TORM
Annual Report 2022

Plain-text annual report

Annual Report 2022 TORM PLC OFFICE 105, 20 ST DUNSTAN’S HILL LONDON, EC3R 8HL, UNITED KINGDOM COMPANY: 09818726 Contents Strategic Report Governance Financial statements At a glance TORM at a glance Letter from the Chairman and the CEO 2022 in review Business model and strategic choices The value chain in oil transportation Strategic framework and highlights Leading product tanker owner The versatile TORM fleet Positioned to capitalize on a strong market Greener future with zero emissions Optimizing performance now Long-term decarbonization Superior operating platform Fuel efficiency initiatives Integrated digital foundation Our responsibility Responsibility report Enhancements in 2022 TORM’s ESG targets Stakeholder engagement and materiality Environment Social Governance SASB index and responsibility data Review and risk Market review Market drivers and outlook Financial outlook and coverage 2023 TORM fleet development Financial review 2022 Risk management TORM ANNUAL REPORT 2022 4 6 7 9 10 12 13 14 15 16 17 18 19 20 22 24 27 28 30 34 39 43 51 53 56 58 60 70 Governance introduction Governance at TORM Chairman’s introduction Governance structure TORM’s governance structure Board of Directors Board and Committee meeting attendance Leadership, governance, and engagement Board activities 2022 Committee reports Audit Committee report Risk Committee report Nomination Committee report Remuneration Committee report Other Investor information Engagement and decision making Directors’ report Statement of Directors’ responsibilities Safe habor statement 79 80 83 84 85 86 87 89 95 97 100 111 115 118 121 123 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 to the consolidated financial statements Parent company financial statements Management review for TORM plc Income statement Statement of comprehensive income Company balance sheet Company statement of changes in equity Cash flow statement Notes to parent company financial statements Other Independent auditor’s report TORM fleet overview Glossary and alternative performance measures 125 125 126 127 129 130 176 177 177 178 179 180 181 187 193 196 TORM strategy Responsibility report Corporate governance Financial statements 11 22 79 125 CONTENTS 2 Key figures TCE earnings (USD/Day) EBIT (USDm) Adjusted RoIC (%) Dividend/share (USD) 40,000 34,154 30,000 20,000 10,000 0 19,800 16,526 13,703 12,982 800 600 400 200 0 601 139 206 1 3 28.1 30 20 10 0 9.3 5.2 0.2 0.3 4.6 5 4 3 2 1 0 0.85 0 0.10 0 2022 2021 2020 2019 2018 2022 2021 2020 2019 2018 2022 2021 2020 2019 2018 2022 2021 2020 2019 2018 2022 2021 2020 2019 2018 2022 2021 2020 2019 2018 Income statement (USDm) Revenue Time charter equivalent earnings (TCE) ¹⁾ ⁵⁾ Gross profit ¹⁾ EBITDA ¹⁾ Operating profit (EBIT) Financial items Profit/(loss) before tax Net profit/(loss) for the year Net profit/(loss) ex. non-recurrent items¹⁾ Balance sheet and cash flow (USDm) Non-current assets Total assets Equity Total liabilities Invested capital ¹⁾ Net interest-bearing debt ¹⁾ Net Asset Value (NAV) (USDm) ²⁾ Cash and cash equivalents, incl. restricted cash Investment in tangible fixed assets Free cash flow 1,443 982 782 743 601 -45 557 563 548 620 379 188 137 1 -42 -41 -42 -36 747 520 341 272 139 -49 90 88 693 425 252 202 206 -39 167 166 122 51 635 352 169 121 3 -36 -33 -35 -31 1,874 1,968 1,755 1,788 1,445 2,614 2,331 1,999 2,004 1,714 1,504 1,052 1,017 1,008 1,111 1,279 981 996 847 867 2,142 2,011 1,720 1,786 1,469 650 972 713 786 2,330 1,047 902 1,016 627 856 324 119 172 320 136 173 72 384 127 202 513 -243 116 -152 -105 Key financial figures ¹⁾ Gross margins: Gross profit EBITDA Operating profit (EBIT) Return on Equity (RoE) 54.2% 30.4% 45.6% 36.4% 26.6% 51.5% 22.1% 36.4% 29.2% 19.1% 41.6% 0.2% 18.6% 29.7% 0.5% 44.0% -4.1% 8.7% 17.9% -4.3% Return on Invested Capital (RoIC) 29.2% 0.01% 7.8% 12.6% Adjusted RoIC Equity ratio TCE per day (USD) ⁵⁾ OPEX per day (USD) ⁵⁾ Loan-to-value (LTV) ratio ⁵⁾ 0.1% 0.3% 28.1% 0.2% 9.3% 5.2% 57.5% 45.1% 50.9% 50.3% 49.4% 34,154 13,703 19,800 16,526 12,982 6,825 6,633 6,398 6,371 6,389 24.9% 52.3% 50.8% 46.1% 52.9% Share-related key figures ¹⁾ Basic earnings/(loss) per share (USD) 6.92 -0.54 1.19 2.24 -0.48 Diluted earnings/(loss) per share (USD) 6.80 -0.54 1.19 2.24 -0.48 Declared dividend per share (USD) Declared dividend (USDm) Dividend paid per share (USD) Net Asset Value per share (NAV/share) ²⁾ Stock price in DKK (per share of USD 0.01)³⁾ Number of shares (m) ³⁾ ⁴⁾ Number of shares, weighted average (m) ⁴⁾ 4.63 378.7 2.04 28.5 198.4 - - - 0.85 63.2 0.95 0.10 7.4 - - - - 13.0 51.7 81.8 80.7 81.3 78.1 12.1 13.6 11.6 45.0 74.4 74.3 74.5 43.9 74.4 73.9 74.0 73.1 TORM ANNUAL REPORT 2022 KEY FIGURES 3 ¹⁾ For a definition of the calculated key figures (the APMs), please refer to the glossary on pages 196-202. ²⁾ Based on broker valuations as of 31 December 2022, excluding charter commitments. ³⁾ End of period. ⁴⁾ Excluding treasury shares. ⁵⁾ For Tanker segment We all have an obligation to do our utmost to reduce CO2 emissions. TORM is pushing fast forward in our environmental efforts and will reduce our carbon intensity by 40% compared to the IMO baseline by 2025 – ahead of IMO’s 2030 target. 13 15 60 As of 16 March 2023. TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 AT A GLANCE AT A GLANCE 4 4 CHRISTOPHER H. BOEHRINGER, CHAIRMAN OF THE BOARD “2022 was a year where the geopolitical landscape was changed dramatically, and we were all confronted by the tragic Russian invasion of and subsequent war in Ukraine. Since the beginning, TORM decided to cease activity with Russian cargos and Russian harbors completely,” says Christopher H. Boehringer. The war meant that Europe had to import refined oil from further away, and together with supportive fundamentals, such as close-down of refineries in distant regions of the world as well as the limited number of new vessels coming to the market, this increased the imbalance between supply and demand. Consequently, a constant high utilization of the world fleet led to record high product tanker rates and the strongest result on record for TORM,” says Jacob Meldgaard. JACOB MELDGAARD CEO/EXECUTIVE DIRECTOR TORM ANNUAL REPORT 2022 AT A GLANCE 5 Letter from the Chairman and the CEO In 2022, the world economy and the product tanker markets were significantly impacted by the changes in the geopolitical landscape. At the beginning of Russia’s war against Ukraine, TORM decided to stop transporting Russian products, and in the following months new trading patterns started to take shape. The One TORM platform proved to be ready for the changes that occurred, and at the same time TORM was diligently preparing for the changes we will see in the years to come. The One TORM platform The tragic situation in Ukraine and the changing trading Distribution Policy In May 2022, TORM’s Board of Directors decided to patterns stemming from refinery closures combined with change the Distribution Policy for the benefit of our limited fleet growth increased the utilization of the global shareholders. We introduced a transparent model where product tanker fleet to very high levels. This resulted in high the quarterly cash generation is shared with our investors, and volatile freight rates and the highest yearly earnings on either in the form of dividends or share buy-back. This record for TORM with a net profit of USD 563m. means that we distribute cash in excess of a threshold that is based on the number of vessels in our fleet, the net proceeds from vessel sales and purchases, and restricted cash. We believe this is a prudent and transparent way of sharing the cash generated with our owners. 4.63 Dividend per share 28.1% Adjusted Return on Invested Capital (ROIC) We believe the integrated One TORM platform is what enables us to invest in and operate vessels obtaining one of the highest return on investments amongst our peers in the product tanker industry. In 2022, TORM obtained a Return on Invested Capital of 28.1%. Christopher H. Boehringer, Chairman of the Board All in all, based on our cash generation in the fourth quarter of 2022, TORM will pay out record high dividends of USD 2.59 (approximately DKK 18) per share, which brings the dividend per share based on the full year 2022 cash generation up to USD 4.63 (approximately DKK 33). Jacob Meldgaard, Executive Director TORM ANNUAL REPORT 2022 AT A GLANCE 6 Preparations for the future TORM has for many years had decarbonization and reducing fuel consumption as a core strategic focus. Hence, we find us well prepared for both the introduction by IMO of the EEXI and CII certification from the beginning of 2023 and further the increasing focus from our financiers and investors to reduce emissions. By being diligent in our efforts to find the next energy efficiency improvement, we will be part of driving a change in our industry. We also expect our customers to increase their focus in the years to come, which is why we have prepared TORM’s organization both commercially and technically to exploit the opportunities both directly and in partnerships. 2022 in review January January May July Pushing fast forward on climate Since 2015, TORM has accelerated its work to improve energy efficiency and in January 2022, we announced an ambitious 2030 climate target to reduce our carbon intensity by 45% compared to the IMO baseline (2008). Increasing efficiency of the fleet As we entered into 2022, TORM took delivery of the LR2 vessel, TORM Houston, equipped with energy-saving technology such as pre-shrouded vanes, hub vortex absorbed fins, and ability for Flettner rotors. Distributions to shareholders Strategic fleet adjustment TORM's new Distribution Policy was introduced, which incorporates a stronger alignment between cash generation and shareholder distributions. The last remaining vessel in the Handysize vessel class was sold, in line with our long-term strategic priority to move towards larger vessels. Read more on page 15 Read more on page 114 Read more on pages 13 & 58 Full year Empowering decarbonization To deliver on its ambitious climate targets, TORM enhanced its organizational structure by creating dedicated teams for both the technical and the commercial decarbonization work – ensuring high focus and empowerment to take action. Read more on page 23 TORM ANNUAL REPORT 2022 AT A GLANCE 7 2022 in review August September & November December December Scrubber commitment increased With the successful installation of more than 50 scrubbers, enabled through our company ME Production, TORM announced further installations that together with already planned installations will bring the total number of scrubbers to 68. Reconnecting sea and shore Once safe to do so following the pandemic, TORM reinstated face-to- face annual officer seminars. Nurturing this close relationship between sea and shore colleagues contributes heavily to the unique value that TORM provides through our integrated One TORM platform. Supporting quality education since 2007 Both in India and the Philippines, we have supported hundreds of children from poorer backgrounds by providing education scholarships. Climate innovation Another green pilot project was initiated as an air lubrication system was installed on TORM Hermia with expected energy savings of approximately 5% per vessel. Read more on page 34 Read more on page 38 Read more on page 33 August December Strengthening environment-related innovation Building on the existing strong partnership, TORM acquired a 75% ownership stake in ME Production to support TORM's climate goals through environmental innovation. Record high dividend In Q3 2022, TORM delivered the best quarterly result on record, and the highest quarterly distribution of USD 119m was paid out to our shareholders in December. Based on Q4 2022, TORM will pay a dividend of around USD 212m. Read more on pages 31-32 Read more on page 14 TORM ANNUAL REPORT 2022 AT A GLANCE 8 The value chain in oil transportation The global oil industry covers a range of activities and processes that contribute to the transformation of primary petroleum resources into usable end products for industrial and private customers. The value chain of the global oil industry begins with the In addition to clean products, TORM uses some of its The transportation patterns of both refined and unrefined identification and subsequent exploration of productive vessels for the transportation of residual fuels from the products are subject to constant change; however, the petroleum fields. The unrefined crude oil is transported refineries as well as crude oil directly from the production different products may be affected differently. As an from the production area to refinery facilities by crude oil field to the refinery. These fuel types are commonly referred example, closedowns of refineries in oil-importing regions tankers, pipelines, roads, and rail. to as dirty petroleum products, and extensive cleaning of mean that these regions will require less transportation of the vessel’s cargo tanks is required before a vessel can unrefined oil, while it, at the same time, will require more TORM is primarily involved in the transportation of refined transport clean products following transportation of dirty transportation of refined oil. oil products from the refineries to the onshore distributors cargo. In 2022, 98.6% of TORM’s turnover was generated who transport refined oil products to the end users. Refined from clean products transportation. Hence, short and long-term changes will impact the value oil products (or clean products) are mainly used in the road transportation sector (gasoline, diesel), in the aviation sector (jet fuel), and as a feedstock to the petrochemical industry (naphtha). chain of the global oil industry, and vessel operators should be ready to adapt to the changes. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 9 Strategic highlights Leading product tanker owner 88 Vessels in all major product tanker vessel classes Including acquired vessels as of 16 March 2023 28.1% Adjusted RoIC 24.9% Net LTV Additional capacity available for fleet growth USDm 379 Dividends paid based on 2022 earnings Including dividends to be paid in April 2023 Green future with zero emissions 37.1% AER reduction compared to IMO baseline (2008) ZERO Carbon Shipping in 2050 TORM signed up for Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping Superior operating platform USDm 563 Net profit USD 34,154 TCE/day Across all vessel classes 0.42 Accidents per one million exposure hours LTAF (Lost Time Accidents Frequency) TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES BUSINESS MODEL AND STRATEGIC CHOICES 10 10 Strategic framework OUR VISION The reference company in the transportation industry Our dedicated team strives to be the reference company, servicing our customers via our integrated business model – safely, reliably, and environmentally responsible. OUR STRATEGIC CHOICES OUR WAY OF WORKING Leading product tanker owner Superior operating platform > Financial flexibility and fleet optimization > Commercial management > Spot exposure > Integrated operations > Optimal vessel positioning > Safe technical management > An integrated digital foundation leveraging Green future with zero emissions operational performance > Ambitious and ongoing energy optimization > Integrated decarbonization efforts > Zero CO2 emissions by 2050 Pages 12-20 Pages 12-17 Pages 18-20 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES BUSINESS MODEL AND STRATEGIC CHOICES 11 11 Leading product tanker owner TORM is an internationally leading product tanker company and one of the largest owners of product tankers in the world. LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM Active management of spot market exposure We primarily employ our fleet of 88 vessels in the spot Through a combination of various employment and coverage options as well as active fleet management, Positioned to capitalize on the strong market Going into 2023, TORM owned a fleet of 78 vessels, of which market. Throughout 2022, TORM has utilized its position to TORM aims to benefit from movements in freight rates to 56 were scrubber-fitted. During the first quarter of 2023, benefit from increasing market conditions. Going into capitalize on market highs and have lower market exposure TORM purchased seven LR1 vessels and 3 MR increasing the 2023, TORM is thus ready to continue to benefit from the when freight rates are low. strong market conditions, where seven LR1 vessels were added to our fleet during January 2023. Read more on the operational leverage of TORM’s product tanker market. In a continued strong market, TORM spot market exposure in the Financial outlook on will have increased focus on maintaining vessels in the fleet fleet to 88 vessels. With an almost entirely spot-exposed fleet, TORM is well positioned to capitalize on the elevated With our presence in all large product tanker vessel classes, page 56 TORM is well positioned to meet our customers’ transport and storage requirements. TORM’s modern and well- maintained fleet, with the majority of the vessels being Fleet growth and optimization TORM seeks to selectively grow its fleet and to serve as a for an extended period. In this way, TORM will optimize its invested capital to enable the highest possible RoIC. TORM’s scalable business platform provides strategic flexibility as attractive investment or divestment opportunities arise and is scrubber-fitted, further provides TORM and our customers consolidator in the product tanker segment if the right a supportive and required enabler for being a leading product with enhanced flexibility to fulfill different cargo opportunities arise. TORM continuously assesses tanker owner. requirements as well as reduced fuel costs. TORM’s opportunities to optimize our fleet by acquiring attractive normalized PBT break-even rate is approximately USD/day high-specification second-hand product tankers or In May 2022, TORM introduced a new quarterly 15,000. selectively pursuing newbuilding programs with high-quality Distribution Policy to allow for increased alignment shipyards. Further, TORM seeks to optimize the trading between cash generation and shareholder distribution. With While TORM mainly operates in the spot market, TORM also optionality of the fleet through enhanced cargo optionality a prudent and solid capital structure approach, TORM has enters into medium and long-term contracts when levels covering chemical trading options. already based on cash generation from the second and the are assessed to be attractive. Such contracts provide more third quarter of 2022 paid out dividends to our cash flow certainty for TORM and include i) charter During 2022, TORM decided to sell the remaining two Handy- shareholders, and TORM expects to pay out a total of USD contracts on which a specific vessel is chartered out to a size vessels in the fleet. Further three older LR2 vessels, one 379m in dividends related to 2022 earnings. customer for a longer period, ii) contracts of affreightment LR1 vessel and two older MR vessels were sold. TORM has on (CoA) which involve several consecutive cargos with a the other hand purchased one modern scrubber-fitted LR2 customer at agreed freight rate levels, and iii) forward vessel during 2022. Read more about TORM’s capital structure on page 14 freight agreements (FFA) which are financial instruments hedging the forward price for freight for a defined period. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 12 The versatile TORM fleet TORM is present in all larger vessel classes in the product tanker market providing enhanced offering to our customers and synergies across vessel classes. Within the MR vessel class, certain vessels have increased trading flexibility within chemical cargos. LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM 13 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. The numbers are as of 16 March 2023, including ordered but not delivered second-hand vessels. 15 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 which are traditionally dominated by the smaller MR vessels. A typical LR1 trade could be diesel or jet fuel from the Middle East to Europe. 60 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 ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 13 LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM Positioned to capitalize on a strong market As the product tanker market has improved during 2022, TORM has capitalized on a strong market and generated strong financial results over the year. TORM has generated a profit before tax in all quarters of 2022, increasing from USD 11m in the first quarter to USD Strong markets provide significant cashflow generation 222m in the fourth quarter. In the same period, average rates have increased from USD/day 16,743 to USD/day 47,520. Going into 2023, TORM has covered 89% of the first quarter at USD/day 43,002. Combining the strong market fundamentals with a low and stable cost base, TORM expects an EBITDA for the full year 2023 in the range of USD 750m - USD 1,100m. With an interest rate coverage of 81% at 1.4% excluding margin untill 2027, taking the refinancing into account, TORM is only to a very limited degree exposed to the fluctations in the interest rate markets. New Distribution Policy In May 2022, TORM adjusted its Distribution Policy to allow for quarterly distributions above a fixed threshold cash level as of the quarterly balance sheet day. The new policy combined with TORM’s solid capital structure has enabled TORM to make dividend payments to our shareholders in the second and third quarters of 2022. Combined with the dividend of USD 212m related to the fourth quarter, the total dividend for 2022 will be USD 379m. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 14 LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM Greener future with zero emissions We strive to utilize our 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. 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 a strong focus on reducing CO2 emissions. This is achieved through a committed focus on optimal performance in the short and medium term and industry collaboration in the long term supporting sustainable solutions. TORM believes that both the decarbonization and the ESG agendas will be integral and determining elements for the future of the product tanker business. At the same time, TORM acknowledges that oil and refined oil products are essential resources for societies, and therefore we want to distribute refined oil products as CO2-efficiently as possible with accessible means. Optimizing performance now TORM maintains its focus on the optimization and improvement of our existing fleet and on enhancing the efficiency of our existing fleet by applying a broad set of operational and technical improvements. These efforts include small investments on vessels with short payback time and also large investments with an expected more substantial impact such as air lubrication systems and Flettner rotors. Further, digital solutions such as IOT on vessels and route optimization algorithms are being utilized. To ensure a successful implementation of these efforts, TORM focuses on seafarers’ training and behavioral changes for crew on board the vessels. Decarbonizing shipping To obtain commercially viable and environmentally friendly results, TORM deepens its knowledge through external collaboration. This includes the acquisition of the Danish marine equipment manufacturer ME Production, which will support a faster implementation of our emission reduction ambitions. Long-term industry collaboration Alternative fuels will be required on a global scale to reach the 2050 targets set by the IMO. TORM monitors the development of new fuels and associated technologies, and TORM wants to be part of shaping the development and employing new technologies and alternative fuels whenever commercially and operationally viable. 2030 target and 2050 ambition To quantify the green ambitions, TORM has set the goal to accelerate our climate target and deliver at least a 40% CO2 intensity reduction by 2025 compared to 2008 using IMO’s defined methodology and a 45% CO2 reduction by 2030. For the long term, TORM has an ambition to have zero CO2 emissions from operating our fleet in 2050. Further to support these goals, TORM’s Management and organization has specific performance measures on achieving these targets. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 15 Optimizing performance now Energy transition towards 2030 TORM is continuously working to improve the fuel efficiency of our vessels. In 2022, several concrete steps towards reaching TORM´s 2025 and 2030 CO2 intensity reduction targets were taken. LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM TORM categorizes potential investments to reduce the CO2 emissions from our vessels into two different categories. Long term and test pilot projects The other category is investments with a longer payback During 2022, TORM also made an in-depth assessment of the likelihood of reaching our 2025 and 2030 CO2 intensity period, which are also typically large investments and where reduction targets. The assessment showed that both the Short term and known technologies the technology is more unproven for tanker vessels. The 2025 and 2030 CO2 emission reduction targets can be One category is small investments with a short payback time where the technology is usually known and proven. An example of this is our investment in ultrasound on propellers. Ultrasound is a promising method to fight biofouling which can prevent surface algae and can ensure smoother, energy-saving sailing. typical process for this category is for TORM to do a test reached with the energy reduction initiatives and pilot project to verify if the technology is successful and will investment projects currently included in our budget and deliver the expected CO2 emission reduction. If successful, long-term planning. a roll out of the technology to more vessels is conducted. Examples of this include Flettner rotors and air lubrication systems. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 16 Long-term decarbonization Industry collaboration and new fuels LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM Active industry collaboration To achieve our ambitious 2050 environmental target of Preparing for new propulsion systems Over the past years, the shipping industry has increasingly With methanol being the only viable solution currently, TORM has special focus on this both from a commercial zero CO2 emissions from operating our fleet, TORM is worked on the future of maritime fuels and solutions for perspective, where a number of our vessels are in the actively involved in various industry collaborations zero emission shipping. Some technical solutions are process of being upgraded to transport this cargo, and also supporting this journey. These collaborations are important, already in place, including methanol engines, while others from a technical perspective, where TORM believes that as the ambitious target cannot be met by single entities are in the process of being developed and approved for vessels with methanol engines could be a commercial alone but requires joint efforts across the shipping industry. commercial operation, including ammonia-fueled engines. solution for product tankers within a few years. The collaborations include TORM’s active engagement with TORM is enthusiastic about this development and expects participation in Danish Shipping through which TORM aims that the future fuels for ocean-going vessels will be covered A significant obstacle for all future propulsion solutions to impact the decision-making in the IMO in relation to by a mix of different technologies. ongoing discussions on the implementation of CO2-related regulations. Fuels remains to be fuel availability. However, we expect that such obstacles will be reduced over time as production achieves larger scale, and as the supply chain for such fuels is further developed. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 17 LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM One TORM in-house organization Superior operating platform TORM’s fleet is effectively managed on the in-house integrated operating platform known as One TORM. Operations are conducted jointly 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. We believe that our integrated business model creates a unique customer offering as it further provides our customers with better accountability and insights into safety and vessel performance. In line with the strategic focus on safety, the One TORM platform features the One TORM Safety Culture program. The purpose of the program is to continuously strengthen TORM’s safety culture beyond mere compliance, and it reflects the belief that profitability and safety need to go hand in hand. On the One TORM platform, the commercial, technical, sale & purchase, and support divisions all work towards common goals in a network-based organization with easy access to stakeholders supporting efficient decision-making. Commercial management TORM’s commercial team is responsible for the 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 optimal position of the fleet in the global basins, where differences in earnings can be significant over the span of a year. Technical management TORM’s fleet is managed by our 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-efficient technical operation. A key focus area for the technical management and a corporate KPI is to ensure that TORM’s fleet is tradable with our customers, thereby supporting commercial performance. The team also has extensive experience in vessel design and construction and provides essential knowledge for TORM to execute newbuilding programs. In addition to the office staff, TORM has more than 3,300 seafarers employed. Sale & purchase and support functions TORM’s sale & purchase activities are conducted by an in- house team. The sale & purchase team leverages relationships with shipbrokers, shipyards, financial institutions, and shipowners to ensure fleet renewal and actively pursues opportunities in the second-hand and newbuilding markets. The support division is also 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. For years, the support division has built a strong data and digitalized business support function. This includes supporting TORM’s commercial operations with an analytical model developed by the advanced analytics and applied AI function. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 18 Fuel efficiency initiatives LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM TORM is well positioned to successfully install and implement fuel efficiency equipment on board vessels through the integrated operating platform. TORM has full control of the usage, full transparency of the impact of the technology, and receives full economic benefit from the installed equipment. This is opposed to other sharing arrangements such as pool structures. Control of both the technical and commercial management also allows TORM to make full use of the equipment in the commercial decision-making. As fuel efficiency becomes increasingly complex, crew training in systems and equipment becomes increasingly important. This includes implementation of voyage optimization guidelines and knowledge of how the impact of devices such as Flettner rotors and air lubrication systems should be operated. In addition, general energy and power management forms part of the daily work on board the vessels. TORM conducts continuous training of the crew from the TORM crew pool. TORM is therefore able to ensure that crews with the right competences are matched to ensure optimal use of the fuel efficiency equipment. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 19 Integrated digital foundation To be at the forefront of technological and digital developments is a key competitive advantage in our industry. It has been an embedded element of TORM´s strategy to monitor and implement new technologies supporting our reference company vision. LEADING PRODUCT TANKER OWNER GREENER FUTURE WITH ZERO EMISSIONS SUPERIOR OPERATING PLATFORM Artificial Intelligence The use of sophisticated artificial intelligence modelling, e.g. deep learning methodology, has increased in the shipping industry in recent years. For many years, TORM has implemented AI models into our processes and operations to support decision-making. Two examples of this are i) our use of algorithms to predict the optimal routing of a vessel before departing from its origin port until arrival at the destination port, and ii) the newest generation of our vessel positioning tool which can predict how to optimally deploy our fleet across the global basins. Infrastructure and governance TORM’s digital development is anchored in a solid and robust data governance structure. This supports data transparency and fast decision-making across the organization. The solid structure ensures that data is captured, cleansed, documented, controlled, and governed in all our processes including financially anchored processes such as financial reporting, SOX compliance, and ESG reporting, and also in more commercial processes such as route planning and energy optimization on our vessels. To harvest the benefits of new technologies and digitalization opportunities, we have found that it has become increasingly important to monitor trends and technologies and prioritize what to explore. To prioritize our digital initiatives, discuss ideas, and develop business cases, we have established a cross-organizational Digitalization Committee. Internet of Things To support optimal maintenance and operations of our vessels, we capture relevant voyage and energy data across our fleet. During 2022, this has been accelerated through installations of a wide range of sensors and technologies to create fully connected vessels. The project will enable our on- and offshore staff to monitor all relevant performance measures on each vessel and guide them in decision- making. TORM ANNUAL REPORT 2022 BUSINESS MODEL AND STRATEGIC CHOICES 20 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 21 21 Responsibility report Responsible behavior and sustainability are embedded in the way we conduct business in TORM. We are committed to protecting our employees, our assets, our environment, and our society. We believe that a sustainable business also creates business value for TORM. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA We constantly push ourselves to remain relevant and competitive in the eyes of our investors, customers, employees, financiers, and other key stakeholders. We do this by deeply integrating sustainable business practices in our commercial strategy to consider how we affect the world around us, and how the world around us has an impact on us. TORM’s sustainability approach and actions are guided by a range of both internal and external instruments. We harness these to build an overarching approach to create a more sustainable future, sustainability measures allowing us to take decisions based on knowledge, and to provide transparency to our stakeholders. This is done by constantly challenging ourselves and the way we work. Further, TORM does this by interacting and collaborating with different peers and industry stakeholders. Transparency and accountability are key to TORM’s way of doing business, and these values play a central role in our responsibility approach. The principles in the model to the right illustrate some of the important elements of the way we think sustainability. They are frequently reviewed and validated considering our safety culture, how our leaders shall operate, and not least our strategic choices. This section (pages 22-49) of our report also constitutes the Danish statutory reporting on corporate social responsibility. Our business model, which is set out on page 12, forms an integral part of our statutory reporting. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 22 Our responsibility OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Integrating sustainability into our strategy is a way to grow As an additional governance measure, TORM has for Building a better future requires a joint effort. Therefore, and optimize our business for the future. TORM harnesses several years incorporated financial mechanisms to drive TORM has been a long-standing partner in many industry- respected guidelines such as the ESG (Environment, social, ESG efforts whereby senior management and the rest of relevant collaborations. By working together, we can build government) structure, SASB (Sustainability Accounting the organization’s KPIs are directly linked to ESG targets to momentum, draw focus, and share best practices to make a Standards Board) reporting, Scope 1, 2, & 3 emissions ensure that TORM continues to prioritize sustainable larger positive imprint on our world. reporting, and the UN SDGs (Sustainable Development actions. ESG-linked renumeration is available on page 99 SASB Index and responsibility data are available on page 43 Goals) to operate in a responsible manner. A materiality matrix guides the prioritization of our actions. TORM was the first shipping company in Denmark to sign the UN Global Compact. This, together with the UN Sustainability Goals, is another way in which we commit to an internationally recognized set of principles on health, safety, labor rights, environment, and anti-corruption. Enhancements in 2022 In 2022, TORM increased the transparency around our emissions and the impact of our sustainability response on our business by preparing a TCFD (Task Force on Climate- Related Financial Disclosure) report and an analysis of our Scope 3 emissions. Governance driving sustainability Organizing the Company to focus on sustainability is essential. To empower the organization to reduce emissions and achieve our ambitious environmental goals, new organizational roles were created in 2022. This was to establish a separate department of experts focused on accelerating our green efforts. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 23 Enhancements in 2022 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Scope 3 Scope 3 refers to emissions which are a consequence of Scope 3 reporting is an additional voluntary effort creating For example, efforts to reduce Scope 1 emissions on board awareness of our entire value chain enabling us to take our vessels, such as using less fuel to perform our routes, TORM’s activities but occur from activities which are not ownership beyond our direct business based on data. By will also positively impact our Scope 3 emissions as less owned or controlled/operated by TORM. Scope 3 reporting including entire value chains, we can understand the knock- upstream fuel will be consumed. This increased is an expansion in 2022 of the already reported Scope 1 on effect of actions to reduce emissions. transparency also ripples down to our partners and and 2 emissions. This is to disclose the indirect emissions from TORM’s activities. customers, empowering them with increased emissions transparency in their value chains. Scope 3: What does it consist of? TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 24 Enhancements in 2022 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA TORM’s process on Scope 3 A two-phase process using the Green House Gas Protocol’s quantities. Positively, these consist of a high degree of that TORM holds at different times on different vessels. In primary/hybrid data, providing us with a deeper degree of 2022, we reduced the time charter ratio. The final 15 categories for Scope 3 emissions was conducted. First, transparency. The following discusses each category and category, category 6, relates to TORM’s business travel, we made a mapping of our value chain, and a screening of the mechanisms involved. including seafarers’ travel. Our seafarer workforce all 15 categories was performed based on five criteria contributes considerably to these emissions as traveling is which considered the number of emissions, the degree of In 2022, category 2 accounts for most emissions, with a necessary part of operating the vessels. Regardless, we influence we have, associated risks, importance to our 32% compared to 57% in 2021, and a category where 88% constantly implement best practices and improvements to stakeholders, and if the activity is performed in-house or of data is primary/hybrid data. For vessel acquisitions, we make the positioning of seafarers as efficient as possible. not. This resulted in the following five categories: have used a lightweight methodology as we are not able to We have also applied this logic to optimize our shore-based acquire the exact emissions data from the shipyards. As business communication towards online platforms. This • Category 1: Purchased goods and services this category reflects the emissions linked to vessel focus was accelerated during the COVID-19 pandemic and • Category 2: Capital goods – vessels and modifications purchases and modifications, this number can fluctuate learnings have continued. • Category 3: Upstream fuel & energy-related activities from year to year depending on TORM’s vessel purchases. • Category 6: Business travel This was the case from 2021 to 2022 where the • Category 13: Downstream leased assets – T/C out > 3 investment in vessels was significantly lower. months The subsequent significant categories were 1, 3, and 13 – Data types applied within each Scope 3 category SOURCE: BASED ON TCO2E In the second phase, emission data for the five categories purchased goods and services, upstream fuel and energy- was refined and categorized as either ‘primary/hybrid’ or related activities, and downstream leased assets, ‘secondary’. ‘Primary/hybrid’ is data where we know the respectively. For category 1, we have lower data actual quantities consumed combined with industry- transparency, however, we believe this will improve over specific emission factors; however, these are only provided time due to the general focus on emissions which our by a few vendors. Where only one data point was available, suppliers will experience. Category 3 includes upstream a hybrid calculation method was used, and average industry emissions associated with the production and distribution emission factors were applied to the purchased quantities. of the bunker fuel for our vessels. With our drive to reduce Where no primary data was available, spend-based our Scope 1 emissions by sailing more efficiently, we will consumption data was used to assess Scope 3 emissions, inevitably reduce our Scope 3 emissions. Category 13 and this was categorized as ‘secondary data’. reflects our commercial decision to focus on the spot market which can fluctuate depending on our decisions to Following this selection and data collection process, we employ the fleet in the spot or time charter market. These attained our 2021 and 2022 Scope 3 emissions data and emissions will fall in either Scope 1 (spot) or Scope 3 (time the split between primary/hybrid quantities and secondary charter) depending on the degree of operational control TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 25 Enhancements in 2022 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA The Task Force on Climate-related Financial Disclosures (TCFD) framework This Scope 3 process has provided us with a deeper TORM’s process understanding of the indirect emissions and how we can We engaged an external consultancy and developed three move between the different scopes. These improvements climate scenarios to assess TORM’s risks and also come from working with our partners and suppliers to opportunities: Net Zero 2050 (1.5°C), Delayed Transition raise awareness and challenge them to provide their (1.8°C), and Hot House World (+3°C). emissions data. To maximize our efforts with this new reporting feature, we engaged ESG expert consultants in These scenarios were supplemented by data and insights the entire process to work closely with TORM. relevant to upstream and midstream oil and gas activities Next steps and the transport of refined oil products. They also took into consideration TORM’s full value chain including With this increased visibility, TORM will continue to potential production of and demand for renewable energy understand the new scope and data and decrease the fuels and technologies. amount of secondary data by encouraging suppliers to provide the necessary information, thus turning it into The scenario analysis process involved senior primary/hybrid data. Subsequently, we will use this data representatives from TORM’s organization and TORM’s and our increased understanding to adjust our ways of Board of Directors to fully analyze the consequences of the working to positively impact Scope 3 emissions. risks and the opportunities ahead. The risks and TCFD Being relevant for tomorrow is just as important as being opportunities were assessed for financial materiality and their potential impact on TORM’s business model and strategy. Four financially material climate-related risks and relevant today. To ensure TORM’s position and relevance in three financially material climate-related opportunities the future, we conducted a climate-related scenario were investigated. analysis in 2022 using the Task Force on Climate-related Financial Disclosures (TCFD) guidelines. This was to assess The findings from the scenario analysis were incorporated transitional and physical risks and opportunities and how into TORM’s corporate strategy process to improve its they might impact the resilience of our company strategy. resilience. Further details are outlined in the risk section of We believe in taking advantage of available tools to show our stakeholders and potential investors how TORM is prepared for the future. This also provides TORM with input for focus areas to guide our strategy. this report. TCFD details are available on pages 75-77 TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 26 TORM’s ESG targets These targets ensure our collective focus on the same goals and encourage transparency between management, employees, and stakeholders. TORM has committed to the below ESG-linked targets to be relevant to investors, lenders, customers, and other stakeholders. We will elaborate on these targets throughout this report. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA 2030 Climate target TORM continues to work on reducing our carbon intensity from -37.1% in 2022 to -45% by 2030 compared to 2008*. * % reduction compared to the IMO’s 2008 base year using the CII reference line using CO2 g/dwt x nm. 2030 Safety target Safety is measured as a long- time accident frequency per million exposure hours. In 2022, TORM’s safety performance was 0.42, and our target for 2030 is 0.30. 2030 2022 -37.1% 2030 2022 0.42 -45% 0.30 2050 Climate ambition TORM is pursuing an ambitious climate agenda, whereby we will have zero CO2 emissions from operating our fleet by 2050. 2030 Leadership diversity target We believe that diverse teams led by diverse leaders deliver better business performance, and by 2030 at least 35% of our leaders will be female. ZERO emission 2030 2022 21% 35% TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 27 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Stakeholder engagement and materiality Stakeholder engagement Working in close collaboration with our customers and Materiality As part of our continued efforts to increase transparency in stakeholders is an immense focus for TORM and is key to our reporting, we included a materiality assessment in our delivering our ambitious climate targets. Among other 2021 responsibility reporting. This assessment has been things, the stakeholder groups include employees, reviewed in 2022 and is still valid. It will be reviewed again community, suppliers, customers, investors, and in 2023. authorities. Throughout the year, specialists across TORM interact with environmental topics with the largest impact throughout these stakeholders to ensure an open dialogue. This our value chain”. In TORM, we have defined materiality as “social and includes our ongoing dialogue with financial institutions to ensure a high level of transparency in our climate efforts – both ashore and at sea. Materiality assessment TORM’s ESG materiality assessment is to identify and prioritize the ESG issues which are most important to and As a company, we work with a selection of partnerships have the most impact on TORM and our key stakeholders. sharing the same values and goals as TORM. TORM We have defined our key stakeholders as customers, continued its work in the Mærsk Mc-Kinney Møller Centre lenders, investors, regulators, employees, suppliers, for Zero Carbon Shipping which we joined in 2021 as a community, and environment. Mission Ambassador. Here we work with industry partners and knowledge specialists to achieve zero carbon shipping Each score is evaluated relative to each other as all the solutions by 2050. TORM is also an active member of material topics are important to TORM and our key industry organizations such as Danish Shipping. These stakeholders. The material topics and the materiality matrix efforts must ensure that TORM is part of the conversation were approved by the Board of Directors. that is important to many of our stakeholders and society at large. Engagement and decision-making in TORM are described on pages 115-117 TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 28 Stakeholder engagement and materiality OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA MATERIALITY MATRIX MOST IMPORTANT ESG-RELATED TOPICS FOR TORM (SCORING OF TOPICS IS RELATIVE TO EACH OTHER) A. LEGAL COMPLIANCE B. HEALTH AND SAFETY C. SECURITY D. ENVIRONMENTAL EFFORTS E. PEOPLE F. HUMAN RIGHTS AND BUSINESS ETHICS G. COMMUNITY H. RESPONSIBLE PROCUREMENT R E H G H I Y E K O T E C N A T R O P M I S R E D L O H E K A T S R E W O L G H A B D F E C LOWER IMPACT ON TORM HIGHER Environmental efforts on pages 30-33 Health and safety on page 34 Security on page 35 People on pages 36-37 Community on page 38 Legal compliance on page 39 Human rights and business ethics on pages 40-41 Responsible procurement on page 42 TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 29 Environment Environmental efforts TORM believes in and supports the UN’s SDG 13 Climate Action as marine pollution constitutes the largest environmental risk in the shipping industry. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA TORM has dedicated resources, time, and closely connected and integrated One TORM platform and much more. It aims to be a central tool providing focus to minimize its sea and atmospheric enables us to capture. pollution. It also employs a broad range of tools and means to achieve its ambitious emissions reduction goals. 2022 fuel consumption and energy efficiency TORM has relentlessly worked on the ambitious environmental goal of reducing our carbon footprint by deploying effective strategies and efficient technologies across our value chain. This is done to reduce both our carbon intensity, address how efficiently our vessels transport its cargo, and the subsequent carbon emissions. These ambitions support IMO’s Green House Gas Strategy which envisages a reduction in carbon intensity of international shipping of at least 40% by 2030. Our decarbonization efforts in 2022 have enabled us to reduce our carbon intensity, measured through the IMO defined methodology using Annual Efficiency Ratio (AER), by 37.1%. This reduction is compared to the IMO baseline of 2008. We are on track to achieve our goal of a 40% reduction in carbon intensity by 2025. These decarbonization strategies and technologies also produce commercial benefits and synergies, which our Superior operating platform TORM’s fleet is effectively managed on the in-house integrated operating platform known as One TORM. Operations are conducted jointly for the entire fleet to reap synergies across vessel classes. Daily engagement with the vessels continues to create significant value to encourage and support best practice behavior regarding energy consumption. In addition, the efforts ensure that corrective actions can be taken swiftly, if needed. The strategic choices section elaborates on how this platform operates and the synergies it produces. Read more about our superior operating platform on page 18 Vessel performance optimization and behavior Over the years, TORM has gained a lot from information and data sharing to improve learnings, both ashore and on board our vessels. This concept has been taken further and thereby contributed to our performance in 2022 as well. TORM initiated the NEXUS project that considers all processes influencing fuel efficiency, not only vessel engine performance but also voyage planning, hull performance, transparency through live data to the various stakeholders and to improve decision-making. The Connected Machinery project is one of the first elements which provides automated vessel data and energy optimization guidance, allowing the crew to proactively make the right decisions on matters impacting fuel efficiency. This has been tested on 18 vessels during 2022 and has contributed learnings towards improving the tool. During 2023, it is expected that 40-60 vessels will have the tool installed, and it is expected to be completed by 2024. Technologies In 2022, we continued our journey of improving the hull of our vessels to make them glide easier through the water, thereby requiring less power and producing less emissions. One method to improve vessel hulls is applying a silicon coating. Traditional hull coatings have higher roughness, which requires more power to move the vessel through water. Silicone-based coatings provide a very smooth and low-friction surface with a higher resilience towards fouling organisms sticking to the hull. TORM has increased the number of vessels with this coating that has now been applied to more than 50 vessels. