FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of April 2005
A/S STEAMSHIP COMPANY TORM
(Translation of registrant's name into English)
Tuborg Havnevej 18
DK-2900 Hellerup
Denmark
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F___
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
INFORMATION CONTAINED IN THIS FORM 6-K REPORT
Set forth herein as Exhibit 1 is a copy of the Annual Report - 2004 issued
by A/S STEAMSHIP COMPANY TORM to The Copenhagen Stock Exchange on March 8, 2005.
Exhibit 1
ANNUAL report 2004
Table of contents
2 To the shareholders
4 Group financial highlights
5 Management's and auditors' reports
6 2004 highlights
7 Outlook for 2005
10 Tanker division
12 Bulk division
14 Trends in the product tanker and bulk segments
20 TORM's strategy
22 Dampskibsselskabet "NORDEN"A/S
23 Safety, environment and security
25 Managing risk and exposure
28 Human resources
30 Corporate governance
31 Investor relations, shareholders and share price
34 Financial review
39 Key accounting policies
41 Income statement
42 Balance sheet
44 Statement of changes in shareholders' equity
46 Cash flow statement
47 Notes
72 Transition to IFRS from January 2005
78 Board of Directors and Management
80 Glossary
81 Securing and employing tonnage
84 Announcements 2004 and financial calendar 2005
85 Fleet information
Basic information
Name & address:A/S Dampskibsselskabet TORM
Tuborg Havnevej 18
DK-2900 Hellerup
Tel.: +45 3917 9200
www.torm.com
Founded: 1889
Board of directors: N. E. Nielsen (chairman)
Christian Frigast (deputy chairman)
Lennart Arrias (elected by the employees)
Ditlev Engel
Rex Harrington
Peder Mouridsen (elected by the employees)
Gabriel Panayotides
Management: Klaus Kjaerulff, CEO
Klaus Nyborg, CFO
To the shareholders
2004 was an outstanding year for TORM. Historically high freight rates and
thereby high earnings for both the Tanker and Bulk divisions coupled with a
significant increase in the value of the investment in Dampskibsselskabet
"Norden" A/S have resulted in the best financial performance ever achieved by
the Company. The Board of directors recommends to the Annual General Meeting a
dividend payment of DKK 15 per share (2003: DKK 6), corresponding to a total
dividend payment by the Company of DKK 546 mill.
Rates in the product tanker market were at high levels throughout the year and
rose further toward year-end.
As a result of increased demand for heating oils, rates are in normal
circumstances at their highest during the winter period during the fourth and
first quarters of the year, after which rates are somewhat lower during the
summer. In 2004, however, rates remained at very high levels throughout the
summer period and then rose further in the fourth quarter - a situation only
seen previously in the product tanker market in 2001.
The basis for these high rate levels and substantial increases was a solid
growth in worldwide demand, low inventories of refined products especially in
the western world - in part due to high oil prices - combined with the fact that
for many years, this part of the world has not increased refinery capacity,
causing increased distances over which refined petroleum products have to be
carried. This led to a very high utilization rate for the world fleet and
consequently very high freight rates. Furthermore, an increasing number of
market participants without owned tonnage or cargoes have added further
volatility to the market in recent years.
With a young and modern fleet, which mainly operates in the spot market
globally, TORM has been ideally positioned to take advantage of the very firm
tanker market.
The bulk market sustained the very firm levels seen at the end of 2003. During
the first quarter of 2004, bulk freight rates reached levels never seen before
in history. The background for these booming rates was the significantly
increased import of raw materials, especially in China, but also the result of
more growth in other regions of the world, including India, combined with an
increase in waiting days due to limited port capacity.
In the second quarter of 2004, the Chinese government adopted a number of
measures aimed at minimizing the risk of overheating the economy, which resulted
in a substantial drop in bulk freight rates. In the third and fourth quarters,
however, rates began to firm once again, as stocks reached more normal levels,
and imports of raw materials to China began to rise again.
In order to cover earnings at the historically high levels in a market with
significant volatility we began towards the end of 2003 to charter out a
significant part of the bulk fleet on time charter, typically for periods of
about one year. This coverage has been gradually renewed in the final quarter of
2004 and early 2005, and, it is pleasing to note, at firmer rates, thereby
securing a significant portion of the Bulk division's earnings for 2005.
TORM continued its fleet renewal and expansion during 2004. We took delivery of
two LR1 product tankers from the Hyundai yard in Korea and also purchased two
second hand MR product tankers. In accordance with our strategy to own a young,
modern fleet of product tankers, at the end of 2004, we purchased two MR product
tanker newbuildings to be delivered in 2005. At the beginning of 2005 we sold
two of our oldest LR1 product tankers but chartered them back for a period of 5
years in order to retain capacity as well as to take advantage of the firm
market. In January 2005 we entered into agreements to purchase a total of 5.5
LR1 product tankers, which will be delivered during the period 2005-2007.
Furthermore, we have in March 2005 announced that we have acquired five MR and
one LR1 product tankers built 2000-2004 from our pool partner LGR. The owned
bulk fleet was expanded during the year through the exercise of existing
purchase options held on a number of chartered-in vessels, resulting in three
Panamax bulk carriers being added to the owned fleet at favourable prices.
The three product tanker pools experienced further growth throughout the year.
Despite an unchanged number of pool partners the three pools grew by 23% from 61
vessels to 75 vessels during 2004.
The increasing importance of the markets east of Suez combined with the fact
that many of our customers have representation in Singapore led TORM to
strengthen its office in Singapore in 2004. The new office undertakes numerous
functions and charters and operates TORM's and our pool partners' vessels.
In October 2004, TORM opened its own recruitment office in the Philippines,
which will help ensure our ability to further strengthen and retain the staff of
seagoing personnel with the competencies crucial to maintaining the highest
possible standards, which is important as demand for highly qualified naval
officers is increasing strongly.
In June 2004, we moved to our new, modern offices at Tuborg Havn, which has
helped creating open and dynamic work environment for all concerned.
The value of TORM's investment in Norden rose significantly during 2004 and in
addition Norden paid a dividend of DKK 200 mill. to TORM in 2004.
It is pleasing to note that our shareholders have been able to benefit from the
successful times for the Company. The TORM share price reached new highs on both
the Copenhagen Stock Exchange and the NASDAQ during the year and we paid a high
dividend in 2004. The share price on the Copenhagen Stock Exchange rose with no
less than 150% in 2004.
TORM has for the past few years enjoyed very solid earnings generating a
considerable cash flow. It is TORM's belief that the good times experienced by
the shipping industry should lead to a good dividend for the shareholders.
However, the levels of dividends paid will at the same time be weighed against
the wish to keep sufficient capital available due to the general volatility in
the shipping market and for timely expansion, as TORM wishes to have financial
capacity in order to be able to make significant investments with favourable
timing.
In 2005, TORM will change to reporting according to IFRS and as our business is
predominantly undertaken in USD, the accounts will in the future be presented in
USD.
It is with great pleasure that I can report to you that TORM - in terms of
strategy, financial strength and organization - is very well prepared for
whatever challenges may face us in 2005 and the years beyond. Developments in
2005 will be very much dependent on the world economy and thereby oil
consumption - and for the Bulk division, China's growth will be key.
Finally, I would like to thank our shareholders for the support and our pool
partners and business partners for the cooperation in 2004, whilst at the same
time also thanking most sincerely the sea going and land based personnel in TORM
for all your tremendous efforts during 2004.
Klaus Kjaerulff, CEO
Management's and auditors' reports
Statement by the Board of directors and Management on the Annual Report
The Board of directors and Management have presented and adopted the Annual
Report for the year ended 31 December 2004.
The Annual Report of A/S Dampskibsselskabet TORM has been prepared in accordance
with the provisions of the Danish Financial Statements Act applicable for listed
companies in Accounting Class D, Danish accounting standards and the
requirements of the Copenhagen Stock Exchange relating to the presentation of
financial statements by listed companies.
We consider the accounting policies used to be appropriate and the accounting
estimates made to be reasonable. To the best of our belief, the Annual Report
includes the information which is relevant for an assessment of the Company's
and the Group's financial position. Against this background, it is our opinion
that the Annual Report gives a true and fair view of the Company's and the
Group's assets and liabilities, financial position, results of operations and
consolidated cash flows for the year ended 31 December 2004.
We recommend that the Annual Report is adopted at the Annual General Meeting.
Copenhagen, 8 March 2005
Auditors' report
To the shareholders of A/S Dampskibsselskabet TORM
We have audited the Annual Report of A/S Dampskibsselskabet TORM for the
financial year ended 31 December 2004, presented in accordance with the Danish
Financial Statements Act and the financial reporting requirements of the
Copenhagen Stock Exchange.
The Annual Report is the responsibility of the Company's Board of directors and
Management. Our responsibility is to express an opinion on the Annual Report.
Basis of Opinion
We conducted our audit in accordance with Danish Auditing Standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance that the Annual Report is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Annual Report. An audit also includes assessing the
accounting policies used and significant estimates made by the Board of
directors and Management, as well as evaluating the overall Annual Report
presentation. We believe that our audit provides a reasonable basis for our
opinion.
Our audit has not resulted in any qualification.
Opinion
In our opinion, the Annual Report gives a true and fair view of the Group's and
the Parent Company's financial position at 31 December 2004 and of the results
of the Group's and the Parent Company's operations and the consolidated cash
flows for the financial year then ended in accordance with the Danish Financial
Statements Act and the financial reporting requirements of the Copenhagen Stock
Exchange.
Copenhagen, 8 March 2005
Deloitte Ernst & Young
Statsautoriseret Statsautoriseret
Revisionsaktieselskab Revisionsaktieselskab
Jesper Jarlbaek Tom Hornb0ll
State Authorised Public Accountant State Authorised Public Accountant
Kirsten Aaskov Mikkelsen Henrik Kofoed
State Authorised Public Accountant State Authorised Public Accountant
2004 highlights
o The result of DKK 1,300 mill., excluding tax and unrealized profit on the
Norden holding, is in line with the upward adjusted profits forecast issued on
25 January 2005.
o Net profit after tax for the year was DKK 2,281 mill. (2003 DKK 1,051 mill.).
The Board of directors considers the result to be highly satisfactory.
o The result includes an unrealized value adjustment of DKK 1,034 mill. on the
Company's holding in Norden and tax of DKK 53 mill.
o Profit before depreciation was DKK 1,351 mill. (2003: DKK 572 mill.).
o Cash flow from operating activities was DKK 1,397 mill. (2003: DKK 494 mill.)
whilst cash flow from investing activities was negative by DKK 1,117 mill.
(2003: DKK (1,007) mill.).
o Shareholders' equity was DKK 4,324 mill. as at 31 December 2004 (2003: DKK
2,464 mill.).
o Return on equity was 67.2% (2003: 51.4%) whilst return on invested capital was
32.7% (2003: 13.1%).
o The Company's owned fleet increased by 29% to 2.0 mill. dwt at the end of
2004.
o As at 31 December 2004, the market value of the Company's fleet exceeded its
book value by DKK 3,134 mill. (2003: DKK 837 mill.).
o The three product tanker pools consisted of a total of 75 vessels as at 31
December 2004 - an increase of 14 vessels during 2004.
o TORM expects a result before tax for 2005 of USD 165-175 mill. (2004: USD 177
mill.). This forecast excludes any unrealized value adjustment on the Norden
holding, in that this will henceforth be adjusted through shareholders' equity,
any dividends received and gains or losses from sales of vessels.
o In the beginning of 2005, TORM has sold the two LR1 product tankers, TORM
HILDE and TORM MARGRETHE. The gain on the sale, USD 19 mill., is not included in
the expected result.
o The Board of directors recommends to the Annual General Meeting a dividend
payment of DKK 15 per share (2003: DKK 6), corresponding to a total dividend
payment by the Company of DKK 546 mill.
Outlook for 2005
Tanker division
In 2005, the tanker market will be affected by the relatively large order book
of vessels for delivery in 2005 and an expected slightly lower world economic
growth. The revised IMO rules for phase-out of older single-hulled vessels will
come into force from April 2005. There is, however, some uncertainty about the
size of the impact of this on freight rates for TORM's Tanker division.
With an expected growth in GDP of 3.5% for USA, 1.6% for Europe, 1.6% in Japan,
and 9.3% in China, the International Energy Agency (IEA) expects a growth in
world oil demand in 2005 of 1.5%, corresponding to a growth of 1.4 mill. barrels
per day (source: Fearnleys). This will lead to an additional growth in the
transportation of oil. For the product tanker market tonmiles is expected to
increase by 4.7% in 2005 and 3.5% in 2006. If these growth figures are compared
with the net growth in tonnage, utilization of the active tanker fleet is
expected to fall from 91.5% in 2004 to 86.5% in 2005 - corresponding to the
level in 2001 (source: R.S. Platou).
In total, TORM expects that for 2005 the Tanker division will experience lower
rates than in 2004.
Seasonal patterns mean that first and fourth quarters traditionally are the
strongest due to the winter season in the western world.
The risk factors, which are judged to have the largest effect on the product
tanker market in 2005 are:
o Lacking economic growth in the world and thereby lower consumption of refined
products,
o Lower imports of refined products to especially USA and China.
TORM expects the following freight rates in the Tanker division in 2005:
TORM expects that Bulk markets in 2005 will again be at levels which seen in
historic terms are very high but at the same time may exhibit considerable
fluctuations.
The order book for bulk vessels is relatively modest, despite the very high rate
levels, and the demand in the bulk market is very dependent on the development
in a few markets, especially China.
TORM has therefore - as was the case in 2004 - decided to secure a significant
part of the Company's earnings for 2005 through time charters. Consequently, 65%
of the earning days for 2005 for the Company's Panamax bulk vessels were covered
on longer term contracts as at 1 March 2005, thereby securing a historically
high income of 30,800 USD/day for these earning days.
The risk factors which are judged to have the largest effect on the bulk markets
in 2005 are:
o China's import of raw materials are lower than expected,
o Waiting days in ports are reduced,
o A generally lower global economic growth.
TORM expects the following freight rates in the Bulk division in 2005:
For 2005, TORM expects a profit before tax of USD 165-175 mill. As the 2005
financial reports will be reported based on IFRS, a potential unrealised gain or
loss on the Norden shares will not be part of the income statement and is
therefore not included in the expectations. Furthermore, any dividends received
in 2005 and gains or losses from sale of vessels are not included in the
expectations. This forecast is based on a USD/DKK exchange rate of 5.40. The
comparative result in 2004 was USD 177 mill. The gain from the sale of TORM
HILDE and TORM MARGRETHE, USD 19 mill., is not included in the expected result.
However, the rate levels can easily be influenced by several factors, which may
impact TORM's results significantly, whereby the forecasts are uncertain.
