted earnings/(loss) per share (USD) 1.19 2.24 -0.48 When calculating diluted earnings per share for 2020 and 2018, RSUs have been omitted as they are out-of-the-money and thus not 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) 63.2 7.4 - Number of shares, end of period (million) Dividend per share 74.9 0.85 74.7 0.10 74.2 - 2020 2019 2018 The Board of Directors has decided not to recommend any dividends relating to the second half of 2020. TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 148 PARENT COMPANY 2020 TORM ANNUAL REPORT 2020 CONSOLIDATED FINANCIAL STATEMENTS 149 COMPANY BALANCE SHEET AS OF 31 DECEMBER Note 2020 2019 USD '000 Note 2020 2019 USD '000 ASSETS NON-CURRENT ASSETS Tangible fixed assets Vessels Land and buildings Other plant and operating equipment Total tangible fixed assets Financial assets Investments in subsidiaries Loan receivables Total financial assets Total non-current assets CURRENT ASSETS Loans to subsidiaries Other receivables Prepayments Total current assets TOTAL ASSETS EQUITY AND LIABILITIES EQUITY Common shares Treasury shares Hedging reserves Share premium 5 - 24,644 72 7 - 35 79 24,679 Retained profit/(loss) 6 1,031,005 1,061,559 7 4,617 4,617 LIABILITIES Total equity 1,035,622 1,066,176 NON-CURRENT LIABILITIES Borrowings 1,035,701 1,090,855 Total non-current liabilities 552,939 242,221 207 254 215 370 625,809 313,407 CURRENT LIABILITIES Borrowings Trade payables Payables to subsidiaries Other liabilities Total current liabilities 1,661,510 1,404,262 Total liabilities Cash and cash equivalents, including restricted cash 72,409 70,601 Note: The profit/(loss) for the financial year dealt with in the financial statements of the Company is USD -15,516k (2019: USD 275,725k). 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 1,661,510 1,404,262 Mr. Jacob Meldgaard Executive Director 1 March 2021 TORM ANNUAL REPORT 2020 Parent company financial statement 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 150 748 747 -4,235 -2,887 -21,489 -10,902 12,307 911,552 2 1,038,097 222,543 1,025,428 1,121,053 3 479,709 235,839 479,709 235,839 3 78,337 23,230 203 250 54,440 12,234 8 23,393 11,656 156,373 47,370 636,082 283,209 COMPANY STATEMENT OF CHANGES IN EQUITY USD '000 EQUITY Common Treasury Hedging Share Retained shares shares reserves premium profit Total Equity as of 1 January 2019 742 -2,887 -2,677 907,355 -55,095 847,438 Comprehensive income for the year: Net profit/(loss) for the year Other comprehensive income/(loss) for the year Total comprehensive income/(loss) for the year Capital increase Share-based compensation Total changes in equity 2019 Equity as of 31 December 2019 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 Capital increase Capital decrease Transaction costs capital decrease Share-based compensation Acquisition treasury shares, cost Dividend paid Total changes in equity 2020 Equity as of 31 December 2020 0 - - - 5 - 5 - - - - - - - -8,225 -8,225 - - - - - - 4,197 - 4,197 275,725 275,725 - -8,225 275,725 267,500 - 1,913 1,913 4,202 1,913 6,115 747 -2,887 -10,902 911,552 222,543 1,121,053 - - - 1 - - - - - 1 - - - - - - - -1,348 - -1,348 - -10,587 -10,587 - - - -15,516 - -15,516 -15,516 -10,587 -26,103 788 - -32 1,681 -1,348 - - - - - - - 787 - -900,000 900,000 -32 - - - - 1,681 - -70,611 -70,611 -899,245 831,070 -69,522 748 -4,235 -21,489 12,307 1,038,097 1,025,428 TORM ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 151 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS Note 1 – Accounting policies – Supplementary for the Parent Company Note 2 – Profit/loss and total comprehensive income for the year Note 3 – Borrowings Note 4 – Staff costs Note 5 – Tangible fixed assets Note 6 – Financial assets Note 7 – Loan receivables Note 8 – Other liabilities Note 9 – Impairment testing Note 10 – Collateral security for mortgage debt and bank loans Note 11 – Guarantee commitments and contingent liabilities Note 12 – Related party transactions 153 154 154 154 154 154 155 155 155 156 156 156 TORM ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 152 NOTE 1 – ACCOUNTING POLICIES – SUPPLEMENTARY FOR THE PARENT COMPANY NOTE 1 - continued BASIS OF PREPARATION TORM plc is a public company limited by shares and is incorporated in England and Wales. Its registered number is 09818726 and its registered address is Birchin Court, 20 Birchin Lane, London, EC3V 9DU. 