Segment report

The three segments, INDUSTRY, MOBILITY, and CERTIFICATION, continued their growth ­trajectory in the fiscal year 2016.

INDUSTRY

In the INDUSTRY Segment, 8,134 employees (on average) generated revenue of € 961.1 million. This is equivalent to 41.0% of consolidated revenue. Although revenue in the segment rose by € 15.7 million, or 1.7%, year on year, growth fell short of our expectations.

The Industry Service Division recorded a slight decline in revenue  in the fiscal year, but remained the division with the highest volume of revenue within the segment, accounting for 61.9% of revenue. Large-scale projects in South Korea that are coming to an end, and the difficult market conditions in the traditional mass business in Germany weighed on demand. In addition, the persistently low oil price and slowed growth in the Chinese economy as well as political uncertainties in Turkey and the UK have had a negative impact on most areas of our business.

The Real Estate & Infrastructure Division generated 38.1% of segment revenue. In the reporting year, building and transport technology benefited in Germany from the amendment of the German Ordinance on Industrial Safety and Health [“Betriebssicherheitsverordnung” (BetrSichV)] as well as in Spain by the strong market position of TÜV SÜD ATISAE. Demand for our inspection and homologation services in the field of rail transport is steadily rising, as we can offer one-stop management of large-scale projects across national borders. In Brazil, where the economic situation has still not improved, Bureau de Projetos e Consultoria Ltda., São Paulo, again saw a decrease in orders.

At € 77.9 million, EBIT in the INDUSTRY Segment was 3.3% below the prior-year figure of € 80.6 million, and thus also fell short of our forecast. EBIT development was impacted by higher personnel expenses, which saw higher percentage growth than our revenue. In addition, we recognized impairment losses at subsidiaries in the US and Brazil, South Africa and the UK, in order to reflect the unfavorable development of local business in these countries. At 8.1%, the EBIT margin was within the expected forecast range; the expected margin improvements, however, could not be achieved.

The increase in segment assets by € 18.3 million to € 533.5 million (prior year: € 515.2 million) was characterized by working capital, particularly due to trade receivables. In fixed assets, capital expenditures and depreciation and amortization virtually equaled each other out. A significant portion of investments (€ 18.9 million) has been spent for a refrigeration technology laboratory and into the acquisition of technical equipment for performing material tests in Singapore and Italy. By contrast, impairment losses on intangible assets identified as a result of the purchase price allocation led to a decrease in fixed assets.

MOBILITY

The 5,305 employees (on average) of the MOBILITY Segment generated revenue of € 703.9 million. This is equivalent to 30.0% of consolidated revenue. Revenue growth of € 65.1 million or 10.2% clearly exceeded the expected growth rate. Excluding the new Spanish companies, the segment posted growth in the medium single-digit range, which is in line with our expectations.

Roadworthiness tests and exhaust gas analyses, the core business of the segment, saw a significant increase in revenue – mainly due to the new activities in Spain. In Germany, the number of vehicle inspections carried out remained at the prior-year level. On the other hand, business with driver’s license tests grew significantly. Positive effects also resulted from price adjustments. Growth impetus was also provided by our investment in Turkey and by new services relating to vehicle preparation and damage assessment reports. In addition, the demand for emissions testing increased significantly, especially in Germany, with a positive effect on the utilization of our test facilities. Homologation likewise saw good revenue development, with order intake stagnating only in China.

The business model in the MOBILITY Segment is partially geared to subcontracting services. Accordingly, the ratio of purchased service cost to revenue is 14.9%, which is above the group-wide ratio of purchased service cost to revenue of 12.5%. In addition, increased personnel expenses as a result of collective wage increases and higher depreciation and amortization negatively impacted EBIT. At € 55.2 million, EBIT met our expectations. However, at 7.8% the EBIT margin was just below the projected target value.

As of the reporting date, segment assets came to € 351.7 million (prior year: € 273.8 million). A total of € 23.2 million was invested in 2016, including in the ASPro IT application system. The Dynamic Component Testing laboratory in the Czech Republic was also equipped. In Germany and Spain, the modernization and expansion of the technical service centers were driven forward. However, the significant increase in segment assets is due to the first-time consolidation of TÜV SÜD ATISAE and ATICAL. Intangible assets identified in the purchase price allocation were capitalized in addition to purchased property, plant and equipment.

CERTIFICATION

The CERTIFICATION Segment represents a quarter of consolidated revenue generated (€ 586.7 million). The average headcount here was 5,902 in 2016. With an increase in revenue of € 30.0 million or 5.4%, the segment achieved the expected growth rate in the medium single-digit percentage range.

The Product Service Division generated approximately three quarters of segment revenue and accounted for the largest share of the revenue increase in the segment, with revenue growth of 6.2%. The industrial goods sector showed weaker growth compared to the prior year in Japan, the UK and Germany. However, this was partially compensated by a good utilization of our battery test labs in North America. Revenue generated by consumer goods audits and certifications have also increased worldwide; China showed the strongest growth with export goods for the European and the US market. In fiscal year 2016, our services for medical products in Europe, and especially in Germany, were increasingly in demand.

The good order situation in Germany, China, India and Mexico also led to a positive revenue development in the Management Services Division (3.0%, prior year: 9.3%). Revenue drivers remain our portfolio of services relating to quality, environment and energy management systems, in particular in the automotive industry. However, newer services such as cyber security and FSC certifications also contributed to revenue growth.

Purchased services increased to a lesser extent than revenue, with the result that the ratio of purchased service cost to revenue decreased to 14.3% (prior year: 14.9%). Personnel expenses developed disproportionately higher than revenue, with the major share of the increase being attributable to collective wage increases in Germany. EBIT in the CERTIFICATION Segment amounted to € 58.8 million, and the EBIT margin of 10.0% was within the range we expected.

In the CERTIFICATION Segment, segment assets increased to € 321.3 million. This is equivalent to an increase of € 39.0 million or 13.8% compared to the prior year. A total of € 21.5 million was invested in the segment. The investment focus was on the expansion of the laboratory network for electromagnetic compatibility testing as well as on the development of software for process control. The good business performance and the associated increased billing additionally increased segment assets.

Other

We have pooled our Life Service and Academy business along with the corporate functions under other. Together they generated revenue of € 125.7 million in 2016. The increased demand for open seminars in the Academy business provided the greatest contribution.
 
EBIT in other amounted to € 6.7 million. The value improved by € 24.2 million compared to the prior year in particular, mainly due to the write-up of the existing stake in TÜV SÜD ATISAE recognized in profit or loss at TÜV SÜD ATISAE. The good level of order backlog in the Academy business and cost reduction measures at the group headquarters also had a positive effect. Segment assets decreased by € 14.9 million from € 282.8 million to € 267.9 million. During the fiscal year, the company mainly invested in software, IT hardware and canteen equipment at the Munich location.

For an overview of the development of revenue in the segments, including other, and in the regions, please refer to segment reporting (note 32) in the notes to the consolidated financial statements.