Thomas Triska, is Vossloh on track to outgrow expectations?

Dr. Thomas Triska is the CFO of the European railway company, Vossloh. After years of structural change, Vossloh now seems to be on a new growth track that is supported by global infrastructure investments.

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We have discussed the following topics:

Teaser

[00:00:00] Tilman Versch: To transition the world to a cleaner state and to a net zero carbon world, a lot of investment is done and train infrastructure in this case is a very interesting place to look at. So I’m very happy to welcome Vossloh to this episode of Good Investing Talks. They are maybe a kind of boring company, but they’ve transitioned over the last years to an interesting pure play into the mobility and training space. I hope you enjoy my conversation with the company.

Intro Good Investing Talks & Disclaimer

[00:00:29] Tilman Versch: A warm welcome to the good Investing Talks Podcast. I’m your host, Tilman Versch and I’m very happy that you are discovering underfollowed investors and underfollowed companies together with me. Before we jump into this conversation, I want to thank my supporters. They helped me to keep this channel free and public for adding thank you very much. If you also want to join the Good Investing Supporters Club. Please click on the link below. You’re very welcome. And now, one last step here’s the disclaimer for you, all we are doing here is no advice and no recommendation. Please always do your own work and now enjoy the video.

Introducing Thomas Triska

[00:01:07] Tilman Versch: Dear audience of Good Investing Talks, it’s great to have you back on the podcast. Today, I’m talking with Mr Trishka of Vossloh and Vossloh is located in Werdohl. There’s Werdohl on the map.

[00:01:20] Mr Thomas Triska: Yes. Hello, Mr Versch. First of all, thanks for inviting me. It’s a pleasure to be here. Vossloh is located roughly 50 kilometres southwest of Dortmund. It’s a small city with roughly with up to 20,000 inhabitants.

The regional importance of Vossloh

[00:01:37] Tilman Versch: What kind of importance do you have for this region?

[00:01:40] Mr Thomas Triska: We are among the top employers in this region, so we are not the biggest one in Werdohl, but I would say among the top three. All in all, we employ here 350 people. The major part is related to our fastening Systems business unit where we produce fastening systems. Here, we have the factory future in Werdohl where we invested heavily over the last couple of years, all in on roughly 40 million. So here roughly 300 people work in that area and for the headquarters for Vossloh AG. This is the remaining part. So all in all, it sums up to 350.

We are among the top employers in this region, so we are not the biggest one in Werdohl, but I would say among the top three. All in all, we employ here 350 people. The major part is related to our fastening Systems business unit where we produce fastening systems. Here, we have the factory future in Werdohl where we invested heavily over the last couple of years, all in on roughly 40 million. So here roughly 300 people work in that area and for the headquarters for Vossloh AG. This is the remaining part. So all in all, it sums up to 350.

Comparing the European & US railway system

[00:02:23] Tilman Versch: Many of my viewers are coming from the US, so if you compare the US railway system and the European railway system, how are they different? So you’re doing business in both markets. So you maybe have the chance to do a comparison of both markets?

[00:02:39] Mr Thomas Triska: Yeah. So the US market, of course, is a very important one for us. So it’s among the top markets in the world. The business there is more related to freight than in Europe where you have passenger and freight transportation. I would say both are more or less at the same level and therefore the infrastructure is slightly different and the customer base is as well. So in the US, we have the huge class one operators, which are all publicly listed and if they use concrete tiles, we are supplying them the technical specifications therefore slightly different because, for heavy haul with high axial load, you need special features in our products when it comes to turnouts on fastening systems. If you compare it with other modes of transportation like conventional or high-speed. I would say this is. A huge difference on top of that, I would say in Europe already started that many state national railway operators invest more in the rail infrastructure. So there was a wear and tear in the past and now especially we see it in Germany, a lot of state national railway operates like Deutsche Bahn, they started to invest a couple of years ago and it’s not only Germany, I would say more or less all over Europe, maybe a slight exception at the moment is France, but in many other regions, demand for our products is at a very good level at the moment.

What highspeed train tracks

[00:04:25] Tilman Versch: So compared to the US, in the European system there’s a lot more passenger transport and people are riding at high speeds like 200 kilometres or something like this. So what’s this mean for the railway tracks and the systems, especially with your strength and attention clamps and the sleepers? What does this mean by the higher speeds and the higher share of passenger traffic?

[00:04:54] Mr Thomas Triska: Yeah. So the forces on the rail track and the force law, we are a producer of all the components of a rail track and we understand how all these components work together. So the forces are completely different. On high-speed, we have some additional components in our fastening systems to make sure that– At the end, the rail is fixed to the sleeper, which is necessary. And if you’re absolutely right, if you run the line with more than 250 kilometres per hour, this is more or less the definition of high speed. And in China, trains have a speed of up to 350 kilometres per hour. It’s completely different than in some parts of Europe. They have a speed in conventional lines between 60 and up to 120 kilometres per hour.

