Strong growth in the world economy has led to a high level of activity in most industries. At the same time, society in general has adopted a zero tolerance for failure and companies are expected to run safe, reliable and efficient operations. To meet these expectations, the demand for technical and business-risk services has grown. DNV is in a unique position to respond to these demands, being one of the world’s leading providers of risk management services. Based on its core competence of identifying, assessing and managing risk, the company experienced a growth in turnover of 9 per cent in 2006.
DNV strengthened its position in all sectors of its activities throughout 2006, with a continuous focus on quality and integrity. DNV’s environmental, social and financial performance all showed progress. Further, a considerable growth throughout the organisation has led to a higher level of profitability.
A total of 20 per cent of all contracted ship newbuildings world-wide, measured in gross tons, has been ordered to DNV class. This represents an all time high for DNV, and demonstrates the trust that ship-owners and shipyards have in the DNV rules and technical support services. A relentless fight against substandard vessels and operations has further strengthened DNV’s quality image, which has attracted many of the leading shipping companies to DNV.
The demand for risk-related technology and management services has been high in the oil and gas industries, providing DNV with exciting projects on all continents. The North Sea is still the most important area in terms of business revenue, while strong growth is seen in Brazil, North America, India and China.
DNV is among the world’s three leading management system certification companies, delivering services towards all major international standards. Quality, safety, health and the environment still remain the most important management system certification standards. Risk management services have, over the past decade, grown to become DNV’s second largest line of business, and include leading competencies within enterprise, project and asset risk management.
Freedom to act
A sound financial foundation is required to secure the independence and integrity of DNV’s operations. At year-end 2006 DNV’s equity ratio reached 61 per cent. DNV had strong year-end financial results with growth in turnover of 9 per cent and a net profit of NOK 546 million. People are DNV’s most valuable asset, and the number of employees increased by 670 to a total staff of 6 765.
Besides the financial bottom line, DNV is committed to reporting on environmental and social aspects as outlined in the Global Reporting Initiative (GRI). DNV’s main contribution to environmental improvements comes through the effect of services the company provides to customers. Services for validation and verification of emission reductions according to the Kyoto Protocol, green passports for vessels, carbon capture and storage and environmental system certification are examples of such services. DNV has developed a concept for a Fraud and Corruption Resistance Profile, which represents a valuable tool for companies to improve their ability to perform responsibly.
The Board of Directors regards DNV’s market position as strong and the financial situation to be good. This gives a high degree of freedom to pursue new opportunities in support of DNV’s purpose, which continues to be “to safeguard life, property and the environment”.
In May 2006, Henrik O. Madsen succeeded Miklos Konkoly-Thege as Chief Executive Officer (CEO). The Board expresses acknowledgement to Miklos Konkoly-Thege for his years of service to DNV. Henrik O. Madsen has an in-depth knowledge of DNV’s international markets and broad DNV experience from his 24 years in various positions in the company.
Strategy
Based on a six-month strategy development process headed by the new CEO, Henrik O. Madsen, a new strategy was approved by the Board in June 2006. The strategy builds on the main direction of the previous strategy plan, which was to make DNV the leading provider of services for managing risk. This shall be achieved through a balanced risk management of the opportunities and threats from relevant technical, organisational, environmental, human, commercial and societal factors.
New priorities
The most important new element in the strategy is the introduction of a clear industry sector focus. DNV is to concentrate on industry sectors where the company has, or intends to develop, deep industry knowledge, and can thus create an impact. The two top priority sectors for DNV at present are the maritime and energy sectors. Within the strategy period, two more industries are to be identified and developed as new priority sectors for DNV.
Society and businesses are becoming increasingly vulnerable to failures in software and IT systems. Acknowledging this, DNV has in its strategy decided to put considerable resources into building an organisation to help customers manage risks related to business and safety critical software systems. DNV acquired Q-Labs, a leader in software development and system maintenance and optimisation. The efforts are based on DNV’s current risk services, combined with Q-Labs’ software improvement services.
Research and innovation have been given even more focus in the new strategy. DNV will invest in technology, research and innovation to meet the needs of customers in a world undergoing rapid change. Investments will primarily be channeled to research and innovation supporting DNV’s long-term business goals, and also to explore new emerging opportunities that may become part of future strategies. Strategic research will focus on new knowledge and technologies with a longer term impact on business development.
Another high priority matter in the new strategy is the collaboration between different organisational units in DNV. Internal barriers can hamper rational operation and utilisation of technical, human and financial resources. Considerable efforts are being spent on developing processes for capturing, sharing and managing knowledge.
