GFKL Financial Services AG - Letter to the Shareholders
Essen, 16. August 2004
Dear Partners,
dear Sir/Madam,
As of January 1, 2004, we began applying the new accounting regulations stipulated in IAS 32 and 39 (we informed you of these in our letter to shareholders dated July 2, 2004) and can now present our half-year results on time.
Please note that for reasons of transparency, both the current half-year’s figures and the comparative figures from the previous year have been determined using the new accounting standards.
What has changed?
Firstly, income from the leasing area is no longer booked at the time of securitization; instead, it is booked pro rata as interest income accrued during the term of the agreements. In the first half-year, this led – ceteris paribus – to a marked decline in interest income. Even so, with a volume of new business amounting to 175 million Euro, we generated a cash equivalent of approximately 21 million Euro in the first six months of 2004. However, we were only able to book approximately 9 million Euro of this in the interest income affecting the result, instead of the approximately 16 million Euro disclosed previously. The remaining 7 million Euro were partly compensated by income from the portfolio built up earlier. However, due to the new standards, we will on balance disclose poorer results in the leasing sector for at least the next three years. This in turn will lead to a steady increase in our undisclosed reserves.
Secondly, in the first half-year, we purchased and securitized a refinancing portfolio in the outsourcing area. We were able to record a profit of almost 6 million Euro on this transaction, which according to the old accounting standards would have had an immediate effect on the result. Using the new accounting regulations, only approx. 0.5 million Euro can be booked in the first half-year. The remainder is also included in the undisclosed reserves.
Thirdly – and this was positive – the booking of earnings from the phinware/ABIT transaction carried out in 2003 according to the old accounting standards was also postponed. The undisclosed reserves accrued at the end of 2003 in accordance with the new accounting methods were (had to be) disclosed on entry of the merger in March 2004, thereby affecting the result. This means that according to the new accounting standards, approximately 7 million Euro more in earnings were generated. Even when the ABIT loss of 0.6 million Euro incurred through the merger is deducted, 6.4 million Euro still remain.
In short, the one-off phinware/ABIT effect in the first half-year means that we can disclose approximately the same result under IAS 39 revised as we would have done if the accounting standards had not been changed.
The changes to earnings from previous years resulting from the amendment were taken into account once only in the shareholders’ equity recorded in the balance sheet as of January 1, 2004. This way of proceeding ensures that the current accounts will continue to be comparable with those of previous years. As of January 1, 2004, the GFKL shareholders’ equity disclosed in the balance sheet correspondingly changed from 91.4 million Euro (old) to 75.1 million Euro (new). In subsequent years, the difference of 16.3 million Euro will flow from the undisclosed reserves back into the shareholders’ equity.
For accounting laypeople, all this is extremely difficult to understand. Therefore I will dispense with comparisons with the »old« accounting world. For purposes of comparison, we have instead recalculated the previous years’ figures so that they appear as they would have done if the new IAS changes had been applied retroactively. This means that it will be possible to compare apples with apples both now and later.
Highly gratifying half-year result for 2004
Although market conditions are still difficult, the GFKL Group was able to hold its ground on its markets. Although consolidated sales remained almost unchanged, earnings before taxes were well up on the previous year.
As of July 30, 2004, the Financial Outsourcing sector had contributed 8.7 million Euro to earnings (+ 3.8 million Euro = +77% compared to the previous year), well above the previous year’s result and well over the target figure.
As of July 30, 2004, the Leasing sector’s contribution to earnings amounted to 3.1 million Euro (+ 2.5 million Euro and +390% compared to the previous year), which was as expected well up on the previous year’s result. Due to the low level of new business in the first quarter, the gratifying growth in earnings in the leasing sector still falls below our ambitious planning for 2004. In July, the positive second quarter and the very good month of July had already reduced the shortfall in scheduled earnings to less than 10%. If the new business continues to develop in the coming months as it did in June and July, we will still manage to reach our targets for the leasing sector by the end of the year.