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 30 Environment Environmental efforts OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Before painting the hull, grit blasting the hull is very operationally, commercially, and sustainably viable way. We problems by using their expert knowledge. Our seafarers important. This results in a reduction of roughness and a continued our participation in the Getting to Zero Coalition, thereby have access to easy and timely assistance and can much smoother surface, and thereby less water resistance. a collaboration between the Global Maritime Forum and the quickly solve matters and secure optimal vessel This way both CO2 and fuel consumption are reduced. For World Economic Forum. performance. example, the impact on our largest LR2 vessels is that we can save up to 120 tons of CO2 emissions per vessel every People competencies ME Production acquisition single year. People have a considerable influence on how effective our In 2022, TORM purchased an ownership stake of 75% in 120 tons CO2 emissions saved on an LR2 vessel when grit-blasted prior to hull painting Industry collaboration To harness momentum and synergies, TORM continued to be an active contributor in several industry collaborations. This involves active participation in Danish Shipping through which TORM aims to impact the decision-making in IMO in relation to ongoing discussions on the implementation of CO2-related regulations. This work also continued in 2022 with the innovation partnership, ShippingLab (a non-profit platform for maritime research), for development and innovation with 30 partners from across the maritime industry. TORM was actively involved in two projects that were concluded in 2022. Again in 2022, TORM supported and engaged in the Mærsk McKinney Møller Institute for Zero Carbon Shipping as a Mission Ambassador to research ways to grow in a more sustainability technology works. Therefore, equipping them ME Production (MEP), a Danish industrial company with the training and competencies to optimize relevant specializing in developing and producing advanced and technology is as important as the technology itself. To green marine equipment. The new partnership is built on a achieve this, we train our crew to have the right skills. year-long collaboration between TORM and MEP with the To ensure key crews on board have the latest vision for relation to TORM’s substantial exhaust gas cleaning two companies working closely together, especially in energy and fuel efficiency technologies, the annual junior (scrubber) commitment. and senior officer seminars dedicate time to share, discuss, and challenge upcoming technologies. This gives an This partnership supports TORM’s environmental goals understanding of the processes and capabilities, but it also both now and going forward. With environmental innovation provides insight into what the shore-based technical team we aim to be able to be in the forefront when it comes to is working on. assets that will support us in minimizing the harm of the environment and to the benefit of TORM in the longer term. To build competences for the decarbonization journey, we also focus on the next round of officers. Prior to an officer being promoted to Captain or Chief Engineer, the officer attends a promotion assessment training which involves two weeks in a TORM office where the officers get fully acquainted with all departments with a specific focus on the technical decarbonization work, tools, goals, and upcoming innovations. Addressing behavior and the impact on our performance is a key focus area. In addition, our shore-based technical team provides an approachable point of contact to virtually troubleshoot TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 31 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Decarbonizing shipping Environment Environmental efforts Combining the experience and engineering resources at Our people MEP with the operational excellence at TORM will help Committing to these challenging targets requires support TORM in achieving its environmental targets by creating from several aspects. One aspect is our people. Therefore, energy optimization devices. One such technology is heat investing in our people by enhancing their knowledge of new pumps that use the vessels’ own waste heat to heat other and upcoming technologies is important for this long-term machinery, water, and other vessel parts. journey to extract the value of new energy and fuel In 2022, this technology has been tested on one vessel superior operating platform to harness synergies allowing with positive results. Benefiting from the pilot project, clear us to optimize our vessels’ energy and fuel performance. solutions. TORM will thus strengthen and enhance our improvements are visible to enhance this even further. New fuels We expect this to be tested further with the potential roll Another aspect will be industry research on new fuel out across the fleet where more benefits can be reaped. sources for vessels. MEP technology and expertise in building such innovations will be critical. Decarbonization is a journey Over the years, TORM has outperformed its set emissions targets. Therefore, TORM is pushing fast forward on our environmental efforts and will reduce our carbon intensity by 40% by 2025 – instead of by 2030. The baseline for the target is in line with the definition set forth by the International Maritime Organization, IMO, which defined how this should be measured and calculated. Read more details about TORM’s investments to support the goal of zero emissions under our strategic choice of Greener Future. Long-term decarbonization on page 17 TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 32 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Environment Environmental efforts Innovation and technology will be key TORM maintains its focus on the optimization and efficiency of our fleet by applying a broad set of operational Air lubrication system During autumn 2022, we installed the first air lubrication system on one of our LR2 vessels. Air lubrication is a and technical improvements. These efforts include smaller system which blows out microscopic air bubbles at the investments with short payback time and also larger bottom of the vessel, creating a layer of air between the investments with an expected larger impact. vessel and the water. Air lubrication is expected to enable a Variable frequency drives An example of innovation is the use of variable frequency drives (VFD) for cooling pumps on board vessels which can reduction in friction and in CO2 emissions of approximately 5% per vessel. If the tests confirm the desired outcome, we expect this technology to be rolled out on several vessels. reduce energy consumption. There are always cooling Route optimization systems on board vessels, and these are designed for the An accurate weather forecast is one of the most important extreme conditions that the vessels may experience. tools for a sailor. Optimizing a vessels’ voyage is essential However, as vessels do not constantly operate in these to any shipping company. And we always strive to do even extreme conditions, these systems can be managed more better - for our business and for the environment. efficiently. The VFDs control the cooling systems’ capacity Therefore, TORM has further developed an in-house according to its situation and thus run the systems more algorithm model designed to optimize the voyages. This efficiently. For example, the VFDs can be used to optimize continuously provides our captains and their crew with the air conditioning on board which saves power and also updated routes, considering factors such as wind, waves, creates a more stable and comfortable temperature for the freight markets, and bunker prices. This helps to ensure crew on board. The VFD program is 95% completed across that every journey is as safe and efficient as possible, while our fleet. keeping emissions as low as possible. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 33 Social Health and safety The majority of our workforce are seafarers, and therefore healthy and safe conditions on board our vessels are crucial. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Audits TORM resumed physical audits on board in 2022, providing activities such as physical seminars, virtual town halls, and TORM increased the number of junior officer safety information-sharing sessions and deployed thorough review trainings in 2022 which covers the mindsets, an increased personal contact and engagement with our and analysis of data such as “near-miss” for better insight. competencies, and behaviors needed for safe operations. crew. This enabled the timely takeover of our newly A high number of near-miss reports indicate that the This course serves as a supplement to the safety leadership acquired vessels. Because of the effectiveness of the One organization proactively monitors and responds to risks. course for senior officers as junior officers should be TORM platform, audits, inspections, flag changes, etc. have been completed successfully during the time of the COVID-19 pandemic. This includes taking over vessels and Safety Our safety policy is rooted in the regulations by the Danish TORM took over eight Team Tanker vessels in 2021 and by early 2022, all the crews had participated in the TORM prepared for their future ambassador roles. delivering vessels to new owners. Maritime Occupational Health Service. In 2022, TORM Safety Delta self-assessment program, and all senior SIRE inspections Inspections ascertain the health of our vessels, and TORM continued with its ‘One TORM Safety Culture – driving officers had been involved in the senior officer safety resilience’ program which defines standards and training and officer seminars. expectations for excellent performance. TORM also uses SIRE inspections overseen by the OCIMF (Oil continued the “Safety Delta” tool, continuous crew Companies International Marine Forum). In 2022, OCIMF evaluation, dialogue, reflection, and development. All Lost Time Accident Frequency (LTAF) initiated a revamped SIRE 2.0 inspection and assessment vessels have completed three Safety Delta cycles in 2022. SOURCE: TORM regime for the tanker industry. In TORM, this has been prioritized and will be in place prior during the first half of In 2022, we could resume physical onsite officer seminars 2023. Lost Time Accident Frequency Lost Time Accident Frequency (LTAF) is a measure of in Copenhagen and Mumbai, and another seminar was held in the Philippines in January 2023. Shore and sea-based colleagues came together to discuss and align on our business strategy. A total of 160 senior officers attended serious work-related personal injuries which result in more the conferences. than one day off work. LTAF is measured per million hours of work. TORM’s LTAF measure in 2022 was 0.42 (2021: 0.37). Officer safety training TORM continued to conduct safety leadership courses for senior officers on board. The course includes workshops for 0.96 1.2 1.0 0.8 0.6 0.4 0.2 0.0 0.65 0.67 0.65 0.47 0.42 0.42 0.37 Once the pandemic subsided, we increased the number of all senior officers and key marine shore staff and focuses on 2015 2016 2017 2018 2019 2020 2021 2022 physical visits on board. TORM also conducted additional how to be a good leader when it comes to safety. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 34 Social Security 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 2022, TORM experienced three minor incidents. No persons were harmed during these incidents. 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 main area of concern remains the Gulf of Guinea. This is despite the fact that reported incidents have dramatically decreased in comparison to previous years. However, the root cause of piracy in the region has not been eradicated, so piracy remains a threat. TORM has adapted its procedures to the changing threat levels across all areas called at by TORM vessels. The security situation in certain areas is affected by changes in geopolitical situations. TORM will continue monitoring the situation globally and implement adequate precautionary measures for risks identified. . TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA OUR RESPONSIBILITY 35 Social People People and culture play an essential role in TORM, and it is important for TORM to develop employees within their potential, which positively influences our employee retention, talent acquisition, and brand value. The pandemic challenged the way we work, but we have now adjusted to a post-pandemic world, and we use our learnings to improve the way we work. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA In 2022, TORM increased awareness of its zero-tolerance towards harassment. Although not accepted, we must ensure our people have the right tools to handle such situations. An online training course, including reflection, was rolled out to all seafarers and shore-based colleagues to explain the different types of harassment, what to do if it occurs, and what tools are available to support them. At sea Improving workplace and well-being To nurture the close relationship between sea and shore- based colleagues, we re-established the physical induction of new seafarers and physical training in 2022 – taking the best of both online and offline worlds. The “Well at TORM” program, focuses on the well-being of our seafarers by increasing engagement, mental resilience, physical health, and embracing socialization among the crew, has proven to be successful. More than half of our seafarers are actively participating in this program. The mealtime for our seafarers is not just important sustenance and nutrition, it is also a time to socialize and nurture the unique tightknit group on board. Therefore, in 2022, we changed the main global catering supplier to ensure this time is even more enjoyable and healthy. In 2022, TORM implemented a new Marine HR management system to bring our seafarers and shore- Ashore In 2022, we continued our bi-annual real time data based organization closer in daily operations. This platform engagement survey. 98% of all shore-based employees provides more transparency of status, current and responded to the November survey which resulted in an upcoming contract planning, and wage details. The system engagement score of 8.4 out of ten. The overall positive also facilitates a smoother travel expense process. outcome of the survey was maintained from previous years and positions TORM in the top quartile of companies across In 2022, we have worked to improve our crew engagement survey. This survey allows us to gauge the temperature of all industries using the same platform. Our ambition is to improve and nurture the culture needed to fulfill our our seafarers to understand what support they need. The ambitious strategy and develop initiatives which matter to results highlighted that our seafarers have a very positive our employees. relationship with leadership and teams and have high job satisfaction. Senior management is involved in evaluating the results to gain attention and focus for actions. The Employee health and well-being During 2022, we formalized the remote work setup as a survey covers questions about their connection with the post-COVID work practice. This derives from the 2021 Company, team and manager, their personal well-being, employee engagement survey and the practices’ success and job satisfaction. during the pandemic. We expect this opportunity to provide more flexibility for a global team and their work/life balance. At the end of 2022, TORM employed 3,218 seafarers and increased the retention rate for senior officers to 95%. We are consistently focusing on employee health and well- Thus, TORM demonstrated compliance with customer being – physical and mental. Therefore, the stress requirements in ensuring the right level of experience awareness training initiated in 2021 was rolled out across among senior officers per vessel across the fleet (the so- all offices in 2022. Through in-depth knowledge, a common called officer matrix compliance). language, and targeted tools, all employees are equipped with the tools required to spot and mitigate stress. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 36 Social People OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Diversity In TORM, it is our policy to work towards a diverse workforce irrespective of gender, religion, sexuality, lifestyle at sea. Learnings from this pilot project will build a tool that can be used to support diversity. nationality, ethnicity, or disabilities. A diverse workforce Gender diversity provides a balance of voices and thought that inspires We actively monitor the representation of females in the innovation and creativity. workforce and in leadership. At the end of 2022, the proportion of female full-time employees in the shore- Geographical diversity of seafarers in % TOTAL NUMBER OF SEAFARERS AT THE END OF 2022: 3,218 In 2022, we continued to participate and drive the aim of based workforce was 35%, while women in leadership Other 0.2% Europe 9.5% Danish Shipping’s taskforce for more women at sea. In this positions constituted 21%. TORM has a target for 2030 of work group, we have incorporated 10 recommendations 35% women in leadership positions. At the end of 2022, Southeast Asia 49.7% into processes and procedures as best practice. The the Board of Directors consisted of four male members and recommendations include setting gender diversity targets, one female member elected at the Annual General Meeting. supporting women through family-friendly policies, and Since 2020, the Board of Directors has fulfilled its target of rethinking the recruitment process. 20% female Board members (1 out of 5). Also in 2022, we piloted a system with our Danish female seafarers to enhance their network by making use of experienced women seafarers in other parts of our organization and additional mentoring for the unique This section also constitutes the Danish statutory reporting on gender distribution in management. Diversity of permanent employees Non-executive Directors of the Company Executive Directors of the Company Senior executives Managers not listed above (managers with one or more direct reports) Other permanent employees of the Group Male Female 3 1 3 135 174 1 - 21 108 India subcontinent 40.6% In 2022, we continued our strategy to employ seafarers with different nationalities as we believe that diversity on board is an important foundation for high performance, while keeping focus on cooperation and a safe working environment. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 37 Social Community OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA TORM is a long-standing supporter of maritime education in India and in the gender sensitivity and equality, facilitation skills, and a TORM sponsors 33 students at SAMPARC and assists mini-retreat and reflection session with discussion focused them with their basic needs, including school equipment Philippines, and it is therefore natural for on developing emotional intelligence. TORM to support SDG 4 Quality Education. and certain living expenses. With a focus on meeting the hygiene needs of children at Bhaje, TORM sponsored a Another wing of the TPEF, the Social Development toilet block construction in 2022. In keeping with the Initiatives, works towards providing relief to better annual tradition, a team from TORM India visited SAMPARC TORM believes that education is one of the best ways to surroundings during troubled times. In 2022, a provision of Bhaje to celebrate Deepawali and distribute presents to all nurture future competences and build a strong pipeline for 130 sets of solar lamps and four sets of solar-powered the students. the industry. Additionally, by contributing to society, TORM charging stations was given to an elementary school in the builds a sense of trust and pride in our colleagues, resulting island of Jagoliao, Getafe, Bohol. The school was ravaged TORM believes that better infrastructural support and more in higher retention and positive brand recognition. by super typhoon “Rai” in December 2021 causing a power extracurricular activities nurture a holistic education for Education foundation in the Philippines The TORM Philippines Education Foundation (TPEF) is a foundation set up by TORM Philippines in 2007 to support education in the Philippine community. During the educational year 2022-2023, we supported: • 38 scholars studying in various colleges and universities • 24 apprentices (one female and 23 male) within maritime courses outage on the island. A total of 130 students, seven students. In April 2022, TORM sponsored the construction teachers, and the community benefited from the project. of a new school at Nalasopara, Mumbai. To further support Education support in India TORM India funds specific projects under selective social education infrastructure, TORM has committed to adding an additional floor to the school building. causes, and since 2018 TORM India has worked closely Additionally, TORM has committed to constructing toilet with three organizations to achieve the purpose: blocks and paver blocks in Dahanu, Maharashtra to assist • SAMPARC – an organization taking care of positive impact on society, TORM is currently evaluating disadvantaged children across India several more projects in and around Mumbai, specifically • BAIF – an organization working towards upgrading and aimed at helping young girls. pre-nursery schools. Continuing our efforts to have a In addition to these students currently supported during providing rural infrastructure 2022, 12 scholars graduated in 2022 with various degrees in engineering, education, psychology, IT, multimedia arts, • Akshayshakti – an organization looking to improve the lives of students, welfare, and abandoned children and masters in business administration. The TPEF also intensively invests in the Scholars In 2022, TORM supported the construction and furnishing of one of the Zhilla parishad schools, state-run secondary Development Program which focuses on self-awareness schools, in India. and academic support, how to be an environmental warrior outside the classroom, communication and public speaking, TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 38 Governance Legal compliance For TORM, good corporate governance represents the framework and guideline for business management. The aim is to ensure that TORM is managed in a proper and an orderly manner consistent with applicable legislation and codes. This complements our commercial purpose to ensure we meet the high expectations of our investors, customers, and other stakeholders. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Legal compliance is essential to TORM and to our stakeholders. International transport of refined oil products Data Ethics Policy TORM’s business model, the One TORM platform, uses TORM generally does not collect, store, or handle data in relation to private customers or consumers. The data which is a highly regulated area, and full compliance with all advanced analytics and digital solutions in which large TORM collects and stores is mainly commercial data, applicable rules and regulations at all times is a necessity amounts of data are processed. TORM’s Data Ethics Policy relevant to the operation of our owned and chartered for operating successfully in our industry. confirms TORM’s commitment to our defined data ethics vessels. Such commercial data includes without limitation principles, and it defines how we collect, store, and process global trade flows, trading patterns, cargo types, weather TORM’s compliance with all applicable sanctions requires data. constant focus as any violation may have a significant patterns, port data, etc. and may be generated internally or obtained from external sources. business impact. The same applies to compliance with TORM wants to maintain high ethical standards for the applicable rules and regulations in relation to (without protection of our data, and we want our handling of all data To ensure that TORM and our employees uphold these high limitation) health, safety and environment, anti-bribery and to be beneficial and value-adding to our customers, standards, clear instructions are available for how corruption, competition/anti-trust, as well as employment employees, business partners, authorities, and other employees should handle personal data. To ensure that and labour. Legal compliance is often closely linked to other stakeholders. areas included in the materiality matrix and is also separately included. Our treatment of data must be robust to prevent any confirm that they have read and will comply with the unintended disclosure. TORM’s data security measures Business Principles and associated policies. employees understand and are kept updated on TORM’s obligations such as sanctions, they are annually asked to The Governance section describes TORM’s framework and include a variety of guidelines and defined processes as well governance model, designed to ensure TORM’s continued as technical and human controls. ability to operate successfully. Governance section on pages 79-123 TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 39 Governance Human rights and business ethics OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Business ethics Transparency and accountability are key to TORM’s way of dealings and relationships, wherever TORM operates. In addition to its efforts within MACN, TORM continued to TORM will uphold all laws relevant to countering bribery and strengthen its companywide anti-corruption policies in doing business, and these values play a central role in our corruption in all the jurisdictions in which TORM operates. 2022 to mitigate the risk of bribery and corruption. TORM corporate social responsibility approach. Our approach to has continued its anti-corruption training program, which responsible behavior is rooted in our TORM Business TORM has three elements which it leverages to continue a includes mandatory anti-corruption courses for all shore- Principles which have the following five objectives: high level of transparency and accountability of its anti- based staff and all officers on board TORM’s vessels. With • Maintaining a good and safe workplace • Reducing environmental impact • Respecting people • Doing business responsibly • Ensuring transparency 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 TORM’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 TORM’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 TORM is committed to acting professionally, fairly, and with integrity in all business corruption and anti-bribery policy. One being strict the reduced risk of COVID-19 in 2022, we had the employee guidelines and processes to prevent and manage enhanced access to share and stress the importance of this anti-corruption and anti-bribery, the second being specific at the physical officer seminars held at key TORM offices. reporting processes, and the third being compulsory e- The training targets new hires as well as existing employees learning courses. TORM further complies with SOX and must be repeated annually. TORM will continue these regulations according to which employees must complete efforts in 2023. training and confirm adherence to the policies and guidelines, ensuring 100% compliance. This training was Since 2006, TORM’s Board of Directors has provided a enhanced again in 2022 by MACN to ensure its relevance. whistleblower facility with an independent lawyer as part of the internal control system. In 2022, the whistleblower Since 2011 when TORM co-founded the Maritime Anti- facility received three notifications, which were Corruption Network (MACN), TORM has been taking a joint investigated and closed without any critique or stand with the industry against the request for facilitation requirements for new measures. payments which 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. 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 2022, TORM actively engaged at a MACN working forum with 200+ members to continue sharing experiences, best practices, and solutions to the current issues facing companies. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 40 Governance Human rights and business ethics OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Human rights With the TORM Leadership Philosophy, TORM’s Business stays, TORM has a supervision team consisting of 4-6 TORM respects employees’ right to associate freely, to join TORM employees or externals representing TORM to – or not to join – unions and to bargain collectively. TORM Principles, and the commitment to the UN Global Compact, ensure work is carried out in line with TORM standards. offers equal opportunities for its employees as stated in TORM’s Business Principles. Zero claims or offenses have been reported regarding human rights in 2022. TORM is committed to respecting human rights as outlined in the United Nations Guiding Principles on Business and Human Rights. 2009 TORM signed the UN Global Compact 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, we will continue to promote human rights-related policies and processes. The most material risk for human rights abuses is related to TORM’s supply chain. 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. To enforce and promote the importance of human rights on how TORM performs business at large projects such as newbuildings or yard TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 41 Governance Responsible procurement Responsible behavior throughout the organization is central to TORM’s business, management practices, and corporate culture. OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Our supply chain is important to achieve our goals, and we must ensure that our quality standards and responsibility efforts are extended and improved throughout it. We expect our suppliers to comply with recognized international standards and work to improve human rights, labor conditions, impact on the environment, safety, corruption, and quality. As a long-standing member of the UN Global Compact, TORM remains committed to protecting its employees, assets, reputation, and the environment by maintaining the highest possible standards. Transparency and accountability are central parts of TORM’s way of doing business. TORM signed the UN Global Compact in 2009 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. This also means that TORM reports on its social and environmental performance on an annual basis to ensure progress and accountability to stakeholders. Because of TORM’s commitment to integrate responsibility in all business practices, a revised set of Business Principles has been introduced. The Business Principles ensure alignment between our values, as outlined in the TORM Leadership Philosophy, and the policies that ensure appropriate behavior, which cannot be deviated from. This relationship applies to policies within all operations, including those related to sustainability. TORM also applies its Business Principles when dealing with subcontractors and suppliers. TORM's Business Principles emphasize our commitment to promote responsible business principles in our supply chain. Therefore, TORM is compliant with the UK Modern Slavery Act. TORM is certified according to ISO 14001:2015, and in accordance with the requirements of our certifications, we constructed a supplier assessment questionnaire and supporting process in 2021. In 2022, this assessment process was rolled out, and initially it focuses on the suppliers with the highest spend. This is to allocate resources to the areas with the largest potential risks and impacts. The main purpose of the first supplier assessment is to establish a baseline and understand the status of our suppliers to facilitate a dialogue with them about how we together can extend and improve the quality of sustainability efforts. In some situations, there may be areas where we will work with a particular supplier to align with TORM requirements. The questionnaire consists of a range of questions related to their business within the following main categories: Performance Training • Company information • Quality management • • • Human rights and labor • Environment, health, and safety • Business ethics • Complain procedure In 2022, TORM has individually followed up on each questionnaire response to ensure their completeness. TORM will, when possible, conduct site visits to audit the categories in the questionnaire or conduct a remote audit. This document can also be used as a guide for all TORM suppliers to self-assess their compatibility with TORM standards. This is a live document and is constantly incorporating improvements and adapting to the latest regulations. The questionnaire and process will be further developed in 2023. Anti-corruption and anti-bribery on page 40 TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 42 SASB marine transportation industry standard OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Topic Accounting metric Greenhouse Gas Gross global Scope 1 emissions Discussion of long-term and short-term strategy or plan to manage Scope 1 emissions, emissions reduction targets, and an analysis of performance against those targets Unit 2022 2021 Code Metric tons (t) CO₂e 1,363,076 1,081,027 TR-MT-110a.1 See pages 15-17, 19, 22-27, 30-33 See pages 22- 27, 34, 40 in AR 21 Gigajoules (GJ) 19,265 17,672 1) Total energy consumed 2) Percentage heavy fuel oil 3) Percentage renewable Average Energy Efficiency Design Index (EEDI) for new vessels Air emissions of the following pollutants: 1) NOₓ (excluding N₂O) 2) SOₓ 3) Particulate matter (PM10) Air quality Ecological impacts Shipping duration in marine protected areas or areas of protected conservation status Number of travel days Percentage of fleet implementing ballast water: 1) exchange Percentage of fleet implementing ballast water: 2) treatment Number of spills and releases to the environment 2) Aggregate volume of spills and releases to the environment 3) Percentage (%) Percentage (%) Number Cubic meters (m³) Percentage (%) Percentage (%) Grams of CO₂ per ton- nautical mile Metric tons (t) Metric tons (t) Metric tons (t) 53 0 3 n/a¹⁾ 1,785 n/a¹⁾ n/a¹⁾ 12 88 0 0 50 0 3 n/a¹⁾ 1,533 n/a¹⁾ n/a¹⁾ 27 73 0 0 TR-MT-110a.2 TR-MT-110a.3 TR-MT-110a.3 TR-MT-110a.3 TR-MT-110a.4 TR-MT-120a.1 TR-MT-120a.1 TR-MT-120a.1 TR-MT-160a.1 TR-MT-160a.2 TR-MT-160a.2 TR-MT-160a.3 TR-MT-160a.3 The emission figures in this report represent TORM’s findings to the best of our knowledge given today’s methodology used by TORM and aligned with current IMO methodology. TORM is continuously committed to improving the methodology and advancing transparency in reporting as well as to following best industry practices on emissions reporting. In 2021, we allocated the emissions related to T/C out to gross global Scope 1 emissions as we did not report on Scope 3. In 2022, we report on Scope 3 and have reallocated the part included in Scope 1 in 2021 to Scope 3 in 2021. SOₓ emissions for 2021 have been adjusted slightly due to updates to the methodology. ¹⁾ Data unavailable. Assessment of feasibility of disclosure is ongoing. ²⁾ Our definition of spills is based on ITOPF. ³⁾ We report total volume of spills as the estimated aggregate volume of all spills as defined above. We do not do netting of the amount of such material that was subsequently recovered, evaporated, or otherwise lost as required by SASB standard TR-MT-160a.3 -2.1. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 43 SASB marine transportation industry standard OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Topic Accounting metric Unit 2022 2021 Code Lost Time Incident Rate (LTIR)¹⁾ Rate 0.42 0.37 TR-MT-320a.1 Employee Health & Safety Business ethics Number of calls at ports in countries that have the 20 lowest rankings in Transparency International's Corruption Perception Index Total amount of monetary losses as a result of legal proceedings associated with bribery or corruption Accident & Safety Management Number of marine casualties²⁾ Percentage classified as very serious²⁾ Number of Conditions of Class or Recommendations Number of port state control: 1) deficiencies Number of port state control: 2) detentions Activity metrics Number of shipboard employees Total distance travelled by vessels Operating days Deadweight tonnage Number of vessels in total shipping fleet Number of vessel port calls Twenty-foot equivalent unit (TEU) capacity Number 18 13 TR-MT-510a.1 USD Number Percentage (%) Number Ratio³ Ratio³ 0 1 0 3 0 1 0 7 0.71 0.01 0.55 0.00 Number 3,218 3,420 Nautical miles (nm) 4,568,294 4,398,088 Thousand deadweight tons Days Number Number TEU 29,610 5,034 78 2,428 n/a 28,717 4,746 84 2,514 n/a TR-MT-510a.2 TR-MT-540a.1 TR-MT-540a.1 TR-MT-540a.2 TR-MT-540a.3 TR-MT-540a.3 TR-MT-000.A TR-MT-000.B TR-MT-000.C TR-MT-000.D TR-MT-000.E TR-MT-000.F TR-MT-000.G ¹⁾ Instead of LTIR, we report on LTAF (LTIF) which is an industry norm based on OCIMF guidelines on injury reporting. The rate per one million man hours is the most common unit in respect of LTAF. ²⁾ Our definition of marine casualty is based on the IMO Casualty Investigation Code Ch 2 -2.9, and very serious marine casualty is based on IMO Casualty Investigation Code Ch 2 -2.22. ³⁾ We report the number of port state control deficiencies and detentions as a ratio instead of a number. It is the industry norm to report port state control performance as a ratio as it provides important context to the metrics. The ratio is calculated as the number of deficiencies (or detentions) divided by the total number of PSC inspections. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 44 Environmental indicators OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Indicator Greenhouse gas (GHG) emissions Direct GHG emissions (Scope 1) Indirect GHG emissions – owned (Scope 2) Indirect GHG emissions – not owned (Scope 3) Total GHG emissions ¹⁾ Energy consumption Heavy fuel Low-sulfur heavy fuel Marine gas oil Office consumption Electricity consumption Water consumption Greenhouse gas (GHG) emissions - Fleet CO₂ emissions, AER – total fleet CO₂ emissions, AER – LR2 CO₂ emissions, AER – LR1 CO₂ emissions, AER – MR CO₂ emissions, AER – Handysize CO₂ emissions, EEOI – total fleet CO₂ emissions, EEOI – LR2 CO₂ emissions, EEOI – LR1 CO₂ emissions, EEOI – MR CO₂ emissions, EEOI – Handysize Unit 2022 2021 2020 Tons CO₂e 1,363,076 1,081,027 1,257,468 Tons CO₂e 448 486 434 Tons CO₂e 607,961 1,238,479 Not calculated Tons CO₂e 1,971,485 2,319,991 1,257,902 Tons Tons Tons kWh m3 g/dwtxnm g/dwtxnm g/dwtxnm g/dwtxnm g/dwtxnm g/cargoxnm g/cargoxnm g/cargoxnm g/cargoxnm g/cargoxnm 252,012 136,329 84,086 216,610 126,371 88,978 170,907 174,836 80,865 659,476 514,461 445,093 4,062 3,875 3,268 5.15 3.68 4.73 6.09 8.37 10.88 8.13 9.38 12.69 21.29 5.05 3.72 4.33 5.83 7.23 10.64 8.67 8.95 11.80 15.24 5.34 4.10 4.66 6.02 7.52 11.17 8.07 9.43 13.06 15.07 The emission figures in this report represent TORM’s findings to the best of our knowledge given today’s methodology used by TORM aligned with current IMO methodology. TORM is continuously committed to improving the methodology and advancing transparency in reporting as well as to following best industry practices on emissions reporting. In 2021, we allocated the emissions related to T/C out to direct GHG emissions (Scope 1) as we did not report on Scope 3. In 2022, we report on Scope 3 and have reallocated the part included in Scope 1 in 2021 to Scope 3 in 2021. ¹ The total CO₂ emissions are significantly lower in 2020 compared to 2021 and 2022 because Scope 3 emissions have not been calculated for 2020. ⁾ TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 45 Social indicators OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Indicator Our employees Total number of seafarers Total number of employees (shore-based) Diversity – shore-based employees Total women in leadership Gender with lowest representation (women) Diversity – seafarers Total women in leadership Gender with lowest representation (women) Health & Safety Fatalities Unit 2022 2021 2020 Further information Headcount Headcount 3,218 355 3,420 348 3,023 345 Annual Report 2022 Annual Report 2022 % % % % Headcount 21 35 2 1 0 22 37 1 1 0 21 36 1 1 0 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Lost Time Accident Frequency (LTAF) Per million exposure hours 0.42 0.37 0.65 Annual Report 2022 Ethics Sexual Harassment and/or Non-discrimination Policy Equal and fair opportunity employer Child and/or Forced Labor Policy Child and/or Forced Labor Policy covers suppliers and vendors Human Rights Policy Human Rights Policy covers suppliers and vendors Modern Slavery Policy UN Global Compact Signatory Recycling and Scrapping Policy Yes  / No  ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Business Principles Business Principles Business Principles Business Principles Business Principles Business Principles UK Modern Slavery Act Responsibility Report ● ● ● ● ● ● ● ● ● TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 46 Governance indicators OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Indicator Board of Directors Members Gender with lowest representation (women) Total nationalities Independence Senior Management Members Gender with lowest representation (women) Total nationalities Executive Management has their bonus linked to ESG performance Whistleblower function Number of whistleblower notifications received through external system Number of whistleblower cases reviewed Ethics Anti-corruption Policy Anti-bribery Policy Whistleblower Policy Articles of Association Data Ethics Policy Code of Conduct Policy (Business Principles) Yes  / No  Unit 2022 2021 2020 Further information Number % Number % Number % Number 5 20 5 60 4 0 1 ● 3 3 ● ● ● ● ● ● 5 20 5 60 4 0 1 ● 1 1 ● ● ● ● ● ● 5 20 5 60 4 0 1 ● 3 3 ● ● ● ● ● ● Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Annual Report 2022 Business Principles Business Principles Annual Report 2022 Annual Report 2022 Business Principles TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 47 Definitions OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA CO2 emissions (equivalent ton) The greenhouse gas emissions (GHG) reporting covers are calculated for each single vessel and then consolidated. Numbers under the Scope 1 data sheet have been collected EEOI (g/cargoxnm) EEOI is a measure of efficiency using the total fuel Scope 1 (direct emissions from own production), Scope 2 on board the vessels or at the offices. The collection is consumption, distance travelled, and cargo intake. The (indirect emissions from the generation of purchased based on actual usage. The vast majority of TORM’s Scope measure is defined as grams CO2 emissions per cargo-ton- energy) and Scope 3 (emissions indirectly affected but not 1 emissions are linked to vessel operations with our fleet. nautical mile. EEOI is affected by vessel size, speed, cargo owned or controlled by TORM) of the Greenhouse Gas Due to the very limited share, emissions from company cars availability, duration of ballast voyages, waiting time, and Protocol. have not been included. port stays. TORM uses the operational control principle as our organizational boundary when calculating our Scope 1, Scope 2 CO2 emissions generated indirectly from operational SOX emissions (ton) SOx emissions are calculated based on average sulfur Scope 2, and Scope 3 emissions. This has the following activities at the TORM offices are calculated using Danish content for the different fuel types. implications: and World Resources Institute emission factors. Only offices where data is available are included. A comprehensive study for TORM by an independent • Upstream emissions from fuel usage in Scope 1 and Scope 2 are accounted for in Scope 3 • Investments with operational control are accounted for Scope 3 CO2 emissions generated from activities not owned or 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 in Scope 1. The Marine Exhaust segment is not included controlled by TORM, but that we indirectly affect in our sulfur emissions are reduced to an average of 0.025% in 2022 but will be included from 2023 value chain. Scope 3 emissions are calculated using a when using the exhaust gas cleaning system. • In line with our organizational boundary, we consider mixed approach where spent-based data as well as vessels that are time-chartered out (T/C-out) for less supplier-specific and/or activity data are used, and where than three months as well as vessels which are time- the relevant emission factors are applied. We are using a Energy consumption (GJ) All fuel burned on board the vessels has been converted chartered in (T/C-in) for more than three months as variety of data sources for these emission factors where into energy based on fuel oil analysis results. part of Scope 1 the key sources are DEFRA, WIOD, GLEC, and Ecoinvent. • In line with our organizational boundary, we consider vessels that are time-chartered out for more than three months as well as vessels which are time-chartered in AER/Carbon intensity (g/dwtxnm) AER is a measure of efficiency using the total fuel Office electricity consumption (kWh) Electricity consumed indirectly in operating activities at TORM offices excluding the London and the Houston for less than three months as part of Scope 3 consumption, distance travelled, and deadweight. The offices. Scope 1 CO2 emissions have been calculated based on the consumption of heavy fuel oil and marine gas oil according to IMO’s conversion factor for emission per ton. Emissions 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. Office water consumption (m3) Water consumed indirectly in operating activities at the TORM offices excluding the offices in London, Houston, Mumbai, and New Delhi. TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 48 Definitions OUR RESPONSIBILITY FRAMEWORK OUR PRIORITIES AND RESULTS SASB INDEX AND RESPONSIBILITY DATA Spills The definition of spills is based on ITOPF. We report the total volume of spills as the estimated aggregate volume of Marine casualty (based on IMO Casualty Investigation Code Ch 2 -2.9) A marine casualty means an event, or a sequence of events, Very serious marine casualty (based on IMO Casualty Investigation Code Ch 2 -2.22) A very serious marine casualty means a marine casualty all spills. We do not net the amount of such material that that has resulted in any of the following and that has involving the total loss of the ship, a death, or severe was subsequently recovered, evaporated, or otherwise lost occurred directly in connection with the operation of a ship: damage to the environment. Permanent management positions (ex. Directors and senior executives) – shore-based Total Management other than Directors of the Company (VPs, GMs, Senior Managers and Managers with one or more direct reports). The five Non-Executive Directors are not included as employees of the Group. Permanent seafarer officers Defined as officers living in Scandinavia. as required by SASB standard TR-MT-160a.3 -2.1. Deadweight tonnage (based on SOLAS II-1A-Reg 2- 20) Deadweight tonnage is the difference in tons between the displacement of a ship in water of a specific gravity of 1.025 at the draught corresponding to the assigned summer freeboard and the lightweight of the ship. COC (based on IACS document Classification societies Section B3 Classification surveys) The requirement that specific measures, repairs, request for survey, etc. are to be carried out within a specified time period in order to retain class. LTAF or LTIF (based on OCIMF Marine Injury Reporting Guidelines Section 4) The number of Lost Time Injuries per unit exposure hours. Unit in respect of LTIF is one million man hours. Lost Time Injuries are the sum of fatalities, permanent total disabilities, permanent partial disabilities, and lost workday • • • the death of, or serious injury to, a person the loss of a person from a ship the loss, presumed loss, or abandonment of a ship • material damage to a ship • the stranding or disabling of a ship or the involvement of a ship in a collision • material damage to marine infrastructure external to a ship that could seriously endanger the safety of the ship, another ship, or an individual • severe damage to the environment or the potential for severe damage to the environment, brought about by the damage of a ship or ships However, a marine casualty does not include a deliberate act or omission with the intention to cause harm to the safety of a ship, an individual, or the environment. Material damage to ship (based on IMO Casualty Investigation Code Ch 2 -2.16) A material damage in relation to a marine casualty means: cases as based on OCIMF Marine Injury Reporting • damage that significantly affects the structural Guidelines Section 3. integrity, performance or operational characteristics of marine infrastructure, or a ship • • damage that requires major repair or replacement of a major component or components destruction of the marine infrastructure or ship TORM ANNUAL REPORT 2022 OUR RESPONSIBILITY 49 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 50 50 Market review The Russian invasion of Ukraine in 2022 and the consequent EU/G7 sanctions against the Russian oil sector are set to reshape the global crude and oil product trade flows. The subsequent lengthening of trade distances pushed the product tanker market into freight rate levels not seen for years. The shift in trade patterns following Russia’s invasion of China. At the same time, Russia also needed to redirect disruptions due to the oil embargo, European countries Ukraine led the product tanker benchmarks to reach multi- some of the lost volume towards Turkey, the Middle East, increased their imports from the Middle East, Asia, and the year highs, despite looming risks from the energy crisis in and North Africa. By the end of 2022, i.e. five weeks before Atlantic basin by 25% in 2022, leading to a strong freight Europe and worsening of the global economic situation. the EU ban on Russian oil products came into full effect, rate environment which was not weakened even with lost Further support came from strong import demand, Europe still imported 1 mb/d of refined oil products from long-haul naphtha flows from Russia to OECD Asia. especially in Latin America and also regions where refineries Russia. That was down from the peak of 1.3 mb/d in had been closed recently, not only adding to ton-mile February 2022 but on par with the 2021 average trade demand but also contributing to increased ballast volumes. The EU countries stopped importing Russian oil distances. products once the ban on Russia took effect on 05 February 2023. Nevertheless, in anticipation of trade Sanctions on Russia Russia’s invasion of Ukraine on 24 February 2022 triggered several oil market players to self-sanction Russian oil, which was followed by more formal sanction packages introduced by the US, the UK, and the EU. Given the high importance of Russia as a source of the EU’s crude oil and diesel imports, it was especially the EU ban on Russian oil which played a major role, scheduled to come into full effect on 05 December 2022 for the crude oil and on 05 February 2023 for refined oil products. The tightness in the diesel market pushed refinery margins to new highs, incentivizing refineries worldwide to maximize diesel output. The deadline for the EU sanctions against Russian oil products on 05 February 2023 has been one of the main drivers behind strong freight rates in 2022. The EU countries started to look for diesel from sources further afield, such as the Middle East, India, the US, and even EU/UK clean petroleum product imports by source Tanker freight rates in 2022 SOURCE: KPLER SOURCE: CLARKSONS K B/D 1,900 1,700 1,500 1,300 1,100 900 700 500 AVERAGE TCE IN USD/DAY 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2021 avg Jan ´22 Feb ´22 Mar ´22 Apr ´22 May ´22 Jun ´22 Jul ´22 Aug ´22 Sep ´22 Oct ´22 Nov ´22 Dec ´22 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Russia Other LR2 Ras Tanura - Chiba MR Average LR1 Ras Tanura - Chiba TORM ANNUAL REPORT 2022 REVIEW AND RISK 51 Market review Vessel delays in Latin America Recovering oil demand in Latin America led to increased Active LR2 swing tonnage While the product tanker market experienced elevated Europe towards India and China. In addition, the release of the US strategic crude stockpiles (SPR) mostly supported fuel inflows to the region, exceeding the discharging rates across the vessel classes, the crude tanker market the Suezmax tanker segment. The volatility between the capacities. This led to temporary logistical floating storage saw more diverting trends. The market for the largest crude relative strength of the clean LR2 and the dirty Aframax tying up vessels, especially during the second and third tankers, the VLCC segment, remained weak during the first segments triggered a number of LR2 vessels to move into quarters of the year. three quarters of 2022. It was negatively influenced by dirty voyages immediately after the Russian invasion of Changes in the refinery landscape In addition to the geopolitical tensions in Europe and the and started to pick up only at the end of the third quarter of 2022, and again a wave of moves into dirty voyages 2022 in tandem with China’s increasing appetite for towards the end of 2022. At the end of 2022, the LR2 consequent shifts in trade flows, changes in the refinery imported crude oil. On the other hand, the Aframax and the fleet trading dirty had increased by a net of four vessels landscape contributed to the strong freight rate Suezmax crude tanker segments benefitted from Russia’s compared to the end of 2021. OPEC under-performance relative to its production targets Ukraine, followed by a wave of LR2 clean-ups in mid-year environment in 2022. The closure of two out of four attempts to redirect its crude exports away from close-by refineries in Australia at the end of 2021 and the sole refinery in New Zealand in April 2022 led to a 22% increase in the region’s fuel imports in 2022, not only adding to the ton-mile demand but also contributing with longer ballast distances. At the same time, permanent and temporary refinery closures in South Africa increased the country’s fuel imports by more than 20%. China product export quotas China’s product exports remained at low levels throughout the year until new and high product export quotas were released in the last quarter of 2022. This brought the level of China’s refined product exports to an all-time high level in the fourth quarter of 2022. Although most of the Chinese exports remained within Asia, flows to Europe reached record high levels, facilitating Europe’s shift away from Russian diesel and contributing with a strong ton-mile effect. Australia/New Zealand/South Africa clean petroleum product imports China clean petroleum product exports SOURCE: KPLER SOURCE: KPLER K B/D 1,200 1,000 800 600 400 K B/D 1,600 1,400 1,200 1,000 800 600 400 200 0 2019 2020 2021 2022 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 REVIEW AND RISK REVIEW AND RISK 52 52 Market drivers and outlook The product tanker market continues to benefit from longer trade distances amid sanctions against Russia, further supported by recent developments in the refinery landscape and the need to replenish stockpiles. This is accompanied by an unprecedented favorable tonnage supply side. In this section, we lay out TORM’s expectations for the will be shipped to third countries under the G7 price cap The third demand side driver on the market is the need to product tanker market in the next three years. The regime (allowing the EU/UK vessel insurance) or will utilize a replenish oil inventories. Since the summer of 2020, development of the product tanker market is the most shadow fleet. Either way, according to TORM estimates, a product inventories in main trading hubs (e.g. the US Gulf important driver impacting full recalibration of the diesel trade flows would add at least Coast, the US East Coast, Northwest Europe, and TORM’s financial performance for which an outlook is further explained on page 56 7% to the ton-mile demand for product tankers. Singapore) have declined as refinery production has lagged the recovery in oil demand. This was especially the case for In addition to sanctions against Russia, changes in the diesel, where inventories in main trading hubs had fallen to refinery landscape – both recent and still to come – will 22% below normal seasonal levels by the beginning of the Tonnage demand Despite the weaker macroeconomic environment, growth in support the product tanker market. Since 2020, 2.5 mb/d fourth quarter of 2022 – the same magnitude as the of refining capacity has been closed permanently, and a excess stocks seen in the early months of the COVID-19 oil demand in 2023 will be supported by China’s reopening further 0.6 mb/d is scheduled to be closed during 2023- pandemic. In spite of diesel inventories in main trading hubs and the recovering international travel. The key demand 2024. Most of the affected capacity is in regions which are gaining towards the end of the year (at least partly due to driver on the product tanker market, however, was and will already large importers of refined oil products, with the EU countries building up stocks via increased imports be the full implementation of the EU ban on Russian oil Australia, New Zealand, and South Africa as some of the ahead of the EU ban on Russian oil products), they products on 05 February 2023 and the corresponding need most prominent examples. Given the fact that oil demand in nevertheless remained 14% below the seasonal norm in to recalibrate the whole oil product trade ecosystem these regions is still lagging the pre-COVID-19 levels, the December 2022. towards longer trade distances. Even though some of this full effect of refinery closures is yet to be seen. effect already started in 2022 and in early 2023, the full effect is expected to be seen once both the EU/UK fully On the other hand, these refinery closures coincide with replace the volumes previously imported from Russia with around 4 mb/d of new capacity coming online mainly in the non-Russian sources, and Russia finds new buyers for their Middle East, China, and India – regions which already today oil products, previously exported to the EU/UK. The impact are large exporters of oil products. Both these of this trade recalibration will stay intact as long as the oil developments are positive for trade flows and ton-mile in embargo remains in place. Given the proximity of Europe the coming years, with only a few projects which are not and Russia, the EU/UK will need to source more diesel from positive for trade, most notably the large-scale Dangote regions further afield, while Russia will need to find new refinery in Nigeria, which exact start date is, nevertheless, markets for its diesel in regions further away. It remains to still uncertain. be seen whether Russian diesel and other refined products TORM ANNUAL REPORT 2022 REVIEW AND RISK 53 Market drivers and outlook The need to replenish the stocks to at least pre-COVID-19 The effective fleet growth turned out slightly lower as a net years comparable with 2022 in terms of freight market levels translates into higher fuel transportation needs. The of four LR2 vessels had moved to the dirty trade by the end strength. The number of product tanker newbuilding orders exact timing of this effect is, however, uncertain given the of the year. current tight supply-demand situation for diesel. placed in 2022 was 69 vessels, with the MR vessels accounting for the majority of orders (42 units), while the With record high newbuilding prices and limited shipyard number of LR2 vessels ordered was 17. No new orders for Subsequently, TORM expects the product tanker ton-mile space, tanker ordering in 2022 remained very low, despite LR1 vessels were placed. demand on main trade routes to grow by a compound a strong freight market. The general tanker ordering (crude