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 United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including 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 following exemptions available under FRS 101 have been applied: • Paragraphs 45(b) and 46 to 52 of IFRS 2, “Shared-based payment” (details of the number and weighted-average exercise prices of share options, and how the fair value of goods or services received was determined); IFRS 7 “Financial Instruments: Disclosures”; • • Paragraph 91 to 99 of IFRS 13, “Fair value measurement” (disclosure of valuation techniques and inputs used for fair value measurement of assets and liabilities); • Paragraph 38 of IAS 1 “Presentation of financial statements” comparative information requirements in respect of paragraph 79(a)(iv) of IAS 1; • The following paragraphs of IAS 1 “Presentation of financial statements” 10(d) (statement of cash flows); 16 (statement of compliance with all IFRS); • • • 38A (requirement for minimum of two primary statements, including cash flow statements); 111 (cash flow statement information); ; and 134-136 (capital management disclosures). • • IAS 7 “Statement of cash flows”; • • Paragraph 30 and 31 of IAS 8 “Accounting policies, changes in accounting estimates and errors” (requirement for the disclosure of information when an entity has not applied a new IFRS that has been issued but is not yet effective); • Paragraph 17 and 18A of IAS 24 “Related Party Disclosures” (Key management personnel compensation) • The requirements in IAS 36 “Impairment of Assets” (disclosure of valuation technique and assumptions used in determining recoverable amount) 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 112. 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 123-124. ACCOUNTING POLICIES In supplement to the accounting policies provided in note 1 of the Group consolidated financial statements on pages 112-121, the following accounting policies were applied to the Company’s financial statements. 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 less provision for impairment 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”. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS In supplement to the critical accounting estimates and judgements provided in note 1 of the Group consolidated financial statements pages 120-121, the following is considered a significant accounting estimate used in the preparation of the Company’s financial statements. Carrying amounts of investments in subsidiaries The Company evaluates the carrying amounts of subsidiaries to determine if events have occurred that would require a modification of their carrying amounts. The valuation of subsidiaries is reviewed based on the performed impairment testing of the Group’s cash- generating unit, excluding the Parent Company’s effect on the value in use of the cash- generating unit. For further information regarding the underlying impairment testing of the vessels in the Group, please refer to note 8 of the Group consolidated financial statements. TORM ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 153 NOTE 2 – PROFIT/LOSS AND TOTAL COMPREHENSIVE INCOME FOR THE YEAR NOTE 5 – TANGIBLE FIXED ASSETS 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. NOTE 3 – BORROWINGS As of 31 December 2020, the Company had borrowed USD 563.8m (2019: USD 240.1m, 2018: USD 170.0m). The loan proceeds was USD 5.9m lower (2019: USD 3.0m, 2018: USD 3.6m) due to borrowing fees. The fees are amortized over the loan periods. In 2020, the Company had interest expenses of USD 16.5m (2019: USD 9.4m, 2018: USD 8.5m) regarding these loan facilities. As of 31 December 2020, the Company had finance lease liabilities of USD 0.1m (2019: USD 21.9m, 2018: USD 25.3m). In 2020, the Company had interest expenses of USD 1.1m (2019: USD 2.0m, 2018: USD 2.3m) regarding financial leases. NOTE 4 – STAFF COSTS USD'000 Total staff costs 2020 2019 Staff costs included in administrative expenses Total staff costs Average number of permanent employees 1,348 1,348 1 Employee information The average number of employees is calculated as a full-time equivalent (FTE). 1,338 1,338 USD '000 Vessels Cost: Balance as of 1 January 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 Of which right-of-use assets NOTE 6 – FINANCIAL ASSETS 2020 2019 30,500 30,500 -30,500 - - 30,500 5,856 4,088 -6,973 - 1,117 1,768 - - - 5,856 24,644 24,644 USD'000 2020 2019 1 Investments in subsidiaries Cost: Balance as of 1 January Additions Disposals Capital decreases in subsidiaries Capital increases related to share-based payments 1,205,059 1,292,080 - - - - -33,635 -88,934 1,681 1,913 Balance as of 31 December 1,173,105 1,205,059 Impairment: Balance as of 1 January Impairment (reversal)/losses for the year Balance as of 31 December 143,500 415,800 -1,400 -272,300 142,100 143,500 Carrying amount as of 31 December 1,031,005 1,061,559 TORM ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 154 NOTE 7 – LOAN RECEIVABLES NOTE 9 – IMPAIRMENT TESTING USD '000 Loan receivables Cost: Balance as of 1 January Additions during the year Balance as of 31 December Expected credit loss: Balance as of 1 January Additions during the year Balance as of 31 December 2020 2019 As of 31 December 2020, 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. 4,711.2 - - 4,711.2 4,711.2 4,711.2 94.2 - 94.2 - 94.2 94.2 As of 31 December 2020, the recoverable amount of the investments in subsidiaries was based on the value in use. Based on this test, Management concluded that a reversal of impairment charge of USD 1.4m was needed, as the value in use exceeded the carrying amount. 