Good Investing Talks - Is Vossloh on track to outgrow expectations, Mr. Trischka?

Episode Date: March 31, 2023

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

To transition the world to Ukraine estate 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 Foslow 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 peer play into the mobility and train space. I hope you enjoy my conversation with the company. A warm welcome to the Good Investing Talks podcast. I'm your host, Tillman Fiersh, and I'm very happy that you're discovering underfollowed investors and underfollowed companies together with me.

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All we are doing here is no advice and no recommendation please always do your own work and now enjoy the video The audience of good investing talks It's great to have you back on the podcast Today I'm talking with Mr. Trishka of Foslo

And Foslo is located in Vardul Where is Vardul on the map? Yes, hello Mr. Fesh First of all thanks for inviting me It's a pleasure to be here And Foslow is located roughly 50 kilometers southwest of Dortmund. It's a small city with roughly up to 20,000 inhabitants. What kind of importance do you have for this region?

We are among the top employers in this region. So we are not the biggest one in Badu, but I would say among the top three. All in all, we employ here 350 people, major part is related. related to our fastening systems business unit, where we produce fastening systems. Here we have the factory future in Badu, where we invested heavily over the last couple of years, all in all, roughly 40 million. So here, roughly 300 people work in that area. And for the headquarters, for fossil O.G, this is the remaining parts.

So all in all, it sums up to 350. Many of my viewers are coming from the U.S. So if you compare the U.S. railway system, 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. Yeah. So the U.S. 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.

on freight than in Europe, where you have a passenger and freight transportation, I would say, both more or less at the same level. And therefore, the infrastructure is slightly different and the customer base as well. So in the US, we have the huge Class 1 operators, which are all publicly listed. And if they use concrete ties, we are supplying them. And the technical specifications, therefore, are slightly different because for heavy, with high axle loads, you need special features in our products when it comes to tunnels or fastening systems if you compare it with other modes of transportation like conventional or high speed.

And I would say this is a huge difference on top of that. I would say in Europe it 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, it's, 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 all. products is at a very good level at the moment. So compared to the U.S., in the European system, there's a lot of more passenger transport, and people are riding with high speeds like 200 kilometers or something like this. So what does this mean for the railway tracks and the systems, especially with your strength and the tension clams and the sleepers? Yeah, what does this mean, the higher speeds and the higher share of passenger traffic?

Yeah. So the forces on the rail track and Foslow, 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 a line with more than 250 kilometers per hour, this is more or less a definition for high speed. And in China, the trains, they have a speed up to 350 kilometers 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 kilometers per hour.

So, you ask for the differences in the systems, just to give you some indication here in the fasting systems area. In the past, we had more than 60 different systems for each and every application. And, of course, this depends on the specifications of the specific country. But, of course, temperature is an issue as well. and the usage of the lines have a huge importance on the detail specifications of the track. For Turnos, 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 in in europe so in principle you have the german and the french technology and both are slightly different but of course serving the needs for the customer and i would say in the u.s we have the arrema standard and all in all i think it's fair to state that 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, there are huge programs like the Biden Infrastructure Act, which will support our business. In the future, especially when it comes to passenger transportation with our customer, Amtrak, which runs the north-east corridor in the U.S. Maybe a quick follow-up on your products.

I think many people can understand what a sleeper is or a turnout, but what is a tension clamp and why is the tension clamp important for the railway system? Yeah, yeah. So I think you also have the tension clamps in the back. somewhere so people can better imagine them yeah you're right you can see it right here on the in the back so of course all our products are safety relevant and therefore we have to fulfill 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 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 wire. 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 of the 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, that you can travel safely and into the freight transportation in a safe manner on the track.

Maybe let's take the example of the tension clamp. How much R&D is in such a piece? of steel. 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 Bedoull a couple of years ago.

so we invested here 40 million, which on one hand side gives us some advantages on the production cost side. But what is even more important, we have a technology center here, and we are developing new generation of tension clamps. So the product, which is in use at the moment, in many cases, this was patented back in 1967, and we ran out of the patent a decade ago. So innovation was at a very low level, but when it comes to the 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 break, of a tension clamp, 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, Foslow is leading and a very good example for our innovation strengths is that we, and we have presented this during the inner transfer, which took place last year in September in Berlin. It's a so-called new generation, an M-generation tension clamp with 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 you are accordingly invited to visit us here in Verdol

and to do a plant tour together with me and then if you see the production flow how it is organized as of today and the machinery we use first to do the bending of the material

and the cutting and then the heat treatment and afterwards the coating as a final step. Yeah, it's not so easy as you would imagine when you just see the product in the field. It's time for a quick advert Tillman. Here we go. Are you looking for a beautiful and efficient way to analyze stocks? Then please check out what my friends at Stratosphere are building. They have built a great tool to visualize data, to get ideas about ownership of stocks, and many more information that's helpful in the analysis process.