You asked for the differences in the systems, just to give you some indication here. In the fastening systems area, in the past, we had more than 60 different systems for each and every application, and of course, it just depends on the specifications of the specific country. But of course, the temperature is an issue as well, and the usage of the lines has a huge importance on the detailed specifications of the track. For turnouts, for example, we use, it depends, or the crossings are different. If you have a conventional line or if you have a high-speed line and there are even differences in the technology in Europe. So in principle, you have German and French technology and both are slightly different, but of course, serve the needs of the customer.

And I would say, in the US, we have the array mashed on that and all in all, I think it’s fair to state the quality of the infrastructure in Europe is at a higher level at the moment than in the US, so I would say in Europe the catch up already started, but this will definitely continue with all the discussions on CO2 reduction goals going forward. And we, in the US, I would say we are just at the beginning, but nevertheless, they are huge, huge programmes like the Biden infrastructure which will support our business in the future, especially when it comes to passenger transportation with our customer, Amtrak, which runs the Northeast Corridor in the US.

Tension clamps

[00:07:53] Tilman Versch: Maybe a quick follow-up on your products. I think many people can understand what a sleeper is or a turnout. What is a tension clamp and why is a tension clamp important for the railway system? Yeah. So I think you also have the tension clamps in the back somewhere, so people can better imagine them.

[00:08:15] Mr Thomas Triska: Yeah, yeah, you’re right. You can see it right here in the back. So of course, all our products are safety-relevant and therefore we have to fulfil high homologation requirements from our customers. And the main purpose of a fastening system is to fix the rail to the sleeper and to make sure that of course, the train can run smoothly and safely on the track. And depending on which train is running and which axle load is required at the track. You don’t need only a tension clamp which is made of wires. This is what we have produced here in the past, but you need a whole system. So you need some dowels. and screws to fix the tension clamp in the sleeper in most cases it’s already the dowel is already included in the sleeper and you need some plastic components to make sure and ground plates to make sure that the whole system is stable. And fit for use so that you can travel safely and to the freight transportation in a safe manner on the track.

Research & Development

[00:09:34] Tilman Versch: Maybe let’s take the example of the tension clamp, how much R&D is in such a piece of steel?

[00:09:43] Mr Thomas Triska: So if you take a first look at the tension clamp, at first glance it seems like it’s kind of mass product, but there’s a lot of know-how. This was one of the major reasons why we took the decision to invest here in our factory of the future in Werdohl a couple of years ago, so we invested here 40 million, which on the one hand side gives us some advantages on the production cost side. But what is even more important, we have a technology centre here and we are developing a new generation of tension clamps.

So the product, which is in use at the moment and in many cases now, was patented back in 1967, and we ran out of the patent decade ago, so innovation was at a very low level. But when it comes to specific topics and specific details we are seen as the technology leader in this area for good reasons.

So there are some companies which copy our products, but if you have some and sometimes you have a breakage of attention plan then, of course, to understand the root cause and to make sure that this doesn’t happen again and to find solutions with the customer. I think we, here at Vossloh are leading and a very good example of our innovative strength is that we and we have presented this during the inner transfer which took place last year in September, in Berlin and it’s a so-called new generation, an M generation tension clamp with outward, outwardly bent springs arms and this is completely new. It’s a new design. It strengthens the robustness of our products. It requires less material and it has a better CO₂ footprint. And this all and all gives us some confidence that we will be successful to bring this to the market rather soon, and this clearly underlines that we are the technological leader in that area.

And if you and your colleague are invited to visit us here in Werdohl and do a plant tour together with me. And then if you see the production flow, how it is organised as of today and the machinery we use. First, do the bending of the material and the cutting and then the heat treatment. Afterwards, the coating is the final step. Yeah, it’s not so as easy as you would imagine when you just see the product in the field.

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Maintenance

[00:13:24] Tilman Versch: So this is a product you want to win market share with, but another topic that I find interesting is maintenance. Like, if we take the example of Werdohl where you’re located, there’s a train running every few minutes, but when you think about going climate neutral or getting more sustainable malleability you have to increase the speed and so also the maintenance needs to increase because the system is used more intense. Is this also something for Vossloh’s quick profit?

[00:13:55] Mr Thomas Triska: Sure, sure. So this is of course a general trend. If we look at our business, we will, this year or in 2022, after nine months, already have an order intake of roughly one billion. So which was a record level for us. all the backlog is high as well at a record level and we expect that this trend continues for the whole year 2022. So what does this mean? You’re absolutely right. If you look at Europe over the last decades or years, many countries didn’t spend sufficient or didn’t dedicate sufficient funds to the rail infrastructure to make sure that the quality remains at a very good level, so the vessel’s wear and tear. And now there is a certain catch-up in our products, which is definitely good for our business and we see that in many countries, order intake is slightly growing.