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. Please refer to note 8 in the consolidated financial statements for further information in respect of the value in use of these vessels. Carrying amount as of 31 December 4,617.0 4,617.0 NOTE 8 – OTHER LIABILITIES USD '000 Derivative financial instruments Other Balance as of 31 December 2020 2019 21,489 10,902 1,904 754 23,393 11,656 TORM ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 155 NOTE 10 – COLLATERAL SECURITY FOR MORTGAGE DEBT AND BANK LOANS NOTE 12 – RELATED PARTY TRANSACTIONS The vessels owned by subsidiaries of the company that have been provided as security for the Company’s debt amounting to USD 563,821k as of 31 December 2020 (2019: USD 238,743k). 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 statement of changes in equity. NOTE 11 – GUARANTEE COMMITMENTS AND CONTINGENT LIABILITIES The Company has received dividends from subsidiaries amounting to USD 0.1m (2019: USD 7.6m, 2018: USD 12.1m). The Company is guarantor for loan agreements established in the subsidiaries TORM A/S and VesselCo 9 Pte. Ltd. The Company has income in the form of interests from its subsidiaries of USD 16.2m (2019: USD 8.8m, 2018: USD 2.6m), relating to loans to subsidiaries. As part of sale and leaseback transactions made by a subsidiary, the Company issued a guarantee to the third party in relation to future lease payments to be made by the subsidiary, which are expected to total approximately USD 24.9m. The Company has income in form of bareboat hire from its subsidiary TORM A/S of USD 70.3m (2019: USD 53.0m, 2018: USD 48.7m). The Company has paid bareboat hire to its subsidiaries in the amount of USD 66.2m (2019: USD 47,2m, 2018: USD 43.0m). There have been no or limited transactions with related parties during the financial year other than the transactions disclosed above. TORM ANNUAL REPORT 2020 PARENT COMPANY FINANCIAL STATEMENT 2020 156  INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS OPINION In our opinion: • • TORM plc’s group financial statements and parent company financial statements (the “financial statements”) give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2020 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements of TORM plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2020 which comprise: GROUP PARENT COMPANY Consolidated balance sheet as at 31 December 2020 Balance sheet as at 31 December 2020 Consolidated income statement for the year then ended Statement of changes in equity for the year then ended Consolidated statement of comprehensive income for the Related notes 1 to 12 to the financial statements including a year then ended summary of significant accounting policies Consolidated statement of changes in equity for the year then ended Consolidated cash flow statement for the year then ended Related notes 1 to 28 to the financial statements, including a summary of significant accounting policies The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in 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 parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. CONCLUSIONS RELATING TO GOING CONCERN In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and parent company’s ability to continue to adopt the going concern basis of accounting included carrying out the following procedures: • We confirmed our understanding of management’s going concern assessment process and also engaged with management early to ensure key factors were considered in their assessment, including the evaluation TORM ANNUAL REPORT 2020 INDEPENDENT AUDITOR’S REPORT 157 Independent Auditor’s report INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued of any operational and economic impacts of COVID-19 on the Group; • We obtained management’s board approved forecast cash flows and covenant calculations covering the period of assessment from the date of signing to 31 March 2022. As part of this assessment, the Group has modelled a low case and stress case adverse scenario in their cash forecasts and covenant calculations in order to incorporate unexpected changes to the forecasted liquidity of the Group; • We assessed the reasonableness of the cashflow forecast by analysing management’s historical forecasting accuracy and understanding how the anticipated impact of COVID-19 has been modelled. We evaluated the key assumptions underpinning the Group’s assessment by challenging the appropriateness of the downside scenarios modelled by management and how these compare with principal risks and uncertainties of the Group; • We tested the clerical accuracy and logical integrity of the model used to prepare the Group’s going concern assessment; • We considered whether the Group’s forecasts in the going concern assessment were consistent with other forecasts used by the Group in its accounting estimates, including impairment testing of the carrying value of vessels; • Our analysis also considered the mitigating actions that management could undertake in an extreme downside scenario and whether these were achievable and in control of management considering timing and quantum; • We also confirmed the continued availability of debt facilities through the going concern period, and reviewed