Group Management Report
FUNDAMENTAL PRINCIPLES OF THE GROUP
The TÜV NORD GROUP is a globally active technology group. Its workforce, which now numbers more than 10,000, has been the byword for safety, independence and quality for 150 years. The employees test, inspect, certify, offer advice and qualify in accordance with many globally applicable technological standards. This allows the TÜV NORD GROUP to offer unparalleled holistic support and care to its various customer groups in this networked world. These include renowned global players and small and medium-sized enterprises with a regional and local focus, alongside organisations, institutions and consumers.
The TÜV NORD GROUP has divided its activities into six business units and the Holding / Services division and is active in the TICET (Testing, Inspection, Certification, Engineering, Training) market. Extensive consulting and training services are offered alongside the traditional testing business. The Group has a unique selling proposition in the sector as a whole, with services in the natural resources and aerospace fields.
- The certification, service and testing portfolio of the companies in the Industrial Services business unit includes specific individual tests and the management of complex security solutions.
- The Mobility business unit offers numerous services, such as vehicle and driving tests, vehicle assessments, solutions for used car management and development-related consulting for the automotive sector.
- The Natural Resources business unit offers engineering services in raw material exploration, mining, engineering, construction and infrastructure, product testing and building safety business fields as well as industrial testing and measurement technology.
- The core activities of the Training business unit are vocational education and training for specialists and managers, along with publicly funded training measures.
- The Aerospace business unit is involved in activities concerning the procurement, modification, testing and certification of electronic components for the aerospace industry.
- The IT business unit focuses on IT security assessment services for hardware and software according to the common criteria evaluation system as well as testing and certification services for IT infrastructures for the validation of the security and availability of data centres and cloud providers.
As of 31 December 2018, the Group with its management company TÜV NORD AG embraced a total of 84 fully consolidated companies, 39 of them domiciled in Germany and 45 abroad. The TÜV NORD AG consolidated financial statement includes all major companies in Germany and abroad in which TÜV NORD AG either directly or indirectly holds the majority of voting rights.
General economic and sector-specific conditions
As 2019 gets underway, there are major uncertainties concerning future trends in the global economy. The global economic growth of 3.8% in 2018, which represented an improvement on the previous year (2017: 3.4%), was driven in particular by a global expansion of production which was sustained until the summer before significantly tailing off in the second half of the year. On the one hand, the withdrawal of international investors led to a deterioration in the financial conditions in the emerging economies; in Turkey and Argentina this development took on crisis proportions. On the other, development was also affected by ongoing trade disputes.
The differences in the economic dynamics between countries have grown since the beginning of 2018. While the US economy picked up speed due to the strong impetus delivered by tax cuts and additional expenditure by the individual states, and growth in India quickened, the economies of China and the Eurozone faltered. The slowdown was particularly evident in France and Italy.
The upturn in Germany continued in 2018 before tailing off significantly at the end of the year. One of the mainstays here was the domestic economy, which was positively influenced by strong job creation figures and low interest rates. At 1.5%, growth failed to match that of the previous year (2017: 2.2%), a development which was essentially down to a loss of dynamism in the export sector. Moreover, the economic picture was affected in the summer by major fluctuations in production and supply in the automotive sector associated with the introduction of the new WLTP testing procedure on 1 September 2018. Due to the huge importance of the automotive industry, this had a macroeconomic impact.
A study carried out by MARKETS & MARKETS estimated the worldwide market for TICET services in 2017 at 185 billion US dollars, and consistent growth is anticipated over the next few years. The key growth markets are in the Asia-Pacific region, particularly in China and the equally fast-growing regions of India and Southeast Asia.
With a market volume of about 47 billion US dollars (of which Germany’s share is approx. 30%), Europe continues to command a significant proportion of the global market (approx. 25%). However, comparatively low growth rates, due among other things to weak growth in the automotive market and the current skills shortage, require increased investments in innovation and the internationalisation of the business.
As a recognised technology service provider, the TÜV NORD GROUP is the global byword for security and trust. Independent engineers and IT security professionals provide excellent solutions for security and quality and an outstanding competitive position from which to meet the extra requirements imposed by digitalisation, global networking and ever shorter production cycles.
The TÜV NORD GROUP continued to grow in the 2018 reporting period in spite of the slowdown in the domestic economy and intense competition on the German TICET market. Notwithstanding the expenditure on future and growth projects, earnings improved slightly across the board.
The sales and earnings trends announced in the 2017 management report and the forecast for 2018 were slightly exceeded. With the exception of Training, all the business units contributed to the growth in sales. All the business units made a positive contribution to earnings as planned.
The planned further sales increases in the Industrial Services business unit were fully achieved abroad and, due to the intensity of the competition, partly realised on the domestic market. As a result of operative improvements abroad and, to some extent, cost reductions in Germany, earnings rose in the reporting period.
The strategy of market positioning throughout the whole of Germany and increases in turnover in the areas of periodic vehicle inspections, damage appraisals and valuations in the Mobility business unit was consistently pursued. The business unit has shown a pleasing growth rate and exceeded the plan in terms of both sales and the positive earnings trend. This positive state of affairs was mainly attributable to enhanced cooperation with partners and increases in sales.
The slight increase in sales and earnings expected for the Natural Resources business unit was achieved on the back of the improved order situation in geo- and systems engineering and the seismology business.
The Training business unit failed to achieve the planned increase in sales, essentially due to a decline in orders in the training voucher business. Earnings exceeded the plan and the previous year, driven in particular by the increase in turnover in the Academy business.
Sales in the Aerospace business unit were in line with the planned volume. The planned slight increase in earnings was achieved on the back of projects with a higher rate of return.
The IT business unit has grown steadily in line with the plan. The planned decline in earnings was due to start-up losses in the consulting business.