So and you are absolutely right. There are a lot of initiatives to bring more traffic on the rail. So what does this mean? In Germany, this is if you can’t build new lines in a short period of time. So this usually takes a lot of time and in some cases more than 10 years and the space is limited. So what needs to be done is first of all to upgrade and renew the existing lines. This is what has just been started and all our products have an on-average lifetime, I would say depending on the usage of the track between, yeah, let’s say, 25 years. So this means all our products are going to be replaced every 25 years. So 4% of the track is going to be renewed every year. And now with the higher utilisation of the track, the lead time of our products will slightly reduce going forward and just take into consideration that the average lead time would go down to 20 years only. Then 5% of the existing network needs to be replaced each and every year.

So currently we are in the phase of catching up. So spend what we should have spent it in the past. But going forward, we expect that the demand will stay at a higher level and as more the track is needed, the higher the replacement rate will be. And there is one important other important aspect and this will clearly change our way of doing business going forward. Because for the operators, the availability of the track will be key in the future, so they can’t afford a closure of a track because of the non-availability of some components because the track is urgently needed to transport goods and passengers. So here and this is new for us because the railway industry was seen as no, not really innovative in the past.

Now this is changing with the terms of digitization. New innovations are coming to the market and we are one of the leading companies in that area because the availability of the track is getting more and more important for the customer. And here, Vossloh, next to the component business, so we have all the relevant components for the rail track in our portfolio, which means fastening systems, concrete ties turnouts, tension clamps, fastening systems, turnouts and concrete ties. But we offer services for the rail track as such, so we have services in our portfolio to extend the lifetime of the rail and all of this we’ll gain some importance going forward.

So let’s take Deutsche Bahn as an example. They need to make sure that the rail in the field can be used longer than in the past, so typically what you do is that after a certain period of time, you exchange and replace the whole rail track. So the rail which is on the track after, let’s say, 25 years. So now what started a couple of years ago is that there are certain services available like milling to reduce the failures on the track by removing some millimetres of the surface of the rail, which extends the lifetime to a certain extent, but even more this is not really preventive. And therefore there are now some technologies in the market and here we have a USP in the field of high-speed grinding. So maybe I can give you some information about what high-speed grinding is all about and then we will see the importance that is especially has in Germany and will have in other European markets as well.

So for high-speed grinding, we offer services to grind the surface of a rail track with a speed of up to 80 kilometres per hour, and this is unique. No one else can do that. This service is already in China and now we had a breakthrough and did a press release last September to offer their services in Germany as well. So the big advantage for the customer Deutsche Bahn is that they don’t need to close down the track while they’re doing the maintenance, and this is new. So when it comes to conventional grinding or to milling, you have to stop the traffic on the line to do the maintenance and we have some services in our portfolio that clearly have some benefits for the customer because you can still run the line and in between was 80 kilometres per hour, we are able to do our services and here the speed of innovation is extremely high.

So one key aspect why we were successful to bring this to the market in Germany was that we recently have equipped our yellow machines, our high-speed grinding trains not only the big one, the high-speed running, but we have small applications for urban transport as well as the high-speed running city. The census and now we can first show the customer the result of our grinding measures and secondly, we collect additional information to give the customer information, additional information, about the condition of the track and maybe to give them some advice on which services should be done on top of that to make sure that the availability of the track increases going forward. And here we are, one of the leading companies we have shown the scene some good examples and nice projects in the past and this is certainly something where we see high growth potential in the future.

The Chinese market & thoughts on maintenance renewal contracts

[00:22:08] Tilman Versch: If we talk about maintenance. I also have to think about the Chinese network where you’re already doing business and you told me that you’re already growing by the growth of the Chinese network which expanding a lot, but also if you think about the network, this was built 20 or 30 years ago. Is this also a chance to win there in maintenance and renewal contracts with the Chinese network?

[00:22:36] Mr Thomas Triska: Sure. So this will come sooner or later, no doubt. So normally, the life cycle of the lead time of our products in China is a little bit higher, although it’s very high-speed. But it’s a slab track and not ballasted track. But take Germany as an example, or Vossloh in total, maybe. I would say as of today or since one or two years back around 85% of our business was a replacement. So old equipment out, put new components in. And in China, it’s completely the other way around. So as you said, they started to build new high-speed lines back in 2007 and right now they have a huge network already of 40,000 kilometres and they will expand it over the next 12 years until 2035 to 70,000 kilometres.

So far, no maintenance is needed because the average lifetime is around 20 years for these components or might maybe even be slightly longer. The maintenance business is something that will develop going forward. It started at a very low level, but in a couple of years or a decade, the Chinese will reduce or stopped to build new lines once they have achieved this 70,000 kilometres network and then the situation will be similar to Germany where the replacement business will kick in. And here it’s worth mentioning that we currently have had a market share of around 20% for many years right now in the high-speed area and our system is slightly different from the system that the Chinese competitors have in their portfolio. So there is a certain likelihood that when it comes to replacement, our products will be in the field as well. So sooner or later the Chinese market will move more in the direction we have in Europe.