their underlying terms, including covenants, by examination of executed documentation. We considered whether management’s disclosures in the financial statements sufficiently and appropriately reflect the going concern assessment and outcomes. Despite COVID-19 the Group performed strongly in 2020 and is forecast to continue to be profitable and generate positive cashflows in the going concern period. Under both its low case and stress case scenarios the Group is forecast to maintain adequate liquidity and it is only in the stress scenario that headroom on the covenants becomes limited. However, in that unlikely stress scenario management consider the impact can be mitigated by cash and cost saving measures which are within their control during the going concern period. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group and parent company’s ability to continue as a going concern for the period to 31 March 2022. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. OVERVIEW OF OUR AUDIT APPROACH Audit scope • We performed an audit of the complete financial information of the Group. Key audit matter • Carrying value of vessels Materiality • Overall Group materiality of $10m which represents 0.5% of Group total assets. AN OVERVIEW OF THE SCOPE OF THE PARENT COMPANY AND GROUP AUDITS Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each company within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of group- wide controls, changes in the business environment and other factors when assessing the level of work to be performed for the Group. In establishing our overall approach to the Group audit, we considered that all significant elements of the Group’s finance and accounting function are situated and managed centrally in Copenhagen, Demark, and operate under one common internal control environment; and all operations of the Group are also managed from this location together with the UK headquarters. All audit work performed for the purposes of the audit was undertaken by the Group audit team, as an integrated audit engagement team, consisting of team members located in Denmark and the UK. As an integrated team all audit work was performed in a shared electronic workspace. The audit plan was developed jointly and both teams were involved in the execution of the plan and in the consideration of areas of significant judgement and estimation. During the course of the audit, the UK senior members, including the Senior Statutory Auditor, supervised the members of the audit team who are based in Copenhagen, Denmark. As a result of UK lockdown, travel restrictions, and government’s recommendation to work from home, the year end audit procedures performed by UK audit team members were completed remotely. We held regular meetings with management and the Denmark based audit team via video calls to direct and supervise the audit and the UK team continued to access client documentation and document our work in the shared electronic work file. Key audit matters 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 our opinion thereon, and we do not provide a separate opinion on these matters. TORM ANNUAL REPORT 2020 INDEPENDENT AUDITOR’S REPORT 158 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued Risk Our response to the risk Carrying value of vessels (Group) Refer to the Audit Committee Report (page 69); Accounting policies (page 117,118 and 120); and Note 8 of the Consolidated Financial Statements (page 129) The carrying value of the Group’s vessels carried as at 31 December 2020 totalled $1,734.5m (2019: $1,769.8m). The carrying values of vessels are reviewed quarterly by management for indicators of impairment. If impairment indicators exist, an impairment test is carried out where the future discounted net cash flow deriving from the cash generating units (CGUs) must be estimated. These estimates are based on a number of assumptions principally future freight rates and weighted average cost of capital (WACC). As of 31 December 2020, Management tested the carrying amount of its fleet for impairment within 3 CGUs, being the Main Fleet (LR2,LR1 and MR vessels) and the 2 Handysize vessels. There is a risk that CGUs are not correctly classified and that the testing is not performed at the appropriate level, which may mask impairments that would otherwise arise. Auditing the Group's impairment assessment was complex due to significant judgements involved in determining the cash-generating units (CGUs) and the significant estimation uncertainty in forecasting the undiscounted cashflows of the CGUs. These significant assumptions are forward looking and subject to future economic and market conditions. We performed a walkthrough of the Group’s impairment process to gain an understanding of the process and assessed the design effectiveness of the controls. We challenged management’s CGU determination by evaluating their analysis in respect of the smallest group of assets that generate largely independent cash inflows. This considered management’s view of the homogenous nature and joint operation of the LR1, LR2 and