Strategy & Strategic control parameters

strategic principles

Vossloh is among the global leaders in the rail technology market. Its business focuses on rail infrastructure products and services and is subdivided into three divisions: Core Components, Customized Modules, Lifecycle Solutions.

The three core divisions will be monitored and 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". The Group's operating activities are carried out under the umbrella of Vossloh AG. Vossloh AG has a direct operative influence as an integral top level of management, and closely coordinates, leads and controls the business divisions and units.

The Group (Vossloh AG) is operating according to three strategic principles:

  • A focused portfolio: Vossloh is focused on the core business of rail infrastructure and thereby only addresses those submarkets in which it is already market leader or in which it can become market leader. Defined focus markets are China, the USA, Western Europe and Russia. In addition, other attractive individual markets exist worldwide in which the Group is active on a project basis.
  • Value-oriented growth: The Group has the clear goal to grow at least as strong as the market for rail infrastructure – ideally even stronger. Growth will be achieved both organically, through the development of new products and services, as well as through selective acquisitions. Research and innovation form a strong focus of future growth.
  • High profitability: Vossloh intends to generate a positive value added. This means that earnings before interest and taxes (EBIT) exceed the cost of capital. Furthermore, Vossloh strives for sustained positive free cash flow in all of its divisions.

Control system
and targets

Vossloh follows a value-oriented growth strategy. Value added serves as an indicator. 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) and the cost of capital, which is calculated as the weighted average cost of capital (WACC) (debt and equity). 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. Value added is disclosed as an earnings measure for the divisions and business units as part of the external reporting.

Cost of equity is composed of a risk-free interest rate plus a market risk premium. As a result of the pretax consideration, the interest rate factor is adjusted accordingly. 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. Intragroup controlling in the 2018 fiscal year and in the previous year was based on pretax WACC of 7.5 percent as the yield expected by investors and lenders.

The most relevant financial performance indicators for the Vossloh Group are value added, sales revenues and EBIT as well as EBIT margin.

While sales revenues, EBIT and EBIT margin are used 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. There are two ways of increasing value added: increasing EBIT and optimizing capital employed. Both variables are also major drivers of ROCE. 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 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 and quarterly 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 Executive Board. The close, personal interaction between the Executive Board of Vossloh AG and the management of the operating units guarantees a rapid flow of information and allows for quick responses.