Letter to shareholders concerning the business year 2006
Essen, 02. May 2007
Dear Partners, dear Sir/Madam,
With the annual financial statement for 2006, we are presenting you with a balance sheet well worth looking at. We have reached or outperformed our 2006 budgets in each of our four business units: Credit, Collection, Software and Systems.
Credit: Leasing growth above average for sector
In Germany, GFKL increased its new leasing business by 9.5 percent (from EUR 425.4 million in the previous year to EUR 465.9 million in 2006), topping the very good growth average for the sector of approximately 8 percent. Thanks to the expansion of its core business areas, GFKL even generated a plus of more than 50 percent in the Benelux countries, with figures rising from EUR 57.1 million in the previous year to EUR 85.9 million in 2006. Our English leasing specialists generated more than EUR 100 million of new business in its first full business year. In addition to the organic growth in our markets to date, in April 2006 we entered the Spanish market with a majority holding. The Spanish subsidiary booked new business amounting to EUR 74.0 million.
In 2006, the total volume of new leasing business booked by GFKL amounted to EUR 726.6 million, 47 percent up on 2005 (EUR 494.2 million). Viewed regionally, no less than approximately 36 percent of the volume of newly concluded agreements came from the markets in the European countries outside Germany. Our European growth strategy is therefore on the right course.
Collection: GFKL the fourth largest provider
As regards the Collection business, GFKL consolidated its market position in all receivables segments. During the business year 2006, the volume of secured and unsecured loans (NPL) serviced by us increased six-fold to approximately EUR 6 billion from more than 250,000 receivables.
With the servicing of more than 1 million individual receivables in our bulk business with small items, we have become the number one for the German insurance sector, and the first milestone mandate in the telco sector shows further growth.
In the classic Collection business, i.e. the servicing of current receivables from trade, commerce and industry, GFKL has as announced expanded its competence by means of strategic acquisitions, thus strengthening and consolidating its market position. Here we concentrated on companies who are showing sustained success in their market activities and have a wide client base.
At the same time, GFKL also made its first steps abroad in this sector during the reporting period. Firstly, we acquired shares in a servicer of non-performing real estate financing in Portugal, with whom we have cooperated before. Secondly, GFKL opened an office in Vienna in order to intensify sales activities in the Austrian NPL market.
Due to the consolidation of its market position in all receivables segments, the GFKL Group is now one of the four largest collection providers in Germany with approximately 900 collection personnel (March 30, 2007).
Software: merger completed
As a shareholder, you have no doubt been following the merger process between GFKL Financial Services AG and ABIT AG. We were glad that the legal proceedings reached a successful conclusion and the merger could be completed in August. Since then, our expectations concerning achievable synergies in the so-called NPL area, i.e. the servicing of non-performing loans, have been fulfilled. As planned, we are also profiting from the extremely positive course of business as a provider of software applications for loan and receivables management. In the Credit sector alone, we had a client base of approximately 200 companies and computer centers for the ABIT Banknology© product suite by the end of the year.
Systems: successful integration
During the past business year, GFKL’s IT systems business was dominated by the integration of the newly acquired company ADA-Das SystemHaus GmbH into the GFKL Group. Special mention must be made of the growing together of the company with our existing IT remarketing competence to form an unbroken value chain. At the same time, the company’s vertical range of products for the financing, installation, maintenance and remarketing of IT systems was extended by the set-up of its own repair center in Essen. As regards operations, particular emphasis must be placed on the scheduled rollout of 80,000 computers as part of a major order from a public sector company. Moreover, we have again increased our remarketing business in the IT sector.
After approximately 72,000 remarketed computers in 2005, our subsidiary handled approximately 120,000 IT assets in 2006.
Sales and income: challenging targets reached
The good operational development of GFKL has built the basis for the significant outperformance of our 2006 budgets. At EUR 1 billion (all figures given in accordance with IFRS), consolidated sales were exactly within the target corridor (2005: EUR 669.1 million).
Sales in each segment developed as follows:
- Credit: EUR 799.8 million (previous year: EUR 610.1 million)
- Collection: EUR 59.0 million (previous year: EUR 28.3 million)
- Software: EUR 20.2 million (previous year: EUR 16.4 million)
- Systems: EUR 152.3 million (previous year: EUR 14.3 million)
With a 36 percent rise from EUR 19.5 million to EUR 26.5 million, consolidated earnings before taxes were considerably higher than expected. We were able to achieve a disproportional increase in the proportion of recurring income, thus improving the stability and quality of our earnings.
GFKL booked the following earnings before taxes in each segment:
- Credit: EUR 13.4 million (previous year: EUR 15.6 million)
- Collection: EUR 16.4 million (previous year: EUR 5.1 million)
- Software: EUR 1.6 million (previous year: EUR 2.3 million)
- Systems: EUR 3.4 million (previous year: EUR 2.1 million)
When analyzing the earnings before taxes in the credit segment, the start-up costs of setting up the leasing business in England amounting to EUR 2.5 million and the exceptional earnings amounting to EUR 5.7 million contained in the comparative figures from the previous year must be taken into account.
After taxes, GFKL achieved consolidated earnings of EUR 21.9 million (2005: EUR 16.7 million).
Due to our acquisitions and the considerable organic growth, the consolidated balance sheet total rose from EUR 443.4 million EUR in the previous year to EUR 972.2 million, with a capital contribution of EUR 147.3 million (2005: EUR 121.4 million). As a result of this development, the equity ratio fell from 27 percent in the previous year to 15 percent. In contrast, the return on equity in 2006, which amounted to 16.3 percent, remained almost unchanged from the previous year (16.7 percent), which in view of the rise in average equity again underlines the gratifying earning power of GFKL and the quality of our acquisitions.
Forecast
During the business year just concluded, the GFKL Group reached or exceeded the targets set in all business divisions – thanks to our competent, committed personnel and their entrepreneurial thinking. My special thanks go to them for what they have achieved. However, we will not rest on our laurels; we also have ambitious plans for 2007.
GFKL will continue its organic growth using the tried and tested method of making acquisitions; here we will make use of attractive purchase opportunities: in the leasing business to strengthen our presence in European countries outside Germany, in the German collection segment to expand our own competitive position. Moreover, at the beginning of the new business year, we succeeded in entering the market as an operational factoring provider with the subsidiary Universal Factoring GmbH; according to branch estimates, this market still needs to catch up and therefore has considerable growth potential compared to neighboring European countries.
In all, the GFKL Group expects sales growth to continue and profitability to increase further. On an annual basis, we expect earnings to increase by approximately 20%. The first quarter confirmed our expectation of rising profits with earnings well above schedule.
However, I am aware that many of our shareholders are turning their attention to another aspect of our corporate development: the stock market flotation announced by us during the past year as a medium-term option.
At the present time, no final decision has yet been made regarding this, but we are currently examining various possibilities of giving appropriate capital support to the expected growth of our company.
Yours faithfully,
Dr. Peter Jänsch
GFKL Financial Services AG
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