If all other factors are unchanged, the chart below shows how profits before tax
will be impacted by a change in the freight rates in all five segments. The
chart shows the development in profit before tax with positive and negative
changes in expected freight rates.
The change is only calculated for those operating days in 2005 where the vessels
are not already contractually committed.
A change in the freight rates in all five segments of 1,000 USD/day will lead to
a change in profit before tax for the year of USD 9.6 mill.
Safe harbour statement -
forward looking statements
Matters discussed in this release may constitute forward-looking statements.
Forward-looking statements reflect our current views with respect to future
events and financial performance and may include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements, which are other than statements of historical
facts.
The forward-looking statements in this release are based upon various
assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in our records and other data available from third
parties. Although TORM believes that these assumptions were reasonable when
made, because these assumptions are inherently subject to significant
uncertainties and contingencies which are difficult or impossible to predict and
are beyond our control, TORM cannot assure you that it will achieve or
accomplish these expectations, beliefs or projections.
Important factors that, TORM's our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
strength of world economies and currencies, changes in charter hire rates and
vessel values, changes in demand for "ton miles", the effect of changes in
OPEC's petroleum production levels and worldwide oil consumption and storage,
changes in demand that may affect attitudes of time charterers to scheduled and
unscheduled dry-docking, changes in TORM's operating expenses, including bunker
prices, dry-docking and insurance costs, changes in governmental rules and
regulations including requirements for double-hull tankers or actions taken by
regulatory authorities, potential liability from pending or future litigation,
domestic and international political conditions, potential disruption of
shipping routes due to accidents and political events or acts by terrorists.
Risks and uncertainties are further described in reports filed by TORM with the
US Securities and Exchange Commission, including the TORM Annual Report on Form
20-F and its reports on Form 6-K. Did you know that:
The pumps of an LR2 product tanker can fill an olympic sized swimming pool in
fifteen minutes
Tanker division.
Freight rates prevailing in the market for TORM's Tanker division in 2004 were
generally at very high levels largely throughout the year.
In normal circumstances, the tanker market is strongest during the first and
fourth quarters of the year as a result of demand for oil products for heating
during the winter period.
After a short spell during the start of the second quarter of 2004, when rates
fell as expected - rates firmed again over the summer period and further
increased towards year-end. These developments took place against a background
of a market facing a tight tonnage balance due to a strong demand for crude oil
and clean petroleum products. Ton-miles for the tanker market as a whole, which
indicated the total capacity demand in the market increased 10.4% in 2004,
whereas the world's fleet increased by only 4.2% (source: P.F. Bass0e).
Demand for transport capacity increased further as a result of historically low
inventories of clean petroleum products in the Western countries. This was
partly brought about by the higher oil price, increasing demand and limited
refinery capacity in the Western world.
With the highest global economic growth since 1976, world consumption of oil saw
similar records - despite the historically high oil prices. OPEC increased its
production to almost full capacity - over 30 mill. barrels/day - and the main
reason for the high demand was China, which with its exceptionally high growth
rates increased its oil consumption and import by more than 30%. The growth in
the US is furthermore a contributing factor behind the large oil demand.
Utilization of the active tanker fleet reached 91.5%, which is equivalent to
almost full capacity as bad weather, maintenance, waiting time in ports etc.
make up the remaining time. This is the highest utilization rate registered
since measurements started in 1986.
The high utilization rates furthermore led to high volatility in the different
segments during the year.
During 2004, TORM expanded and further renewed its fleet of modern product
tankers by taking delivery of two LR1 product tankers named TORM Estrid and TORM
Ismini, as well as acquiring two second hand MR product tankers, TORM Alice and
TORM Agnete.
TORM's total order book in the tanker segment following the delivery of the
2003-built LR1 product tanker TORM SARA in first quarter 2005 is 17.5 vessels
with a total investment exceeding USD 700 mill.
The three tanker pools grew further during the year. Despite the number of pool
partners remaining unchanged, the three pools nonetheless grew by 23% from 61
vessels to 75 vessels by the end of 2004.
The Tanker division had a net profit of DKK 525 mill. in 2004, which was more
than 90% higher than in 2003. The significantly better result is due to the
higher freight rates combined with more operating days as a result of the
expansion of the fleet.
Bulk division
The market for the Company's bulk carriers reached historically high levels in
2004, albeit rates fluctuated significantly during the year.
This came about against a background of increasing import of raw materials,
especially to China, increasing worldwide economic growth plus an increase in
the number of waiting days in various ports brought about by increased market
activity, affecting a large part of the world's fleet.
Concurrently, the increase in the world bulk fleet has been relatively modest
for some years, given the very firm rate levels.
Compared to the Tanker division, the strategy in TORM's Bulk division is based
to a greater extent on long term chartered-in vessels, often including purchase
options, when possible and when it is considered favourable to enter such
agreements.
As freight rates in the fourth quarter of 2003 and first quarter of 2004
increased to levels not seen before, TORM considered it advantageous to charter
out a substantial part of the fleet for longer periods - generally for a period
of about 12 months - thereby reducing the risk inherent in a bulk market
experiencing such volatility.
As a result, TORM's quarterly results achieved in the Bulk division showed
considerably less volatility than the bulk market experienced in general.
A significant number of the charters entered into in the fourth quarter of 2003
thus expired in the fourth quarter of 2004 or will expire in the first quarter
of 2005. The Company has renewed or will renew a number of these contracts as
they expire.
At the end of 2004, TORM's Panamax fleet consisted of 7 owned vessels and 10
chartered vessels, of which TORM holds purchase options on three units.
Trends in the product tanker and bulk segments
This section describes the most important factors which TORM's management
considers key trends impacting the two divisions, Tanker and Bulk.
Refineries move away from the western world
There has for a number of years been a clear trend that refining capacity has
primarily grown in areas other than the western world - which however remains
the most substantial consumers of clean petroleum products.
This trend is the result of increasingly stringent environmental focus in the
western part of the world coupled with the fact that the oil producing nations
wish to retain more of the value added by the refining process. The effect of
this trend is to increase the distances involved in the transportation of
refined oil products, which in turn positively affects the product tanker
market.
Consequently, the increase in consumption in the western world will mainly be
covered by imports, which is beneficial for TORM.
The Bulk division achieved a net profit of DKK 546 mill. in 2004, which was
almost seven times higher than in 2003. The very large increase is primarily due
to the higher freight rates, as the number of operating days is relatively
unchanged from 2003.
Did you know that:
The total fleet in TORM's
three product carrier pools
have a combined capacity of more than six billion liters, corresponding to two
years' use of gasoline in Denmark.
Lower inventories
Inventories of clean petroleum products were at very low levels during 2004.
This came about as a result of increased consumption combined with the rising
price of crude oil resulting in a number of market participants not wishing to
hold excessive inventories.
The low inventories mean that if, for example, longer periods of poor weather,
strikes or other events disrupt the reliability of supply, market participants
are prepared to pay very high freight rates.
The charts below show the historical highest and lowest US inventories of
selected refined products during the period for each individual week of the year
compared to the inventories in 2004.
Obtaining capital from the financial markets
During the last 5-10 years it has become increasingly common among shipping
companies to raise capital in the financial markets through the sale of shares
or corporate bonds, offering new opportunities for financing purchases of fleets
or companies.
The relatively large risk appetite from financial investors has furthermore
opened a window of opportunity for comparative newcomers to shipping with a view
to raising capital in the financial market for the acquisition of vessels or
companies. This has contributed to higher vessel prices.
Furthermore, the increasing focus among financial investors on shipping
companies has resulted in interest from private equity funds who in the past
showed little or no interest in shipping companies as an investment object.
High vessel prices
The shipyards' order book for the sizes of vessels operated by TORM are largely
filled until 2008, which is a historically long period. This factor, taken
together with very firm freight rates and the comparative ease with which
capital can be raised in the financial markets, has resulted in a very
significant increase in the wish to invest, which combined with high steel
prices and a worsening currency situation has led to strong increases in
newbuilding prices.
It is TORM's expectation that newbuilding prices will remain at relatively high
levels for some time as a result of a long term order book, high steel prices,
high earning potential and the comparative ease with which ship owners can raise
capital.
However, TORM expects that the prices of newer second-hand tonnage will
fluctuate in relation to the rate development in the spot market.
The influence of new markets
A continually increasing percentage of the world's consumption of raw materials
- for example coal and oil - is being consumed by "new" markets such as China
and India. This means that freight rates affecting product tankers as well as
bulk carriers are to an increasing extent dependent on the developments in these
countries.
As an example, there has traditionally been greater demand for oil products
during the first and fourth quarters of the year, on the back of demand for
heating oil in the western world. However, the growing importance of markets
outside the western world has resulted in these seasonal variations being less
pronounced in recent years.
In the bulk market, the effect particularly of China has been very pronounced.
China's increasing import of raw materials from far-away producer nations has
absorbed significant capacity. At the same time, the increase in demand during
specific periods of the year placed heavier demand on certain load and discharge
ports which did not have the capacity to handle the large number of additional
vessels arriving to load or discharge. This resulted in an increasing number of
waiting days, thereby reducing world fleet capacity. This development is
expected to continue for some time.
TORM's strategy
Tanker division
In the Tanker division TORM has specialised in product tankers. This focus is
due to the continued expectation that this segment of the tanker market over a
longer period of time will grow faster than the tanker market in general. This
expectation is based on the growth of refining capacity increasingly taking
place outside the key consuming areas - the western world - resulting in larger
transportation distances.
TORM has for a number of years focused on the ownership and operation of quality
tonnage and as early as 1988 the Company took delivery of its first
double-hulled product tanker. The average age of the Company's tanker fleet was
as at 1 March 2005 5.0 years - one of the lowest among the major tanker owning
companies. With an increasing focus from the IMO, the EU and individual
countries and customers, it is TORM's view that in the future it will be very
important to have a double-hulled quality fleet to retain a competitive edge.
TORM's strategy in the product tanker segment has since 1989 been to focus on
the development of the pool concept together with other ship owners who share
TORM's philosophy with regards to quality and service. The Tanker division's
customers - mainly the large oil companies and oil traders - have over the past
10-15 years become fewer, but significantly larger, partly the result of mergers
and acquisitions. Pooling gives TORM and its partners critical mass - and
thereby the possibility to offer the ever larger customers the delivery,
capacity and reliability they require in the future. Furthermore, pooling helps
to reduce the number of waiting days and to even out regional differences in
freight levels through presence in several markets at the same time.
Through the three pools, TORM and its partners have achieved a leading position
in the world market. In as much as TORM wishes to be in a position to offer
delivery reliability and at the same time retain its leading market position,
the strategy is naturally focused on the spot market. Nonetheless, TORM will to
a lesser extent cover a part of its freight and bunkers price risk.
Bulk division
In the Bulk division, TORM has chosen to focus on Panamax vessels and, to a
lesser extent, Handysize vessels. The Panamaxes are operated by TORM, whereas
the Handysize vessels are operated within the IHC pool in Hong Kong.
TORM's investments in the Bulk division is relatively limited, although it
increased in 2004 as a result of a strategy partly based on the chartering in of
tonnage for longer periods. When it is considered commercially advantageous, a
purchase option will be negotiated as part of the charter party terms. This
gives a significantly higher degree of flexibility from an investment and
business perspective as well as hedging of freight rates. This is significant in
the segments of the bulk market within which TORM operates given that this
market affords good opportunities for asset management.
The bulk market is in general much more fragmented than the product tanker
market, wherefore pooling has far less commercial relevance in this market.
So far as market conditions allow, TORM will generally seek to cover forward a
portion of this volatility by chartering vessels out on period charter. Should
the spot market fall drastically - precisely the situation the Company wishes to
protect itself against - smaller market players may face the problem of survival
and the hedging has thereby not been effective, since a market risk is then
merely replaced by a credit risk
Financial strategy
It is a key success criteria in shipping always to be in a position to invest in
vessels when prices are favourable. Consequently, TORM wishes to have financial
capacity in order to be able to make significant investments when the timing is
favourable.
TORM has for the past few years enjoyed very solid earnings generating a
considerable cash flow. It is TORM's belief that the good times experienced by
the shipping industry should lead to a good dividend for the shareholders.
However, the level of dividends paid will at the same time be weighed against
the wish to keep sufficient capital available due to the general volatility in
the shipping markets and for timely expansion.
Did you know that:
In one full cargo from an LR2 tanker, an average car could drive for about 1.5
billion km - or about 36,000 times around the world.
Dampskibsselskabet
"NORDEN" A/S
In the summer of 2002, TORM acquired a share holding in Norden and subseqently
launched a public offer via the Copenhagen Stock Exchange for the remainder of
Norden's shares. After the offer, TORM owned 727,803 shares representing 33% -
excluding Norden's own shares - acquired at a price of DKK 361 per share for a
total investment of DKK 263 mill.
Despite the fact that the goal of acquiring Norden - to create one shipping
company combining TORM's tanker activities with Norden's strength in bulk
markets - was not realized in 2002, TORM nonetheless retained the shareholding
in Norden. This was done not only with the aim of making a merger possible in
the longer term, but also in view of the investment potential.
The investment in Norden has proved to be extremely satisfactory. Against an
initial investment of DKK 263 mill., TORM has since received dividends from
Norden in the amount of DKK 207 mill., of which DKK 200 mill. was received in
2004. Furthermore, the unrealized gain on the investment since the purchase
totals DKK 1,721 mill., thereof DKK 1,034 mill. in 2004.
In the autumn of 2004, two of Norden's shareholders decided to sell a total of
20% of the shares in Norden to Rasmussengruppen AS. At the same time
Rasmussengruppen reached an agreement with A/S Motortramp, which owns 25.7% of
the share capital, whereby the two parties have granted one another first
refusal on each other's shares in Norden, and at the same time committing
themselves not to sell their shares to a third party for a period of two years.
TORM's gain on a potential sale of the Norden holding will become tax free after
3 years' of ownership, in other words in August 2005, which does not necessarily
mean, however, that TORM has decided to dispose of the investment after this
date.
TORM belives that given the positive freight market especially for the bulk
market and the extent of forward coverage taken by Norden, it is deemed to have
good potential.
Did you know that:
One cargo of coal in one of TORM's panamax vessels can generate enough
electricity to cover the requirements of about 170,000 houses for a year.
Safety, environment and security
Safety, environment and security are important focus areas for TORM. It is the
Company's view that these subjects will increasingly be an important competitive
parameter. The considerable costs of being at the forefront of developments in
this area should be viewed as a natural cost of doing business.
ISPS Code
The implementation of the International Ship and Port Facility Security Code
(ISPS) - covering security of vessels and ports and the communication between
these - has been a key focus area in 2004. The certification of all TORM's
vessels was completed well before the 1 July 2004 deadline.
