"We are sensitive to economic fluctuation only to a very small extent"
Dr Triska, Vossloh has announced the publication of its annual figures for March 21. Should investors expect an announcement until then containing preliminary figures or even revised targets?
We know our preliminary figures. It cannot be inferred from this that we are outside the target ranges we most recently communicated. As a rule, we do not publish preliminary vital figures. In this respect, the probability that we will report figures for the past year before the aforementioned date is very low.
What are your forecasts?
We have raised our sales and earnings guidance twice in 2023. The last time was on October 19. Since then, we expect revenue of between 1.175 and 1.225 billion euros. Previously, the target range was 1.125 to 1.2 billion euros and before that 1.05 to 1.15 billion euros. In 2022, we had achieved a turnover of 1.05 billion euros. In October, we also raised the forecast for our operating result (earnings before interest and taxes, EBIT; editor's note): From 87 to 94 million euros to 94 to 100 million euros; the previous target range was 79 to 88 million euros. In 2022, EBIT was 78 million euros. Based on the mean value of the current sales forecast, this results in a range for the EBIT margin in 2023 of between 7.8% and 8.3%, compared to 7.5% in the previous year.
After years of gloom, sales and earnings have recently risen sharply. What has changed?
We sold parts of the Group and focussed on rail infrastructure. From 2019 onwards, we implemented a comprehensive restructuring programme and fundamentally revised our strategy in 2020 so that from then on, we were very optimistic that we would be able to grow faster than the market. Of course, we also benefited from the changes in the market environment. Since the middle of the last decade, the topic of "environmentally friendly mobility" has played an increasingly important role in the public debate. It has taken a while in many countries, but large sums of money are now being invested in rail infrastructure worldwide after a long period of almost universal wear and tear. The political will to put more traffic on the railway is there.
Thomas TriskaThe political will to put more traffic on the railway is there.
Shouldn't this have been reflected in Vossloh's figures at an earlier stage already? People have been talking about more environmentally friendly transport and investment in the railways for half an eternity, at least in Germany.
For one thing, in many countries, it usually takes years from the announcement of investments to the actual flow of funds, partly because the planning processes in our industry are incredibly lengthy. Turnover and capacity utilisation, therefore, increase with a considerable delay compared to investment announcements. Let me take Germany as an example: Here, it was only the third performance and financing agreement that ensured that investment planning gained noticeable momentum and that more and more orders are now being placed in order to remedy the shortcomings of the past.
Please explain this agreement.
The third performance and financing agreement (LuFV III), signed at the beginning of 2020, is an agreement between the Federal Republic of Germany and Deutsche Bahn on the maintenance and replacement of the infrastructure of Deutsche Bahn's railway infrastructure companies. The agreement regulates replacement investments and maintenance expenses. It provides for investments totalling 86 billion euros over a period of ten years up to 2030.
The long time that elapses between the announcement of investments and the awarding of contracts – is this a typical German problem?
No. This applies to almost all countries. However, there is movement in the awarding of contracts. In the EU, the Green Deal, i.e. the European Commission's concept aimed at reducing net greenhouse gas emissions in the EU to zero by 2050, is certainly playing a pivotal role. In the USA, too, there is now a trend towards sustainably strengthening the railways as the undisputed most climate-friendly mode of transport. This gives us confidence for the coming years.
Thomas TriskaOnce the orders get underway, this remains the case over a longer period of several years.
Is it possible to say how long it will take to clear the investment backlog in the railway sector?
It won't happen overnight. But once the orders get going, it will stay that way for several years. That's quite typical for our industry.
How high is the domestic share of Vossloh's total sales?
In 2022, we had revenue in Germany in the region of 100 million euros with Group sales of just over 1 billion euros. Even though the final figures for 2023 are not yet available, we assume that we have increased sales in Germany by almost 40% – which is largely thanks to LuFV III. In many cases, the end customer was Deutsche Bahn, even though some of its suppliers are our customers. For example, our rail fasteners go to the sleeper manufacturers, who then supply Deutsche Bahn.