The number of full-time employees of the Group in 2018 almost reached the planned figure. The increase in the workforce is accounted for by recruitment in the course of the planned innovation and digitalisation projects and in internationalisation and growth projects, principally in the Industrial Services business unit.
The Group innovation projects decided upon in the context of Strategy 2020plus were continued as planned with the aim of developing new services.
The trends within the Group in the 2018 fiscal year in comparison with the previous year were as follows:
- Turnover increased by 3.8% from €1,184.8 million to €1,229.5 million. The rise in sales of €44.7 million was essentially due to the Mobility and Natural Resources business units.
- Before special items, earnings before interest and taxes (EBIT) rose by 3.5% from €77.5 million to €80.2 million. The increase of €2.7 million can primarily be attributed to the positive development in earnings in the Industrial Services and the Mobility business units and to savings derived from a Group-wide efficiency project.
- The return on sales, measured by EBIT, was 6.5% as in the previous year.
- Earnings before tax (EBT) increased by €3.9 million to €80.5 million.
- The number of employees, converted to full-time equivalent, increased from 10,485 to an average of 10,735 in 2018. Productivity also increased.
The 2018 fiscal year came to an end with a turnover of €1,229.5 million (2017: €1,184.8 million).
The following figure shows the trend of sales in the Group (€ million):
The following figure shows the breakdown of sales by region (€ million):
The Group’s domestic revenue in 2018 amounted to €903.4 million (2017: €872.2 million). Turnover from the international business amounted to €326.1 million (2017: €312.6 million) and achieved a share of 26.5%.
Broken down by business units and Holding / Services, the following overall picture emerged for the year 2018:
Due the heterogeneous nature of their market presence, their various product spectra and their regional alignments, the individual business units developed very differently.
The Industrial Services business unit generated a turnover of €559.9 million (2017: €551.5 million), where the development of foreign business was especially positive. In Germany, sales of €361.0 million slightly surpassed the previous year’s level (2017: €355.8 million). The increase in foreign sales to €198.9 million (2017: €195.8 million) was principally accounted for by the healthy development of the companies in China and India. The turnover of the Mobility business unit, at €390.5 million, was 6.6% higher than the figure of the previous year, €366.2 million. The increase in sales was primarily accounted for by transactions with cooperation partners and the realisation of higher sales for all the key services. In the Natural Resources business unit, a turnover of €106.5 million (2017: €96.0 million) was generated, the increase being mainly due to growth in geo- and system engineering and the seismology field. In the Training business unit, sales declined to €101.2 million (2017: €102.1 million) because of a fall in orders in the training voucher business. The sales of the Aerospace business unit, at €47.6 million, surpassed those of the previous year (2017: €45.8 million). The sales of the IT business unit increased to €18.6 million (2017: €17.4 million) due to higher project volumes in the IT security area.
Group expenses increased by 3.5% to €1,189.1 million during the year under review. The cost of materials reached a peak of €216.1 million in comparison to €198.4 million in the previous year. This is primarily attributable to higher costs for services bought in.
Personnel expense increased by 1.9% to €712.5 million.
Further information on expenses can be found in the Notes to the Consolidated Financial Statements, under No. 3, Consolidated Income Statement disclosures.
As in the previous year, all the business units contributed to the positive result of the Group. Earnings before tax (EBT) amounted to €80.5 million and were thus €3.8 million above the previous year’s result of €76.6 million.
Net profit, at €51.2 million, exceeded that of the previous year by 7.0% (2017: €47.8 million).
The TÜV NORD Group balance sheet reveals a sound structure. Total assets increased to €924.0 million during the year under review, as against €888.4 million in 2017.
Non-current assets rose from €542.9 million to €548.2 million. This was primarily due to an increase in property, plant and equipment levels as a result of higher investment. The rate of coverage of non-current assets (equity plus pension provisions divided by noncurrent assets) amounts to 112.4% (2017: 107.9%).
Current assets, which make up 40.7% of total assets, are recognised at €375.8 million (2017: €345.5 million). The increase is due to a growth in receivables, which is essentially attributable to increased sales in the last quarter of 2018. Cash and cash equivalents decreased to €73.5 million (2017: €84.7 million).
The Group has additional hidden reserves, which primarily take the form of property ownership and investments.
Equity capital, at €108.7 million, is above the level of the previous year (2017: €101.2 million). The equity ratio amounts to 11.8% (2017: 11.4%). Due to the lowering of the discounting interest rate for pension obligations, actuarial losses in the Other equity positions amounting to €36.6 million in 2018 (2017: €33.6 million) were offset, thereby affecting the consolidated income statement.
In the 2018 fiscal year, €766.8 million (2017: €754.3 million) of plan assets were netted against pension provisions. The proportion of the provisions for current and future pension obligations that is not covered by plan assets amounted to €507.2 million (2017: €484.9 million). The cause of this increase was the significant reduction in the discount rate of pension provisions.
Reinsurance coverage of pension provisions increased by €9.9 million to €783.0 million. Through this allocation of funds, the degree of coverage adjusted for the effects of a change in the discount rate increased once again in comparison with the previous year.
Further information on the asset situation can be found in the Notes to the Consolidated Financial Statements, under No. 5, “Consolidated Balance Sheet disclosures”.
Financial situation, cash flow
Notwithstanding the high amount of investment in, and expenditure on, innovations and digitalisation projects, the TÜV NORD Group still recorded a net positive financial position on 31 December 2018 and was thus not indebted as of the record date. The most important objectives of the conservative financial policy remain the further maintenance of the Group’s good rating and the safeguarding of an adequate level of liquidity for the centralised financing of the subsidiary companies by the Group at a level that meets their needs. In addition, it is fundamental to the Group’s financial strategy to ensure a broad measure of financial flexibility along with transparent risk and opportunity management.
