Introduction
TORM held an Extraordinary General Meeting on 9 January 2013
with the purpose of amending the Company's Articles of Association,
including adopting certain minority-protecting rights, and electing
members to the Board of Directors.
At the Extraordinary General Meeting, the former chairman, N. E.
Nielsen, gave a presentation of the restructuring of TORM completed
on 5 November 2012 and the related transactions.
In this report by the Board of Directors, focus will therefore
be on TORM's results of operations in 2012.
Operations in 2012
TORM incurred a clearly unsatisfactory loss before tax of USD
579 million in 2012. The performance was in line with the revised
forecast of 27 February 2013. The results include special items of
USD 210 million from the restructuring and recognized impairment
losses of USD 116 million related to FR8 and assets held for
sale.
The operating loss of USD 253 million, before special items of
USD -326 million, was driven by the adverse market conditions
during 2012 in both the product tanker and dry bulk segments. In
addition, the results of both the Bulk and Tanker Divisions were to
a significant degree adversely affected by TORM's challenging
financial position up until the completion of the restructuring
towards the end of the year.
The product tanker freight rates remained under pressure in 2012
as the markets continued to suffer from tonnage oversupply. Global
growth indicators were sluggish, which negatively impacted the oil
product transportation. Nevertheless, by leveraging strong customer
relationships and scale benefits and despite the difficult market
conditions, TORM achieved high fleet utilization as well as
earnings above spot market benchmarks.
The dry bulk market also suffered from a record-high tonnage
influx and declining demand growth, especially in China. Freight
rates were generally at a lower level than experienced in 2011.
During 2012, TORM focused on strengthening its customer
relations.
Let me elaborate on the trends in the product tanker and bulk
markets in order to put TORM's performance and situation into
perspective.
Tanker Division
TORM's greatest exposure is to the product tanker market, and
TORM's business model aims at maintaining a continued presence in
the spot market - i.e. without long-term coverage - in order to be
able to take advantage of the anticipated volatility and gradual
market recovery. Short term, TORM will not seek higher coverage
than the current levels, as the Company is of the opinion that
there is an upside potential in the market.
Product tanker freight rates continued to be under pressure in
2012, as the markets continued to suffer from an oversupply of
tonnage, some of it ordered back in 2007-2008. 2012 saw a net fleet
growth of approximately 2%. Global economic growth indicators were
sluggish, which hampered the global oil consumption and
subsequently the refined oil product transportation. Total demand
growth measured in dead weight tons in 2012 is estimated at
approximately 3%. In comparison, the net fleet growth was
approximately 4% in 2011 and the total demand growth was
approximately 1%.
In the first quarter of 2012, the freight markets - for
especially the larger segments (LRs) - continued at the low levels
from end-2011. This was mainly due to reduced demand for naphtha in
the East and temporary refinery closures in the Arabian Gulf. The
freight rates for MR vessels were positively influenced by
Brazilian imports and increasing ton-miles.
In the second quarter of 2012, the jet oil arbitrage opened to
Europe, increasing the freight rates for LRs in the East. The MR
freight rates were negatively affected in the West by a lack of
arbitrage as well as weaker US East Coast demand.
In the third quarter of 2012, freight rates in the eastern
market were stronger and LRs were supported by the increased amount
of long haul cargo from the Arabian Gulf to Brazil and the naphtha
trade in general, together with the distillate arbitrage from the
Middle East to the West. The western market remained weak and MRs
were impacted by planned refinery maintenance in Europe and
continued limited diesel trade. A refinery explosion in Venezuela
led to increased long haul trades from the US Gulf. MRs were
positively impacted by new trades created by the permanent closures
of refineries in Australia.
The fourth quarter of 2012 showed a positive development in MR
freight rates in the West triggered by hurricane Sandy and refinery
outages on the US West Coast, which positively impacted the
ton-miles factor through an increased product flow from the US Gulf
and the Far East. The eastern market was positively impacted by
increased naphtha and ethylene demand, distillate arbitrage to
Europe and internal arbitrage in the Far East.
Despite TORM's challenging financial position, TORM once again
outperformed the commercial spot benchmarks by 12%, 10% and 32% for
LR2, LR1 and MR, respectively. This was due to TORM's strong
customer relations and the Company's scale effects.