annual rate of around 6% during 2023-2025. This is a pure and product tankers) corresponded to around 1% of the ton-mile effect not taking into account any potential existing fleet, which was 4-5 times less than seen in recent emerging inefficiencies in the market which can similarly years. The low ordering level was in stark contrast to the affect freight rates. above 10% ordering activity seen in 2015 and 2008, the ~6 % Expected ton-mile growth during 2023-2025 (CAGR) Tonnage supply The positive outlook for the demand for product tankers in the next three-year period coincides with the supply side which is the most supportive seen for more than two decades. The product tanker fleet grew by 2.4% in terms of capacity (2.2% in terms of number of vessels), down from a 2.3% growth in 2021. Compared to the year before, both deliveries and scrapping declined, the latter reflecting the strength of the freight market in 2022. While 106 newbuilt vessels entered the fleet, 31 older vessels were scrapped. TORM ANNUAL REPORT 2022 REVIEW AND RISK 54 Market drivers and outlook Consequently, the order book-to-fleet ratio for product With a historically low order book and newbuilding ordering Generally, positive trends on the product tanker demand tankers ended 2022 at a historically low level of 5%. This activity expected to be limited in the coming years, TORM side combined with limited tonnage supply growth support a was further supported by a similarly historically low 4% order expects the net product tanker fleet capacity to grow by a positive freight market development in the next three-year book-to-fleet ratio for crude tankers. compound annual rate of approximately 1% during 2023- period, although market volatility is expected not least due 2025. to the geopolitical instability. Due to the recent record high ordering activity in the container vessel segment and shipyards currently targeting the LNG segment, ordering of product tankers with delivery before 2025 remains difficult. This will limit the fleet growth in 2023-2025 even further, in addition to already record low order book ratios. Given the uncertainty around the requirements for vessel propulsion systems in the ~1% future, TORM expects the newbuilding ordering activity to Expected fleet growth during 2023-2025 remain relatively limited in the next couple of years. (CAGR) Global product tanker fleet and order book As of 31 December 2022 Fleet 31.12.2021 Delivered in 2022 Scrapped in 2022 Fleet 31.12.2022 Order book for 2023-2025 LR2 LR1 MR Handysize Total 403 377 1,809 776 3,365 19 0 68 19 106 6 1 14 10 31 416 376 1,863 785 3,440 44 1 97 29 171 2023-2025 Order book as % of end- 2022 fleet 11% 0% 5% 4% 5% TORM ANNUAL REPORT 2022 REVIEW AND RISK 55 Financial outlook 2023 Financial outlook To assess our financial performance, the number of • One-off market-shaping events such as strikes, embargoes, political instability, weather conditions, etc. covered days, interest-bearing bank debt, the TCE market, and EBITDA sensitivity to freight rates are included in our We have very low visibility on TCE rates that are not yet periodic ongoing reporting. fixed with our customers. Hence, these rates may be significantly lower or significantly higher than our current The primary driver for our financial performance is the expectations. product tanker market which is highly uncertain and therefore expected to be highly volatile. We expect to For the full year 2023, TCE earnings are expected to be in maintain relatively stable OPEX on a per vessel day basis, the range of USD 1,025 - USD 1,375m (2022: USD however, with a slightly increasing trend compared to 981.5m), and EBITDA is expected to be in the range of recent historical levels. Administrative costs are also USD 750 – 1,100m (2022: USD 743m) based on the expected to remain at historical levels. In 2022, we had an current fleet size, including published acquisitions and EBITDA break-even TCE rate of approx. USD/day 8,000. divestments of vessels. Please refer to page 202 for a definition of TCE earnings. Our financial outlook is primarily based on the assumptions described on the preceding pages, and the most important As of 12 March 2023, TORM had covered 31% of the Disclaimer on financial outlook The purpose of this Financial Outlook for 2023 is to comply with reporting requirements for Companies listed in Denmark. Actual results may vary, and this information may not be accurate or appropriate for other purposes. Information about our financial outlook for 2023, including the various assumptions underlying it, is forward-looking and should be read in conjunction with the Safe Harbor Statements on page 123, and the related disclosure and information about various economic, competitive, and regulatory assumptions, factors, and risks that may cause our actual future financial and operating results to differ materially from what we currently expect. macroeconomic factors affecting our TCE earnings in 2023 2023 full-year earning days at USD/day 42,759. Hence, The information included in this Financial Outlook for 2023 are expected to be: 69% of the 2023 full-year earning days are subject to is preliminary, unaudited and based on estimates and • The EU ban on imports and transportation of Russian change. information available to us at this time. TORM has not finalized its financial statements for the periods presented. crude oil and oil products, and the G7 price gap vis-à-vis As 20,647 earning days in 2023 are unfixed as of 12 During the course of the financial statement closing imports of Russian oil by third countries March 2023, a change in freight rates of USD/day 1,000 process, TORM may identify items that would require it to • Global economic growth or recession, consumption of will – all other things being equal – impact the EBITDA by make adjustments, which may be material to the refined oil products, and inflationary pressure USD 20.6m. • Location of closing and opening refineries and temporary shutdowns due to maintenance • Oil price development • Oil trading activity and developments in ton-mile • Bunker price developments • Global fleet growth and newbuilding ordering activity • Potential difficulties of major business partners Also as of 12 March 2023, 89% of the Q1 2023 earning days was covered at USD/day 43,002. For the individual segments, the Q1 2023 coverage was 90% at USD/day 65,950 for LR2, 86% at USD/day 44,135 for LR1 and 89% at USD/day 37,730 for MR. information provided in this section. As mentioned above, the provided information constitutes forward-looking statements and is subject to risks and uncertainties, including possible adjustments to the financial outlook for 2023. TORM ANNUAL REPORT 2022 REVIEW AND RISK 56 Coverage 2023-2025 Total physical and covered days in TORM as of 12 March 2023 Total physical days Covered, % 2023 2024 2025 2023 2024 2025 LR2 LR1 MR Total Covered days LR2 LR1 MR Total 4,527 4,805 4,671 4,659 5,366 5,316 20,694 21,602 21,453 LR2 LR1 MR 30,026 31,640 31,428 Total Coverage rates, USD/day 1,043 2,108 6,229 9,379 - 65 333 398 - - - - LR2 LR1 MR Total 23 44 30 31 65,801 - 1 2 1 - 45,106 46,108 38,109 40,011 42,759 41,010 - - - - - - - - Actual no. of days can vary from projected no. of days primarily due to vessel sales and delays of vessel deliveries. TORM ANNUAL REPORT 2022 REVIEW AND RISK 57 TORM fleet development Expected development in the fleet of owned and leased vessel as of 16 March 2023 As of the end of December 2022, TORM had 78 vessels in the LR2, LR1 and MR vessel classes. In January 2023, TORM purchased seven LR1 vessels built in 2011-2013 that will be financed by sale and leaseback. Fleet development As of the date of this report, two of these vessels were Owned vessels delivered, and the rest of the vessels are expected to be delivered before the end of April 2023. In March 2023, TORM purchased three 2013-built MR vessels that are expected to be financed partly with shares LR2 LR1 MR Total and partly with mortgage loans. The vessels are expected to Leased vessels be delivered during the second quarter of 2023. TORM expects to refinance two leased MR vessels with bank financing in the second quarter of 2023. LR2 LR1 MR Total Q4 Q1 Q2 Q3 2022 Changes 2023 Changes 2023 Changes 2023 Changes Q4 2023 7 8 40 55 6 - 17 - - - - - 4 - 7 8 40 - - 5 7 8 45 55 5 60 6 4 17 - 3 -2 6 7 15 23 4 27 1 28 - - - - - - - - - 7 8 45 - - - 7 8 45 60 - 60 6 7 15 28 88 - - - - - 6 7 15 28 88 Total fleet 78 4 82 6 88 TORM ANNUAL REPORT 2022 REVIEW AND RISK 58 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 REVIEW AND RISK REVIEW AND RISK 59 59 Financial review 2022 Financial review for the year ended 31 December 2022 We delivered a record high TCE of USD 982m and a net profit of USD 563m, which is slightly better than our estimate from the Q3 2022 outlook. Our capital structure is currently very conservative with a Net Loan-to-Value of 25%, USD 416m in available liquidity including restricted cash, no major refinancing need before 2026, and limited off-balance sheet commitments of USD 18m. In March 2022, we obtained a USD 433m commitment for refinancing existing facilities, thereby extending maturities to 2028 and with an option to extend to 2029. Further, we secured a USD 123m commitment for financing additional second-hand vessels. Kim Balle, CFO Key highlights USDm Income statement Revenue Time charter equivalent (TCE) Gross profit EBITDA Operating profit (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) Adjusted RoIC Return on Equity (RoE) Basic earnings per share (EPS) 2022 2021 Change 1,443 982 782 743 601 -45 563 1,874 2,614 1,504 1,111 2,142 28.5 29.2% 28.1% 44.0% 6.92 620 379 188 137 1 -42 -42 1,968 2,331 1,052 1,279 2,011 13.0 823 603 594 606 600 -3 605 -94 283 452 -168 131 15.5 0.0% 29.2% points 0.2% 27.9% points -4.1% 48.1% points -0.54 7.46 TORM ANNUAL REPORT 2022 REVIEW AND RISK 60 Financial review 2022 Change in time charter equivalent earnings in the tanker fleet USDm Time charter equivalent earnings 2021 Change in number of earning days Change in freight rates Other Time charter equivalent earnings 2022 Handysize 7.0 -4.4 0.9 - 3.5 MR 263.9 15.5 404.7 -0.5 683.6 LR1 46.3 -7.4 60.6 -0.1 99.4 LR2 61.4 14.6 119.2 -0.2 195.0 Total 378.6 18.3 585.4 -0.8 981.5 TCE In 2022, total revenue increased by USD 823m to USD 1,443m, corresponding to a 133% increase of which revenue in the tanker fleet increased by USD 820m. The significant increase in the revenue can primarily be attributed to the higher freight rates. Higher freight rates were driven by a strong product tanker market supported by the trade recalibration caused by the sanctions and the self-sanctioning of Russian product exports as a consequence of the Russian invasion of Ukraine. In particular, we saw a significant increase in the average TCE rate/day across all vessel classes with an overall increase of 149% from USD/day 13,703 in 2021 to USD/day 34,154 in 2022. Similarly, the TCE earnings increased by 159% to USD 981m in 2022, which is partly due to an increased amount of earning days. In 2022, port expenses, bunkers, commissions, and other cost of goods sold were USD 459m compared to USD 241m in 2021. The increase is primarily driven by increased bunker consumption at substantially higher bunker prices compared to previous periods. TORM ANNUAL REPORT 2022 REVIEW AND RISK 61 Financial review 2022 Earnings data USDm LR2 vessels Available earning days Spot rates ¹⁾ TCE per earning day ²⁾ LR1 vessels Available earning days Spot rates ¹⁾ TCE per earning day ²⁾ MR vessels Available earning days Spot rates ¹⁾ TCE per earning day ²⁾ Handysize vessels Available earning days Spot rates ¹⁾ TCE per earning day ²⁾ Total Available earning days Spot rates ¹⁾ TCE per earning day ²⁾ 2021 Full year Q1 Q2 Q3 Q4 Full year % change Full year 2022 3,979 1,340 1,306 1,184 1,096 4,926 14,037 17,220 39,027 52,595 64,485 44,137 15,422 18,432 30,741 55,532 58,889 39,612 3,206 694 691 685 620 2,690 13,702 20,201 36,535 51,089 50,287 38,881 14,365 16,424 33,269 51,102 48,067 36,879 19,703 5,254 5,309 5,161 5,138 20,862 12,918 16,525 34,115 43,284 47,876 35,014 13,395 16,462 29,174 40,968 45,029 32,795 726 180 92 6 9,665 13,391 12,602 12,505 9,709 13,614 12,196 6,397 - - - 278 12,917 12,995 27,614 7,468 7,398 7,036 6,854 28,756 13,019 16,884 34,844 45,646 50,818 36,641 13,703 16,743 29,622 44,376 47,520 34,154 24% 214% 157% -16% 184% 157% 6% 171% 145% -62% 34% 34% 4% 181% 149% ¹⁾ Spot rate = Time Charter Equivalent Earnings for all charters with less than six months’ duration = Gross freight income less bunker, commissions, and port expenses. ²⁾ TCE = Time Charter Equivalent Earnings = Gross freight income less bunker, commissions, and port expenses. TORM ANNUAL REPORT 2022 REVIEW AND RISK 62 Financial review 2022 Liquidity and cash flow TORM´s liquidity position by the end of 2022 was USD As of 31 December 2022, TORM had CAPEX commitments of USD 18.4m related to scrubber installations and Flettner 416m including restricted cash of USD 3m and undrawn rotors. credit facilities of USD 93m. In the beginning of 2022, TORM finalized the refinancing of nine specific MR vessels. The refinancing was initiated in late 2021 by executing sale and leaseback transactions. TORM also took delivery of the LR2 newbuilding, TORM Houston, financed in a sale and leaseback transaction. During 2022, TORM entered into one additional new sale and leaseback agreement to finance the purchase of the second-hand LR2 vessel, TORM Hannah. Further, TORM repaid debt on two revolving credit facilities and therefore has undrawn and committed credit facilities amounting to USD 92.6m at the end of 2022. In March 2023, TORM obtained commitment for USD 433m bank refinancing at attractive terms, thereby extending our debt maturities until 2028 and with the possibility to extend to 2029. We further secured a USD 123m commitment for financing additional second-hand vessels. 502m Net cash inflow from operating activities 338m Net cash outflow from financing activities Net cash flow from financing activities was USD -338m (2021, USD 298m). The decrease was primarily driven by ordinary loan installments, a decrease in the proceeds from borrowings by 452m due to reduced vessel purchase Net cash inflow from operating activities was USD 502m activities, and dividends paid during the year related to Q2 (2021, USD 48m). The increase was primarily driven by an and Q3 2022 of 167m (2021, USD nil). increase in TCE compared to 2021, offset by a related increase in working capital. 11m Net cash inflow from investing activities Distribution A dividend of USD 2.59 per share has been approved by the Board of Directors for the quarter ended 31 December 2022, in total USD 212m. The distribution is in line with TORM’s Distribution Policy with a cash position of USD 323.8m, working capital facilities of USD 92.6m, restricted cash of USD 3.3m, earmarked proceeds of USD 58.4m, and a cash position related to Marine Exhaust Technology A/S of USD 2.4m. Cash reservation per vessel Net cash flow from investing activities was USD 11m is USD 1.8m for 78 vessels, USD 140.4m in total. With this refinancing, TORM has a flexible capital structure, a prudent liquidity strategy, and further available funding capacity. (2021, USD -291m). This was the result of the divestment of eight older vessels in 2022, of which seven were sold during 2022 and one in 2021, offset by the purchase of one newbuilding and one newer second-hand vessel. TORM ANNUAL REPORT 2022 REVIEW AND RISK 63 Financial review 2022 Operation of vessels The development in operating expenses (OPEX) is summarized in the table on this page. The table also Change in operating expenses summarizes the operating data for TORM’s fleet (including both owned vessels and vessels financed via bareboat USDm charters in sale and leaseback arrangements). Operating expenses 2021 Change in operating days OPEX for the fleet increased by USD 11m to USD 202m in Change in operating expenses per day 2022 compared to USD 191m in 2021. This was due to an Operating expenses 2022 increasing number of operating days and operating expenses per day. Higher global inflation in 2022 was one of the main drivers behind the increase in repair and Operating data maintenance costs and crew wages impacting operating USD/day Handysize 4.6 -2.8 -0.0 MR 134.6 4.7 4.7 LR1 21.9 -1.8 0.4 LR2 Total 29.4 190.5 6.2 0.3 6.3 5.3 1.8 144.1 20.4 35.9 202.1 Handysize MR LR1 LR2 expenses per day. Operating expenses per operating day in 2021 6,300 6,566 6,660 6,992 Operating expenses per operating day in 2022 6,133 6,788 6,781 7,045 The total fleet of owned vessels had 854 off-hire and dry- Change in the operating expenses per operating day in % -3% 3% 2% 1% docking days, corresponding to 3% of the operating days in 2022. This compares to 1,103 off-hire days in 2021 or 4% of the number of operating days. Operating days in 2022 ¹⁾ Off-hire Dry-docking Available earning days 2022 ¹⁾ Including bareboat charters. 290 21,216 3,011 5,093 29,610 -12 - -123 -231 -95 -226 -55 -112 -285 -569 278 20,862 2,690 4,926 28,756 TORM ANNUAL REPORT 2022 REVIEW AND RISK 64 Total 6,633 6,825 3% Financial review 2022 Assets TORM’s total assets increased by USD 283m to USD impairment existed, and thus no recommendations to test the value of the fleet were made to the Board of Directors. Equity In 2022, total equity increased by USD 452m to USD 2,614m in 2022. The increase was primarily driven by an 1,504m. The increase was primarily driven by an increase in increase in trade receivables of USD 176m due to a As in previous years, the carrying amount at the end of the retained profit of USD 563m due to increased freight rates substantial increase in TCE in Q3 and Q4 2022 and an year was tested using either fair value less cost of disposal and earnings partially offset by dividend payments of USD increase in cash position of USD 152m, which can be or the future discounted net cash flow deriving from the 167m. Additionally, the hedging reserve, largely stemming attributed to higher freight rates and earnings. The Main Fleet CGU. In 2022, Management based the from unrealized gains on interest derivatives of USD 57m in movement is partly offset by a decrease in the carrying recoverable amount on the fair value less cost of disposal. 2022, has increased by USD 43m from 2021 because of value of vessels. During the year, TORM sold seven vessels. When assessing the fair value less cost of disposal, increasing interest rates. During 2022, 5-year USD swaps All vessels sold in 2022 and one vessel sold in 2021 were Management includes a review of market values calculated increased from approximately 1.35% at the end of 2021 to delivered to the new owners. as the average of two internationally recognized approximately 4.02% at the end of 2022. On average, As of 31 December 2022, the carrying amount of vessels, deadweight tonnage, yard, and age of the vessel. The fair the coming three years and 87.7% over the coming five capitalized dry-docking, and prepayments on vessels value is based on the assumption that the vessels are in years. 94.6% of the debt level as per the end of 2022 was shipbrokers’ valuations. The shipbrokers’ primary input is TORM has fixed 92.7% of its interest rate exposure over amounted to USD 1,856m compared to USD 1,950m at good and seaworthy condition and with prompt, charter- hedged. the end of 2021. The decrease was due to the divestment free delivery. The fair value less cost of disposal of the of seven vessels of USD 78m as well as depreciations of vessels is determined to be within level 3 of the fair value USD 134m and an impairment of USD 3m offset by hierarchy. Based on this review, Management concluded Tax Tax for the year amounted to an expense of USD 0.5m of investment in two vessels and capitalized dry-docking of that as of 31 December 2022 assets within the Main Fleet income tax and USD 1m of tonnage tax compared to an USD 120m. Based on broker valuations, TORM’s fleet had CGU were not impaired as fair value less cost of disposal expense of USD 0.4m of income tax and 0.9m of tonnage a market value of USD 2,650m as of 31 December 2022, exceeded the carrying amount by USD 784m. Please refer tax in 2021. In addition, deferred tax adjustments of USD 43% above the carrying value. to note 10 for additional details of the impairment 7.3m were recognized compared to USD 0.0m in 2021. Assessment of impairment of assets Management has followed the usual practice of performing a review of impairment indicators for Q1 to Q3 2022 and presented the outcome to the Audit Committee. The Audit Committee evaluates the impairment indicator assessment and prepares a recommendation to the Board of Directors on whether to conduct an impairment test of the carrying value of the fleet. In Q1 to Q3 2022, no indicators of assessment. For the newly acquired MET business, the year-end impairment test did not identify any impairments. TORM has elected to participate in the Danish tonnage tax scheme since 2001. 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 investment and activity level equivalent to that at the time of entering into the tonnage tax scheme. TORM ANNUAL REPORT 2022 REVIEW AND RISK 65 Financial review 2022 Primary factors affecting the results of operations TORM generates revenue by charging customers for the charterer’s choice because TORM primarily bases its financial decisions on expected TCE rates rather than Available earning days Available earning days are the total number of days in a expected revenue. The analysis of revenue is therefore period when a vessel is ready and available to perform a transportation of refined oil products and crude oil, using primarily based on developments in TCE earnings. voyage, meaning that the vessel is not off-hire or in dry- TORM’s tankers. TORM’s focus is on maintaining a high- quality fleet and high tradability, and TORM actively manages the deployment of the fleet between spot market Spot charter rates A spot market voyage charter is generally a contract to 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 voyage charters, which generally last from several days to carry a specific cargo from a load port to a discharge port is required because charter hire is only paid on earning days several weeks, and time charters. for an agreed freight rate per ton of cargo or a specified and not for off-hire days or days in dry-dock. TORM believes that the important measures for analyzing pays voyage expenses such as port, canal, and bunker total amount. Under spot market voyage charters, TORM trends in the results of its operations of tankers consist of costs. the following: Operating days Operating days are the total number of available days in a period with respect to the owned and leased vessels, before Time charter equivalent (TCE) earnings per available earning day TCE earnings per available earning day is defined as revenue Spot charter rates are volatile and fluctuate on a seasonal deducting unavailable days due to off-hire days and days in and a year-to-year basis. Fluctuations derive from dry-dock. Operating days is a measurement which is only imbalances in the availability of cargo for shipment and the applicable to the owned vessels, not to the time chartered- number of vessels available at any given time to transport in vessels. less voyage expenses divided by the number of available these cargos. Vessels operating in the spot market earning days. Voyage expenses primarily consist of port and generate revenue which is less predictable but may enable bunker expenses which are unique to a particular voyage, TORM to capture increased profit margins during periods of Operating expenses per operating day Operating expenses per operating day are defined as crew and which would otherwise be paid by a charterer under a improvements in tanker freight rates. wages and related costs, the costs of spares and time charter, as well as commissions, freight, and bunker derivatives. TORM believes that presenting revenue net of voyage expenses neutralizes the variability created by Time charter rates A time charter is generally a contract to charter a vessel for maintenance (excluding capitalized dry-docking), the cost of insurance, and other expenses on a per-operating-day consumable stores, expenses relating to repairs and unique costs associated with particular voyages or the a fixed period at a set daily or monthly rate. Under time basis. Operating expenses are only paid for owned vessels. deployment of vessels on the spot market and facilitates charters, the charterer pays voyage expenses such as port, TORM does not pay such costs for the time chartered-in comparisons between periods on a consistent basis. Under canal, and bunker costs. Vessels operating on time charters vessels, as they are paid by the vessel owner and instead time charter contracts, the charterer pays the voyage provide more predictable cash flows but can yield lower factored into the charter hire cost. expenses, while under voyage charter contracts the profit margins than vessels operating in the spot market shipowner pays these expenses. A charterer has the choice during periods characterized by favorable market of entering a time charter (which may be a one-trip time conditions. charter) or a voyage charter. TORM is neutral as to the TORM ANNUAL REPORT 2022 REVIEW AND RISK 66 Financial review 2022 Going concern As of 31 December 2022, TORM’s available liquidity case, TORM has sufficient liquidity and headroom above all the covenant limits. Long-term viability statement In accordance with provision 31 of the UK Corporate including undrawn and committed facilities was USD TORM performs sensitivity calculations to reflect downside Governance Code, the Board of Directors confirms that 416m, including a total cash position of USD 324m scenarios including, but not limited to, future freight rates they have a reasonable expectation that TORM will (including cash held for dividend payment). TORM’s net and vessel valuations in order to identify risks to future continue in operation and meet its liabilities as they fall due interest-bearing debt was USD 663m, and the net debt liquidity and covenant compliance and to enable for the three-year period ending 31 December 2025. loan-to-value ratio was 25% (Tanker segment only and Management to take corrective actions, if required. The before dividend payment). Further information on TORM’s downside scenarios cover the principal risks and This period has been selected for the following reasons: objectives and policies for managing its capital, its financial uncertainties facing TORM as set out on pages 70-74 and risk management objectives, and its exposure to credit and include different distressed outlooks for the product tanker liquidity risk can be found in note 24 to the financial market. In a stress case scenario, Management has • The general volatility and uncertainty in the product tanker market leads to a significant increase in the statements. stressed freight rates to the lowest rolling four-quarter degree of judgement and uncertainty beyond a three- average since 2000 on a per vessel class basis and a year period The principal risks and uncertainties facing TORM decline in vessel values. In such scenario, TORM maintains are set out on pages 70-74 sufficient headroom on liquidity and covenants. • Three years are generally in line with the forecast horizon for external equity analysts covering the shipping sector TORM monitors its funding position throughout the year to The Board of Directors has considered TORM’s cash flow • TORM will not have any outstanding CAPEX ensure that we have access to sufficient funds to meet the forecasts and the expected compliance with TORM’s commitments related to currently known projects forecasted cash requirements, including potential financial covenants for the period until 31 March 2024. • TORM will have passed the first CO2 reduction target newbuildings, purchase of secondhand vessels and loan TORM’s cash flow forecast and expected covenant milestone covering a 40% emission intensity reduction commitments, and to monitor compliance with the financial compliance are based on the Business Plan approved by the in 2025 compared to the 2008 level covenants in our loan facilities, details of which are Board of Directors. Based on this review, the Board of available in note 2 to the financial statements. A key Directors has a reasonable expectation that taking element for TORM’s financial performance in the going reasonably possible changes in trading performance and concern period relates to the increased geopolitical risk vessel valuations into account, TORM will be able to following Russia’s invasion of Ukraine in February 2022 and continue the operational existence and comply with its the associated effects on the product tanker market. The financial covenants for the period until 31 March 2024. changed geopolitical situation has so far been positive for Accordingly, TORM continues to adopt the going concern the product tanker market, and TORM’s base case assumes basis in preparing its financial statements. that this positive sentiment related to freight rates and vessel values will continue throughout 2023. In the base TORM ANNUAL REPORT 2022 REVIEW AND RISK 67 Financial review 2022 The assessment of the Board of Directors has been made viability. In a low case with freight rates slightly above the potential impact of economic volatility, climate change with reference to TORM’s current financial position and lowest rolling four-quarter average since 2000 on a per agenda, new regulations, technological disruption, and prospects. The assessment of financial performance and vessel class basis and a related decline in vessel values, general changes in the utilization of energy sources into cash flows is primarily dependent on the expectations for: TORM maintains sufficient headroom on liquidity and consideration. Based on this assessment and taking the • Demand-supply picture in the product tanker sector rate assumptions as per the going concern assessment into account, the Board of Directors believes that TORM is including the expected vessel values and freight rates continue throughout the viability period and have further well positioned both to respond to these risks and to take achieved by TORM, which also covers the outlook sensitized the vessel values downward over the period to advantage of any positive market developments for a period related to the geopolitical situation and climate change reflect a continued downturn. Should the product tanker beyond the three-year forecast horizon. covenants throughout the viability period. TORM’s freight current capital structure and TORM’s operational platform developments • Development of the fleet • Operating and administrative expenses • Capital expenditures covering newbuildings and 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 On behalf of TORM plc the going concern period, which would require mitigating maintenance of the existing fleet including installation actions, including cost savings, sale of vessels, or increased Kim Balle of scrubbers and fuel efficiency equipment leverage which are considered within Management’s Chief Financial Officer • Changes in interest rates control and achievable. In such a scenario, Management TORM A/S would also consider obtaining appropriate waivers, and 16 March 2023 The expected financial performance and cash flows are although Management would be confident of obtaining based on the same underlying assumptions as used in such waivers, this is not within Management’s control. TORM’s general financial planning. The operating and administrative cost levels are on similar levels as TORM’s The Board of Directors monitors if TORM is moving towards historical performance, and freight rates are assumed to a covenant breach in order to incorporate any mitigating remain at strong and profitable levels, however, with a actions in due course on an ongoing basis. Based on the decreasing trend from 2024 onwards. Vessel values used in sensitivity analysis, the Board of Directors does not forecasting compliance with financial covenants are based currently expect that TORM will breach its financial on the latest market valuations from two independent, covenants or experience a liquidity shortfall over the three- recognized shipbrokers. The expected outlook has then year forecast period. been subject to a stress test and a sensitivity analysis over the three-year period, using a conservative outlook for the The Board of Directors has also considered the long-term product tanker sector with sensitivities including freight prospects of TORM beyond the three-year forecast viability rates and vessel values. Management has conducted a low horizon. In doing so, the Board of Directors has taken the case scenario and a stress case to assess the long-term long-term risks and opportunities for TORM, and the TORM ANNUAL REPORT 2022 REVIEW AND RISK 68 “ We must anticipate and adapt to our ever-changing environment and mitigate risks as well as seize the opportunities this brings. TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 69 69 Risk management In our efforts to be a sustainable company, we must anticipate and adapt to our ever- changing environment and mitigate risks as well as seize the opportunities this brings. We face a diverse set of risks, and managing these systematically is key for us to create and protect value over the short, medium, and long term. Risk management framework We acknowledge that TORM faces a range of risks in doing If the consequence of a risk exceeds the agreed risk The risks are reassessed on a quarterly basis, and if specific tolerance, Management is required to assess if events occur, it may require a reassessment. The identified business and that our success depends on identifying, implementation of additional mitigating controls is possible risks in TORM are divided into top risks and risks on TORM’s balancing, and deciding on how best to manage and and necessary until the desired risk level is achieved. watch list. mitigate these risks. TORM believes that a strong risk management framework is vital to protect TORM. TORM’s risk management framework acknowledges that unforeseen or “black swan events” occur in the maritime On an annual basis, TORM conducts an Enterprise Risk industry. Therefore, TORM accepts these types of risks and Management (ERM) process, during which the critical risks will have a plan or will diligently develop a plan in case such facing TORM are identified, assessed, and discussed by events materialize. The ability to react and navigate an TORM’s Senior Management Team and subsequently unpredictable future is managed in close collaboration approved by the Risk Committee. between Management and the Risk Committee via agreed predefined accepted risk tolerance levels, which will be The objective is for TORM and its shareholders to be reported on at regular meetings or, if needed, adequately rewarded for any desired risk tolerance level, extraordinarily. and that the governance structure tailored to oversee the risk management activities is in place, so that risks are mitigated to the extent desired. Governance TORM’s risk management approach emphasizes Risk assessment process TORM’s risk identification process stipulates that the risk department conducts risk interviews with heads of departments and senior management on an annual basis to identify principal and emerging risks. Identified risks are management’s accountability and oversight. Identified risk prioritized, challenged, and approved by the Senior responsibility is assigned to the Senior Management Team Management Team as risk owners. This also includes the member most suited to managing the risk, who is required assessment of availability and effectiveness of mitigating to continually monitor the risk, implement and maintain actions taken to avoid or reduce the impact or occurrence mitigating actions, evaluate and report. of the underlying risks. TORM’s risk appetite and main risk exposure The Senior Management Team and the Risk Committee discuss and decide on TORM’s risk appetite and risk tolerance to principal and emerging risk exposures. TORM’s risk appetite and inherited exposure risks are divided into five main categories and emerging risks: • Industry and market risks • Operational risks • Compliance and IT risks • • Financial risks Emerging risks TORM’s general risk appetite per group of risk categories: Industry and market risks TORM accepts taking risks, where the expected return outweighs the evaluated risk exposure. Operational, compliance and IT risks TORM is risk adverse regarding operational, compliance and IT risks. In essence, TORM will seek to mitigate any such risks to a meaningful minimum level. TORM ANNUAL REPORT 2022 REVIEW AND RISK 70 Risk management Financial risks TORM is risk adverse regarding financial risks. In essence, TORM will seek to mitigate any such risks to a meaningful minimum level. Emerging risks facing TORM, including risks that would threaten our business model, future performance, solvency or liquidity, Emerging risks are described in detail in our TCFD section on pages 75-77 and reputation. TORM’s top risks measured on likelihood and consequence are listed below and displayed on the heat map. Development compared to last year The Board of Directors and the Senior Management Team A detailed description of each of the top risks is available on pages 73-74 have carried out a robust assessment, under the Corporate The focus below is the development in the risks. Governance Code, of the principal and emerging risks TOP RISK HEAT MAP TORM TOP RISKS WITHIN THE COMING 12 MONTHS – POST-MITIGATION ACTIVITIES 2022 2021 UNCHANGED Industry and market risks TORM’s market risk exposure remains high, and we are exposed to potentially adverse market conditions. The risk likelihood is deemed to have decreased despite a potential recession due to current market fundamentals which A. TANKER FREIGHT RATES B. BUNKER PRICE C. ASSET MANAGEMENT D. OIL MAJOR APPROVAL E. SEVERE VESSEL ACCIDENTF. MARITIME SAFETY THREATS include mitigating factors. G. LEGAL COMPLIANCE H. IT AND CYBER-SECURITY I. LIQUIDITY RISK J. TERMS AND SOURCES OF FUNDING (REMOVED)L. INFLATIONARY PRESSURE WORST CASE S E C N E U Q E S N O C MAJOR MODERATE MINOR MIN. EFFECT A C I I E J D G G F H H A B B F C L RARE UNLIKELY POSSIBLE LIKELY FREQUENT 1. Ton-mile growth reflecting changing trade patterns related to refinery dislocation and extra distance for European imports/Russian exports 2. Congestion remains elevated tying up capacity 3. Complex sanction regime has created further “inefficiencies” across the shipping industry The Russian invasion of Ukraine has brought energy security to the forefront as energy prices remain near record high. Moreover, disruption of current trading patterns creates uncertainty about ton-mile and oil demand. This adds uncertainty about the path to a zero- carbon future and makes it more difficult to make investment decisions, which seems to impact the tanker vessel order books, which again limits the supply of new TORM ANNUAL REPORT 2022 REVIEW AND RISK 71 LIKELIHOOD vessels. Risk management Operational risks Oil major approval risk is considered at a low level due to continuous focus and efficient controls. infrastructure across the globe are vulnerable to hacking and spying. TORM’s involvement in an environmental disaster would damage TORM’s reputation, but financially it is considered highly unlikely that a vessel accident with severe oil pollution will not be covered by insurance. Events such as piracy and terrorism could result in kidnapping of or injury to seafarers or vessel damage. The likelihood has decreased slightly, and the East African region has been removed as an “area of unrest”. Compliance and IT security risks Due to the Russian invasion of Ukraine, sanctions are set to increase although the likelihood of violating sanctions is deemed minor and manageable due to TORM’s current setup involving training of personnel and different digital and automized sanction screening systems. IT and cyber-security is the risk of system unavailability and data loss due to cyber-attacks. Oil and gas and associated infrastructure industries are expected to be targeted by e.g. Russia. TORM assesses that the risk of cyber-activism has increased from “possible” to “likely”, which is in line with the Danish Centre for Cyber Security’s increase of the risk level related to cyber-activism from low to medium in 2022 and subsequently from medium to high in early 2023. The likelihood of Russian cyber-attacks is increasing as the Ukraine conflict evolves into an extended war of attrition. Critical government and private sector networks as well as Financial risks TORM’s financial gearing, liquidity buffer, and break-even levels have been maintained at an acceptable level. Considering the high value generation and current mitigation activities, the breach of covenants is considered unlikely. TORM has removed Terms and Sources of Funding as a top risk. Banks and leasing companies have a strong appetite for funding product tanker companies, and adequate access to capital is no longer considered a short-term risk but included as a long-term risk in the TCFD section. Read more about mandates and sensitivity analysis of the various risks from page 164 Inflationary pressure has been added as a top risk. Various consumer price indexes reached +10% year-on-year in September 2022, and TORM may be vulnerable to price and salary increases. In strong tanker markets, TORM is typically able to push most of the increased costs on to the customers via higher freight rates, whereas in tighter markets it may be more difficult to pass on the increased costs. TORM’s risk appetite The Senior Management Team and the Risk Committee decide on TORM’s risk appetite and risk tolerance to principal risk exposures. Risk appetite conclusion In TORM’s 2022 risk assessment, it has been concluded that there is alignment between risk appetite and net severity for TORM’s top risks. Severe vessel accidents are deemed outside the risk appetite; however, this is the same methodology used in previous years’ enterprise risk management evaluation. TORM accepts that risks cannot be fully mitigated due to the nature of risks. More details on the risks, mitigations, and strategies in our TCFD disclosure: www.torm.com/investors/reports-and- presentations/financial-reports/ TORM ANNUAL REPORT 2022 REVIEW AND RISK 72 Risk management Description of top risks Industry and market risks Operational risks Tanker freight rates 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 not covered by corresponding freight rate increases. Unexpected value depreciation of vessels. The most exposed vessels are older vessels due to new legislation driven by the climate change agenda. 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. 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 temporarily bear the full effect of price increases. A decline in TORM’s net asset value, which can lead to a requirement from banks to provide additional security. TORM is also exposed to cyclical asset prices and assets contracted at too high prices. 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 TORM’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. Unleveraging is considered when terms and pricing are deemed attractive hereunder with time charter-outs and FFA coverage. In general, TORM does not hedge future bunker expenses. In case freight income is fixed, TORM does hedge future bunker exposures. With a conservative capital structure, focus on conservative loan-to-value and a close view of the market, TORM maintains flexibility and an ability to act in the asset market. TORM’s integrated platform with in-house safety and technical and operational staff secures continued focus on quality and high vetting standards. Disaster recovery plans for emergency situations are in place as well as an ongoing safety resilience program to enhance safety culture, including officers being trained as “safety ambassadors”. TORM’s internal 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 place in case of an incident. Risk Potential impact Mitigating activities TORM ANNUAL REPORT 2022 REVIEW AND RISK 73 Risk management Description of top risks Compliance and IT security risks Financial risks Legal compliance IT and cyber-security Liquidity risk Inflationary pressure L 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 severe external threat 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. Risks related to cost inflation, supply chain bottlenecks and increase in interest rates. Among other things, TORM’s expenses are vulnerable to price increases related to salaries and other OPEX. 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 manoeuvrability. Disruptions in the supply chain or sudden inflation in key materials could result in project delays and budget overruns. Compliance and awareness training is mandatory for all employees. In connection with sanctions, a know-your-customer screening system has been implemented. Business continuity plans have been implemented covering the entire group. The plans include assessment and contingency of critical systems in case of business interruption. Continuous focus on capacity to detect and react on cyber- attacks. Moreover, we have a cyber-risk security development program ongoing that has run throughout 2022 and will continue for two years, thereby lifting our risk maturity significantly. Conservative financial leverage guided by short and long-term cash flow forecasting with stress-testing of critical assumptions. Constantly maintaining sufficient cash buffers and a tangible catalogue of available liquidity-enhancing initiatives in alignment with our Distribution Policy. To mitigate the risk of increasing interest rates, TORM hedged more than 89% of its 5-year interest exposure. Short-term mitigation of increasing crew expenses is done by paying our seafarers’ salaries in USD. This means that the seafarers’ purchasing power has often increased in line with inflation. Risk Potential impact Mitigating activities TORM ANNUAL REPORT 2022 REVIEW AND RISK 74 Climate-related risk analysis and TCFD Climate change is likely to have consequences for TORM in the long term and will impact several areas of the core business activities. TORM’s emerging risks are in essence viewed as directly related to climate change. In 2022, TORM conducted a climate-related scenario The Senior Management Team has the overall management collaborations supporting this journey. These collaborations analysis using the Task Force on Climate-related Financial responsibility for climate-related risks and opportunities in are important, as the ambitious target cannot be met by Disclosures (TCFD) guidelines to assess transition and TORM. physical risks and opportunities, and how they might impact single entities alone but requires joint efforts across the shipping industry. the resilience of our company strategy. We are committed to achieving zero CO2 emissions by 2050. TORM is actively involved in various industry To complete our TCFD analysis, we developed three bespoke climate scenarios. The scenarios were based on publicly available scenarios published in 2021 by the International Energy Agency, the Network for Greening the Financial System, and the IPCC Sixth Assessment Report. The scenarios were supplemented by data and insights relevant to upstream and midstream oil and gas, and the transport of refined oil products. The scenarios are: • 1.5 C Net Zero 2050 • 1.8 C Delayed Transition • 3-4 C Hot House World Governance The Risk Committee has oversight of climate-related risks and opportunities through its responsibility for the governance of TORM’s enterprise risks, which includes climate-related risks and opportunities. Climate-related risk scenarios 1.5°C Net Zero 2050 Orderly transition 1.8°C Delayed Transition 3-4°C Hot House World Disorderly transition Worst case scenario • An ambitious scenario that limits global warming to 1.5°C through stringent climate policies and innovation, reaching net zero CO₂ emissions around 2050 • The world continues with “business as usual”, and emissions rise until 2030 • This scenario relies only on government policies that have already been introduced or announced, such as the EU’s Fit for 55 • Some advanced economies decarbonize faster and reach net zero CO₂ emissions by 2045 • By 2030, governments and societies • Emissions grow until 2080, leading to finally take action to avoid catastrophic global warming about 3°C of warming and severe physical risks • Assumes that ambitious climate policies are introduced immediately with low policy variation between regions and strong international cooperation to achieve net-zero CO₂ emissions worldwide • Governments work to ensure an orderly transition across the energy sector • But at this point, aggressive climate action is required to limit global warming to 1.8°C • This includes irreversible changes such as higher sea level rise and extreme temperatures • This results in a disorderly transition in which the transition to a low- carbon economy occurs in an unexpected and chaotic way • Conflict and humanitarian crises are exacerbated, and some areas of the world become uninhabitable zones High and immediate transition risk Delayed and very high transition risk Low transition risk Relatively low physical risk Medium physical risk High physical risk TORM ANNUAL REPORT 2022 REVIEW AND RISK 75 Climate-related risk analysis and TCFD Process The process to undertake the scenario analysis included a The findings from the scenario analysis were presented to medium, and long terms as being 2025, 2030, and 2050, TORM’s Senior Management Team and the Risk respectively. workshop with senior representatives from Finance, Committee. The climate-related risks identified through the Investor Relations, Risk, Strategy, Market Research, and scenario analysis exercise will be incorporated into TORM’s The scenarios took TORM’s full value chain into the Operations and Technical departments to consider the annual Enterprise Risk Management setup going forward. consideration, including upstream oil and gas production, three scenarios and identify climate-related risks and opportunities. The risks and opportunities were then assessed for financial materiality and their potential impact Risks and opportunities TORM undertook an assessment of the transition and refining, and downstream customer demand. The scenarios also examined production and demand for renewable energy fuels and technologies, including biofuels, hydrogen, on TORM’s business model and strategy. This process aims physical climate-related risks and opportunities which it ammonia, and carbon capture utilization and storage. at improving TORM’s corporate strategy’s resilience. faces until 2050. The assessment was based on three climate scenarios, which were combined with short, Climate-related risks All potential financially material climate-related risks are transition risks, none are physical risks. Risk severity in scenarios # Type Climate-related risks Main impact(s) 1.5 °C 1.8 °C 3-4 °C Strategic actions to mitigate risks Risk 1 Market risk Declining demand for oil and gas Demand for oil products would decline significantly in the Net Zero 2050 scenario (91 mb/d in 2020 to 24 mb/d in 2050) with peak oil demand in 2019, and in 2030 in the Delayed Transition scenario, mainly due to the electrification of transport. Decreased demand/revenue Decreased asset value High High (delayed) None Risk 2 Reputation Higher cost of capital and reduced access to capital Withdrawal of banks from the sector and a more limited pool of investors over time, resulting in more expensive debt/equity financing. Risk 3 Emerging regulation Risk 4 Technology Carbon price regulations The EU has announced plans to include shipping in the Emissions Trading System (ETS). Other nations, such as the United States, are expected to introduce similar schemes over time. Decarbonization of vessels In the Net Zero 2050 and the Delayed Transition scenarios, decarbonization of TORM’s fleet will be required to meet customer and regulatory requirements. The diversity of alternative fuels and technologies increase the risk of selecting the wrong technology. Reduced access to and higher cost of capital Inability to grow the business or maintain the current average fleet age Increased operating cost (bunker and carbon tax) Decreased asset value (if not decarbonized) Increased CAPEX to decarbonize the fleet Stranded assets due to selecting a wrong technology Increased operating cost (alternative fuels) High High (delayed) None  Revenue diversification into transport of renewable fuel types (see opportunity 1)  Monitoring of a number of “disruption indicators”  Decarbonizing the fleet faster than required by the IMO to ensure competitiveness in a declining market  Strong opportunity for higher asset utilization due to vessel supply shortage (see opportunity 3)  Apply modest financial gearing and operate in a lease structure to remove asset value risk  Revenue diversification into transport of renewable fuel types (see opportunity 1)  Maintaining a conservative capital structure profile and having access to multiple funding sources  Decarbonizing the fleet faster than required by the IMO to remain investable as transition company High High (delayed) None  Decarbonizing the fleet faster than required by the IMO to ensure competitiveness in a declining market  Carbon tax will be incorporated into the market rate and thus lead to exposure only if emissions from TORM vessels are higher than the “average vessel” of competitors High High (delayed) None  Decarbonizing the fleet faster than required by the IMO to ensure competitiveness in a declining market  Focus on using known solutions to decarbonize the fleet and delaying investments until fuel technologies are derisked and adopted at industry level  Participating in industry decarbonization groups, such as the Mærsk McKinney Møller Center for Zero Carbon Shipping as a Mission Ambassador TORM ANNUAL REPORT 2022 REVIEW AND RISK 76 Climate-related risk analysis and TCFD The scenario analysis identified four financially material We have decided not to include financial materiality or climate-related risks: • Opportunity 1: Diversification into transport of low- metrics as this is deemed too uncertain. • • • • Risk 1: Risk 2: to capital Risk 3: Risk 4: Declining demand for oil and gas • Opportunity 2: Market volatility due to weather and Higher cost of capital and reduced access refinery consolidation carbon and renewable fuels Carbon price regulations Decarbonization of vessels • Opportunity 3: Higher asset utilization due to vessel supply shortage A detailed description can be found in the table below. More details on the risks, mitigations, and strategies in our TCFD disclosure: www.torm.com/investors/reports-and- presentations/financial-reports/ The scenario analysis also identified three financially material climate-related opportunities: Climate-related opportunities Opportunity in scenarios Type Climate-related opportunities Main impact(s) 1.5 °C 1.8 °C 3-4 °C Strategic actions to mitigate risks # 1 Market Diversification into low-carbon fuels Demand for transport of low-carbon fuels will increase under the Net Zero 2050 and the Delayed Transition scenarios. This includes biofuels, green methanol, liquid hydrogen, and hydrogen-based fuels such as ammonia 2 Market 3 Market There are significant similarities between the business model, customer segments and vessel operations for transporting these new products and TORM’s existing business Market volatility due to extreme weather Across all three scenarios, the frequency and intensity of extreme weather such as tropical cyclones and storm surges will increase as compared to a world without climate change This will lead to more frequent disruption to refinery production, resulting in a higher frequency of market volatility Higher utilization due to supply shortage Across all three scenarios, it is expected that investments in newbuildings will be limited due to reduced access to capital, uncertainty relating to the transition of shipping to new fuel types, and uncertainty relating to future demand for oil products Except for the 1.5C Net Zero 2050 scenario, it is, however, expected that the demand for oil products will remain high in the medium term Opportunity to diversify revenue into these new and growing markets. In particular, 64% of TORM’s fleet is already able to carry biofuels Opportunity to improve TORM’s forecasting of these events and position our vessels to take advantage of the supply and demand imbalances that occur during periods of market volatility Opportunity for higher asset utilization of the existing fleet due to supply/demand imbalance in the short to medium term   ()  Pursuing opportunities within the biofuel market to build a market position with the existing assets and capabilities  Upgrading a number of the current vessels to carry methanol, which will make us a large player in the segment  Investigating the opportunity to enter into the hydrogen and ammonia segments – this would require new and different types of assets  Monitoring of a number of “disruption indicators     Investments in vessel positioning tools, optimum voyage and BI setup  Predictive analytics and AI to better forecast these extreme events and have our vessels positioned to take advantage of this ()    Monitoring of a number of “disruption indicators” to assess the likelihood of the opportunity materializing  Remain exposed to the oil and liquids segment in the medium term to capture the opportunity whilst diversifying revenue in the longer term TORM ANNUAL REPORT 2022 REVIEW AND RISK 77 Governance Governance introduction Governance at TORM Chairman’s introduction Governance structure TORM’s governance structure Board of Directors Board and Committee meeting attendance Board activities Committee reports Audit Committee report Risk Committee report Nomination Committee report Remuneration Committee report Other Investor information Engagement and decision making Directors’ report Statement of Directors’ responsibilities Safe habor statement 79 80 83 84 85 87 89 95 97 100 111 115 118 121 123 TORM ANNUAL REPORT 2022 GOVERNANCE 78 Governance at TORM In respect of the year ended 31 December 2022, TORM plc was subject to the UK Corporate Governance Code (available from www.frc.org.uk). TORM has considered the individual provisions and is Transactions of an unusual nature or of major importance Board Leadership and Company Purpose compliant with 39 out of 41 provisions. The non- may only be executed by the Executive Director based on a Long-term value and sustainability culture compliance with provisions 18 and 32 is because of special authorization granted by the Board of Directors. If Shareholder engagement business decisions taken after careful consideration by the certain transactions cannot await approval by the Board of Board of Directors. No plan is currently in place to attain Directors due to their urgency, the Executive Director must, Other stakeholder engagement Conflicts of interest compliance with the below recommendations. taking into consideration TORM’s interests to the extent Divisions of Responsibilities In depth details on the non-compliance can be found on pages 97 and 100 that the Board of Directors is subsequently informed. Any Divisions of responsibilities transaction must always be subject to the authorizations Non-Executive Directors stated in TORM’s Articles of Association, including any Independence possible, obtain the approval of the Chairman and ensure Role of the Chairman This section constitutes the statutory reporting on approvals required by the Minority Director. The Executive Composition, succession, and evaluation corporate governance. Director is assisted by the Senior Management Team in the Appointments and succession planning day-to-day management of the business. The Senior Skills, experience, and knowledge Management structure and delegation of authority TORM’s Board of Directors approves TORM’s strategy and Management Team members are individually responsible for further delegation of authority in the organization. TORM maintains an overview of mandates and authorities for ensures that Management operates the business in different levels in the organization. Length of service Evaluation Diversity Non-compliance accordance with this strategy. Details of the strategy and purpose are set out in the strategic report on pages 4-77. The Board of Directors has delegated the day-to-day management of the business to Executive Director Jacob Meldgaard. This includes TORM’s operational development and responsibility for implementing the strategy 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. Audit, risk, and internal control Committee Integrity of financial statements Fair, balanced, and understandable Internal controls and risk management External auditor Principal and emerging risks Remuneration Independent judgement and discretion Non-compliance Alignment with purpose, values, and long-term strategy P. 22 P. 115 P. 115 P. 97 P. 83 P. 79 P. 83 P. 47 P. 97 P. 84 P. 84 P. 98 P. 98 P. 79 P. 89 P.187 P. 187 P. 92 P. 93 P. 95 P. 99 P. 100 P. 104 TORM ANNUAL REPORT 2022 GOVERNANCE 79 Chairman’s introduction year with nine ad hoc meetings in addition to the Board’s six scheduled meetings (see page 85). Read more about TORM’s Board and Committees on page 83 Distribution Key deliverables Board evaluation This year’s evaluation was undertaken internally, involving a review of the Board and its principal Committees that covered a wide range of topics. It is a well-established process and an important opportunity to test that the Board is well placed to provide constructive challenge to management. The outcome of this review led to the Board requesting further deep dives on cyber-security, understanding AI, alternative fuels, the electricity grid being able to support the electric vehicle increase, and geopolitical risks. Changes to the Board In 2022, there were no changes to the Board of Directors. The membership of the Board is drawn from a diverse mix of nationalities, gender, and backgrounds which brings the relevant skills and knowledge to provide a positive contribution to the Board. Chairman’s statement On behalf of the Board, I am pleased to introduce the corporate governance report for 2022. This continues to be the Board’s principal method of reporting to shareholders on our application of the principles of good corporate governance. Strong governance is essential for the effective delivery of our strategy This creates value for all our stakeholders and the ongoing Board leadership Organizing the Company to focus on sustainability is A new, more transparent Distribution Policy with the purpose of distributing all cash generated over a certain minimum threshold per vessel to our investors. Further details can be found on page 87. ESG Established a separate department focused on execution of our ambitious ESG reporting, working in close cooperation with our commercial and technical decarbonization teams. Management has been given specific KPIs directly linked to ESG, ensuring that leadership prioritizes sustainable actions. Further details can be found on page 27. Board deep dives requested in 2023 As a result of the 2022 Board evaluation, deep dives on cyber-security, the use of AI in TORM, methanol as a fuel, the electricity grid, and geopolitical risks were requested. Employee Engagement Survey Bi-annual engagement survey. 