The Deutsche Bundesbank, having investigated important financial metrics such as profitability, internal financing strength, liquidity and capital structure on the basis of audited financial statements, has for the twelfth year in succession awarded the TÜV NORD Group the accolade of eligibility for rediscount with the central bank. The Group thus belongs to the round of companies whose credit liabilities can be used by commercial banks as collateral with regard to the Deutsche Bundesbank. This guarantees the TÜV NORD GROUP a preferred position in terms of access to financial resources.
The cash flow (see “Consolidated Cash Flow Statement”) amounted to €65.9 million and was essentially applied to investments in intangible assets and in property, plant and equipment, and to the reinsurance of pension liabilities. Capital expenditure excluding corporate acquisitions amounted to €57.6 million in the year under review as against €43.0 million in 2017. Of this, €51.8 million was invested by the German companies, and €5.8 million abroad. The focus was on the construction of real estate in Hamburg, physical investment in testing equipment, vehicle fleets and computer hardware and software. No material capital expenditure obligations existed as of the reporting date. The Group spent a total of €2.2 million (2017: €6.7 million) on the acquisition of companies and equity holdings during the year under review. All projects were assessed by value creation criteria; every potential acquisition or capital investment project was scrutinised and analysed both with regard to the return it would bring and also from the point of view of its impact on the consolidated balance sheet.
The Group’s net financial position amounted to €21.9 million at the end of the year under review, a figure which, due to the high investments, was below that of the previous year (2017: €32.9 million).
The existing syndicated loan for the Group in the amount of €100.0 million had not been used as of 31 December 2018.
In 2018 the Group was in the position to meet its payment obligations at all times.
In view of the macroeconomic situation, the TÜV NORD GROUP is satisfied with the way the year under review progressed. However, notwithstanding the very good operating profit of the Group, every effort continues to be made to optimise the company’s position in terms of its earnings, assets and finances. TÜV NORD GROUP assumes that the earnings, asset and financial positions will remain stable in the future.
NON-FINANCIAL PERFORMANCE INDICATORS
The TÜV NORD GROUP is in the throes of the digital transformation. This is having a significant impact on its business. The growth in networking in our digital world presents new opportunities and challenges. The Group needs a vibrant and purposeful culture of innovation, the targeted promotion of innovation and an established and active innovation management as the basis of its success if these opportunities are to be exploited and the challenges mastered. Digitalisation and innovation are therefore key drivers for the growth of the TÜV NORD GROUP.
The know-how of the TÜV NORD employees and its global presence form the ideal basis for the digital transformation and the Group’s innovation process, both of which are needed to underpin the success of TÜV NORD GROUP’s customers in the digital age. For this purpose, the TÜV NORD GROUP is also involved in universities and cooperates with research institutions. In addition, employees of the TÜV NORD GROUP are to be found in all relevant committees for the domestic and international development of industry-specific regulations.
The necessary culture change is being actively promoted from within the company by the work of the Digital Academy. This successful programme is in its second year and has met with a great deal of interest, including from beyond the TÜV NORD GROUP. Just under 20 digitisation projects have already emerged from the Digital Academy and are either being implemented or have already been completed. Employees from all the business units have been trained as digital experts and successfully re-integrated into the operational business. Due to the project’s success and the demand for its services, the TÜV GROUP GROUP will continue to offer the Digital Academy to its customers in 2019.
Projects implemented by the individual business units in the reporting period included the following:
In the field of additive manufacture (3-D printing), a project to determine the properties of metal powder was carried out in the Industrial Services business unit. There were also new findings concerning the approval of pressure vessels produced using additive technology. The “remote services” topic continued to dominate in 2018. With the active marketing and expansion of its Digital Monitoring System, the Industrial Services business unit is now able to offer its customers continuous systems monitoring around the clock. At the beginning of 2019, TÜV NORD Systems won the German Excellence Award in the “Digital Services B2B” category for this innovative approach. In the remote audit field, trials were carried out to make it possible to provide optimal conditions to the customers at lower cost.
In the Mobility business unit, the holistic development of official services is taking place in working groups or companies set up for that purpose. Vehicle data in car dealerships and workshops will in the future be automatically transferred and recorded by scanners and voice recognition systems. As a result, the digitalisation project will provide a streamlined process with greater transparency for the customer. With the introduction of the TÜV NORD real-time damage report in 2018, TÜV NORD has digitalised the damage reports business and is positioning itself as a first mover in the vehicle valuation market. The remote technology in use means that the service can now be speedily accessed throughout Germany. Within the framework of defined sub-projects and intensive committee work on the subject of automated and networked driving, TÜV NORD is developing test requirements and working on requirements for security and safety. TÜV NORD is participating in the development of guidelines for type tests and test procedures with the aim of approving such vehicles for road use and is also involved in the development of test fields for automated driving functions.
The digitalisation trend is also continuing in the Training business unit, and the importance of continuing education and lifelong learning is increasing. The focus is on blended learning – a hybrid of face-to-face learning and self-study – as well as on the development of the proJobTraining learning platform. Furthermore, simulation- based training using Virtual or Augmented Reality goggles for trainee professional drivers and train drivers is now also being introduced.
The Natural Resources business unit carried out many different research and development projects in 2018. Many such projects are focused on the fields of geotechnical engineering, energy distribution and energy storage, new concepts for extraction and use in mining, nuclear waste repositories, guarantees of origin for raw materials, intelligent sensor networks, model engineering and process control in mining. Particularly worthy of note is the already very successful participation of DMT in the Knowledge and Innovation Community EIT Raw Materials research and development consortium of the European Institute of Innovation & Technology and many other platforms, including mFUND, the modernity fund of the Ministry of Transport and Digital Infrastructure (BMVI), and EU Interreg and RFCS (Research Fund for Coal and Steel). Project funds just short of €2 million were raised in 2018 in the context of R&D subsidisation.
