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. With the acquisition of Rocla Concrete Tie, USA, effective on January 3, 2017, Vossloh Tie Technologies expands the Core Components division as a new business unit. In addition, Vossloh is active in the locomotive business. This Transportation division, which is not classified as core business, also included the Electrical Systems business unit, which was sold at the end of January 2017.

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 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 and WACC, the weighted average cost of capital (debt and equity). Multiplying the premium by average capital employed produces the value added in a period in absolute terms.

For intragroup controlling purposes, ROCE and value added are determined before taxes. In line with IFRS 8, value added is disclosed in published reports as the division and 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 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, required to determine WACC, is two-thirds to one-third and 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 here based on fair value and not the carrying amounts recognized in the balance sheet. Intragroup controlling in fiscal 2016 was based on pretax WACC of 9 percent as the yield expected by investors and lenders. From financial year 2017, WACC will be reduced to 7.5 percent due to the continuing low interest rate environment.

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

While the Company uses sales, EBIT and EBIT margin in particular as key performance indicators for its short-term perspective, the long-term management of business units 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 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.

The monthly financial reporting represents a central element for the on-going analysis and control of the Group companies, divisions, business units and the Group for the management of Vossloh AG. Here, the financial statements and also the key performance indicators of all Group entities included are consolidated and analyzed as in the monthly annual projection. Deviations from plan are investigated as to their effects on the financial targets. The monthly and quarterly annual projections are supplemented by a risk report to identify potential decreases or increases to assets. The effectiveness of measures proposed to ensure targets are achieved is continuously analyzed. The figures of the operating units are intensively discussed by the management and the Executive Board. The close interaction between the Executive Board of Vossloh AG and the management of the operating units guarantees a rapid flow of information and also allows short-term responses.

Indicators