But in Europe, of course, many lines have been built hundred years ago or even longer, so the market here is very mature and in China, we are right at the beginning. But China will nevertheless be a growth market for us, maybe not in the high-speed segment when it comes to the building of new lines. But there are other areas, and the Chinese, they now start to build new lines between cities, which are at the moment, high-speed lines where the trains are running 350 kilometres per hour, there will be some connexions between the cities at the line. Some cross connexions where the speed is up to 250 kilometres per hour. We expect the first tenders in the market soon and then in the next quarters and we think that we have quite a good product here to gain a certain market share in that area as well. Like we did some steps over the last three years with the newly formed joint venture three years back named Anyang in the area of conventional alliance and in the UTS business.

So China is an important market for us. It will stay an important market for us and yeah, but the mechanism of the market is at the moment still completely different from what we see in Europe. Here, the market is mainly dedicated to existing lines but due to all the political discussions and the high political wall that we see when it comes to CO₂ reduction targets, not only upgrading existing lines but building new lines will play a certain role going forward. Just worth mentioning one or two projects, let’s take the Rail Baltica project as an example. So Rail Baltica is the new line which is under discussion for roughly 30 years right now. So it’s a line from Warsaw to Tallinn through Lithuania and Latvia with a length of up to close to 1000 kilometres, and there will be a tunnel between Tallinn and Helsinki, slightly more than 100 kilometres, so all in all, the line has a length of roughly 1000 kilometres, slightly more from Helsinki to Warsaw, and this is a new line and this has been discussed for many years.

But each and every time funding was an issue, especially after the financial crisis in 2008, 2009, and 2010. Funding was not available and a strong political will to bring to have higher usage of rail as the by far greenest mode of transportation going forward. Now funds are available and this line will be built. Current plans are until 2026, so we should see some tenders in the market for all products over the next quarters. And this is just one indication of what is happening in Europe right now. There are plans in many countries. For example, in France, they are planning to build new high-speed lines as well to make sure that in the future domestic flights are no longer needed.

So the French market at moment is at a rather low level due to the high losses SNCF have suffered over the last couple of years during the pandemic, but recently they announced that they made some positive earnings in the last year and that they now want to invest more in the infrastructure as well. There are plans, a programme called X2 with a clear target to double passenger and freight transportation over the next years in France as well. So sooner or later we expect the market to recover and that some funds will be available to modernise and even upgrade the infrastructure and even build some new lines.

The hurdles of demographic change

[00:29:33] Tilman Versch: all this investment we are talking about happens behind the background or in the framework of demographic change also a lot of the state agencies will lose a lot of their skilled workers because they retire. And what chance or hurdle is a demographic change for Vossloh?

[00:29:53] Mr Thomas Triska: Indeed. This is a huge topic. So first of all, in the future, more people will live in big cities, so the trend will not stop and the car as a mode of transportation will not be the solution in these areas. So there will be a higher focus on UTS networks and definitely, there will be some growth in that area. Retirement and the lack of competency is a topic which gives us a lot of opportunities going forward. Maybe it’s worth spending some minutes about the DB, so at the moment, DB scolding is more or less in vogue. But I’m not participating here.

So DB is a very, very important customer for us. They have a lot of experts technology level at DB is high, but you’re right, retirement in the future will not be only a problem for Deutsche Bahn, but for many other state national railways as well. And there will be a lack maybe of competency or at least it must make sure that the knowledge days within the state National Rail operators, but in some cases it might make sense to outsource some activities to suppliers like Vossloh. So we are seen, on the DB side, not only as a supplier but as a partner. So we developed together with DB for example the business of high-speed grinding and we are looking at other options as well. And we have a lot of services in our portfolio that Deutsche Bahn could make use of and of course, it’s up to us to demonstrate to them going forward that we are the right partner and we are able to solve their problems and maybe then we can increase our services business for Deutsche Bahn as well going forward at least is a clear target for us.

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Vossloh since 2014

[00:33:00] Tilman Versch: So we’ve been a bit on a higher or meta-level, with our discussion till now but let’s jump on the concrete like the more focused Vossloh level. So how has the company changed over the last five years, if you will compare Vossloh today to Vossloh five years ago? What is different with Vossloh?

[00:33:22] Mr Thomas Triska: So this was a very, very long process, so I would even go back slightly until 2014 at that point in time we took the decision to clearly focus on the rail infrastructure. Only at that time, we had one division which was called transportation. So we were part of the rolling stock area, but we decided to get rid of and sell the business. Why? Mainly for three reasons. First of all, our clear ambition and maybe we will come to that later is to be a double-digit margin company going forward. So mid-term, this is our ambition for all our divisions and long term, this is the target for the group and we are convinced that in the rail infrastructure business, this is possible. On the other hand, this is very hard to achieve, or nearly impossible to generate these margins in the wrong stock area.