The various Governments, port states and authorities had differing
interpretations of the Code. Furthermore, not all ports were certified within
the required time frame. All the Company's vessels have been trading world wide
during the second half of 2004 without encountering any significant security
related problems.
Safety Management
The Safety Management performance on board TORM's vessels has been outstanding
during 2004. The Lost Time Accident Frequency (the number of accidents where a
person has been injured for each one million hours worked onboard) for the year
2004 was 1.5 (2003: 1.5), which is considered very low by industry standards.
The severity of the accidents has also been very minor. This demonstrates that
the Company has succeeded in maintaining high safety awareness levels across all
onboard, despite the fact that the total pool of employed seafarers increased by
40% in 2004.
Increasing requirements and verifications
The international system for regulation of environmental and safety issues for
shipping companies is generally governed by the IMO. In addition, in recent
years the EU has begun to play a more active role together with the vessels'
flag states and the classification societies.
Many different players continuously carry out quality checks of the vessels,
their equipment, safety standards, crew training and of the quality and safety
management systems operating within a particular shipping company. One of such
inspections, which are conducted on a regular basis on tankers, is what is known
as an Oil Major Vetting inspection. A vetting inspection is a comprehensive
assessment of all operational aspects of a vessel, i.e. from a technical
evaluation covering safety and environmental procedures, to the competence of
the officers and crew, including the onboard documentation to support the fact
that the systems are fully implemented both on board and ashore.
The Company is fully committed to deliver the best possible product to its
customers and to use the "vetting performance" of the vessels as one of the key
indicators of TORM's quality performance. Last year's figures show a clear and
satisfactory trend towards a decrease in the number of deficiencies reported
during such vetting inspections.
Tanker Management and Self Assessment
New requirements and regulations are continuously emerging within the shipping
industry and one of the major changes in the making is the introduction of the
new OCIMF scheme called "Tanker Management and Self Assessment" (a best practice
guide for ship operators).
This programme should be considered as a tool to help TORM's ship management and
operations divisions to be able to measure and improve the Company's systems.
The programme should furthermore encourage TORM's ship management and operations
divisions to assess the safety management systems against listed key performance
indicators and in this way demonstrate best practice.
This scheme requires the Company to evaluate its own operations with regard to
safety, quality and environmental issues, and by answering a number of
questions, ranks the Company's overall performance on a scale from one to four.
In areas where the Company does not score sufficiently high points, the
requirements of the scheme need to be incorporated into TORM's Quality and
Safety Management System. By complying to the best possible extent, TORM may be
able to reduce the number of inspections that each of the Company's vessels
undergoes.
The Green Award
Ten of the Company's MR tankers have been enrolled in The Green Award Scheme.
This voluntary certification scheme is mainly focusing on environmental aspects
of the operation of oil tankers. The Green Award verifies the continuous
compliance with certification requirements during annual audits of the specific
vessels and of TORM's office every third year.
Apart from the environmental and safety related benefits obtained by addressing
The Green Award Scheme requirements, the certificate issued also entitles the
enrolled vessels to call at certain ports at reduced port charges.
Based on the experience with the MR vessels, TORM will consider whether more
vessels will participate in The Green Award Scheme.
ISO 14001
The next major project is to address and implement the ISO 14001 requirements
into TORM's systems and to obtain and maintain such certification. A new
revision of ISO 14001 is about to be released but the changes to the standard
are not expected to be significant.
Oil spill
A TORM tanker was involved in a minor oil spill in Texas in August 2004. The
TORM vessel was lying at anchor when a bunker barge ran into her starboard
side near the engine room area and starboard fuel oil bunker tank. Although
full responsibility for the accident was accepted by the bunker barge operator,
under US rules, the responsibility for the clean up operation was TORM's, as the
oil spilled originated from the TORM owned tanker.
Fortunately, very limited damage to the wild life was reported to have occurred.
The clean up was a large-scale operation involving several hundred people. The
US Coast Guard later expressed satisfaction with the vessel's immediate response
to the oil spill by laying out booms, etc. and with the handling of the incident
by the Company.
Though the incident and clean up operation had severe economical consequences
for many parties involved and affected many people in the local area, it also
added valuable experience to TORM's Emergency Group with regard to the
management of an emergency situation and showed the Company to be very well
equipped to handle an emergency situation.
The cost to TORM of the incident was limited to internal resources.
Managing risk and exposure
TORM operates worldwide, and consequently the Company is exposed to changes in
economic, political and legal circumstances in individual countries. These
include the risk of changes to the economic climate to which shipping, by its
very nature, is exposed. These risks can be divided into commercial and
financial risks.
Earnings
The Company's income is principally generated from individual voyages, fixed at
rates reflecting market conditions prevailing at the time and with an average
duration of 20-40 days. To a lesser extent, income is also generated from time
charter agreements typically of 6 to 12 months' duration. As such, TORM is
exposed to the considerable volatility inherent in the freight markets. By
participating in well-established pool arrangements and through the ability to
service larger customers, this volatility is reduced through better fleet
utilisation and a broader geographical spread. Furthermore, the number of
waiting days is reduced given the size and capacity of each pool.
Freight rates are to an extent covered against the volatility in a number of
different ways, including contracts of affreightment, FFAs and time charters and
in total 40% of the earnings for the Company's tanker vessels in 2004 were
secured that way. Of these, the first two mentioned above accounted for half of
the coverage since they best combine the certainty of stable freight rates with
the need for serving the customers of the pools.
In order to further increase the control with its freight positions the Company
is contemplating the implementation of a risk management (Value-at-Risk) system
in the course of 2005.
Sale and purchase of tonnage
The expansion of the fleet taking place particularly within the Tanker division,
primarily through a substantial newbuilding program, also encompasses a number
of risk elements. These include the timing for placing contracts and the value
of the vessels - which can vary considerably during its lifetime. The Company's
strategy is through an overall portfolio management of the assets and a solid
financial status always to be in a position to take advantage of favourable
market conditions in respect of the timely sale and purchase of vessels, rather
than letting external parties decide when to undertake such transactions.
With regard to TORM's newbuilding program, where at year-end there were seven
vessels on order at Korean and Chinese yards, guarantees for the Company's
prepayments have been put in place. All guarantees have been arranged via state
owned banks. At year-end 2004, the value of total prepayments was DKK 204 mill.
Fleet accidents
National and international rules, regulations and conventions mean that the
Company could incur considerable liabilities in the event that a vessel should
be involved in an oil spill or emission of other environmentally damaging
agents. In order to reduce or eliminate the likely effect this could have on the
Company's financial position, the fleet has been insured with international
renowned P&I clubs with the maximum coverage offered.
The total insurance package consists of a wide insurance cover of vessel and
cargo, including environmental damage, pollution and third party liability, hull
and machine damage, total loss and war cover. All owned vessels are insured for
loss of hire for a period of up to 90 days in the event of an accident. The
Company's policy is to place insurances only with the most highly rated insurers
- presently some 8-10 companies - along with the use of two P&I clubs in order
to spread risk.
Movement in bunker prices
The Company's operating results are affected by movements in the price of fuel
oil consumed by the vessels - known in the industry as bunkers. To cover this
risk, the Company hedges the price of part of its bunkers' requirements for up
to 12 months forward at a fixed price. In 2004, the Company hedged twenty two
per cent of its bunker requirements, and at year-end it had hedged about fifteen
per cent of the 2005 requirement. The market value of these contracts was DKK
(4.3) mill. at year end (2003: DKK 0 mill.). A hypothetical change of 1
percentage point in the price per ton of bunker oil would result in a change in
cost in 2005 of DKK 2 mill. based on the expected consumption of bunkers, where
the Company, not the charterer, takes the risk.
In light of the Company's pool structure, bunker hedging for tankers is not done
in respect of an individual vessel when it has been chartered out. Instead,
bunker hedging is planned in connection with the specific pool's total estimated
bunker requirements. Nonetheless, where a contract of affreightment covering
several voyages has been fixed, the pool may hedge bunker requirements
specifically for such a contract. For the bulk carriers, bunkers are similarly
hedged to match cargo contractual obligations but the requirements are generally
less, given that a larger part of earnings are derived from vessels chartered
out on time charter, where the charterer is responsible for the payment of
bunkers.
All bunker hedgings and indeed any other form of hedging are carried out only
based on specific requirements and not for the purpose of any form of
speculation.
Credit risk
The Company's credit risk is considered minimal, as it is normal shipping
practice that freight is paid prior to the discharge of a vessel's cargo.
The amounts receivable are therefore primarily made up of cross-over voyages and
a small amount of demurrage.
With regard to investments in vessels and financing of investments and operating
activities it is the Company's policy only to work with well-known and reputable
partners.
Almost 100 per cent of the Company's income and charter obligations and the vast
majority of operating costs and assets and liabilities are USD denominated. On
the financial side, the Company is exposed to exchange rate and interest rate
changes. In order to manage these risks, the Company utilises financial hedging
instruments.
Exchange rate risk
Exchange rate risks are assessed based on the USD, and the Company's policy is
to limit the impact of exchange rate movements on the financial statements and
the financial position of the Company.
As TORM uses USD as measurement currency and given that most of the Company's
transactions are in USD, TORM only has limited transaction risk, which primarily
relates to costs in DKK.
In order to minimize the exchange rate risk on the year's estimated result, the
Company typically enters into forward contracts. The expected cash flows related
to the payment of wages and salaries, non-USD related technical operating costs,
administrative expenses and dividends in DKK countered by interest income in DKK
are typically covered for a period of up to one year. In 2004, the Company
entered into forward contracts with the sale of USD 38 mill. against the DKK and
sold USD 19 mill. spot against DKK in order to cover cash requirements for
operating costs in 2004.
At year-end 2003, the Company had sold forward USD 21 mill.
to cover operating costs for 2004 corresponding to 25 per cent of the year's
cash flow. In 2004, spot and forward exchange contracts amounting to USD 78
mill. were entered into at an average rate of
5.96 against DKK as compared with an average USD/DKK exchange rate of 5.99.
The Company has decided to divest its bond portfolio during 2005 in order to
cover its DKK requirements. In addition, TORM has entered into an agreement to
buy put options for USD 35 mill. which leaves the majority of the expected DKK
cash flow for 2005 covered. With regard to the put options, the counterparty
must buy USD from TORM at exchange rates between 5.85 and 6.06 to the DKK. In
case the USD/DKK exchange rate exceeds various agreed levels between 6.10 and
6.50, the counterparty can purchase USD from TORM at exchange rates between DKK
5.85 and 6.06 per USD. The average rate for these transactions is DKK 6.03 for
the put options.
TORM was in 2004 exposed to translation risk between USD and DKK for the part of
net profit for the year originating from the operating entities. All else being
equal, a variation of 1 per cent in the USD/DKK exchange rate would result in a
change in the net profit of DKK 12 mill. in 2004. Aside from the effect on the
operating result, the effect on equity includes the effect of translation of
balance sheet items from the measurement currency to DKK.
A variation in the USD/DKK exchange rate of 1 per cent at year-end 2004 would
result in a change of DKK 29 mill. in total.
When the Company in 2005 changes into using USD as reporting currency, the
translation risk will be reduced significantly as all important entities of the
Group are also using USD as a measurement currency.
Interest rate risk
TORM's interest rate risks are in all materiality related to the interest
bearing mortgage debt. All the Company's loans are variable interest rate loans
in USD entered into for the purpose of financing the Company's vessels. The
Company's interest bearing USD debt increased from year-end 2003 to year-end
2004 by USD 60 mill. to USD 395 mill. The portion of the variable rate mortgage
debts with maturity within one year was USD 62 mill., and USD 172 mill. after
one year but within 5 years. The average effective interest rates were between
2.3% and 4.6%.
In certain cases, the Company utilises derivative financial instruments to
control the effect of interest rate fluctuations on earnings and cash resources.
Typically, the Company uses interest rate swaps for periods up to 5 years,
normally 2-3 years if satisfactory interest rate levels can be achieved. For
shorter term interest rate risk hedging, TORM uses forward rate agreements
(FRAs) from time to time.
The profile of the instruments always matches the loan profile of the particular
loan in question. When assessing interest rate risk hedging for its loan
portfolio, the Company takes into account expected interest rate developments
and future adjustments to the fleet to meet future market requirements.
The portion of the interest swaps hedging the USD mortgage debt with maturity
within one year was USD 15 mill., and USD 67 mill. after one year but within 5
years. The average effective interest rates were between 2.6% and 4.1%. The fair
value of the Company's interest rate swaps was DKK 1.3 mill. at year-end 2004
(2003: DKK (31.4) mill.).
At year-end, the Company had covered 68 per cent of its 2005 interest costs at
an average rate of 4.1% including margin. The covered debt has an average
remaining time to maturity of 2.3 years with maturity between 2005 and 2013. A
change of 1 percentage point in the interest on the outstanding variable debt
would result in a change in interest cost of DKK 6.6 mill. in 2005.
At 31 December 2004, the Company had an investment in Danish Government bonds
and mortgage bonds with a book value of DKK 317 mill. The adjusted duration of
the Company's bond portfolio was 2.7 years at year-end, and the portfolio
produced an effective yield of 3.74% in 2004.
Human resources
Change and growth have affected the working environment in TORM during 2004.
First and foremost, considerable changes took place in relation to relocation to
new offices in Copenhagen, expansion of the office in Singapore and the
establishment of a new office in the Phillippines.
ashore
In order to ensure that TORM continues to be an attractive and challenging place
to work, competitive salaries and a good physical and mental environment in
which to work are essential.
TORM's growth is created by its employees, and with a growing business and fleet
the Company has been able to create a number of new positions, not least in
Denmark. The training and education of young people with the aim of making them
the most talented within the shipping industry especially viz. chartering and
operations is the result of thorough training within the Company combined with
theoretical and academic education in shipping and maritime law. Every year,
TORM employs a number of trainees who helps form the base for TORM's future
growth and expansion.
Education and international experience are important for the younger employees
as well as for the more senior people. Through this, the right competences and
attitudes are developed to reach goals individually as well as across the
organization. Through short or long placements abroad, the younger employees
have the possibility of gaining international experience. TORM places great
importance on training and education which is seen as a targeted and on-going
process both in general terms, but also in specific subjects relevant to the
tasks to be performed - including IT, personal development and management.
Additionally, an important part of TORM's management development program is
participation in courses offered by leading international business schools.
TORM places emphasis on paying competitive salaries consisting of a fixed
element and a bonus and pension scheme. These are significant factors in the
competition to attract and retain competent employees - not least in Denmark.
However, what also makes TORM an attractive place to work is the emphasis the
Company places on ensuring a good, open working environment with cooperation and
support for the individual. A clear and well communicated business strategy and
annual individual assessments help to ensure a good and positive dialogue in
respect of short term as well as long term goals.