The Tanker Division's EBIT before restructuring effects was a
loss for 2012 of USD 156 million before impairment losses of USD 74
million, compared to a loss of USD 107 million before impairment
losses in 2011. The loss for 2012 includes a net loss of USD 16
million from the sale of two vessels and the cancellation of one
newbuilding order.
The result is clearly unsatisfactory.
In 2012, the market conditions impacted both product tanker
newbuilding prices and resale values, causing further pressure on
vessel values. This was particularly the situation for LR2 vessels,
with the estimated value of five-year-old second-hand vessels
dropping by 28% during 2012. Prices generally stabilized in the
fourth quarter of 2012.
Bulk Division
The dry bulk spot market was volatile during 2012 driven by
seasonality and events like the drought in the US grain season, the
Indonesian raw material export ban and the tropical storms Isaac
and Sandy. The bulk fleet increased by approximately 10% net in
2012 despite considerable scrapping of older tonnage. In 2012,
growth in trade volumes reached approximately 5% with increased
Chinese iron ore imports as the primary driver. The freight rates
in the Panamax segment moved between USD/day 3,500 and 13,000 with
an average market level of approximately USD/day 7,679, or some 45%
below 2011 levels. In fact, this was the lowest level recorded in
the Baltic Freight Index since 1986.
In the first quarter of 2012, freight rates were under pressure
due to a large number of seasonal newbuilding deliveries - a total
of 69 Capesize, 111 Panamax and 85 Handymax vessels. Furthermore,
the market was negatively influenced by slower growth in the
Chinese commodity demand and a delay in the South American grain
season.
The second quarter of 2012, started with a positive sentiment as
a result of South American grain coming into season. However,
general macroeconomic uncertainty and events like the Indonesian
export ban led to an overall negative development. Especially the
larger segments suffered.
In the third quarter of 2012, the Pacific market was impacted by
the monsoon season, and in the Atlantic freight rates were
adversely affected by drought, leading to the lowest North American
grain yield in six years, as well as a logistical disruption caused
by the tropical storm Isaac.
The fourth quarter of 2012, was negatively affected by the
seasonal decline in dry bulk freight rates for both the Atlantic
and the Pacific markets. This occurred despite the fact that the
demand for iron ore continued to be firm.
TORM experienced an increasing number of waiting days and
ballasting days due to adverse effects of the Company's financial
situation. Despite this, TORM achieved average earnings of USD/day
10,248 in the Panamax segment, which was 33% higher than the
average benchmark level. In the Handymax segment, TORM's average
daily earnings were USD/day 10,481, which is 11% higher than the
average benchmark level.
The Bulk Division posted an operating loss (EBIT) for 2012 of
USD 27 million excluding restructuring effects, against an
operating loss of USD 68 million in 2011. This is highly
unsatisfactory and is primarily due to the low bulk spot market
level.
During 2012, TORM focused on strengthening its customer
relations, and the coverage for 2013 is thus entirely based on
contracts of affreightment (COAs) with key customers.
Bulk asset prices gradually decreased during 2012. For example,
the estimated price of a five-year-old second-hand Panamax bulk
carrier decreased by 30% during 2012. Piracy
Unfortunately, international shipping is still faced with the
challenge of piracy. TORM's response to piracy is founded in the
Best Management Practice (BMP) developed by the International
Chamber of Shipping, the International Shipping Federation and
national navy forces. During 2012, TORM experienced two failed
attempts of hijacking. The Company will continue to monitor the
risk situation and preempt hijacking by following Company security
procedures, which currently means engaging armed guards on all
vessels passing through High Risk Areas. During 2012, TORM
completed 271 voyages with armed guards.
The international campaign against piracy is paying off, as is
evidenced by the decline in the number of attempted hijackings in
the Gulf of Aden area, which is down by two thirds compared with
2011.
I would like to highlight the efforts of the Danish forces on 15
December 2012, when the frigate Iver Huitfeldt came to TORM
Krisitina's rescue following an attempt of hijacking. In March,
TORM had the opportunity to honor the crew at a reception attended
by the Minister of Defense along with representatives of TORM, the
Armed Forces, the Danish Shipowners' Association and the Danish
press.
Financial statements
I will now go through the financial statements for 2012.
