Controlling system

Strategy and controlling system

Vossloh is one of the world's leading companies in the rail infrastructure markets.

The three core divisions will be controlled according to the fundamental principles of their respective business models, this means in accordance with product, project and service orientation. All divisions work closely together and externally present themselves uniformly and in a coordinated fashion as "One Vossloh". As an operational management and financial holding company, Vossloh AG is the parent of the Vossloh Group and controls and oversees all major operations and activities within the Group. In addition to determining corporate strategy and controlling corporate development, Vossloh AG allocates the financial resources.

Strategic decision

In mid-2020, Vossloh completed the transformation of the Group and transitioned into a company focused on its core business of rail infrastructure. Vossloh’s unique selling point is its comprehensive range of track-related products and services. Vossloh manufactures all significant track components. The associated knowledge of the technical and physical properties of the rail track forms the basis for understanding the systemic interaction of all components.

Improving track availability will play a significant role in transporting more people and goods by environmentally friendly rail. Vossloh contributes to this in two different areas: The company is continuing to enhance its rail infrastructure products to make them more durable, easier to maintain and more reliable. Vossloh is also playing its part in making the process of maintaining rail networks more efficient. Digitalization will be at the heart of this, as it enables the processing and evaluation of ever larger amounts of data. Vossloh brings its comprehensive and systemic understanding of rail infrastructure to bear to derive relevant information and maintenance recommendations from the collected data. This is the foundation for meeting the specific needs of publicly and privately owned regional, freight and long-distance transport operators and offering them tailored condition-based maintenance solutions.

Vossloh’s existing business with products and conventional services forms the basis for the development and expansion of the digital service business. The conventional hardware business and the constantly growing service business form an inseparable unit. The new possibilities afforded by digitalization and, most importantly, the efficient processing and analysis of large amounts of data serve as the link that joins the business models.

Vossloh aligned itself to clearly defined strategic cornerstones in 2020 as part of an extensive internal project, while also defining its role in the international rail infrastructure market. The strategy newly devised and pursued by Vossloh is divided into three sub-areas:
  • The existing business with products pertaining to rail infrastructure will be expanded and further strengthened with a view to their profitability. In this context, the focus is on sustainable reduction of production costs, increased sales concentration on selected markets, and also acquisitive expansion of the product portfolio with complementary products as well as an entire series of selective innovations.
  • The existing service business will be further internationalized and expanded to include further service offerings. The focus of smart maintenance is on the collection of condition data, both directly on the
  • track and through Vossloh’s own fleet of maintenance vehicles and using artificial intelligence to draw up condition-based, predictive maintenance programs. This provides customers with an outstanding opportunity to improve their efficiency levels.
  • The new strategy also focuses on accelerating the development of digital expertise, including through relevant partnerships, and emphasizes the importance of sustainable management more strongly than before. At the same time, a Group-wide system for continuously increasing efficiency in every division has been designed.

Strategic measures were implemented and reviewed on a regular basis. The new strategy will contribute significantly towards achieving an average annual sales growth rate of between 4 and 5 percent over the medium term. This improvement would be well above the rate currently forecast for the market in a number of studies. Vossloh also expects all of its divisions to achieve double-digit EBIT margins over the medium term. Vossloh intends for the Group as a whole to achieve an EBIT margin of at least 10 percent over the long term. A double-digit EBIT margin for the Vossloh Group equates to an EBITDA margin of at least 16 percent.

Controlling system

The most significant financial performance indicators for the Vossloh Group are value added, sales, EBITDA-margin and EBIT margin. While the Company uses revenue, EBIT margin and EBITDA margin as key performance indicators for short-term planning, the long-term management of the business units within the framework of the value-oriented growth strategy is focused on value added. Value added is the management-relevant earnings indicator for the divisions and business units within the framework of external reporting.

Positive value added is generated when a premium is earned on top of the return claimed by investors and lenders (cost of capital). This premium is the difference between the return on capital employed (ROCE, calculated as EBIT/Capital employed) and the cost of capital, which is calculated as the weighted average cost of equity and debt. Multiplying the premium by average capital employed produces the value added over a period in absolute terms. For internal controlling purposes, ROCE and value added are determined before taxes.

Cost of equity is composed of a risk-free interest rate plus a market risk premium. The interest rate factor is adjusted accordingly on the basis of the input tax consideration. Cost of debt is calculated on the basis of the Group’s average financing terms. The ratio of equity to interest-bearing debt of two-thirds to one-third, which is used to determine WACC, is not derived from the balance sheet since it is not only predicated on a benchmark for the funding structure but also because equity is based on target market values in this case and not the carrying amounts recognized in the balance sheet. For internal management purposes, a pre-tax weighted average cost of capital (WACC) of 7.0% was applied in the 2020 financial year as the return expected by investors (previous year: 7.5%).

There are two ways of increasing value added: increasing EBIT and optimizing capital employed. ROCE is derived from both values. Vossloh seeks to improve the parameters it can influence to optimize this performance indicator. As a result, the Company additionally focuses on working capital, working capital intensity (average working capital/annual revenue) and free cash flow.

To the management of Vossloh AG, the monthly financial reporting represents a central element for the ongoing analysis and control of the divisions, business units and the Group itself. To this end, the financial statements and key performance indicators prepared by the consolidated Group companies are consolidated and analyzed in the same way as the monthly annual forecast. Deviations are investigated in relation to their effects on the financial targets. The monthly annual projections are supplemented by a risk report to identify potential reductions and increases in assets. The effectiveness of measures aimed at ensuring targets are reached is continuously analyzed. The figures of the operating units are intensively discussed by their respective management and the Group Executive Board with the involvement of the relevant central departments of Vossloh AG.

Indicators