MR vessels, thereby forming a single CGU (the Main Fleet) and that the 2 Handysize vessels were each the lowest level at which independent cash flows are identified. We inspected evidence to support the explanations and rationale supporting the joint operation of the LR1, LR2 and MR vessels (the Main Fleet). We obtained management’s impairment model containing the value in use calculations and tested the clerical accuracy of the model. We challenged the key assumptions by comparing them with publicly available market information, our knowledge of the Group and industry and the Group’s most recent business plan. We analysed the assumptions and estimates made by management in their impairment assessment for the prior year against the actual outcomes in 2019 to assess the robustness and accuracy of management’s forecasting process. We involved our internal valuation specialists to independently assess the appropriateness of the discount rate (WACC) applied to the value-in-use calculation. This included assessing management’s methodology and preparing our own independent point estimate to check management’s rate fell within an acceptable range. We reviewed management’s sensitivities on the group’s value in use calculation incorporating reasonably possible changes in key assumptions including in respect of freight rates, the discount rate and operating costs. We have ensured the fact there is limited headroom in value in use over carrying value has been disclosed and have checked the impact of reasonably possible changes in key assumptions is correctly calculated and disclosed. At the conclusion of the above procedures we stood back and considered all evidence gathered to reassess and confirm our conclusions remained appropriate. We assessed the appropriateness of disclosures provided in the financial statements in accordance with IAS 36. Key observations communicated to the Audit Committee Based on our audit procedures performed, we concur with management’s conclusion on impairment of vessels at 31 December 2020, including: • That the determination of CGUs is highly judgemental, but is supported by management’s assessment; • • • • No impairment recognised for the Main Fleet, however there is no headroom between the value in use and carrying value and is therefore sensitive to reasonably possible changes in key assumptions; Impairment loss recognised for the Handysize vessels is appropriate; The determined discount rate is within the range determined by our internal valuation specialist; The freight rates assumed and applied have been benchmarked to external sources and assessed as reasonable. We consider the disclosures in the financial statements to be sufficient and appropriate and in compliance with accounting standards. TORM ANNUAL REPORT 2020 INDEPENDENT AUDITOR’S REPORT 159 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued OUR APPLICATION OF MATERIALITY We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment and taking into account this is our first year audit of TORM plc, our judgement was that performance materiality be set at 50% (2019: 70%) of our materiality, namely $5m (2019: $7m). material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group to be $10 million (2019: $10 million), which is 0.5% (2019: 0.5%) of the Group’s total assets. We believe that total assets provides us with an appropriate materiality basis given that the key users of the Group’s financial statements are primarily focused on the Group’s assets, primarily the vessel value. In addition, we also considered that total assets be the most stable and consistent benchmark in a period of significant freight rate volatility. In 2019, the predecessor auditor set Group materiality using the same basis. We determined materiality for the parent company to be $8.2 million (2019: $10 million), which is 0.5% (2019: 0.7%) of total assets as the parent entity principally holds investments in subsidiary entities and does not trade. During the course of our audit, we reassessed initial materiality and no change has been made to the materiality level reflecting the insignificant movement in the carrying value of vessels between the time we set initial materiality and 31 December 2020. Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of $0.5m (2019: $0.5m), which is set at 5% of materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. • 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. 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 directors’ report have been prepared in accordance with applicable legal requirements. Other information The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. 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 course of 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 themselves. If, based on the work we have performed, we conclude that there is a Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • 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 and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • • • we have not received all the information and explanations we require for our audit TORM ANNUAL REPORT 2020 INDEPENDENT AUDITOR’S REPORT 160 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF TORM PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS - continued Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 102, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. 