The German economy is not in good shape. The state also has to make savings. Will this affect Vossloh?
Are you alluding to the 60 billion euros in borrowing that was not utilised during the coronavirus pandemic and was supposed to be transferred to the Climate and Transformation Fund in the second supplementary budget for 2021, which the Federal Constitutional Court ultimately declared unconstitutional? This means that many billions are indeed missing for climate protection projects. However, we do not currently see the savings and reallocations in the state budget having a noticeable impact on Vossloh.
Why not?
If you look at the environmental footprint, rail is by far the most environmentally friendly mode of transport. And there are plans everywhere to put more traffic on the railway. As politicians are also aware that the railways have been running on wear and tear for a long time, it is not just the investments that have been decided on. I would even say that the funds for the railway could be increased, as was planned before the verdict from Karlsruhe. Up to 35 billion euros could be added to the 86 billion euros envisaged in the LuFV III. We, therefore, firmly believe that environmentally friendly mobility will be increasingly promoted despite the austerity measures at home and abroad.
And the recession in Germany is not affecting Vossloh?
We are a company that is sensitive to economy fluctuation only to a very limited extent. As shown, our industry has very long-term investment cycles; short-term changes in GDP, for example, in quarters, have no recognisable influence on this.
Thomas TriskaCore Components is the segment in which we manufacture our mass products.
Vossloh's Group activities are divided into three divisions: Core Components, Customised Modules and Lifecycle Solutions. These designations are not very meaningful for an outsider. Would you describe the divisions a little more clearly, also using product examples?
Sure. Core Components is the segment in which we manufacture our mass products. They are technically demanding, but these products are rarely further developed for a customer. In this area, there are two business segments: Firstly, rail fastenings, which are manufactured in our large facility in Werdohl – the headquarters of our company – and provide the lion's share of the segment's revenue; we are the world leader in rail fastenings. The other business segment is concrete sleepers; currently, we operate exclusively in North America – USA, Canada, and Mexico – and Australia. In both markets, we have shares of more than 70%. In Core Components, we currently have the highest operating margin; it is significantly double-digit and was significantly higher in 2023 than the previous year. We are unlikely to maintain this level entirely this year; the same applies to segment revenue. This is due to a base effect: Large projects in Mexico came into play last year, which will not occur this year. The same applies to China, where there were high-volume deliveries that temporarily increased our market share there to about 20% on average in rail fastenings.
Next up would be Customized Modules.
This is our railway switch business. Here, we make various customizations on behalf of the customer. Switches always involve a high level of engineering effort; they must fit precisely to the track. In switches, we are globally ranked number 2 behind Austrian Voestalpine Railway Systems. In this area, we have seen high growth rates in recent years. In 2023, revenue is expected to exceed the 500 million euro mark significantly. As for profitability, we had an EBIT margin of about 8% in 2022. It is not expected to deviate significantly in 2023, but we are confident that we will approach our medium-term goal in 2024 – a double-digit EBIT margin in each business area. The quality of incoming orders also indicates that we will improve our margin in the future.
That leaves Lifecycle Solutions.
This is our service business for everything "around the rail". Here, we particularly benefit from higher demand from Deutsche Bahn, as around half of the business in this area takes place in Germany. Here, we provide a wide range of services, ranging from rail welding and its transportation to the construction site to services aimed at extending the lifespan of the rail, such as rail milling or high-speed grinding for the heavily loaded network in Germany. Due to the diverse services, the sector is very fragmented. However, it is the fastest-growing sector in the group, and we are also confident that we will approach a double-digit EBIT margin in 2024 in this area.
Thomas TriskaMid-term, we aim to achieve an operating margin of at least 10% in each of our three areas.
What financial goals does Vossloh aim for?
