GFKL Financial Services AG - Letter to the Shareholders
Essen, 5. April 2005
Dear Partners,
Ladies and Gentlemen,
The 2004 annual report of GFKL Group is, once again, a true growth-report: We have achieved our ambitious objectives while simultaneously getting the company ready for continued growth. Our goals for 2005 are equally lofty and aim at sustained stability.
In my most recent shareholder letters I have repeatedly made reference to the changes in the accounting provisions, which contrary to the old regulations, result in the later reporting of earnings GFKL attained in the continuing growth phase in the corporate results. In all reports we are showing the previous year’s results based on the new accounting provisions as well to make comparison more transparent and to comply with capital market standards.
Excellent earnings
In the Leasing business segment GFKL attained new business revenues totaling EUR 450.9 million. Universal Leasing contributed EUR 393.8 million and EUR 57.1 million came from Transned Lease B.V., which was consolidated for the first time in the third quarter. The before tax share of the leasing business amounted to EUR 10.1 million, which translates into an increase by 470 percent in comparison to the year prior (EUR 1.8 million). After a rather hesitant early part of the year, the commitment and outstanding efforts of our sales force allowed the business to gain a lot of ground in the second half and to produce these positive results.
The financial outsourcing business unit is also reporting significant gains in profits. This division encompasses our portfolio acquisition and warranty, receivables administration, mobile investment asset marketing, as well as software and services for receivables management programs. In this segment alone, GFKL achieved an earnings increase of approximately 88 percent from EUR 8.2 million to EUR 15.4 million. These results affirm our expectations in terms of the growth potential inherent in financial outsourcing as a dynamic market with a solid future.
GFKL Group’s team of about 660 employees brought in consolidated Group revenues of EUR 539.5 million. The after tax consolidated earnings were healthy at EUR 14.1 million (this equals an increase of 1,450 percent over 2003, which produced EUR 0.9 million). At 18.5 percent the shareholder equity profits were positive in the last fiscal year as well.
Organic growth and acquisition
The highly rewarding development of our business in all segments rests on two very strong shoulders: substantial organic growth and a clearly profit-driven acquisition strategy.
In the leasing business, GFKL acquired Transned Lease B.V., Eindhoven, the largest independent Dutch truck and trailer leasing corporation. The event also marked the company’s first takeover in a European country outside of Germany. At the same time, we have also increased our highly qualified and motivated Universal Leasing sales force by 15 %. After the standard six months’ orientation period, i.e. by mid 2005, we expect to see verifiable growth in our new business in Germany thanks to this move.
In continuing our international expansion, GFKL will focus on the British market in 2005. To this end, we have decided not to procure an enterprise in the United Kingdom, but to establish our own. In recent months we have convinced an experienced team of British leasing experts to join GFKL in compiling an extensive business plan. Just last week, we founded Universal Leasing Ltd. ( London), setting the stage for our active launch by mid this year. In comparison to the takeover of an existing firm, the required overall investment into the British subsidiary will remain reasonable at a level of approximately EUR 5 million, while it will obviously be harder to project the success of such a venture than it would be if we had acquired an established company. Nevertheless, thanks to the excellent sales contacts and the long-time experience of our newly hired staff, we do expect to close up to EUR 23 million in new business in the United Kingdom in 2005 at an interest margin of about 4.2 %.
A series of portfolio acquisitions with subsequent warranties drive the business development in the financial outsourcing sector. The takeover of a leasing refinancing portfolio with a receivables volume of approximately EUR 68 million from a German state bank by GFKL subsidiary Proceed Securitization Services deserves particular praise. The position GFKL has been able to secure in such a short time in this highly dynamic market, was impressively re-affirmed in 2004 thanks to a rating by Standard & Poor´s: GFKL was the first German company to receive a Servicer Rating as a “Primary Servicer” and a “Special Servicer” in the equipment finance industry. The rating defines the company as “Above Average, Outlook Stable”, which is the third-best rating on an assessment scale of 18.
We also must highlight the positive business development at our subsidiary Sirius Inkasso GmbH in Düsseldorf. As a service specialist, Sirius Inkasso handles the collection of receivables in default at large corporations, primarily in the insurance industry. Since its debut on the market, Sirius Inkasso is already managing more than 300,000 receivables. The high level of integration of the IT systems utilized as well as the excellent motivation of all staff members have been the primary drivers of this success.
Reinforcement in financial outsourcing: ABIT AG
Crucial elements in the creation of the technical infrastructure supporting Sirius Inkasso were the innovative software solutions of ABIT AG, a company we hold a stake in. This project was just one example of the even better than expected fruitful cooperation between GFKL and ABIT. Thanks to the huge portfolio of solutions and the many years of market know-how accumulated by ABIT as a receivables management expert, GFKL has been able to expand its competency in the Financial Outsourcing sector considerably. This is especially true for the successful entry into NPL transactions, i.e. into the acquisition and sale of loans in default, so-called non-performing loans. In this context, GFKL reaps the benefits of market access inherent in ABIT’s leading market position in the German credit industry, especially on the credit union and savings bank sector.
With the objective to utilize synergies and cross-selling effects even more beneficially in the future, the executive boards of GFKL and ABIT have mutually decided in November of last year to merge ABIT into the GFKL. The merger decision will be presented to the shareholders at the applicable scheduled shareholder meetings in June for a shareholder resolution.
IPO is a medium-term option
Given the present stock market listing of ABIT, the GFKL executive and supervising boards have evaluated and discussed in detail the option, to aim at an IPO of the GFKL Group in conjunction with the merger transaction. For the time being, we have decided against this move, but will continue to consider an IPO as a medium-term option. Primarily, we intend to push for even more growth in our business sectors. Moreover, we will continue to carefully watch the emerging revitalization of the primary market, i.e. the IPO business. As a business, we are in the excellent position to not have to rely on an IPO to reinforce our own funding. Thanks to the coming on board early this year of FI Equity Partners, a company that is part of the ABN Amro Bank conglomerate, we have received additional equity capital in the amount of approximately EUR 29 million.
Nevertheless, a medium-term IPO of GFKL will remain on the agenda and the investment of a private equity enterprise should also be considered in relation to such an option.
Continued growth remains priority one
Our outlook for the upcoming fiscal year is positive. In 2005, we expect organic growth in the domestic and on the international market with an anticipated growth of more than 10 %. Moreover, GFKL’s “coffers” are full and we are therefore well-prepared to take advantage of any promising procurement options to continue our successful acquisition business. Nevertheless, we will be very prudent and diligent in the selection of suitable companies, and will, if there are any well-founded misgivings, forego a potential purchase, as we have done in the past.Based on our positive start into 2005 and given the nicely filled order books in both business segments, we are anticipating a profit increase of more than 10 % for the current fiscal year. Considering that the 2004 results contain the one-time profits from the Phinware/ABIT transaction, which yielded about EUR 7 million net, this would be an enormous increase of our sustained profits.Yours faithfully,Dr. Peter JänschGFKL Financial Services AG