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. EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. • The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company and management. • We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant are those related to the reporting framework (IFRS as adopted by the EU, FRS 101, the Companies Act 2006 and Corporate Governance Code), the Danish and UK tax legislation as well as IMO 2020 Sulphur Regulation. • We understood how TORM plc is complying with those frameworks by making inquiries of management and identifying the policies and procedures regarding compliance with law and regulations. We also identified those members of management who have the primary responsibilities for ensuring compliance with law and regulations, and for reporting any known instance of non- compliance to those charged with governance. We corroborated our enquiries through our review of board minutes, discussion with the Audit Committee and any correspondence received from regulatory bodies. • We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by meeting with management to understand where they considered there was susceptibility to fraud, reviewing the Group’s risk register, enquiry with management and the Audit Committee during the planning and execution phases of our audit. We also considered performance targets and their influence on efforts made by management to manage earnings. Where this risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from material misstatements arising from fraud. Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved: journal entry testing, with a focus on manual journals and journals indicating large or unusual transactions based on our understanding of the business; inquiries of members of senior management, and when appropriate, those charged with governance regarding their knowledge of any non-compliance or potential non-compliance with laws and regulations that could affect the financial statements, review of board minutes and correspondence received from regulatory bodies. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. OTHER MATTERS WE ARE REQUIRED TO ADDRESS • •Following the recommendation from the audit committee, we were appointed by the company on 15 April 2020 to audit the financial statements for the year ending 31 December 2020 and subsequent financial periods. • The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of the Group and the parent company in conducting the audit. • The audit opinion is consistent with the additional report to the audit committee 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. Lloyd Brown (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London, 1 March 2021 TORM ANNUAL REPORT 2020 INDEPENDENT AUDITOR’S REPORT 161 TORM FLEET OVERVIEW AS OF 31 DECEMBER 2020 Vessel type Vessel class Vessel Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR1 LR1 LR1 LR1 LR1 LR1 LR1 LR1 LR1 MR MR MR MR MR MR MR TORM GUDRUN TORM HELLERUP TORM HERMIA TORM HERDIS TORM HILDE TORM INGEBORG TORM MAREN TORM MARINA TORM MATHILDE TORM VALBORG TORM EMILIE TORM ESTRID TORM ISMINI TORM SARA TORM SIGNE TORM SOFIA TORM VENTURE TORM ELISE TORM ELIZABETH TORM AGNES TORM AGNETE TORM ALEXANDRA TORM ALICE TORM ALMENA TORM AMALIE TORM ANABEL TORM ANNUAL REPORT 2020 Fleet overview DWT 99,965 114,000 114,000 114,000 114,000 99,999 109,672 109,672 109,672 99,999 74,999 74,999 74,999 72,718 72,718 72,660 73,700 75,000 75,000 49,999 49,999 49,999 49,999 49,999 49,999 49,999 Built 2000 2018 2018 2018 2018 2003 2008 2007 2008 2003 2004 2004 2004 2003 2005 2005 2007 2019 2019 2011 2010 2010 2010 2010 2011 2012 Ownership Carrying value (USDm) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 12¹ 48¹ 46¹ 47¹ 49¹ 15¹ 35¹ 29¹ 31¹ 15¹ 19¹ 16¹ 19¹ 15¹ 21¹ 22¹ 21¹ 39¹ 39¹ 22¹ 25¹ 25¹ 22¹ 22¹ 22¹ 25¹ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ 162 TORM FLEET OVERVIEW AS OF 31 DECEMBER 2020 - continued Vessel type Vessel class Vessel Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR TORM ARAWA TORM ASLAUG TORM ASTRID TORM ATLANTIC TORM AUSTRALIA TORM CARINA TORM ERIC TORM FREYA TORM HARDRADA TORM HELVIG TORM HORIZON TORM INDIA TORM KANSAS TORM LAURA TORM LENE TORM LILLY TORM LOKE TORM LOTTE TORM LOUISE TORM MOSELLE TORM MALAYSIA TORM NEW ZEALAND TORM PLATTE TORM RAGNHILD TORM REPUBLICAN TORM RESILIENCE DWT 49,999 49,999 49,999 49,999 51,737 46,219 51,266 45,990 45,983 46,187 46,955 49,999 46,955 49,999 49,999 49,999 51,372 49,999 49,999 47,024 51,737 51,737 46,959 46,187 46,955 49,999 Built 2012 2010 2012 2010 2011 2003 2006 2003 2007 2005 2004 2010 2006 2008 2008 2009 2007 2009 2009 2003 2011 2011 2006 2005 2006 2005 Ownership Carrying value (USDm) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 25¹ 22¹ 26¹ 24¹ 