CEO’s address
- It’s the spoken word that counts -"Future with Mobility"
Address to Vossloh AG’s stockholders at the AGM in Düsseldorf on May 20, 2009
Werner Andree, CEO
Stockholder Representatives,
Ladies and Gentlemen:
Also on behalf of my Executive Board colleague, Dr. Norbert Schiedeck, and our employees, I would like to extend a warm welcome to this annual general meeting of Vossloh AG. I am delighted that so many of you have traveled here to Düsseldorf today, thus demonstrating your interest in our company. A special welcome to the media representatives. As ever you have been following us with a keen yet always fair eye—I take this opportunity to express my thanks.
Looking back over the past year I can repeat a sentiment I expressed last year: nothing succeeds like success! Operating business, the year before already at a record level, has been outstanding. We also disposed of our Infrastructure Services unit which is in the track construction business and for us no longer ranked among our core businesses. In this way we have improved the Group’s risk structure and, at the same time, gained additional financial latitude.
The Infrastructure Services business unit had joined the Vossloh Group in 2002 when we acquired the Cogifer Group and had since then made good progress. But: major construction contracts nowadays are increasingly being awarded by internationally operating project companies. As a consequence of fiercer competition, more and more of the risks are being downloaded onto the companies performing the construction work. Managing such construction risks is not our métier. Eurovia, the new buyer and an international construction and infrastructure specialist of considerable magnitude, is better fitted to cope with such risks and is hence a better owner.
A few years ago we have set ourselves the strategic target of internationalizing our business by generating around 30 percent sales outside of Europe. This is a target we regard as having been achieved. In 2008, the Vossloh Group generated added sales of almost 14 percent in Europe. Outside of Europe, revenue rose by almost one-third. Accordingly, sales outside of Europe as a percentage of the total mounted by nearly 3 percentage points to 28.2 percent. Our target for the future must be to penetrate growth markets, irrespective of continent, even more deeply and to access wholly new markets on which we are not yet present. I will come back to this when commenting on our prospects.
Even allowing that the newcomers did share in our incremental growth, especially in the switch business, nonetheless in all organic growth, in other words, growth from our own efforts was the mainstay of our business success in 2008. Let me illustrate this by referring to the situation at our individual business units.
However, the share of GAS expenses in net sales appreciably shrank from 11.9 percent in 2007 to 10.6 in the period.
The significant sales boost, the gross margin decline offset by a shallower rise in GAS expenses and the climbing net other operating income were the drivers of the steeper EBIT growth rate, up by nigh 24 percent from €111.1 million a year ago to €137.7 million in 2008.
The Vossloh team once again successfully coped with an enormous workload during a period in which Vossloh operated in Germany, Europe or elsewhere in over 100 countries. To all these employees that have made this possible, I and my Executive Board colleague Dr. Norbert Schiedeck extend our sincere thanks.
Last year I mentioned at this point that success breeds satisfaction and contentment, an agreeable working climate is the outcome. I can and do repeat this today.
Our employees are highly qualified, highly motivated and remarkably committed, fluctuation is still very low. With such employees we continue to confidently face the challenges ahead.
So what does this mean? It means that at year-end 2008, we had more cash than debts. In other words and this is still true today, Vossloh is virtually debt-free. We command vast financial flexibility, quite a rarity nowadays. We do not have any refinancing problems. And if you take a look at the structure of our financial debts you will note a further positive aspect: our financial debts are largely long-term in nature, in the form of a US private placement contracted in 2004. These borrowings have a bullet maturity for repayment in 2014 and 2016. At the time we had agreed on annual interest rates of around 5.4 percent. Given the present situation on the capital markets any refinancing or rescheduling at a comparable interest rate is barely conceivable. Moreover, predictions as to a sharp rise in inflation over the years ahead are gaining ground. Hence, the level of interest rates is not likely to present a downtrend. So, Vossloh is strongly positioned in two aspects: we have, on the one hand, ample cash and cash equivalents to allow us to act with great flexibility and, on the other, we have firmed for ourselves over the next 5 to 7 years highly congenial terms and conditions on the debt market.