The project for a specialised information, ordering and service platform is still being implemented in the Aerospace business unit. In this Big Data project, key technical data are being made available to customers and partners. Over 1,100 users are already registered. Another innovation project is the development of a virtual laboratory that will allow customers to observe test processes and help design them in real time. On top of that, the companies of the business unit are also working in power technologies for semiconductors for high reliability, automotive and other industrial applications. Furthermore, the companies are developing photonics technologies to be used in quantum computing and quantum communications, both of which technologies are considered pillars of the next technological revolution.
The IT business unit is specifically examining the disruptive potential of new technologies, such as Blockchain and Artificial Intelligence (AI), for the purpose of identifying new business fields. TÜViT is a member of the Working Committee for Artificial Intelligence of the German Institute for Standardisation (DIN) with its twin aims of influencing the development of norms and standards in the AI field and pioneering related services. Although the Internet of Things is increasingly gaining in significance in the context of digitalisation and networking, too little attention has thus far been paid to security aspects in the manufacture of IT products and systems. The IT business unit is therefore actively participating in the creation of protection profiles, security concepts and technical guidelines in the area of the Internet of Things that will form the basis of future, innovative services.
The compatibility of work and family life is an important issue in the TÜV NORD GROUP. Its family-conscious personnel policy is reflected, among other things, in flexible working hours, holiday activities for children and possible avenues for offering advice on particular challenges, such as those faced by employees in the care of family members. The TÜV NORD AG and many of its subsidiaries have been certified according to the “berufundfamilie” (“work and family”) audit since 2009. The re-audit of this certificate was successfully completed in the 2018 reporting period. The TÜV NORD GROUP was for the first time audited as a whole, and the individual certificates issued to the various companies were thus combined into one single certificate for the Group.
The Gender Balance Programme launched in 2017 also continued in 2018. In the 2017 reporting period, initial measures were implemented with the aim of removing obstacles from employee career paths and providing equal opportunities for women and men in the technical professions. Other measures included those to balance the numbers of all sexes in the TÜV NORD GROUP workforce and at managerial levels. Further sub-projects were implemented in 2018. For example, a talent relationship management approach was created. The external talent pool to be integrated into this is being established with an equal share of candidates of all sexes matching the company’s target group. The inclusion of gender and language as a foundational element in the corporate wording underscores the intention to use gender-neutral language in all corporate communications from now on. In 2019, the aims and objectives of the Gender Balance Programme will be pursued as before as part of a new diversity project.
A gender balance will also contribute to the attractiveness of the TÜV NORD GROUP as an employer. The Group aspires to be equally attractive to good applicants of all sexes. The Group is an interesting and attractive employer, in particular for engineering and natural science graduates. According to the UNIVERSUM study, the TÜV NORD GROUP is one of the “TOP 100 employers” for young professionals and students. The TÜV NORD GROUP was also singled out by Kununu for a similar accolade, that of “Top Company”. As an employer, the TÜV NORD GROUP is, moreover, the byword for open and authentic public communication. Since 2012 the Group has been the proud bearer of the Kununu “Open Company” seal of quality, which is confirmation of the implementation of this guiding principle.
With the aim of engaging with and promoting these values, a global employee survey was once again carried out in 2017. This led to the identification and implementation of some specific improvement measures in the 2018 reporting period. The objective of the new employee survey was to review the success of the measures undertaken as a result of its predecessor in 2014. It also included new questions, concerning, for example, the issues of innovation and digitalisation. The 6,593 employees who took part in the employee survey amounted to 63.5% of the total workforce, a significant increase on 2014 (57.2%). When it came to the most important parameter – the Commitment Index, which expresses the strength of employee bonds with the company – the high level of commitment achieved in the previous survey was successfully maintained.
As of 31 December 2018, the domestic and foreign companies of the TÜV NORD GROUP employed an average of 10,735 staff (converted to full-time equivalent) in comparison to 10,485 in the previous year.
Including the experts provided by the associations, the average number of full-time employees was 10,780 (2017: 10,539). On the sampling date of 31 December 2018, the absolute number of employees was 13,693. The proportion of women working in the Group is approximately 28%.
7,665 of the employees work in Germany. The number of employees abroad increased in 2018 to 3,115. The largest business unit is Industrial Services, with 5,768 employees in Germany and abroad, followed by the Mobility business unit with 2,660 employees.
With its dual system of vocational training in tandem with dual courses with integrated training and practice, the Group offers attractive opportunities for school-leavers and young professionals. This has been rewarded with success: In 2018, a trainee was awarded the accolade of the state’s best IT specialist in system integration.
Roughly 40 new recruits are currently preparing themselves for their future positions of responsibility in the TÜV NORD GROUP in the context of their dual studies. In the 2018 reporting period, the focus was on the recruitment of six new members of staff in (applied) information technology. Various models of the training and this dual curriculum are being offered at many sites in the Group.
With the aid of inter-regional partnerships with academic institutes, the TÜV NORD GROUP has been sponsoring students from Germany and abroad since 2008. The partners include the Leibniz University of Hanover, the University of Hanover, the Hamburg University of Applied Sciences and the Technical University of Braunschweig.
Since 2014, the TÜV NORD GROUP has been sponsoring school students. With the START scholarship we made it possible for a grant recipient from a migrant background to prepare properly for her higher school-leaving exam.
It is the know-how and technical expertise of the staff that form the basis for the long-term success of the TÜV NORD GROUP. For this to be maintained, a comprehensive portfolio of measures for the training and development of staff and managers alike is indispensable. Over the next few years, preparation for the digital transformation will be at the heart of the training measures, involving the staff in shaping this change process in order to exploit the existing opportunities and value-creation options.