Competition for highly qualified employees is considerable. Nonetheless, TORM
can still note with satisfaction that it has succeeded in retaining and
attracting talented employees.
A low staff turnover of 6.2% coupled with a low absenteeism percentage indicate
that TORM is an attractive company to work for, with a good team spirit and
atmosphere.
With the move to the new premises in Tuborg Havn - with a completely open office
environment and glass walls - a place to work has been created which encourages
an open communication and contributes to a dynamic work culture.
At sea
TORM continues to contribute to the education of Danish officers and maintains
an annual intake of about 10-12 trainees. Currently, there are more than 40
trainee officers at different levels of education and in the summer of 2005,
TORM will be able to derive great satisfaction from the fact that the first of
our young trainees will complete her dual senior qualifications and after having
completed the requisite time at sea, she will qualify for command.
Did you know that:
The steel produced from of one cargo of iron ore in a TORM Panamax vessel is
enough to build 3.6 Eiffel towers.
Corporate
Governance
In October 2004, TORM opened its own recruitment office in the Philippines,
which will contribute to the strengthening and retaining of the seagoing
personnel with the competence necessary for maintaining the high standard.
During 2004, a number of seminars were held for the Company's officers where
both internal and external instructors focused on current issues.
The expansion which TORM has experienced naturally increases the need for
additional recruitment of sea going personnel, wherefore the need for courses
and seminars has increased further during the year.
Leaving aside new recruits, which are essential to keep up with the growth of
the fleet, TORM continues to have a low turnover of seagoing personnel - less
than 5% per annum.
It is a policy for TORM that the Company should at all times be managed properly
and responsibly, both in the short and long term, which will help create value
for the shareholders and at the same time ensure that TORM remains a trustworthy
and respected business partner for external interests. For an overview of Danish
corporate governance and key differences between corporate governance in Denmark
and corporate governance practices applied in the US, please refer to the
Company's website, www.torm.com.
Aside from compliance with Danish rules and standards TORM is required as part
of its listing on NASDAQ to comply with a series of requirements under the
American Sarbanes-Oxley Act, of which the most comprehensive requirements are
covered under Section 404. These require not only that significant procedures
and internal controls must be documented, tested and maintained, but also that
Management as part of the completion of the Company's American annual report
(20-F) undertakes an extensive evaluation of the Company's internal controls in
respect of reporting as of the balance sheet date, and states the outcome of
this evaluation and any deficiencies in internal controls which the evaluation
may have uncovered.
The Company's auditors will, in addition to the normal audit in connection with
the annual report, undertake an independent audit of the Company's internal
controls in respect of the preparation of the accounts. The results of this
audit are highlighted in an audit opinion in 20-F from the Auditors which will
contain a qualification if the result of the audit is not materially in
accordance with Management's assessments.
In addition to Section 404, the Sarbanes-Oxley Act contains many other
requirements not only to the Company, but also to the Company's external
advisors, for example:
o Requirements covering the establishment of an Audit Committee, which is to
include the participation of a financial expert,
o The establishment of a "Whistle Blower" function, whereby employees
anonymously can contact the audit committee about possible weaknesses in the
internal controls,
o The rotation of partners and senior personnel from the Company's auditors,
o Restrictions on which functions, aside from auditing, the audit firm may
undertake on the Company's behalf,
o Requirement on lawyers providing SEC services to report evidence of material
violations of US securities laws.
TORM began work on ensuring compliance with the Sarbanes-Oxley Act quite some
time ago. In addition to complying with the law, TORM expects that the increased
focus on internal controls and risks both in the short and long term is likely
to enhance the Company's business opportunities. Furthermore, it is TORM's
expectation that the intentions of the American laws will in a few years spread
to the rest of the world, either in the form of similar laws or by influencing
the standards for good corporate and accounting practice.
The Company's compliance with Section 404, which covers the internal controls in
connection with the preparation of the annual report, will be audited for the
first time at the end of the financial year 2006. TORM has worked on this for
some time and the Company expects to be ready well ahead of time.
Apart from the considerable use of internal resources, TORM expects that the
total external costs needed to implement the requirements of the Sarbanes-Oxley
Act, including additional IT expenses, to be less than USD 1 mill.
Investor relations, shareholders and share price
TORM has over the past couple of years increased the level of investor
information and the frequency with which same is made available to shareholders
and partners. This has come about as a result of a wish to increase awareness of
the Company and thereby improving the basis for evaluating TORM as a business
partner, investment or borrower.
TORM wishes to ensure that existing and potential investors are
at all times sufficiently informed about important developments involving the
Company, and to ensure that all shareholders have equal access to all such
information.
It is pleasing to note that the interest for TORM's shares among Danish and
international investors has increased considerably over the last few years. As
an element in pursuing greater awareness about TORM, the Company's Board of
directors decided in 2002 to dual list on the NASDAQ, as a number of TORM's
important competitors were already publicly listed in the USA.
Liquidity in TORM's shares - both on the Copenhagen Stock Exchange and the
NASDAQ - increased considerably during 2004.
In 2004, TORM was awarded first prize by the Danish financial newspaper B0RSEN
for the best Danish annual report in 2003. The Company regards this as an
acknowledgement of the information policy and intends to retain and further
improve upon it.
In May 2004, TORM issued bonus shares whereby shareholders received one bonus
share for every share owned.
TORM's share capital consists of 36.4 mill. shares of DKK 10 each. The shares,
which are bearer shares and are without any special rights, are listed on the
Copenhagen Stock Exchange and on NASDAQ. TORM had 5,418 shareholders registered
by name at 31 December 2004, a significant increase from the 1,953 registered
shareholders as at 31 December 2003. At 31 December 2004, 14% of TORM's share
capital was converted to ADRs.
The following shareholders have reported that they own more than 5% of the share
capital according to Section 29 of the Danish Securities Trading Act covering
share dealings:
Table of contents
34 Financial review
39 Key accounting policies
41 Income statement
42 Balance sheet
44 Statement of changes in Shareholders' equity
46 Cash flow statement
47 Notes
72 Transition to IFRS from January 2005
Financial review
Net profit for the year increased by 117 % to DKK 2,281 mill. from DKK 1,051
mill. in 2003, corresponding to earnings per share (EPS) of DKK 65.6 in 2004
against DKK 30.3 in 2003. Excluding an unrealized gain on the shares in
Dampskibsselskabet "NORDEN" A/S of DKK 1,034 mill. the profit before tax for the
year was DKK 1,300 mill., which is considerably higher than expected at the
beginning of the financial year.
The considerably higher profit is primarily the result of freight rates which
during most of the year were higher than expected and the addition of seven
vessels to TORM's fleet of owned vessels, of which three vessels had previously
been chartered by the Company. A further contribution to the reported profit was
the addition of these vessels which were not acquired at the time of the
announcement made at the beginning of the year.
The Group's total assets increased by DKK 1,885 mill. to DKK 6,779 mill. from
DKK 4,894 mill. in the previous year. The most significant developments behind
this increase are an increase in the book value of vessels in 2004 of DKK 600
mill. due to fleet expansion, and DKK 1,034 mill. relating to a value adjustment
of the Company's investment in Dampskibsselskabet "NORDEN" A/S, whereas Cash at
bank and in hand increased by DKK 195 mill.
The Company's shareholders' equity increased by DKK 1,860 mill. to DKK 4,324
mill. from DKK 2,464 mill. corresponding to an increase in the solvency ratio of
14 percentage points to 64% from 50% in 2003. The significant increase in
shareholders' equity emanates mainly from the profit for the year less dividend
paid out and exchange rate adjustment from translation of financial statements
in USD to DKK. The Group's total debt increased by DKK 25 mill. to DKK 2,455
mill. from DKK 2,430 mill. in the previous year.
Net earnings from shipping activities
The total net revenue for the Group for 2004 were DKK 2,596 mill. against DKK
1,928 mill. in the previous year. TORM's revenue derives from two segments, the
Tanker division and the Bulk division. In the markets in which these operate,
the time charter equivalent (TCE) rates, defined as net revenue less voyage
expenses divided by the number of available earning days is used as a measure
for freight rates. Under time charter contracts the charterer pays for the
voyage expenses whereas the ship owner pays for the voyage expenses under voyage
charter contracts. As a consequence, TORM primarily bases economic decisions
upon expected TCE rates rather than on expected net revenues. The analysis of
TORM's revenue is therefore primarily based on the development in time charter
equivalent earnings. The Group's time charter equivalent earnings in 2004 were
DKK 2,099 mill. against DKK 1,307 mill. in 2003. Generally higher rates in all
segments as well as the addition of tonnage especially in the tanker segments
LR1 and MR were the primary drivers behind the positive development.
The positive development in the time charter equivalent earnings should be seen
against the background of the continued drop in the USD/DKK exchange rate. The
average USD/DKK exchange rate in 2004 decreased by more than 9% compared to
2003. Without this drop, the Company's increase in earnings would have been
approximately DKK 1,001 mill. against the actual DKK 792 mill.
Tanker division
Net revenues in the Tanker division increased by 37% to DKK 1,532 mill. from DKK
1,115 mill. in 2003, whereas the time charter equivalent earnings increased by
DKK 329 mill. or 41% to DKK 1,125 mill. from DKK 796 mill. in the previous year.
Freight rates in the product tanker market were generally characterized by high
rates during the year. The rates reached the highest level in March with a
subsequent shorter than usual low season in the second quarter. Towards the end
of the year the rates increased sharply and peaked in November with a weakening
tendency in December influenced by a warmer than usual winter in USA, which
slowed market demand for crude oil and product tanker vessels.
Seen for the year as a whole, the LR2 segment achieved freight rates on average
22% higher than in the previous year, which increased earnings by DKK 71 mill.
The number of available earning days increased by 593 days or 48%, as the
delivery of two newbuildings in the second half of 2003 had full effect in 2004,
which resulted in an increase in earnings of DKK 106 mill.
In the LR1 segment TORM took delivery of two newbuildings during the year. The
newbuildings were the primary reason for the increase in the number of available
earning days of 578 days or 68%, resulting in an increase in earnings of DKK 86
mill. The increase in average freight rates of 11% increased earnings by DKK 23
mill.
In the MR segment, the Company took delivery of two vessels. Also in this
segment, the addition of tonnage was the main reason for the increase in the
number of available earning days of 331 days or 8%, which increased earnings by
DKK 38 mill. The average freight rates were 24% higher than in the previous
year, which affected earnings positively by DKK 117 mill.
The continuing drop in the USD/DKK exhange rate affected the time charter
equivalent earnings for the year in the Tanker division negatively by DKK 112
mill. The increase in the time charter equivalent earnings in the Tanker
division can be summarized as illustrated in the table on the preceding page.
Contained in time charter equivalent earnings, port and bunker expenses - or
voyage expenses - rose in 2004 by almost 28% or DKK 88 mill. to DKK 407 mill.
primarily as a consequence of the increased activity in the form of more
vessels, leading to more available earning days and more port calls. The average
bunker price for purchases in 2004 was 6% higher than in 2003, which corresponds
to an increase in bunker expenses of DKK 15 mill.
Bulk division
In the Bulk division net revenue increased by 34% to DKK 1,064 mill. from DKK
793 mill. in the previous year, whereas the time charter equivalent earnings
increased by DKK 489 mill. or 101% to DKK 974 mill. from DKK 485 mill. in 2003.
The increase can almost solely be explained by freight rates reaching
historically high levels and that earnings in the Bulk division in 2004 were not
negatively affected by FFA-hedging to the same extent as in 2003.
Freight rates in the Panamax segment were on average 118% higher than in 2003,
increasing earnings by DKK 513 mill. In this segment, the Company added three
vessels to its fleet of owned vessels during the year. However, the Company had
previously chartered in all three vessels, but two additional vessels were
chartered in starting July and November 2004, respectively which is the main
reason for the increase in the number of available earning days by 9% or 482
days. The time charter equivalent earnings rose by DKK 37 mill. as a result
hereof.
In the Handysize segment earnings increased by DKK 57 mill. as a consequence of
average freight rates being 93% higher than in the previous year. This increase
was partly offset by a drop in the number of available earning days of 202 days,
or 16%, as tonnage redelivered in 2003 had full effect in 2004, thereby reducing
earnings, and one additional chartered-in vessel was redelivered in July 2004.
The time charter equivalent earnings were reduced by DKK 12 mill. as a
consequence hereof.
The increase of DKK 489 mill. in the bulk vessels' earnings, which adjusted for
the lower USD/DKK exchange rate would have been DKK 585 mill., is a clear
indication of the continued, very positive market situation, although the sharp
increases seen in this part of the industry in 2003 were followed by higher but
more volatile freight rates in 2004. The increase in the time charter equivalent
earnings in the Bulk division can be summarized as illustrated in the table
below.
Contained in time charter equivalent earnings, port and bunker expenses - or
voyage expenses - dropped by 71% or DKK 218 mill. to DKK 90 mill. in 2004
primarily as a consequence of several chartered-in vessels in the Panamax
segment being redelivered in 2004 and that the bulk vessels as part of the
Company's hedging strategy to a greater extent have been chartered out on time
charters rather than on voyage charters.
Operation of vessels
Vessels chartered in by the Company do not give rise to technical running costs
for TORM but only charter hire payments. Charter hire in the Tanker division
decreased by DKK 3 mill. to DKK 81 mill., whereas charter hire paid in the Bulk
division dropped by DKK 34 mill. to DKK 276 mill. The drop in the Bulk division
after adjustment for the development in the USD/DKK exchange rate was DKK 6
mill. and was primarily caused by the Company during the year taking delivery of
three vessels previously chartered in.
The technical running costs for the Company's owned vessels increased by DKK 43
mill. to DKK 298 mill. The most significant factor behind this development was
the increase in the number of operating days of 2,530 days or 36%, primarily due
to the addition of owned vessels in the LR1, MR and Panamax segments. TORM's
total fleet of owned vessels incurred 15 off-hire days in 2004 corresponding to
two per thousand of the number of operating days compared to 21 off-hire days in
2003 corresponding to three per thousand of the number of operating days. The
Company regards this as a very positive development.
Administrative expenses and other operating income
The Company's total administrative expenses increased from 2003 to 2004 by DKK
46 mill. to DKK 172 mill. mainly due to higher staff costs including bonuses due
to an increased number of positions in the Company and a general increase in
salary levels, and expenses relating to the Parent Company moving to new
offices, increased expenses to Directors' and Officers' Liability and Company
Reimbursement Insurance and increased travel activities compared to the previous
year.
Other operating income primarily comprises income from chartering commissions
received by TORM in connection with the management of the three tanker pools.