98% response resulting in an engagement score of 8.4 out of 10, positioning TORM in development and sustainability of our business. essential. To empower the organization to reduce emissions the top quartile of companies across all industries using the Throughout the year, the Board continued to meet in and achieve our ambitious environmental goals, new same platform. Further details can be found on page 36. person and via virtual conference and was able to deliver on organizational roles were created in 2022. its strategic commitments. The Board met 15 times this TORM ANNUAL REPORT 2022 CHAIRMAN’S INTRODUCTION 80 Chairman’s introduction This was to establish a separate department of experts focused on accelerating our green efforts. TORM’s Suppliers We expect our suppliers to comply with recognized As a long-standing member of the UN Global Compact, TORM remains committed to protecting its employees, management has been given specific KPIs directly linked to international standards and work to improve human rights, assets, reputation, and the environment by maintaining the ESG targets and efforts to support TORM’s strategic focus labor conditions, impact on the environment, safety, highest possible standards. Transparency and on sustainable performance. corruption, and quality. TORM also applies its Business accountability are central parts of TORM’s way of doing Principles when dealing with subcontractors and suppliers. business. Shareholders TORM introduced a new quarterly Distribution Policy during 2022 to allow for increased alignment between cash Community TORM has a history of supporting the communities in which Read more about TORM’s ESG journey on pages 22- 47 generation and shareholder distribution. With a prudent and we work and the needs of the people we serve. The TORM solid capital structure approach, TORM has started to pay Philippines Education Foundation is a great example of this. out quarterly dividends to our shareholder in Q2 2022, and The foundation was set up by TORM Philippines in 2007 to TORM expects to pay out a total of USD 379m in dividends support education in the Philippine community. During the related to 2022. Employees Our ambition is to improve and nurture the culture needed to fulfill our ambitious strategy and develop initiatives which matter to our employees. Through in-depth knowledge, a common language, and targeted tools, all employees are equipped with the tools required to spot and mitigate stress. Read more about TORM's people on page 36 Customers The relationship with our customers continues to be strong. We believe that our integrated business model creates a unique customer offering as it provides our customers with better accountability and insight into safety and vessel performance. TORM ANNUAL REPORT 2022 educational year 2021-2022, TORM was pleased to continue to provide support. Read more about TORM's connection to the surrounding communities on page 38 Sustainability In 2022, TORM added two elements to increase the transparency around our emissions and the impact of our sustainability response on our business. These are the Task Force on Climate-Related Financial Disclosure and the report on Scope 3 emissions. Read more about TORM's sustainability efforts on page 22 CHAIRMAN’S INTRODUCTION 81 Chairman’s introduction The year ahead In the year ahead, the Board will, among other topics, continue the focus on ensuring that TORM sets strategically relevant ESG targets. The focus will continue to be on applied AI competences and cyber-security, and due to increased interest from customers, we will look further into methanol as a fuel. We will continue our work on analyzing peak oil projections, utilizing our disruption indicator modelling. Our partnership with macroeconomics advisors will provide valuable insight in navigating the intersection of global markets, geopolitics, and policy. In doing so, we aim to mitigate emerging risks and act in due time. Read more about TORM’s forward focus on page 15 I look forward to connecting with you at our Annual General Meeting in April 2023 and updating you at that time on our progress. Thank you for your continued support. Christopher H. Boehringer Chairman of the Board TORM ANNUAL REPORT 2022 CHAIRMAN’S INTRODUCTION 82 TORM’s governance structure The Board of Directors Chaired by 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 Board of Directors include establishing policies for strategy, accounting, organization, finance, and the appointment of executive officers. The Board of Directors governs TORM 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 Director Board Observers Leads the Board of Directors, sets the agenda, and promotes a culture of open debate between Executive and Non- Executive Directors. Meets regularly 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. Committed to contributing constructively to challenge and help develop proposals on strategy. Available to both Non-Executive Directors and shareholders if they have concerns. Meets with each Non-Executive Director on an annual basis to appraise the performance of the Chairman. Responsible for the day-to-day management of TORM and for TORM’s operational development, results, and internal development. Implements the strategies and overall decisions approved by the Board of Directors. Three types. Employee-elected Observers, providing a communication platform between the employees and the Board of Directors. Minority Board Observer appointed by the B- shareholder and Board member-elected Observers. All Observers are entitled to attend and speak at Board meetings. Audit Committee Chaired by Göran Trapp. Risk Committee Chaired by Göran Trapp. Nomination Committee Remuneration Committee Chaired by Christopher H. Boehringer. Chaired by Christopher H. Boehringer. Meets a minimum of four times a year. Meets a minimum of three times a year. Meets a minimum of twice a year. Meets a minimum of twice 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 TORM. Responsible for supervisory oversight and monitors responsibilities with respect to internal controls and risk management. 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 regarding any changes. Considers succession planning for Directors, the Chief Executive Officer, and others. Assists the Board of Directors in reviewing Management’s performance and remuneration as well as TORM’s general remuneration policies. Read more about the role and activities of the Audit Committee on page 89 Read more about the role and activities of the Risk Committee on page 95 Read more about the role and activities of the Nomination Committee on page 97 Read more about the role and activities of the Remuneration Committee on page 100 Senior Management Team Consists of the following employees of TORM A/S (in addition to the Executive Director, Jacob Meldgaard): Kim Balle (Chief Financial Officer – CFO), Lars Christensen (Senior Vice President and Head of Projects), and Jesper S. Jensen (Senior Vice President and Head of Technical Division). The Senior Management Team holds weekly meetings and assists the Executive Director in the day-to-day management of the business. TORM ANNUAL REPORT 2022 GOVERNANCE STRUCTURE 83 Board of Directors Christopher H. Boehringer David N. Weinstein Göran Trapp Non-Executive Director and Chairman of TORM’s Board of Directors Senior Independent Director and Deputy Chairman of TORM’s Board of Directors Non-Executive Director Nationality: Canadian First elected: 2015 Nationality: American Appointed: 2015, continues until removed by the B-shareholder Nationality: Swedish First elected: 2015 Annette Malm Justad Non-Executive Director Nationality: Norwegian First elected: 2020 Jacob Meldgaard Executive Director and Chief Executive Officer Nationality: Danish First elected: 2015 Employment: Managing Director and Head of Europe, Oaktree Capital Management (International) Limited Employment: Senior Investment Banking, Governance, and Reorganization Specialist Employment: Board member Employment: Board member Employment: Chief Executive Officer of TORM since 01 April 2010 Skills and experience: Shipping, strategy, capital investment, M&A. Goldman Sachs, FI Travel Corporation, Warburg Dillon Read/SG Warburg, and LTU GmbH & Co Skills and experience: Strategy, capital markets and finance, risk management and oversight, extensive public company and corporate governance experience, global business, US Listings (i.e. Seadrill Limited, Stone Energy Corp, and Deep Ocean Group) and as Managing Director of Calyon Securities Inc, BNP Paribas, Bank of Boston and Chase Securities Inc. Skills and experience: Shipping, strategy, customers, capital, finance. Morgan Stanley crude oil trader, Head of Oil Products Trading Europe & Asia, Global Head of Oil Trading and Head of Commodities EMEA. Business development and oil trading at Equinor. Founding director of energy advisory boutique Energex Skills and experience: Shipping, strategy, customers, capital, finance. More than 25 years of executive experience from shipping and industry including CEO of Oslo-listed Eitzen Maritime Services ASA from 2006-2010. The last 10 years as independent consultant and Non- Executive Board member Skills and experience: Shipping, customers, strategy, capital, M&A, US listing. Previously served as Executive Vice President of Dampskibsselskabet NORDEN A/S and held a number of management positions in J. Lauritzen A/S and A.P. Moller - Maersk External appointments: External appointments: N/A Utmost Group, Marco Capital Holdings Limited and Oaktree Capital Management (International) Limited External appointments: Board member of Energex Partners Ltd. External appointments: Partner at Recore Norway AS. Chair of the Board of Directors of Store Norske Spitsbergen Kulkompani AS, American Shipping Company ASA, Småkraft AS and Norske Tog AS. Board member of Awilco LNG ASA and PowerCell Sweden AB External appointments: Chairman of the Board of Danish Shipping and Grant Compass A/S and Board member of International Chamber of Shipping, Danish Ship Finance, SYFOGLOMAD Ltd, and the TORM Foundation Committees: C C C Committees: Committees: C C Committees: Committees: None Audit: Risk: Nomination: Remuneration: Chairman: C TORM ANNUAL REPORT 2022 GOVERNANCE STRUCTURE 84 Board and committee meeting attendance Audit Risk Nomination Remuneration Board Committee Committee Committee Committee Meetings held in 2022 Chairman of the Board Christopher H. Boehringer Senior Independent Non-Executive Director David N. Weinstein Executive Director Jacob Meldgaard Non-Executive Independent Directors Annette Malm Justad Göran Trapp Board Observers Christian Gorrissen Jeffrey S. Stein Rasmus J. Skaun Hoffmann C C C C C Board of Directors: Audit: Risk: Nomination: Remuneration: Chairman: C 15 14 15 15 14 14 14 7 14 6 3 6 3 2 2 2 3 3 3 6 6 3 3 2 3 TORM ANNUAL REPORT 2022 GOVERNANCE STRUCTURE 85 Leadership, governance, and engagement Tenure Independence Board evaluation 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. As TORM is not a company listed in the UK, we are not required to have an external evaluation under the UK Corporate Governance Code. Instead, TORM has undertaken an internal evaluation involving a detailed and 4 thorough review of the Board and its principal Committees that covered a wide range of topics. This year, additional questions were included in the Board self-evaluation, which focused on whether the shift to virtual meetings during the pandemic had a negative impact on Board culture, whether the Board is sufficiently informed on the AI projects that TORM is working on, and whether the Board has access to the views of the workforce that provides meaningful information and data that the Board can use when considering the impact of the strategic decisions on employees. What the Board did in 2022 is described on pages 87-88 Gender diversity 1 1 4 1 1 3 0-3 years 4-6 years 7-10 years Ethnicity Independent Executive Non- Independent Male Female Other 5 White Ethnically diverse Other TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 GOVERNANCE STRUCTURE GOVERNANCE STRUCTURE 86 86 Board activities 2022 In 2022, TORM’s Board of Directors worked with markets, geopolitics, and policy. By doing so, TORM aims to strategically important areas with particular focus on risks be as knowledgeable as possible to be able to mitigate and opportunities in both the short and the long run. The emerging risks and act in due time. ME Production In 2018, TORM joined forces with ME Production China (“MEP”) to produce scrubbers for TORM’s vessels to reduce sulfur emissions. In the third quarter of 2022, governance structure is set for this and is ongoingly developed to be contemporary. TORM’s governance structure is described on page 83 Dubai office A large and increasing part of the world’s refinery capacity TORM agreed to increase the stake by acquiring 75% of ME Technology in Denmark, which owns MEP, thereby will be running in the Middle East in the future. In the fall of strengthening the combination of the experience and 2022, TORM therefore decided to be present in Dubai, engineering resources at MEP with the operational closer to our customers. The office will be our ninth office excellence at TORM, helping us in achieving our Learn more about the activities of the Committees on pages 89-110 when opening in 2023. Strategy update TORM runs a strategic update on a yearly basis. The topics Disruption indicator model Transportation of refined oil is expected to decline at some point in the future when electrification of passenger and below are to some extent a reflection of the work, which other vehicles accelerates. For TORM to be able to act in environmental targets, where we have decided to push fast forward to deliver a 40% CO2 reduction by 2025 and 45% by 2030 compared to 2008. ESG oversight Environmental, social and governance risks and the Board of Directors has conducted prior to the strategic due time, we work with several indicators for when peak oil opportunities are recurringly on the agenda for the Board of work. The result of the strategic work is presented in the can be expected. Although peak oil is not the same as peak Directors meetings. These risks and opportunities have strategic report of this Annual Report. in ton-miles, we also use acknowledged reports from many shapes and forms, however, measuring and reporting renowned organizations in our understanding of peak oil are becoming still more focused and aligned, helping TORM Distribution Policy In May 2022, TORM announced a new, transparent projections. Distribution Policy with the purpose of distributing all cash generated over a certain minimum threshold per vessel to Carbon capture and CO2 transportation As part of TORM’s work with adjacent business areas, an our investors. With this new policy, TORM’s investors get analysis was made to strengthen our understanding of the distributions that are highly reflecting the cash earnings in carbon capture market, in particular the post-consumption to set strategically relevant targets related to ESG. In 2022, TORM made the first Scope 3 calculations and TCFD assessments, and more ESG reporting disclosures will come in the near future. TORM’s Audit Committee will have oversight of the reporting as it advances into more advanced stages involving limited and reasonable the product tanker market. absorption. Carbon capture is one of the key technology assurance, and TORM’s Risk Committee will work with the areas to achieve climate goals. TORM has no concrete risks, such as disruption indicators, CO2 tax, and more. Geopolitical updates The development in the geopolitical landscape means that plans to enter the carbon capture market but will, along with other technologies, continue to assess the carbon global companies potentially face new risks. TORM has capture market. partnered up with macroeconomics advisors to gain better strategic insights to navigate the intersection of global TORM ANNUAL REPORT 2022 GOVERNANCE STRUCTURE 87 Board activities 2022 Methanol trades TORM expects that the demand for seaborne Maintain experienced tonnage With the new ton-mile demands of the product tanker transportation of methanol will increase over the coming market and the limited order book for the years to come, it years, driven by the expansion of power-to-x facilities, is reasonable to assume that there will be a need in the producing green hydrogen-based fuels including methanol, market for a higher number of older vessels than previously. and the ordering and ongoing construction of vessels using Consequently, TORM is ready to operate and maintain our methanol-based propulsion systems. TORM is currently not vessels for a longer period, if required. conducting methanol trades but does experience some interest from customers. TORM has several vessels which could be prepared for methanol trading and will continue to analyze the potential in that market. Cyber-security One of the themes which is more and more frequently on the agenda for the Board of Directors and the Risk Committee meetings is cyber-security. In our Enterprise Risk Management framework, we assess that the likelihood of this risk materializing is still increasing. Reasons for this are many, but Russia’s invasion of Ukraine means that the risk that TORM will be subject to a cyber-attack has increased. Further, as shipping in general and TORM’s business model in particular are becoming more digital, it is important for TORM to have defenses in place to prevent cyber-attacks and to have contingency plans in place, if they do occur. Although TORM has a high level of cyber- security, we see a constant need to improve our defense as risks increase, and for that reason a detailed cyber-risk maturity project was initiated during 2022 and will continue in the coming years. TORM ANNUAL REPORT 2022 GOVERNANCE STRUCTURE 88 Audit Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Chairman’s statement This report provides an overview of how the Audit The Audit Committee also has access to the financial expertise in TORM and its independent auditors and can Committee operates, an insight into the Audit Committee’s seek further professional advice at TORM’s expense, if activities and its role in monitoring and reviewing the required. integrity and quality of TORM’s financial statements, the effectiveness of internal controls, and related processes. The role of the Audit Committee Meetings The Audit Committee meets at least four times a year. The Chief Financial Officer of TORM A/S, the Head of Group Financial Controlling & Internal Controls together with Read more about the Audit Committee’s area of responsibility on page 83 senior representatives of TORM’s independent auditors are invited to attend all or part of the meetings by invitation as appropriate. Terms of Reference for the Audit Committee are available at www.torm.com/investors/governance Audit Committee members The Board is satisfied that the Audit Committee meets the Updates related to financial reporting • Quarterly overview of the product tanker market conditions and its impact on the quarterly results • Russia’s invasion of Ukraine and geopolitical instability At a glance Chairman Göran Trapp Members Annette Malm Justad David N. Weinstein Composition The Audit Committee is composed solely of Independent Non Executive Directors. - Meetings The Audit Committee had six scheduled meetings in 2022. The members’ attendance at the Committee meetings can be seen on independence requirements and any applicable laws, • Net divestment of seven vessels page 85. regulations, and listing requirements, including the UK • Acquisition of Marine Exhaust Technology A/S, a Corporate Governance Code. Danish industrial company specializing in developing 2022 highlights and producing advanced and green marine equipment • The first fully integrated audit was performed on the Annual The Audit Committee has deep knowledge of and significant business experience in financial reporting, risk management, internal control, and strategic management. This combined knowledge and experience enables us to perform our duties properly. In addition, the Board of Directors believes that the members of the Audit Committee have the relevant shipping sector knowledge. In the opinion of the Board of Directors, the Chairman of the Audit Committee, Göran Trapp, meets the requirement of bringing recent financial experience to the Audit Committee. TORM ANNUAL REPORT 2022 Report 2022 in compliance with section 404(b) of the Sarbanes-Oxley Act • Quarterly assessment of the impairment indicator test of the vessels in the fleet • Going concern assessment and viability statement COMMITTEE REPORTS 89 Audit Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Principal activities in focus Financial reporting • Key elements of the Quarterly Reports and the Annual Risk and compliance • Reports from Group Legal on the status of significant External audit • Monitoring the effectiveness and quality of the external Report as well as the estimates and judgements litigations, claims, and investigations from tax audit process through examination and review of the included in TORM’s financial disclosures authorities coverage provided by the external auditor’s audit plan • The appropriateness of Management’s and the external • Compliance review of the UK Corporate Governance • Reviewing reports from the external auditor on key audit auditor’s analysis and conclusions on judgemental Code recommendations and accounting matters, business processes, internal accounting matters • The appropriateness of the Enterprise Risk controls, and IT systems • An assessment of whether the Annual Report, taken as Management Report representing critical risk factors, • Agreeing the audit and non-audit fees of the external a whole, is fair, balanced, and understandable, and its ownership and governance, and alignment with the auditor during the year, including the objectivity and whether our US annual report on Form 20-F complies Risk Committee independence of the external auditor with relevant US regulations with focus on clarity of • Concerns raised through the whistleblower function disclosures, compliance with relevant legal and financial process and its remediations reporting standards, and application of appropriate accounting policies and judgements • The going concern assessment and adoption of the going concern basis in preparing the Annual Report and financial statements • The external auditor’s reports on its audit of the financial statements, and reports from Management and the external auditor on the effectiveness of our system of internal controls and our internal control over financial reporting • Compliance with applicable provisions of the Sarbanes- Oxley Act • A quarterly assessment of the impairment indicator test of the vessels in the fleet TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 90 Audit Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Significant reporting issues In the financial statements, there are several areas Impairment review of vessels The impairment review of TORM’s vessels is a key recurring Revenue recognition The Revenue Recognition Policy was discussed and agreed requiring the exercise of judgement by Management. The risk due to its significance in the context of TORM’s net to have no changes. Revenue is recognized upon delivery of Audit Committee’s role is to assess whether the asset value. The Audit Committee received and considered services in accordance with the terms and conditions of the judgements made by Management are reasonable and a paper from Management covering the impairment testing charter parties and is made based on “load to discharge”, appropriate. To assist in this evaluation, the CFO presents of the carrying amount of TORM’s vessels in the fleet within and demurrage is recognized with up to 95% until actual an accounting paper to the Audit Committee once a year, the single cash-generating unit (CGU) comprised of the realization. Accordingly, no revenue is recognized for the setting out the key financial reporting judgements. The Main Fleet of LR2, LR1 and MR vessels. days incurred during a vessel’s positioning voyage to a load main areas of judgement considered by the Audit port. Committee in the preparation of the financial statements The carrying amount was tested using the fair value less are as follows: Going concern The Audit Committee reviewed Management’s assessment cost of disposal for the CGU. Supported by the fair value less cost of disposal, the Audit Committee concluded not to conduct any impairments on the CGU as the fair value less Depreciation policy and residual value of vessels The Audit Committee noted and agreed that the accounting cost of disposal showed a significant headroom of 42% policy of depreciating vessels over 25 years was of the basis for preparing TORM’s financial statements on a compared to the carrying amount. Please refer to Note 10 appropriate and in line with TORM’s peers. The residual going concern basis. This included reviewing and to the financial statements. challenging Management’s forecast and the underlying value was calculated based on two elements: scrap values reviewed on a yearly basis and cost of voyage to the base and low case sensitivity calculations along with its Management prepared an analysis of the potential impact scrapping place. In 2021, the Audit Committee agreed to assumptions. The Audit Committee also considered of climate change and how different drivers might have the recommendation from Management to gradually phase- TORM’s available liquidity, including undrawn and implications on the impairment assessment. Among the in the green recycling prices in the calculation of residual committed facilities along with any liquidity-enhancing drivers were the fleet age, TORM’s short and long-term values by applying an equal weighted average of green projects and projections for the financial covenants within climate targets, and the risk of stranded assets. Together recycling and conventional recycling prices, while still using TORM’s borrowing facilities. with Management, the Audit Committee discussed the a three-year average to limit volatility in the residual values. different drivers and their impact on the value of the fleet. In continuation of the decision made in 2021, it was agreed Based on this, the Audit Committee confirmed that the While the potential impact of the drivers can have a by the Audit Committee in 2022 that TORM should further application of the going concern basis for the preparation of material impact on the value of the fleet, the Audit increase the weight of green recycling prices from 50% to the quarterly reports and year-end financial statements Committee agreed that currently they only pose potential 60% compared to conventional recycling prices as the continued to be appropriate, with no material uncertainties. risks but risks that Management should be mindful of when market continued to mature. Please refer to Note 1 to the financial statements. evaluating different investment options. The Audit The going concern statement is set out in the Financial Review page 67 Committee will continue to monitor the development closely. TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 91 Audit Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Effectiveness of the Audit Committee In 2022, the Audit Committee carried out a detailed self- Internal controls and risk management The Audit Committee has the primary responsibility for the Due to the size of the company, TORM has since the listing in 2017 been exempt from an external auditor attestation assessment by way of a questionnaire and discussions oversight of TORM’s system of internal control, including under Section 404(b) of SOX. The exemption can be facilitated by the Head of Group Financial Controlling & the risk management framework, the compliance applied for a maximum of five years after the listing, and as Internal Controls. Based on the self-assessment, no framework, and the work of the internal control function. a result, 2022 was the first year that TORM was required to material concerns arose. The Audit Committee regularly discusses the principles for have controls audited by its external auditor to comply with Internal audit The Audit Committee assesses the need for an internal risk assessment and risk management related to the Section 404(b) of SOX. To ensure TORM meets its target financial reporting and reviews TORM’s significant risks, of SOX compliance, the Audit Committee continuously including fraud, and their impact on financial reporting, monitors the status of the ICFR. This oversight by the Audit audit function on an annual basis and makes a including stress testing, when relevant. Committee includes recurring reporting, including recommendation to the Board of Directors. The Audit Committee was satisfied that based on TORM’s size, complexity, and its internal control environment, TORM can defer the establishment of an internal audit function but Read more about principal risks and uncertainties on pages 70-77 testing, and the status of auditor testing. The Audit Committee ensures that Management sufficiently addresses deficiencies when they become present. management oversight, the outcome of management must revisit the decision in 2023. The Board of Directors fulfills its responsibility regarding effectiveness of the risk management and Internal Controls Having monitored TORM’s ICFR, the Audit Committee has In the absence of an internal audit function, internal over Financial Reporting (ICFR) through the Audit not identified any material weaknesses in TORM’s ICFR assurance is achieved through the work of Group Internal Committee. As a result of the US listing on Nasdaq in New through either management testing or external audit. Control and PwC’s testing of the internal controls. To the York in 2017, TORM was required to become compliant extent possible, external audit relied on control tests performed by PwC. with the Sarbanes-Oxley Act (SOX) resulting in increased regulatory requirements. Therefore, Management has, together with the Audit Committee, focused on ensuring The Audit Committee is satisfied that the internal audit that the ICFR meet all relevant requirements. arrangements continue to provide effective assurance of TORM’s risk and controls environment. Throughout the year, the Audit Committee monitored the effectiveness of TORM’s risk management and internal control systems, including material financial, operational and compliance controls . 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 the enabling of best practice and a strong control environment. TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 92 Audit Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT ESG At the request of the Board of Directors in 2021, the Board of Directors and members of the Audit Committee reported to the Audit Committee on their independence Committee received details of all relationships between from TORM. TORM and EY which may have a bearing on their independence and received confirmation from EY that it is participated again in 2022 in a deep dive covering the ESG The Audit Committee and the Board of Directors are independent of TORM in accordance with applicable laws area. The deep dive was facilitated by experts from PwC. satisfied that EY has adequate policies and safeguards in and regulations. The purpose was to further understand how to effectively place to ensure that auditor objectivity and independence set up Board oversight, a good governance structure are maintained. The Audit Committee has recommended to The Audit Committee maintains a policy and has including roles and responsibilities, how ESG data is the Board of Directors the reappointment of the external procedures in place for the pre-approval of all audit collected, and how to report on ESG measures including the auditors for the 2023 financial year, and the Board of services, audit-related services and other services alignment towards the financial reporting. In addition to the Directors will be proposing the reappointment of EY at the undertaken by the external auditor. The principal purpose of deep dive, the Audit Committee has on several occasions upcoming AGM. throughout the year received updates by Management on the development of regulatory requirements and how Management is planning to and progressing in the implementation of these requirements. The Audit Effectiveness of the external audit process The Audit Committee reviewed the quality of the external policies include restrictions on the types of services which the independent auditor can provide, in line with the Ethical audit throughout the year and considered the performance Standard published by the UK Financial Reporting Council this policy is to ensure that the independence and the objectivity of the external auditor are not impaired. The Committee will continue to monitor the development within of EY by undertaking an annual review of the performance (FRC). Details of the services which the independent the ESG area including the implementation by of the independent auditor by a combination of discussions auditors cannot be engaged to perform were provided to Management. with Management, the quality of written deliverables to the the Audit Committee at the November 2022 Audit Audit Committee, and the quality of dialogue and insights Committee meeting. A copy of the policy can be made External auditor The Audit Committee has primary responsibility for provided during Audit Committee meetings. The findings of available on request. the survey were considered by the Audit Committee, and it overseeing the relationship with the external auditor, Ernst agreed that the audit process, independence, and quality of & Young LLP (‘EY’). the external audit were satisfactory. This includes making the recommendation on the Based on these reviews, the Audit Committee concluded appointment, reappointment, or removal of the external that there had been appropriate focus and challenge by EY auditor, assessing their independence on an ongoing basis, on the primary areas of the audit, and that EY had applied approving the statutory audit fee, the scope of the robust challenge and skepticism throughout the audit. statutory audit, and the appointment of the lead audit engagement partner. Lloyd Brown has held this role since the appointment of EY in 2020. During the year, EY Auditor independence and objectivity In its assessment of the independence of the auditor, and in accordance with the standard on independence, the Audit TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 93 Audit Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Audit and non-audit fees Full disclosure of the audit and non-audit fees paid during Whistleblower TORM’s Whistleblower Policy, which supports the Approval On behalf of the Audit Committee 2022 can be found in Note 6 to the financial statements. groupwide Business Principles, is monitored by the Audit Audit fees: Non-audit fees: USD 1.0m USD 0.4m The independent auditor may be contracted to perform Committee. Read more about TORM’s Whistleblower Policy here: www.torm.com/investors/governance/whistleblower Göran Trapp Chairman of the Audit Committee 16 March 2023 certain non-audit activities. The Audit Committee believes The Audit Committee received reports providing details of that this can be performed without compromising the matters reported through TORM’s international, auditor’s independence and objectivity. The Audit confidential telephone reporting lines and secure e-mail Committee will allocate the non-audit work after reporting facility, which is operated by an independent third considering TORM’s policy on the provision of non-audit party, Holst Advokater. All matters reported are services by TORM’s auditors. A copy of the pre-approval investigated by Holst Advokater and reported to the Board procedures can be made available on request. of Directors as well as to the Audit Committee together Fees relating to the provision of non-audit services by EY amounted to USD 0.4m corresponding to 40% of the total audit fees. The Audit Committee considered that the services provided were most efficiently provided by the external auditor. To maintain the external auditor’s independence and objectivity, the external auditor did not make any decisions on behalf of Management. 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 2022 COMMITTEE REPORTS 94 Risk Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Chairman’s statement This report provides an overview of how the Risk Committee pages 70-77 in the risk management section and monitoring of the compliance with internal mandates, such At a glance operates, an insight into the Risk Committee’s activities, as FFA derivatives level, refinance risk, interest rate hedge and its role in monitoring and reviewing the integrity and level, credit risk, and time charter position. Further, a quality of TORM’s companywide risk management. liquidity forecast is presented at each Risk Committee The role of the Risk Committee meeting. Read more about the Risk Committee’s area of responsibility on page 83 Terms of Reference for the Risk Committee are available at www.torm.com/investors/governance Cyber-security Cyber-security is a recurring agenda item at each meeting. The Risk Committee reviews TORM’s cyber-security program established to enhance and mature TORM’s cyber- security even further over the coming years. Chairman Göran Trapp Members Annette Malm Justad David N. Weinstein Composition The Risk Committee is composed solely of Independent Non Executive Directors. Risk Committee Members The Risk Committee shall at any time consist of at least two Customer credit risk During 2022, the Risk Committee approved an updated - Meetings Customer Credit Risk Policy. TORM has a well-functioning The Risk Committee had three scheduled meetings in 2022. The independent members of the Board of Directors, each of customer credit approval process, where all customers are members’ attendance at the Committee meetings can be seen on whom shall meet the independence requirements and have reviewed prior to commercial charters. TORM has revisited page 85. sufficient qualifications within risk management and capital and subsequently refined the credit methodology to ensure market knowledge to have the ability to make an consistency, efficiency, and high-quality risk assessment. 2022 highlights independent assessment of the appropriateness of TORM’s The credit rating levels have been updated, and the ratings • Risk management review of TORM’s policies on insurance, IT, risk management and control environment as well as the planning and execution of the risk management policies and define a maximum number of active voyages and nominal financial instruments, and its Financial Policy amount per customer instead of only a nominal outstanding • Review of TORM’s capital structure risk funding activities. amount. Meetings The Risk Committee meets no less than three times a year. Activities during the year At each meeting, the Risk Committee follows up on key risk Capital structure risks The Risk Committee reviewed risk considerations related to TORM’s capital structure, including liquidity position, loan- to-value, TORM’s Distribution Policy, off-balance sheet liabilities, terms and sources of funding vessel investments, indicators to ensure alignment of risk tolerance and actual and fleet employment strategy. risk level. These measures include the risks described on • Intensified focus on IT security risk and oil demand disruption • Review and approval of the Enterprise Risk Management report TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 95 Risk Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT SOFR amendment to loan and derivative contracts TORM needs to amend all existing interest rate swaps and Maritime safety threats The Risk Committee reviewed the measures taken by TORM Enterprise Risk Management The Risk Committee reviewed the key risks faced by TORM floating-rate-based leasing and loan agreements to replace to assess, manage, and mitigate future safety threats. and the underlying drivers of these exposures. The US LIBOR interest rates with SOFR interest rates because of changes in regulation. The Risk Committee has reviewed the amendment plan. Review policies The Risk Committee reviewed TORM’s IT Policy, Financial alignment of actual risk and desired risk was discussed, and the Risk Committee approved TORM’s risk profile based on these discussions. Further, the Risk Committee reviewed Liquidity governance The Risk Committee approved TORM’s liquidity risk and net loan-to-value risk methodologies. TORM works with break- even levels to ensure sufficient liquidity is available for the next 12 months. Furthermore, TORM ensures that financial Policy, FFA and Bunker Policy, and Credit Risk Policy. These the assigned management accountability, which highlights policies outline core activities and risks, and the measures current and planned risk-mitigating activities. which TORM has taken to mitigate these risks. ESG reporting/TFCD In 2022, TORM conducted a climate-related scenario TORM’s annual Enterprise Risk Management Report was approved at the Board of Directors meeting in Q1 2023. gearing related to loan agreements can manage periods of analysis using the Task Force on Climate-related Financial Read more about TORM’s annual risk assessment low profitability and declining vessel values. Disclosures (TCFD) guidelines to assess transition and on pages 70-77 Financial Policy The Risk Committee approved that TORM may, in addition the resilience of TORM’s strategy. The findings from the scenario analysis were presented and discussed with the Approval On behalf of the Risk Committee to the current policy, perform foreign exchange hedging of Risk Committee. The climate-related risks identified the coming 13 to 36 months. Prior to the approval, only through the scenario analysis exercise have been Göran Trapp hedges up to 12 months were approved. incorporated into TORM’s annual Enterprise Risk Chairman of the Risk Committee physical risks and opportunities and how they might impact Management process and will become part of the recurring 16 March 2023 items discussed at the Risk Committee meetings. TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 96 Nomination Committee report Chairman’s statement In 2022, no changes were made to the Nomination The Nomination Committee reviewed the independence of all Non-Executive Directors pursuant to the UK Corporate At a glance Committee, and the key focus areas of the Nomination Governance Code. Except for the Chairman, the Chairman Committee have been governance, succession planning, Nomination Committee is composed solely of Independent Christopher H. Boehringer and employee engagement. Non Executive Directors, and they continue to make AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT The role of the Nomination Committee independent contributions to and effectively challenge - Management. Read more about the Nomination Committee’s area of responsibility on page 83 Terms of Reference for the Nomination Committee at www.torm.com/investors/governance The Executive Directors’ service contracts and the Non- Executive Directors’ terms and conditions of appointment are available for inspection at our registered office and will be available on display at the 2023 Annual General Meeting. Compliance with the code The Nomination Committee complies with the UK Effectiveness During the year, the Nomination Committee reviewed the Corporate Governance Code except for provision 18. This independence, time commitment, and potential conflicts of provision states that all directors should be subject to interests of the Non-Executive Directors and concluded annual re-election, however, TORM’s B-Director is not that they each continued to demonstrate challenge and Members Annette Malm Justad David N. Weinstein Composition Except for the Chairman, the Nomination Committee is composed solely of Independent Non Executive Directors. Meetings - The Nomination Committee had two scheduled meetings in 2022.The members’ attendance at committee meetings can be seen on page 85. appointed for a specified term but will continue until independent judgement and to devote sufficient time to Focus area removed by the B-shareholder. TORM believes that discharging their duties. 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. At the 2021 Annual General Meeting, a decision was made to update TORM’s Articles of Association to move from bi- annual re-election to annual re-election of the remaining Directors. All TORM’s Non-Executive Directors will submit themselves for re-election at the 2023 AGM. 11% 11% 11% 67% Succession planning Diversity Employee population Governance TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 97 Nomination Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Board evaluation In accordance with the UK Corporate Governance Code, TORM in avoiding instability by mitigating the risks which may be associated with unforeseen events, such as the Approval On behalf of the Nomination Committee TORM conducts an annual internal evaluation of the Board. departure of key individuals, as well as promoting diversity The outcome of this review led to the Board requesting and inclusion. further deep dives on cyber-security, TORM’s use of AI, methanol as a fuel, the electricity grid being able to support the electric vehicle increase, and geopolitical risks. Read more about what the Board did this year on pages 87- 88 Employee engagement Throughout the year, the Nomination Committee received updates on key elements of the people strategy, which provides insight into a variety of areas, including culture, diversity and inclusion, succession planning, future capabilities, and colleague engagement. Retention rate At the end of 2022, the retention rate for all shore-based employees was 90%, which is still at a satisfactory level. In 2021 and 2020, the retention rate was 88% and 92%, respectively. Read more about our employee health and well-being on page 36 Board diversity matrix Diversity The Nomination Committee continued to review TORM’s progress against its gender diversity targets for both female Board members and women in the shore-based workforce. Country of principle Executive Offices Foreign private issuer Disclosure prohibited under home law Total number of Directors Read about TORM’s diversity targets from page 37 Succession planning Succession planning continues to be a priority for the Nomination Committee, and throughout the year the Nomination Committee focused on the succession pipeline for senior management, which is essential to ensure a continuous level of quality in management. It further aids Gender identity Directors Underrepresented individual in home country jurisdiction LGBTQ+ Did not disclose demographic background Christopher H. Boehringer Chairman of the Nomination Committee 16 March 2023 United Kingdom Yes No 5 Female 1 Male Non-Binary Not disclosed 4 - - None Not known 5 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 98 Total remuneration 2022 of the CEO AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Annual performance bonus KPI outcomes Annual performance bonus discretionary For 2022, the Remuneration Committee established a KPI bonus scorecard across four areas. These were: Contribution Margin, Carbon Footprint, Safety and Quality and Administrative Cost to a maximum bonus potential of 70% against which 7% was attained. The Remuneration Committee reviews the CEO incentive award prior to payment using judgement to ensure that the final assessment of performance is fair and appropriate. If circumstances warrant it, the Remuneration Committee may adjust the final payment. 2022 annual bonus 7% 50% Formulaic outcome percentage of maximum 70% Committee discretion maximum 50% 57% Final outcome percentage of maximum 120% Despite a backdrop where the geopolitical landscape was changed dramatically, and where we were all confronted by the tragic Russian invasion of and subsequent war in Ukraine, the One TORM platform proved to be ready for the changes that occurred, leading to the strongest result on record for TORM with a Adjusted Return on Invested Capital of 28.1% and expected dividend payouts related to 2022 earnings of USD 379m. Taking this into consideration, the Remuneration Committee decided to award the CEO the full 50% available at its discretion. Total remuneration 2022 Benefits 2% One TORM KPIs (70%) 7% Committee discretion (50%) 50% 34% Annual performance bonus 2022: USD 1,744m 2021: USD 2,448m Base salary 64% Long-term incentive plan Awarded in 2022 Restricted Share Units 255,200 Exercise price per share DKK 58.00 Vesting over three years 2023 - 2025 Grant value USD 0.5m TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS COMMITTEE REPORTS 99 99 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Chairman's statement The Renumeration Committee report describes the activities of the Remuneration Committee for the period 01 by the Chairman of the Remuneration Committee is not At a glance subject to audit. January 2022 to 31 December 2022. It sets out The role of the Remuneration Committee remuneration details for the Executive and Non-Executive Directors in TORM. It has been prepared in accordance with Schedule 8 of the Large and Medium-Sized Companies and Read more about the Remuneration Committee’s area of responsibility on page 83 Chairman Christopher H. Boehringer Members Annette Malm Justad David N. Weinstein Composition Groups (Accounts and Reports) Regulations 2008 as amended (the "Regulations"). The report is split into two main areas: • Chairman’s statement • Annual report on remuneration The Remuneration Policy, approved by the shareholders at the Annual General Meeting (AGM) on 14 April 2021, 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. Find TORM’s Remuneration Policy at www.torm.com/investors/governance The annual report on remuneration provides details on remuneration in the period and additional information required by the regulations. The UK Companies Act 2006 Find the Terms of Reference for the Remuneration Committee at www.torm.com/investors/governance Compliance with the code The Remuneration Committee is in full compliance with the Except for the Chairman, the Remuneration Committee is composed solely of Independent Non Executive Directors. UK Corporate Governance Code except for provision 32. This provision states that the Board of Directors shall Meetings - establish a Remuneration Committee of Independent Non- Executive Directors, with a minimum membership of three. The Remuneration Committee had two scheduled meetings in 2022. The members’ attendance at committee meetings can be In addition, the Chairman of the Board of Directors can only seen on page 85. be a member if he is independent on appointment, and he cannot chair the Remuneration Committee. TORM's Chairman of the Board of Directors, Christopher H. Boehringer, has been appointed as chairman of TORM’s Remuneration Committee. However, given his association with the controlling shareholder and the alignment of interest regarding remuneration, the Board of Directors considers it appropriate for Christopher H. Boehringer to Focus area 23% 10% 5% 37% One TORM KPIs CEO remuneration LTIP Employee remuneration 3% Governance 22% Board remuneration requires that the auditor’s report to the shareholders on chair the Remuneration Committee. 