Secondly, we want to be among the top market leaders in this market we are in and if possible on a global scale. We are number one in fastening systems worldwide and we are number two globally in the turn-up business and in the running stock business, this was not possible at all. So if you compete with Siemens, Arson, Bombardier or CRC, it doesn’t make sense to compete with them. And a third reason was the risk profile of the huge contracts you have in the rolling stock area, this is something we didn’t feel comfortable with any longer.

And now in the rail infrastructure, the risk profile is much lower than in the rolling stock area. So we sold this off. And then a couple of years later or in parallel, we did a performance programme in 2019. And this was a huge change for Vossloh as an organisation. So we sold loss-making entities because we found out that we were not fit for the future. So our cost position was not the best in class, so there was hardly any growth in the company. Margins were stable or even slightly decreasing. So what we did is that we did an analysis of all loss-making activities, sort them off or restructured them or in some cases close them down and on top of that, we reduce the workforce by roughly 7% all over the world, so this was a huge step, but this was urgently needed to make sure that we are able to reach our ambitions going forward.

This took quite a while, I would say now the process is more or less finished. Still, we have some activities in France where we need to improve, but all in all, I would say the performance programme is done. But it was a critical situation for our employees coming from a company with sales of 1.3 billion, now shrinking down to around 850 and doing a performance programme, and they offer a lot of people. People ask us, our employees, and it was a fair question. What does the Vossloh stand for? What is the North Star? So we decided in 2020 to run a broad strategy project, we invited more than 100 employees and discussed with them back and forth what is key for our business in the future. Finally, we aligned on 30, roughly, slightly more than 30 strategic actions which we presented to the capital markets in December 2022.

And since then we are clearly following that path and this gives us purpose and orientation, this is one of the, I would say, success factors while Vossloh was able to grow much faster than the market over the last two years, and while we expect that going forward our ambition is to grow faster than the market and recently the unique they gave an update about the expectations of the market going forwards. They expect an average growth rate of 3.8% and we have clearly underlined over the last two years at least if you take the middle of our guidance for the fiscal year 2022 where we have seen growth in the ballpark of around 8% over the last two years.

And this gives us some confidence that we are on the right for two reasons. First of all, we did our homework and now secondly and this will be a key driver going forward. We see that the first tenders, which have been discussed for many years now, now come to the market. The railway industry and especially our industry, so they have long lead times. So we recognised and this started, I would say three or four years back. That many projects were discussed in detail which have been more or less dormant for quite a while because of funding issues. Now the customers came back and discussed with us all the specifications, normally it takes, let’s say two to three years until the tenders come to the market. Then the tender award might take additional 12 months and then if we start to deliver our products, it might take two or three years or even more.

So from the pre-tendering phase to the final delivery of our products sometimes it’s more than five years and what we saw or currently observed is that this has started for several reasons. So there are huge infrastructure programmes all over the world announced, have been announced a couple of years ago. And now, yeah, to a certain extent, we see some growth, but even more in our P&L on the top line in the sales, but even more we see a record, all the intake and the record order backlog. So we are quite confident that we can continue this trend. And that we will see some additional growth in 2023 both on the sales side and on the EBIT side and in the current global environment where polar crisis is one of the major buzzwords. I think this is a very good development that we are really confident that we will continue the way that we started two or three years back.

To sum it up, there was a huge change. We clearly transformed our company. This is not finalised for sure, so you can’t implement a strategy completely in two years, but I think we are addressing the right topics, market topics, and product development topics, improving on the services side and improving our organisation with several measures that we are fit for future are more competitive and can increase our market share and show some profitable growth in the future.

Climate targets and demand for products

[00:41:26] Tilman Versch: As societies, we are also working towards the climate target. In 2015, many societies want to become climate neutral and invest in this way. And I think the railway has a crucial part to play here, so does this have an impact on the clock speed in which your industry is operating? So have things sped up over the last years?

[00:41:57] Mr Thomas Triska: Yes and no. Yes, because funding is more available, so if you now look in some areas like in the US, there was a Biden bill, which Biden infrastructure bill, which was released roughly one year back was 66 billion US dollars for Amtrak only. And they run the northeast corridor in the US. We see many projects in the next Generation EU or the European Green Deal where projects will be financed in the future and maybe to some extent, it has already been started. But there are many other regions in the world like Egypt, where we have one of the first nice tenders to build up to equip a new high-speed line with our fastening systems.

And in Australia, for example, where the Indian Rail Project where we are in a very good position. So all in all, funds are there, but does this mean that the speed to build the new lines increases? I would say, only to a minor extent because the planning which is needed to build a new line has not changed, so there are a lot of requirements to be done to make. And very often, especially in Europe, 10 years is nothing from the first plans to finally build some lines. And we have seen that in many countries that even if funds are available so planning capacities are limited. So in this regard, I will say, okay, we know that more projects will come, but the speed of one single project I think there is no speed up, but all in all due to the high number of projects in the market, hence the changed requirements of our customer that they are now more and more focusing on the availability of the existing network. This clearly changes our industry and gives innovation much higher relevance than this was done in the past. And here, companies and the railway infrastructure like Vossloh clearly need to adjust and therefore it was quite good that we already incorporated this in our strategy that we are agile when it comes to finding new solutions for our customers.