In 2018, €8.0 million was spent on internal and external training events (2017: €7.0 million). The promotion programmes to prepare staff for management tasks were further developed and adapted to the needs of the individual target groups. A major goal of these programmes was to enhance the networking of managers from different business units and international companies. For instance, the new international middle-management programme with 30 participants from 13 countries was carried out for the first time to very positive acclaim; this programme incorporated alternative learning forms such as e-learning and blended learning. A mentoring programme was also introduced in which managers from the Group were recruited to offer support and advice to promising young executives over a period of twelve months. The focus here is on the targeted transfer of professional and personal experience and knowledge in a protected and non-hierarchical relationship.
The TÜV NORD GROUP offers its staff a wide range of health-promoting options in the context of its occupational health management policy. The measures are free of charge to the employees, who can make use of them in accordance with their individual needs and interests. Various sporting activities are also offered at many of the sites.
The safety of the employees is a major concern for the Board of Management. Due to the large number of cross-border activities carried out in the TÜV NORD GROUP, a concept was developed to improve on the previous travel risk management policy. The aim is to offer preventive measures and automated information processes to prepare members of staff as thoroughly as possible for foreign trips in respect of health and safety issues and to continue to support such employees when they are away from home. The concept was implemented in two companies in the 2018 reporting period and is still being trialled. The expansion of this concept to cover the whole Group is envisaged.
The average length of service in TÜV NORD GROUP, at over ten years, is higher than the comparable figures from the competitor companies. This shows just how important it is for the Group to have a culture that strengthens the bonds of loyalty between the employees and their companies.
The Board of Management would like to thank all the staff and company managers, both at home and abroad, for their commitment. The success achieved in the year under review would have been impossible without their dedication to their work. Their thanks also go out to the employee representatives for their trusting and constructive cooperation.
REPORT ON EXPECTED DEVELOPMENTS, OPPORTUNITIES AND RISKS
Report on expected developments
The leading German economic research institutes expect significantly weaker growth in the global economy as a whole in 2019. This forecast is due in particular to the ongoing trade dispute between the United States and China and declining growth in the latter. Likewise, after growth of 1.9% in the Eurozone in 2018, significantly lower rates of growth are also predicted here for the next two years. Brexit represents the biggest short-term economic risk, as it is currently difficult to gauge the negative economic impact of the UK’s departure from the EU. According to the current forecasts of leading German economic research institutes, the heavily export-dependent German economy will also grow significantly more slowly than in previous years. Growth forecasts for 2019 are expected to average out at 1.5%; by way of contrast, in forecasts made at the end of 2017, real GDP was expected to rise by just under 2% in 2019. A slowdown in the domestic economy, caused among other things by a growing skills shortage, could also inhibit growth.
A further growth driver in the dynamic global TICET market in addition to the harmonisation of standards and guidelines is the introduction of new legal frameworks and standards. Growth is being further stimulated by rising consumer demand in the emerging markets. The increasing number of product recalls and the rise of piracy and plagiarism are leading to a growing demand for testing services and certificates. In contrast, relatively low growth rates on the domestic and European markets, high levels of competitive pressure and the existing skills shortage may have a negative impact on the growth of the European market participants.
For the 2019 reporting period, the TÜV NORD GROUP thus expects a moderate increase in sales with a rate of growth slightly in excess of the level achieved in 2018. This does not take into account possible effects from the acquisition and sale of companies. The major growth drivers are the Mobility, Natural Resources and IT business units.
The TÜV NORD GROUP anticipates as before that all the business units will continue to contribute positively to earnings. A positive operative result is anticipated for the Group as a whole, albeit one which, due to high levels of expenditure on future projects, will be slightly below the operative level of the 2018 reporting period.
For the Industrial Services business unit, moderate organic sales growth is expected in the classic business fields, both in Germany and abroad. In international business, the China and India regions are likely to make a particular contribution to the increase in sales. In 2019 reporting period, the costs of digitalisation and internationalisation projects will continue to have a dampening effect on earnings, with the consequence that an operative result on a par with that of 2018 is anticipated.
For the Mobility business unit, the growth trend in sales and earnings is expected to continue. This is mainly due to the expansion of the partner organisation as well as the digitalisation and further development of services e. g. in the damage report and valuation fields.
The Natural Resources business unit expects the investment climate in the international commodity markets to stabilise. Moderate growth in revenue and earnings is anticipated, especially in the Industrial Engineering segment. At the same time, the business unit is striving to reduce its dependence on the commodities markets by shifting business activities into international markets. To this end, the intention is to develop new products and services in the context of innovation projects.
The Training business unit expects sales and earnings to decline in 2019, mainly due to the closure as planned of the training and education system for the mining industry. Moreover, a slight decline in the Academy business is likely. In 2019, the lucrative seminar business spurred by the General Data Protection Regulation (GDPR) will tail off.
The Aerospace business unit does not anticipate an increase in sales and earnings for 2019. The planned expansion of engineering services will be counterbalanced by a decline in the components business, due in particular to a reduction in the number of contracts being awarded by the ESA.
The IT business unit is planning significant sales increases, particularly in the IT security field. However, the relatively high start-up costs mean that earnings in 2019 will remain at the level of the previous year.
The planned increases in turnover in the Group go hand in hand with a scheduled increase in the number of employees for 2019. The Group will focus on the productivity of its staff, taking into account growth opportunities on both domestic and foreign markets. The increase in the workforce is accounted for by recruitment in the course of planned innovation, digitalisation, internationalisation and growth projects, principally in the Industrial Services, Mobility and IT business units.
The innovation projects identified in the context of the Strategy 2020plus should contribute to the organic growth of the Group in the long term. These projects will continue in 2019 with the aim of developing new services. In their innovation projects, all the business units are engaging with global megatrends such as Industry 4.0, the Internet of Things, critical infrastructure and connected cars, with the aim of adopting these developments in innovative and profitable business models.