We differentiate between medium- and long-term goals. In the medium term, we aim to achieve an operating margin of at least 10% in each of our three areas – we have already achieved this in Core Components. In the other two areas, this should be the case by 2025 but no later than 2026. Long-term, we envision a double-digit margin for the group as well. However, it should be noted that we provide some services within the holding company, so it is not sufficient for the group if all three business segments generate double-digit returns. This will take several more years.
After nine months, despite higher investments compared to the previous year, free cash flow stood at 48.0 million euros, compared to minus 46.5 million in the previous year. What caused this change?
The negative sign in the free cash flow in 2022 can be attributed to three reasons: Firstly, the year was marked by disruptions in many procurement markets, such as metals and energy, following the invasion of Russian troops into Ukraine on February 24th. As a result, we built up inventories to remain production and delivery-capable. This increased the working capital, which burdened the free cash flow. Naturally, the improvement in our operating results also contributes to a better free cash flow. Finally, in the second quarter of 2023, we implemented a program to optimize working capital – Cash 4 Growth – which also boosted cash flow.
How did the free cash flow develop in the fourth quarter?
We expect to report a positive free cash flow for the fourth quarter of 2023, especially since the fourth quarter is generally one of the better ones cash-wise in our industry.
Revenue and earnings are expected to continue to grow. Will this be possible without an increase in working capital?
We have an admittedly very ambitious goal to grow profitably in the coming years while maintaining or even reducing working capital. This is why we anticipate a growing free cash flow in the next few years despite relatively high investments in 2024 and 2025.
Where in the group are investments expected in the foreseeable future?
In our switch area, the utilization at many locations is very high, so we have decided to expand capacities here.
Debt reduction relies on free cash flow. Could this possibly be jeopardized by the high investments?
No. This significantly distinguishes Vossloh today from the state of the company several years ago. Today, we are able to reduce debt despite relatively high investments sustainably. In contrast, in the past, although positive cash flows were also generated, little remained for debt repayment after deducting interest, leasing, and dividend payments. Without exaggeration: We are now in a new phase of the company.
Thomas TriskaAll major topics have been addressed. Now, it's about managing the growth.
Vossloh has gone through difficult years and an extensive transformation. I'll mention, for example, the separation from locomotive production at the Kiel site, which involved significant write-downs. Is the restructuring now complete?
If you're asking whether everything is now ideal in the company – certainly not. Naturally, there are areas where we still aim to improve. But the challenging phase in 2019, during which we had to implement a comprehensive restructuring program, is over. I can confidently say: All major issues have been addressed. Now, it's about managing growth.
Net financial debt was significantly reduced in the first nine months of 2023 compared to the previous year, from 293 to 239 million euros. Did this trend continue in the final quarter? Do you aim for a specific ratio?
Here, I must dampen expectations. In the full year, we will have only slightly reduced net financial debt. We pay attention to the ratio of net financial indebtedness to EBITDA, the so-called Net Leverage. Previously, we had such high values that an investment-grade rating would have been questionable. This value has improved noticeably in 2023 thanks to the continued increase in EBITDA. It is expected to be around 1.5 or slightly below. This gives us the option, if interesting targets were available, to consider larger, partly leveraged acquisitions, as long as the Net Leverage does not sustainably exceed 2.75. At this level, it is undisputedly still investment-grade.
After nine months, the equity ratio had increased from 43.6 to 45.0%. Is there a specific ratio or range that you aim for here?
No. However, one thing to note here: In 2021, we issued a hybrid bond worth 150 million euros, which is accounted for as equity under IFRS. The bond can be redeemed for the first time in 2026. If we refinance the hybrid bond through debt, it would naturally reduce the equity ratio.
Thomas TriskaOur priority is the long-term nature of external financing.
Can you outline how Vossloh's external financing looks?
Our priority is the long-term nature of external financing. We are currently negotiating with our eight house banks for a new syndicated loan. Specifically, these are BayernLB, BNP Paribas, Commerzbank, Deutsche Bank, Helaba, HSBC, LBBW, and SEB. The final negotiations are underway; the contracts are almost ready for signature. Our current syndicated loan runs until November 2024. Therefore, we wanted to establish this financing on a new foundation in good time. In addition, we are an established player in the Schuldschein market. We have various Schuldscheine outstanding with different maturities.