You can find that tool where the link below and feel free to sign up, it's free. Thank you for your attention. And now, Advertilman, ander. 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 Vardul, where you're located, there's a train running. every few minutes, but when you think about going climate neutral or getting more sustainable mobility, you have to increase the speed.

And so also the maintenance needs increase because the system is used more intense. Is this also something Foslo could profit from? Sure, sure. So this is, of course, a general trend. if we look at our business we will we will this year or in 2022 after after nine months we already had an order intake of roughly one billion so which was a record level for us or the backlog is high as well at a record level and we expect that this trend continues for the for the whole year 2022 so what does this mean you're absolutely right if you look at 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 there is a bear and term. 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 rail. So what does this mean? In Germany, and this is, you can't build new lines in a short period of time. So this usually takes a lot of time, 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 a lifetime, I would say, depending on the usage of the track between, let's say, 25 years. So this means all our products are going to replace every 25 years, so 4% of the track is going to renew it every year. And now with the higher utilization 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 face of catching up, so spend what we should have spent 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, availability of the track will be key in the future. So they can't afford a closure of a track because of non-availability of some components because the track is urgently needed to

to transport goods and passengers. So here, and this is new for us, because the railway industry was seen as 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, Foslo, next to the component business, so we have all the relevant components for the rail track in our portfolio, which means fastening systems, concretize, turnouts, and tension claims, fastening systems, turnouts, and concretize. 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 will gain some importance going forward. So let's take Deutsche Barn 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

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 has 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 millimeters 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 more information about high-speak grinding, what it's all about, and then we will see the importance that 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 the speed of up to 80 kilometers per hour. And this is unique. No one else can do that. We offer the service already in China, and now we had a breakthrough and did a press release last September. to offer that services in Germany as well. So the big advantage for the customer Deutsche Barn is

that they don't need to close down the track while they are 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, which clearly has some benefits for the customer because you can still run the line.

And in between, with 80 kilometers 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 grinding, but we have small applications for urban transport as well,

the high-speed grinding city, with 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 additional information about the condition of the track, and maybe to give them some advice, 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, seen some good examples and nice projects in the past. And this is certainly something where we see high growth potential in the future. If we talk about maintenance, I also have to think about the Chinese network where you're already doing business with. And you told me that you're already growing by the growth of the Chinese network, which is expanding a lot. But also, if you think about this, 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? Sure. So this will come sooner or later, no doubt.

So normally the life cycle of the lead time of all. Our products in the China is a little bit higher, although it's very high speed, but it's a slap track and not belested track. But take Germany as an example, or Foslo in total, maybe. I would say as of today, or since one or two years back, around 85% of our business was replacement. So old equipment out, put new companies. 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 kilometers. And they will expand it over the next 12 years until 2035 to 70,000 kilometers. So far, no maintenance needed. Because if the average lifetime is around 20 years for these components, or maybe even slightly longer. The maintenance business is something that will develop going forward.

It's started at a very low level, but in a couple of years or a decade, the Chinese, they will reduce or stop to build new lines once they have achieved the 70,000 kilometers network. And then the situation will be similar, like in Germany, that the replacement business will kick in. And here, it's worse to mention that we currently have a market share of around 20% for many years right now in the high-speed area. And our system is slightly different from the systems that the Chinese competitors have in their portfolio. So there is a certain likelihood that it comes to replacement that our products will be in. the field as well.

So sooner or later, the Chinese market will move more in the direction like we have in Europe. But in Europe, of course, many lines have been built for 100 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 gross market for us. maybe not in the high-speed segment when it comes to 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 at the high-speed lines where the trains are running 350 kilometers per hours. There will be some connections between the cities at the line, some cross-connections where the speed is up to 250 kilometers per hour. expect first tenders in the market soon and 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 our, with a new deformed joint venture three years back named Anyang in the area of conventional lines and in the UTS business. So China is an important market for us. It will stay an important market for us.