The financial statements are extraordinary as they were materially
impacted by the restructuring in a number of areas. The effects are
described in detail in the listing prospectus dated 7 December
2012, as well as in the Annual Report, pp. 38 onward. In the income
statement, the items charter hire, sale of vessels and financial
expenses are impacted negatively by a total of USD 210 million by
the restructuring. The capital increase of USD 200 million,
effected by conversion of debt, was recognized as an increase in
equity.
Income statement
TORM's revenue for 2012 was USD 1,121 million, compared to USD
1,305 million in 2011. The weaker performance was primarily due to
a 16% drop in the number of available earning days.
Earnings at the so-called TCE (Time Charter Equivalent) level
were USD 466 million in 2012, against USD 644 million in 2011. The
mentioned decrease in available earning days corresponded to a
reduction in TCE earnings of USD 102 million and lower freight
rates in both the Tanker and Bulk Divisions, corresponding to a
reduction in TCE earnings of USD 68 million.
EBITDA, i.e. earnings before interest, depreciation,
amortization and tax, was a loss of USD 49 million excluding
restructuring effects, compared to a loss of USD 44 million in
2011. At an EBITDA level, the restructuring had an additional
negative impact of USD 145 million on the financial statements for
2012.
Total administrative expenses amounted to USD 67 million, which
was a decrease of USD 4 million or 6% compared to the USD 71
million in 2011, mainly due to a reduction in the number of
employees and despite the inflationary pressure. Since 2008, TORM
has cut its administrative expenses by 26% or USD 23 million.
TORM incurred a loss before tax of USD 579 million in 2012,
compared to a loss of USD 451 million in 2011. This is in line with
the revised forecast as of 27 February 2013. The results include
special items of USD 210 million from the restructuring and
recognized impairment charges of USD 116 million related to FR8 and
the assets held for sale.
The operating loss of USD 253 million excluding special items of
USD -326 million was driven by the adverse market conditions during
2012 in both the product tanker and dry bulk segments. As
previously mentioned, the results of both the Bulk and Tanker
Divisions were significantly adversely affected by TORM's
challenging financial position until the completion of the
restructuring towards the end of the year.
TORM incurred a loss after tax of USD 581 million, compared with
a loss of USD 453 million in 2011, resulting in negative earnings
per share (EPS) of USD 3.3 in 2012, against negative EPS of USD 6.5
in 2011.
The result for 2012 is clearly unsatisfactory.
Balance sheet and cash flow
TORM's total assets decreased by USD 424 million to USD 2,355
million from USD 2,779 million in 2011. The decrease was primarily
due to impairment losses of USD 116 million relating to FR8 and
vessels held for sale, depreciation of USD 138 million and a change
in working capital.
The Company's recorded equity decreased by USD 377 million to
USD 267 million calculated according to a going concern assumption.
The decrease in equity was mainly due to the loss for the year of
USD 581 million and the USD 200 million capital increase in
connection with the restructuring. The equity at 31 December 2012
gave TORM an equity ratio of 11%.
TORM estimates the fleet's total long-term earning potential
each quarter, based on discounted future cash flow, in accordance
with IFRS requirements. The estimated value of the fleet as of 31
December 2012 supports the carrying amount. It should be emphasized
that, in case of a forced sale, the recoverable amount of the fleet
will be significantly lower (USD 789 million at year end 2012) than
under the going concern assumption, as stated in the Annual
Report.
The Group's net interest-bearing debt for 2012 was USD 1,868
million, up 5% relative to 2011, when it stood at USD 1,787
million. The increase was primarily a result of the new working
capital facility (USD 58 million) and the effects of the
termination of swaps in connection with the restructuring
(approximately USD 30 million).
TORM's operating activities in 2012 generated a cash flow of USD
-100 million as compared to a cash flow of USD -75 million in 2011.
The decline was due to the lower freight rates. Cash flow from
investing activities amounted to USD 0 million, compared to a cash
flow of USD 168 million in 2011, affected by USD 284 million from
sales of vessels. Cash flow from financing activities was a cash
flow of USD 42 million in 2012, against a cash flow of USD -128
million in 2011. The change was explained by deferral of
installments on mortgage debt as well as a new working capital
facility.
The Annual Report 2012 was provided with an independent
auditors' report without any qualification.