23¹ 11¹ 14¹ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ 11¹ ⁾ 12 ⁾ 18¹ 12¹ ⁾ 17 ⁾ 15¹ 20¹ 19¹ 22¹ 18¹ 22¹ 22¹ 10¹ 23¹ 25¹ 15¹ 19¹ 15¹ 16¹ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ TORM ANNUAL REPORT 2020 FLEET OVERVIEW 163 TORM FLEET OVERVIEW AS OF 31 DECEMBER 2020 – continued Vessel type Vessel class Vessel Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR MR TORM SINGAPORE TORM THAMES TORM THOR TORM THUNDER TORM TIMOTHY TORM TITAN TORM TORINO TORM TROILUS TORM THYRA TORM SOLUTION TORM SOVEREIGN TORM SUPREME TORM STRENGTH TORM STRONG TORM SUBLIME TORM SUCCESS TORM STELLAR TORM SPLENDID Handysize TORM GYDA Handysize TORM TEVERE ¹ Indicates vessels for which TORM believes that, as of 31 December 2020, the basic charter-free market value is lower than the vessel's carrying amount. ⁾ DWT 51,737 47,036 49,842 49,842 49,842 49,842 49,842 49,842 45,950 49,999 49,999 49,999 49,999 49,999 49,999 49,999 49,999 49,999 36,207 37,383 Built 2011 2005 2015 2015 2015 2015 2015 2015 2003 2019 2017 2017 2019 2019 2019 2019 2020 2020 2009 2005 Ownership Carrying value (USDm) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 24¹ 18¹ 31¹ 31¹ 31¹ 31¹ 31¹ 32¹ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ ⁾ 11¹ ⁾ 32 ⁾ 28 28 32 32 32 32 32 32 15¹ 11¹ ⁾ ⁾ TORM ANNUAL REPORT 2020 FLEET OVERVIEW 164 GLOSSARY 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. Coverage: A measure of Covered days divided by Earning days. 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. ESG: Environmental, Social, and Governance. LTAF: Lost Time Accident Frequency. Work-related personal injuries that result in more than one day off work per million hours of work. 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. FFA: Forward freight agreement. A financial derivative instrument enabling freight to be hedged forward at a fixed price. Product tanker: A vessel suitable for carrying clean petroleum products such as gasoline, jet fuel and naphtha. Handysize: A specific class of product tankers with a cargo carrying capacity of 20,000–40,000 dwt. Spot market: Market in which vessels are contracted for a single voyage for near-term delivery. IAS: International Accounting Standards. IFRS: International Financial Reporting Standards. IMO: International Maritime Organization. COA: Contract of Affreightment. A contract that involves a number of consecutive cargos at previously agreed freight rates. 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. Coating: The internal coatings applied to the tanks of a product tanker enabling the vessel to load refined oil products. Loan-to-value (LTV): A measure of notional debt divided by broker values of the encumbered vessels. Commercial management: An agreement to manage a vessel’s commercial operations for the account and risk of the shipowner. 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. TORM ANNUAL REPORT 2020 Glossary 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. GLOSSARY 165 GLOSSARY KEY FINANCIAL FIGURES TCE % TCE per day Gross profit % EBITDA % Operating profit/(loss) % Return on Equity (RoE) % Return on Invested Capital (RoiC) % Equity ratio Earnings per share, EPS Diluted earnings/(loss) per share, EPS (USD) = = = = = = = = = = TCE Revenue TCE Available earning days Gross profit Revenue EBITDA Revenue Operating profit/(loss) (EBIT) Revenue Net profit/(loss) for the year Average equity Operating profit/(loss) less tax Average invested capital Equity Total assets Net profit/(loss) for the year Average number of shares Net profit/(loss) for the year Average number of shares less average number of treasury shares TORM ANNUAL REPORT 2020 GLOSSARY 166 GLOSSARY ALTERNATIVE PERFORMANCE MEASURES Net profit/(loss) for the year excluding non-recurrent items: Net profit excluding impairment is net profit less impairment and reversals of impairment generated from impairment testing during the year (Please refer to Note 8). The Company reports Net profit excluding impairment because we believe it provides additional meaningful information to investors regarding the operational performance excluding fluctuations in the valuation of fixed assets. The APM replaces “Net profit/(loss) for the year excluding impairment as it is more relevant and provides more useful information. 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 revenue 2020 2019 2018 747.4 692.6 635.4 USDm 2020 2019 2018 Revenue Reconciliation to net profit/(loss) for the year Net profit/(loss) for the year Profit from sale of vessels 88.1 166.0 -34.8 -1.1 -1.2 Impairment losses and reversals on tangible assets 11.1 -114.0 Expense of capitalized bank fees at refinancing Termination of finance leases Provisions 2.8 2.7 18.5 - - - -0.8 3.2 - - 1.9 Net profit/(loss) for the year ex. non-recurrent items 122.1 50.8 -30.5 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: USDm Reconciliation to revenue Revenue 2020 2019 2018 747.4 692.6 635.4 Port expenses, bunkers and commissions -227.9 -267.7 -283.0 TCE earnings 519.5 424.9 352.4 Port expenses, bunkers and commissions -227.9 -267.7 -283.0 Charter hire Operating expenses Gross profit - - -2.5 -178.4 -173.0 -180.4 341.1 251.9 169.5 Net interest-bearing debt: Net interest-bearing debt is defined as borrowings (current and non- current) less loans receivables and cash and cash equivalents, including restricted cash. 