[00:44:39] Tilman Versch: As the quality of your demand and then also the quality of your revenues improved over the last year. So if you go back 10,20 years investments in infrastructure, especially railways were always a topic when it comes to downturns of the economy that they were cut and they weren’t seen as needed. But now, with the focus on climate neutrality and climate change. I think this could have an impact on the quality of your revenues and the quality of your demand because people really wanted this and need to do this instead of just seeing it as a can-be investment.

[00:45:17] Mr Thomas Triska: Yeah. A very good question. We will see. I’m extremely convinced that you are right that there will be a higher demand for our products going forward. Why? Political will. Now, the rail is by far the greenest mode of transportation. But we were looking 10 years back, there was a very good overall environment for our products as well. The market was quite strong, but then with the austerity measures all over the world and you mentioned, there was some spending, some cuttings in the overall budgets in the railway infrastructure market. Today, we don’t feel that. So still funds seem to be available. New projects are announced and it will be more or less a question of how fast these projects could be handled, could be handled going forward. But it seems that funds are available.

This does not mean that maybe one or the other project will be delayed going forward because we were affected hardly as well by the rising of raw material prices, not Vossloh only but the whole infrastructure business and therefore some projects might be put on hold, which is not the case at the moment, but we cannot exclude since this might happen in some areas, but all in all, we don’t see that this trend will end, it’s more the other way around. Funds seem to be available and new projects are going to be planned. And our good indicator is our order intake and our order backlog. So for order intake and order backlog after nine months last year, we have shown record numbers and we most likely will never start into a new year with such a high level of order backlog.

I think here it’s worth mentioning that at Vossloh if you look at our order backlog, these are only firm orders. So on top of that, we have roughly between 300 and €350 million in sales which come out of Franc contracts which are not part of the order backlog at the beginning of the year because we only put them into our order intake and order backlog once we have received the caller from the customer. So this. This is a very good indicator and if you look at the sales level we have in our books when we look into 2023, this has increased compared to prior years and therefore we think we will grow the company once again in 2023.

Inflation & negotiations with partners

[00:48:32] Tilman Versch: If we talk about inflation, it also can be an interesting topic to better understand your negotiation power like inflation is still high, but we might be coming down a bit and you’re mainly impacted by steel price inflation because energy is not a super huge thing for you in the cost basis of your products. How has this been on the negotiation side where your partner’s willing to renegotiate or have they tried to put you down and put pressure on your profitability or do they see you as a partner? Do they also want to be happy?

[00:49:15] Mr Thomas Triska: So we are an industry where typically you cannot pass on any additional burden from the material side. This is what we have seen in 2022, so the increase in raw materials was huge. For some components like the wire that we use for our tension clamps, the price increase over the last 18, 18 months was more than 100% and therefore we started quite early in 2022 to renegotiate with all our customers on a global scale, most projects, even those contracts where we didn’t have a price escalation formula. So we went for, we negotiated higher prices down payments as a standard and included price escalation formulas going forward.

There was a period especially after the Russian invasion started where it was very hard for us to finally judge the potential impact on our P&L going forward, but we did a quite good job. So all in all, and I think this was to mention the absolute EBIT we are, if you take the middle of our guidance, we are even slightly higher than the 2021 numbers. And 2021 we have an EIT of €72 million despite the fact that we had a huge additional burden from the material side. Of course, we cannot neglect that it had a certain impact on our margin because even if you are able to pass everything through, you have a deterioration on the margin side.

Let’s take an example, you have 1 billion of sales with 80% EBIT and the margin is 8%. And if you now have 50 million additional costs, which you can pass on by 100% then you have 1.05 billion of sales, but still 80% EBIT. And your EBIT margin goes down to 7.6%, although you have done a quite good job. So there was a certain impact on our profitability in 2022. So our latest guidance is 7 to 7.5% which compares to 7.7 the year before. But yeah, nevertheless, if you take the middle of our guidance and let the EBIT, it will be the highest EBIT in the foster group since 2012. So there are a lot of challenges we found a way in 2022 to handle this.

Looking forward, you mentioned the energy costs. At the moment, energy costs are at a rather low level, but of course, we needed to secure some prices in October and November of 2022 to make sure that energy is available in 2023. So from today’s view, our challenges will not stop even for the material. For some components like wire, we see prices are going down. For some other components, there is a certain delay in the prices for our products. So and for many components, not only plastic components but for some steel components as well, we expect a further price increase in 2023. So we have to handle but all in all, the magnitude should be should lower than in 2023. And total offset of course due to the high inflation you mentioned, there will be an increase in global salaries. That’s for sure. So this will be higher than the average numbers in the past, so it will be an additional burden on our P&L as well. But we are quite confident that we can handle that once again,

From the inflation top line, I think the impact will be a little bit lower than in 2022 because we were faced with high increases in material prices already in 2022 and were able to pass on the majority of it to our customers. So one portion of the growth that we will have realised in 2022 and by the way, the first time in the infrastructure, we will exceed the 1 billion in sales was driven by the pass-on. But the other portion is still coming from the, not still, is coming from the operations and the very strong demand in many countries that we see currently.