Other operating income increased in 2004 by DKK 28 mill. to DKK 79 mill. from
DKK 51 mill. in the previous year, and adjusted for the effects of the lower
USD/DKK exchange rate the increase was DKK 35 mill. The increase primarily
derived from increased commissions from the three tanker pools as a direct
result of the higher freight rates compared to 2003 and a greater number of
vessels.
Investments in vessels
The increase in tangible fixed assets of DKK 570 mill. to DKK 3,763 mill. is
mainly attributable to the change in vessels and capitalized dry-docking. The
carrying value of vessels and capitalized dry-docking increased by DKK 596 mill.
to DKK 3,540 mill. The increase relating to vessels amounted to DKK 600 mill. as
a result of the addition of two LR1 tanker newbuildings, two MR tankers built in
1999 and 1995 as well as three Panamax bulk vessels, of which one was built in
2001 and two in 1997. The addition of new tonnage amounted to a total
acquisition cost of DKK 1,021 mill., but the drop in the USD against the DKK
caused a negative translation adjustment of DKK 225 mill. for the total fleet,
and depreciation on the vessels amounted to DKK 200 mill. Prepayment on vessels
under construction decreased by DKK 25 mill. among other things due to the
abovementioned deliveries and the drop in the USD/DKK exchange rate. During the
year additional prepayments on already agreed newbuildings were paid.
Depreciation amounted to DKK 211 mill. in 2004 against DKK 177 mill. in 2003
equivalent to an increase of DKK 34 mill. The increase, of which DKK 17 mill.
can be allocated to each of the two divisions, is entirely due to the expansion
of the fleet during 2004. The lower USD/DKK exchange rate reduced the total
depreciation by DKK 21 mill. compared to 2003.
During the fourth quarter of 2004, the Company added to its newbuilding
programme by acquiring two MR newbuildings from the STX yard in South Korea for
delivery in first/second quarter of 2005. By the end of the year, the first two
installments corresponding to 20% of the total contract amount regarding these
vessels had been paid.
Market value of vessels
The market value of the Company's fleet and newbuilding programme exceeded the
carrying value of the fleet including newbuilding contracts by DKK 3.1 bill. at
year-end. This valuation is based on the average of three internationally
acknowledged shipbrokers' valuations.
Norden
Other investments mainly comprise the Company's investment in 31.6% of the
shares in Norden with a carrying value of DKK 1,984 mill. as at 31 December 2004
against DKK 950 mill. in the previous year. TORM continues not to consider
Norden as an associated company, as TORM does not have influence on decisions
and is not represented on the Board of directors.
Financing
Net financial items in 2004 were positive by DKK 1,194 mill. against DKK 657
mill. in 2003. The most significant reason for the difference is the large
unrealized gain on the Norden shares of DKK 1,034 mill. against DKK 681 mill. in
the previous year. Dividends received amounted to DKK 201 mill. in 2004, of
which DKK 200 mill. also originate from the Company's investment in Norden. In
2003, dividends received amounted to DKK 8 mill., hereof DKK 7 mill. from
Norden.
The Company's net interest expenses amounted to DKK 68 mill. in 2004 against DKK
55 mill. in 2003. The increase relates to interest expenses, which amounted to
DKK 89 mill. against DKK 74 mill. in the previous year. Net interest bearing
debt was reduced by DKK 212 mill. during the year to DKK 1,486 mill. from 1,698
mill. in 2003. However, mortgage debt is denominated in USD and amounted to DKK
2,162 mill. as at 31 December 2004 against DKK 2,177 mill. including capitalized
lease obligations in the previous year. Adjusted for the lower USD/DKK exchange
rate, mortgage debt increased by DKK 179 mill. to DKK 2,356 mill., which is the
main factor behind the increase in interest expenses.
Invested capital increased by DKK 609 mill. to DKK 3,795 mill. from DKK 3,186
mill. at the beginning of the year. The increase can primarily be explained by
the addition of tonnage during the year and taking into account the development
in net interest bearing debt, it is evident that the additions are net financed
by cash flow from operations.
The Company's shareholders' equity increased by DKK 1,860 mill. to DKK 4,324
mill. The considerable growth in shareholders' equity is mainly derived from net
profit for the year of DKK 2,281 mill. less dividends paid out during the year
of DKK 209 mill. excluding dividends on own shares, and an exchange adjustment
from translation from USD to DKK of DKK 179 mill.
To support the Company's strategy, the financial flexibility was increased in
the fourth quarter of 2004, as a revolving facility was agreed with leading
banks. The facility has a total limit of USD 570 mill., of which a part is
dedicated to the financing of new tonnage, whereas the remaining part
constitutes ongoing financing of part of the Company's existing vessels.
In addition to an ordinary overdraft facility to cover day-to-day fluctuations
in liquidity, the Company had unused rights to draw down loans in connection
with already purchased vessels and prepaid installments on newbuildings of
slightly more than DKK 1.5 bill.
As of the end of February 2005, TORM's newbuilding programme comprised twelve
vessels, hereof one vessel in a 50/50 joint venture with J. B. Ugland Shipping
A/S. In the newbuilding programme, the first 20% of the contract price is
financed by TORM, and the remaining 80% is financed by mortgage debt. TORM has
entered into an agreement for financing of the five LR2 product tanker vessels
to be delivered during the period from April 2006 to January 2008. Payments
corresponding to 10% of the contract price have been made on all five vessels.
The remaining 10% installments are to be paid by TORM between March 2005 and
January 2007. The financing for the remaining vessels has not yet been agreed.
For all twelve vessels, the Company's total self-financing is expected to amount
to DKK 348 mill., hereof DKK 220 mill. in 2005.
Tax on profit for the year
Tax for the year was an expense of DKK 53 mill. against an expense of DKK 1
mill. in 2003. TORM entered into the tonnage taxation scheme with effect from
2001 and has filed tax returns for 2001 through 2003. The assessment of the tax
returns by the tax authorities has not yet been completed and the tax provision
for the year is therefore to a great extent based on management's judgment
regarding the outcome of the assessment. Please refer to the section regarding
tax in "Key accounting policies" for further information.
Cash flow
The Company's total cash and cash equivalents including bonds amounted to DKK
676 mill. at the end of the year against DKK 479 mill. at the beginning of the
year, resulting in a net increase in cash and cash equivalents from cash flows
for the year of DKK 197 mill.
Despite of this relatively modest development, the Company's operations
generated a historically high cash flow of DKK 1,397 mill. in 2004 against DKK
494 mill. in 2003. The cash flow corresponds to a flow per share (CFPS) of DKK
40.2 in 2004 against DKK 14.3 in 2003. The primary source of the cash flow was
profit from operating activities but the Company's investment in Norden also
contributed with DKK 200 mill. in dividends received.
Cash flow from operating activities was for the most part used to finance the
investing activities during the year as DKK 1,117 mill. net was invested in
tangible fixed assets, primarily comprising the Company's extensive expansion of
the fleet.
Cash outflow from financing activities was DKK 83 mill. Borrowing amounted to
DKK 875 mill. for the financing of the Company's newbuilding programme and
purchase of second hand vessels, while scheduled repayments on mortgage debt and
finance lease obligations amounted to DKK 695 mill. Dividends paid to the
Company's shareholders in the amount of DKK 209 mill. and settlement of share
options including shares transferred amounting to DKK 54 mill. also affected
cash flow from financing activities negatively.
Of the Group's cash and cash equivalents as at 31 December 2004 of DKK 676
mill., DKK 54 mill. were held as collateral for a USD loan. Thus, the Company's
unencumbered cash and cash equivalents were DKK 622 mill. at year-end.
Important events subsequent to year-end 2004
In January 2005, TORM entered into agreements to purchase 5.5 LR1 product tanker
vessels, of which TORM SARA has been delivered and two further vessels are
expected to be delivered during 2005, 1.5 vessels will be delivered in 2006 and
the final vessel is expected to be delivered in the first quarter of 2007.
In February 2005, the Company sold the two LR1 product tanker vessels TORM HILDE
and TORM MARGRETHE and both vessels were upon delivery chartered back on 5-year
time charters. Subsequently, the buyer of the vessels has sold the company which
acquired TORM HILDE to Beltest Shipping Company Limited, who is a shareholder in
TORM.
TORM has in March 2005 acquired five MR and one LR1 product tanker built in
2000-2004 from the pool partner LGR.
Unusual events in the financial year 2004
Aside from the significant unrealized gain on the Norden shares, there have been
no unusual developments during the financial year 2004.
Key accounting policies
The preparation of financial statements in conformity with accounting principles
generally accepted in Denmark 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 we
apply our accounting policies. Key accounting policies are those policies that
require the application of management's subjective accounting judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Key accounting
policies involve judgments and uncertainties that are sufficiently sensitive to
result in materially different results under different assumptions and
conditions.
Net revenue from pools
The Company generates its revenue from shipping activities, which to a large
extent are conducted through pools. Net revenue is recognized upon delivery of
service in accordance with the terms and conditions of the charter parties.
Total pool revenue is generated from each vessel participating in the pools in
which the Company participates and is based on either voyage or time charter
parties. The pool measures net revenues based on the contractual rates and the
duration of each voyage. The Company's net revenue from pools is made up by a
share of the total net revenue in each pool. The calculation of this share is
primarily based on available earning days from the Company's vessels in relation
to total available pool earning days.
If the scale applied in the allocation of the total pool revenue to the
participating pool partners is changed, the Company's net revenue from pools
will be affected. Historically, the Company has not experienced material
adjustments to the allocation of revenue.
Demurrage revenues
Freight contracts contain conditions regarding the amount of time available for
loading and discharging of the vessel. If these conditions are breached, the
Company is compensated for the additional time incurred in the form of a
demurrage revenue. Demurrage revenues are recognized upon delivery of service 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 counter claims 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. The Company receives the demurrage
payment upon reaching final agreement of the amount, which on average is
approximately 100 days after the original demurrage claim was submitted.
If the Company accepts a reduction of more than 5% of the original claim or if
the charterer is not able to pay, demurrage revenue in future periods will be
affected. Historically, the Company has not experienced material adjustments to
previously recognized demurrage revenue.
Port and bunker expenses
Voyage expenses, which comprise port expenses, commissions and bunker fuel
consumption, are recognized upon delivery of service in accordance with the
terms and conditions of the charter parties. Invoices in relation to port
expenses are received up to 18 months after the expenses have been incurred.
Consequently, recognition of port expenses is based on port statistics and
reports on actual expenses incurred, which are received on a regular basis from
agents and captains.
The Company's voyage expenses from pools are made up by a share of the total
voyage expenses in each pool. The calculation of this share is primarily based
on available earning days from the Company's vessels participating in the pool
in relation to the total available pool earning days for all pool participants.
If the actual expenses of a voyage differ from the estimated expenses, it will
have an impact on voyage expenses in future periods. Historically, the Company
has not experienced material changes to the estimated expenses.
Revenues and expenses related to 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 concluded
voyages.
When recognizing net revenue, there is a risk that the actual number of days it
takes to complete the voyage will differ from the estimate, and for time charter
parties, a lower day rate may have been agreed for additional days. The contract
for a single voyage may state several alternative destination ports. The
destination port may change during the voyage and the rate may vary depending on
the destination port.
Recognition of voyage expenses is based on the expected duration and destination
of the voyage, vessel statistics regarding bunker consumption, estimates of port
expenses and previous experience. Changes to the scheduled voyage will affect
the voyage expenses.
Changing the basis for estimates in relation to cross over voyages may affect
the net earnings in future periods. The calculations applied for the estimated
duration of the voyage, as well as the effect of changing destinations and
weather conditions, are constantly updated and, historically, the application of
estimates in relation to cross over voyages has not materially affected the
Company's net revenues and port and bunker expenses.
Dry-docking costs
The Company's vessels are required to undergo planned dry-dockings for major
repairs and maintenance, which cannot be carried out while the vessels are
operating, approximately every 30 and 60 months depending on the nature of work
and external requirements.
In connection with the acquisition of a vessel, the cost is divided into
dry-docking costs and the cost of the vessel. The two elements are recognized
and depreciated separately. The measurement of the dry-docking costs is based on
an assessment of the specific assets as well as on previous experience. Costs
capitalized as part of the dry-docking include actual costs incurred at the
dry-docking yard, including marine paint, cost of hiring crews to effect repairs
and the cost of parts used in making such repairs, cost of travel, lodging and
supervision of Company personnel, and the cost of hiring third party personnel
to oversee a dry-docking.
The costs associated with the dry-docking are capitalized and depreciated on a
straight-line basis over the estimated period between dry-dockings. As
depreciation is commenced at the completion of the dry-docking and invoices to
some extent are received subsequently, the total dry-docking cost is based on
estimates.
If the actual expenses of a dry-docking differ from the estimates, the
depreciation expense recorded in the following period will change. Historically,
the Company has not experienced material changes to the estimated expenses.
Useful life of vessels
The useful life of the vessels is assessed periodically based on market
conditions, regulatory requirements and the Company's business plans. The
estimated useful life and the associated estimated salvage value are the basis
for determining depreciation expense.
The Company's vessels are depreciated on a straight-line basis to the estimated
salvage value over their estimated useful lives, which the Company estimates to
be 25 years. The Company considers that a 25-year depreciable life is consistent
with that used by other ship owners with comparable tonnage. It has been
considered whether to shorten the useful lives of the vessels in light of
initiatives taken by the EU and the IMO limiting the use of tankers older than
23 years. However, there are no clear indications in the market that the
initiatives have affected the useful lives of the vessels, which are therefore
maintained at 25 years.
Depreciation is based on cost less the estimated salvage value. Salvage value is
estimated as the lightweight tonnage of each vessel multiplied by scrap value
per ton. If the estimate of useful life for vessels is revised or there is a
change in the estimated salvage value, the amount of depreciation expenses
recorded in future periods will change.
Carrying amounts of vessels
The Company evaluates the carrying amounts and period over which the vessels are
depreciated to determine if events have occurred that would require a
modification of their carrying amounts or useful lives. The valuation of vessels
is reviewed based on events and changes in circumstances that would indicate
that the carrying amount of the assets might not be recovered. In assessing the
recoverability of the vessels, the Company reviews certain indicators of
potential impairment, such as reported sale and purchase prices and general
market conditions. In addition, market valuations from independent ship broking
companies are obtained to support the recoverable amounts for the vessels on a
semi-annual basis.
The carrying cost of the Company's vessels may not represent their fair market
value at any point in time since market prices of second hand vessels to a
degree tend to fluctuate with changes in charter rates and the cost of
newbuildings.
If the estimated future cash flow or related assumptions in the future
experience lasting changes, an impairment of vessels currently recorded may be
required.