Share price development
The average daily trading volumes in 2012 were approximately
113,000 on NASDAQ OMX and 31,000 American Depository Receipts
(ADRs). The share price deteriorated from DKK 3.9 per share at the
beginning of 2012 to DKK 1.7 per share at the end of 2012.
At the Company's Extraordinary General Meeting on 9 January 2013
and in Company Announcement no. 1 of the same date, the former
Board of Directors set out the changes in the share capital in
detail. The current status is that TORM's issued share capital
amounts to DKK 7,280,000 nominal value, equal to 728,000,000 shares
of a nominal value of DKK 0.01 each.
In 2012, TORM ensured continued compliance with the NASDAQ rules
by changing the ratio of its ADRs to its Common Shares from 1:1 to
1:10. The present situation is that the ADR program represents
approximately 0.5% of the Company's total share capital. The Board
of Directors finds that it would be in the interest of the Company
to delist the ADR program due to its limited size, and the costs
involved with a listing on NASDAQ and the reporting and filing
obligations under the U.S. Securities Exchange Act. The Annual
General Meeting will consider this proposal under item 7.b.
Dividend
The Board of Directors proposes that no dividend be distributed
for the financial year 2012.
Market developments in 2013
In the product tanker segment, the first quarter is seasonally
stronger than the following two quarters, and during the first
months of 2013, average freight rates have exceeded the level
obtained in the comparable periods since the onset of the
crisis.
Going forward, TORM expects increasing oil consumption and
increased ton-mile effects from relocation of refinery capacity to
increase demand. The supply side is still affected by the tonnage
influx in 2008-2012, which resulted in ample tonnage supply.
However, a moderate order book, scrapping of existing tonnage and
possible postponement of newbuildings will reduce the increase in
supply and impact rates positively. Freight rates are expected to
be volatile, and the number of future newbuilding orders remains
uncertain.
In the bulk segment, the first quarter of 2013 began on a weaker
note than the same period in 2012 for handymax and panamax. TORM
remains cautious about the prospects for the dry bulk market in
2013 due to the relatively high level of newbuilding deliveries
expected across all segments. Freight rates are expected to remain
under pressure due to the oversupply of tonnage and the market's
significant dependence on China coupled with seasonal demand
fluctuations.
TORM's outlook for 2013
TORM expects a loss before tax for 2013 of USD 100-150 million
excluding any vessel sales and impairment losses. Given that 24,676
earning days remained open at the end of 2012, profit/loss before
tax would be impacted by USD 25 million by a change in freight
rates of USD/day 1,000. As described in the Annual Report, TORM
expects to remain in compliance with the financial covenants in
2013.
One TORM
TORM has now succeeded in stabilizing the Company's situation
and in strengthening the organization with fresh resources. Under
the "One TORM" heading, the Company has launched a number of
measures to support TORM's strong operational platform and ensure
optimal value creation for all stakeholders. I will now briefly
give some examples of these measures, focusing on four common
goals.
Customers first
Even under difficult conditions, TORM has consistently generated
earnings above market level. One reason for this is the Company's
strong customer focus.
In the period since the restructuring, the organization has
managed to fully re-establish its close relations with all core
customers.
In order to strengthen the proximity to customers, TORM
re-organized the structure of the Tanker Division into supporting
all vessel segments depending on the geographical location of the
customers. By doing so, the Company mirrors the organization of
individual customers, thereby enhancing customer relationships.
TORM has rejected the traditional pool models with their broadly
based decision-making process in favor of strategic partnerships
and so-called Revenue Sharing Schemes, which provide far greater
flexibility and faster decision-making as well as a better cost
structure.
Ensuring quality in everything
TORM handles the technical management of the Company's vessels
itself, and with optimized processes and systems this provides an
improved scope for technical and commercial action.
For instance, TORM strives to be a quality carrier approved at
all times by a pre-defined, representative group of oil majors,
thus securing optimal trading flexibility and profitability. During
2012, TORM again improved its performance on this objective by 2
percentage points compared to 2011.
TORM also made significant headway on the integration of the IT
landscape, resulting in a number of efficiency enhancements across
the value chain.
Acting responsibly
Acting responsibly is key to TORM's way of doing business, and
TORM strives to uphold the highest safety, environment and CSR
standards.