DNV Maritime
DNV Maritime’s strategic objective is to be the world’s leading classification society in terms of quality, profitability and size. The strong focus on quality has helped to maintain DNV’s position as one of the classification societies with the lowest ratio of detentions in the Port State Control regimes worldwide. This is one of the core elements in DNV Maritime’s quality index, and represents an important means of measuring results in our efforts to eradicate substandard shipping.
In June 2006, the common structural rules for tankers and bulk carriers came into effect. This represents a significant development in maritime safety. By working with one set of common structural rules as a basis for design approval and newbuildings, competition between classification societies in these market segments is now based on service, cost efficiency and value-adding services, and not on technical standards.
The development of “Goal Based Standards”, which is the responsibility of the International Maritime Organisation (IMO), represents an important basis for the common class rules. It is of vital importance that discussions and decisions on detailed technical standards reside with the classification societies and not with the IMO, which has a higher level responsibility to set policy and safety goals and to verify that class rules meet these goals.
DNV strongly supports the IMO as the regulator of the international maritime industry. We believe that the international community is best served when regulations effecting maritime safety and environment are made by the IMO and not on regional or national levels. It is therefore disturbing that an increasing number of regulatory decisions are made on a regional basis and not through the IMO.
Regulatory bodies, and the public at large, expect classification societies to represent an effective safety net in the shipping industry. This is very demanding, as capacity is being fully stretched at both shipyards and in many shipping companies, at the same time as new players are entering the shipping scene. The attraction and retention of people with the right competence is a major challenge for all organisations in the maritime industry; this is also true for the classification societies.
Within the field of ship classification, DNV’s share of the world fleet measured in gross tons is approximately 16 per cent. Of the newbuildings contracted during 2006, DNV’s share of the world market was 26 per cent when measured in gross tons. This represents 605 ships. A total of 5 228 trading vessels, representing 113.5 million gross tons, were classed by DNV at year-end, which is an all-time high for DNV.
DNV Energy
As a consequence of DNV’s new industry sector orientation, all activities towards the oil, gas process and power industries are organised in DNV Energy, which comprises the former DNV Technology Services and parts of DNV Consulting. The strategic goal is to become a leading provider of solutions that integrate business risk management and technical expertise. The aim is to help customers safeguard and improve their business performance.
Due to continued high oil prices and a growing demand for energy, the level of activity in this sector remains high. This is also reflected in the high level of activity in DNV Energy, demonstrating the need for risk-based services and qualification of new technologies. The main business segments for DNV Energy are upstream and downstream, pipeline transport, utilities, and cleaner and renewable energies.
DNV Energy has shifted its strategic focus from primarily serving the international oil majors to include a more dedicated effort towards national oil companies in countries with significant oil and gas resources. It is predicted that much of future oil and gas developments will come in regions with more unstable political conditions and demanding business environments. The national oil companies will play a more central role in exploration and production.
The acquisition of CC Technologies has proven successful and complements DNV’s range of services for the pipeline industry. CCT is working to re-establish safe production in the onshore pipeline system at Prudhoe Bay in Alaska. Based on its Pipeline Rules, DNV is engaged in most of the world’s major offshore pipeline development projects.
In the area of cleaner energies and renewables, DNV is developing risk analysis programs for carbon capture and storage with a special focus on the challenges represented by centuries of storage in geological structures. Also, through the business improvement system isrs7, DNV is assisting the nuclear industry to identify and assess its risk exposure. DNV has retained the leading position for certification of offshore wind energy farms.
DNV Industry
DNV’s new industry sector approach has led to the establishment of the new business area DNV Industry, which is built on the former DNV Certification and parts of DNV Consulting. The operations in DNV Industry are based on DNV’s global position as a leading provider of certification services and strong competence within risk management. Main services include certification of systems and products, assessment and risk management services. Related training is provided worldwide.
The concept of Risk Based Certification™, which was launched two years ago as a unique DNV approach to system certification, has proven to be a success. Risk Based Certification™ introduced a risk approach to traditional management system certification, adding significant value to the certification process.
DNV is among the world’s three largest companies within accredited quality management system certification, and world leader in environmental management system certification. There is a clear trend towards more industry-specific certification schemes, which will increase the need for a deep understanding of the various industries.
In the new strategy, increased attention is given to global industry sectors and with major international companies.
The selected sectors are capital intensive, and have a need for – and are open to – adapting a risk based approach. Prioritised industries are the automotive, food and beverage, ICT and telecom, health care and transportation. Developing two selected industries into separate global industry-focused business areas is a strategic goal.