Risk and opportunity management system
Its international presence means that the TÜV NORD GROUP is exposed to a wide range of risks but also well-positioned to take advantage of opportunities. The risk and opportunity management system is therefore an important element of corporate governance. Early identification and forward-looking management form the basis of a systematic risk and opportunity management policy.
Regular analyses of market and competition data (market intelligence) are an important element in the risk and opportunity management system. Market potentials are continuously monitored to identify overall economic and sector-specific opportunities in good time. At the same time, the TÜV NORD GROUP is concentrating simultaneously on established markets in the industrialised nations and growth markets in the emerging economies. The recording and management of risks to the future development of business activities takes place in the context of the risk management system. The strategy of the existing risk management system consists in the systematic identification, evaluation, aggregation, monitoring and notification of the existing risks across the Group and implementation of the corresponding measures for risk reduction or elimination in all the companies in which the TÜV NORD GROUP holds a majority stake. These risks are identified by the end of each quarter in all the business units in a standardised, IT-based, periodic process. As no single instrument is capable of identifying all the risks, the risk management system provides for a combination of different instruments and methods for risk identification. The identified risks are analysed and evaluated, taking into account the potential levels of damage and likelihood of occurrence, so that countermeasures for risk mitigation or elimination can be coordinated or developed to complement existing measures. On the basis of the risks that continue to exist after the implementation of countermeasures, a report is sent to the risk management department of the TÜV NORD GROUP. Key risks that might jeopardise the very existence of the Group are reported immediately as ad-hoc notifications outside the regular reporting schedule.
The risk management system is so structured as to ensure that the individual risks and their impact on the Group are determined in order to accurately map the risk situation of the Group.
Where necessary, financial provision is made for individual risks. Furthermore, the Group has a centralised insurance management system, which uses appropriate insurance contracts to limit the possible financial impact of risks to a defined excess.
The Group Executive Committee, the Board of Management and the Supervisory Board are kept informed at regular intervals of the current risk situation of the Group. They discuss at length the causes of the risk situation and any measures taken in response to it. Additionally, the effectiveness of the risk management system is verified by the corporate audit department and external auditors. The results of these audits are also reported to the Board of Management and the Supervisory Board.
Risks and opportunities for TÜV NORD GROUP
With its diversified services, the Group is subject to a wide range of risks but well-positioned to take advantage of a whole raft of opportunities. None of these have significantly changed in a year-on-year comparison.
In the 2018 reporting period, no risks were identified which might either individually or collectively endanger the survival of the Group or substantially impair its asset, financial and earnings position. As far as can be seen at present, there are no risks in the foreseeable future which might jeopardise the survival of the Group.
Interest rate risks can arise in connection with pension obligations. The plan assets intended to finance the pension obligations are managed in a fiduciary capacity by the TÜV NORD PENSION TRUST e. V., which was founded in 2008. Changes to the actuarial interest rates in the valuation of pension obligations can have an impact on the cash value of the discounted pension obligations and thus influence the equity capital and overall earnings.
The Group is not exposed to any material price, credit loss or liquidity risks, or to risks arising from fluctuations in cash flow. The Group’s financial assets are invested in such a way that, as far as can be seen at present, no material risks exist.
Digitalisation and global networking – with all their manifestations such as Industry 4.0 and autonomous driving – are both an opportunity for, and a challenge to, the TÜV NORD GROUP.
The individual business units report the following risks and opportunities in their business activities:
The Industrial Services business unit expects its business to continue to develop positively in the coming years. The business unit is exposed to risks, above all in its core European market. Intense price competition in tandem with equally intense competition with regard to the recruiting of staff, especially engineers, may have a negative impact on the achievement of its objectives. Digitalisation offers the opportunity both to mitigate the skill shortage threat posed by demographic developments and to slim down processes. However, there is a real risk in Germany that regulations will be amended with the effect that previously mandatory tests will no longer be required and / or other specialist companies will be granted permission to conduct tests alongside the experts currently charged with the responsibility for doing so. Opportunities for the expansion of business activities lie in offering new services and in the expansion of existing services: for example, the Group’s market presence in the fields of wind energy, railway technology, food and medical devices is being geared to international markets. To realise these opportunities, we set in train the implementation of an organisational structure that focuses even more single-mindedly on the customers. Using this structure, all the companies within the business unit will from January 2019 be controlled using a standardised process. In addition, the sales activities of the business units are being intensified. Alongside the emphasis on the acquisition of major national and international projects, a strong focus is being placed on the expansion of cross-selling activities.
As a result of the amendment of the Atomic Energy Act in 2011, the nuclear business is confronted with the medium- to long-term risk of declining orders in Germany. Opportunities are presented by activities in the domestic decommissioning and waste management market and, in the long term, in connection with final nuclear waste disposal. The integration of German and international companies into the new customer-focused organisational structure in the nuclear field is opening up new possibilities for participation in tenders on international markets.
In the certification business, changes to the statutory base make it impossible to rule out the possibility that individual services will become obsolete or be cut back. However, due to the high level of diversification and the heterogeneity of the customer structure, this risk is manageable. The risk remains that accreditation bodies will impose drastic sanctions, up to and including the revocation of accreditation for certain areas, in the event of violations of the rules by individual employees of the certification company. In the Industrial Services business unit, a centralised accreditation management system is being installed to minimise the risks through targeted redundancies and internal auditing. Opportunities will arise through process optimisation and investments in the areas of digitalisation alongside energy management, social standards and consumer protection.
For the Mobility business unit, the previous premises and conditions remain largely unchanged. The development of the business is thus expected to be stable in the coming years. The customer-group-oriented strategy of the Mobility business unit fundamentally revolves around the recognition of sector-specific risks and changes in market conditions in the segments and regions in the context of market and competition analyses.
The process of concentration in the car dealership market requires the Group to offer services throughout Germany. This trend is being countered with increasing success by the establishment of a national market presence in the form of franchise partners.