Tax
The Company entered the Danish tonnage taxation scheme with effect from 1
January 2001 and has filed tax returns for 2001, 2002 and 2003. The assessment
of the tax returns by the tax authorities has not yet been completed. It is the
Company's assessment that the uncertainty pertaining to the estimate of taxes
payable as at 31 December 2004 is not immaterial, because precedence with regard
to the interpretation of the tonnage tax regulation has yet to be established.
The Company estimates that the tax returns filed for 2001, 2002 and 2003 and the
Company's activities in 2004 will not trigger taxes payable in excess of the
amount, which has been recognised as per 31 December 2004, because estimated
taxable income to a large extent is offset by deductible losses from prior
periods.
Subsequent to entering the tonnage tax scheme, tax liabilities relating to the
vessels are considered as contingent liabilities, which are disclosed in the
Notes.
The Company's investment in Norden is regarded as a strategic investment. At a
sale of this investment after three years of ownership, no tax liability is
connected to the gain on this asset.
If this shareholding is sold entirely or in part before August 2005, any gain
will be taxed at 30%.
There are no deferred tax assets or tax liabilities connected with any other
assets or liabilities.
Accounting policies
Note 1
The Annual Report of TORM has been prepared in accordance with the provisions of
the Danish Financial Statements Act applicable for listed companies in
Accounting Class D, Danish accounting standards and the requirements of the
Copenhagen Stock Exchange relating to the presentation of financial statements
by listed companies.
Change in accounting standards
The accounting policies are unchanged from last year except that Danish
accounting standard 21 "Leasing" and Danish accounting standard 22 "Income" have
become effective and are applied as from this financial year.
The effect of implementing Danish accounting standard 21 is that a gain relating
to a sale and leaseback transaction under certain circumstances is recognized in
the income statement immediately. Previously, a gain was always recognized in
the balance sheet and amortized over the life of the charter party. In
connection with a sale and leaseback transaction in the financial year 2000
resulting in an operating lease, TORM recognized a gain in the balance sheet
which has since been amortized in proportion to the gross rental on the time
charter over the life of the charter party. The fair value at the transaction
date essentially equalled the book value, and the accounting treatment applied
is consequently considered to be in accordance with Danish accounting standard
21.
The effect of implementing Danish accounting standard 22 is that the stated
criteria for recognizing income have become more explicit in accordance with the
standard. The methods applied by TORM to recognize income are in accordance with
Danish accounting standard 22.
The changes in accounting standards have thus not resulted in any changes in the
reported amounts.
General recognition and measurement criteria
Income, including net revenue, is recognized in the income statement when:
o the income creating activities have been carried out,
o the income can be measured reliably,
o it is probable that payment will occur,
o costs relating to the transaction can be measured reliably, and
o documentation of the income exists.
Costs incurred in order to achieve the earnings for the period, including
depreciation and provisions, are also recognized in the income statement.
Furthermore, value adjustments of financial assets and liabilities, which are
measured at fair value or amortized cost, as well as the effects of changes to
accounting estimates made in prior periods are recognized in the income
statement.
Assets are recognized in the balance sheet when it is probable that the future
economic benefits attributable to the asset will flow to the Group, and the
value of the asset can be measured reliably.
Liabilities are recognized in the balance sheet, when it is probable that there
will be an outflow of future economic benefits from the Group, and the value of
the liability can be measured reliably.
Upon initial recognition, assets and liabilities are measured at cost.
Subsequently, assets and liabilities are measured as described in accounting
policies related to the balance sheet.
Certain financial assets and liabilities are measured at amortized cost, whereby
a constant effective yield to maturity is recognized. Amortized cost is
calculated as original cost less repayment and with addition/deduction of the
accumulated amortization of the difference between the cost and the nominal
amount.
Recognition and measurement take into account all circumstances, including
predictable risks and losses occurring before the preparation of the Annual
Report, which confirm or disconfirm circumstances existing at the balance sheet
date.
Consolidation principles
The Annual Report comprises the Parent Company, TORM and its subsidiaries, i.e.
the entities in which the Parent Company, directly or indirectly, holds the
majority of the votes or otherwise has a controlling interest.
Entities in which the Group holds between 20% and 50% of the votes and exercises
significant but not controlling influence are regarded as associated companies.
Associated companies which are by agreement managed jointly with one or more
other companies (joint ventures), and therefore subject to joint control, are
consolidated on a pro rata basis, whereby the individual items are included in
proportion to the ownership share.
The Consolidated Financial Statements are prepared on the basis of the financial
statements of the Parent Company, its subsidiaries and pro rata consolidated
companies by combining items of a uniform nature and eliminating inter-company
transactions, balances and shareholdings as well as realized and unrealized
gains and losses on transaction between the consolidated companies.
Foreign currencies
The measurement currency of the operating entities including
subsidiaries and associated companies is USD, because the Group's vessels
operate in international shipping markets, in which revenues and expenses are
settled in USD and the Company's most significant assets and liabilities in the
form of vessels and related mortgage debt are in USD. The books for these
operating entities are maintained in USD. The measurement currency of the
administrative entity is DKK.
Transactions in currencies other than the measurement currency are translated
into the measurement currency at the date of the transactions. Gains or losses
arising between the exchange rate at the transaction date and the exchange rate
at the settlement date are recognized in the income statement.
Cash, accounts receivable and payable and other monetary items denominated in
currencies other than the measurement currency are translated into the
measurement currency at the exchange rate prevailing at the balance sheet date.
Differences between the exchange rate at the transaction date and the exchange
rate at the balance sheet date are recognized in the income statement under
financial items.
The reporting currency of the Company is DKK. Upon recognition of the operating
entities, the financial statements are translated from USD into DKK. Items in
the income statement are translated into DKK at the average exchange rates for
the period, whereas balance sheet items are translated at the exchange rates as
at the balance sheet date. Exchange gains and losses arising upon the
translation of the income statements and balance sheets of operating entities
are recognized directly in shareholders' equity. Exchange gains and losses
arising upon the translation of shareholders' equity at the beginning of the
year into DKK at the exchange rate at the balance sheet date are recognized
directly to shareholders' equity.
Foreign exchange rate gains or losses of intercompany balances with
subsidiaries, which are considered a part of the investment in the entity, are
recognized directly in shareholders' equity.
Derivative financial instruments
Derivative financial instruments are entered into to hedge future committed or
anticipated transactions.
Derivative financial instruments are initially recognized in the balance sheet
at cost and are subsequently measured at their fair value. The instruments are
recognized as other receivables or other liabilities, respectively.
Changes in fair value of derivative financial instruments which are used to
hedge the fair value of a recognized asset or a recognized liability are
recognized in the income statement under the same item as changes to the
carrying amount of the hedged item, except for currency translation gains or
losses arising from the hedging of exposures relating to long-term intercompany
receivables in subsidiaries. Currency translation gains or losses related to
such exposure are recognized directly in shareholders' equity.
Changes in fair value of derivative financial instruments, which are used to
hedge the expected future transactions, are recognized directly in shareholders'
equity under retained profit. When the expected future transaction results in an
income or a cost, amounts deferred under retained profit are transferred to the
income statement and included in the same line as the hedged item.
Changes in fair value of derivative financial instruments that do not qualify
for hedge accounting are recognized in the income statement at the end of each
period.
Segment information
The Group consists of two business segments: Tanker and Bulk. This segmentation
is based on the Company's internal management and reporting structure in
addition to evaluation of risk and earnings. Transactions between segments are
based on market-related prices and are eliminated at Group level.
The Group only has one geographical segment, because the Group considers the
global market as a whole, and the individual vessels are not limited to specific
parts of the world.
The segment non-current assets consists of the non-current assets used directly
for segment operations.
Current assets are allocated to segments to the extent that they are directly
attributable to segment operations, including inventories, outstanding freight,
other receivables and prepayments.
Segment liabilities comprise segment-operating liabilities including mortgage
debt attached to the vessels, trade payables and other liabilities.
Not allocated items primarily comprise assets and liabilities as well as
revenues and expenses relating to the Group's administrative functions, offshore
activities, termination of Liner activity and investment activities, including
cash and bank balances, interest bearing debt except mortgage debt attached to
the vessels, taxes, etc.
Participation in pools
Torm acts as pool manager for a number of pools, and the Group is participating
with a significant number of vessels in these. The Group's share of the income
statement and balance sheet in the respective pools is accounted for by entering
a proportional share, based on participation in the pool, by combining items of
uniform nature. The Group's share of the revenues in the pools is primarily
dependent on the number of days the Group's vessels have been available for the
pools during the period.
Accounting for pension plans
The Company 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.
Stock based compensation
The Board of directors, the Management and a number of key employees participate
in a share option programme. Option commitments under this programme are hedged
through holdings of own shares and are not recognized in the balance sheet or
the income statement.
The difference between the exercise price and the market price of the shares at
the date the options are granted is recognized as a compensation expense in
administrative expenses in the income statement.
At the time of exercise the payments received for the sale of own shares are
recognized directly in shareholders' equity.
If payment is made as net settlement, the amount payable by the Company is
recognized in shareholders' equity under retained profit at the time of
settlement.
Leases
Agreements to charter vessels and to lease other property, plant and equipment
where TORM has substantially all the risks and rewards of ownership are
recognized in the balance sheet as finance leases. Lease assets are measured at
the lower of fair value and the present value of future leasing payments
determined in the agreements including any purchase options.
For the purpose of calculating the present value, the interest rate implicit in
the lease or an approximate value is used as discount factor. The lease assets
are depreciated and written down under the same accounting policy as the vessels
owned by the Group or over the lease period depending on the lease terms.
The capitalized lease obligation is recognized as a liability in the balance
sheet, and the interest element of the lease payment is charged to the income
statement as incurred.
Other charter agreements concerning vessels and other leases are classified as
operating leases, and lease payments are charged to the income statement on a
straight-line basis over the lease term. The obligation for the remaining lease
period is disclosed in the notes to the financial statement.
Sale and leaseback transactions
A gain or loss related to a sale and leaseback transaction resulting in a
finance lease is deferred and amortized in proportion to the gross rental on the
time charter over the life of the charter party.
A gain related to a sale and leaseback transaction resulting in an operating
lease is recognized in the income statement immediately provided the transaction
is agreed on market terms. If the sales price is lower than the fair value and
this is reflected in future lease payments below fair value, the difference
between the fair value and the sales price is deferred and amortized in
proportion to the lease payments over the life of the lease. If the sales price
exceeds the fair value, the difference between the sales price and the fair
value is deferred and amortized in proportion to the lease payments over the
life of the lease.
A loss related to a sale and leaseback transaction resulting in an operating
lease is recognized in the income statement at the date of transaction.
Swap agreements
Gains or losses on swap of ownership in vessels are recognized in the income
statement at the date of the swap transaction, except when the acquired vessels
are similar to the vessels exchanged. If the swap is an exchange of similar
vessels, the vessels are accounted for based on carryover value and no gain is
recognized.
Income statement
Net revenues
Net revenues comprise freight and demurrage revenues from the vessels. Net
revenues are recognized when they meet the general criteria mentioned above and
the stage of completion can be measured reliably. Accordingly, freight and
demurrage revenues are recognized at selling price upon delivery of service in
accordance with the charter parties concluded.
Port expenses and bunkers
Port expenses and bunkers, which comprise port expenses and bunker fuel
consumption, are recognized upon delivery of service in accordance with the
charter parties concluded.
Charter hire
Charter hire includes the expenses related to the chartering in of vessels
incurred in order to achieve the net revenues for the period.
Technical running costs
Technical running costs, which comprise crew expenses, repair and maintenance
expenses and tonnage duty, are expensed as incurred.
Profit on sale of vessels and interests
Profit or loss from sale of vessels and interests are stated as the difference
between the sales price less sales costs and the carrying amount of the asset at
the time of the sale. Furthermore, any gains or losses upon repayment of related
loans are included in the gain or loss on disposal.
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 income
Other operating income comprises chartering commissions and profits and losses
deriving from the disposal of other plant and operating equipment.
Equity income from investments in subsidiaries and associated companies
Equity income from investments in subsidiaries and associated companies include
the Parent Company's proportional share of the net income of the individual
subsidiary less the proportional share of unrealized internal gains.
Depreciation and impairment losses
Depreciation and impairment losses comprise depreciation of fixed assets for the
period as well as the deduction in the value of vessels by the amount by which
the carrying amount of the asset exceeds its recoverable amount. In the event of
indication of impairment of value, the carrying amount is assessed and the value
of the asset is reduced 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 net
selling price.
Financial items
Financial items comprise interest income and interest expense, financing costs
of finance leases, realized and unrealized exchange rate gains or losses
relating to transactions in currencies other than the measurement currency,
realized and unrealized gains or losses from other investments and securities,
dividends received on shares and other financial income and expenses including
value adjustments of certain financial instruments not accounted for as hedging
instruments. Interest is recognized in accordance with the accrual basis of
accounting taking into account the effective interest rate, and dividends 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.
Tax
In Denmark, A/S Dampskibsselskabet TORM is jointly taxed with certain wholly
owned Danish and non-Danish subsidiaries. The Parent Company provides for and
pays the aggregate Danish tax of the taxable income of these companies. The
expected tax of the taxable income for the year and adjustments relating to
previous years are recognized in the income statement. However, tax relating to
items posted in shareholders' equity is posted directly in shareholders' equity.
Balance sheet
Tangible fixed assets Land is measured at cost.
Buildings are measured at cost less accumulated depreciation and accumulated
impairment losses. Buildings are depreciated on a straight-line basis over 50
years.
Vessels are measured at cost less accumulated depreciation and accumulated
impairment losses. All major components of vessels less salvage value are
depreciated on a straight-line basis based on an anticipated useful life of 25
years. Costs incurred in replacing or renewing the separate assets (dry-docking
costs) are capitalized and depreciated on a straight-line basis over the
estimated period until the next dry-docking.
Prepayment on vessels under construction is measured at costs incurred.
Operating equipment is measured at cost less accumulated
depreciation. Computer equipment is depreciated on a straight-line basis over
three years, and other operating equipment is depreciated on a straight-line
basis over five years. Operating equipment with a cost price of less than DKK
25,000 is fully depreciated in the year of acquisition.
Leasehold improvements are measured at cost less accumulated amortization and
impairment losses, and leasehold improvements are amortized on a straight-line
basis over the shorter of the term of the lease and the estimated useful life.
Cost comprises acquisition cost and costs directly related to
the acquisition up until the time when the asset is ready for use. The cost of
vessels and vessels under construction also includes interest expenses incurred
during the period of construction.
Financial fixed assets
Investment in subsidiaries and associated companies are recognized and measured
in the Annual Report of the Parent Company according to the equity method, which
requires that a proportionate share of their annual net income or loss is
reflected in the income statement of the Parent Company. Unrealized intercompany
profits are eliminated when calculating the proportionate share of income and
equity.