Are you planning for larger investments in 2024?
The investment volume before leasing measures will be around 10 million euros higher in 2024 than the previous year. This is mainly due to two projects: Firstly, a new factory construction in Sweden, which falls under the Customized Modules area, and secondly, a new factory construction in Australia, which is expected to start operations by the end of the year and also belongs to the Customized Modules area. In the Core Components area, however, we still have sufficient capacity, so we are currently not considering expansion investments here.
Everywhere, there is talk of a shortage of skilled workers. How is it at Vossloh? Are there any differences between the over 40 locations in this regard? For example, the company headquarters in Werdohl, in the eastern Sauerland region, may not exert much appeal for many, especially young people. Dortmund, the nearest major city, is just under 60 kilometres away by car. What about attracting skilled workers or young talent in that regard?
There are some very interesting and encouraging developments. Of course, we share the fate of other companies and must acknowledge that it is currently challenging to find qualified individuals, especially in the service business. However, many young people choose Vossloh because we stand for green mobility. But it's true, the situation in Werdohl is not easy. Additionally, due to a bridge demolition on the A45 motorway two years ago, the journey to and from Dortmund currently takes half an hour longer than usual. However, it's not as if we can't fill critical positions. It just sometimes takes longer than before, and there are also fewer applicants per position than before.
Are acquisitions under consideration?
We are looking at which product areas or regions we still have gaps in. These would not be significant acquisitions but rather consolidations. And then we also have to consider our market position: In the rail and switch sector, we are the number 1 or 2 in each market. Making a major acquisition in these areas is almost impossible due to competition law reasons. In the concrete sleeper sector, we are currently only active in North America and Australia; this raises the question of whether we should also expand into other regions. I see the greatest potential in services, specifically in the Lifecycle Solutions area. On the one hand, the market here is very fragmented, and on the other hand, rail-related services are very diverse, so we would most likely look to acquire in this area.
Since November 2022, the Vossloh stock price has fluctuated within a relatively narrow range, ranging from just over 36 to nearly 45 euros. Do you view this positively, due to the low volatility favoured by institutional investors, or negatively, due to the lack of share price gains despite the favourable market environment for transportation infrastructure companies?
I would go even further: Our stock price has been fluctuating around the 40 euro mark for about three years, even though during this time, we have added approximately 50 million euros to EBITDA and about 40 million euros to EBIT operationally. However, it is essential to note that in the past two years, the MDax and SDax have declined significantly while the Dax has gained. Considering this, the Vossloh stock has held up quite well. And one more note regarding the average EBITDA multiples in the railway industry: Historically, these have averaged between 9 and 10. Currently, Vossloh – thanks to the generally positive earnings development of recent years – is significantly below this value.
I would venture to say that the somewhat disappointing stock price performance is also related to the still unresolved inheritance issue of your former main shareholder. Heinz Hermann Thiele, who held 50.1% of Vossloh, passed away in February 2021. What is the current status here?
In April 2023, the Heinz Hermann Thiele Family Foundation was established, which will hold a 50.1% stake in Vossloh in the future. The chairman of the foundation's board is Stephan Sturm, who was CEO of Fresenius from July 2016 until the end of September 2022. We are in communication with the foundation. Among other things, we have discussed our fundamental strategic orientation, which we first communicated at a capital markets day at the end of 2020, and this is supported by the foundation. Of course, we are aware that there are legal disputes over inheritance in the background, but I know no more about this than what is reported in the press. What is important for us at Vossloh is that these disputes do not affect our operational development. It is also clear that in passing on sensitive information to a non-board member, we must respect the legal limits, even if the shareholder holds more than half of the shares in Vossloh. Essentially, the family foundation receives updates on the company's situation, like any other major investor would.