The Group is courting the staff of its competitors just as assiduously as it is new customers, although this strategy gives rise to a risk that top performers will be lost. Targeted measures are being implemented to find suitable applicants for vacant positions and to enhance the loyalty to the company of top performers.
The risk remains that the lack of evidence of calibration of the test equipment in car dealerships and workshops will make it impossible to carry out testing activities on site. The ongoing expansion of capacities for calibration services on the market will contribute to the solution of this temporary challenge. To meet the demands of the market, the Mobility business unit has implemented the construction of DAkkS-accredited calibration laboratories. TÜV NORD’s own equipment at technical inspection centres is gradually being calibrated by TÜV NORD employees when the due date for calibration arrives. There are thus no risks associated with the Group’s own equipment.
No discernible risks to the Mobility business unit have arisen out of the exhaust emissions scandal that was uncovered in the 2015 reporting period. Neither a slump in sales nor a loss of reputation have been identified. The scandal has impacted on the type approval process in the form of changes to testing and measurement procedures and the increased use of appropriate measuring technology. Measures were successfully taken to ensure the implementation of exhaust gas type testing in accordance with the WLTP standard. As of 2018, tailpipe emissions measurements will be made mandatory once again for all vehicles to ensure the maximum effectiveness of the periodic exhaust emissions tests.
Technological developments in the automotive sector are resulting in changes in the requirements on data protection and data security. The increasing complexity of equipment and vehicles requires that the existing tests be supplemented by the testing of software for security management purposes. The Group sees opportunities to expand business activities in the manufacturing business in the form of the further development of methods to test systems installed in vehicles. The offer of vehicle valuations in growing second-hand car markets around the world presents further opportunities. Penetration of the market will be facilitated here by the use of new technologies and the development of targeted collaboration.
The expectation in the Natural Resources business unit is of an improvement in the investment climate in both the international commodities and infrastructure and plant construction markets and of an increase in demand for services related to commodities. The business unit’s project business is subject to special complexity risks as well as to risks that arise from increasing competitive pressure. New services and products to compensate for the loss of sales in the German coal-mining industry are being developed in the framework of the innovation projects. Opportunities are arising from the increasing demand in the engineering, exploration and plant and product testing fields in Germany. The infrastructure and plant construction and exploration markets in India also offer growth opportunities.
For the companies of the Training business unit, falling unemployment could give rise to risks in the coming years, as it may lead to a substantial reduction in the number of contracts for training measures financed from public funds. The companies are mitigating the risk of regionally uneven reductions in order volumes with temporary training sites and the approval of new qualification measures to allow them to respond flexibly to needs as they emerge. Nursing and healthcare are two areas which will in the future offer increasing opportunities, as the need for caregivers is increasing due to demo- graphic trends. The training centres for healthcare and nursing offer initial and retraining measures alongside training and qualifications in geriatric care in the form of state registered seminars for care of the elderly. The greatest risk is currently to be found in the shortage of registered course heads in the field of healthcare and nursing. Constant training and information requirements are to be expected as a result of technical developments or changes to rules and regulations, especially in the TÜV-specific areas.
The companies of the Aerospace business unit are partially dependent upon successful partnership with the electronic component manufacturers. In the market for satellite construction there is a risk that the component manufacturers may enter into direct business relationships with the builders of satellites or systems, which could affect part of the business. A specialised information, ordering and service platform has been developed to minimise the potential negative impact. The idea behind the project is to improve the partnership with the component manufacturers and at the same time to create a marketing platform for customers. Prospects for business expansion are also offered by increased growth in Europe and other emerging markets as well as the expansion of existing services and their marketing for other high reliability sectors.
Particular risks for the companies in the IT business unit arise from the ever intensifying shortage of IT security experts. Competition for the services of qualified specialists will continue in the coming year. As there are very few trained IT security specialists on the market, further investment will be required in the search for employees with potential and their subsequent training and retention.
Risks to the IT business unit might also arise through the burgeoning market for private IT security seals. Consumers cannot distinguish these seals from official rules which are based on approved standards. Neither the depth of the testing nor the testing methods themselves are discernible for the consumer. These seals are being awarded by unqualified providers of IT security seals despite deficiencies in the performance of the tests. Successful cyber-attacks on these inadequately tested products with their putative “TÜV guarantee” might have a negative impact on the perception of IT security seals or the reputation of the TÜV brand. It is thus imperative to play a positive role in the development of appropriate quality seals and to establish an appropriate testing regime which can meet the demands of an increasingly networked environment. Numerous opportunities for the IT business unit may arise from the increasing investment of companies in information and cyber-security.
Further opportunities may also arise from the draft bill for the creation of a central European authority for cybersecurity, which is represented by the European Agency for Network and Information Security (ENISA). The IT business unit has been liaising intensively with ENISA for some time and aspires to closer collaboration with it in the future. As far as is currently known, ENISA is to be granted sovereign authority over IT security in Europe as well as over the testing procedures, with the exception of high security, which will remain in the domain of the nation states. National procedures will thus remain in place. The principle of conformity assessment will expand the evaluation business field in which TÜViT has specialised. The number and complexity of the products to be certified could increase significantly due to changing security requirements.
For the effective implementation of corporate governance, the TÜV NORD GROUP takes its guidance from the requirements imposed by the German Corporate Governance Codex on capital-market- orientated companies. The governance structure is thus consistently aligned with the globally recognised Three Lines of Defence (TLoD) governance model and is the byword for responsible management and control with the aim of long-term value creation. With its three connected lines of defence, of which the first is operative management, the second risk management, controlling, law, compliance etc., and the third internal auditing, the TÜV NORD GROUP guarantees the lawfulness of all its business processes and organisational structures along with the efficiency and effectiveness of its established internal control system (ICS).