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 world, that we see when it comes to CO2 reduction targets. Not only upgrading of existing lines, but building new lines will play a certain role going forward. Just worse to mention one or two projects,

let's take the Rail Baltica project as an example. So Rail Baltica is a new line, which is under discussion for roughly 30 years right now. So it's a line from Varshao to Tallinn through Lithuania and Latvia, with the lengths of up to close to 1,000 kilometers per kilometers. And there will be a tunnel between Tallinn and Helsinki, slightly more than 100 kilometers. So all and all the line has the length of roughly 1,000 kilometers,

slightly, slightly more from Helsinki to Varsan. And this is a new line, and this has been discussed for many years. But each and every time, funding was an issue. And especially after the financial crisis, 2008, 2009, 2010, funding was not available. And with a strong political will to have a higher usage of rail, as a by far greenest mode of transportation going forward. No 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 going, there are plans to build new high-speed lines as well. to make sure that in the future, domestic flights are no longer needed. So the market, the French market at the moment, is at a rather low level due to the high losses that SNCF 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. infrastructure as well. There are plans, a program called X2, with a clear target to double passenger and freight transportation over the next years in France as well. So soon or later, we expect the market to recover and that some funds will be available to modernize and even upgrade the infrastructure and even build some new lines. all this investment we are talking about happens behind the background or in the framework of demographic change and like also a lot of the state agencies will lose a lot of their skilled workers because they retire

and what chance or hurdle is demographic change for Foslo indeed this is a huge topic so so first of all yeah 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. The retirement and the lack of competency is a topic which gives us a lot of opportunities. opportunities going forward. Maybe it's worse to spend some minutes about the DB. So at the moment, at the moment, DB scolding is more or less on 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 D.B. is high. But you're right, retirement in the future will not be only a problem for Deutsche Barn, but for many other state National Railways as well. And there will be a lack maybe of competency, or at least it must be, it must make sure that the knowledge stays within the state national railway operators. But in some cases, it might make sense to outsource some activities to suppliers like

Foslo. So we are seen on the DB side not only as a supplier, but as a partner. So we develop 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, which Deutsche Barn 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 Bank as well going forward. At least this is a clear target for us. Hey, Timon here. It's great that you've made it that far into the video, and I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus.

It's a place that's very helpful to people who are ambitious about investing. It's helpful to investment talent, as well as Experian fund managers. So, if you're interested, please, click on the link below. And now, without further ado, enjoy the conversation. 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 Foslo level. So how has the company changed over the last five years? We'll compare Foslo today to Foslo five years ago.

What is different with Foslo? Oh, 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 and to sell the business. Why, mainly for three reasons.

First of all, 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 midterms is our ambition for all our divisions and long-term this is a target for the group. And we are convinced that in the rail infrastructure business is possible. And on the other way, on the other hand, And this is very hard to achieve or nearly impossible to generate these margins in the RONIC 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, and we are number one in fastening systems worldwide, and we are number two globally in the turn-up business, and in the rolling stock business, this was not possible at all. So if you compete with Siemens, Arsum Bombardier or CRC, it doesn't make sense to compete, to compete with them. And the third reason was that the risk profile of the huge contracts you have in the rolling stock areas, this is something we didn't feel comfortable 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 program in 2019 and this was a huge change for Fosloa as an organization so we sold loss-making entities because we found out that we were not fit for future so our cost position was not best in class So there was hardly no 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, sold them off or restructured them or in some cases closed them down.

And on top of that, we reduced 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, are able to reach our ambitions going forward. So this was, and this took quite a while, I would say, now the process is more or less finished. Still, still we have some activities in France where we need to improve, but all in all, I would say the performance program is done. But it was a critical situation for our employees.

from a company with the sales of 1.3 billion, now shrinking down to around 850 and doing a performance program and they offer a lot of people. People ask us, our employees, and it was a fair question, what does Foslo stand for? What is the North Star? So we decided in 2020 to run a broad strategy project. We invited more than 100 employees, discussed with them back and course, 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 22. And since then, we are clearly following that path. And this gives us purpose and orientation. And this is one of the, I would say, success factor.

why Foslow was able to grow much faster than the market over the last two years. And why we expect that going forward, our ambition is to grow faster than the market. And recently, they gave an update about the expectations of the market going forward. 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 midst of our guidance for fiscal year 2022, where we have seen growth in the ballpark of around 8% of the last two years. And this gives us some confidence that we are on the right way 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 come to the market. The railway industry, and especially our industry, so they have long lead times. So we recognized and 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, they 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 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 observe is that this has started for several reasons. So there are huge infrastructure programs all over the world announced, have been announced a couple of years ago. And now, to a certain extent, we see some growth, but even more in our P&L, on top line in the sales, but even more we see a record order intake and a 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 have started two or three years back. So, to sum it up, there was a huge change. We clearly transformed our company. This is not finalized for sure.

