Controlling system

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". 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.

Controlling system

The most significant financial performance indicators for the Vossloh Group are value added, sales and EBIT margin. The EBITDA margin will be provided from the 2020 fiscal year onwards. This important indicator provides transparency about the Company’s self-financing power. 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. A weighted average cost of capital before taxes (WACC) of 7.5 percent was used as the yield expected by investors and lenders for the purposes of intragroup controlling in the 2019 fiscal year, as it was in the previous year.

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 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 Group Executive Board with the involvement of the relevant central departments of Vossloh AG.