Without wishing to dampen anyone’s spirits, as the figures on the next page are more than impressive, I find it necessary to prevent unrealistic expectations from arising. Without the special income from phinware/ABIT, earnings after taxes in the first half-year would only have been 1.5 million Euro better than in the comparative period last year.
However, we can actually look back on a record result of 10.1 million Euro earnings after taxes for the first half-year of 2004. This corresponds to a half-year’s income of 72 cents per share.
This income was generated by approximately 750 employees from consolidated sales amounting to 227 million Euro. In the first half-year, our return on equity amounted to 26.9% after taxes.
Highlights
Acquisition of a leasing portfolio
On April 23, 2004, Proceed Securitization Services GmbH purchased a leasing refinancing portfolio from a state bank with retroactive economic effect from January 1, 2004. The receivables volume of the portfolio amounted to approximately 65 million Euro. The portfolio consists of purchased leasing installments and loan receivables which were primarily assigned for the purpose of residual value refinancing. The debtors are approximately 40 smaller and middle-class leasing companies and their lessees. The receivables purchased by Proceed Securitization Services GmbH were refinanced via the Galleon ABCP program arranged by the State Street Bank.
Foundation of Sirius Inkasso GmbH
Sirius Inkasso GmbH now manages more than 100,000 receivables belonging to VICTORIA Versicherung and D.A.S. Deutscher Automobil Schutz; approximately 12,000 new receivables are added each month. Moreover, discussions with other companies relating to the takeover of new mandates have reached an advanced stage. It is very clear that the foundation stone for sustained growth and stable results has been laid.
Acquisition of Transnedlease B.V., Eindhoven
After the successful integration of several leasing companies into the GFKL Group, the executive board has decided to make further acquisitions to promote sound growth. As of July 29, 2004, the Dutch company Transnedlease B.V. was successfully taken over from SNS Reaal Invest N.V. Through this company takeover, the GFKL Group has acquired a European company outside Germany for the first time, thereby gaining access to the lucrative Dutch leasing market.
Transnedlease B.V. was founded in Eindhoven in 1993, and is the largest independent truck and trailer leasing company in the Netherlands. In the last business year, which came to an end on December 31, 2003, the company with its 18 staff generated just under 48 million Euro of new business, corresponding to 952 agreements. This means that Transnedlease generated earnings before taxes of 2.1 million Euro in 2003.
The leasing portfolio as of June 30, 2004, which contains just under 4,000 agreements, is divided into 83% trucks and 17% trailers, and is a good addition to Universal Leasing GmbH’s previous portfolio. Since 1997, Transnedlease has also been active on the Dutch leasing market under the brand name IVECO-Lease; under this name, it acts as a »captive leasing company« for IVECO.
In future, Transnedlease will continue to manage its inventory of agreements independently, and will actively and independently generate new business under the familiar labels »Transnedlease« and »IVECO Lease«. The integration strategy intends our new subsidiaries to receive the web-based platform »Netlease« as well as to link them into the cross-company risk management and credit management process.
The new business and existing portfolio will largely be refinanced via ABN Amro’s ABCP program »Tulip«, which has been increased to 350 million Euro for this purpose.
Forecast
Due to the new business generated in Germany in June and July and because of the acquisition of Transnedlease, new business amounting to 450 million Euro (+20%) is expected in the leasing sector for 2004. Even in 2004, earnings in this sector will probably be up on the previous year – which is better than we had expected at the beginning of the year. We can expect further significant increases in earnings for 2005.The Financial Outsourcing sector can also look forward optimistically to the second half-year. This is still considerable growth potential, and if we can bring some of our current projects to a successful conclusion, this will also have a gratifying influence on future results.To conclude: for the business year 2004, the executive board is expecting business activities to continue developing positively and is counting on a further increase in consolidated net income.Yours faithfully,Dr. Peter JänschGFKL Financial Services AG