So you can't implement a strategy completely in two years. But I think we are addressing the right. topics, market topics, product development topics, improving on the services side, and to improve our organization 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. 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 Raywell 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 speed up over the last years? So yes and no. Yes, because funding, is more available. So if you now look in some areas like US, there was a Biden bill, a Biden infrastructure bill,

which was released roughly one year back, with $66 billion US dollars for Amtrak only, and they run the north-east 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 tender to equip a new high-speed line with our fastening systems.

And in Australia, for example, where the inland trade 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, only to a minor extent, because the planning, which is needed to build a new line, this 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 first plans to finally build the mines. And we have seen that in many countries that even if funds are available,

the planning capacities are limited. So in this regard, I would 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 and 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, gives innovation a much higher relevance than this was done in the past.

And here, companies in the railway infrastructure, like Foslow, they 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 find new solutions for our customers. 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 came 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 revenues and the quality of your demand because people really want to do this and need to do this instead of just seeing it as a can-be investment. 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 is there. 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 we see historic measures all over the world. And you mentioned it. There were some cuttings in the overall budgets in the railway

infrastructure market. Today, we don't see that. So still funds seem to be available. New projects are announced. And it will be more or less a question how fast these projects 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 for slow only, but the whole infrastructure, a rail infrastructure business, and therefore some projects might be put on hold, which is not the case at the moment, but we cannot exclude that 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. A 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. And I think here it's worth to mention that at Folslow, 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 euros. sales, which come out of frame contracts, which are not part of the order backlog at the

beginning of a year, because we only put them into our order intake and order backlog once we have received the caller from the customer. So 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. If we talk about inflation, it also can be an interesting topic to better understand your negotiating power.

Like inflation is still high, but it 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. So 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 we see you as a partner? They also want to be happy. So we are in an industry where typically you cannot pass on any additional burden from the first. from the material science. This is what we have seen in 2022.

So the increase for raw materials was huge. For some components like wire that we use for our attention clamps, the price increase over the last 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 to include price escalation formulas going forward.

And there was a period, especially over after the Russian invasion started, where it was very hard for us to finally judge on the on the potential impact for our P&L going forward but we did a quite good job so all in all and I think this is worth to mention the absolute EBIT we are we are if you take the midst of our of our guidance we are even slightly higher than the 2021 numbers in 2021 we had an EBIT of 72 million euros, despite the fact that we had a huge additional burden from the material side. But, 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 one 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 then on our profitability in 2022. So our latest guidance is 7 to 7.5% which compares to 7.7 the year before. But nevertheless, if you take the midst of our guidance and calculate the EBIT, it will be the highest EBIT in the FOSLO 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, November, 2020, to make sure that energy is available in 2023. So from today's view, the challenges will not stop. Even for material, for some components like wire, we see prices are going on.

For some other components, there is a certain delay on the prices for our products. And for many components, not only plastic components, but for some steel components as well, we expect to further price increase in 2023, which we have to handle. but all in all, the magnitude should be lower than in 2023. And of that, 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 2022 and were able to pass on the majority of it to our customers. So one portion of the growth that we will have realized in 2022, by the way, the first time in the rail infrastructure, we will exceed the one 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 it's a very strong demand in many countries that we see currently. You already mentioned this huge other backlog Foslo has. What impact does this other backlog have on investments? Because you're delivering your physical product and that's not easily scalable. So you have to do investments to fulfill the demand.

Yeah. So a very good question. If you look at our business at the moment, so in the core components, I would say we have sufficient capacity available. As mentioned in the U.S., we are coming from a situation where the demand in the market was quite low. And for fasting systems, we have some capacity available, so there are more or less no capacity constraints. In the service area, as well, it's to a certain extent, a mixed picture. In some areas, we have already a very good utilization of our.

of our machinery and in some others we had some capacity available, like for the high-speed grinding. So the growth we will see in 2023 will come in this area, but capacity is available as well. In our turn-off business, where we have several production sites all over the world, mainly in France, but as well in Scandinavia and Sweden and in Australia. In some areas, we are already running at a high-capacity utilization. So we slightly changed the organization in this regard. Now, we have a functional organization. We have one COO in place who clearly oversees the situation all over the world

and we 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 turn-up business. In Australia, we will invest after we have won the huge contract for Inland Rail. So all in all, from a group perspective, of the last, I think it's worse to say that over the last two years, we invests slightly less than the depreciation rate and we expect this to change going forward. So 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 the capacity slightly and therefore need some additional CAPEX. I think over the last, like, years or 10 years you've put a 150 year old man, Mr. Foslow, in a boot camp to become more profitable and stronger as a company. So what is your goal in terms of profitability and, yeah, profits you want to achieve with Foslo?