On March 6, 2009, Vossloh Fastening Systems opened up its substantially expanded rail fastener production plant in Erzincan, eastern Turkey, where some 55 employees will annually manufacture about eight million tension clamps, mostly for Turkey’s high-speed rail network.
At Vossloh Fastening Systems the tall order backlog shrank by €64 million, mainly due to the scheduled and successive shipments under the Chinese megacontract. The Switch Systems unit’s order intake rose by 25 percent and so its order backlog. Only slight changes were reported by Vossloh Locomotives: Kiel’s backlog inching up, Valencia slipping down. A 24-percent higher order intake by Vossloh Electrical Systems significantly propelled order backlog at this business unit.
Ladies and gentlemen, we presently find ourselves in the deepest recession since World War II. So far, Vossloh’s business has been relatively unaffected by the crisis. I’ve just been talking to you about our record year 2008 and a respectable first quarter of this year. We may be somewhat favored by the peculiarities of rail markets because these normally plan well ahead. But we are not among the winners in this recession as could be read here and there. In the short term we benefit only little from present public infrastructure programs. After all, a decision to build a new railway line is not made and then enacted from one day to the next. I will now deal with just exactly how we see our immediate future.
“Future with mobility” is the leitmotif of our this year’s annual report. We are firm believers in the future of railbound transport. Besides the risks from the current economic situation, Vossloh management does perceive considerable opportunities for future business.
The International Monetary Fund predicts for 2009 the lowest global economic growth rate since World War II. Nonetheless, we strongly feel that the presently prevailing global trends—urbanization, deregulation of state-owned railways, the growth of competition among modes of haulage and, of course, environmental protection commitments—will sprout incremental demand for railbound infrastructure and eco-friendly vehicles.
An additional factor is that though outlays by our customers in some countries are cyclical, Vossloh's business units have managed in the past to largely compensate for regional fluctuations thanks to their international presence. Due to the synchronous worldwide downturn this compensation will be less effective in the near future, however. On the other hand, several countries have announced as part of their economic stimulus packages, investments in railbound infrastructure, including Russia, China and even Germany. According to the latest calculations by our European industry association UNIFE, the European Union has made available for economic stimulus programs in rail transport an amount of €20 billion, China a total of €85 billion.
We observe on the part of our private-sector customers an extreme spending reluctance at present, particularly in freight haulage. We must brace ourselves for a drought ahead. This is especially relevant as far as our locomotives business is concerned since diesel locomotives are mainly used on freight haulage services which currently are battered by the recession. Success in excess of our expectations elsewhere in the Group should, however, offset this shortfall.
All mobility sectors are generally of significance in the future development of Vossloh’s business: freight, long-distance passenger and local haulage.
First of all freight haulage. Freight volumes are on the decline with economic output contracting. The rule of thumb that freight tonnages increase twice as strongly as economic output is, unfortunately, inversely true, too. But this is a problem of limited duration. Consumer regions and production regions have already drifted apart worldwide. The exchange of goods over long distances will therefore continue to have a future. Eco-compatibility and energy efficiency will gain in importance. We see this as an opportunity for further expanding the role of railbound traffic within the mix of transport modes. There is also continued need for the expansion of European freight corridors. In cargo haulage, rail systems score highly when it comes to conveying heavy and bulky goods—an advantage that comes to the fore in the globalized economy. Whereas in the past freight trains traditionally operated on a regional to national scale, in future cross-border or even transcontinental services will figure ever more prominently. A signal for the future was sent out by the Trans-Eurasia Express in the fall of 2008. Crammed with 50 containers, it completed the 10,000-kilometer journey from Beijing to Hamburg in 17 days—a third faster than by sea and 75 percent less expensive than by air.