DNV plays an active role in making the emission trading mechanism of the Kyoto Protocol become operational. Services where DNV has a strong international position include validation of projects for emission reduction and verification of actual emission reductions in specific projects.
Verification of sustainability reports is a service that builds on DNV’s competence within Corporate Responsibility. The Fraud and Corruption Resistance Profile is a new tool to ensure that measures are taken to prevent misconduct in organisations. International companies are part of a pilot project to evaluate DNV’s new concept.
DNV IT Global Services
Failures or break-downs in IT systems and software-intensive systems represent major safety hazards for both society and businesses. In the new strategy, services related to IT and software risks from the inception phase to operations are defined as the basis for a new business area called DNV IT Global Services, which is expecting to double revenue in the strategy period.
The efforts are based on DNV’s current IT risk management services, combined with Q-Labs’ system and software improvement services. The IT service portfolio focuses at enhancing trust in IT. Maritime, oil and gas, automotive, finance and defence are industries where DNV has been engaged in IT and software risk management for several years. The four companies comprising the new business area – Q-Labs and the three acquisitions, Tireno, CIBIT and Echelon – position DNV strongly in the European market. The market shares in the finance segment are significant and an obvious target for growth. The new DNV IT Global Services business area became operational on 1 January 2007.
Organisation and human resources
Changes have been made to the DNV organisation throughout 2006. Henrik O. Madsen introduced a new Executive Board when he took office as CEO in May. As a consequence of the revised strategy presented in June, the Business Area structure was changed.
During the change period, DNV has had a strong growth and maintained a more than satisfactory profitability. The Board of Directors appreciates the dedicated and hard work by all employees to achieve these results.
At year-end 2006, DNV had 6 765 employees, compared to 6 095 the previous year. The total number of employees includes 6 392 permanent staff and 373 employed on time-limited contracts. 88 nationalities are represented in the staff.
The turnover of personnel during 2006 was 9.4 per cent, compared to 7.4 per cent in 2005. DNV’s ambitious growth strategy implies a large net manning growth each year in the strategy period. The fight for the best competence will continue to be an important factor in the strategy. Corporate HR has been strengthened with senior managers, learning specialists and internal communication resources. Consequently, DNV has decided to make substantial changes in the process for attraction and retention of employees.
A two-year international Attraction and Retention project was started in August 2006, with the aim of initiating actions to attract the competence needed and to retain an optimal work force. The main focus of the project is on major growth countries such as China, India, Brazil and Norway. DNV performs dedicated efforts to improve diversity in the organisation, and has an equal opportunity policy for all employees, irrespective of nationality, gender or age. Sixty-eight per cent of the managers are from countries outside Scandinavia, an increase of 6 per cent compared to the year before. The number of women in management training programmes is rising, and the ratio of female managers is now at 15 per cent, an all-time high.
Improvement of key processes such as leadership support and development, compensation and rewards, and better induction courses are other elements in the project. An additional aim is to increase the HR competence in DNV through sharing of knowledge and best practices in a global HR network.
Corporate Focus Areas
Safety, Health and Environment (SHE) risk assessments are carried out in most of the countries where DNV is established. This gives a good basis for enhanced focus on SHE system improvements. Underreporting is a problem for many global enterprises. DNV is prepared to see increased rates of lost-time accidents for some years as a consequence of better reporting. Underreporting makes it difficult to initiate relevant preventive actions.
The sickness absence rate was 2.0 per cent in 2006, compared to 2.3 per cent in 2005.
DNV’s own activities do not have any significant negative impact on the environment. Procedures for waste handling and energy savings are being introduced in the international network of offices as part of the Environmental Management System for DNV.
As part of the company’s efforts within Corporate Social Responsibility, DNV is in the process of implementing country analysis procedures to enable decision support when establishing presence in countries with difficult political conditions and business environment, including corruption. DNV’s rapid growth in Angola demonstrated how difficult it can be to achieve strong growth in such countries. The importance of good control systems, experienced expatriates and local knowledge became evident. In order to ensure sustainable business practices, in line with DNV’s policies and standards, operations in Angola have been downsized and restructured throughout 2006.
DNV’s partnership with the Red Cross has been appreciated by our partner and has created enthusiasm, involvement and pride among DNV employees. In addition to a fixed financial contribution to the Red Cross, the focus of the partnership has been on provision of in-kind services, such as improving the water supply in areas hit by draught or disasters. Engineers from DNV have been instrumental in developing mobile drilling units for clean drinking water in Indonesia and in Mozambique.