The Compliance Management System (CMS) of the TÜV NORD GROUP, which was established over 10 years ago and has been awarded multiple certifications, is an essential element of corporate governance as stipulated by TLoD. Taken together with the realignment of the Group’s mission statement and values, these strategies are a means of effectively preventing potential risks and averting damage to the TÜV NORD GROUP. The central CMS in TÜV NORD AG, with its Compliance point of contact which coordinates compliance issues and tasks, has a key role to play here. This central Compliance point of contact is available to all employees. Appropriately conceived and clearly formulated policies and regulations, accessible to all staff at all times via the Intranet, are fundamental factors when it comes to ensuring good corporate governance. The adoption of a corporate philosophy and a binding code of conduct have given employees a concrete framework of guidelines for their actions, thus reinforcing good business practices in compliance with the law. The corporate philosophy and code of conduct are regularly reviewed and updated. Information events and training sessions are organised to enhance staff awareness of the significance of compliance; this is because TÜV NORD aspires to a preventive compliance approach and a corporate culture in which heightened awareness among the staff precludes the possibility of breaches of the rules.
The key principles of the TÜV NORD compliance strategy are adherence to applicable law, respect for ethical values and sustainable action. Compliance is also an important assessment criterion in the selection of its suppliers and business partners and is guaranteed by a Compliance Code for suppliers and business partners which forms the basis of existing and future business relationships. By signing the agreement on the Compliance Code, the suppliers of the Group undertake to act in the spirit of the TÜV NORD compliance standards. These include the basic requirements of human rights, equal opportunities and non-discrimination, environmental protection, product and occupational safety, the observance of the law and the extirpation of corruption.
Members of staff, business partners and customers have a further opportunity in the form of an ombudsman system, bound by principles of confidentiality and anonymity, to communicate compliance issues or draw the Group’s attention to breaches of the compliance regulations of the TÜV NORD GROUP. A renowned lawyer, appointed as an external point of contact for all employees, customers and business partners, gathers information on any violations of the law or policy to which he is alerted.
Compliance with the corporate governance rules and regulations is continually monitored by the internal audit department through its risk-orientated audit planning. The quality management system implemented by the Group’s internal audit department aims to guarantee the efficiency and effectiveness of its auditing work. The effectiveness of the established processes is regularly confirmed by an external and voluntary audit in accordance with the DIIR (German Institute of Internal Auditing) standard.
The CMS has been tested by external auditors on the basis of the IDW auditing standard PS 980. The audit report deemed the implementation and orientation of the CMS to be appropriate. The verdict of the audit confirms with sufficient confidence that the compliance management system is suitable for both the identification of risks of major violations of the rules and the prevention of such violations in the first place.
Awareness and sensitivity concerning compliance at corporate management level and among the employees have been deemed exemplary across the Group over a sustained period. Regular compliance queries submitted by the employees and the recommendations for conduct issued in reply in advance of active business transactions are effective and efficient measures for the prevention of damage. Risk-based process controls, such as, for instance, a compliance check for business partners, systematically reduce potential compliance risks. The tracking, sanctioning, evaluation and documentation of breaches of compliance represent an integral part of the continuous improvement process. In addition to the continuous supply of up-to-date information, the Group’s point of contact for compliance presents a compliance report to the Board of Management and to the Group Executive Committee. These measures will further strengthen the tried-and-tested compliance structures and permanently reinforce awareness of the mandatory nature of TÜV NORD compliance in the Group’s day-to-day business.
STATEMENT ON CORPORATE GOVERNANCE
Findings on the promotion of the participation of women in leadership positions according to Article 76 (4) and Article 111 (5) German Stock Corporation Act
The TÜV NORD GROUP pursues a strategy of diversity and is striving to increase the percentage of women in managerial positions 1.
The Supervisory Board resolved back in 2017 that it was not seeking to increase the number of women in the Board of Management and the Supervisory Board for the period ending on 30 June 2022. Should any subsequent appointments become necessary, women will, as always, be offered the same opportunities as men in both bodies.
The targets were either met or exceeded by 30 June 2017. For the first and second tiers of management below the Board of Management, the target of 30% was met. For both targets, the deadline set for implementation was 30 June 2022.
For the other affected companies in the Group, the targets for the proportion of women in the Supervisory Board, the Board of Management and the next two tiers of management and implementation deadlines were set on time.
1) Pursuant to the act on the equal participation of women and men in managerial positions in the private and public sectors, certain companies in Germany are committed to setting targets for the proportion of women on their supervisory boards, executive boards and in the following two management tiers and to set a date for the achievement of these targets. The TÜV NORD GROUP pursues a strategy of diversity and is striving to increase the percentage of women in managerial positions.
TÜV NORD AG is deemed to be directly dependent within the meaning of Sec. 17 of the Stock Corporations Act (Aktiengesetz – AktG) upon TÜV Nord Holding GmbH & Co. KG of Hamburg and TÜV HSA Holding GmbH & Co. KG of Hanover, and indirectly dependent upon TÜV Nord e. V. and TÜV Hannover / Sachsen-Anhalt e. V. For the period from 1 January to 31 December 2018 and in respect of relevant special transactions during the 2018 fiscal year, the Board of Management of TÜV NORD AG has drawn up a report pursuant to Sec. 312 of the AktG regarding relations between the company on the one hand and TÜV Nord Holding GmbH & Co. KG, TÜV HSA Holding GmbH & Co. KG, TÜV Nord e. V., TÜV Hannover / Sachsen-Anhalt e. V. and the affiliated companies on the other.
This report ends with the following declaration:
“We hereby declare that, in respect of every legal transaction with affiliates, TÜV NORD AG received consideration that was appropriate in the light of the circumstances known to us at the time when such transactions were performed.
Beyond the activities reported on herein, there were no further reportable transactions, measures or omissions.”
Hanover, 28 February 2019
TÜV NORD AG
The Board of Management