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 subject to audit are indicated in the report. The statement TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 100 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Meetings The Chairman and the Executive Director attend the Extraordinary bonus In December, the Remuneration Committee unanimously Approval On behalf of the Remuneration Committee meetings of the Remuneration Committee except for agreed that an extraordinary general bonus should be paid matters relating to their own remuneration. The Head of out to our employees in lieu of the strong financial results Christopher H. Boehringer Group Human Resources attended some meetings, and for the Company and also taking into account the general Chairman of the Remuneration Committee other members of Management may attend when increase in cost-of-living pressures brought about by the 16 March 2023 necessary. Activities during 2022 KPIs As detailed in the Annual Report 2021, a new KPI structure which better aligns TORM’s performance with bonus current geopolitical climate. Senior management and executives who are part of the long-term incentive programme were excluded from the payment. Succession and the wider workforce In addition, the Remuneration Committee engaged in payouts to employees was instigated in 2022. In discussions surrounding the wider workforce remuneration accordance with the UK Corporate Governance Code, the and incentives to ensure that, as a company, TORM creates Remuneration Committee reviewed the proposed KPI an environment where our most talented employees are catalogue, from which employees would be able to select, recognized and given greater responsibilities. to ensure that remuneration is aligned to Company purpose and values and is clearly linked to the successful delivery of the Company’s long-term strategy. Annual Remuneration Policy review The Remuneration Committee reviewed the Remuneration Policy. The conclusion was that no amendments to the Remuneration Policy were required at this time. The Remuneration Policy was approved at the 14 April 2021 AGM. 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. TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 101 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Remuneration at a glance Executive Director’s and Chief Executive Officer’s remuneration Fixed pay Base salary Effective 01 January 2022 Chief Executive DKK 7.39m Executive Director salary Euro 70,000 Effective 01 January 2023 Chief Executive DKK 7.72m Euro 70,000 Benefits Pension Annual bonus Short-term incentive Long-term incentive Long-term incentive DKK 276,000, covering the running and maintenance expenses associated with a private vehicle DKK 276,000, covering the running and maintenance expenses associated with a private vehicle Not entitled to any pension Not entitled to any pension Opportunity (% of salary): Maximum: 120% of the base salary in the financial year 2022 Opportunity (% of salary): Maximum: 120% of the base salary in the financial year 2023 Granted a total of 255,200 RSUs with effect as of 01 January 2022, which will vest in equal installments over the next three years. The exercise price for each RSU is DKK 53.5 Granted a total of 255,200 RSUs with effect as of 01 January 2023, which will vest in equal installments over the next three years. The exercise price for each RSU is DKK 58.0 Statement of voting at the AGM Shareholder voting on the resolutions to approve the annual Remuneration Report put to the 2022 AGM and the Directors’ Remuneration Policy put to the 2021 AGM were as follows: Annual Remuneration Report Directors' Remuneration Policy Votes for % Votes against % Total votes Abstentions 47,924,209 48,123,828 59.2 1,897,025 3.8 49,821,234 63.9 3,018,434 4.0 51,142,262 1,033 952 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 102 Remuneration Committee report Executive Director’s and Chief Executive Officer’s remuneration address which may be used for both business and private purposes, including internet access and call charges. No changes in allowances and benefits are expected for 2023. Single total figure of remuneration The table to the right sets out the 2021-22 remuneration for 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 base salary is discussed and agreed with the Chairman of the Board of Directors and the Remuneration Committee once a year. Base salary as of 01 January 2022: DKK 7.39m (USD 1,040m). In addition, the CEO receives Euro 70,000 (USD 72,000) for his role as Executive Director. The CEO’s base salary was reviewed on 07 February 2023 to determine the appropriate salary for 2023. The base salary as of 01 January 2023 was determined at DKK 7.72m, and the adjustment of the salary will take effect as of 01 January 2023. Taxable benefits TORM 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 23,000 per month, covering the running and maintenance expenses associated with a private vehicle. For 2022, the amount of DKK 276,000 (USD 39,000) was included in the single figure amount. Total remuneration for the financial year 2022 Base salary Taxable benefits Pension Total fixed remuneration Variable pay (USD'000) Annual performance bonus Total variable pay Single total figure of remuneration (USD'000) Change in remuneration of colleagues and Directors 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 Employee entire group Chief Executive Officer AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT 2022 2021 Fixed pay (USD'000) Fixed pay (USD'000) 1,112.0 1,243.4 38.8 - 44.0 - 1,150.8 1,287.4 592.8 592.8 1,161.3 1,161.3 1,743.6 2,448.7 % change from 2021 to 2022 Salary 4.6% -10.6% Benefits 0.0% -11.8% Bonus -1.9% -49.0% TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 103 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Performance bonus 2022 The Remuneration Committee has provided the CEO with a performance cash bonus for the financial year 2022 in the Long-Term Incentive Program – Restricted Share Units granted to the CEO In accordance with TORM’s Remuneration Policy, the As detailed in announcement no. 7 issued on 18 March 2021, the CEO was granted a total of 255,200 RSUs which will vest in equal amounts over the next three years. following range and based on the following parameters: Board of Directors has as part of the Long-Term Incentive The first amount can be exercised from 01 January 2022. Program (LTIP) granted Restricted Share Units (RSUs) in The exercise price for each RSU is DKK 53.5, • The fulfillment of specific performance metrics set by the form of restricted stock options to certain employees. corresponding to the average price of TORM shares in the TORM (up to 70% of the CEO’s base salary). These The RSUs aim at retaining and incentivizing the employees 90 calendar days preceding the publication of TORM plc’s include but are not limited to RoIC, cost structure, to seek to improve the performance of TORM and thereby Annual Report 2022 plus a 15% premium. Vested RSUs highest safety standards, and environmental footprint the TORM share price for the mutual benefit of themselves may be exercised for a period of 360 days from each • Up to 50% of the CEO’s base salary based on the sole and TORM’s shareholders. Each RSU granted under the vesting date. discretion of TORM’s Board of Directors LTIP entitles its holder to acquire one Class A common share, subject to vesting. Below is a description of the As detailed in announcement no. 9 issued on 23 March In aggregate, the maximum achievable cash bonus for the RSUs which have not expired without exercise. 2022, the CEO was granted a total of 255,200 RSUs financial year 2022 for the CEO is equal to 120% of the which will vest in equal amounts over the next three years. CEO’s base salary in the financial year 2022. The specific The original RSUs granted to the CEO in 2016 vested in The first amount can be exercised from 01 January 2023. metrics and calculation methodology for each of the equal amounts over a five-year period. Subsequent awards The exercise price for each RSU is DKK 58, corresponding parameters have been determined by the Board of vest in equal amounts over three years. Directors. Based on the aforesaid methodology, the CEO’s to the average price of TORM shares in the 90 calendar days preceding the publication of TORM plc’s Q4 2021 performance cash bonus for 2022 was determined to be a Vested RSUs may be exercised for a period of 360 days release plus a 15% premium. Vested RSUs may be total of 57% (7% on parameter 1 and 50% on parameter 2) from each vesting date. Details of the CEO’s awards and exercised for a period of 360 days from each vesting date. of the 2022 fixed annual salary of DKK 7.39m, resulting in interests in Restricted Share Units are set out on page 106. an amount of DKK 4,212m (USD 0.59m). The single figure remuneration table for the CEO does not include any amounts in relation to the RSU awards since 2016, and there are no performance conditions associated with the grant of RSUs. TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 104 Remuneration Committee report Long-Term Incentive Program – Restricted Share Units granted to the Executive Director AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Year 2016 2017 2018 2019 2020 2021 2022 Grant of RSUs excluding the Executive Director Grant of RSUs to the Executive Director Vesting period in years Vesting period in years to the Executive Director Beginning Exercise period from vesting 723,069 866,620 944,470 1,001,054 1,047,389 1,099,921 1,137,770 1,276,725 3 5 - 3 766,035 3 3 - 3 - 3 255,200 255,200 3 3 3 3 01/01/2017 01/01/2018 01/01/2019 01/01/2020 01/01/2021 01/01/2022 01/01/2023 Six months and 12 months for the Executive Director Six months 360 days after each vesting date 360 days after each vesting date 360 days after each vesting date 360 days after each vesting date 360 days after each vesting date Exercise price Reduced due to dividend payment DKK 96.30 DKK 96.30 DKK 53.70 DKK 49.70 DKK 69.90 DKK 53.50 DKK 58.00 DKK 0.00 DKK 0.00 DKK 47.40 DKK 28.2 DKK 49.1 DKK 38.3 DKK42.8 Black-Scholes model, the theoretical market value USD 5.0m USD 1.0m USD 2.3m USD 1.7m USD 1.3m USD 3.0m USD 2.7m Total RSUs expired unexercised RSUs exercised within 2019 RSUs exercised within 2020 RSUs exercised within 2021 RSUs exercised within 2022 Total RSUs exercised by grant year RSUs outstanding as of 31 December 2022 1,999,794 866,620 1,050,383 305,576 409,376 124,062 69,117 - - - - - - - - - - - - 529,402 - 12,405 95,276 118,315 291,112 - - - - - - - 309,090 334,961 433,979 660,122 695,478 334,961 433,979 - - - - - - 1 303,052 797,080 1,323,853 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 105 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT LTIP element of Jacob Meldgaard’s remuneration package 2022 Grant date RSU LTIP grant Original exercise price per share RSU grant value assuming 100% vesting 18 March 2021 23 March 2022 255,200 255,200 DKK 53.50 DKK 58.00 USD 0.6m USD 0.5m End of service gratuity TORM 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. Post-service salary If the CEO dies during his employment, TORM 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 because of termination of the Service Agreement. Total pension entitlements The Directors of TORM plc are not entitled to any pension Outside appointments The Executive Director is entitled to retain the fees earned contributions from TORM. In addition, Denmark-based from non-executive appointments outside TORM. Jacob Executive Director Jacob Meldgaard, in his role as CEO of Meldgaard was appointed Non-Executive Director of Danish TORM A/S, is not entitled to any pension contribution. Ship Finance A/S for which he received DKK 350,000 and Taxable benefits In general, members of the Board of Directors of TORM plc Non-Executive Director of SYFOGLOMAD Limited for which he received EUR 5,000 for his services. Jacob Meldgaard is also Chairman of the Board of Grant Compass A/S for do not receive any additional benefits. which he receives no fee but has been granted warrants. Payments for loss of office No payments for loss of office have been made in 2022. Annual bonuses and LTIPs TORM’s Remuneration Policy stipulates that the Non- The Company does not consider making payments for loss Executive Directors’ remuneration cannot include of office to Non-Executive Directors. For Executive participation in share or warrant programs. The Non- Directors, a termination notice cannot exceed 24 months. Executive Directors of TORM plc do not receive any part of Termination by the Executive Director must be subject to a their remuneration from TORM in shares or warrants. The minimum of six months’ written notice. Any severance pay remuneration for the Non-Executive Directors is cannot exceed an amount corresponding to the determined by the Board of Directors subject to limits in remuneration paid for the preceding two years. The TORM’s Articles of Association. During 2022, none of the Remuneration Committee will maintain a discretionary Non-Executive Directors received any part of their approach to the treatment of leavers given that the facts remuneration in shares or warrants. 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 2022 COMMITTEE REPORTS 106 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT The Executive Director’s interests in the shares of TORM The table to the right summarizes the total interests of the Executive Director in shares of TORM plc as of 31 December 2022. During the period 01 January to 31 December 2022, no gains were made by the Executive Director on the exercise of share options. No changes took place in the Executive Director’s interests between 31 December 2022 and 16 March 2023. The Directors’ interest in the shares of TORM The table to the right summarizes the total interests of the Directors in shares of TORM plc as of 31 December 2022. Executive Director’s interests in the shares of the Company (audited) Jacob Meldgaard's Restricted Share Units 2016 2017 2018 2019 2020 2021 2022 Awarded 1,276,725 - 766,035 - - 255,200 255,200 Vested not exercised Agreed not to exercise Exercised Unvested - 255,345 255,345 255,345 255,345 - - - 766,035 - - - 1,276,725 1,021,380 766,035 - - - - 255,345 510,690 - - 85,066 255,345 255,200 425,334 No changes took place in the Directors’ interests between 2022 statement of Directors' shareholding and share interests 31 December 2022 and 16 March 2023. Remuneration for Non-Executive Directors The table to the right summarizes the remuneration paid to the Non-Executive Directors of TORM in 2022. The fees payable can be found in the Remuneration Policy and are paid in Euros. The decrease in fees in USD is in relation to exchange rates. The fees in Euros remain unchanged year on year. The 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. Director Christopher H. Boehringer David N. Weinstein Göran Trapp Annette Malm Justad Jacob Meldgaard The above table shows the total number of share interests of each Director. Ordinary shares as of 01 Jan 2022 Ordinary shares as of 31 Dec 2022 21,204 5,000 12,820 2,700 21,204 5,000 12,820 2,700 255,411 340,477 Changes from 31 Dec 2022 to 11 Mar 2023 Ordinary shares as of 11 Mar 2023 - - - - - 21,204 5,000 12,820 2,700 340,477 2022 remuneration table Non-Executive Directors USD '000 Base fee Committee fee Total Director Christopher H. Boehringer David N. Weinstein Göran Trapp Annette Malm Justad 2022 2021 2020 2022 2021 2020 2022 2021 2020 157 176 104 117 52 52 59 59 171 114 57 57 52 104 104 104 60 116 117 117 85 86 114 82 210 207 155 155 235 234 176 176 256 200 171 139 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 107 Remuneration Committee report Information provided in the following part of the Annual Report on remuneration is not subject to audit. AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Assessing pay and performance In the tables to the right, we summarize the Chief Executive Officer’s single figure remuneration over the past six years, and how our variable pay plans have paid out in relation to the maximum opportunity. This can be compared to TORM’s performance since the listing of TORM plc, measured by total shareholder return, compared to the average of a selection of TORM’s main peers in the industry and with the performance of the Danish stock index OMX. The OMX index is a market cap weighted index of all stocks listed on Nasdaq in Copenhagen. The total shareholder return is calculated in USD. 6-year historical performance. TORM plc vs peers and the OMX index Financial year remuneration for the Chief Executive Officer 177 176 134 129 96 72 106 71 108 112 51 62 56 58 200 180 160 140 120 100 80 60 40 20 0 3,000 2,500 2,000 1,500 1,000 500 0 2,208 2,307 2,449 140% 120% 1,744 1,473 1,626 1,531 117% 100% 100% 67% 60% 45% 57% 100% 80% 60% 40% 20% 0% 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Peer average TORM OMX Annual bonus (% earned of base salary) Total remuneration USD '000 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 108 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Annual percentage change in Directors’ remuneration The table to the right shows the percentage change over the year ended 31 December 2021 to the year ended 31 December 2022 in respect of the Directors’ remuneration and average employee remuneration. As required by legislation, the Directors’ remuneration is compared to the employees of TORM plc on a full-time equivalent basis. Relative importance of spend on pay The table to the right shows the actual expenditure of TORM on employee pay and distributions to shareholders compared to the retained earnings of TORM. Change in remuneration of colleagues and Directors’ Chief Executive Officer Christopher H. Boehringer David N. Weinstein Göran Trapp Annette Malm Justad Colleagues entire group Salary or fees % change Benefits % change Bonus % change 2021 to 2022 2020 to 2021 2021 to 2022 2020 to 2021 2021 to 2022 2020 to 2021 -10.6% -10.9% -11.4% -11.7% -11.7% 4.6% 10.1% -11.8% 7.4% -49.0% 2.1% -8.1% 16.8% 2.9% 26.5% 3.5% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.0% 0.0% -1.9% 1.4% 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 Director’s fees is 1.5%, taxable benefits is 0.0% and annual bonus is -42.1%. % change in Euro for Non-Executive Director fees is 0%. Fees have remained unchanged. Relative importance of spend on pay Expenditure USDm Dividends paid Purchase of outstanding treasury shares in TORM A/S Purchase/disposals of treasury shares Executive Director’s remuneration Total Staff costs Retained earnings 2022 166.7 - - 1.7 168.4 2021 - - - 2.4 2.4 49.7 52.1 2020 70.6 - 1.3 2.3 74.2 50.7 2019 - - - 2.2 2.2 45.8 1,290.4 899.5 939.2 920.0 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 109 Remuneration Committee report AUDIT COMMITTEE REPORT RISK COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT Remuneration Policy The TORM plc Remuneration Policy approved at the 20 2023 remuneration The Remuneration Policy approved at the 14 April 2021 Approval On behalf of the Remuneration Committee April 2021 AGM remained unchanged during 2022. In AGM will be implemented for the financial year 2023. There accordance with the UK Corporate Governance Code, are no foreseen changes to the policy. Christopher H. Boehringer TORM’s Remuneration Policy and practices are designed to support the business strategy and promote TORM’s long- term sustainable success. The Remuneration Committee Adaptation and publication The Board of Directors must review the Remuneration will continue to consider the appropriateness of the Policy at least once a year. Any changes to the Remuneration Policy annually to ensure that it continues to Remuneration Policy must be adopted by the Board of align with the business strategy. At this point, there is no Directors and approved by the shareholders at an AGM. intention to revise the Remuneration Policy more often than every third year, unless required due to changes to TORM’s Remuneration report will be included in TORM’s regulations or legislation. Find TORM’s Remuneration Policy at www.torm.com/investors/governance/ Annual Reports for all financial years and will contain information on remuneration paid to the Board of Directors and Executive Management. Chairman of the Remuneration Committee 16 March 2023 TORM ANNUAL REPORT 2022 COMMITTEE REPORTS 110 Investor information Share information Exchanges ISIN (CPH) CUSIP (NY) Tickers Year high (TRMD A) Year low (TRMD A) Number of A-shares (end 2022) Number of treasury shares Nasdaq CPH and NY Analyst coverage ABG Sundal Collier Petter Haugen GB00BZ3CNK81 Phone: +47 22 01 61 39 G89479102 Email: petter.haugen@abgsc.no TRMD A and TRMD DKK 225.00 (03 Nov.) DKK 42.78 (24 Jan.) Clarksons Frode Mørkedal 82,311,299 Phone: +47 22 01 63 27 493,371 Email: frode.morkedal@clarksons.com Pareto Securities Eirik Haavaldsen Phone: +45 24 13 21 20 Email: eirik.haavaldsen@paretosec.com Skandinaviska Enskilda Banken AB Ulrik Bak Phone: +45 31 25 60 33 Email: ulrik.bak@seb.dk Financial calendar 2023 13 April 2023, Annual General Meeting 11 May 2023, First quarter 2023 results 17 August 2023, First half 2023 results 09 November 2023, Nine months 2023 results Investor relations contact Andreas Abildgaard-Hein Vice President, External Reporting and IR Phone: +45 3917 9339 Email: ir@torm.com Jomkwan Palitwanon Investor Relations Phone: +45 3917 9331 Email: ir@torm.com Danske Bank Håvard Sjursen Lie Phone: +47 40 47 44 43 Email: hvli@danskebank.com Evercore ISI Jonathan B. Chappell Phone: +1 212 497 0827 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, Email: jonathan.chappell@evercoreisi.com US and Asian financial centers. Fearnley Securities Øystein Vaagen Phone: +47 22 93 63 97 Email: o.vaagen@fearnleys.com Kepler Cheuvreux Anders Redigh Karlsen Phone: +47 23 13 90 68 In 2022, TORM issued a total of 33 announcements to the stock exchange. Find all announcements in English at https://www.torm.com/investors/announcements Three weeks prior to the publication of quarterly and annual financial statements, communication with investors is Email: arkarlsen@keplercheuvreux.com limited to issues of a general nature, and in that period no individual investor meetings are held. TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 OTHER OTHER 111 111 Investor information Share price performance In 2022, TORM had an average of 81,804,130 A- shares outstanding. The average daily trading volume on Nasdaq in New York. As of 31 December 2022, TORM holds 70% of the votes capable of being cast on such Reserved 493,371 as treasury shares. Matter action. Copenhagen has been approximately 305,000 shares and Each A-share carries one vote on all resolutions proposed at Until the Threshold Date, the sole TORM C-share has approximately 314,000 shares on Nasdaq in New York. the General Meetings of the Company except for the 350,000,000 votes at the General Meetings in respect of During 2022, the share price increased from DKK 51.7 to election or removal of the B-Director. Until the Threshold certain Specified Matters only, including the election of DKK 198.4 on Nasdaq in Copenhagen and from USD 7.96 Date (the first time at which OCM Njord Holdings S.à r.l. members to the Board of Directors of TORM (including the to USD 29.2 on Nasdaq in New York. Throughout 2022, (“Oaktree”) and its affiliates cease to beneficially own at Chairman, but excluding the B-Director) and certain TORM has been part of the Mid Cap segment on Nasdaq in least one third of the issued shares), the sole B-share has amendments to the Articles of Association. The sole C- Copenhagen. As of 02 January 2023, TORM became part one vote at the General Meetings and special administrative shareholder, Oaktree, must continue to hold the C-share as of the Large Cap segment on Nasdaq in Copenhagen. rights, including the right to appoint the Deputy Chairman long as it or its affiliates beneficially own at least one third The 2022 share price development is available at Directors can be appointed or removed by passing an Oaktree may continue to operate as the Company’s www.torm.com/investors/share ordinary resolution. The B-shareholder also has the right to controlling shareholder, even if Oaktree does not own a of the Board of Directors. After the Threshold Date, all of the issued shares (“Threshold Date”). Accordingly, Changes to the share capital As of 31 December 2021, TORM plc’s total share capital was USD 812,332.71 consisting of 81,233,269 A- appoint one Board Observer. Pursuant to the Articles of majority of the A-shares. Pursuant to the Articles of Association, no more than one B-share can be issued by the Association, no more than one C-share can be issued by the Company. Company. shares of USD 0.01 each, one B-share and one C-share The Company can only take certain material actions A number of the A-shares are issued subject to restrictions both of USD 0.01. relating to supermajority matters and Reserved Matters (as on transfer (“Restricted Shares”) imposed by US securities specified in its Articles of Association) if either (i) the laws. These Restricted Shares may only be transferred During 2022, TORM has increased its share capital by majority of the Directors (who must include the Chairman pursuant to an effective registration statement filed with 1,078,030 A-shares as a result of the same number of and the B-Director) approve the relevant action or (ii) (a) in the U.S. Securities and Exchange Commission or an Restricted Share Units being exercised. case of a supermajority action, if the B-Director did not exemption from the registration requirements of the United Share capital As of 31 December 2022, TORM’s share capital amounted such action is approved by a shareholder resolution specific restrictions on the size of a holding of the A-shares approved by at least 86% of the votes capable of being cast nor the transfer of the A-shares (except for the Restricted to USD 823,113.01 divided into 82,311,299 A-shares of on such supermajority action or (ii) (b) in case of a Reserved Shares as detailed above), which are both governed by the USD 0.01 each, one B-share of USD 0.01 and one C-share Matter action, if the B-Director did not approve such action general provisions of the Articles of Association and approve such action or attend the relevant Board meeting, States Securities Act of 1933 as amended. There are no of USD 0.01. A total of 82,311,299 votes are attached to or attend the relevant Board meeting, such action is prevailing legislation. the A-shares. Only the A-shares are admitted to trading approved by a shareholder resolution approved by at least and official listing on Nasdaq in Copenhagen and Nasdaq in TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 OTHER OTHER 112 112 Investor information The B-share can only be transferred to (i) another trustee (it • Up to an aggregate nominal amount of USD 686,142 in December 2022, leaving a current authority to issue up is currently held by SFM Trustee Limited on behalf of the connection with the Exchange Offer (of which USD to 247,702,600 A-shares minority shareholders), or (ii) the Company if the B-share is 622,988.48 nominal value was issued (62,298,846 A- • Up to an aggregate nominal amount of USD 777,625 to redeemed or (iii) any person who has acquired 100% of the shares, one B-share and one C- share)) during the Directors, officers, or employees of the Company or any issued A-shares. The B-share cannot be encumbered. period ended 31 December 2016. As the Exchange of its subsidiaries The C-share is held by Oaktree and can only be transferred issued under this authority (i) to one of Oaktree’s affiliates or (ii) to the Company if the • Up to an aggregate nominal amount of USD 1,372,283 C-share is redeemed or (iii) any person who has acquired which can be offered in connection with any proposed 100% of the issued A-shares. The C-share cannot be initial public offering of equity securities on certain US Further, 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. Offer has been completed, no further shares will be encumbered. For further details on the transferability, please see the Articles of Association at www.torm.com/investors/governance 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 stock exchanges, of which none was issued from 01 January 2020 to 31 December 2022, 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 All the above authorities to issue and purchase shares expire on 14 April 2025. Details of TORM’s CEO’s share scheme and any rights attached to the shares under this scheme is set out in the Directors’ Remuneration report. none was issued from 01 January 2020 to 31 The U.K. Takeover Code, issued and administered by the U.K. Takeover Panel, applies to the Company. Share pre-emption grant Share repurchase grant granted at TORM plc’s AGM on 15 March 2016 (2016 Authority Date Value Granted AGM) and updated authorities granted at TORM plc’s AGM Granted 14 April 2020 USD 777,625 Repurchase period 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: Utilized Utilized Utilized Remaining 15 May 2020 USD 10,474 Remaining 18 March 2021 USD 13,551 23 March 2022 USD 13,930 USD 739,670 14 April 2020 7,476,065 1 January to 31 December 180,500 Approx. 10% of TORM's share capital excluding treasury shares 7,295,565 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 OTHER OTHER 113 113 Investor information Shareholders As of 31 December 2022, TORM had approximately TORM’s Transfer Agent is Computershare Inc, P.O. Box 43006, Providence RI, 02940-3078, USA. 12,003 registered shareholders representing approximately 87% of the share capital. Distribution Policy TORM intends to distribute on a quarterly basis excess In 2020, TORM has been subject to UK Disclosure liquidity above a fixed threshold cash level as of the balance Guidance and Transparency Rules under which sheet date. For each quarter, the threshold cash level will shareholders have a 3% ownership notification be determined as the product of cash requirement per requirement. From 01 January 2021, because of Brexit, vessel and the number of owned and leased vessels in TORM has changed its home member state in relation to TORM’s fleet as of the balance sheet day. Excess liquidity is the EU’s Prospectus Regulation and Transparency Directive determined as TORM’s readily available liquidity less the to Denmark. This implies that shareholders now have a 5% threshold cash level. The readily available liquidity is defined ownership notification requirement. Based on notifications as i) TORM’s cash balance at the last day of the quarter received during 2022 and 2023 to date, OCM Njord preceding the relevant distribution date excluding Holdings S.à r.l. (Oaktree) is the only shareholder with more restricted cash, plus ii) undrawn amounts on TORM’s than 5% of the share capital holding 65% of the share working capital facilities, minus iii) proceeds received from capital. As of 31 December 2022, TORM’s treasury shares represented approximately 0.6% 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. At the end of 2022, the members of the Board of Directors held a total of 382,201 shares, equivalent to a total market capitalization of DKK 75,828,678 or USD 10,875,861. The Board of Directors and certain employees are limited to trading shares during a four-week period after the publication of the financial report. vessel sales, or additional proceeds from vessel refinancing, or securities offerings in the past 12 months earmarked for share repurchases, debt prepayment, vessel acquisitions, or general corporate purposes. The cash requirement per vessel is fixed at: • USD 1.5m for 30 June 2022 • USD 1.8m for 30 September 2022 onwards In line with the Distribution Policy effective from the second quarter of 2022, the Board of Directors has decided to recommend a distribution of USD 212m for the fourth quarter of 2022. 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. Warrants and Restricted Share Units As of 31 December 2022, 2,423,986 RSUs were outstanding with 1,078,030 being exercised during 2022. The specific terms for the RSUs are described on pages 100-110 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. For further information about investor relations, please visit www.torm.com/investors/ TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 OTHER OTHER 114 114 Engagement and decision-making The following information forms 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 TORM for the benefit of its members as a whole during the year ended 31 December 2022. Why? 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 markets’ valuation of TORM shares and future access to capital in the equity markets. 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 of Directors 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’s management and the Directors have a continuous focus on unleveraging the integrated One TORM platform, TORM’s capital structure, TORM’s ESG agenda, and the product tanker market fundamentals in support for short-term and long-term RoIC generation with the aim of maximizing the long-term value for TORM’s shareholders. TORM issued 33 stock exchange announcements during 2022. After the lockdowns related to the COVID-19 pandemic were stopped, it was again possible to conduct physical meetings with investors. TORM did, however, still organize 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, investors, and ESG consultants have been consulted about their requirements for the 2022 reporting. TORM has included TCFD and Scope 3 reporting for the first time in the 2022 Responsibility report. TORM is actively communicating initiatives that are affecting leverage and liquidity, and we are continuously confirming TORM’s focus on the One TORM platform through quarterly and annual presentations. The Board of Directors 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, how they are 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. The Board of Directors receives and follows up on the Employee Engagement Survey performed twice a year. Since 2006, TORM’s Board of Directors has provided a whistleblower facility with an independent lawyer as part of the internal control system. Read more on page 40 The Observers on TORM’s Board of Directors allow TORM’s employees to have a direct line of questioning to and receiving feedback from the Board. Full details of attendance can be found on page 85 In 2022, we continued our bi-annual real-time data engagement survey, which we introduced in 2019. More than 98% of all land- based employees responded to this survey. Read about TORM’s engagement survey on page 36 TORM ANNUAL REPORT 2022 OTHER 115 Engagement and decision-making Why? How? Outcomes and actions Why is it important to engage? How did Management and Directors engage? What was the impact of the engagement? Suppliers and Customers Managing the relationship with suppliers and customers is an integral part of the way TORM conducts its business. 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 of Directors includes a Tradability KPI ensuring that TORM vessels are available to meet our customers’ demands. TORM encourages feedback from its customers and suppliers. The Board of Directors’ pre-emptive actions enabled TORM to ensure a smooth continuation of operations throughout 2022. 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. Read more about how TORM meets customers’ requirements on pages 12 and 36 In 2022, TORM made a supplier assessment to establish a baseline and understand the status of our suppliers to facilitate a dialogue with them about how we together can extend and improve the quality of sustainability efforts. The after-effects of COVID-19 combined with the war in Ukraine led the global supply chains to be under immense pressure throughout the year. TORM’s supply chain proved successful in maintaining more than reasonable cost levels against this ever-increasing tide of rising costs. Lenders Strong relationships with our banks, financial institutions, and investors support the Company’s ability to be financially flexible. TORM maintains an ongoing dialogue with several funding providers. TORM is engaged with lenders and potential lenders for being able to fund vessel acquisitions. In 2022, TORM entered into one new leasing agreement to finance a second-hand vessel. The sale and leaseback transaction is structured as an operational lease securing TORM’s option to redeliver the asset to the lessor at the end of the lease. TORM is also in dialogue with leasing providers for operational lease funding of vessel acquisitions and for sale and leaseback transactions with buy-back options and no obligations to mitigate stranded asset risk. TORM is engaged with funding providers to understand ESG risks related to financing in order to be an attractive and transparent borrower. TORM ANNUAL REPORT 2022 OTHER 116 Engagement and decision-making Why? 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 in both 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, the committees and through the compliance systems, the Board of Directors ensures that the Company remains up to date with the latest regulatory changes. Examples of matters discussed this year by the Board of Directors or the committees include: IMO regulations on CO2 emissions Danish Shipping and the Charter for More Women in Shipping Mærsk McKinney Møller Center for Zero Carbon Shipping as a Mission Ambassador ESG reporting requirements • Sanctions compliance • • • • • Community and 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. TORM is improving its ESG reporting to improve insight into TORM’s environmental impact and to enable enhancement opportunities in the future. TORM’s Business Principles ensure that TORM is always in compliance with legislation and lives up to the commitment to responsible business practices. See page 40 TORM’s Corporate Governance statement is available at www.torm.com/about TORM’s Modern Slavery Act Statement is available at www.torm.com/responsibility Read more about TORM’s participation in Danish Shipping on pages 17 and 31 and the Centre for Zero Carbon Shipping on pages 28 For information on how the TORM Philippines and the TORM India’s Education Foundations have been uplifting and supporting the educational development actions in the community, see page 38 To see how TORM is actively involved in various industry collaborations supporting our ambitious journey to achieve our 2050 environmental target of zero CO2 emissions from our operating fleet, see pages 30-33 To support TORM’s ambitious CO2 target, TORM’s Management will be measured on achieving it. You can read more about TORM’s ESG journey on pages 22-49 TORM ANNUAL REPORT 2022 OTHER 117 Directors’ report The Directors are pleased to present the Annual Report on the affairs of the TORM Group for 2022, including the Find TORM’s corporate governance statement at www.torm.com/investors/governance Details of Directors’ interests in the Company is set out on page 107 financial statements and the auditor’s report. 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. TORM’s section 172 statement can be found on pages 115-117 A description of the composition and operation of the Board of Directors and its Committees can be found on page 85 Other information included in the strategic report The strategic report on pages 4-69 provides a review of TORM’s operations in 2022 and the potential future developments of those operations. Details on greenhouse 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. Requirements of the listing rules TORM plc is listed on Nasdaq in Copenhagen and Nasdaq in Responsibility statement A responsibility statement made by the Board of Directors regarding the preparation of the financial statements is required under UK-adopted International Accounting gas emissions are included in the strategic report from page New York. The only listing rule requirement regarding the 31, and details on TORM’s general policy relating to content of the Annual Report is that TORM’s Annual Report recruitment, training, career development, and disabled must comply with the provisions of the UK Companies Act, employees are included on page 38. including provisions for EEA-listed companies. Standards. TORM’s responsibility statement can be found on page 121 Going concern TORM’s going concern statement can be found on page 67 Corporate governance statement The corporate governance statement sets out how the Company complies with the UK Corporate Governance Code 2018 and includes a description of the main features of our internal control and risk management arrangements in relation to the financial reporting process. Information on the Directors’ regard for the need to foster the Company’s business relationship with suppliers, customers, and other stakeholders is set out on pages 116-118 Directors and their interests Information on the Directors of the Company who served during the financial year 2022 and up to the date of signing the financial statements can be found on page 85 The rules relating to the appointment and the replacement of Directors and the Directors’ powers can be found in TORM’s Articles of Association at www.torm.com/investors/governance With effect from 01 January 2021, TORM plc elected Denmark as its Home State under the Transparency Directive rules due to the implications of Brexit. Accordingly, TORM plc has complied with the guidelines laid down in the Public Statement from The European Securities and Markets Authority (ESMA32-61-1156) concerning the application of transparency requirements by UK issuers with securities admitted to trading on regulated markets in the EU under Article 4 of the Transparency Directive, to ensure compliance and transparency in this Annual Report. Share capital More information on TORM’s share capital can be found on page 112 TORM ANNUAL REPORT 2022 OTHER 118 Directors’ report Dividends In line with the Company’s Distribution Policy, the Board of Articles of Association As per section 21 of the Companies Act 2006, TORM may Group policy compliance TORM has implemented a comprehensive compliance Directors has decided that USD 212m will be distributed as only amend its Articles of Association by special resolution. program to ensure that the Company remains in compliance dividends for the fourth quarter of 2022. The dividends will be paid 05 April 2022. Combined with the dividends paid in September and November 2022, TORM has paid a total amount of USD 379m in dividends for the fiscal year 2022. Sustainability Information about the Company’s approach to TORM's Articles of Association are available at https://www.torm.com/investors/governance Retirement, reappointment and appointment of Directors In line with the Company’s Articles of Association on file at sustainability risks and opportunities is set out from page Companies House, each Director, apart from the B- with rules and regulations related to our business activities worldwide. As part of this compliance program, all employees are required to document that they are aware of and have received all training required in relation to each compliance area. Company branches The TORM Group has offices in Denmark, India, the 71. Also included on these pages are details on our Director, must retire from office at the first annual general Philippines, Singapore, the UK, and the US. Further details greenhouse gas emissions. meeting after their appointment. The Company’s Directors on the Company's global presence are set out on page 171. Financial risk management 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 23 to the were re-elected at the 2022 Annual General Meeting and will therefore be due to retire in 2023. 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 Political donations No political donations were made during 2022. Significant shareholdings Details on significant shareholdings are set out in the financial statements. Details on financial risks are provided inspection from the Company Secretary, Elemental CoSec. Investor information on page 112. in the Risk management section on pages 70-74. Annual General Meeting TORM’s next Annual General Meeting (AGM) will be held on 13 April 2023. The notice of the AGM, including the complete proposals, will be available on TORM’s website, www.torm.com, prior to the meeting and will be available for inspection from the Company Secretary, Elemental CoSec. Payment for loss of office TORM’s policy in regard to payments for loss of office can Controlling shareholder TORM’s controlling shareholder, Oaktree, owns TORM plc’s be found in the Remuneration Policy. TORM’s Remuneration Policy is available at https://www.torm.com/investors/governance sole C-share, which carries 350,000,000 votes at the General Meetings 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 Research and development The Company continues to focus on optimization of assets Association. but does not allocate specific costs to research and development. TORM ANNUAL REPORT 2022 OTHER 119 Directors’ report Recent developments and post-balance sheet events Details of important events affecting TORM which have occurred since the end of the financial year are disclosed in Statement by the Directors in performance of their statutory duties in accordance with section 172(1) of the UK Companies Act 2006 Note 2 to the financial statements. TORM’s engagement and decision-making can be found on pages 115-117 Independent auditor Each person who is a Director at the date of approval of the Annual Report confirms that: • As far as the Director is aware, there is no relevant audit information of which the Company’s independent auditor is unaware • The Director has taken all reasonable steps that he 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. Approval On behalf of the Board of Directors Christopher H. Boehringer Chairman of the Board of Directors 16 March 2023 TORM ANNUAL REPORT 2022 OTHER 120 Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual In preparing these financial statements, the Directors are • In respect of the parent company financial statements Report and the financial statements in accordance with required to: state whether applicable UK Accounting Standards, applicable United Kingdom laws and regulations as well as • Select suitable accounting policies in accordance with including FRS 101, have been followed, subject to any additional requirements for listed companies in accordance IAS 8 Accounting Policies, Changes in Accounting material departures disclosed and explained in the with the Danish Financial Statements Act. Estimates and Errors and then apply them consistently financial statements • Make judgements and accounting estimates that are • Prepare the financial statements on the going concern Company law requires the Directors to prepare financial reasonable and prudent basis unless it is inappropriate to presume that the statements for each financial year. Under that law, the • Present information, including accounting policies, in a Company will continue in business Directors are required to prepare the group financial manner that provides relevant, reliable, comparable and statements in accordance with UK-adopted International understandable information Accounting Standards (UK-adopted IAS) as well as • Provide additional disclosures when compliance with International Financial Reporting Standards (“IFRS”) as the specific requirements in UK-adopted IAS as well as issued by the International Accounting Standards Board International Financial Reporting Standards (“IFRS”) as (“IASB”) and IFRS as adopted by the EU, as applied to issued by the International Accounting Standards Board financial periods beginning on or after 01 January 2022 and (“IASB”) and IFRS as adopted by the EU, as applied to have elected to prepare the parent company financial financial periods beginning on or after 01 January 2022 statements in accordance with United Kingdom Generally (or in respect of the parent company financial Accepted Accounting Practice (United Kingdom statements, FRS 101) is insufficient to enable users to Accounting Standards and applicable law), including understand the impact of particular transactions, other Financial Reporting Standard 101 “Reduced Disclosure events and conditions on the entity's financial position Framework” (FRS 101). Under company law, the Directors and financial performance must not approve the financial statements unless they are • In respect of the group financial statements, state satisfied that they give a true and fair view of the state of whether UK-adopted IAS as well as International affairs of the Group and the Company and of the profit or Financial Reporting Standards (“IFRS”) as issued by the loss of the Group and the Company for that period. International Accounting Standards Board (“IASB”) and IFRS as adopted by the EU, as applied to financial Due to the Company having shares listed on a regulated periods beginning on or after 01 January 2022 have market in Denmark, the Annual Report and financial been followed, subject to any material departures statements are furthermore prepared in accordance with disclosed and explained in the financial statements the additional requirements of the Danish Financial Statements Act applicable to listed companies (reporting class D). TORM ANNUAL REPORT 2022 OTHER 121 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 Directors’ responsibility statement We confirm that to the best of our knowledge: Further, the Annual Report for the financial year 01 January - 31 December 2022 with the file 213800VL1H1ABVM1ZF63-2022-12-31-en.zip is with reasonable accuracy at any time the financial position • The consolidated financial statements, prepared in prepared, in all material respects, in compliance with the of the Company and the Group and enable them to ensure accordance with the Companies Act 2006 and UK- ESEF Regulation (the European Single Electronic Format that the Company and the Group financial statements comply with the Companies Act 2006 as well as additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act. They are also adopted International Accounting Standards as well as International Financial Reporting Standards (“IFRS”) Regulation). as issued by the International Accounting Standards Board (“IASB”) and IFRS as adopted by the EU, as This responsibility statement was approved by the Board of Directors on 16 March 2023 and is signed on its behalf by: responsible for safeguarding the assets of the Group and applied to financial periods beginning on or after 01 the Company and hence for taking reasonable steps for the January 2022, and the parent company financial prevention and detection of fraud and other irregularities. statements, prepared in accordance with United Jacob Meldgaard Kingdom Generally Accepted Accounting Practice Executive Director Under applicable laws and regulations, the Directors are (United Kingdom Accounting Standards and applicable also responsible for preparing a strategic report, Directors’ law), give a true and fair view of the assets, liabilities, report, Directors’ remuneration report and corporate financial position and profit or loss of the Company and governance statement that comply with that law and those the undertakings included in the consolidation taken as regulations including additional disclosure requirements for a whole listed companies in accordance with the Danish Financial • The Annual Report, including the Strategic report, Statements Act. The Directors are responsible for the includes a fair review of the development and maintenance and integrity of the corporate and financial performance of the business and the position of the information included on the Company’s website. Legislation Company and the undertakings included in the in the United Kingdom governing the preparation and consolidation taken as a whole, together with a dissemination of financial statements may differ from description of the principal risks and uncertainties that legislation in other jurisdictions. 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 TORM ANNUAL REPORT 2022 OTHER 122 Safe harbor statement as to the future Matters discussed in this release may constitute forward- looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business. 