Financial performance
The strong growth in the world economy, with a high level of activity in most industries, have resulted in good financial performance and a long-term order reserve, both better than ever. DNV achieved operating revenue of NOK 7 297 million in 2006, NOK 614 million or 9 per cent more than in 2005. All the business areas achieved a sound growth, but the fastest growth was also in 2006 within DNV Technology Services and DNV Maritime. DNV’s core activities grew by 16 per cent.
The operating profits increased from NOK 750 million in 2005 to NOK 794 million in 2006, representing an operating margin of 11 per cent. Adjusting for the profits from sale of business activities in 2005, the improvement in operating profits between 2005 and 2006 is NOK 252 million or 47 per cent, mainly explained by good financial performance in the business areas.
DNV does business in 70 currencies, and has subsidiaries and branch offices in close to 100 countries. We have seen minor development in the exchange rates, and moderate currency effects in the 2006 accounts. The net financial income of NOK 31 million is explained by good return on the liquidity reserve, partly offset by the increased interest level leading to higher forward premiums on the currency hedging contracts.
The tax cost in 2006 of NOK 280 million gives an average tax cost of 34 per cent. The net profit after tax in 2006 came to NOK 546 million compared with NOK 528 million in 2005 and NOK 223 million in 2004.
DNV has a sound cash flow and no interest-bearing debt. Short-term financial investments in equity funds and the money market amount to NOK 1 304 million, and the unused available credit lines were NOK 750 million at year-end. DNV has a strong balance sheet with a total equity of NOK 3 895 million, or 61 per cent of its total assets.
The accounts for the parent company, stiftelsen Det Norske Veritas, show a profit after tax of NOK 40 million which has been allocated to Other Equity. The Board of Directors confirms that the financial statements are based on the going-concern assumption.
Outlook
DNV believes that the demand for its services will continue to be high in 2007. This is based on the assumption of a continuously high oil price and a high level of activity in all our main markets. The order reserve is very satisfactory at the start of 2007 for all business areas, and DNV expects a sound growth in revenues in 2007.
The financial risks are primarily related to currency fluctuations, in that a strengthening of the NOK against primarily the US Dollar will have considerable negative effects.
As society has adapted a zero tolerance for failures, any accident or incident involving DNV represents a risk to the brand. The only way to handle the future risk to our reputation and standing in the market is by living up to DNV’s value statement: Never compromise on quality or integrity.
ATLE BERGSHAVEN – Chairman of the Board of Directors. Member of the Board since 2003. Chairman and CEO of the Bergshav Group of companies. Member of the Board of Norwegian Hull Club, North of England P&I Club, Fosen Mekaniske Verksteder and Deep Sea Supply PLC. Council member of Intertanko.
AUDUN BRANDSÆTER – Member of the Board since 2002. Elected by the employees of DNV. Principal Engineer/ Project Manager, Information Quality Management. Joined DNV in 1982.
MARY GRACE ANDERSON – Member of the Board since 2005. Development Engineering Manager – Europe, Shell Exploration and Production International B.V. Member of the Board A/S Norske Shell. Member of the Board Shell UK Limited. Member of the Board Enterprise Oil Limited.
C. MAURY DEVINE – Member of the Board since 2000. Former President and Managing Director, Mobil Exploration Norway, Inc. Fellow, Harvard University. Member of the Board of Directors of FMC Technologies Inc. and the National Foreign Language Center. Member of the Council on Foreign Relations.
AXEL C. EITZEN – Member of the Board since 2004. Chief Executive Officer and Member of the Board Camillo Eitzen & Co ASA. Chairman of the Board NaturGass (USA) AS. Member of the Board Northern Oil ASA. Member of the Executive Committee Gard.
JOHN H. WIIK – Member of the Board since 2003. Managing Director Norwegian Hull Club. Chairman of the Board, Fana Sparebank. Member of the Board Handelsbanken (Norway).
TOM RUUD – Member of the Board since 2002. Group Executive Vice President Nordea AB. Member of Group Executive Management. Head of Corporate Institutional Banking and President of Nordea bank Norge ASA. Member of the Board VPC AB, Stockholm. Member of the Board Finansnæringens Hovedorganisasjon (FNH), Oslo.
KNUT VÅGNES – Member of the Board since 2002. Elected by the employees of DNV. Senior Principal Surveyor, DNV Maritime, Maritime Technology and Production Centre. Joined DNV in 1969.
David McKay – Deputy Member of the Board since 2002. Elected by the employees of DNV. Principal Surveyor, DNV Energy Offshore Class North America. Joined DNV in 1990.
Henrik O. Madsen - President and Chief Executive Office
The Board of Directors of stiftelsen Det Norske Veritas
Høvik, 19 April 2007