So our clear ambition is to be a double-digit event margin company. So this is how we organize. Foslo. This is one integral part of our strategy and we are making good progress here. So midterm, we expect all our divisions to be at 10%. So at the moment we are at the ballpark between 8 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 will already achieve the target a little bit earlier. So this means that at group level, the EBIT margin would be around 9%. Why is that? Because we have some holding costs. We discussed the headquarters right at the beginning, which is here located in Bedoules. Here we have costs of around 16 to 70 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 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 are able to achieve it. You have this margin goal. Maybe let's try to invert this a bit. What could happen or should happen that you fail with this margin goal, that you don't get the margin you're operating in? So it's more like a thinking exercise about like thinking what risks are there and how they could happen or hit you. I would prefer what must happen to achieve it, but of course, it's a mixture.

So I think in China, I mentioned at the beginning we have a very good market share of 20% for since 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 Badol. and we are now very cost-competitive. We have some benefits of around 5 million per year coming out of the new factory.

But we suffered to a certain extent on the high gas prices here in Bedoult because the heat treatment is done with gas. So if the gas prices would explode once again and there would be no additional measures from the government to reduce the impact, this would be a challenge for the fasting system. 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 of 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 customized modules, as well in France, which is our home turf and the biggest production sites are in France. and we have acquired a French company 21 years back, yeah, if the French government would stop to support spendings in 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.

In many other areas, we already see that the demand is quite high. And in lifecycle 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%. So the biggest risk, of course, is if the overall trend to CO2 reductions, and the political will to bring more traffic on 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 a 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. Your margin is my opportunity, and it's a well-known Basel quote. And with a high margin of 10%, you also run into the risk that more competition comes into this space and tries to out-compete you. Like, where do you especially see such a competition risks and where do you see, like, yeah, certain risk coming from competitors on your margins? So first of all, in the fasting systems era, we are number one on a global scale,

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 of the future to have a good cost position to be successful in the future.

In the concrete Thai 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 turn-up business, we are a clear number one on a global scale. There is one company.

It's a subsidiary of the Austrian steelmaker, Vustalpine. They are number one in that market because they really have a strong footprint in China and the U.S. And we are not present, for example, in the U.S. and in China, we only have an equity-consolidated company. In LifeCycle Solutions, it's two. 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 track 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 to deliver to a country you first have to prove that your products are fit for use so you need a test track and after after a couple of years you maybe get homologation and then in many cases and this is especially true for for turnouts and for sleepers, you have to take the decision if you want to invest in a country because in many areas local production is needed. It doesn't make sense to ship, for example, concrete ties from Australia to Europe. So you need to invest. And then once you took the decision, you can participate in tenders and then you meet Foslow, which have a really good market position in the, in the, in the, in the, in the in the field and a very good, yeah, I would say a 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 all that, their rail industry, they will certainly look at the business. But I would say we are prepared to manage this situation as well. Sadly, we're running a bit out of time. So I want to end this interview of three short questions. You can answer them quickly.

Okay, I will try to do my best. The first question is about the shareholder structure. Sadly, 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 route the family exits at a certain time? And this could put pressure on the other shareholders because they sell or are they more long-term oriented? So far, we don't have any indication that it will change. Like, it has. has been in the past.

So we are in constant and good communication with the heirs of Heinzemantile, so with the wife's, the daughter, and the executor. What we receive is positive feedback. So all of them, they 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 Heinzheimer-Tel 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 as of today. Do you or other parts of the management own shares? When I started at Foslow, a couple of years back in 2009,

we had a program for employees, so I owned roughly 50 shares of Foslow coming out of this program. 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 foster share price in absolute terms and in comparison to the relevant indices. So a very high portion of my compensation is related to the development of the fossil share. When has management last bought shares and why? Management, I think last time executive board member board chairs, this was more than a decade ago. So this is not, 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 Foslostock

yeah thank you very much for coming on a podcast and thank you very much for answering my questions and also to the audience I want to say thank you that you stayed till the year and wish you a great day and bye bye Okay, thank you. Bye.