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 other statements, which are other than statements of historical facts. The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. Words such as, but not limited to, “believe”, “anticipate”, “intend”, “estimate”, “forecast”, “project”, “plan”, “potential”, “may”, “should”, “expect”, “pending” and similar expressions or phrases may identify forward-looking statements. The forward-looking statements in this release are based upon various assumptions, many of which are, in turn, based upon further assumptions, including without limitation, management’s examination of historical Important factors that, in our view, could cause actual and vessel collision, the potential conflicts of interest results to differ materially from those discussed in the involving our board of directors and senior management . forward-looking statements include, but are not limited to, the strength of the world economy and currencies including In light of these risks and uncertainties, undue reliance central bank policies intention to combat overall inflation should not be placed on forward-looking statements and rising interest rates, inflationary pressure, the general contained in this release because they are statements domestic and international political conditions or events, about events that are not certain to occur as described or including “trade wars” and the conflict between Russia and at all. These forward-looking statements are not Ukraine, the highly cyclical natures of our business causing guarantees of our future performance, and actual results fluctuations in charter hire rates and vessel values caused and future developments may vary materially from those by changes in supply vessels and constructions of projected in the forward-looking statements. newbuildings and changes in “ton-mile” demand caused by changes in worldwide OPEC petroleum production, Except to the extent required by applicable law or consumption and storage, the duration and severity of the regulation, the Company undertakes no obligation to ongoing COVID-19 pandemic, including its impact on the release publicly any revisions or updates to these forward- demand for petroleum products and the seaborne looking statements to reflect events or circumstances after transportation of clean products, the operations of our the date of this release or to reflect the occurrence of customers including, losses of large customers, failures of unanticipated events. Please see TORM’s filings with the our contract counterparties to meet their obligations and U.S. Securities and Exchange Commission for a more changes in their credit risks, the operations of our business complete discussion of certain of these and other risks and including availability of skilled crew members, labor uncertainties. The information set forth herein speaks only disruptions, our ability to attract and retain employees, as of the date hereof, and the Company disclaims any adequacy of insurance coverage, arrests of our vessels, intention or obligation to update any forward-looking disruption of shipping routes due to adverse weather, statements as a result of developments occurring after the accidents and political events, the length and number of date of this communication. off-hire periods our ability to complete vessel transactions as planned, the changes in governmental rules and regulations including changes to US trade policies, operating trends, data contained in our records and other applicable regulations related to bribery, our limitations data available from third parties. Although the Company under incorporation under the laws of England and Wales, believes that these assumptions were reasonable when the new environmental regulations and increasing scrutiny made, because these assumptions are inherently subject to towards our ESG policies, the potential for technological significant uncertainties and contingencies that are difficult innovation to reduce vessel value and charter income, the or impossible to predict and are beyond our control, the interruption or failure of our information technology and Company cannot guarantee that it will achieve or communication system including cyber-attacks, the accomplish these expectations, beliefs, or projections. increased cost of capital or limited access to funding due to EU taxonomy and the potential liability from future litigation and future costs due to environmental damage TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 OTHER OTHER 123 123 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 to the consolidated financial statements Parent company financial statements Management review for TORM plc Income statement Statement of comprehensive income Company balance sheet Company statement of changes in equity Cash flow statement Notes to parent company financial statements Other Independent auditor’s report TORM fleet overview Glossary and alternative performance measures 125 125 126 127 129 130 176 177 177 178 179 180 181 187 193 196 TORM ANNUAL REPORT 2022 124 Consolidated income statement 01 January-31 December Consolidated statement of comprehensive income 01 January-31 December Note 2022 2021 2020 USD '000 USD '000 Revenue Port expenses, bunkers, commissions, and other cost of goods and services sold Operating expenses Profit from sale of vessels Administrative expenses Other operating income and expenses Share of profit/(loss) from joint ventures 3, 4 1,443,351 619,532 747,356 -459,468 -240,937 -227,924 5 -202,098 -190,471 -178,376 27 10,165 - 1,069 5, 6 -55,005 -51,542 -50,773 5,992 414 -19,185 152 -104 -242 Net profit/(loss) for the year Other comprehensive income/(loss): Items that may be reclassified to profit or loss: Exchange rate adjustment arising from translation of entities using a functional currency different from USD Reclassification of exchange rate adjustments on disposal of joint venture 2022 2021 2020 562,574 -42,089 88,114 -531 -209 16 51 - - Fair value adjustment on hedging instruments 54,851 8,455 -15,790 Impairment losses on tangible assets 8, 10, 27 -2,647 -4,645 -11,096 Depreciation and amortization 7,8,9 -139,023 -130,851 -121,922 Fair value adjustment on hedging instruments transferred to income statement 1,739 8,667 6,860 Operating profit (EBIT) Financial income Financial expenses 601,419 1,396 138,907 Tax on items that may be reclassified to profit or loss -13,162 - - 12 12 4,037 241 536 Items that may not be reclassified to profit or loss: -48,793 -42,382 -49,914 Remeasurements of net pension and other post- retirement benefit liability or asset - -8 103 Profit/(loss) before tax 556,663 -40,745 89,529 Other comprehensive income/(loss) after tax 42,948 16,905 -8,811 Tax 16 5,911 -1,344 -1,415 Total comprehensive income/(loss) for the year 605,522 -25,184 79,303 Net profit/(loss) for the year 562,574 -42,089 88,114 Net profit/(loss) for the year attributable to: TORM plc shareholders Non-controlling interest Net profit/(loss) for the year Earnings per share for TORM plc shareholders Basic earnings/(loss) per share (USD) Diluted earnings/(loss) per share (USD) 562,754 -42,089 88,114 -180 - - 562,574 -42,089 88,114 31 31 6.92 6.80 -0.54 -0.54 1.19 1.19 Total comprehensive income/(loss) for the year attributable to: TORM plc shareholders Non-controlling interest 605,607 -25,184 79,303 -85 - - Total comprehensive income/(loss) for the year 605,522 -25,184 79,303 TORM ANNUAL REPORT 2022 CONSOLIDATED FINANCIAL STATEMENTS 125 Note 2022 2021 2020 USD '000 Note 2022 2021 2020 Consolidated balance sheet As of 31 December USD '000 ASSETS NON-CURRENT ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Tangible fixed assets Land and buildings 7,10,33 1,835 7 1,941 3,776 - - - - - - 8,9 3,814 4,824 7,098 Vessels and capitalized dry-docking 8,9,10,20 1,855,903 1,937,791 1,722,465 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 8 8 - 11,996 12,024 5,573 6,327 6,847 1,865,290 1,960,938 1,748,434 11 16 76 1,473 1,588 4,570 4,617 4,617 555 197 651 1 344 1 5,398 6,742 6,550 EQUITY AND LIABILITIES EQUITY Common shares Share premium Treasury shares Hedging reserves Translation reserves Retained profit Equity attributable to TORM plc shareholders Non-controlling interest Total equity LIABILITIES NON-CURRENT LIABILITIES Non-current tax liability related to held- over gains Deferred tax liability Borrowings 17 823 812 748 167,531 159,558 102,044 17 -4,235 -4,235 -4,235 39,870 -3,559 -20,681 -439 137 346 1,297,774 899,467 939,247 1,501,324 1,052,180 1,017,469 33 2,350 - - 1,503,674 1,052,180 1,017,469 16 16 45,176 45,176 44,923 6,082 - - 9,19,20,22 849,818 926,450 739,543 Other non-current liabilities 18 3,038 - - Total non-current assets 3 1,874,464 1,967,680 1,754,984 Total non-current liabilities 904,114 971,626 784,466 CURRENT ASSETS Inventories Trade receivables Other receivables Prepayments Cash and cash equivalents incl. restricted cash Current assets Assets held for sale Total current assets TOTAL ASSETS 72,033 48,812 22,459 259,479 83,968 58,574 74,026 39,966 24,881 10,371 5,624 2,181 13 14 15 32 323,803 171,733 135,564 739,712 350,103 243,659 27 - 13,216 - 739,712 363,319 243,659 2,614,176 2,330,999 1,998,643 CURRENT LIABILITIES Borrowings Trade payables Current tax liabilities Other liabilities Provisions Deferred income Total current liabilities 9,19,20,22 117,107 208,951 102,858 22 48,502 35,332 14,350 1,953 929 1,418 18,22 31,141 43,681 59,782 30 6,800 18,300 18,300 885 - - 206,388 307,193 196,708 Total liabilities 1,110,502 1,278,819 981,174 TOTAL EQUITY AND LIABILITIES 2,614,176 2,330,999 1,998,643 TORM ANNUAL REPORT 2022 CONSOLIDATED FINANCIAL STATEMENTS 126 Consolidated statement of changes in equity 01 January-31 December USD '000 Common shares Share premium Treasury shares ¹⁾ Hedging reserves Translation reserves Retained profit Equity attributable to shareholders of TORM plc Non- controlling interest Total Equity as of 01 January 2020 747 101,289 -2,887 -11,751 330 919,959 1,007,687 - 1,007,687 Comprehensive income/loss for the year: Net profit/(loss) for the year Other comprehensive income/(loss) for the year²⁾ Total comprehensive income/(loss) for the year Capital increase Transaction costs of capital increase Acquisition of treasury shares Share-based compensation Dividend paid Total changes in equity 2020 - - - 1 - - - - - - - 787 -32 - - - - - - - - -1,348 - - - -8,930 -8,930 - - - - - - 16 16 - - - - - 88,114 88,114 103 88,217 - - - 1,682 -70,611 -8,811 79,303 788 -32 -1,348 1,682 -70,611 1 755 -1,348 -8,930 16 19,288 9,782 Equity as of 31 December 2020 748 102,044 -4,235 -20,681 346 939,247 1,017,469 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 ³⁾ Transaction costs of capital increase Share-based compensation Total changes in equity 2021 - - - - - - 64 57,799 - - -285 - 64 57,514 - - - - - - - - 17,122 17,122 - -42,089 -209 -209 -8 -42,097 - - - - - - - - 2,317 -42,089 16,905 -25,184 57,863 -285 2,317 17,122 -209 -39,780 34,711 Equity as of 31 December 2021 812 159,558 -4,235 -3,559 137 899,467 1,052,180 - - - - - - - - - - - - - - - - - - 88,114 -8,811 79,303 788 -32 -1,348 1,682 -70,611 9,782 1,017,469 -42,089 16,905 -25,184 57,863 -285 2,317 34,711 1,052,180 TORM ANNUAL REPORT 2022 CONSOLIDATED FINANCIAL STATEMENTS 127 Consolidated statement of changes in equity 01 January-31 December USD '000 Common shares Share premium Treasury shares ¹⁾ Hedging reserves Translation reserves Retained profit Equity attributable to shareholders of TORM plc Non- controlling interest Total Equity as of 01 January 2022 812 159,558 -4,235 -3,559 137 899,467 1,052,180 - 1,052,180 Comprehensive income/(loss) for the year: Net profit/(loss) for the year Other comprehensive income/(loss) for the year ²⁾ Tax on other comprehensive income Total comprehensive income/(loss) for the year Capital increase ³⁾ Transaction costs of capital increase Share-based compensation Dividend paid Total changes in equity 2022 Non-controlling interest arising on acquisition - - - - 11 - - - 11 - - - - - 8,004 -31 - - 7,973 - - - - - - - - - - - - - 562,754 56,591 -13,162 -576 - - - 562,754 56,015 -13,162 -180 95 - 562,574 56,110 -13,162 43,429 -576 562,754 605,607 -85 605,522 - - - - - - - - - - 2,211 8,015 -31 2,211 -166,658 -166,658 - - - - 8,015 -31 2,211 -166,658 43,429 -576 398,307 449,144 -85 449,059 - - - - 2,435 2,435 Equity as of 31 December 2022 823 167,531 -4,235 39,870 -439 1,297,774 1,501,324 2,350 1,503,674 ¹⁾ Please refer to note 17 for further information on treasury shares. ²⁾ Please refer to "Consolidated Statement of Comprehensive Income". ³⁾ Please refer to note 17 for further information on capital increases during the year. TORM ANNUAL REPORT 2022 CONSOLIDATED FINANCIAL STATEMENTS 128 Consolidated cash flow statement 01 January-31 December USD '000 Note 2022 2021 2020 USD '000 Note 2022 2021 2020 Cash flow from operating activities Net profit/(loss) for the year Reversals: Profit from sale of vessels 562,574 -42,089 88,114 -10,165 - -1,069 Depreciation and amortization 7.8 139,023 130,851 121,922 Impairment losses on tangible assets 7, 10, 27 2,647 4,645 11,096 Cash flow from investing activities Investment in tangible fixed assets ¹⁾ Investment in intangible fixed assets Acquisition of subsidiaries, net of cash acquired Sale of tangible fixed assets Change in restricted cash -119,344 -319,787 -173,050 -618 1,070 - - - - 106,623 10,033 83,662 23,542 19,161 -30,414 33 27 Net cash flow from investing activities 11,273 -290,593 -119,802 Share of profit/(loss) from joint ventures Financial income Financial expenses Tax expenses Other non-cash movements Dividends received from joint ventures Interest received and realized exchange gains -152 -4,037 104 -241 242 -536 48,793 42,382 49,914 -5,911 -3,691 1,344 1,350 1,415 1,093 12 12 16 28 Cash flow from financing activities Proceeds, borrowings Repayment, borrowings - 275 275 Dividend paid 4,037 241 583 Capital increase ¹⁾ Transaction costs share issue 11, 19 96,254 548,817 734,346 19 -275,155 -253,420 -746,475 -166,658 - -70,611 17 8,015 2,863 -31 - -285 - -1,348 788 -32 Interest paid and realized exchange losses -49,631 -41,046 -52,905 Purchase/disposal of treasury shares Income taxes paid Change in inventories, receivables and payables, etc. -658 -1,379 -252 28 -180,915 -48,489 15,909 Net cash flow from operating activities 501,914 47,948 235,801 Net cash flow from financing activities -337,575 297,975 -83,332 Net cash flow from operating, investing, and financing activities 175,612 55,330 32,667 Cash and cash equivalents as of 01 January 144,844 89,514 56,847 Cash and cash equivalents as of 31 December 320,456 144,844 89,514 Restricted cash as of 31 December 32 3,347 26,889 46,050 Cash and cash equivalents, including restricted cash as of 31 December 323,803 171,733 135,564 ¹⁾ In 2021 share capital was increased by USD 57.9m including a USD 55.0m non-cash share issue in relation to acquisition of eight vessels. Please refer to Note 17 for further reference. TORM ANNUAL REPORT 2022 CONSOLIDATED FINANCIAL STATEMENTS 129 Notes to the consolidated financial statements Note 1 – Accounting policies, critical accounting estimates and judgements Note 2 – Liquidity, capital resources, and subsequent events Note 3 – Segment Note 4 – Revenue from contracts with customers Note 5 – Staff costs Note 6 – Remuneration to auditors appointed at the parent company’s annual general meeting Note 7 – Intangible assets Note 8 – Tangible fixed assets Note 9 – Leasing Note 10 – Impairment testing Note 11 – Loan receivables Note 12 – Financial items Note 13 – Trade receivables Note 14 – Other receivables Note 15 – Prepayments Note 16 – Tax ` 131 135 137 140 141 144 144 145 148 150 152 153 153 154 154 154 Note 17 – Common shares and treasury shares Note 18 – Other liabilities Note 19 - Effective interest rate, outstanding borrowings Note 20 – Collateral security for borrowings Note 21 – Guarantee commitments and contingent liabilities Note 22 – Contractual obligations and rights Note 23 – Derivative financial instruments Note 24 – Risks associated with TORM’s activities Note 25 – Financial instruments Note 26 – Related party transactions Note 27 – Assets held for sale and non-current assets sold during the year Note 28 – Cash flows Note 29 – Entities in the group Note 30 - Provisions Note 31 – Earnings per share and dividend per share Note 32 – Cash and cash equivalents, including restricted cash Note 33 – Business combination 155 156 157 158 158 159 161 164 168 169 170 170 170 172 172 173 173 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 130 130 NOTE 1 – ACCOUNTING POLICIES, CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS NOTE 1 - continued Overview of business TORM plc is a shipping company that primarily owns and operates a fleet of product tankers and is engaged in the marine exhaust industry. 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 Office 105, 20 St Dunstan’s Hill, London, EC3R 8HL, United Kingdom. Unless otherwise indicated, the terms “TORM plc”, “we”, “us”, “our”, the ”Company”, and the “Group” refer to TORM plc and its consolidated subsidiaries, which include TORM A/S and its consolidated subsidiaries. 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 TORM as set out on pages 70-74 and include different distressed outlooks for the product tanker market. In a stress case scenario, Management has stressed freight rates to the lowest rolling four-quarter average since 2000 on a per vessel class basis and a decline in vessel values. In such scenario, TORM maintains sufficient headroom on liquidity and covenants. The Board of Directors has considered TORM’s cash flow forecasts and the expected compliance with TORM’s financial covenants for the period until 31 March 2024. TORM’s cash flow forecast and expected covenant compliance are based on the Business Plan approved by the Board of Directors. 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, TORM will be able to continue the operational existence and comply with its financial covenants for the period until 31 March 2024. Accordingly, TORM continues to adopt the going concern basis in preparing its financial statements. TORM plc is listed on the stock exchanges Nasdaq in Copenhagen, Denmark, and on Nasdaq in New York, the United States. Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with UK- adopted International Accounting Standards (“UK-adopted IAS”). The consolidated financial statements are also prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and IFRS as adopted by the EU, as applied to financial periods beginning on or after 01 January 2022 and additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act. 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 As of 31 December 2022, TORM’s available liquidity including undrawn and committed facilities was USD 416m, including a total cash position of USD 324m (including cash held for dividend payment). TORM’s net interest-bearing debt was USD 663m, and the net debt loan-to-value ratio was 25% (Tanker segment only and before dividend payment). Further information on TORM’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 24 to the financial statements. The principal risks and uncertainties facing TORM are set out on pages 70-74. TORM monitors its funding position throughout the year to ensure that we have access to sufficient funds to meet the forecasted cash requirements, including potential newbuildings, purchase of second-hand vessels and loan commitments, and to monitor compliance with the financial covenants in our 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 increased geopolitical risk following Russia’s invasion of Ukraine in February 2022 and the associated effects on the product tanker market. The changed geopolitical situation has so far been positive for the product tanker market, and TORM’s base case assumes that this positive sentiment related to freight rates and vessel values will continue throughout 2023. In the base case, TORM has sufficient liquidity and headroom above all the covenant limits. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 131 NOTE 1 - continued 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 UK in the consolidated financial statements for 2022: • • Annual Improvements 2018-2020 Amendments to IFRS 3 Business Combinations; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets It is assessed that application of these effective on 01 January 2022 has not had any material impact on the consolidated financial statements in 2022. Accounting standards and interpretations not yet adopted IASB has issued a number of new or amended accounting standards (IFRS) and interpretations (IFRIC) which have not yet come into effect: • • • • • • • IFRS 17 Insurance Contracts (01 January 2023) IAS 12 amendments Deferred Tax related to Assets and liabilities arising from a Single Transaction (01 January 2023) IAS 8 amendments Definition of Accounting Estimates (01 January 2023) IAS 1 and IFRS Practice Statement 2 amendments Disclosure of Accounting Policies (01 January 2023) Amendments to IAS 1 Presentation of Financial Statements (01 January 2024) Amendments to IFRS 16 Lease Liability in a Sale and Leaseback (01 January 2024) IFRS 10 and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture issued in September 2014 (deferred indefinitely) Leasing Impairment Loan receivables Financial items Trade receivables Tax • • • • • • • Other liabilities • Borrowings • Derivative financial instruments • • • Provisions Earnings per share Business combinations 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 TORM reassesses 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. 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. 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: Accounting policies The Group’s general accounting policies are described below. In addition to this, specific accounting policies are described in each of the individual notes to the consolidated financial statements as outlined in the following notes: • • • • • Segment reporting Revenue from contracts with customers Staff costs Intangible assets Tangible fixed assets • • • • 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 which 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. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 132 NOTE 1 - continued NOTE 1 - continued 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. Income statement Port expenses, bunkers, and commissions and other costs of goods and services sold Port expenses, bunker fuel consumption, and commissions are recognized as incurred. To the extent that 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, forward freight agreements (FFA) as well as write- down for losses on trade receivables are included in this line. 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. Operating expenses Operating expenses, which comprise crew expenses, repair and maintenance expenses, and tonnage duty, are expensed as incurred. 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. 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 and income Other operating expenses primarily comprise management fees paid to commercial and technical managers for managing the fleet, profits and losses deriving from the disposal of fixed assets other than vessels as well as claims and disputes provisions. 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 is recognized if the recoverable amount exceeds the carrying amount to the extent that the carrying amount does not exceed the carrying amount without any historical impairment losses. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 133 NOTE 1 - continued NOTE 1 - continued Balance sheet Financial assets Financial assets are initially recognized on the settlement date at fair value plus transaction costs, except for financial assets at fair value through profit or loss, which are recognized at fair value. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred. Investments in joint ventures Investments in joint ventures comprise investments in companies which by agreement are managed jointly with one or more companies and therefore are subject to joint control and in which the parties have rights to the net assets of the joint venture. Joint ventures are accounted for using the equity method. Under the equity method, the investment in joint ventures is initially recognized at cost and thereafter adjusted to recognize TORM’s share of the profit or loss in the joint venture. When TORM’s share of losses in a joint venture exceeds the investment in the joint venture, TORM discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that TORM has incurred legal or constructive obligations or made payments on behalf of the joint venture. Inventories Inventories consist of bunkers, lube oil and other inventories and are stated at the lower of cost in accordance with the FIFO-principle and net realizable value. Cost of bunkers and lube oil includes expenditure incurred in acquiring bunkers and lube oil including delivery costs less discounts. The cost of other inventories consists of raw materials and components based on direct costs, direct payroll costs and a proportionate share of indirect production costs. Indirect production costs include the proportionate share of capacity costs directly relating hereto, which are allocated on the basis of the normal capacity of the production facility. 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. 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. Other non-current liabilities Other non-current liabilities consist of long-term employee-related liabilities related to the frozen Danish holiday funds in connection with the transition to the new Danish Holiday Act. TORM has elected to keep the holiday funds until the employees, covered at the transition date, reach the age of retirement. The liability is remeasured annually based on an index rate published by the Holiday Allowance fund. Trade payables Trade payables are recognized at the fair value of the item purchased and are subsequently measured at amortized cost. Deferred income Deferred income relates to amounts received from customers in advance of the related performance obligations being satisfied. 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 are 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, dividend paid to shareholders. 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 relates to cash provided as security for initial margin calls and negative market values on derivatives as well as a sale and leaseback transaction prepayment to be released upon delivery of the vessel. 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 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 134 NOTE 1 - continued NOTE 1 - continued 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 which can affect the amounts recognized. Judgements Management has assessed that TORM has two cash-generating units (CGUs), being the Main Fleet and the Marine Exhaust cash-generating units. The Main Fleet is comprised of TORM’s LR1, LR2 and MR vessels, which 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 can handle multiple sizes of cargo 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 which are largely independent of those from other vessels or vessel classes. The MR vessels acquired in 2021 with chemical trading capability are operated as all other product tanker vessels and thus included in the Main Fleet CGU. In addition, the activities within the Marine Exhaust segment represent a single CGU because cash inflows are generated independent of the cash inflows from the Main Fleet from serving the existing external customer base of the Marine Exhaust segment. In 2021 and 2020, CGUs outside the Main Fleet in the Tanker segment comprised the two Handysize vessels, which are typically used for shorter and coastal trade routes and more frequent port calls. The Handysize vessels were both disposed of during 2022. Estimates Carrying amounts of vessels The Company evaluates the carrying amounts of the vessels (including newbuildings) to determine if events have occurred which would require a modification of their carrying amounts. The recoverable number of vessels is reviewed based on events or changes in circumstances which would indicate that the carrying amount of its vessels might not be recoverable. In assessing the recoverability of the vessels, the Company reviews certain indicators of potential impairment or indication of any past impairment losses that should be reversed such as reported sale and purchase prices, market demand and general market conditions. Further, market valuations from leading, independent, and internationally recognized shipbrokers are obtained on 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 10. 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. NOTE 2 – LIQUIDITY, CAPITAL RESOURCES, AND SUBSEQUENT EVENTS Liquidity and capital resources As of 31 December 2022, TORM’s cash and cash equivalents including restricted cash totaled USD 324m (2021: USD 172m, 2020: USD 136m), and undrawn and committed credit facilities amounted to USD 93m (2021: 38m, 2020: USD 132m). The undrawn and committed credit facilities consisted of two revolving credit facilities as part of a syndicate loan agreement. TORM had no newbuildings on order as of December 2022 (2021: one, 2020: two). TORM has a Syndicated Facilities Agreement which includes a USD 144m Term Facility Agreement, an undrawn USD 48m Revolving Credit Facility and an undrawn USD 45m Working Capital Facility with maturity in 2026. The undrawn facilities were utilized in 2021 and repaid by TORM in 2022. In addition to the Syndicated Facilities, TORM has a USD 202m Term Facility Agreement with Danish Ship Finance with maturity in 2027. Further, TORM has a USD 31m Term Facility Agreement and a USD 11m Term Facility Agreement both with maturity in 2025, and a USD 21m Term Facility Agreement with maturity in 2026 with Hamburg Commercial Bank. TORM also has a Term Facility Agreement with China Export-Import Bank of USD 41m with maturity in 2030 and with KfW-IPEX Bank of USD 38m with maturity in 2032. As of 31 December 2022, the scheduled minimum payments on mortgage debt and bank loans in 2023 were USD 73m. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 135 NOTE 2 - continued TORM has lease debt of a total of USD 70m with various Japanese leasing providers expiring in 2026, lease debt of a total of USD 211m with BoComm Leasing which consists of a lease facility of USD 46m expiring in 2025, a USD 4m lease facility to finance scrubber and ballast water treatment systems expiring in 2024, a lease facility of USD 91m to finance three second-hand LR2 vessels expiring in 2029 and a facility of USD 71m to finance the two newbuilt LR2 vessels delivered in late 2021 and early 2022, with expiry in 2031. Further, TORM has a lease facility of a total of USD 160m with China Development Bank Financial Leasing with expiry in 2029 and 2032 and a lease facility of USD 37m with China Merchant Bank Financial Leasing with expiry in 2033. As of 31 December 2022, the scheduled minimum payments on lease agreements in 2022 were USD 43m. TORM manages its capital structure for the Group as a whole in order to support our spot-based vessel employment profile. This is done through a conservative leverage, a strong liquidity position and limited off-balance sheet commitments. TORM ongoingly stress tests the capital structure and liquidity position as well as prepares cash forecasts to make sure the capital structure remains robust to potential risks. Besides the liquidity position, the main considerations are loan-to-value ratio, distribution policy, CAPEX commitments, off-balance sheet liabilities, terms and sources of funding vessel investments, hedging of financial market risks and fleet employment strategy, hereunder entering into FFA contracts. In the second quarter of 2022, TORM introduced a new Distribution Policy where we intend to distribute on a quarterly basis excess liquidity above a fixed threshold cash level as of the balance sheet date. For each quarter, the threshold cash level will be determined as the product of cash requirement per vessel and the number of owned and leased vessels in TORM’s fleet as of the balance sheet date. Excess liquidity is determined as TORM’s readily available liquidity less the threshold cash level. The readily available liquidity is defined as i) TORM’s cash balance at the last day of the quarter preceding the relevant distribution date excluding restricted cash, plus ii) undrawn amounts on TORM’s working capital facilities, minus iii) proceeds received from vessel sales, or additional proceeds from vessel refinancing, or securities offerings in the past 12 months earmarked for share repurchases, debt prepayment, vessel acquisitions, or general corporate purposes. The cash requirement per vessel is fixed at: • USD 1.5m for 30 June 2022 • USD 1.8m for 30 September 2022 onwards NOTE 2 - continued TORM’s 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 2022, 2021 and 2020, TORM did not have any covenant breaches, and Management has assessed that a covenant breach in the near future is remote. Subsequent events On 25 January 2023, TORM entered into an agreement to acquire three LR1 vessels which together with another agreement that TORM entered into earlier in January 2023 resulted in TORM purchasing a total of seven 2011-2013 built LR1 vessels for an aggregate cash consideration of USD 233.0m. All vessels are expected to be delivered no later than 30 April 2023 and are expected to be financed by sale and leaseback agreements with a Chinese financial institution. In March 2023, TORM entered into an agreement to purchase three 2013-built MR eco product tanker vessels for a total cash consideration of USD 48.5m and the issuance of 1.42 million shares. The vessels are expected to be delivered no later than 31 May 2023. The cash element of the transaction is expected to be financed through traditional bank financing and in connection with each of the three deliveries, TORM will issue one third of the total share issuance, corresponding to 50% of the total consideration. The transactions will increase TORM's total fleet to 88 vessels on a fully delivered basis. In March 2023, TORM obtained commitment for refinancing of USD 433m bank and leasing agreements into two new bank facilities, thereby extending debt maturities until 2028, with a possibility to extend most of the debt expiration to 2029. Further, TORM has obtained commitment for financing additional second-hand vessels for up to USD 123m with the same expiration terms. Closing of the agreements is subject to documentation and is expected during the second quarter of 2023. The geopolitical risk increased significantly following Russia’s invasion of Ukraine in February 2022. The sanctions imposed on Russia by certain Western nations increased uncertainty on the general energy market, sending the price of crude oil to the highest level since 2014. The initial sanctions were not targeting the oil trade, however, the uncertainty and potential for rerouting of trade flows sent the crude tanker freight rates in the European markets upwards. Due to the continuous development and complexity of the situation, the impact on the tanker markets going forward is uncertain, not least due to the implementation by the EU and other nations of oil import and oil price cap sanctions that were imposed on Russian oil on 05 February 2023. Considering our current customer base, main suppliers and financial counterparties as well as covenants in our loan facilities, we do not expect any direct impact on our operations although we expect increased volatility in freight rates, bunker cost, foreign exchange rates, and vessel values. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 136 NOTE 3 – SEGMENT Segment reporting - consolidated income statement USDm Revenue Port expenses, bunkers, and commissions Other cost of goods and services sold Operating expenses Profit from sale of vessels Administrative expenses Other operating income and expenses Share of profit/(loss) from joint ventures Impairment losses and reversal of impairment on tangible assets Depreciation and amortization Operating profit (EBIT) Financial income Financial expenses Profit before tax Tax Net profit for the year Tanker segment 1,440.4 -458.9 - -202.1 10.2 -52.4 5.8 0.2 -2.6 -138.7 601.9 4.0 -48.7 557.2 5.9 563.1 2022 Marine Exhaust segment Intersegment elimination 5.9 - -3.0 - - -2.6 - - - -0.3 - 0.1 -0.1 - - - -2.9 - 2.4 - - - - - - - Total 1,443.4 -458.9 -0.6 -202.1 10.2 -55.0 5.8 0.2 -2.6 -139.0 -0.5 601.4 - - 4.1 -48.8 -0.5 556.7 - 5.9 -0.5 562.6 Prior to the acquisition of Marine Exhaust Technology A/S (MET) on 01 September 2022, TORM had only one reportable segment, the Tanker segment. Accordingly, comparative segmental information is not provided. The eliminations above represent revenue and other costs of goods and services sold from the installation of scrubbers performed by the Marine Exhaust entities on tanker vessels within the Tanker segment. All revenue from the Tanker segment is derived from external customers. In all material aspects, TORM’s customers are domiciled outside the UK and are spread all over the world with only a few countries contributing significantly to TORM’s revenue. In 2022, Switzerland and Mexico contributed with 15.30% (USD 220.9m) and 12.35% (USD 178.2m) respectively of TORM’s revenue. In 2021, Switzerland and Mexico contributed with 23.16% (USD 143.5m) and 16.0% (USD 96.6m) respectively of TORM’s revenue. In 2020, Switzerland, the United States and Mexico contributed with 24.69% (USD 184.5m), 11.87% (USD 88.7m), and 10.73% (USD 80.2m) respectively of TORM’s revenue. Revenue is allocated to countries based on the customer’s ultimate parent domicile. A major part of TORM’s revenues stems from a small group of customers. In 2022, one customer accounted for 12% of TORM’s revenue in the Tanker segment (2021: one accounted for 15% in the Tanker segment; 2020: one customer accounted for more than 10% in the Tanker segment). TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 137 NOTE 3 – continued Segment reporting - consolidated balance sheet USDm ASSETS NON-CURRENT ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Tangible fixed assets Land and buildings Vessels and capitalized dry-docking 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 Inventories Trade receivables Other receivables Prepayments Cash and cash equivalents incl. restricted cash Total current assets TOTAL ASSETS 2022 Marine Exhaust segment Intersegment elimination Total 1.8 2.0 3.8 3.8 1,855.9 5.6 - - - - -7.5 - -7.5 1,865.3 - - - - - 0.1 4.6 0.5 0.2 5.4 1.8 1.3 3.1 1.0 - 1.5 2.5 - - - - - Tanker segment - 0.7 0.7 2.8 1,863.4 4.1 1,870.3 0.1 4.6 0.5 0.2 5.4 1,876.4 5.6 -7.5 1,874.5 61.1 255.7 72.7 9.7 321.4 720.6 2,597.0 11.0 4.2 1.3 0.7 2.4 19.6 25.2 -0.1 -0.4 - - - -0.5 72.0 259.5 74.0 10.4 323.8 739.7 -8.0 2,614.2 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 138 NOTE 3 – continued Segment reporting - consolidated balance sheet USDm EQUITY AND LIABILITIES Total equity LIABILITIES NON-CURRENT LIABILITIES Non-current tax liability related to held-over gains Deferred tax liability Borrowings Other non-current liabilities Total non-current liabilities CURRENT LIABILITIES Borrowings Trade payables Current tax liabilities Other liabilities Provisions Deferred income Total current liabilities Total liabilities TOTAL EQUITY AND LIABILITIES Non-current asset additions during the year: Goodwill Other intangible assets Land and buildings Vessels and capitalized dry-docking Prepayments on vessels Other plant and operating equipment Total non-current asset additions 2022 Marine Exhaust segment Intersegment elimination Tanker segment Total 1,498.0 6.2 -0.5 1,503.7 45.2 5.8 844.6 2.2 897.8 115.7 46.4 1.6 31.0 6.5 - 201.2 1,099.0 2,597.0 - 0.6 0.3 84.7 43.1 0.8 129.5 - 0.3 5.2 0.8 6.3 1.3 3.5 0.4 0.3 0.3 6.8 12.7 19.0 25.2 1.8 1.2 1.1 - - 1.6 5.7 - - - - - - -1.4 - -0.2 - -5.9 -7.5 -7.5 -8.0 - - - -7.5 - - 45.2 6.1 849.8 3.0 904.1 117.1 48.5 2.0 31.1 6.8 0.9 206.4 1,110.5 2,614.2 1.8 1.8 1.4 77.2 43.1 2.4 -7.5 127.7 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 139 NOTE 3 - continued NOTE 4 – REVENUE FROM CONTRACTS WITH CUSTOMERS The Company’s non-current assets are based on domicile of the legal entity ownership in the following countries: USDm Disaggregation of revenue 2022 2021 2020 Transportation of refined oil products 1,440.4 619.5 747.4 USDm UK Denmark Singapore Other countries Non-current assets 2022 2021 2020 Scrubbers and related services 0.1 - 0.1 Welding and mounting 1,389.7 1,442.9 1,199.9 475.0 516.7 546.3 4.5 2.9 3.7 1,869.3 1,962.5 1,750.0 Accounting policies The segmentation is based on the Group’s internal management and reporting structure. The Group has two operating segments, the Tanker segment, for which the services provided primarily comprise transportation of refined oil products such as gasoline, jet fuel, and naphtha, and the Marine Exhaust segment for which the services provided primarily comprise developing and producing advanced and green marine equipment. Transactions between the segments are based on market-related prices and are eliminated at Group level. TORM considers the global product tanker market as a whole, and as the individual vessels are not limited to specific parts of the world, the Group has only one geographical segment for the Tanker segment. Further, the internal management reporting does not provide geographical information for either the Tanker segment or the Marine Exhaust segment. Consequently, geographical segment information on revenue from external customers or non-current segment assets for the Tanker segment or the Marine Exhaust segment is not provided. Others Total revenue Tanker segment Marine Exhaust segment Intersegment elimination Total revenue USDm Customer contract balances Trade receivables Customer contract assets¹⁾ Customer contract liabilities²⁾ Total ¹⁾ Recognized in prepayments. ²⁾ Recognized in deferred income. 1.2 1.1 0.7 - - - - - - 1,443.4 619.5 747.4 1,440.4 619.5 747.4 5.9 -2.9 - - - - 1,443.4 619.5 747.4 2022 2021 2020 259.5 3.0 -0.9 84.0 2.0 - 58.6 - - 261.6 86.0 58.6 Refer to Note 13 for further information on trade receivables. Customer contract assets primarily relate to prepaid voyage expenses until the cargo load date. During the year, USD 2.0m was recognized relating to customer contracts entered in 2022 (2021: USD 1.4m relating to 2020, 2020: USD 2.6m relating to 2019). Customer contract liabilities primarily relate to prepayments received by customers in connection with scrubber installations. The acquisition of Marine Exhaust Technology A/S resulted in an increase in customer contract liabilities of USD 4.3m. Accounting policies 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 Revenue comprises freight, charter hire, and demurrage revenue from the vessels as well as Marine Exhaust revenue. Revenue is recognized when or as performance obligations are satisfied TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 140 NOTE 4 - continued NOTE 4 - continued by transferring services to the customer, i.e. over time, provided that the stage of completion can be measured reliably. Revenue is measured as the consideration that the Group expects to be entitled to. 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 because the customer receives the benefit during the voyage as it is provided. Revenue is thus recognized upon the customers obtaining control. There is generally only one performance obligation related hereto. A warranty provision is recognized for expected repair costs related to warranty claims for sold marine exhaust equipment within the standard warranty period of one year. These provisions are recognized when the equipment is sold and are based on historical experience. The warranty provision estimates are updated annually. 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. 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. For cross-over voyages, an estimate of incurred demurrage is recognized at the balance sheet date. The Company receives the demurrage payment upon reaching final agreement on the amount, which could be up to approximately 100 days after the original demurrage claim was submitted. Any adjustments to the final agreement are recognized as demurrage revenue. Marine Exhaust revenue Some of the Group’s contracts with customers relate to the sale of marine exhaust equipment with installation services. Customers obtain control of the marine exhaust equipment with installation services when the goods are delivered to the customer, they have completed commissioning and delivery has been accepted by the customers. When without installation services, customers obtain control of the marine exhaust equipment when the goods are delivered to and have been accepted by the customers. NOTE 5 – STAFF COSTS Employee information Staff costs included in operating expenses relate to the 100 seafarers employed under Danish contracts (2021: 106, 2020:109). 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 2022 2021 2020 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 Average number of permanent employees Seafarers Land-based Total 7.7 42.0 49.7 9.7 42.4 52.1 9.2 41.5 50.7 38.8 42.1 42.3 2.9 3.3 1.5 3.2 2.3 3.6 1.3 2.8 1.7 3.3 1.3 2.1 49.7 52.1 50.7 100 386 486 106 341 447 109 332 441 The majority of seafarers on vessels are on short-term contracts. The number of seafarers on short-term contracts in 2022 was on average 1,565 (2021: 1,449, 2020: 1,474). Total seafarers’ costs in 2022 were USD 76.3m (2021: USD 75.9m, 2020: USD 80.5m), which is included in “Operating expenses”. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 141 NOTE 5 - continued USD '000 Non-Executive Board and Committee remuneration, short term 2022 2021 2020 Christopher H. Boehringer David N. Weinstein Göran Trapp Torben Janholt Annette Malm Justad Total Executive Management USD '000 Executive Management remuneration Jacob Meldgaard 2020, TORM A/S¹⁾ 2020, TORM A/S adjustment¹⁾ 2020, TORM plc¹⁾ 2021, TORM A/S¹⁾ 2021, TORM plc¹⁾ 2022, TORM A/S¹⁾ 2022, TORM plc¹⁾ ¹⁾ Paid by legal entity as noted. 210 207 155 - 155 727 235 234 176 - 176 821 Salary Taxable benefits Annual perform- ance bonus 256 200 172 89 139 856 Total 1,052 - 77 1,161 82 1,040 72 41 - - 44 - 39 - 1,262 -125 - 2,355 -125 77 1,161 2,366 - 82 593 1,672 - 72 As discussed in the 2020 Annual Report, at the time of issue the CEO’s bonus figure had yet to be agreed, and instead the Annual Report 2020 included an estimate of DKK 8.4m (USD 1.262m), equating to 120% of the CEO’s base salary. After final agreement with the Remuneration Committee, the CEO’s bonus figure was set at DKK 7.0m (USD 1.1m), equating to 100% of his base salary. Key management personnel consist of the Board of Directors and the Executive Director. Total compensation to key management personnel expensed during the year as detailed in this note amounts to USD 2.5m (2021: USD 3.3m, 2020: USD 3.2m). NOTE 5 - continued Senior Management Team The aggregated compensation paid by the Group to the three (2021: 3) other members of the Senior Management Team in 2022 (excluding CEO Jacob Meldgaard) was USD 2.1m (2021: USD 2.2m, 2020: USD 2.1m), which includes an aggregate of USD 0.1m (2021: USD 0.1m, 2020: USD 0.1m) allocated for pensions (defined contribution plans) for these individuals. LTIP element of CEO Jacob Meldgaard's remuneration package 2022: Grant date RSU LTIP grant¹⁾ Exercise price per share 25-Apr-18 18-Mar-21 23-Mar-22 766,035 255,200 255,200 DKK 53.7 DKK 53.5 DKK 58.0 RSU grant value assuming 100% vesting USD 0.9m USD 0.6m USD 0.5m ¹⁾ LTIP award is fixed by the Board of Directors and was communicated via company announcement no. 10 of 25 April 2018, announcement no. 7 dated 18 March 2021, and announcement no.9 dated 23 March 2022, therefore there is no minimum or maximum for 2018, 2021 and 2022. 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 an 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 RSUs 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). There are no performance conditions associated with this grant of RSUs. Refer to Long-Term Incentive Program – restricted share units granted to the executive director on page 104 for further information. The original RSUs granted to the CEO in 2016 vested in equal installments over a five-year period. Subsequent awards vest in equal installments over three years. Vested RSUs may be exercised for a period of 360 days from each vesting date. Details of the CEO’s awards and interests in Restricted Share Units are set out on page 106. The single figure remuneration table for the CEO does not include any amounts in relation to the RSU awards as there are no performance conditions associated with this grant of RSUs. As detailed in announcement no. 7 issued on 18 March 2021, the CEO was granted a total of 255,200 RSUs which will vest in equal amounts over the next three years. The first amount can be exercised from 01 January 2022. The exercise price for each RSU is DKK 53.5, corresponding to the average price of TORM shares in the 90 calendar days preceding the publication of TORM plc’s 2020 Annual Report plus a 15% premium. Vested RSUs may be exercised for a period of 360 days from each vesting date. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 142 NOTE 5 – continued NOTE 5 – continued As detailed in announcement no. 9 issued on 23 March 2022, the CEO was granted a total of 255,200 RSUs which will vest in equal amounts over the next three years. The first amount can be exercised from 01 January 2023. The exercise price for each RSU is DKK 58, corresponding to the average price of TORM shares in the 90 calendar days preceding the publication of TORM plc’s 2021 Annual Report plus a 15% premium. Vested RSUs may be exercised for a period of 360 days from each vesting date. Accounting policies 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. 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 which will eventually vest. The fair value of the share schemes is calculated using the Black-Scholes model at the grant date. Long-term employee benefit obligations The obligation comprises an obligation under the incentive programs to deliver Restricted Share Units in TORM plc at a determinable price to the entity's key personnel. The RSUs granted entitle the holder to acquire one TORM A-share. The program comprises the following number of shares in TORM plc: Number of shares (1,000) 2022 2021 2020 Outstanding as of 01 January Granted during the period Exercised during the period Expired/forfeited during the period 2,372.9 2,187.5 2,228.3 1,393.0 1,355.1 1,047.4 -1,078.0 -409.4 -107.7 -263.8 -760.3 -980.5 Outstanding as of 31 December 2,424.0 2,372.9 2,187.5 Exercisable as of 31 December - - - In 2020, the Board of Directors 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 at DKK 69.9. The exercise period is 360 days from each 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 of 31 December 2020 is 1.5 years. In 2021, the Board of Directors agreed to grant a total of 1,355,121 RSUs to other management. The vesting period of the program is three years for key employees. The exercise price is set at DKK 53.5. The exercise period is 360 days from each vesting date. The fair value of the options granted in 2021 was determined using the Black-Scholes model and is not material. The average remaining contractual life for the restricted shares as of 31 December 2021 is 1.5 years. In 2022, the Board of Directors agreed to grant a total of 1,137,770 RSUs to other management. The vesting period of the program is three years for key employees. The exercise price is set at DKK 58.0. The exercise period is 360 days from each vesting date. The fair value of the options granted in 2022 was determined using the Black-Scholes model and is not material. The average remaining contractual life for the restricted shares as of 31 December 2022 is 1.5 years. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 143 NOTE 6 – REMUNERATION TO AUDITORS APPOINTED AT THE PARENT COMPANY’S ANNUAL GENERAL MEETING NOTE 7 – INTANGIBLE ASSETS 0.9 0.5 0.4 Balance as of 31 December The remuneration of the auditor is required to be presented as follows: USDm Audit fees Fees paid 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 Others Total non-audit fees Total 2022 2021 2020 0.1 1.0 0.2 - 0.2 0.4 0.3 0.8 0.1 0.1 - 0.2 0.2 0.6 0.0 0.1 - 0.1 1.4 1.0 0.7 Under SEC regulations, the remuneration of the auditor of USD 1.4m (2021: USD 1.0m, 2020: USD 0.7m) is required to be presented as follows: Audit USD 1.4m (2021: USD 0.8m, 2020: USD 0.6m), audit-related USD 0.0m (2021: other audit related services USD 0.1m, 2020: USD 0.0m) and tax services USD 0.0m (2021: tax related services USD 0.1m, 2020: USD 0.1m). 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. USDm Goodwill Cost: Balance as of 01 January Additions from business combinations Impairment: Balance as of 01 January Impairment losses Balance as of 31 December 2022 2021 2020 11.4 1.8 11.4 11.4 - - 13.2 11.4 11.4 11.4 11.4 11.4 - - - 11.4 11.4 11.4 Carrying amount 1.8 - - The opening balance on goodwill cost and impairment relates to the reverse acquisition of TORM A/S in 2015, which was impaired in 2016. The goodwill addition during the year of USD 1.8m relates to the acquisition of Marine Exhaust Technology A/S, which is allocated to the Marine Exhaust cash-generating unit. Please refer to note 33 for further reference on acquisition and note 10 for further reference on impairment testing. USDm Other intangible assets Cost: Balance as of 01 January Exchange rate adjustments Additions Additions from business combinations Transfer from other items Balance as of 31 December Amortization: Balance as of 01 January Amortization for the year Transfer from other items Balance as of 31 December Carrying amount 2022 2021 2020 - 0.2 0.6 1.2 0.3 2.3 - 0.3 0.1 0.4 1.9 - - - - - - - - - - - - - - - - - - - - - - TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 144 NOTE 7 - continued NOTE 8 – TANGIBLE FIXED ASSETS Accounting policies Goodwill Goodwill is measured as the excess of the cost of the business combination over the fair value of the acquired assets, liabilities, and contingent liabilities and is recognized as an asset under intangible assets. For each business combination, TORM elects whether to measure the non- controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. Goodwill is not amortized as it is considered to have an indefinite useful life, but the recoverable amount of goodwill is assessed annually. For impairment testing purposes, goodwill is on initial recognition allocated to the cash generating unit expected to benefit from the synergies of the combination. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is first allocated to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss for goodwill is not reversed in a subsequent period. Other intangible assets Other intangible assets consist of software as well as scrubber test facility development costs and customer list acquired in connection with the Marine Exhaust Technology A/S acquisition. Other intangible assets are measured at cost less accumulated amortization and impairment losses. Other intangible assets are considered as having finite useful lives and are amortized on a straight- line basis over: • Software: 3 years • Scrubber test facility: 2 years • Customer list: 7 years USDm Land and buildings Cost: Balance as of 01 January Exchange rate adjustment Additions Additions from business combinations Disposals Balance as of 31 December Depreciation: Balance as of 01 January Exchange rate adjustment Disposals Depreciation for the year Balance as of 31 December 2022 2021 2020 10.9 -0.3 0.3 1.1 - 12.0 6.1 -0.2 - 2.3 8.2 11.7 -0.1 0.1 - -0.8 10.9 4.6 - -0.8 2.3 6.1 10.4 - 1.3 - - 11.7 2.3 - - 2.3 4.6 Carrying amount as of 31 December 3.8 4.8 7.1 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 145 NOTE 8 - continued NOTE 8 - continued USDm Vessels and capitalized dry-docking Cost: Balance as of 01 January Additions Disposals Transferred from prepayments Transferred to assets held for sale Balance as of 31 December Depreciation: Balance as of 01 January Disposals Depreciation for the year Transferred to assets held for sale Balance as of 31 December Impairment: Balance as of 01 January Impairment losses on tangible fixed assets¹⁾ Transferred to assets held for sale 2022 2021 2020 USDm 2022 2021 2020 Prepayments on vessels Cost: 2,443.3 2,160.1 2,064.2 Balance as of 01 January 77.2 290.3 102.5 Additions -14.2 55.1 -40.9 78.6 -29.8 Transferred to vessels 148.1 Balance as of 31 December -140.2 -44.8 -124.9 2,421.2 2,443.3 2,160.1 Carrying amount as of 31 December 12.0 43.1 12.0 78.6 95.0 65.1 -55.1 -78.6 -148.1 - - 12.0 12.0 12.0 12.0 475.0 406.2 360.6 During the year, borrowing costs of USD nil (2021: 0.6m, 2020: nil) have been capitalized. The capitalization rate in 2021 was 3.7% and in 2020: 0.0%. -14.2 133.7 -50.7 543.8 30.5 2.7 -11.7 -40.9 -29.8 126.2 118.4 -16.5 475.0 -43.0 406.2 31.4 4.6 -5.5 28.8 11.1 -8.5 31.4 USDm Other plant and operating equipment Cost: Balance as of 01 January Exchange rate adjustment Additions Additions from business combinations Disposals Transfers Balance as of 31 December 21.5 30.5 Carrying amount as of 31 December 1,855.9 1,937.8 1,722.5 ¹⁾ For additional information regarding impairment considerations, please refer to Note 10. Included in the carrying amount for “Vessels and capitalized dry-docking” are capitalized dry- docking costs in the amount of USD 50.1m (2021: USD 65.9m, 2020: USD 66.1m). Included in the carrying amount for “Vessels and capitalized dry-docking” are vessels on short- term time charter leases (as lessor) in the amount of USD 13.7m (2021: 398.8m, 2020: 488.2m). Please refer to Note 22 for expected redelivery of the vessels. Depreciation: Balance as of 01 January Exchange rate adjustment Disposals Depreciation for the year Transfers Balance as of 31 December 3.0 -0.2 -0.6 2.8 -0.1 4.9 0.8 -0.1 -0.1 2.4 - 3.0 Balance as of 31 December 10.5 9.3 Carrying amount as of 31 December 5.6 6.3 6.8 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 146 2022 2021 2020 9.3 -0.2 0.8 1.6 -0.7 -0.3 7.6 -0.1 1.9 - -0.1 - 8.1 - 3.8 - -4.3 - 7.6 3.8 - -4.2 1.2 - 0.8 NOTE 8 - continued NOTE 8 - continued For information on assets provided as collateral security, please refer to Note 20. Please refer to Note 10 for information on impairment testing. The depreciation expense related to “Other plant and operating equipment” of USD 2.8m relates to “Administrative expense” (2021: USD 2.4m, 2020: USD 1.2m). Depreciation and impairment losses on tangible fixed assets on “Vessels and capitalized dry-docking” relate to operating expenses. 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. Accounting policies Vessels Vessels consist of owned vessels and leased vessels. The accounting policy for leased vessels is specified under “Leases”. Owned vessels are measured at cost less accumulated depreciation and accumulated impairment losses. Costs comprise acquisition costs 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 life, which TORM estimates to be 25 years for newbuildings. TORM considers that a 25-year depreciable life is appropriate and consistent with what is used by other shipowners with comparable tonnage. Depreciation is based on costs less the estimated residual value. Residual value is estimated as the lightweight tonnage of each vessel multiplied by the 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 TORM’s business plans. TORM also evaluates the carrying amounts to determine if events have occurred which 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 thereof 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 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. Prepayments on vessels Prepayments consist of prepayments related to newbuilding contracts for vessels not yet delivered and include the share of borrowing costs 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 3–15 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. 