Backlog and investments

[00:54:36] Tilman Versch: You already mentioned this huge order backlog Vossloh has. What impact does this order backlog have on investments because you’re delivering your physical product and that’s easily scalable, so you have to do investments to fulfil the demand?

[00:54:52] Mr Thomas Triska: So a very good question. If you look at our business at the moment, so in the car components, I would say we have sufficient capacity available as mentioned in the US, we are coming from a situation where the demand in the market was quite low. And for fastening systems, we have some capacity available. So there are more or less no capacity constraints. In the services area as well, it’s to a certain extent a mixed picture. In some areas, we have already a very good utilisation of our machinery. And in some others, we had some capacity available, like for the high-speed grinding. So as the growth we will see in 2023 will come in this area, capacity is available as well.

In our turnout business, we have several production sites all over the world, mainly in France, but as well in Scandinavia and Sweden, and Australia. In some areas, we are already running at a high capacity utilisation, so we slightly changed the organisation in this regard. Now we have a functional organisation, we have one CEO in place who clearly oversees the situation all over the world and try to be flexible that whenever necessary and possible that we shift some works to the next site, but nevertheless, we will take or we will need to do some further CapEx in the turnout business. And in Australia, we will invest after we have won the huge contract for inland Rail. So all in all, from a group perspective, over the last I think it’s worth saying that over the last two years, we invested slightly less than the depreciation rate and we expect this to change going forward. So the depreciation rate is at the moment around 55. So I would expect CapEx more between 60 and 70 going forward taking into consideration that in some areas and we need to increase. So there’s a capacity slightly and therefore needs some additional CapEx.

Goals in terms of profitability

[00:57:28] Tilman Versch: I think over the last like five years or 10 years, you’ve put 150-year-old man Mr Vossloh in a boot camp to become more profitable and stronger as a company. So what is your goal in terms of profitability and profits you wanna achieve with Vossloh?

[00:57:51] Mr Thomas Triska: So our clear ambition is to be a double-digit EBIT margin company. So this is how we organise Vossloh. This is one integral part of our strategy and we are making good progress here. So mid-term we expect all our divisions to be at 10%. At the moment, we are at the ballpark between eight and I would say 10% in some areas already, but we want to be at least 10% in all our three divisions. And this will take us, I would say two to three years, maybe in one or two divisions, we already achieved the target a little bit earlier, so this means that at the group level, the EBIT margin would be around 9%. Why is it? Because we have some holding costs we discussed the headquarters like it’s the beginning, which is here located in Werdohl. Here we have costs of around 16 to 17 million per year. And if we want to be a double-digit margin company in the group, we have to cover these costs as well which means that we have to further increase the profitability in our divisions and this will take a little bit longer. So our long-term goal is to be a double-digit even margin on a group level and we will take all additional measures and steps to come there. It’s a long way, but we are convinced that we can achieve it.

Thinking about risks

[00:59:32] Tilman Versch: You have this margin goal at maybe let’s try to invert this a bit. What could happen or should happen that you fail with this margin go that you don’t get the margin you’re operating in? So it’s more like a thinking exercise, thinking about what risks are there and how they could happen or hit you.

[00:59:57] Mr Thomas Triska: I would prefer what must happen to achieve it, but of course, it’s a bit. So I think in China, as I mentioned at the beginning, we have had a very good market share of 20% for a couple of years and everything we intend to do for 2023 is already covered by our order backlog, but this business, of course, is important. So if there would be a change in the demand from the customer or if our market share would go down this would be a challenge, but we have no indications that this will happen going forward for many reasons.

On top of that, we have done the factory of the future here in Werdohl and we are now very cost competitive, so we have some benefits of around 5 million per year coming out of the new factory. But we suffered to a certain extent from the high gas prices here in Werdohl because the heat treatment is done with gas. So if the gas prices would explode once again and there were would be no additional measures from the government to reduce the impact, this would be a challenge for the fastening systems business. For Thai technologies, Australia is a very good and solid market, so I don’t see any risk on that side. In the US, I mentioned at the beginning that the demand for our products was very low. So if it would stay at these levels, then there might be a risk that we don’t end up with a 10% margin then overall in the core components division.

But sooner or later there must be a pickup in the market. So this is what we have seen in the past as well, that the market is quite volatile. But this will be a requirement to clearly surpass the 10% in the core components division. For customised modules, as well France, which is our home turf and our biggest production sites are in France and we acquired a French company 21 years back. Yeah, if the French Government would stop to support spending on the rail infrastructure, I think, but this is not only true for France, but Europe in total, this might put our target in danger to be double-digit in that area and many other areas. We already see that the demand is quite high. So in life cycle solutions, a major driver in 2023 will be high-speed grinding, so this will all in all and the strong demand not only in Germany but in other countries as well.