I come now to long-distance passenger transportation: Countries worldwide are pressing ahead with the expansion of high-speed networks. The railways are an environment-friendly mode of transport, with the CO2 emissions of a high-speed train comparatively low. In the fast-growing regions of the world, railways are the means of conveyance of choice, offering high capacity while covering long distances at comparatively low cost. In long-distance passenger transportation comfortable express and superfast trains have already secured substantial market share in intercity connections in Europe—above all for journey times of up to three-and-half to four hours. A good example is the high-speed rail service on the Madrid–Barcelona route meanwhile more popular than the flight connection which once was among the world’s most frequently used. The express trains operating on the Frankfurt/Main–Paris line have already grabbed a market share of some 90 percent.
Now local transport. Urbanization is on the advance: since 2007 more than half of the world’s population has been living in towns and cities. According to United Nations forecasts, the proportion of urban population will exceed 60 percent globally by 2030, rising to 70 percent by 2050. The distances between where people live, work and recreate are producing enormous flows of commuters; as urban populations rise, innercity traffic swells, as does the traffic between cities and their satellites. The volume of traffic is mushrooming yet the available space for infrastructure facilities is limited. This is where rail systems can ease the situation. Their haulage capacity is relatively high. In the long run, the mobility of thousands of people in a confined area can be sensibly managed only with effective mass transit systems—in the shape of streetcars, trams, light rail and metro systems, buses and trolleybuses. A renaissance in tram and other light rail services has been underway in urban and suburban passenger transport for some years. Yet not only growth countries such as China and India are relying on rail. Even in the USA, where the car still rules, cities such as Houston, Dallas or Denver are investing in modern light rail networks. Their popularity is bolstered by the climate change debate and the knowledge that fossil fuels like crude oil are finite.
When trams make their comeback to the Scottish capital Edinburgh in 2011 after a break of over 50 years, they will be operating with Vossloh Kiepe technology in their insides. We are supplying all the traction components on these over 40-meter-long vehicles, which can accommodate some 250 passengers and will then be the biggest of their kind in operation in the United Kingdom.
Experts anticipate the highest market growth in Asia. Market volume in Eastern Europe and the CIS is also expected to rise at an accelerated rate up to 2016. Nevertheless, Western Europe will remain the biggest and most important single market with an around 35-percent share of total volume, the study concludes.
For 2010, Vossloh is looking to further improvements in sales and earnings.
Based on current budgets and plans, both divisions—Rail Infrastructure and Motive Power&Components—are likely to contribute to sales growth over the next two years.
The Rail Infrastructure division is planned to report 2010 sales of over €800 million. Rising demand is anticipated in virtually all regions, and apart from Asia especially in Eastern Europe, the MENA states, and the Americas. EBIT margin and ROCE should remain well above the targeted benchmarks.
With healthy order books, the Motive Power&Components division's two business units are expecting their solid performance to continue. For 2009 and 2010, Vossloh Locomotives has planned moderate sales growth. Orders on hand at the Valencia location especially ensure capacity utilization arithmetically well beyond 2009. Against the background of an order backlog theoretically sufficient for almost two years, Vossloh Electrical Systems is again anticipating high sales gains. All in all, Motive Power&Components' sales are predicted to grow to over €500 million by the year 2010. ROCE for Motive Power&Components is set to remain well above the 15-percent mark.
We have strengthened our sales organization and thus laid the foundations for seizing any exceptional and in some cases new market opportunities also outside of Europe.
In order to bolster our market positions and generate added growth, outlays of around €60 million have been earmarked for each of the next two years. The emphasis will be on revamping and expanding the capacities of Rail Infrastructure and Vossloh Electrical Systems while at the Vossloh Locomotives plants we will be developing new products.
On the basis of the planned organic growth and the expected cash inflow, Vossloh’s net debts will continue low in both 2009 and 2010 despite the heavy spending.
Workforce figures in 2009 will again be aligned with business volumes and this year around 4,800 people are forecast on average to be working for Vossloh.
Organic growth will remain the focus of Vossloh's objectives in the years ahead, as will the search for prospective acquirees which ideally complement the existing portfolio of shareholdings strategically. This concerns possible expansion geographically in the switch business as well as additional products and services in Rail Infrastructure and Motive Power&Components.