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 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 147 NOTE 8 - continued NOTE 9 - continued when the asset is available for immediate sale in its present condition subject to terms which are usual and customary for sales of such assets, and when its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Assets held for sale mainly refer to vessels being sold and are measured at the lower of their previous carrying amount and fair value less costs to sell. Gains are recognized on delivery to the new owners in the income statement in the item “Profit from sale of vessels”. Anticipated losses are recognized at the time when the asset is classified as held-for-sale in the item “Impairment losses on tangible and intangible assets”. NOTE 9 – LEASING TORM leases office buildings, some vehicles, and other administrative equipment. Except for 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 8. USDm Cost: Balance as of 01 January 2021 Exchange rate adjustments Additions Disposals Balance as of 31 December 2021 Depreciation: Balance as of 01 January 2021 Disposals Depreciation for the year Balance as of 31 December 2021 Other plant and operating equipment Land and buildings 11.7 -0.1 0.1 -0.8 10.9 4.6 -0.8 2.3 6.1 0.6 - 0.2 -0.1 0.7 0.4 -0.1 0.2 0.5 As of 31 December 2022, TORM had recognized the following right-of-use assets: Carrying amount as of 31 December 2021 4.8 0.2 USDm Cost: Balance as of 01 January 2022 Exchange rate adjustments Additions Additions from business combinations Disposals Balance as of 31 December 2022 Depreciation: Balance as of 01 January 2022 Exchange rate adjustment Disposals Depreciation for the year Balance as of 31 December 2022 Other plant and operating equipment Land and buildings 10.9 -0.3 0.3 1.1 - 12.0 6.1 -0.2 - 2.3 8.2 0.7 - 0.1 0.9 -0.4 1.3 0.5 - -0.3 0.2 0.4 USDm Cost: Balance as of 01 January 2020 Additions Disposals Balance as of 31 December 2020 Depreciation: Balance as of 01 January 2020 Disposals Depreciation for the year Balance as of 31 December 2020 Carrying amount as of 31 December 2020 Vessels and capitalized dry- docking Other plant and operating equipment Land and buildings 42.4 - -42.4 10.4 1.3 - 0.6 - - - 11.7 0.6 15.5 -17.1 1.6 - - 2.3 - 2.3 4.6 0.2 - 0.2 0.4 7.1 0.2 Carrying amount as of 31 December 2022 3.8 0.9 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 148 NOTE 9 - continued NOTE 9 – continued 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 of. The table below describes the nature of the Group’s leasing activities by type of right-of-use assets recognized on the balance sheet as of 31 December 2022: 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 Other plant and operating equipment Land and buildings 16 20 0 - 6 years 0 - 4 years 1.8 years 1.8 years 12 - 10 9 1 13 Lease liabilities regarding right-of-use assets are included on the balance sheet under “Borrowings”. USDm 2022 2021 2020 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 2.7 2.6 - 5.3 2.8 3.0 0.1 5.9 2.8 5.9 0.1 8.8 5.0 5.6 8.3 2.5 2.5 3.7 1.9 6.2 2.1 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. Lease payments not recognized as a liability TORM 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. Cash outflow for leases The total cash outflow for leases amounts to USD 2.7m (2021: USD 2.8m, 2020: UDS 2.3m). Accounting policies 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. 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. Leases to charter out vessels are classified as operating leases as the leases are short-term in nature and usually less than one year. Chartered-out vessels are presented as part of Vessels and capitalized dry-docking. Please refer to Note 6. The lease income is recognized in the income statement on a straight-line basis over the lease term. 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 including repurchase options at lower value that the initial sales price, 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 under Vessels and capitalized dry-docking. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 149 NOTE 10 – IMPAIRMENT TESTING NOTE 10 - continued Following the acquisition of Marine Exhaust Technology A/S and the 2022 disposal of the two remaining Handysize vessels, the Management of TORM has assessed that TORM has two CGUs being the Main Fleet and the Marine Exhaust cash-generating unit. Based on this review, Management concluded that as of 31 December 2022 assets within the Main Fleet were not impaired as fair value less costs of disposal exceeded the carrying amount by USD 784m. As of 31 December 2022, Management tested the carrying amount of the Main Fleet and the Marine Exhaust investment for impairment as further set out below. Tanker segment 31 December 2022 As of 31 December 2022, the assessment of the recoverable amount of the Main Fleet is based on the fair value less cost of disposal of the vessels. The Main Fleet is comprised of TORM’s LR1, LR2 and MR vessels, which 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. All vessels in the Main Fleet can handle multiple sizes of refined oil cargos and sail all seas and oceans, over both short and long distances. Given the technical specifications and capacity of the vessels, the Main Fleet is relatively homogenous with a very high degree of interoperability. The Main Fleet includes the 2021 acquired MR vessels with chemical trading capability, which are operated as all other product tanker vessels. The recoverable amount of the Main Fleet as of 31 December 2022 amounts to USD 2,647m, and is based on the market approach which considers the valuations from two internationally acknowledged shipbrokers with appropriate qualifications and recent experience in the valuation of vessels. The shipbrokers’ primary input is deadweight tonnage, yard, and age of the vessel. The fair value assumes that the vessels are in good and seaworthy condition and with prompt, charter- free delivery. The fair value less costs of disposal of the vessels is determined to be within Level 3 of the fair value hierarchy. We have assessed the impact from climate changes and the potential adverse impact on vessel values, however, no specific adjustments in this respect have been reflected in the impairment testing of the Main Fleet given the recoverable amount has been based on the fair value less costs of disposal. Further discussion can be found in the Audit Committee Report, page 91 and TCFD, pages 75-77. We continue to monitor the development closely, and we continuously work on more specific plans for our ambition to have zero CO2 emissions from operating our fleet by 2050, which may impact our impairment testing in the future. Impairments recognized during 2022 of USD 2.7m (2021: USD 4.6m) as set out in Note 8 relate to the disposal of individual vessels during the year. The recoverable amount of the vessels was based on fair value less costs of disposal, which amounted to USD 31.8m. The fair value was based on sales price less transaction costs (fair value hierarchy level 2). 31 December 2021 and 31 December 2020 As of 31 December 2021and 2020, the assessment of the recoverable amount of the Tanker Fleet was based on the value in use for the Main Fleet and Handysize CGUs. The results of impairment testing were summarized as follows: Impairment losses and (reversals) Discount rate applied Recoverable amount Excess values (value in use over carrying amount) 2021 2020 2021 2020 2021 2020 2021 2020 CGU USDm USDm Main Fleet Handysize ¹⁾ Total - - - - 5.5 5.5 % 6.7 6.7 % USDm USDm USDm USDm 7.0 2,276 1,747 269 7.0 26 27 - 2,302 1,774 269 8 - 8 ¹⁾ 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 transportation of various clean petroleum products within Europe and in the Mediterranean. The impairment test was sensitive to reasonably possible changes in key assumptions. 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 2022-2024 was based on TORM’s business plans. Beyond 2024, the freight rates was based on TORM’s 10-year historical average rates, adjusted for expected inflation of 2% in line with US Federal Reserve and ECB target over the medium term. TORM believed that the approach used for long-term rates appropriately reflected the cyclical nature of the shipping industry and was the most reliable estimate for periods beyond those included in its three-year business plan. TORM’s business plans for 2022-2024 and beyond also included the anticipated benefit arising from the installation of scrubbers on certain of the Group’s vessels (the “scrubber premium”). This is based on current market differentials between the cost of heavy and low-sulphur fuel oil. As part of determining fair value, the impact of climate changes and the climate agenda on the global oil demand, emission regulations, and operating expenses, etc. was considered with TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 150 NOTE 10 - continued NOTE 10 - continued focus on the short to medium term implications and our commitment to reduce CO2 emissions by 40% by 2025 and 45% by 2030. However, no adverse impact of climate changes was anticipated in impairment testing our current fleet. We continue to monitor the development closely and are working on more specific plans for our ambition to have zero CO2 emissions from operating our fleet by 2050, which may impact our impairment testing in the future. The discount rate used in the value in use calculation was based on a Weighted Average Cost of Capital (WACC) of 6.7% as of 31 December 2021 (2020: 7.0%, 2019: 7.5%). WACC was calculated by using a standard WACC model in which cost of equity, cost of debt and capital structure were the key parameters. As of 31 December 2021, the 10-year historical average spot freight rates used in the value in use calculation were as follows: LR2: USD/day 19,111 (2020: USD/day 18,884, 2019: USD/day 17,986) • • LR1: USD/day 17,856 (2020: USD/day 17,443, 2019: USD/day 17,060) • MR: USD/day 16,044 (2020: USD/day 16,076, 2019: USD/day 15,802) • Handysize: USD/day 13,208 (2020: USD/day 13,435, 2019: USD/day 13,601) Operating expenses and administrative expenses were estimated based on TORM's business plans for the period 2022-2024. Beyond 2024, operating expenses were adjusted for 2% inflation (2020: 2%), and administrative expenses were adjusted for 2% inflation (2020: 2%) in line with US Federal Reserve and ECB target over the medium term. The product tankers were 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 14 years (2020: approximately 15 years). The estimated residual value of the vessels was based on TORM’s green recycling policy. The impairment test was sensitive to reasonably possible changes in the key assumptions, which may result in future impairments. These were related to the future development in freight rates, the WACC applied as discounting factor in the calculations, and the development in operating expenses. All other things being equal, the sensitivities to the value in use have been assessed as follows: • An increase/decrease in the tanker freight rates of USD/day 1,000 would result in an increase/decrease in the value in use of USD 285m and USD 6m for the Main Fleet and the two Handysize 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 setup. The fair value based on broker values for vessels in the Main Fleet including the order book and leased vessels was USD 1,892m (2020: USD 1,577m), which is USD 72m below the carrying amount (2020: which was USD 245m below the carrying amount). The fair value based on broker values for the Handysize vessels was 21m (2020: USD 22m), which is USD 3m below the carrying amount (2020: which was USD 10m below the carrying amount). Marine exhaust segment 31 December 2022 As of 31 December 2022, the assessment of the recoverable amount of the Marine Exhaust cash- generating unit is based on value in use. The result of the impairment test showed an excess value of USD 3.2m compared to the carrying amount. No impairment of goodwill was recognized as of 31 December 2022. Key assumptions used in the determination of value in use The value in use is calculated based on future cash flows using a five-year budget period from 2023-2027. The future cash flows are based on the budget for 2023, assuming no growth in sales. Cost of goods sold is calculated using the gross margins from the 2023 budget. The gross margins are assumed to be constant in the budget period. Operating costs are based on the 2023 budget and are being inflated in the forecast period with the assumed inflation rates of 2-3% p.a. Cash levels are assumed constant in the forecast period, investments in non-current assets are USD 0.3m in 2023 and zero afterwards, and lastly, leasing liabilities are assumed constant. The terminal value extending beyond 2027 are based on a continuation of beforementioned parameters. The discount rate used in the value in use calculation was based on a Weighted Average Cost of Capital (WACC) of 10.8% as of 31 December 2022 (2021: n/a). The WACC was calculated by using a standard WACC model in which cost of equity, cost of debt and capital structure were the key parameters. The impairment test was sensitive to reasonably possible changes in the key assumptions, which may result in future impairments. These were related to the future development in sales across all revenue segments. All other things being equal, the sensitivities to the value in use have been assessed as follows: • An increase/decrease in the total sales of 10.0% would result 2023 and onwards an • An increase/decrease in WACC of 1.0% would result in an increase/decrease in the value in increase/decrease in the value in use of USD 3.8m. use of approx. USD 148-167m and USD 2m for the Main Fleet and the two Handysize vessels, respectively • An increase/decrease in operating expenses of 10.0% would result in a decrease/increase in the value in use of USD 201m and USD 4m for the Main Fleet and the two Handysize vessels, respectively TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 151 NOTE 10 - continued Accounting policies 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 in market rates of return, or in the cash flows expected to be generated by the fleet. At least annually, or if impairment indicator(s) exists, an impairment test on a CGU level will be performed. A CGU 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 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 CGU 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. For the purpose of assessing impairment, assets, time charter and bareboat contracts are grouped at the lowest levels at which impairment is monitored for internal management purposes. NOTE 11 – LOAN RECEIVABLES USDm Loan receivables Cost: Balance as of 01 January Balance as of 31 December Expected credit loss: Balance as of 01 January Balance as of 31 December 2022 2021 2020 4.7 4.7 4.7 4.7 4.7 4.7 0.1 0.1 0.1 0.1 0.1 0.1 Carrying amount as of 31 December 4.6 4.6 4.6 The loans were issued as part of sale and lease back transactions in 2019 for two MR vessels. The loans will 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. Accounting policies Loan receivables Loan receivables are initially recognized on the balance sheet as fair value less transaction costs. After 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). TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 152 NOTE 12 – FINANCIAL ITEMS NOTE 13 – TRADE RECEIVABLES USDm Financial income Interest income from cash and cash equivalents, including restricted cash ¹⁾ Total Financial expenses Interest expenses on borrowings ¹⁾ Financial expenses arising from lease liabilities regarding right-of-use assets Exchange rate adjustments, including loss from forward exchange rate contracts Commitment fee Amortization of interest rate swaps Ineffectiveness on interest rate swaps Other financial expenses Total 2022 2021 2020 USDm 2022 2021 2020 Analysis as of 31 December of trade receivables: Gross trade receivables: 4.0 4.0 0.2 0.2 0.5 0.5 Not due Due < 30 days 48.5 40.0 45.6 Due between 30 and 180 days Due > 180 days Total gross 0.2 0.3 1.5 Allowance for expected credit loss Total net 122.3 52.1 76.8 14.2 265.4 5.9 259.5 43.4 17.9 23.2 2.6 87.1 3.1 84.0 17.9 10.8 23.7 12.0 64.4 5.8 58.6 0.5 0.6 2.4 -3.6 0.2 48.8 0.5 1.1 1.4 -1.2 0.3 42.4 1.0 1.5 - - 0.3 49.9 Management makes allowance for expected credit loss based on “the simplified approach” according to IFRS 9 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: Total financial items -44.8 -42.2 -49.4 USDm ¹⁾ Interest for financial assets and liabilities not at fair value through profit and loss. Allowance for expected credit loss Accounting policies 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 considering 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 considering the effective interest rate. Balance as of 01 January Provisions for the year Provisions reversed during the year Balance as of 31 December 2022 2021 2020 3.1 3.4 -0.6 5.9 5.8 0.7 -3.4 3.1 3.7 3.1 -1.0 5.8 Allowance for expected credit loss of trade receivables has been recognized in the income statement under “Port expenses, bunkers, commissions, and other costs of goods sold”. Allowance for expected credit loss of trade receivables is calculated using an ageing factor as well as 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. Accounting policies Receivables Outstanding trade receivables and other receivables which are expected to be realized within 12 months from the balance sheet date are classified as “Trade receivables” or “Other receivables” and presented as current assets. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 153 NOTE 13 - continued 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 are, at initial recognition, 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. NOTE 14 – OTHER RECEIVABLES USDm Derivative financial instruments Escrow accounts Other Balance as of 31 December 2022 55.3 14.9 3.8 74.0 2021 8.3 27.4 4.3 40.0 2020 4.5 14.9 5.5 24.9 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 25 for further information on fair value hierarchies. NOTE 16 – TAX USDm Tax for the year Current tax for the year Adjustments related to previous years Adjustment of deferred tax Income tax charge for the year Tonnage tax charge for the year Total 2022 2021 2020 0.5 -0.1 -7.3 -6.9 1.0 -5.9 0.6 -0.1 -0.1 0.4 0.9 1.3 0.4 0.1 - 0.5 0.9 1.4 Adjustment of deferred tax of USD 7.3m for the year ended 31 December 2022 primarily consists of the recognition of deferred tax assets for unused tax credits for charges subject to the corporate interest restriction and for carried forward losses, which now qualify for recognition as a result of the deferred tax liability related to the unrealized gain on interest swaps. 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 investment 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 vessels based on a sliding scale Corporate income tax is primarily levied on the Group’s non-vessel-related activities. The effective tax rate of the Group is -1% (2021: 3.3%, 2020 1.6%). Net deferred tax liability in relation to entities outside the tonnage tax regime amounts to USD 5.5m. USDm 2022 2021 2020 NOTE 15 – PREPAYMENTS USDm Prepaid insurance payments Prepaid bareboat hire Prepaid customer contract assets Other prepayments Balance as of 31 December 2022 2021 2020 - 3.0 3.0 4.0 10.0 0.8 0.4 2.0 2.4 5.6 0.7 0.3 - 1.2 2.2 Deferred tax recognised in the balance sheet Deferred tax asset Deferred tax liabilities Deferred tax, net as of 31 December Balance as of 01 January Deferred tax for the year Deferred tax relating to changes in equity Additions from business combinations Other changes Balance as of 31 December 0.6 -6.1 -5.5 0.6 7.3 -13.2 -0.3 0.1 -5.5 0.7 - 0.6 0.3 0.1 - - 0.3 0.7 0.3 - 0.3 - - - - 0.3 0.3 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 154 NOTE 16 – continued NOTE 16 – continued The deferred tax asset is derived from prior-year losses and can only be utilized on taxable income arising from the same trade as when the tax losses were incurred. The tax value of tax loss carry forwards is included in deferred tax assets to the extent that these are expected to be utilized in future taxable income. 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. As per December 2022, there are unused tax credits of USD 2.2m (2021: USD 13.5m) relating to prior year losses, as the utilization of these losses may not be used to offset taxable profit due to a high degree of uncertainty of future taxable profits. The deferred tax liability is derived from temporary differences between the accounting and tax values of derivative financial instruments of USD 13.2m and intangible assets of USD 0.3m. Deferred tax is calculated at the income tax rates which are expected to apply in the period when the liability is settled or the asset is realized, based on the laws which 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 recognized related to assets and liabilities, including vessels which are subject to tonnage tax. USDm 2022 2021 2020 Non-current tax liability related to held-over gains Balance as of 31 December 45.2 45.2 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 which 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. Accounting policies 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. 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. NOTE 17 – COMMON SHARES AND TREASURY SHARES Common shares 2022 2021 2020 A-shares B-shares C-shares Total Nominal value per share (USD) Number of shares Number of shares Number of shares 0.01 82,311,299 81,233,269 74,855,929 0.01 0.01 1 1 1 1 1 1 82,311,301 81,233,271 74,855,931 During the year, the share capital was increased by 1,078,030 A-shares with a nominal value of USD 10,780.30 in connection with exercises of Restricted Share Units leading to a total cash contribution of USD 8.0m. During 2021, the share capital was increased by 6,377,340 A-shares with a nominal value of USD 63,773.40. The total amount including share premium amounted to USD 57.9m. USD 55.0m was a non-cash increase in conjunction with the acquisition of the eight Team Tanker vessels, and USD 2.9m was contributed in cash in connection with exercises of Restricted Share Units. During 2020, the share capital was increased by 107,681 A-shares with a nominal value of USD 1,076.81 in connection with exercises of Restricted Share Units leading to a total cash contribution of USD 0.8m. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 155 NOTE 17 - continued The A-shares are listed on Nasdaq in Copenhagen and Nasdaq in New York and are publicly available for trading. Each A-share carries one vote at the General Meetings and gives the shareholders the 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 Meetings, has no pre- emption rights in relation to any issue of new shares of other classes, and carries no right to receive dividends, liquidation proceeds, or other distributions from TORM. The holder of the B-share has the right to elect one member to the Board of Directors (being the Deputy Chairman), up to three alternates as well as one Board Observer. The B-share cannot be transferred or pledged, except for a transfer to a replacement trustee. The C-share represents 350,000,000 votes at the General Meetings 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. Treasury shares Number of shares ('000) Balance as of 01 January Additions Balance as of 31 December Nominal value USD '000 Balance as of 01 January Additions Balance as of 31 December 2022 2021 2020 493.4 493.4 312.9 - - 180.5 493.4 493.4 493.4 2022 2021 2020 4.9 - 4.9 4.9 - 4.9 3.1 1.8 4.9 NOTE 17 – continued Treasury shares - continued Percentage of share capital Balance as of 01 January Additions Dilution due to capital increases Balance as of 31 December 2022 2021 2020 0.6% 0.7% - - 0.6% - -0.1% 0.6% 0.4% 0.2% 0.1% 0.7% The total consideration during the year for the treasury shares was USD 0.0m (2021: USD 0.0m, 2020: USD 1.3m). As of 31 December 2022, the Company's holding of treasury shares represented 493,371 shares (2021: 493,371 shares, 2020: 493,371 shares) of USD 0.01 each at a total nominal value of USD 0.0m (2021: USD 0.0m, 2020: USD 0.0m) and a market value of USD 14.0m (2021: USD 3.9m, 2020: USD 3.7m). Restricted Share Units 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. NOTE 18 – OTHER LIABILITIES USDm Accrued operating expenses Accrued interest Wages and social expenses Derivative financial instruments Other 2022 12.0 3.6 15.0 1.9 1.6 2021 11.8 2.3 15.1 11.3 3.2 Balance as of 31 December 34.1 43.7 2020 14.3 3.1 16.8 24.7 0.9 59.8 Hereof non-current Hereof current 3.0 31.1 - - 43.7 59.8 The carrying amount is a reasonable approximation of fair value due to the short-term nature of the payable. Please refer to Note 25 for further information on fair value hierarchies. Accounting policies Other liabilities are generally measured at amortized cost. Derivative financial instruments included in other liabilities are measured at fair value. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 156 NOTE 19 - EFFECTIVE INTEREST RATE, OUTSTANDING BORROWINGS As of 31 December 2022, TORM had an undrawn USD 45m Working Capital Facility and an undrawn USD 47m Revolving Credit Facility as part of the Term Facility. Please refer to Note 2 for further information on the Company’s liquidity and capital resources as well as to Note 2 Subsequent events for commitment obtained for refinancing existing facilities and Notes 23 and 24 for further information on interest rate swaps and financial risks. USDm Borrowings CEXIM (USD) Term Facility DSF Facility HCOB Facility HCOB Facility 2 KFW Facility BoComm 1 (USD)³ BoComm 2 (USD)³ ⁾ BoComm 3 (USD)³ ⁾ CDBL³ Springliner (USD)³ ⁾ Eifuku (USD)³ ⁾ ⁾ Showa (USD)³ ⁾ CMBFL³ ⁾ Other credit facilities ⁾ Sale and leaseback transaction prepayment Weighted average effective interest rate⁴⁾ Total borrowings Borrowing costs included (amortised costs) Right-of-use lease liabilities Total Hereof non-current Hereof current Fixed/ floating Maturity 2022 Effective interest¹⁾ Carrying value²⁾ Maturity 2021 Effective interest¹⁾ Carrying value²⁾ Maturity 2020 Effective interest¹⁾ Carrying value²⁾ Floating Floating Floating Floating Floating Floating Floating Floating Floating Fixed Fixed Floating Floating Fixed Fixed N/A 2030 2026 2027 2025 2026 2032 2025 2031 2029 2029 2026 2026 2024 2033 2026 - 7.0% 7.6% 6.7% 9.9% 8.3% 7.1% 8.7% 7.4% 7.8% 5.8% 4.8% 7.9% 8.6% 4.9% 3.1% - 7.1% 41.1 143.8 201.8 42.4 21.1 37.9 49.4 71.3 90.9 160.8 30.7 20.9 18.7 37.3 4.9 2030 2026 2027 2025 2026 2032 2025 2031 2029 2029 2026 2026 2024 - - - 2022 4.0% 3.8% 3.6% 5.1% 4.5% 4.1% 4.9% 4.9% 4.9% 5.8% 4.8% 4.3% 4.1% - - - 4.4% 973.0 -11.1 5.0 966.9 849.8 117.1 44.9 279.4 221.9 85.3 25.4 40.9 59.2 37.8 99.5 150.8 33.4 22.4 20.9 - - 21.0 1,142.8 -13.0 5.7 1,135.5 926.5 209.0 2030 2026 2027 2025 2025 2032 2025 - - - 2026 2026 2024 - - - 3.2% 3.0% 2.9% 4.3% 3.9% 3.3% 4.1% - - - 4.8% 3.9% 3.3% - - - 3.4% 96.4 299.1 150.3 81.2 33.3 44.0 57.8 - - - 36.0 24.1 23.0 - - - 845.2 -10.9 8.1 842.4 739.5 102.9 ¹⁾ Effective interest rate includes deferred and amortized bank fees. ²⁾ Because of the floating interest rate, the carrying value of the Group's borrowings is approximately equal to the fair value except for fixed rate borrowings, where the fair value amounts to USD 223.5m (compared to a total carrying value as of 31 December 2022 of USD 233.7m) ³⁾ Lease debt recognized under sale and leaseback arrangement with repurchase options (accounted for as finance transactions). ⁴⁾ Please refer to note 23 for average interest rate including hedges TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 157 NOTE 19 - continued NOTE 19 - continued The following table summarizes the reconciliation of liabilities arising from financing activities: Accounting policies Borrowings consist of mortgage debt, bank loans, and lease liabilities. Cash movements Non-cash movements Opening balance as of 01 January USDm 2022 Borrowings Repay- ments Borrowings 1,135.4 96.3 -275.2 Total 1,135.4 96.3 -275.2 End balance as of 31 December 2022 Other changes 2.5 2.5 966.9 966.9 Business combin- ations 7.9 7.9 Cash movements Non-cash movements Opening balance as of 01 January USDm 2021 Borrowings Repay- ments Business combin- ations Other changes End balance as of 31 December 2021 Borrowings 842.4 548.8 -253.4 -2.4 1,135.4 Total 842.4 548.8 -253.4 - -2.4 1,135.4 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. NOTE 20 – COLLATERAL SECURITY FOR BORROWINGS The total carrying amount for vessels which have been provided as security for borrowings amounts to USD 1,856m as of 31 December 2022 (2021: USD 1,928m, 2020: USD 1,711m), including transferred ownership under sale and leaseback arrangements accounted for as financing transactions, where the vessels are not derecognized and where vessels are provided as security for lease debt. Cash movements Non-cash movements Please refer to Note 1 for further information. Opening balance as of 01 January USDm 2020 Borrowings Repay- ments Business combin- ations Other changes End balance as of 31 December 2020 Borrowings 855.4 734.3 -746.5 Total 855.4 734.3 -746.5 - 0.8 0.8 842.4 842.4 NOTE 21 – GUARANTEE COMMITMENTS AND CONTINGENT LIABILITIES The guarantee commitments of the Group are less than USD 0.1m (2021: USD 0.1m, 2020: USD 0.1m) and relate to guarantee commitments to Danish Shipping. 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. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 158 NOTE 22 – CONTRACTUAL OBLIGATIONS AND RIGHTS The following table summarizes the Group's contractual obligations as of 31 December 2022. 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 The following table summarizes the Group's contractual obligations as of 31 December 2021. 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 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 2023 2024 2025 2026 2027 Thereafter Total 119.8 130.0 127.2 185.9 161.7 253.4 34.8 3.3 - 17.3 81.6 30.6 1.6 - 1.1 - 24.7 2.5 18.0 2.2 14.1 5.5 - - - - - - - - - 22.1 11.1 - - 2.5 978.0 144.3 26.2 - 18.4 84.1 256.8 163.3 154.4 206.1 181.3 289.1 1,251.0 2022 2023 2024 2025 2026 Thereafter Total 211.7 129.9 139.3 134.2 43.4 -0.3 39.9 8.1 62.5 38.6 -0.8 - 0.5 - 33.0 -0.7 25.4 -0.1 - - - - - - 181.4 17.8 0.2 - - - 351.9 1,148.4 35.3 2.8 - - - 193.5 1.1 39.9 8.6 62.5 365.3 168.2 171.6 159.5 199.4 390.0 1,454.0 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 2025 Thereafter Total 114.4 106.9 315.3 17.6 0.9 12.4 1.4 12.4 6.1 - - - - - - - - - 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⁾ The presented amounts to be repaid do not include directly related costs arising from the issuing of the loans of USD 11.1m (2021: USD 13.0m. 2020: USD10.9m), which are amortized over the term of the loans. Borrowing costs capitalized during the year amount to USD 0.7m (2021: USD 5.8m, 2020: USD 7.5m). ²⁾ Variable interest payments are estimated based on the forward rates for each interest period including hedging instruments. ³⁾ As of 31 December 2022, TORM had zero contracted newbuildings (2021: one, 2020: two). Commitments regarding newbuilding installments are in excess of the prepayments included in note 8. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 159 NOTE 22 - continued TORM has contractual rights to receive future payments as lessor of vessels on time charter and bareboat charter to customers. The following table summarizes the Group's contractual rights as of 31 December 2022. USDm Contractual rights - as lessor: Charter hire income for vessels ⁴⁾ Total The following table summarizes the Group's contractual rights as of 31 December 2021. USDm Contractual rights - as lessor: Charter hire income for vessels ⁴⁾ Total The following table summarizes the Group's contractual rights as of 31 December 2020. USDm Contractual rights - as lessor: Charter hire income for vessels ⁴⁾ Total 2023 2024 2025 2026 2027 Thereafter Total 2.1 2.1 - - - - - - - - - - 2.1 2.1 2022 2023 2024 2025 2026 Thereafter Total 21.6 21.6 - - - - - - - - - - 21.6 21.6 2021 2022 2023 2024 2025 Thereafter Total 39.1 39.1 2.3 2.3 - - - - - - - - 41.4 41.4 ⁴⁾ Charter hire income for vessels on time charter is recognized under "Revenue". During the years, revenue from time charter amounted to USD 64.7m (2021: 90.7m, 2020: USD 86.2m). The average period until redelivery of the vessels for the period ended 31 December 2022 was 0.4 years (2021: 0.3 years, 2020: 0.4 years). TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 160 NOTE 23 – DERIVATIVE FINANCIAL INSTRUMENTS NOTE 23 – continued Please refer to Note 25 for further information on fair value hierarchies. 2022 2021 2020 USDm 2020 USDm Fair value of derivatives: Derivative financial instruments regarding freight and bunkers: Forward freight agreements — fair value through profit and loss Bunker swaps — fair value through profit and loss Bunker swaps — hedge accounting Derivative financial instruments regarding interest and currency exchange rate: Forward exchange contracts — hedge accounting Interest rate swaps — hedge accounting Fair value of derivatives as of 31 December Offsetting financial assets and financial liabilities: Gross amount Offsetting amount Net amount presented in the statement of financial position Financial assets Financial liabilities 9.9 -5.4 -30.1 5.4 4.5 -24.7 - - - 0.4 0.2 0.1 -3.2 3.7 0.8 Derivative financial instruments assets are offset against derivative financial instruments liabilities where the counterparty is identical. 0.4 53.7 54.1 -1.6 -2.2 2.0 -23.5 -3.1 -20.2 Hedging of risks with derivative financial instruments is 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 transferred upon realization from the equity hedging reserve into the income statement. Derivative financial instruments are presented as below on the balance sheet: At year-end 2022, 2021, and 2020, TORM held the following derivative financial instruments designated as hedge accounting: USDm 2022 Offsetting financial assets and financial liabilities: Gross amount Offsetting amount Net amount presented in the statement of financial position USDm 2021 Offsetting financial assets and financial liabilities: Gross amount Offsetting amount Net amount presented in the statement of financial position Financial assets Financial liabilities 54.5 -0.4 - - 54.5 -0.4 Financial assets Financial liabilities 7.7 - 7.7 -10.8 - -10.8 2022 Forward exchange contracts (USD/DKK) ¹⁾ Interest rate swaps ²⁾ Notional value Unit 2023 2024 After 2024 280.3 687.2 DKKm USDm 280.3 136.9 - - 51.6 498.7 ¹⁾ The average hedge of USD/DKK currency was 6.9. ²⁾ The average interest rate was 1.37 p.a. plus margin. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 161 NOTE 23 – continued Hedge accounting 2021 Forward exchange contracts (USD/DKK) ¹⁾ Interest rate swaps ²⁾ Bunker swaps ³⁾ NOTE 23 – continued Notional value Unit 2022 2023 After 2023 Further details on derivative financial instruments are provided in Notes 24 and 25. Expected maturity TORM did not enter into any enforceable netting arrangements. 274.0 768.7 DKKm USDm 274.0 130.9 - - 136.9 500.9 9,920.0 MT 9,920.0 - - Forward freight agreements (FFAs) of USD 33.3m (net loss) have been recognized in the income statement in 2022 (2021: USD 0.4m, 2020: USD 1.9m). 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. ¹⁾ The average hedge of USD/DKK currency was 6.3. ²⁾ The average interest rate was 1.38 p.a. plus margin. ²⁾ The average price of the hedging instruments was USD 642.4. Hedge accounting Expected maturity Notional value Unit 2021 2022 2020 Forward exchange contracts (USD/DKK) ¹⁾ Interest rate swaps ²⁾ Bunker swaps ³⁾ 231.5 757.5 DKKm USDm 231.5 318.0 - - 84.0 355.5 19,783.0 MT 19,783.0 - - Bunker swap agreements of USD 13.8m (net gain) have been recognized in the income statement in 2022 (2021: USD 12.0m, 2020: USD 2.9m). 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. After 2022 Forward exchange contracts with a fair value of USD 0.4m (net gain) are designated as hedge accounting relationships to hedge a part of TORM's payments in 2023 regarding administrative and operating expenses denominated in DKK with a notional value of DKK 280.3m (2021: DKK 274.0m, 2020: DKK 231.5m). ¹⁾ The average hedge of USD/DKK currency was 6.4. ²⁾ The average interest rate was 2.11 p.a. plus margin. ²⁾ The average price of the hedging instruments was USD 326.9. Interest rate swaps with a fair value of USD 53.7m (net gain) applying the USD LIBOR settings are designated as hedge accounting relationships to fix a part of TORM's interest payments during the period 2023-2028 with a notional value of USD 687.2m (2021: USD 768.7m, 2020: USD 757.5m). 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 1.4m (2021: USD 3.7m, 2020: USD 43.8m) has been provided as security for the agreements relating to derivative financial instruments, which does not meet the offsetting criteria in IAS 32, but which 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 ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 162 NOTE 23 - 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 2022, 2021 and 2020. USDm 2022 Forward freight agreements Bunker swaps Forward exchange contracts Interest rate swaps Total 2021 Forward freight agreements Bunker swaps Forward exchange contracts Interest rate swaps Total 2020 Forward freight agreements Bunker swaps Forward exchange contracts Interest rate swaps Total Income statement Other comprehensive income Equity Port expenses, bunkers, and commis- sions Revenue Financial items Operating expenses Adminis- trative expenses Transfer to income statement Fair value adjustment Hedging reserves as of 31 December - - - - - - - - - - 1.9 - - - -33.3 13.8 - - -19.5 0.4 12.0 - - 12.4 - 2.9 - - 1.9 2.9 - - - 3.2 3.2 - - - -10.8 -10.8 - - - -5.7 -5.7 - - -2.4 - -2.4 - - 0.1 - 0.1 - - -0.1 - -0.1 - - -2.3 - -2.3 - - 0.1 - 0.1 - - 0.1 - 0.1 - -3.3 4.6 0.4 1.7 - -2.8 -0.2 11.7 8.7 - 1.2 - 5.7 6.9 - 3.3 -2.7 54.3 54.9 - 2.1 -3.4 9.8 8.5 - -0.1 2.4 -18.1 -15.8 - - 0.4 52.6 53.0 - 0.1 -1.6 -2.1 -3.6 - 0.8 2.0 -23.5 -20.7 The hedging reserves as of 31 December relates to derivatives used for cash flow hedge for open hedge instruments, only. Certain interest rate swaps include portions of ineffectiveness. The ineffectiveness is recognized in "Financial expenses" in the income statement. Please refer to note 23 for a full overview of the fair value of hedge instruments. Please refer to note 21 for further information on commercial and financial risks. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 163 NOTE 23 - continued NOTE 24 – RISKS ASSOCIATED WITH TORM’S ACTIVITIES Accounting policies 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. Changes in the fair value of derivative financial instruments 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 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 and under “Port expenses, bunkers and commissions” for forward freight agreements and forward bunker contracts. TORM’s overall risk tolerance and inherited exposure to risks is divided into five main categories: Industry and market risks • Emerging risks • • Operational risks • Compliance and IT risks • Financial risks The risks described below under each of the five categories are considered to be among the most significant and quantifiable risks for TORM. Emerging 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 the necessary capabilities to exploit opportunities created by the same risks. Please refer to the Risk Management section under Climate-related risk analysis and TCFD on pages 75-77 for a detailed description of emerging risks. Industry and market risks Industry and market-related risk factors relate to changes in the markets and in the political, economic, and physical environment which Management cannot control, such as freight rates and vessel and bunker prices. Freight rate fluctuations TORM’s income is primarily generated from voyages carried out using the Company’s fleet of vessels. As such, TORM is exposed to the considerable volatility which characterizes freight rates for such voyages. It is TORM’s strategy to seek a certain exposure to this risk, as volatility also represents an opportunity because earnings have historically 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 aims to reduce 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 10 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 ahead, based on market expectations and in accordance with TORM’s risk management policies. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 164 NOTE 24 - continued NOTE 24 - continued During 2022, 12.8% (2021: 31.5%, 2020: 14.4%) of the 28,756 earning days deriving from operating the Company’s product tankers were hedged in this way. Physical time charter contracts accounted for 46.1% (2021: 35.7%, 2020: 41.9%) of overall hedging. In 2022, the Company sold FFAs with a notional contract value of USD 58.3m (2021: USD 44.2m, 2020: USD 165.0m) and bought FFAs with a notional contract value of USD 92.3m (2021: USD 110.3m, 2020: USD 52.7m). The total notional contract volume sold in 2022 was 2,310,000 metric tons (2021: 2,410,000 metric tons; 2020: 8,799,000 metric tons), and the total notional volume bought was 2,592,000 metric tons (2021: 5,962,000 metric tons, 2020: 2,714,000 metric tons). At the end of 2022, the coverage of available earning days for 2023 was 3.7% through time charters, current spot voyages and cargo contracts (2021: 9.9%, 2020: 28.1%). 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: Bunker price fluctuations The cost of fuel oil consumed by the vessels, known in the industry as bunkers, accounted for 61.3% (2021: 56.4%, 2020: 62.3%) of the total voyage costs in 2022 and is by far the biggest single cost related to a voyage. TORM is exposed to fluctuations in bunker prices which are not reflected in the freight rates achieved by TORM. To reduce this exposure, TORM hedges the bunker exposure with oil product instruments to the extent bunker element in the freight rates achieved is considered fixed. Bunker trade is subject to specific risk policies and guidelines approved by the Risk Committee including trading limits, stop-loss, stop-gain and stop-at-zero policies, segregation of duties and other internal control procedures. TORM only hedges bunker exposure whenever the freight is fixed beyond one month. In 2022, 15.2% (2021: 42.1%, 2020: 14.6%) of TORM’s total bunker purchase was hedged through bunker hedging contracts. At the end of 2022, TORM had covered 0% (2021: 4.1%, 2020: 15.6%) of its bunker requirements for 2023. The total bunker exposure is estimated to be approximately 398,021 metric tons. Sensitivity to changes in freight rates USDm 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 2023 2022 2021 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: -26.5 -26.5 -27.2 -27.2 -18.8 -18.8 Sensitivity to changes in the bunker price USDm 2023 2022 2021 Sales and purchase price fluctuations As an owner of vessels, TORM is exposed to risks associated with changes in the value of the vessels, which can vary considerably during their useful lives. As of 31 December 2022, the carrying value of the fleet was USD 1,856m (2021: USD 1,937.8m, 2020: USD 1,722.5m). Based on broker valuations, TORM’s fleet had a market value of USD 2,650.3m as of 31 December 2022 (2021: USD 1,869.5m, 2020: USD 1,475.8m). 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 -22.1 -22.1 -22.6 -22.6 -22.0 -22.0 Operational risks Operational risks are risks associated with the ongoing operations of the business and include risks such as the safe operation of vessels, the availability of experienced seafarers and staff, terrorism, piracy as well as insurance and counterparty risk. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 165 NOTE 24 - continued NOTE 24 - continued Insurance coverage During the fleet’s operation, various casualties, accidents, and other incidents may occur which may result in financial losses for TORM. For example national and international rules, regulations, and conventions could mean that TORM may incur substantial liabilities if a vessel is involved in an oil spill or emission of other environmentally hazardous agents. Receivables, cash, and cash equivalents, including restricted cash The majority of TORM’s customers are companies operating in the oil industry. It has been assessed that these companies are, to a great extent, subject to the same risk factors as those identified for TORM. 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 members of the internationally recognized collaboration, International Group of P&I clubs, and TORM’s vessels are each insured for the maximum amount available in the P&I system. At the end of 2022, the aggregate insured value of hull and machinery and interest for TORM’s owned vessels amounted to USD 2.8bn (2021: USD 2.1bn, 2020: USD 1.9bn). 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 instrument. TORM 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. TORM’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 a positive fair value A major part of TORM’s freight revenues stem from a small group of customers. In 2022, one customer accounted for 12% of TORM’s freight revenues (2021: one accounted for 15%, 2020: one accounted for more than 10%). 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, TORM’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. Because of the payment patterns mentioned above, TORM’s receivables primarily consist of receivables from voyages in progress at year-end and outstanding demurrage. For the past five years, TORM has not experienced any significant losses in respect of charter payments or any other freight agreements. With regard to the collection of original demurrage claims, TORM’s average stands at 98.6% (2021: 97.0%, 2020: 96.9%), which is considered to be satisfactory given the differences in interpretation of events. In 2022, demurrage represented 14% (2021: 18.0%, 2020: 17.3%) of the total freight revenues. Please refer to Note 1 for more details on recognition of demurrage claims 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 having adequate liquidity reserves for possible investment opportunities or to withstand a sudden drop in freight rates. Derivative financial instruments and commodity instruments In 2022, 100% (2021: 100.0%, 2020: 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 entered into with investment grade counterparties. Financial risks Financial risks relate to TORM’s financial position, financing, and cash flows generated by the business, including foreign exchange risk and interest rate risk. TORM’s liquidity and capital resources are described in Note 2. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 166 NOTE 24 - continued NOTE 24 - continued Foreign exchange risk TORM uses USD as its functional currency because most 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 TORM’s expenses denominated in currencies other than USD accounts for approximately 81.4% (2021: 86.0%, 2020: 80.9%) for administrative expenses and approximately 19.8% (2021: 21.3%, 2020: 23.8%) for operating expenses. TORM’s expected administrative and operating expenses in DKK and EUR for 2023 are approximately DKK 406.7m, whereof 68.9% (2021: 70.3%, 2020: 66.1%) are hedged through FX forward contracts. All FX forward contracts have maturity within 2023, and TORM’s average hedge USD/DKK currency rate is 6.93. 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 the USD/EUR exchange rates of 10% would result in a change in profit/loss before tax and equity as follows: USDm 2023 2022 2021 Interest rate risk TORM’s interest rate risk generally relates to interest-bearing borrowings. All TORM’s loans for financing vessels are denominated in USD. Please refer to Note 19 for additional information on borrowings. At the end of 2022, TORM had fixed 94.6% (2021: 84.9%, 2020: 67.6%) of the debt then outstanding with interest rate swaps and fixed rate leasing debt corresponding to an amount of USD 916m. USD 687m of this amount is hedged at an interest rate of 1.37% plus margin with interest rate swaps with maturity in the period 2023-2028. Most of TORM’s debt and interest hedging is based on USD LIBOR which is set to expire by 30 June 2023. TORM is significantly exposed to the ICE US LIBOR reform as all financing and associated interest hedging contracts are denominated in USD. TORM has been in dialog with majority lenders and aligned expectations on how the amendment process should be implemented. To ensure a smooth transition, TORM has amended legacy financing and hedging contracts during 2022 and early 2023. TORM expects compounded SOFR in arrears to become the market standard. TORM expects no effect on the hedging relationship as lenders and hedging providers are largely the same banks. TORM is confident that all financing and hedging contracts are transitioned to SOFR before the final deadline on 30 June 2023. As of 31 December 2022, 93.3% of the debt with a nominal value of USD 689.5m relates to the period after 30 June 2023. As of 31 December 2022, 90.8% of the interest hedging with a nominal value of USD 624m relates to the period after 30 June 2023. Effect of a 10% increase of DKK and EUR: Changes in profit/loss before tax for the following year Changes in equity for the following year -1.8 -1.8 -1.8 -1.8 -2.2 -2.2 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 2023 2022 2021 Effect of a 1%-point increase in interest rates: Changes in profit/loss before tax for the following year Changes in equity for the following year -0.7 16.3 -2.1 19.9 -3.7 11.3 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 2022, TORM’s loan portfolio was spread across eleven different banks. As of 31 December 2022, TORM maintains a liquidity reserve of USD 323.8m in cash and cash equivalents, including restricted cash, combined with USD 92.6m in undrawn and committed credit facilities. Cash is only placed in banks with an investment grade rating. For further information on contractual obligations, including a maturity analysis, please refer to Note 22. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 167 NOTE 25 – FINANCIAL INSTRUMENTS Categories of financial assets and liabilities (USDm): Observable input (level 2) Financial instruments measured at fair value Financial instruments measured at amortized cost Total carrying value 2022 Financial assets Loan receivables¹⁾ Trade receivables¹⁾ Other receivables Cash and cash equivalents, including restricted cash¹⁾ Total Financial liabilities Borrowings¹⁾²⁾ Other non-current liabilities Trade payables¹⁾ Other liabilities¹⁾ Total 2021 Financial assets Loan receivables¹⁾ Trade receivables¹⁾ Other receivables Cash and cash equivalents, including restricted cash¹⁾ Total Financial liabilities Borrowings¹⁾²⁾ Trade payables¹⁾ Other liabilities¹⁾ Total - - 55.3 - 55.3 - - 1.9 1.9 - - 8.3 - 8.3 - - 11.2 11.2 - - 55.3 - 55.3 - - 1.9 1.9 - - 8.3 - 8.3 - - 11.2 11.2 4.6 259.5 18.7 323.8 606.6 966.9 3.0 48.5 29.2 1,047.6 4.6 84.0 31.7 171.7 292.0 1,135.3 35.3 32.5 1,203.1 4.6 259.5 74.0 323.8 661.9 966.9 3.0 48.5 31.1 1,049.5 4.6 84.0 40.0 171.7 300.3 1,135.3 35.3 43.7 1,214.3 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 168 NOTE 25 - continued Categories of financial assets and liabilities (USDm): 2020 Financial assets Loan receivables¹⁾ Trade receivables¹⁾ Other receivables Cash and cash equivalents, including restricted cash¹⁾ Total Financial liabilities Borrowings¹⁾²⁾ Trade payables¹⁾ Other liabilities¹⁾ Total Observable input (level 2) - - 4.5 - 4.5 - - 24.7 24.7 Financial instruments measured at fair value Financial instruments measured at amortized cost Total carrying value - - 4.5 - 4.5 - - 24.7 24.7 4.6 58.6 20.4 135.6 219.2 842.4 14.4 35.1 891.9 4.6 58.6 24.9 135.6 223.7 842.4 14.4 59.8 916.6 ¹⁾ Due to the short maturity, the carrying value is considered to be an appropriate expression of the fair value. ²⁾ See note 20. ³⁾ Derivative financial instruments are presented in the balance sheet line "Other receivables" and "Other liabilities". NOTE 25 - continued NOTE 26 – RELATED PARTY TRANSACTIONS 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. TORM’s ultimate controlling party is Oaktree Capital Group, LLC, a limited liability company incorporated in the USA. The immediate controlling shareholder is OCM Njord Holdings S.á.r.l. (Njord Luxco). • Level 2 fair value measurements are those derived from input other than quoted prices included in level 1 which are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) Shareholders' contribution and dividends paid are disclosed in the consolidated statement of changes in equity. Dividends to related parties are paid out based on the related parties’ ownership of shares. Methods and assumptions in determining fair value of financial instruments Derivative part of other receivables and other liabilities The fair value of derivatives in other receivables and other liabilities is measured using accepted valuation methods with input variables such as yield curves, forward curves, spreads, etc. and compared to financial counterparties to ensure acceptable valuations. The valuation methods discount the future fixed and estimated cash flows and valuation of any option elements. The remuneration of key management personnel, which consists of the Board of Directors and the Executive Director, is disclosed in note 5. On 01 September 2022, TORM purchased 75% of the shares in Marine Exhaust Technology A/S, thereby obtaining a controlling interest in its joint venture entity Marine Exhaust Technology (Hong Kong) Ltd. Until 01 September 2022, TORM’s transactions with its joint venture entity producing scrubbers for the TORM fleet covered CAPEX of USD 5.6m in total. During 2021, TORM effected transactions with its joint venture producing scrubbers for the TORM fleet amounting to USD 1.4m in total (2020: 11.7m). TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 169 NOTE 27 – ASSETS HELD FOR SALE AND NON-CURRENT ASSETS SOLD DURING THE YEAR NOTE 29 – ENTITIES IN THE GROUP During 2022, TORM sold seven vessels. All the vessels sold in 2022 and one vessel sold in 2021 were delivered to the new owners. The sales resulted in an impairment loss of USD 2.6m and a profit of USD 10.2m which are recognized in the income statement for 2022. Entity TORM plc During 2021, TORM sold two vessels. One vessel was delivered to the new owners in May 2021, and one was held for sale as of 31 December 2021, and expected delivery is during the first half of 2022. The sales resulted in an impairment loss on tangible assets of USD 4.6m. The fair value of the asset held for sale of USD 13.2m is comprised of sales price less expected transaction costs (fair value hierarchy level 2). Investments in subsidiaries ⁶⁾: Entity TORM A/S During 2020, TORM sold eight vessels all of which were delivered to the new owners during 2020. 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 of 31 December 2020. NOTE 28 – CASH FLOWS USDm Reversal of other non-cash movements: Exchange rate adjustments Share-based payments Fair value adjustments on derivative financial instruments Reversal of provisions adjustments Other adjustments Total 2022 2021 2020 -0.3 -0.7 2.2 0.6 -6.3 0.1 -3.7 2.3 -0.2 - - -0.2 1.7 - - -0.4 1.4 1.1 USDm 2022 2021 2020 Change in inventories, receivables, and payables: Change in inventories Change in receivables Change in prepayments Change in trade payables and other liabilities Total -21.8 -26.9 -158.1 -37.5 -5.7 -3.5 13.2 14.9 1.3 4.7 19.4 -13.5 -180.9 -48.5 15.9 DK Vessel HoldCo GP ApS ²⁾ DK Vessel HoldCo K/S ²⁾ OCM Singapore Njord Holdings Alice, Pte. Ltd ²⁾ OCM Singapore Njord Holdings Almena, Pte. Ltd ³⁾ OCM Singapore Njord Holdings Hardrada, Pte. Ltd OCM Singapore Njord Holdings St.Michaelis Pte. Ltd ³⁾ OCM Singapore Njord Holdings St. Gabriel Pte. Ltd ³⁾ OCM Singapore Njord Holdings Agnete, Pte. Ltd ³⁾ OCM Singapore Njord Holdings Alexandra, Pte. Ltd ²⁾ OMI Holding Ltd.³⁾ TORM Crewing Service Ltd.³⁾ TORM Shipping India Private Limited ⁴⁾ TORM Singapore Pte. Ltd. TORM USA LLC VesselCo 1 K/S ¹⁾ VesselCo 3 K/S ¹⁾ VesselCo 5 K/S ¹⁾ VesselCo 6 K/S ¹⁾ VesselCo 6 Pte. Ltd. ²⁾ VesselCo 7 Pte. Ltd. ¹⁾ VesselCo 8 Pte. Ltd.³⁾ VesselCo 9 Pte. Ltd. VesselCo 10 Pte. Ltd. VesselCo 11 Pte. Ltd.³⁾ VesselCo 12 Pte. Ltd. TORM SHIPPING (PHILS.), INC. Country United Kingdom Country Denmark Denmark Denmark Singapore Singapore Singapore Singapore Singapore Singapore Singapore Mauritius Bermuda India Singapore USA Denmark Denmark Denmark Denmark Singapore Singapore Singapore Singapore Singapore Singapore Singapore Philippines 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% 100% 100% 100% 25% TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 170 NOTE 29 - continued NOTE 29 – continued Investments in subsidiaries ⁶⁾ - continued: The table below shows the registered addresses for the companies mentioned above: Entity VesselCo A ApS ¹⁾ VesselCo C ApS ¹⁾ VesselCo E ApS ¹⁾ VesselCo F ApS ¹⁾ Marine Exhaust Technology A/S ME Production A/S Marine Exhaust Technology (Hong Kong) Ltd Suzhou ME Production Technology Co, Ltd. Country Denmark Denmark Denmark Denmark Denmark Denmark China China Ownership ⁵⁾ 100% 100% 100% 100% 75% 75% 59% 75% ¹⁾ Entities dissolved in the financial year ended 31 December 2020. ²⁾ Entities dissolved in the financial year ended 31 December 2021. ³⁾ Entities dissolved in the financial year ended 31 December 2022. ⁴⁾Entities with different reporting periods: TORM Shipping India has a Financial reporting period that runs from 1 April to 31 March as required by the Indian government's laws and legislations. ⁵⁾For all subsidiaries, ownership and voting rights are the same except for TORM SHIPPING (PHILS.), INC where voting rights are 100%. ⁶⁾ All subsidiaries are consolidated in full. Interest in legal entities included as joint ventures: Country Denmark Denmark % Control 50% 50% Profit and loss from continuing operations - - Hong Kong 28% -0.1 2022 Other compre- hensive income - - - Total compre- hensive income - - -0.1 Entity (USDm) Long Range 2 A/S LR2 Management K/S Marine Exhaust Technology Ltd.