Strategy & Strategic control parameters

Fundamental 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 fourth division includes locomotives, local transport rail vehicles as well as electrical components for rail vehicles and buses, etc. This division has no longer been classified as a core business and will be sold off or contributed to suitable alliances by end of 2017 at the latest.

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 Western Europe, China, the USA 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. Positive value added is generated when a premium on top of the return claimed by investors and lenders (cost of capital) is earned. This premium is the difference between the return on capital employed (ROCE) and WACC, the weighted average cost of capital (debt and equity). Multiplying the premium with average capital employed produces the value added in a period in absolute terms. For intragroup Multiplying controlling purposes, ROCE and value added are determined on a pretax basis. In line with IFRS 8, value added is disclosed in published reports as the business unit controlling parameter.

Cost of equity is composed of a risk-free rate plus a market risk premium. As a result of the pretax consideration, the interest factor is accordingly adjusted. Cost of debt is calculated on the basis of the Group’s average funding terms. The ratio of equity to interest-bearing debt, required to determine WACC, is two-thirds to one-third and is derived not from the balance sheet since it is not only predicated on a benchmark for the funding structure but also because equity is here based on fair value and not the carrying amounts of the balance sheet. Intragroup controlling in fiscal 2015 – like 2014 – was based on pretax WACC of 10.0 percent as the yield expected by investors and lenders.

Our financial performance indicators include value added, revenue, EBIT or EBIT margin.

While the Company uses sales and EBIT or EBIT margin as key performance indicators for its short-term business analysis, the long-term management of business units is based on value added. Generally, there are two ways of increasing value added: increasing EBIT and optimizing capital employed. Both variables are also major drivers of return on capital employed (ROCE). Vossloh seeks to improve the parameters it can influence to optimize this indicator. As a result, the Company additionally focuses in particular on working capital or working capital intensity, and free cash flow. Vossloh uses the average number of employees (full-time equivalents, FTE) as its non-financial reporting indicator.