This will bring us much closer to the 10%. The biggest risk, of course, is the overall trend to CO2 reductions and the political will to bring more traffic on the rail. If this would change, then this would certainly have an impact on our business and we would need to take some additional steps to nevertheless at 10% target when it comes to EBIT margin. But it’s up to you to decide how likely this is if the sustainability efforts of all the governments worldwide will change or not.

Competition

[01:03:56] Tilman Versch: Your margin is my opportunity. And it’s a well-known Bezos quote and with a high margin of 10%, you also run into the risk that more competition comes into this space and tries to outcompete you. Where do you, especially see such competition risks and where do you see certain risks coming from competitors on your margins?

[01:04:21] Mr Thomas Triska: So first of all in the fasting systems area, we are number one on a global scale there, and there’s only one competitor who’s acting globally as well. It’s a French company and we have some competitors in some markets in Europe. So this is not new, and I think we have done the necessary steps like the investment here in our factory. The future to have a good cost position to be successful in the future. In the concrete-type business, we have a 70% market share or 60 to 70% in Australia and in North America including Mexico and Canada, we are more or less at the same level. So we have a very strong footprint there.

In the turnout business, we are clear number one on a global scale, there is one company, and it’s a subsidiary of the Austrian steelmaker, Voestalpine. They are number one in that market. Because they really have a strong footprint in China and the US and we are not present. For example, in the US and in China, we only have equity consolidated companies. In lifecycle solutions, it’s twofold. So we are number one when it comes to milling, which is one measure to increase. The lifetime of rail and when it comes to tracking supply, which means welding, stationary welding and logistics of welded rail. All in all, the market entry barriers in our industry are quite high because typically all our products are safety-relevant.

And if you want to equip or deliver to a country, you first have to prove that your products are fit for use. So you need a test track and after a couple of years, you maybe get a home location and then in many cases and this is especially for turnouts and for sleepers, you have to take the decision if you want to invest in a country because in many, many areas local production is needed. It doesn’t make sense to ship, for example, concrete tyres from Australia to Europe, so you need to invest. And then once you took the decision, you can participate in tenders and you then you meet Vossloh, which has a really good market position in the field and a very good, I would say cost position as well. So there are some hurdles for new participants to enter, but nevertheless, of course, if the market is attractive and if we are really able to achieve double-digit margins, some other companies, maybe even from other rail industries will certainly look. It’s a business but I would say we are. We are prepared to manage this situation as well.

Shareholder structure

[01:07:50] Tilman Versch: Sadly, we’re running a bit out of time, so I want to end this interview with three short questions and you can answer them quickly.

[01:08:00] Mr Thomas Triska: Okay, I will try to do my best.

[01:08:03] Tilman Versch: The first question is about the shareholder structure, certainly the largest shareholder, Mr Thiele died I think two years ago and there’s a bit of a struggle in the family about their wealth. And do you see a certain [01:08:18 inaudible] with the family sitting at a certain time and this could put pressure on the other shareholders because they sell or are they more long-term oriented?

[01:08:30] Mr Thomas Triska: So far we don’t have any indication that it will change as it has been in the past. So we are in constant and good communication with the Harris of Heisen dealer. So with the wives, the daughter, and the executor, what we receive is positive feedback. All of them will understand our strategy, which of course gives us stability going forward to follow the path that we have implemented and that has been discussed of course with Heinsein dealer until a couple of years back. So the family trust is not finally set up. So we are waiting for this. So we know what is mentioned in the press. So we don’t have any more information on this. But to sum this up, we have no indication that the long-term shareholding might change. Is this a guarantee? Of course, it is not, but at least this is how we see it today.

Skin in the game

[01:09:40] Tilman Versch: Do you or other parts of the management own shares?

[01:09:45] Mr Thomas Triska: When I started at Vossloh a couple of years back in 2009, we had a programme for employees, so I owned roughly 50 shares of Vossloh coming out of this programme. But on top of that, of course, our long-term incentive is based or two third of it is based on the development of the Vossloh share price in absolute terms and in comparison to the relevant indices. So very high portion of my compensation is related to the development of the Vossloh share.

Management buying shares

[01:10:29] Tilman Versch: When has management last bought shares and why?

[01:10:35] Mr Thomas Triska: Management? I think the last time an executive board member bought shares was more than a decade ago. So it’s, of course, something we look at but finally, you have to take into consideration that the major portion of of the salary of the board members is already dedicated to the development of the company and therefore over the last couple of years there were, if I remember well, no board member who acquired or sold some shares in the Vossloh stock.

Thank you & goodbye

[01:11:20] Tilman Versch: Yeah. Thank you very much for coming on the podcast and thank you very much for answering my questions. And also to the audience, I want to thank say thank you that you stayed still here. I wish you a great day and bye-bye.

[01:11:31] Mr Thomas Triska: Okay, thank you. Bye.

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