¹⁾ ¹⁾ TORM obtained control over the entity on 01 September following the acquisition of Marine Exhaust Technology A/S. The amounts above represents the period until TORM obtains control. Denmark India Tuborg Havnevej 18 2nd Floor Philippines 7th Floor 2900 Hellerup Leela Business Park Salcedo Towers, 169 Denmark Andheri-Kurla Road HV dela Costa Street Andheri (E) Salcedo Village, Mumbai 400059 Makati City India Philippines 1227 Singapore United Kingdom USA 6 Battery Road #27-02 Office 105 Suite 1625 Singapore 049909 20 St Dunstan's Hill 2500 City West Singapore London, EC3R 8HL Boulevard United Kingdom 77042, Houston , Texas USA Denmark Sandholm 7 China Hong Kong 208 Longward Road Room 3, 10/F 9900 Frederikshavn Zhapu Town Ping Hu Yue Xiu Building Denmark Jiaxing City Zhejiang Provice China 160-174 Lockhart Road Wanchai Hong Kong TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 171 NOTE 30 - PROVISIONS USDm Cargo claim provisions Warranty provisions Balance as of 31 December 2022 6.5 0.3 6.8 2021 18.3 - 2020 18.3 - 18.3 18.3 In 2020, TORM was involved in cargo claims relating to a customer having granted indemnities for discharge of cargos, but not being able to honor those obligations. The cases involved irregular activities committed by the customer. Legal action was initiated by TORM in the UK and in India against the customer and related individuals. TORM has previously recognized provisions of USD 18.3m in relation to the claims. During 2022, TORM settled one claim and reassessed its provisions for the remaining part of the case complex. TORM has reversed provisions amounting to USD 6.3m, and the total amount as of 31 December 2022 relating to the case complex is USD 6.5m. Legal proceedings are still ongoing, and therefore the provisions recognized are subject to uncertainty in relation to both timing and amount. Warranty provisions relate to sold marine exhaust equipment. Accounting policies 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 which can be reliably estimated. Provisions are measured at the estimated liability expected to arise, considering the time value of money. NOTE 31 – EARNINGS PER SHARE AND DIVIDEND PER SHARE Earnings per share 2022 2021 2020 Net profit/(loss) for the year attributable to TORM plc shareholders (USDm) 562.8 -42.1 88.1 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. dilutive effect of share options 81.8 -0.5 81.3 1.5 78.6 -0.5 78.1 0.3 74.8 -0.5 74.3 - 82.8 78.4 74.3 Basic earnings/(loss) per share (USD) 6.92 -0.54 1.19 Diluted earnings/(loss) per share (USD) 6.80 -0.54 1.19 When calculating diluted earnings per share for 2020, 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 5 for information on the RSUs. Dividend per share Declared dividend per share (USD) Declared dividend for the year (USDm) Dividend paid during the year (USDm) Number of shares, end of period (million) Number of treasury shares, end of period (million) Number of shares outstanding, end of period (million) 2022 2021 2020 4.63 378.7 166.7 82.3 -0.5 81.8 - - - 81.2 -0.5 80.7 0.85 63.2 70.6 74.9 -0.5 74.4 Dividend paid per share 2.04 - 0.95 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 172 NOTE 31 - continued NOTE 33 – BUSINESS COMBINATION Accounting policies Basic earnings per share are 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 are 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. NOTE 32 – CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH Cash at banks and on hand Cash and cash equivalents Cash provided as security for initial margin calls and negative market values on derivatives, etc.¹⁾ Sale and leaseback transaction prepayment to be released upon delivery of the vessel²⁾ Restricted cash 2022 2021 320.5 144.8 320.5 144.8 2020 89.5 89.5 3.3 5.9 46.1 - 3.3 21.0 26.9 - 46.1 Cash and cash equivalents, including restricted cash 323.8 171.7 135.6 ¹⁾ The counterparties have an obligation to return any excess cash provided as security to the Group upon settlement or early termination of the contracts. ²⁾ Prepayment released on 06 January 2022. On 01 September 2022, TORM acquired an ownership stake of 75% of Marine Exhaust Technology A/S (MET), a Danish industrial company specialized in developing and producing advanced and green marine equipment for a cash consideration of USD 2.0m. TORM acquired MET because the entity has gained strong expertise in developing and producing components for the maritime industry, including scrubbers for the shipping industry. As part of the transaction, TORM also obtained control over the joint venture entity Marine Exhaust Technology (Hong Kong) Ltd in which TORM previously held a 27.5% interest. TORM has elected to measure the non-controlling interest in the acquiree at fair value. The fair value of the non-controlling interest in MET has been assessed based on the EBITDA multiples method using estimated 2023 financials based on expected scrubber orders. The value includes an adjustment based on development costs to account for potential future income from the sales of Flettner rotors. Based on the enterprise value estimate, the equity value is calculated through a standard adjustment for net interest-bearing debt. The previously held interest in Marine Exhaust Technology (Hong Kong) Ltd was remeasured at fair value as part of the transaction leading to a gain of USD 0.3m recognized in the share of profit/loss from joint ventures in the consolidated income statement. The acquired assets include contractual receivables of USD 5.7m of which USD 0.3m were considered to be uncollectible at the day of the acquisition. Transaction costs in connection with the acquisition amounted to less than USD 0.1m and are recognized as administration expenses. The goodwill of USD 1.8m represents the value of expected synergies arising from the acquisition and is allocated entirely to the Marine Exhaust segment. The goodwill recognized is not expected to be deductible for tax purposes. Revenue and profit for the period generated by the acquired entity amounted to USD 5.9m and 0.0m, respectively, and have been recognized in the consolidated income statement since the acquisition. Had the acquisition taken place on 01 January 2022, the revenue and profit for the Group for 2022 would have been USD 1,455.9m and USD 561.9m, respectively. TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 173 NOTE 33 - continued NOTE 33 - continued Accounting policies Newly acquired or formed entities are recognized in the consolidated financial statements from the date of acquisition or formation. The date of acquisition is the date on which control over the entity is effectively transferred. Business combinations are accounted for by applying the purchase method, whereby the acquired entities’ identifiable assets, liabilities, and contingent liabilities are measured at fair value at the acquisition date. The tax effect of the revaluation activities is also considered. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the amount of that adjustment is included in the cost of the combination if the event is probable and the adjustment can be measured reliably. Costs of issuing debt or equity instruments in connection with a business combination are accounted for together with the debt or equity issuance. All other costs associated with the acquisition are expensed in the income statement. The excess of the cost of the business combination over the fair value of the acquired assets, liabilities, and contingent liabilities is recognized as goodwill under intangible assets and is tested for impairment at least once a year. Upon acquisition, goodwill is allocated to the cash generating units that subsequently form the basis for the impairment test. If the fair value of the acquired assets, liabilities, and contingent liabilities exceeds the cost of the business combination, the identification of assets and liabilities and the processes of measuring the fair value of the assets and liabilities and the cost of the business combination are reassessed. If the fair value of the business combination continues to exceed the cost, the resulting gain is recognized in the income statement. The following table summarizes the fair values of the assets acquired and the liabilities assumed on 01 September 2022: USDm Intangible assets Tangible fixed assets Inventories Trade receivables Other receivables Prepayments Cash and cash equivalents Borrowings Deferred tax liabilities Provisions Other non-current liabilities Trade payables Other liabilities Deferred income Current tax liabilities Net identifiable assets acquired Goodwill Total net assets acquired Of which fair value of non-controlling interest Total purchase consideration Cash consideration Fair value of previously held interests Total purchase consideration Cash acquired Cash consideration Acquisition of subsidiaries, net of cash acquired 01 September 2022 1.2 2.5 6.4 1.6 3.8 1.5 3.0 -7.9 -0.3 -0.4 -0.8 -1.5 -0.3 -4.3 -0.3 4.2 1.8 6.0 -2.4 3.6 2.0 1.6 3.6 3.0 -2.0 1.0 TORM ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 174 Parent company 2022 Parent company financial statements Management review for TORM plc Income statement Statement of comprehensive income Company balance sheet Company statement of changes in equity Cash flow statement Notes to parent company financial statements 176 177 177 178 179 180 181 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 175 175 Management review for TORM plc The parent company activities include holding company activities for the TORM Group, treasury activities as well as bareboat chartering activities. In 2022, revenue amounted to USD 11.9m compared to USD 32.1m in 2021, primarily driven by fewer vessels on bareboat charters to TORM A/S. The operating loss amounted to USD 4.6m compared to an operating profit of USD 1.9m in 2021, which was impacted by reversals of expected credit losses. In 2022, a reversal of impairment of investment in subsidiaries amounting to USD 139.0m (2021: nil) has been recognized as the recoverable amount exceeded the carrying amount of the investments in subsidiaries. The primary driver of the impairment reversal is the improved conditions in the product tanker market outlook for vessel owning subsidiaries. Net financial income amounted to USD 33.6m compared to USD 35.1m in 2021, primarily impacted by an increase in interest income from subsidiaries of USD 11.5m and a decrease in dividends from subsidiaries of USD 22.2m as well as a decrease in borrowing interest of USD 8.1m Net profit amounted to USD 175.3m compared to USD 37.0m in 2021. Total assets decreased by USD 275.9m to USD 1,619.8m as of 31 December 2022, mainly driven by a decrease in loans to subsidiaries of USD 324.5m partially offset by fair value gains on interest rate swaps of USD 53.7m. Total equity increased by USD 60.4m to USD 1,202.2m as of 31 December 2022, primarily driven by a net profit of USD 175.3m and increased hedging reserves of USD 54.7m from unrealized gains on interest derivatives partially offset by dividend payments of USD 166.7m. During 2022, total borrowings decreased by USD 201.1m, to USD 405.5m primarily driven by debt repayments in connection with vessel sales in subsidiaries. TORM ANNUAL REPORT 2022 PARENT COMPANY FINANCIAL STATEMENTS 176 Income statement 01 January-31 December Statement of comprehensive income 01 January-31 December USD '000 Revenue Charter hire Administrative expenses Other operating income and expenses Expected credit loss Depreciation and amortization Operating profit/(loss) (EBIT) Impairment reversal on investment in subsidiaries Financial income Financial expenses Profit before tax Tax Note 2022 2021 USD '000 11,861 32,132 Net profit for the year 2022 2021 175,334 36,996 -11,715 -31,735 -4,737 -3,192 44 -47 -39 44 4,660 -43 Other comprehensive income: Items that may be reclassified to profit or loss: Fair value adjustment on hedging instruments -4,633 1,866 Fair value adjustment on hedging instruments transferred to income statement Tax on items that may be reclassified to profit or loss Other comprehensive income after tax ¹⁾ 54,259 10,306 412 9,159 -13,162 - 41,509 19,465 Total comprehensive income for the year 216,843 56,461 5 2 2 138,984 - 52,718 63,555 -19,107 -28,425 167,962 36,996 4 7,372 - Net profit for the year 175,334 36,996 TORM ANNUAL REPORT 2022 PARENT COMPANY FINANCIAL STATEMENTS 177 Company balance sheet as of 31 December USD '000 Assets Non-current assets Tangible fixed assets Land and buildings Other plant and operating equipment Total tangible fixed assets Financial assets Investments in subsidiaries Loan receivables Loans to subsidiaries Total financial assets Total non-current assets Current assets Loans to subsidiaries Other receivables Prepayments Cash and cash equivalents Total current assets Total assets Note 2022 2021 USD '000 Note 2022 2021 102 - 102 33 3 36 5 6 940,291 937,589 4,570 4,617 - 803,712 944,861 1,745,918 EQUITY AND LIABILITIES EQUITY Common shares Treasury shares Hedging reserves Share premium Retained profit Total equity LIABILITIES NON-CURRENT LIABILITIES Deferred tax liability Borrowings 944,963 1,745,954 Total non-current liabilities 619,049 139,854 7 53,702 371 1,706 6,843 374 2,622 674,828 149,693 CURRENT LIABILITIES Borrowings Trade payables Payables to subsidiaries Other liabilities Total current liabilities 1,619,791 1,895,647 Total liabilities 823 812 -4,235 -4,235 39,485 -2,024 77,794 69,821 1,088,297 1,077,410 1,202,164 1,141,784 4 5,790 - 8 340,602 463,459 346,392 463,459 8 64,882 143,135 349 256 2,993 135,825 3,011 11,188 71,235 290,404 417,627 753,863 TOTAL EQUITY AND LIABILITIES 1,619,791 1,895,647 The financial statements of TORM plc, company number 09818726, have been approved by the Board of Directors and signed on their behalf by: Jacob Meldgaard Executive Director 16 March 2023 TORM ANNUAL REPORT 2022 PARENT COMPANY FINANCIAL STATEMENTS 178 Company statement of changes in equity USD '000 EQUITY Common shares Treasury shares Hedging reserves Share premium Retained profit Total Equity as of 01 January 2021 748 -4,235 -21,489 12,307 1,038,097 1,025,428 Comprehensive income for the year: Net profit for the year Other comprehensive income for the year Total comprehensive income for the year Capital increase Transaction costs capital decrease Share-based compensation Total changes in equity 2021 Equity as of 31 December 2021 Comprehensive income for the year: Net profit for the year Other comprehensive income for the year Tax on other comprehensive income Total comprehensive income for the year Capital increase Transaction costs capital increase Share-based compensation Dividend paid Total changes in equity 2022 Equity as of 31 December 2022 - - - 64 - - 64 - - - - - - - - 19,465 19,465 - - - 36,996 36,996 - 19,465 36,996 56,461 - - - - 57,799 -285 - - 57,863 -285 - 2,317 2,317 57,514 2,317 59,895 812 -4,235 -2,024 69,821 1,077,410 1,141,784 - - - - 11 - - - 11 - - - - - - - - - - 54,671 -13,162 41,509 - - - - 175,334 175,334 - - 54,671 -13,162 175,334 216,843 - - - - - 8,004 -31 - - 8,015 -31 - - 2,211 2,211 -166,658 -166,658 7,973 -164,447 -156,463 823 -4,235 39,485 77,794 1,088,297 1,202,164 TORM ANNUAL REPORT 2022 PARENT COMPANY FINANCIAL STATEMENTS 179 Cash flow statement USD '000 Cash flow from operating activities Net profit for the year Reversals: Reversal of depreciation and impairment losses Reversal of other non-cash movements Impairment reversal on investment in subsidiaries Financial income Financial expenses Tax Interest received Interest paid Net exchange rate gains and losses Repayments of intercompany trading balances Change in inventories, receivables, and payables, etc. Net cash flow from operating activities 4,411 105,871 2022 2021 USD '000 2022 2021 175,334 36,996 Payments/repayments of loans to subsidiaries 356,093 -226,285 Cash flow from investing activities Net cash flow from investing activities 356,093 -226,285 39 43 12,418 25,846 -138,984 - -52,718 -63,555 19,107 28,425 -7,372 - Cash flow from financing activities Borrowing, mortgage debt Repayment/redemption, mortgage debt Repayment/redemption, finance lease Capital increase Transaction costs capital increase - 17,750 Dividends paid 20,000 224,048 -222,708 -176,000 -38 -43 8,015 2,863 -31 -241 -166,658 - -18,553 -27,384 -717 -68 15,501 87,539 356 281 Net cash flow from financing activities -361,420 50,627 Net cash flow from operating, investing, and financing activities -916 -69,787 Cash and cash equivalents as of 01 January 2,622 72,409 Cash and cash equivalents as of 31 December 1,706 2,622 TORM ANNUAL REPORT 2022 PARENT COMPANY FINANCIAL STATEMENTS 180 Notes to parent company financial statements Note 1 – Accounting policies – supplementary for the parent company 182 Note 2 – Financial items Note 3 – Staff costs Note 4 –Tax Note 5 – Financial assets Note 6 – Loan receivables Note 7 – Other receivables Note 8 – Borrowings 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 183 183 183 184 184 185 185 185 185 185 185 TORM ANNUAL REPORT 2022 TORM ANNUAL REPORT 2022 181 181 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 incorporated in England and Wales. Its registered number is 09818726, and its registered address is office 105, 20 St Dunstan’s Hill, London, EC3R 8HL. 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 and additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act. As permitted by FRS 101, the Company has taken advantage 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) The following paragraphs of IAS 1 “Presentation of financial statements” • • 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) 16 (statement of compliance with all IFRS) 134-136 (capital management disclosures) Where required, the equivalent disclosures are given in the Group's consolidated financial statements. Key sources of estimating 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 5 to the Group consolidated financial statements. Accounting policies In supplement to the accounting policies provided in Note 1 to the Group consolidated financial statements, 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 “Impairment reversal on investment in subsidiaries”. Critical accounting estimates and judgements In supplement to the critical accounting estimates and judgements provided in Note 1 to the Group consolidated financial statements, 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 which 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. The financial statements have been prepared on a going concern basis. Further information relating to the going concern assumption is provided in Note 1 to the Group consolidated financial statements. For further information regarding the underlying impairment testing of the vessels in the Group, please refer to Note 10 to the Group consolidated financial statements. TORM ANNUAL REPORT 2022 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS 182 NOTE 2 – FINANCIAL ITEMS NOTE 4 –TAX USD '000 Financial income Interest income from subsidiaries 30,582 19,115 USD '000 Tax for the year Tax losses for the year 4 87 Adjustment of deferred tax 22,083 44,303 Total 2022 2021 The major components of income tax for the years ended 31 December 2022 and 2021 are: 2022 2021 - -7,372 -7,372 - - - Interest income from cash and cash equivalents, including restricted cash Dividends from subsidiaries Other financial income Total Financial expenses Interest expense to subsidiaries Interest expenses on borrowings Interest expense from right-of-use assets Commitment fees Amortization of interest rate swaps Ineffectiveness on interest rate swaps Exchange rate adjustments, including loss from forward exchange rate contracts Other financial expenses Total NOTE 3 – STAFF COSTS USD'000 Total staff costs Staff costs included in administrative expenses Total staff costs Adjustment of deferred tax of USD 7.4m for the year ended 31 December 2022 consists of the recognition of deferred tax assets for unused tax credits for charges subject to the corporate interest restriction and for carried forward losses, which now qualify for recognition as a result of the deferred tax liability related to the unrealized gain on interest swaps. Tax effects directly recognized in equity or other comprehensive income for the years ended 31 December 2022 and 2021 are: USD '000 2022 2021 Deferred tax charged in the statement of Other Comprehensive Income Deferred tax related to items recognized in OCI during the year Total 13.162 13.162 - - Tax recognized in equity or other comprehensive income relates to the unrealized fair value adjustment on hedging instruments recognized directly in equity or other comprehensive income. 49 50 52,718 63,555 - 135 -18,955 -27,075 -1 -622 -2,394 3,622 -2 -1,100 -1,382 1,193 -713 -44 -71 -123 -19,107 -28,425 2022 2021 1,180 1,180 1,332 1,332 Average number of permanent employees 1 1 Employee information The average number of employees is calculated as a full-time equivalent (FTE). TORM ANNUAL REPORT 2022 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS 183 NOTE 4 – CONTINUED Reconciliation of tax charge USD '000 Accounting profit before income tax Adjustment of income Reversal of impairment Dividend distribution Legal and professional fees Other non-deductible expenses for tax purposes Other non-taxable income Non-trade loan relationship Corporate interest restriction Capital allowances Adjusted taxable loss At effective UK income tax rate of 19% (2021: 19%) Recognition of deferred tax asset from unused tax credits Income tax reported in the Income Statement Deferred tax liability USD '000 Deferred tax liability Balance as of 01 January Deferred tax for the year Deferred tax from changes in equity Total NOTE 5 – FINANCIAL ASSETS 2022 2021 Investments in subsidiaries 167,962 36,996 Cost: USD'000 -138,984 -4,660 -22,083 -44,303 909 48 - - -12,242 -345 75 71 -43 -20,581 6,344 -421 -4,735 -26,522 - 7,372 7,372 - - - 2022 2021 - -7,372 13,162 5,790 - - - - Balance as of 01 January Adjustments to prior years Capital decreases in subsidiaries Capital increases related to share-based payments Balance as of 31 December Impairment: Balance as of 01 January Adjustments to prior years Impairment (reversal)/losses for the year Balance as of 31 December 2022 2021 1,079,689 1,173,105 -3,116 - -137,838 -95,733 1,556 2,317 940,291 1,079,689 142,100 142,100 -3,116 -138,984 - - - 142,100 Carrying amount as of 31 December 940,291 937,589 Adjustments to prior years relate to reclassification due to immaterial deviations. Please refer to note 9 for further reference on impairment reversal for the year. NOTE 6 – LOAN RECEIVABLES USD '000 Loan receivables Cost: Balance as of 01 January Balance as of 31 December Expected credit loss: Balance as of 01 January Additions during the year Balance as of 31 December 2022 2021 4,711 4,711 4,711 4,711 94 47 141 94 - 94 Carrying amount as of 31 December 4,570 4,617 As per December 2022 there are unused tax credits of USD 2.2m (2021: USD 13.5m) relating to prior year losses, as the utilisation of these losses may not be used to offset taxable profit due to a high degree of uncertainty of future taxable profits. TORM ANNUAL REPORT 2022 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS 184 NOTE 7 – OTHER RECEIVABLES USD '000 Derivative financial instruments Other Balance as of 31 December NOTE 8 – BORROWINGS NOTE 9 – CONTINUED 2022 53.686 16 2021 6.824 19 53.702 6.843 Please refer to Note 10 to the Group consolidated financial statements for further information in respect of the fair value less costs of disposal of these vessels. NOTE 10 – COLLATERAL SECURITY FOR MORTGAGE DEBT AND BANK LOANS The vessels owned by subsidiaries of the Company which have been provided as security for TORM’s debt amounted to USD 409.2m as of 31 December 2022 (2021: USD 611.9m). As of 31 December 2022, the Company had borrowed USD 409.2.m (2021: USD 611.9m). The loan proceeds were USD 3.8m lower (2021: USD 5.3m) due to borrowing fees. The fees are amortized over the loan periods. In 2022, the Company had interest expenses of USD 18.7m (2021: USD 16.6m) regarding these loan facilities. As of 31 December 2022, the Company had finance lease liabilities of 0.1m (2021: nil). In 2022, the Company had interest expenses of USD 0.0m (2021: nil) regarding financial leases. The development in borrowings during the year was caused by cash changes from new borrowings of USD 20m (2021: 224.0m) and repayments of borrowings of USD 222.7m (2021: 176.0m) as well as non-cash increases of USD 1.6m (2021: 0.5m). NOTE 9 – IMPAIRMENT TESTING NOTE 11 – GUARANTEE COMMITMENTS AND CONTINGENT LIABILITIES TORM is guarantor for a loan amounting to USD 79m established in the subsidiaries TORM A/S and VesselCo 9 Pte. Ltd. As part of sale and leaseback transactions made by a subsidiary, TORM 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 480m. NOTE 12 – RELATED PARTY TRANSACTIONS TORM’s ultimate controlling party is Oaktree Capital Group, LLC, a limited liability company incorporated in the USA. The immediate controlling shareholder is OCM Njord Holdings S.à.r.l. (Njord Luxco). As of 31 December 2022, Management performed an impairment test of investments in subsidiaries. The subsidiaries of TORM plc are the formal owners of TORM’s vessels and operate in the product tanker market. The Company has received dividends from subsidiaries amounting to USD 22.1m (2021: USD 44.3m). As of 31 December 2022, the recoverable amount of the investments in subsidiaries was based on the fair value less costs of disposal. Based on this test, Management concluded that a full reversal of prior year’s impairment charges of USD 133.5m was needed (2021: no reversal of impairment). The assessment of the fair value less costs of disposal of the subsidiaries was based on the net asset value of the subsidiaries where the key input is the broker valuation of vessels owned by the subsidiaries. The broker valuations are an average of valuations from two internationally acknowledged shipbrokers with appropriate qualifications and recent experience in the valuation of vessels. The Company has income in the form of interests from its subsidiaries of USD 30.6m (2021: USD 17.5m) relating to loans to subsidiaries. The Company has income in the form of bareboat hire from its subsidiary TORM A/S of USD 11.9m (2021: USD 32.1m). The Company has paid bareboat hire to its subsidiaries in the amount of USD 11.7m (2021: USD 31.7m). There have been no or limited transactions with related parties during the financial year other than the transactions disclosed above. TORM ANNUAL REPORT 2022 NOTES TO PARENT COMPANY FINANCIAL STATEMENTS 185  TORM ANNUAL REPORT 2022 186 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 2022 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with UK adopted international accounting standards; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice and additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act; the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; The group financial statements are also prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and IFRS as adopted by the EU, as applied to financial periods beginning on or after 1 January 2022 and additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act. We have audited the financial statements of TORM plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2022 which comprise: Group Parent company Consolidated balance sheet as at 31 December 2022 Balance sheet as at 31 December 2022 Consolidated income statement for the year then ended Income statement for the year then ended Consolidated statement of comprehensive income for the year then ended Consolidated statement of changes in equity for the year then ended Statement of comprehensive income for the year then ended Statement of changes in equity for the year then ended Consolidated statement of cash flows for the year then ended Statement of cash flows for the year then ended Related notes 1 to 33 to the financial statements, including a summary of significant accounting policies Related notes 1 to 12 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 UK adopted international accounting standards. The consolidated financial statements of the group have been prepared in accordance with UK-adopted International Accounting Standards (“UK-adopted IAS”). The consolidated financial statements are also prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and IFRS as adopted by the EU, as applied to financial periods beginning on or after 1 January 2022 and additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act. 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) and additional disclosure requirements for listed companies in accordance with the Danish Financial Statements Act. 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 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 assessed the design, TORM ANNUAL REPORT 2022 INDEPENDENT AUDITOR’S REPORT 187 Independent Auditor’s Report to the Members of TORM plc Report on the audit of the financial statements implementation and operating effectiveness of related controls and also engaged with management early to ensure key factors were considered in their assessment. • We obtained management’s board approved forecast cash flows and covenant calculation covering the period of assessment from the date of signing to 31 March 2024. As part of this assessment, the group has modelled a low case and stress case scenario in their cash forecasts and covenant calculations in order to incorporate unexpected changes to the forecasted liquidity and covenant compliance of the group. • We assessed the reasonableness of the cashflow forecast by analysing management’s historical forecasting accuracy. • We evaluated the key assumptions and sensitivities identified underpinning the group’s assessment by challenging how these compared with external benchmarks, historical performance adjusted for inflation, the lowest rolling 4-quarter average since 2000, as well as performance in the period post year end. • We have evaluated the key assumptions underpinning the group’s base case, low case and stress case scenario by challenging the appropriateness of the low case and stress case scenarios modelled and how these compared with the principal risks and uncertainties of the group. • We have evaluated the stress case scenario and considered whether the combination of factors (notably significantly reduced freight rates and vessel values) is a plausible outcome or remote based upon the historical performance, external benchmarks, and performance and conditions in the period post year end. • 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. • Our analysis also considered the mitigating actions such as sale of older vessels 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 have considered factors, such as freight rates and vessel values, in the period immediately after the going concern period by comparing them to the external benchmarks. • We considered whether management’s disclosures in the financial statements sufficiently and appropriately reflect the going concern assessment and outcomes. The group is forecast to be profitable and generate positive operating cashflows throughout the going concern period in base case scenario, low case scenario and stress case scenario modelled. In each scenario TORM continues to meet its covenants. The combination of factors to achieve a reverse stress test position is considered to be remote. We considered subsequent events, including the planned refinancing in 2023 as well as committed vessels acquisitions in 2023, and obtained management’s assessment over the impact of these events. Management has assessed that the subsequent events do not change the conclusion of Management’s assessment. 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 a period to 31 March 2024. 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 $12m which represents 0.5% of group total assets. An overview of the scope of the parent 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. In assessing the risk of material misstatement to the group financial statements, 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. 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. UK team members were also present in Copenhagen during the year end phase of the audit. TORM ANNUAL REPORT 2022 INDEPENDENT AUDITOR’S REPORT 188 Independent Auditor’s Report to the Members of TORM plc Report on the audit of the financial statements Climate change Stakeholders are increasingly interested in how climate change will impact the group. The group has determined that the most significant future impacts from climate change on its operations will be from declining demand for oil and gas, higher cost of capital and reduced access to capital, carbon price regulations, and decarbonisation of vessels. These are explained on pages 75-77 in the Climate-related risk analysis and TCFD (Task Force for Climate related Financial Disclosures). They have also explained their climate commitments on pages 15 to 17 and 27. All of these disclosures form part of the “Other information,” rather than the audited financial statements. Our procedures on these unaudited disclosures therefore consisted solely of considering whether they are materially inconsistent with the financial statements, or our knowledge obtained in the course of the audit or otherwise appear to be materially misstated, in line with our responsibilities on “Other information”. In planning and performing our audit we assessed the potential impacts of climate change on the group’s business and any consequential material impact on its financial statements. The group has explained in note 10 to the group financial statements articulation of how climate change has been reflected in vessels values, how they have reflected the impact of climate changes and the climate changes agenda on the fair value of vessels including how this aligns with its commitment to the aspirations of the Paris Agreement to achieve net zero emissions by 2050.Significant judgements and estimates relating to climate change are included in note 10. These disclosures also explain where governmental and societal responses to climate change risks are still developing, and where the degree of certainty of these changes means that they cannot be taken into account when determining asset and liability valuations and timing of future cash flows under the requirements of UK adopted international accounting standards and IFRS issued IASB as adopted by the EU as applied to financial periods beginning on or after 1 January 2022. Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating management’s assessment of the impact of climate risk, physical and transition, their climate commitments, the effects of material climate risks disclosed on pages 75 -77 and the significant judgements and estimates disclosed in note 10 and whether these have been appropriately reflected in the carrying value of vessels and associated disclosure where fair value of vessels may be negatively impact by climate changes and climate agenda. Details of our procedures and findings on carrying value of vessels are included in our key audit matter below. We also challenged the Directors’ considerations of climate change risks in their assessment of going concern and viability and associated disclosures. Based on our work we have not identified the impact of climate change on the financial statements to be a key audit matter or to impact a key audit matter. Key audit matters Key audit matters are those matters that, in our professional judgment, 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 2022 INDEPENDENT AUDITOR’S REPORT 189 Independent Auditor’s Report to the Members of TORM plc Report on the audit of the financial statements Risk Our response to the risk Carrying value of the group’s vessels carried as at 31 December 2022 totalled $1,856m (2021: $1,938m). We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the company’s impairment assessment process, including controls over the identification of CGUs and review of the vessels’ fair value. Refer to the Audit Committee Report (page 91); Accounting policies (page 135, 147); and Note 10 of the Consolidated Financial Statements (page 150-152) We performed audit procedures on the impairment assessment that included, among others, assessment of management’s CGU determination by evaluating their analysis in respect of the smallest group of assets that generate largely independent cash flows. The Company assesses impairment at each reporting date or whenever events or changes in circumstances would indicate that the carrying amounts of its vessels might not be recoverable in accordance with IAS 36 Impairment of Assets. If any indications of impairment exist, or at least annually, the company prepares an impairment assessment at the cash generating unit (CGU) level, which has been determined as LR1, LR2 and MR vessels (the Main Fleet) as they are operated collectively, are largely interchangeable and the cash flows generated by them are interdependent with other vessels. Impairment is recognised if the recoverable amount, determined as the higher of value in use and the fair value less cost of disposal, is less than the carrying value of the corresponding CGU. The company determined the recoverable amount to be the fair value less cost of disposal, which was calculated as the average of two valuations prepared by independent shipbrokers. Based on the assessment, the company concluded that the carrying value was recoverable as of December 31, 2022. Auditing the Company’s vessel impairment assessment was complex due to the significant judgement required by management in determining the CGU and the degree of subjectivity involved in determining the fair value of the vessels using independent shipbroker valuations, which use a combination of vessels specific inputs such as size, yard and age of the vessels and assumptions based on market data, including recent comparable vessel transactions. We inspected evidence to assess the reasonableness of management’s determination of the homogenous nature and joint operation of the Main Fleet. We evaluated the recoverability of the carrying value of the vessels by comparing them to the average fair value of two valuations prepared by independent shipbrokers. We performed inquiries with the independent shipbrokers regarding the valuation methodology applied and input data used and evaluated their competence, capabilities and objectivity. We tested the input data used for the valuation of the vessels in the Main Fleet by comparing vessel specific inputs with vessel records and supporting documentation as well as evidence obtained in other areas of the audit. We further performed a retrospective comparison of historical sales prices of vessels with the independent broker valuations near the time of disposal and compared the valuations to recent market data for comparable vessels. 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 notes 1 and 10, including the impact from climate changes, in the consolidated 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 that the carrying value of the group’s vessels was recoverable as of 31 December 2022. We consider the disclosures in the financial statements to be sufficient and appropriate and in compliance with accounting standards. TORM ANNUAL REPORT 2022 INDEPENDENT AUDITOR’S REPORT 190 Independent Auditor’s Report to the Members of TORM plc Report on the audit of the financial statements 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. Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. 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 $12 million (2021: $10 million), which is 0.5% (2021: 0.4%) of the group’s total assets. We believe 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. We determined materiality for the parent company to be $7.4 million (2021: $8.4 million), which is 0.5% (2021: 0.5%) of total asset, as the parent company principally holds investments in subsidiaries and does not trade externally. 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. On the basis of our risk assessments, together with our assessment of the group’s overall control environment, our judgement was that performance materiality was 50% (2021: 50%) of our planning materiality, namely $6m (2021: $5m). Our objective in adopting this approach is to confirm that total detected and undetected audit differences do not exceed our materiality for the financial statements as a whole. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of $0.6m (2021: $0.5m), which is set at 5% of planning 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 this gives rise toa material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. 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 2022 INDEPENDENT AUDITOR’S REPORT 191 Independent Auditor’s Report to the Members of TORM plc Report on the audit of the financial statements Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 122, 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 UK adopted international accounting standards, IFRS as issued by the IASB and adopted by the EU as applied to financial periods beginning on or after 1 January 2022, FRS 101, the Companies Act 2006 and Corporate Governance Code, the Danish Financial Statement Act, 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 as follow: • 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 minutes of meeting of those charged with governance; • • Obtaining and reading correspondence from legal and regulatory bodies; • Obtaining confirmations from the group’s banking • provider to verifying the existence of cash balances and completeness of loans and borrowings; Journal entry testing, with a focus on manual journals and journals indicating large or unusual transactions based on our understanding of the business. 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. 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 - 16 March 2023 TORM ANNUAL REPORT 2022 INDEPENDENT AUDITOR’S REPORT 192 TORM fleet overview As of 31 December 2022 Vessel type 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 Tanker Vessel class Vessel DWT Built Ownership Carrying value (USDm) LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR2 LR1 LR1 LR1 LR1 LR1 LR1 LR1 LR1 MR MR MR MR MR MR TORM HANNAH TORM HELLERUP TORM HELENE TORM HERMIA TORM HERDIS TORM HILDE TORM HOUSTON TORM KIARA TORM KIRSTEN TORM KRISTINA TORM MAREN TORM MARINA TORM MATHILDE TORM ESTRID TORM ISMINI TORM SARA TORM SIGNE TORM SOFIA TORM VENTURE TORM ELISE TORM ELIZABETH TORM ADVENTURER TORM AGNES TORM AGNETE TORM ALEXANDRA TORM ALICE TORM ALLEGRO 109,999 114,000 114,000 114,000 114,000 114,000 114,000 114,445 114,445 114,323 109,672 109,672 109,672 74,999 74,999 72,718 72,718 72,660 73,700 75,000 75,000 46,042 49,999 49,999 49,999 49,999 46,184 2016 2018 2021 2018 2018 2018 2022 2015 2015 2015 2008 2007 2008 2004 2004 2003 2005 2005 2007 2019 2019 2008 2011 2010 2010 2010 2009 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% 100% 42 44 50 46 44 45 49 38 38 38 29 28 28 14 17 12 18 18 23¹⁾ 36 36 16 19 22 22 19 20 TORM ANNUAL REPORT 2022 TORM FLEET OVERVIEW 193 TORM fleet overview As of 31 December 2022 Vessel type 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 Tanker Vessel class Vessel DWT Built Ownership Carrying value (USDm) 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 MR TORM ALMENA TORM AMALIE TORM AMORINA TORM ANABEL TORM ARAWA TORM ASLAUG TORM ASTRID TORM ATLANTIC TORM AUSTRALIA TORM CAVATINA TORM CORRIDO TORM DISCOVERER TORM ERIC TORM FREYA TORM HARDRADA TORM HELVIG TORM INDIA TORM KANSAS TORM LAURA TORM LEADER TORM LENE TORM LILLY TORM LOKE TORM LOTTE TORM LOUISE TORM MALAYSIA TORM NEW ZEALAND 49,999 49,999 46,184 49,999 49,999 49,999 49,999 49,999 51,737 46,200 46,156 45,012 51,266 45,990 45,983 46,187 49,999 46,955 49,999 46,070 49,999 49,999 51,372 49,999 49,999 51,737 51,737 2010 2011 2012 2012 2012 2010 2012 2010 2019 2010 2019 2008 2006 2003 2007 2005 2010 2006 2008 2009 2008 2009 2007 2009 2009 2011 2011 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% 100% 19 19 22 22 22 19 23 21 20 17 21 15 12 9 13 14 17 14 18 15 17 19 16 19 19 21 20 TORM ANNUAL REPORT 2022 TORM FLEET OVERVIEW 194 TORM fleet overview As of 31 December 2022 Vessel type Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Tanker Vessel class Vessel DWT Built Ownership Carrying value (USDm) 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 PHILIPPINES TORM PLATTE TORM RAGNHILD TORM REPUBLICAN TORM RESILIENCE TORM SINGAPORE TORM SOLUTION TORM SOVEREIGN TORM SPLENDID TORM STELLAR TORM STRENGTH TORM STRONG TORM SUBLIME TORM SUCCESS TORM SUPREME TORM THAMES TORM THOR TORM THUNDER TORM THYRA TORM TIMOTHY TORM TITAN TORM TORINO TORM TROILUS TORM VOYAGER 49,999 46,959 46,187 46,955 49,999 51,737 49,999 49,999 49,999 49,999 49,999 49,999 49,999 49,999 49,999 47,036 49,842 49,842 45,950 49,842 49,842 49,842 49,842 45,916 2010 2006 2005 2006 2005 2011 2019 2017 2020 2020 2019 2019 2019 2019 2019 2005 2015 2015 2003 2015 2016 2016 2016 2008 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 17 13 14 14 12 21 30 28 30 30 30 30 29 29 26 14 28 28 9 28 28 29 29 14 ¹⁾ ⁾ Indicates vessels for which TORM believes that, as of 31 December 2022, the basic charter-free market value is lower than the vessel's carrying amount. TORM ANNUAL REPORT 2022 TORM FLEET OVERVIEW 195 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. 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. 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. EBIT/Operating profit: Earnings Before Interest and Tax. Earning days: A measure of operating days available for generating earnings. CAPEX: Capital expenditure. ESG: Environment, Social, and Governance. Charter-in and leaseback days: A measure of operating days available for generating earnings from vessels that are not owned by the Company. FFA: Forward freight agreement. A financial derivative instrument enabling freight to be hedged forward at a fixed price. Handysize: A specific class of product tankers with a cargo carrying capacity of 20,000–40,000 dwt. IAS: International Accounting Standards. IFRS: International Financial Reporting Standards. IMO: International Maritime Organization. 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. Product tanker: A vessel suitable for carrying clean petroleum products such as gasoline, jet fuel, and naphtha. Spot market: Market in which vessels are contracted for a single voyage for near-term delivery. T/C: Time charter: An agreement covering the chartering out of a vessel to an end user for a defined period of time where the owner is responsible for crewing the vessel, but the charterer must pay port costs and bunkers. 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. Technical management: An agreement to manage a vessel’s technical operations and crew for the account and risk of the shipowner. Loan-to-value (LTV): A measure of notional debt divided by broker values of the encumbered vessels. Ton-mile: A unit of freight transportation equivalent to a ton of freight moved one mile. LR1: Long Range 1. A specific class of product tankers with a cargo carrying capacity of 60,000–80,000 dwt. UN Global Compact: The United Nation’s social charter for enterprises, etc. LR2: Long Range 2. A specific class of product tankers with a cargo carrying capacity of 80,000–110,000 dwt. Vetting: An audit of the safety and performance status of a tanker vessel made by oil majors. 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 that ensures through verification of design, construction, building process, and operation of vessels that the vessels at all times meet a long list of requirements to seaworthiness, etc. If the vessels do not meet these requirements, insuring and mortgaging the vessel will typically not be possible. COA: Contract of Affreightment. A contract that involves a number of consecutive cargos at previously agreed freight rates. Coating: The internal coatings applied to the tanks of a product tanker enabling the vessel to load refined oil products. Commercial management: An agreement to manage a vessel’s commercial operations for the account and risk of the shipowner. TORM ANNUAL REPORT 2022 GLOSSARY 196 Glossary Key financial figures TCE per day Gross profit % EBITDA % Operating profit % Return on Equity (RoE) % Return on Invested Capital (RoiC) % Equity ratio Earnings per share, EPS Diluted earnings/(loss) per share, EPS = = = = = = = = = TCE excluding unrealized gains/losses on derivatives Available earning days Gross profit Revenue EBITDA Revenue Operating profit (EBIT) Revenue Net profit/(loss) for the year Average equity Operating profit 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 2022 GLOSSARY 197 Glossary Alternative Performance Measures Group Throughout the annual report, several alternative performance measures (APMs) are used. The following APMs relate to the Group. 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 10). TORM 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. USDm 2022 2021 2020 Reconciliation to net profit/(loss) for the year Net profit/(loss) for the year Profit from sale of vessels Impairment losses on tangible assets Provisions Expense of capitalized bank fees at refinancing Termination of finance leases Step-up gain related to acquisition 562.6 -10.2 2.6 -6.3 - - -0.3 -42.1 - 4.6 - 1.1 - - 88.1 -1.1 11.1 18.5 2.8 2.7 - Net profit/(loss) for the year ex. non-recurrent items 548.4 -36.4 122.1 Gross profit: TORM defines Gross profit, a performance measure, as revenue less port expenses, bunkers and commissions, and other cost of goods sold, charter hire and operating expenses. TORM 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 Revenue Port expenses, bunkers, commissions, and other cost of goods and services sold Operating expenses Gross profit 2022 2021 2020 1,443.4 619.5 747.4 -459.5 -240.9 -227.9 -202.1 -190.5 -178.4 781.8 188.1 341.1 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. RoIC expresses the returns generated on capital invested in TORM. The progression of RoIC is used by TORM to measure progress against our long-term value creation goals outlined to investors. RoIC is calculated as follows: USDm Operating profit (EBIT) Tax EBIT less tax Invested capital, opening balance Invested capital, ending balance 2022 601.4 5.9 607.3 2021 1.4 -1.3 0.1 2020 138.9 -1.4 137.5 2,011.3 1,719.7 1,786.0 2,142.3 2,011.3 1,719.7 Average invested capital for the year 2,076.8 1,865.5 1,752.9 Return on Invested Capital (RoIC) 29.2% 0.0% 7.8% TORM ANNUAL REPORT 2022 GLOSSARY 198 Glossary Alternative Performance Measures Group 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. The Adjusted RoIC expresses the returns generated on capital invested in TORM adjusted for impacts related to the impairment of the fleet. The progression of RoIC is used by TORM to measure progress against our long-term value creation goals outlined to investors. Adjusted RoIC is calculated as follows: Invested capital: Invested capital as defined by TORM measures the net investment used to achieve TORM’s operating profit. TORM 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: USDm 2022 2021 2020 Tangible and intangible fixed assets 1,869.1 1,960.9 1,748.4 USDm EBIT less tax Profit from sale of vessels Impairment losses on tangible assets Provisions Step-up gain related to acquisition EBIT adjusted Average invested capital¹⁾ Average impairment ²⁾ 2022 607.3 -10.2 2.6 -6.3 -0.3 2021 2020 0.1 137.5 - 4.6 - - -1.1 11.1 18.5 - Investments in joint ventures Deferred tax asset Other investments Inventories Trade receivables ¹⁾ Assets held for sale Non-current tax liability related to held-over gains 593.1 4.7 166.0 Deferred tax liability 2,076.8 1,865.5 1,752.9 37.4 42.3 41.5 Other non-current liabilities Trade payables ²⁾ Current tax liabilities Provisions Deferred income 0.1 0.6 0.2 1.5 0.7 - 72.0 48.8 343.9 129.6 - -45.2 -6.1 -3.0 -79.6 -2.0 -6.8 -0.9 13.2 -45.2 - - -79.0 -0.9 -18.3 - 1.6 0.3 - 22.5 85.6 - -44.9 - - -74.1 -1.4 -18.3 - Average invested capital adjusted for impairment 2,114.2 1,907.8 1,794.4 Adjusted RoIC 28.1% 0.2% 9.2% ¹⁾ Average invested capital is calculated as the average of the opening and closing balance of invested capital. ²⁾ Average impairment is calculated as the average of the opening and closing balances of impairment charges on vessels and goodwill in the balance sheet. Invested capital ¹⁾ Trade receivables also include Other receivables and Prepayments. ²⁾ Trade payables includes Trade payables and Other liabilities. 2,142.3 2,011.3 1,719.7 TORM ANNUAL REPORT 2022 GLOSSARY 199 Glossary Alternative Performance Measures Group 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 TORM 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 TORM’s financing agreements. TORM believes that EBITDA assists Management and investors by increasing comparability of TORM’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 which could be affected by various changing financing methods and capital structures, 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 which affect profit/(loss), and these measures may vary among other companies and are therefore not 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 and amortization Impairment losses on tangible assets EBITDA 2022 2021 2020 562.6 -42.1 -5.9 48.8 -4.0 1.3 42.4 -0.2 88.1 1.4 49.9 -0.5 139.0 130.9 121.9 2.6 4.6 11.1 743.1 136.9 271.9 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 TORM’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 ¹⁾ Loan receivables 2022 2021 2020 978.0 1,148.4 853.3 -4.6 -4.6 -4.6 Cash and cash equivalents incl. restricted cash -323.8 -171.7 -135.6 Net interest-bearing debt ¹⁾ Borrowings include long-term and short-term borrowings, excluding capitalized loan costs of USD 11.1m. 972.1 649.6 713.1 TORM ANNUAL REPORT 2022 GLOSSARY 200 Glossary Alternative Performance Measures Group Net Asset Value per share (NAV/share): TORM believes that the NAV/share is a relevant measure which 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 Total vessel values including newbuildings (broker values) Committed Liability CAPEX Committed Investment CAPEX Goodwill Other intangible assets Land and buildings Other plant and operating equipment Investments in joint ventures Loan receivables Deferred tax asset Other investments Inventories Trade receivables Other receivables Prepayments 2022 2021 2020 2,650.3 1,926.0 1,585.3 -18.4 18.4 -39.9 39.9 -100.6 100.6 1.8 1.9 3.8 5.6 0.1 4.6 0.6 0.2 72.0 259.5 74.0 10.4 - - 4.8 6.3 1.5 4.6 0.7 - 48.8 84.0 40.0 5.6 - - 7.1 6.8 1.6 4.6 0.3 - 22.5 58.6 24.9 2.2 Cash and cash equivalents incl. restricted cash 323.8 171.7 135.6 Deferred tax liability Borrowings ¹⁾ Other non-current liabilities Trade payables Current tax liabilities Other liabilities Provisions Deferred income -6.1 - - -978.0 -1,148.4 -853.3 -3.0 -48.5 -2.0 -31.1 -6.8 -0.9 - -35.3 -0.9 -43.7 -18.3 - - -14.4 -1.4 -59.8 -18.3 - Total Net Asset Value (NAV) 2,332.2 1,047.4 902.3 Continued USDm Non-controlling interest 2022 2.4 2021 2020 - - Total Net Asset Value (NAV) excl. non-controlling interest 2,329.8 1,047.4 902.3 Total number of shares end of period excl. treasury shares (million) 81.8 80.7 74.4 Total Net Asset Value per share (NAV/share) (USD) ¹⁾ Borrowings include long-term and short-term borrowings, excluding capitalized loan costs of USD 11.1m. 28.5 13.0 12.1 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. Further, it expresses TORM’s ability to act and invest when possibilities occur. USDm Cash and cash equivalents incl. restricted cash Undrawn credit facilities and committed facilities incl. sale and leaseback financing transactions Liquidity 2022 323.8 2021 2020 171.7 135.6 92.6 38.2 132.2 416.4 209.9 267.8 TORM ANNUAL REPORT 2022 GLOSSARY 201 Glossary Alternative Performance Measures Tanker segment 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. For this reason, we apply TCE earnings in our financial outlook on page 56. Below is presented a reconciliation from revenue to TCE earnings: USDm Reconciliation to revenue Revenue 2022 2021 2020 1,440.4 619.5 747.4 Port expenses, bunkers, and commissions -458.9 -240.9 -227.9 TCE earnings 981.5 378.6 519.5 Net 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 2022 2021 2020 Vessel values including newbuildings (broker values) 2,650.3 1,926.0 1,585.3 Total (value) Borrowings - Hereof debt regarding ”Land and buildings” and “Other plant and operating equipment” Committed liability CAPEX Loan receivables 2,650.3 1,926.0 1,585.3 971.4 1,148.4 853.3 -3.2 18.4 -4.6 -5.6 39.9 -4.6 -8.3 100.6 -4.6 Cash and cash equivalents incl. restricted cash -321.4 -171.7 -135.6 Total (loan) 660.6 1,006.4 805.4 Loan-to-value (LTV) ratio 24.9% 52.3% 50.8% TORM ANNUAL REPORT 2022 GLOSSARY 202 

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