The aim of such acquisitions is firstly to optimize the Group's value-generating structures and secondly to open up additional growth opportunities. Sizable M&A deals are intended to meaningfully supplement the Group’s core competencies in mobility and transport. Acquirees should always meet group requirements from the outset while adding value.
Before closing on the subject of Vossloh stock, I would like to make a few comments on today’s agenda items.
Although our company presently holds a 10-percent treasury stock portfolio, we have again asked you to reauthorize the purchase and use of treasury shares as well as the exclusion of the subscription and preemptive share tender rights. Unless expressly permitted by the law, the repurchase of treasury stock of a company must be authorized by the general meeting. The current authority, conferred by AGM resolution of May 21, 2008, will expire November 20, 2009, hence before the next annual general meeting. Therefore, we propose to the AGM that Vossloh AG be reauthorized to acquire treasury stock.
In this context, I would like to spotlight two facets of such an authority. First: At no point in time may the total treasury shares, together with the treasury stock then directly or indirectly held by Vossloh (i.e., owned or assignable to Vossloh AG as defined in Arts. 71a and following of the German Stock Corporation Act), exceed ten percent of the capital stock. In other words, until we have decided what to do with our presently held treasury shares, we cannot exercise the new authority. Second: Such an authority may never be exercised to trade in treasury stock. However, treasury stock may be used as consideration for equity interests, or Vossloh may redeem and withdraw it.
In agenda item 7, our boards have proposed to authorize new capital of up to €7,500,000 by issuing new no-par bearer shares of common stock against contributions in cash and/or in kind (Authorized Capital). The proposed authorized capital will enable the Executive Board at any time to suit Vossloh AG’s equity base to business requirements and, in your—the stockholders’—best interests, swiftly and flexibly respond to a changing market environment. In relation to the current capital stock, Authorized Capital will correspond to one-fifth; in other words, the authorization of new capital as proposed to the AGM is capped at 20 percent of the capital stock. The Executive Board believes that part of its duties is to ensure that the Company has at all times the necessary funding tools at its disposal, irrespective of any specific utilization plans. Since decisions on meeting funding requirements must in most cases be made quickly, it is important that the Company need not depend on or be bound by either when the annual general meeting convenes, or by observing statutory notice periods when inviting you to an extraordinary general meeting. By permitting the creation of authorized capital, legislators have allowed for this necessity. Standard reasons for resorting to authorized capital include shoring up the capital base or funding M&A transactions.
With these two proposed resolutions in favor of treasury stock and new authorized capital we request that you allow company management the latitude also for possible acquisitions. The opportunity to quickly resort to the proposed options as and when needed may tip the scales, especially in negotiations about M&A projects.
Among all MDAX members, Vossloh in fact ranked third in terms of stock performance in 2008. Accordingly, its December 30, 2008 market capitalization amounted to €1,104.0 million, just shy of the prior-year €1,185.1 million. At 27.9 million shares, the stock’s trading volume exceeded the 2007 all-time high by around another 3.9 million or 16 percent. On a daily average, 109,900 Vossloh shares were traded, 14,500 more than in 2007. Vossloh AG had surged by the end of December 2008, from rank 43 a year before to 23 in terms of market capitalization and from 44 to 29 in terms of 12-month trading volume.
At the end of March 2009, altogether 21 financial analyst firms assessed Vossloh stock; in 2008, the number had been 17. In the forefront of the recommendations, again in the majority of cases favorable, were such factors as the robustness, high level of transparency plus the reliability of Vossloh’s business model. Ten firms awarded the grade “buy” and seven recommended “hold.” The average price target at the end of March was €80 per share, based on a fair value range between €56 and €107.
Vossloh’s business model has a long-term perspective, aiming to continuously add shareholder value. We are now targeting our investment on both existing and new locations and on the development of new products in an effort to actively seize the market opportunities certainly arising in future.
Ladies and gentlemen, thank you for your trust and confidence in Vossloh and its people. I hope things will stay this way. As always, you have been a very attentive audience.
Thank you!