The share of the net income of the subsidiaries and associated companies that
has not been distributed as dividends to the Parent Company is transferred to a
restricted reserve under shareholders' equity in the Parent Company's balance
sheet.
Other investments comprise shares in other companies. Listed shares are measured
at the market value at the balance sheet date. Unlisted shares are measured at
estimated market value.
Realized and unrealized gains and losses resulting from valuation or sales of
shares are recognized as financial items in the income statement.
Dividends on shares in other companies are recognized as income in the period in
which they are declared.
Joint ventures
Participation in joint ventures is recorded using the proportional consolidation
method in the Group accounts. The consolidated income statement includes the
Group's share of income and losses of joint ventures and the consolidated
balance sheet includes the Groups' share of assets and liabilities in joint
ventures.
Inventories
Inventories consist of bunkers, lubricants and spare parts and are stated at the
lower of cost and net realizable value. The cost is determined by the
FIFO-method.
Receivables
Outstanding freight receivables and other receivables which are of a current
nature (expected to be realized within 12 months from the balance sheet date)
are measured at the lower of amortized cost and net realizable values, which
corresponds to nominal value less provisions for bad debts.
Prepayments
Prepayments comprise expenses paid relating to subsequent periods.
Securities
Bonds are measured at market value at the balance sheet date.
Realized and unrealized gains and losses resulting from valuation or realization
of bonds are recognized as financial items in the income statement.
Own shares
Own shares are recognized directly as part of shareholders' equity at cost. Upon
subsequent disposal of own shares, any consideration is also recognized directly
in shareholders' equity.
Dividend
Dividend is recognized as a liability at the time of declaration at the Annual
General Meeting. Dividend proposed for the year is moved from retained profit
and presented as a separate item in shareholders' equity.
Financial liabilities
Mortgage debt and bank loans relating to the financing of vessels are initially
measured at nominal amounts less premiums and costs incurred in the loan
arrangement and subsequently at amortized cost with the difference between the
loan proceeds and the nominal value being recognized in the income statement
over the term of the loan.
Financial liabilities also include the capitalised remaining lease obligation on
finance leases.
Other liabilities
Other liabilities comprising trade payables and other liabilities are measured
at amortized cost corresponding substantially to nominal value.
Accruals
Accruals comprise receipts relating to revenue in subsequent periods.
Statement of cash flows
The statement of cash flows shows the Group's cash flows and cash and cash
equivalents at the beginning and the end of the period.
Cash flow from operating activities is presented indirectly and is based on
profit before financial items for the year adjusted for non-cash operating
items, changes in working capital, income tax paid, dividends received and
interest paid/received.
Cash flow from investing activities comprises the purchase and sale of tangible
fixed assets and financial fixed assets except for profit/loss on sale of
vessels, which is included in the cash flows from operating activities.
Cash flow from financing activities comprises changes in long-term debt, bank
loans, purchases or sales of own shares and dividend paid to shareholders.
Cash and cash equivalents comprise cash at bank and in hand and highly liquid
bonds. Shares are not included.
Earnings per share
Basic earnings per share is computed by dividing consolidated profit or loss
available to common shareholders by the weighted average number of common shares
outstanding during the period. Own shares are not included in the calculation.
Purchases and sales of own shares during the periods are weighted based on the
remaining period.
Diluted earnings per share is computed by dividing consolidated profit or loss
available to common shareholders by the sum of weighted average number of common
shares outstanding and the weighted average number of all potentially dilutive
shares. Such potentially dilutive common shares are excluded when the effect
would be to increase earnings per share or reduce a loss per share.
United States Generally
Accepted Accounting Principles
As a consequence of the registration of American Depository Receipts (ADRS) with
the United States Securities and Exchange Commission (SEC), the Company has
prepared a summary of the effect on net income and shareholders' equity had the
Financial Statements been prepared in accordance with the accounting principles
generally accepted in the United States.
Notes
The Group's accounting policies under Danish GAAP are described below where
these differ from US GAAP:
a) Dry-docking costs
Under Danish GAAP, when a vessel is delivered, major components which are
usually replaced or renewed in connection with a docking are depreciated over
the estimated period to the first docking. The Company subsequently capitalizes
dry-docking costs as they are incurred and depreciates these over the period
until the next docking.
Under US GAAP, the Company accounts for the docking costs
(provision for repairs) by accruing for the estimated dry dock costs involved in
the next docking over the period to the next docking. Subsequent payments for
dry-docking are charged against the accrued liability.
b) Write-down on vessels
In 1998, the Company recognized an impairment charge of DKK 80 mill. for certain
vessels on capital leases as the carrying value at the time exceeded the fair
value of these vessels. Under Danish GAAP, impairment losses are reversed in
subsequent periods if the fair value increases. During 2002, the Company
recorded a reversal of the impairment loss of DKK 12.3 mill. for the increase in
fair value of these assets.
Under US GAAP, impairment losses cannot be reversed. This results in a
difference in depreciation expense between U.S. GAAP and Danish GAAP.
c) Marketable securities
Under Danish GAAP, the Company's marketable securities are classified as
available-for-sale, which under Danish GAAP means that unrealized gains and
losses on these are recorded in the income statement.
Under US GAAP, the Company must classify its investments in marketable
securities as either trading, available-for-sale or held to maturity, as
required by Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". In 2002, the Company
classified its investments in equity securities as available-for-sale and its
investments in bonds as trading. From 1 January 2003, the bonds have been
classified as available-for-sale due to a decrease in the trading activities.
Unrealized gains and losses on available-for-sale investments are recorded as a
component of shareholders' equity unless there is an other than temporary
impairment of the securities. There were no other than temporary impairments in
any period presented.
d) Derivative financial instruments
Under Danish GAAP, derivative financial instruments are recognized in the
balance sheet at fair value. For fair value hedges the change in fair value is
set-off against the change in fair value of the hedged balance item. For cash
flow hedges the change in fair value on the contract is recorded as a component
of shareholders' equity and then transferred to the income statement when the
hedged item is realized. The change in fair value on contracts that do not
qualify for hedge accounting is recorded in the income statement at the end of
each period.
Under US GAAP, the Company accounts for its derivative financial instruments at
fair value with changes reflected in the income statement except where the
Company designates derivative financial instruments as hedges. For derivatives
treated as hedges under US GAAP, the treatment is consistent with that under
Danish GAAP.
Interest rate swaps
The Company has entered into interest rate swaps to hedge the interest rate risk
on the long-term loans obtained to finance vessel purchases.
Under Danish GAAP, the interest rate swaps qualify as cash flow hedges and are
recorded at fair value in the balance sheet and as a component of shareholders'
equity. The fair values of the hedges are released from shareholders' equity
when interest is paid on the loans.
Under US GAAP, the Company has accounted for changes in fair value of the
interest rate swaps as a component of income in accordance with SFAS No. 133.
However, beginning on 1 October 2003 the Company elected to apply hedge
accounting to some interest rate swaps designated as cash flow hedges. During
the year ended 31 December 2003 the Company recorded a gain on interest rate
swaps of DKK 16.2 mill. in the income statement and a loss on interest rate
swaps designated as cash flow hedges of DKK 2.4 mill. was recorded as a
component of shareholders' equity. During the year ended 31 December 2004 the
Company recorded a gain on interest rate swaps of DKK 15.1 million in the income
statement and a loss on interest rate swaps designated as cash flow hedges of
DKK 2.3 mill. was recorded as a component of shareholders' equity.
Bunker price agreements
The Company has entered into bunker price agreements to hedge the price of
bunker for the Company's vessels.
Under Danish GAAP, the bunker price agreements qualify as cash flow hedges and
are recorded at fair value in the balance sheet and as a component of
shareholders' equity. The fair values of the hedges are released from
shareholders' equity when the fuel bunkers are purchased.
Under US GAAP, the Company accounts for changes in fair value of the fuel price
agreements as a component of income. During the year ended 31 December 2003 the
Company recorded a loss on fuel price agreements of DKK 1.1 mill., and during
the year ended 31 December 2004 the Company recorded a loss on fuel price
agreements of DKK 4.3 mill.
e) Stock options
In accordance with the Company's Danish accounting policies, the difference
between the exercise price and the market price of the shares at the date the
options are granted is recognized as a compensation expense in the income
statement. At the time of exercise, the amounts paid to the employees for
options that are cash settled are recognized directly in shareholders' equity.
Under US GAAP, stock-based compensation is accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock based
compensation. Under APB No. 25, the Company recognizes compensation expense for
the difference between the exercise price and market price at the measurement
date. This compensation is amortized over the vesting period. The Company grants
options with cash settlement terms for which the measurement date is the date
that these options are exercised. Under APB 25, compensatory plans with cash
settlement terms qualify as variable plans, for which total compensation cost
must be recalculated each period based on the current share price, until the
options are exercised.
f) Tonnage taxation
On 6 February 2002, the Danish government proposed a bill regarding tonnage
taxation, which was enacted on 18 April 2002. According to the new Danish
Tonnage Taxation Act, tax payments in the future will not be based on a taxable
income, but rather a calculated income based on the tonnage of the Company and
taxable income from activities outside the tonnage tax scheme. The legislation
has been implemented with retroactive date effective from 1 January 2001 and the
Company has chosen to enter the tonnage taxation scheme for a 10-year period
with effect from 1 January 2001. Income taxation of reversed depreciation will
only occur if the total fleet of the Company at the time of entering the tonnage
taxation scheme is reduced in size.
Under Danish GAAP, the provision for deferred tax that existed at the date of
enactment has been released to income.
Under US GAAP, the provision for deferred tax is still carried in the balance
sheet, as the recognition of a provision for deferred tax does not depend on the
likelihood of the provision resulting in taxable amounts. At the end of each
period, the provision for deferred tax is calculated based on the carrying
values and tax values of the shipping related assets and liabilities that were
owned by the Company at the date for entering the tonnage taxation scheme.
Transition to IFRS
from January 2005
TORM will produce Annual Reports for the Group and for the Parent Company in
accordance with International Accounting Standards (IFRS) as from 1 January
2005.
Based on the IFRS standards currently applicable, the changes to the accounting
policies will result in the following changes as at 1 January 2005 and in the
comparative figures for 2004 for the Group and for the Parent Company:
a) The current reporting currency in the Annual Report is DKK. The reporting
currency is changed to USD, which will provide a more true and fair view of the
financial position, financial performance and cash flows of the Company in
accordance with IAS 1 "Presentation of Financial Statements" and IAS 21 "The
Effects of Changes in Foreign Exchange Rates."
b) The administrative entity currently applies DKK as the measurement currency.
The measurement currency in the administrative entity is changed to USD in
accordance with IAS 21 "The Effects of Changes in Foreign Exchange Rates."
c) Unrealized gains or losses in respect of bonds and shares in other companies
are currently recognized in the income statement under financial items. Shares
are treated as financial assets available for sale. In accordance with IAS 39
"Financial Instruments: Recognition and Measurement" unrealized gains or losses
in respect of shares will be recognized directly in shareholders' equity and
released to the income statement when the assets are derecognized. Bonds are
classified as financial assets at fair value through profit or loss. Therefore,
unrealized gains or losses in respect of bonds are still recognized in the
income statement.
d) TORM's share option scheme provides the employees with the choices of cash
settlement or receipt of TORM shares. The difference at the date the options are
granted between the exercise price and the market price of the shares is
currently recognized as a compensation expense in administrative expenses in the
income statement. Receipts and payments relating to the exercise of the share
options are recognized directly in shareholders' equity. In accordance with IFRS
2 "Share-based Payment" a liability relating to share options not exercised will
be recognized in the balance sheet. The change in the liability for the period
and the value of the share options exercised in the period will be recognized in
the income statement. The liability is measured using the Black-Scholes model.
e) In the Parent Company, investments in subsidiaries and associated companies
are currently measured at equity value. In accordance with IAS 27 "Consolidated
and Separate Financial Statements" these investments will be measured at cost.
Dividends will be recognized under financial income in the Parent Company.
f) The Company has chosen to apply the optional exemption in IFRS 1 "First-time
Adoption of International Financial Reporting Standards" relating to cumulative
translation differences. As a consequence, cumulative translation differences
are deemed to be zero at the date of transition to IFRS and gain or loss on a
subsequent disposal of an operation applying a measurement currency different
from USD will exclude translation differences that arose before the date of
transition to IFRS.
The effects of the changes as at 1 January 2005 and to the comparative figures
for 2004 for the Group are illustrated in the statements presented on the
following pages. The statements are presented in USD since the Annual Report
will be presented in USD from now on.
The annual report for 2005 must be based on the IFRS standards applicable at 31
December 2005 and the presented figures may change if IFRS standards are revised
during 2005.
It is TORM's view, that the accounting legislation relating to income taxes for
publicly listed Danish companies is in accordance with IAS 12 "Income Taxes" and
the transition to IFRS is not expected to give rise to any changes in the
accounting treatment of income taxes. The Company expects to participate in the
tonnage tax scheme after the binding period of 10 years and at a minimum to
maintain an investing and activity level corresponding to the level at the time
of entering the tonnage tax scheme. Accounting for income taxes is one of the
areas being discussed as part of the short-term convergence project being
undertaken by IASB and the FASB with a view to eliminating differences between
US GAAP and IFRS. However, a new draft IFRS standard on income taxes is not
expected to be released until the second half of 2005 and TORM will subsequently
reconsider its accounting treatment of income taxes.
In addition, IFRS disclosure requirements are in a number of areas somewhat in
excess of those governing publicly listed Danish companies. The Company will
evaluate the need for adjustments to the current notes and the possible addition
of further notes and disclosures.
From first quarter 2005 TORM will prepare the quarterly reports in accordance
with the criteria for recognition and measurement in IAS/IFRS. TORM will not
apply IAS 34, "Interim Financial Reporting".
Board of Directors
Niels Erik Nielsen
N. E. Nielsen became Chairman of TORM in April 2002 and has been a Board member
since September 2000. He is a partner of the law firm Bech-Bruun Dragsted. Mr.
Nielsen has a law degree from the University of Copenhagen. He is a Board member
of the following other Danish public limited companies:
Amagerbanken Aktieselskab
Ambu A/S
Charles Christensen Holding A/S Cimber Air A/S
Danica-Elektronik A/S
Danish Supply Corporation A/S
Gammelrand Skaervefabrik A/S
GPV Industri A/S
InterMail A/S
Kongskilde Industries A/S
Mezzanin Kapital A/S
Preben Olsen Automobiler A/S
Satair A/S
SCF-Technologies A/S
Weibel Scientific A/S
and related subsidiaries
Christian Frigast
A member of the Board since September 2000. Mr. Frigast became Deputy Chairman
in April 2002. He is the Managing Director of Axcel A/S and holds an M.Sc(Econ)
from the University of Copenhagen. He is a Board member of the following other
Danish public limited companies:
Britannia Invest A/S
Holdingselskabet af 1. august 1997 A/S
Mr. Frigast is also a member of the Board of a number of companies related to
Axcel.