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 Borrowings Loans receivables 2020 2019 2018 853.3 863.4 754.7 -4.6 -4.6 - Cash and cash equivalents, including restricted cash -135.6 -72.5 -127.4 Net interest-bearing debt 713.1 786.3 627.3 TORM ANNUAL REPORT 2020 GLOSSARY 167 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 losses and reversals, 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 2020 2019 2018 138.9 205.9 -1.4 -0.8 137.5 205.1 2.8 -1.6 1.2 USDm EBIT less Tax Profit from sale of vessels 1,786.0 1,469.4 1,406.0 Impairment losses and reversals on tangible assets 11.1 -114.0 1,719.4 1,786.0 1,469.4 Provisions Average invested capital for the year 1,752.7 1,627.7 1,437.7 EBIT less tax and impairment Return on Invested Capital (RoIC) 7.8% 12.6% 0.1% Average invested capital¹ 2020 2019 2018 137.5 205.1 -1.1 -1.2 18.5 - 166.0 89.9 1.2 -0.8 3.2 1.9 5.5 1,752.7 1,627.7 1,437.7 41.5 98.2 185.0 1,794.2 1,725.9 1,622.7 Average impairment ² ⁾ Average invested capital less average impairment ⁾ Adjusted RoIC 9.3% 5.2% 0.3% ¹ ² 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. ⁾ Liquidity: TORM defines liquidity as available cash, comprising cash and cash equivalents, including restricted cash, as well as undrawn and committed credit facilities. TORM finds the APM important as the liquidity expresses TORM’s financial position, ability to meet current liabilities and cash buffer. Furthermore, it expresses TORM’s ability to act and invest when possibilities occur. USDm Cash and cash equivalents, including restricted cash Undrawn credit facilities and committed facilities incl. sale & leaseback financing transactions Liquidity 2020 135.6 2019 2018 72.5 127.4 132.2 173.1 278.7 267.8 245.6 406.1 TORM ANNUAL REPORT 2020 GLOSSARY 168 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 borrowings, 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 compliance with the financial covenants and restrictions contained in the Company's financing 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. EBITDA excludes some, but not all, items that affect profit/(loss), and these measures may vary 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: USDm Reconciliation to net profit/(loss) Net profit/(loss) for the year Tax Financial expenses Financial income Depreciation 2020 2019 2018 88.1 166.0 -34.8 1.4 49.9 -0.5 0.8 41.9 -2.8 1.6 39.3 -3.3 121.9 110.1 114.5 Impairment (reversal)/losses on tangible assets 11.1 -114.0 3.2 EBITDA 271.9 202.0 120.5 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. USDm 2020 2019 2018 Vessel values including newbuildings (broker values) 1,585.3 1,801.5 1,675.1 Total (value) Borrowings 1,585.3 1,801.5 1,675.1 853.3 863.4 754.7 - Hereof debt regarding Land and buildings & Other plant and operating equipment -8.3 Committed CAPEX on newbuildings and second-hand vessels 100.6 Loans receivables -4.6 -6.8 51.2 -4.6 - 258.0 - Cash and cash equivalents, including restricted cash -135.6 -72.5 -127.4 Total (loan) 805.4 830.7 885.3 Loan-to-value (LTV) ratio 50.8% 46.1% 52.9% TORM ANNUAL REPORT 2020 GLOSSARY 169 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), non-current tax liability related to held over gains, 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 2020 2019 2018 USDm 2020 2019 2018 Total vessel values including newbuildings (broker values) 1,585.3 1,801.5 1,675.1 Tangible and intangible fixed assets 1,748.4 1,782.2 1,445.0 Investments in joint ventures Bunkers Accounts receivables ¹ Assets held-for-sale ⁾ Non-current tax liability related to held over gains Trade payables ² Provisions ⁾ Current tax liabilities Deferred income 1.6 22.5 85.6 - -44.9 -74.1 -18.3 -1.4 - 1.2 34.8 99.5 9.1 -44.9 -94.4 - -1.5 - 0.1 39.4 96.3 6.2 -44.9 -71.6 - -1.0 -0.1 1,719.4 1,786.0 1,469.4 Invested capital ¹ ² Accounts receivables includes Freight receivables, Other receivables and Prepayments. Trade payables includes Trade payables and Other liabilities. ⁾ ⁾ Committed CAPEX on newbuildings and second-hand vessels -100.6 -51.2 -258.0 Cash and cash equivalents, including restricted cash 135.6 72.5 127.4 Loans receivables Bunkers Freight receivables Other receivables Other plant and operating equipment Land and buildings Investments in joint ventures Prepayments Borrowings Trade payables Provisions Other liabilities Current tax liabilities Total Net Asset Value (NAV) 4.6 22.5 58.6 24.9 6.8 7.1 1.6 2.2 4.6 34.8 89.8 6.2 4.3 8.1 1.2 3.5 - 39.4 86.0 7.5 3.0 - 0.1 2.9 -853.3 -863.4 -754.7 -14.4 -18.3 -59.8 -1.4 -47.1 -35.1 - -47.3 -1.5 - -36.5 -1.0 801.4 1,016.0 856.1 Total number of shares excluding treasury shares (million) 74.4 74.4 73.9 Total Net Asset Value per share (NAV/share) (USD) 10.8 13.6 11.6 TORM ANNUAL REPORT 2020 GLOSSARY 170 

Continue reading text version or see original annual report in PDF format above