For example, through training of officers TORM has managed to
carry on the positive trend in central CSR key indicators in
relation to environment, health, safety and security.
TORM takes a proactive approach to fuel efficiency as it has a
significant environmental and financial impact. The Company focuses
on a combination of technical modifications of vessels, training in
energy efficiency and addressing the mindset and behavior of the
relevant stakeholders. TORM expects to be able to reduce the fuel
consumption of the existing fleet by up to 10% over the coming
years, which will lead to cheaper operations on full implementation
of such measures. Accordingly, the difference between the latest,
fuel-efficient vessel designs and older vessels can be minimized,
thus retaining their competitiveness of older vessels.
As in previous years, TORM has issued a separate CSR report for
2012, which details TORM's efforts and results in these areas. This
report is available at TORM's website.
Operating in a cost-efficient manner
Among other measures, TORM has reduced administrative expenses
from USD 90 million in 2008 to USD 67 million in 2012. With the
latest string of measures, TORM expects to be able to further cut
administrative expenses significantly in 2013.
The previously mentioned fuel initiatives are also expected to
hold a major cost-saving potential.
With a number of initiatives in such areas as procurement and
crewing, TORM has also managed to keep OPEX significantly below the
2008 level despite the underlying inflationary pressure.
TORM is well on the way to delivering on a cost program of USD
100 million in accumulated savings between 2012 and 2014.
***
TORM has now created a financial and operational platform for
the coming years, which will give the Company time to find a more
permanent capital structure. The "One TORM" measures will
strengthen TORM's long-term foundation.
Proposals submitted by the Board of
Directors
Finally, before rounding off my report, I would like to make a
few comments on the remaining part of the notice to convene this
meeting, which once again this year includes proposals from the
Board of Directors. However, these are far less extensive than last
year, when the proposals included a number of authorizations in
connection with the restructuring process.
Proposal 7.a. is prompted by the existing Danish corporate
governance recommendations issued in 2011 and, accordingly, the
Board of Directors proposes that the shareholders at the General
Meeting approve the level of remuneration for the Board of
Directors for 2013.
Proposal 7.b. concerns an authorization to terminate the
Company's American Depositary Receipt ("ADR") program and in this
connection allow the Company to acquire treasury shares as well as
delist the Company's American Depository Shares ("ADS") from Nasdaq
Capital Market, USA and deregister the Company's securities under
the U.S. Securities Exchange Act of 1934. The Board of Directors
finds that this would be in the interest of the Company due to the
limited size of the ADR program and the costs involved with a
listing on NASDAQ and the reporting and filing obligations under
the U.S. Exchange Act. The ADR program represents approximately
0.5% of the Company's total share capital following the capital
increase carried out in connection with TORM's restructuring in
November 2012.
Concluding remarks
2012 was a challenging year for the shipping industry in
general, and for TORM in particular. In 2012, TORM succeeded in
obtaining a financial restructuring agreement, which stabilizes the
Company in the coming period. The Board of Directors is confident
that, in collaboration with its most important stakeholders, TORM
is on track to re-establish the foundations for a stronger company
for the future.
Thank you.
Safe Harbor statements as to the future Matters
discussed in this release may constitute forward-looking
statements. Forward-looking statements reflect our current views
with respect to future events and financial performance and may
include statements concerning plans, objectives, goals, strategies,
future events or performance, and underlying assumptions and
statements other than statements of historical facts. The
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 guarantee that it will achieve or
accomplish these expectations, beliefs or projections.
Important factors that, in our view, could cause actual results
to differ materially from those discussed in the forward- looking
statements include the conclusion of definitive waiver documents
with our lenders, the strength of the world economy and currencies,
changes in charter hire rates and vessel values, changes in demand
for "tonne miles" of oil carried by oil tankers, the effect of
changes in OPEC's petroleum production levels and worldwide oil
consumption and storage, changes in demand that may affect
attitudes of time charterers to scheduled and unscheduled
dry-docking, changes in TORM's operating expenses, including bunker
prices, dry-docking and insurance costs, changes in the regulation
of shipping operations, including 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.
Forward-looking statements are based on management's current
evaluation, and TORM is only under an obligation to update and
change the listed expectations to the extent required by law.
Attachments:
06-2013 - Board of Directors report at the AGM 2013 US.pdf