Lennart Arrias
A member of the Board since April 2003, representing the employees of TORM on
the Board. Mr. Arrias is employed by TORM as a Captain and has been with the
Company since 1992.
Ditlev Engel
A member of the Board since April 2002. Until 31 December 2004 Mr. Engel was
Group President and CEO of Hempel A/S and as of 1 May 2005 he will take up his
new position as Group President and CEO of Vestas Wind Systems A/S. Mr. Engel
has a BSc (Econ) and a B(Comm) degree from the Copenhagen Business School.
Rex Harrington
Member of the Board since April 2003. Mr. Harrington is the former Director of
Shipping at The Royal Bank of Scotland, where he had responsibility for its
shipping portfolio. He holds a Masters degree from Oxford University. Mr.
Harrington is a former director of Lloyds Register of Shipping and Clarksons
Shipbrokers. Mr. Harrington is now an independent shipping advisor and a
director of several international shipping companies and organizations including
the General Committee of Lloyds Register of Shipping.
Peder Mouridsen
A member of the Board since April 2003, representing the employees of TORM on
the Board. Mr. Mouridsen is employed by TORM as a Chief Engineer and has been
with the Company since 1970.
Gabriel Panayotides
A member of the Board since September 2000. Mr. Panayotides is Chairman of Excel
Maritime Carriers Ltd., listed on the American Stock Exchange. Mr. Panayotides
has been engaged in the ownership and operation of ships since 1978 and sits on
the Greek Committee of the classification society Bureau Veritas and Lloyds
Register of Shipping. He has a Bachelors degree from the Pireaus University of
Economics.
Senior Management
Klaus Kjaerulff
President and Chief Executive Officer since September 2000. Mr. Kjaerulff has
worked for TORM since 1976. From 1997 to 2000, he headed the Company's Tanker
and Bulk divisions as Executive Vice President. From 1981 to 1997, he was Vice
President in charge of the Tanker division. He is a Board member of the
following other public limited Danish company:
gram-agentur A/S
Klaus Nyborg
Chief Financial Officer since March 2002. Prior to this, Mr. Nyborg held a
number of senior positions with the A. P. M0ller - Maersk Group, most recently
as CFO of Maersk Logistics. Mr. Nyborg holds a Masters degree in Law and
Business Economics and a B(Comm) from the Copenhagen Business School.
Management Team
Mogens Fynbo
Executive Vice President,
Technical department
Mikael Skov
Executive Vice President,
Tanker division
Jan Mechlenburg
Executive Vice President,
Tanker division
S0ren Christensen
Senior Vice President,
Bulk division
Kim Rasmussen
Senior Vice President,
Bulk division
Esben Poulsson
Executive Vice President,
TORM Singapore
(Not shown in photo)
Glossary
20-F: Annual report filed with the US Securities and Exchange Commission (SEC)
ADR: American Depository Receipt - proof of ownership of (the equivalent) of one
share. ADRs are used by foreign companies wishing to list on American stock
exchanges.
ADS: American Depositary Shares. Shares registered with the SEC, kept in custody
with a bank as security for the ADRs issued.
Aframax: A vessel with a cargo carrying capacity of 80 - 100,000 DWT.
Asset Acquisition and ownership of assets (ships), which may be management:
disposed of at an optimal time, with a view to generating a one-off profit - as
opposed to profits derived from operating the asset.
Bare boat: A form of charter arrangement whereby the charterer is responsible
for all costs and risk in connection with the vessels' operation.
B/B: See Bare boat
Bulk: Dry cargo (typically commodities such as grain, coal, iron ore etc.).
Bunker: Fuel with which to run a ship's engines.
Classification Independent organisation, which through verification of design,
society: construction, building process and operation of vessels ensure that the
vessels at all times meet a long list of requirements to seaworthiness, etc. If
the vessel do not meet these requirements, insurance and mortgaging the vessel
will typically not be possible.
COA: Contract of affreightment. A contract that involves a number of consecutive
cargoes at previously agreed freight rates.
Coating: The internal coatings applied to the tanks of a product tanker. The
coating enables it to load refined oil products.
Demurrage: A charge against the charterer of a ship 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.
Dry cargo: See bulk.
DWT: Deadweight tons - The cargo carrying capacity of a ship.
EU: The European Union.
FFA: Freight Forward Agreement, a financial derivative instrument enabling
freight to be hedged forward at a fixed price.
GAAP: Generally accepted accounting principles.
Handysize: Bulk carriers with a capacity of 20-35,000 DWT.
IAS: International Accounting Standards.
IFRS: International Financial Reporting Standards.
IMO: International Maritime Organisation.
Liner The operation of ships trading to specified ports using a fixed activity:
schedule. The cargo normally involves containers and general cargo.
LR1: Long Range 1. A specific class of product tankers in the 60 - 80,000 DWT
size.
LR2: Long Range 2. A specific class of product tankers in the 80 - 110,000 DWT
size.
MR: Medium range. A specific class of product tankers in the 35 - 50,000 DWT
size.
OCIMF: Oil Companies International Maritime Forum, a voluntary association of
oil companies having an interest in the shipment and terminalling of crude oil
and oil products.
OPA-90: Oil Pollution Act of 1990: US environmental law implemented following
the grounding of Exxon Valdez in Alaska.
OPEC: Organisation of the Petroleum Exporting Countries.
Panamax: A vessel of 60 - 80,000 DWT with dimensions which allow passage through
the Panama Canal.
Pool: A grouping of ships of similar size and characteristics, owned by
different owners, which are commercially operated jointly. The pool manager is
mandated to charter out the ships for the maximum benefit of the pool as a
whole. Earnings are equalised taking account of differences in ships'
specifications, the number of days the ships has been ready for employment, etc.
Product tanker: A vessel suitable for trading clean petroleum products, such as
gasoline, jet fuel and naphtha.
SEC: US Securities and Exchange Commission.
T/C: See Time charter
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 bunker.
TCE: See T/C equivalent.
T/C equivalent: The freight receivable after deducting port expenses,
consumption of bunker and commissions.
UN: United Nations.
USD: US Dollars.
Securing and employing tonnage
This section is an introduction to the most significant parameters in shipping,
whereby TORM can expand its business and whereby the Company can secure its
earnings.
Obtaining vessels
TORM's fleet consists of a mixture of owned and chartered in vessels. To secure
access to owned and chartered in vessels there are various possibilities, either
to 1) build own vessels, 2) take over newbuilding contracts, 3) acquire second
hand tonnage, or 4) charter in tonnage.
1) Building own vessels requires considerable efforts. In addition to
negotiating a contract with a competitive yard - typically in Korea or China -
the Company must secure the right specifications on the vessel. In such a
situation TORM will establish its own technical site team at the yard during the
construction period - typically 18 to 24 months.
The advantage of building own tonnage is that TORM achieves the right
specifications on the vessel, the disadvantage being that delivery will only
take place several years after contracting. Depending on the order situation at
the yards, the time from contracting the vessels to delivery can be up to four
years, although the construction phase is significantly shorter.
2) An alternative to contracting newbuildings can be to take over newbuilding
contracts placed by other companies, when such contracts are available. The
advantage of this type of acquiring new vessels is earlier delivery, but the
disadvantage is that the vessel is acquired with another owner's specifications,
and that the price for buying a newbuilding contract can be high, especially
when freight rates are firm.
3) To ensure faster delivery - which is favourable, when the market is expected
to be strong - second hand tonnage can be acquired. Negotiations about this
takes place - often through brokers - with the owner selling the vessel. The
disadvantage is that the vessel's specifications must be accepted as they are,
which can however be outweighed by the advantage of the early delivery. In case
of such a purchase, it is advisable to acquire vessels with standard design and
specifications. Thereby the usability of the vessel is enhanced and the
possibility of a later resale to a third party is increased.
4) Instead of owning tonnage, the vessel can be chartered for shorter or longer
term with the expectation of a strong spot market, or for a longer period to
ensure continuity in the fleet structure. There are two types of charters, time
charter and bare boat charter.
The most prevalent method is time charter, where the vessel is chartered
fully crewed and in an acceptable technical condition.
Under a time charter, the charterer pays only for the period, where the
vessel is in all respects operationally in accordance with this standard. If the
vessel is not ready for operation, no charter hire is paid to the owner until
the vessel again is fully operational. During the charter period, the charterer
pays all voyage costs, such as bunkers, port and canal fees, etc., while the
vessel's owner pays crew costs and maintenance. Even if the charterer is unable
to find employment for the vessel, the charter hire must still be paid to the
owner.
The advantage of time charters can be fast delivery, while disadvantages of
chartering in may be that the vessel will not be owned. If the market during the
charter period drops to a level below the agreed charter hire rate, the daily
operations will be loss-making for the charterer, without having the possibility
of a potential subsequent gain on the vessel price.
This can be altered by making a - typically longer term - time charter
contract with a purchase option, which is most common in the bulk market. This
means that the charterer can purchase the vessel at agreed prices at agreed
times during the charter period. This can in some situations be very attractive
to the charterer, but the drawback is that the charter hire is typically
slightly higher during the charter period.
Bare boat charter is an alternative to time charter, whereby the vessel is
chartered without crew, and where the charterer must undertake maintenance,
crewing, insurance etc. A bare boat rate will therefore be lower than a time
charter rate, and such agreements are normally more of a financial nature.
Instead of borrowing to purchase a vessel, a third party finances the vessel and
this is reflected in the bare boat hire. A purchase option can also in certain
cases be negotiated to be part of a bare boat contract. Bare boat contracts most
often concern newbuildings delivered directly from the yard.
It is often considerably easier to charter vessels in the bulk market than in
the product tanker market. This is due to the fact that it is easier to charter
in vessels in a large and relatively homogenous market and that there is more of
a tradition for re-lettings in the bulk market. Also, the vessels in the product
tanker market are more specialised, which is why it is more difficult to find
vessels with the right specifications. Consequently, TORM has based the strategy
more on owned vessels in the Tanker division, whereas the fleet in the Bulk
division consists of a combination of owned and chartered in vessels - with
purchase options where this is deemed to be commercially favourable.
Employment of tonnage
The Company's owned and chartered in tonnage can be employed in different ways.
There are the following possibilities for employment:
1) Spot (market) charter: Here the vessel is employed on single voyages. The
advantage is that the Company can decide the vessel's employment and will gain
from a rising market. At the same time, an organisation with good knowledge
about factors influencing the freight market will generally be able to obtain a
better result per round-trip voyage. The disadvantage is that a drop in the
market will impact directly, and that waiting days will be at the Company's
expense.
The owners of the vessels will pay voyage related costs of bunker, port
calls, canal fees, etc.
In the spot market, the Tanker division most often employs the vessels on
single voyages, i.e. a voyage from loading port A to discharge port B. The
freight is either calculated as a lump sum for the entire voyage or as USD per
ton of cargo. For handling the cargoes in the loading and discharge ports, a
special lay (port) time is agreed to be included in the freight - most often 72
hours. If the charterer uses more lay time than agreed, a rate for excess port
time (demurrage) is paid - typically at a level corresponding to the earnings on
the voyage, calculated as USD/day.
2) Time charter: The advantaqe is that the income is fixed for the charter
period, irrespective of market fluctuations, and that the charterer of the
vessel thus takes the risk of weather related problems and waiting days. The
disadvantage for the owner is that he loses control over the vessel's further
employment, which could be competing with the company's other vessels in the
spot market, and that in markets with volatility in earnings, it is necessary to
evaluate the charterers creditworthiness.
3) Contract of Affreightment (COA), which is a number of single voyages between
loading port A and discharge port B over a period - e.g. one voyage per month
between Rotterdam and New York during one year. The rate can be fixed or
dependent on an index value. With fixed rates for these voyages, the earnings
for the period will be known. Typically, it will be possible to use a number of
vessels of the same type over the year to carry COA cargoes.
4) Consecutive Voyages is the same as COA, except that one vessel carries out
the voyages in continuation.
5) Bare boat charter: The advantage is a secure income without using operational
resources. The disadvantage is that bare boat charters mean that the Company's
abilities and strengths in vessel operations are not utilised, given that this
primarily is a financial transaction.
Rate levels: The agreed rates in the above alternatives for employment of the
fleet are decided by supply and demand. This means that in each transaction it
is important to be on top of the market situation, which inter alia includes the
number of vessels in the area and how many cargoes are available in the
geographical area in question.
In a bare boat charter the owner of the vessel will, all other things being
equal, receive a lower hire payment than in a time charter, where the hire
payment will include compensation for expected operating and maintenance costs.
The hire for a spot voyage will, other things being equal, be even higher, as
this rate includes compensation for the expected port and bunker costs. The
Company's net revenue will therefore - with the same net result - vary
considerably from period to period, depending on the chosen employment of the
fleet.
Announcements 2004
Number Date Subject
14 19 November 2004 Financial calendar 2005
13 11 November 2004 Nine months report 2004
12 5 October 2004 Increased expectations 2004
11 9 September 2004 NORDEN shares
10 12 August 2004 Results for first half 2004
9 19 May 2004 Results for first quarter 2004
8 26 April 2004 Prospectus notice regarding bonus shares
7 20 April 2004 Annual General Meeting 2004
6 16 April 2004 Change of date for first quarter 2004 results
5 30 March 2004 Agenda for AGM
4 29 March 2004 Bonus shares
3 11 March 2004 2003 results and increased expectations for
2004 results
2 18 February 2004 TORM places order for one more newbuilding and
purchases second hand tanker
1 6 January 2004 Expectations for 2003 and 2004 results
Financial calendar 2005
Date event
10 November 2005 Nine months 2005 result
9 August 2005 First half 2005 results
12 May 2005 First quarter 2005 results
19 April 2005 Annual general meeting
TORM Background
TORM was founded in 1889 by Captain Ditlev Torm and is today one of the most
respected names in international shipping. A longtime focus on quality and a
prudent style of financial management have earned it the respect of the maritime
and financial communities alike. TORM's present fleet of nearly 100 vessels
includes some of the most modern ships afloat. Commercial operations are
conducted largely via pooling arrangements with other leading shipowners who
share TORM's commitment to safety, environmental responsibility and customer
service, with TORM responsible for the commercial management of the majority of
these pools. You'll find more about its history, fleet and core businesses along
with detailed investor information at www.torm.com
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
A/S STEAMSHIP COMPANY TORM
(registrant)
Dated: April 5, 2005
By: /s/ Klaus Nyborg
--------------------------
Klaus Nyborg
Chief Financial Officer
03810.0001 #560305