GFKL Financial Services AG - Letter to the Shareholders
Essen, 24. August 2005
Dear Partners, dear Sir/Madam,
The GFKL Group continued to generate high sales and earnings during the first half of the current business year.
Leasing sector
We are pleased to report that new business in the leasing sector was 37% up on the previous year, increasing from 175.6 million EUR to 241.5 million EUR. This includes strong organic growth in Universal Leasing GmbH, where new business rose by 21 percent from 175.6 million EUR to 211.9 million EUR. 29.6 million EUR of this new business was generated by the Eindhoven-based company Transned Lease B.V., which was taken over in July 2004. Our newly founded company Universal Leasing Ltd. in London commenced operations on June 1 as planned. Forecasts indicate that the volume of new business in England will reach 23 million EUR during the second half-year; the initial investment is expected to be recouped in full by the end of the coming year. In all, we are well on the way to reaching our ambitious target of more than 500 million EUR in new leasing business for the GFKL Group this year.
As credit losses during the first half-year did not exceed the limits set, this gratifying growth in sales led to a significant increase in the income generated by the leasing sector. During the first half-year, earnings before taxes in the leasing sector amounted to 5.3 million EUR (+67 percent / 2004: 3.1 million EUR).
Where our cost structure is concerned, our high degree of efficiency can stand up to any comparison. We are observing a marked intensification of competition on the market. The banks in particular frequently offer credit to customers of average and poor credit standing at inadequate interest rates and hope to recoup their losses by means of “cross-selling”. This strategy has never been successful in the past, and was consequently always revised some time later. We are therefore observing developments critically but calmly.
With the issue of an ABS bond (FAST 2005 Limited) in March with a volume of 450 million EUR, GFKL carried out its first successful capital market transaction on its own account and further strengthened its wide refinancing basis. Therefore we are able to purchase more than 97% of the necessary third-party funds at an interest margin of less than 0.2% p.a.
Financial Outsourcing sector
During the first half-year of 2005, income in the Financial Outsourcing sector rose markedly, and at 40.8 million EUR was 65 percent up on the previous year’s figure of 24.8 million EUR. This reflects the upswing in business at Sirius Inkasso GmbH after the start-up phase, a marked increase in sales at Proceed Asset Trading GmbH, and the effects of the full consolidation of ABIT AG.
The Financial Outsourcing sector’s contribution to earnings before taxes fell from8.7 million EUR in the previous year to 5.8 million EUR (- 33 percent). However, it must be considered that the previous year’s result was influenced by the dissolution of the valuation reserve for phinware AG, which accounted for approximately 3.5 million EUR of income from the Financial Outsourcing sector in 2004.
The planned merger of ABIT and GFKL is extremely important for the further development of the Financial Outsourcing sector. At the annual shareholders’ meetings in Essen and Düsseldorf in June, shareholders in the respective companies had to come to a decision regarding this step – and agreed to the merger proposal with an overwhelming majority of 100 percent (GFKL) and 95 percent (ABIT) respectively. However, as expected, ABIT had to deal with objections which are these days a matter of course for companies listed on the stock exchange. Nevertheless, I am sure that ABIT will confront this challenge with the same professionalism and efficiency as they used in managing the extremely demanding annual shareholders’ meeting, and that it will be possible to carry out the merger as planned with retroactive effect from January 1, 2005.
Independent of this, the collaboration between GFKL and ABIT also bore fruit in the second quarter. Together we succeeded in acquiring a service mandate from a major German bank for the handling of non-performing credit commitments in the private client sector – a seal of approval for the quality of our work together to date. This is the first time ever that a major German bank has outsourced the handling of an entire problem credit sector to an external service provider. A long-term cooperation is planned. This mandate is therefore another important milestone in our strategy of increasing the proportion of sustained recurring business in the GFKL Group.
30% growth in sales but lower profits in the first half-year
In all, the Group’s income during the first half-year of 2005 was 29 percent up on the previous year, rising from 257.3 million EUR to 330.5 million EUR. Despite this increase, earnings declined as the first half-year of 2005 was the first period for some time in which we were unable to book any one-off income.
Nevertheless, we are satisfied with the half-year result, as it was possible to increase earnings from sustained business as planned.
When comparing the development of earnings in the first half-year of 2005 to the first half-year of 2004, it is necessary to consider the one-off effect of the 7 million EUR ABIT/phinware transaction in 2004. After corresponding adjustment, it can be seen that our profits in the first half-year of 2005 almost doubled, while sales rose by 30%.
The future needs a foundation
The balance for the first half-year therefore sustains the successful trend of the previous years. At our ordinary annual shareholders’ meeting in June, I described the business development of the GFKL Group since our Financial Outsourcing sector commenced operations seven years ago.
What has GFKL achieved over this period?
Here are a few figures that speak for themselves. In 1988, approximately 70 employees generated revenues amounting to 65 million EUR. Over the last seven years, both figures have increased by a multiplier of 9. In 2004, approximately 660 employees correspondingly generated revenues amounting to 565 million EUR. Earnings before taxes grew even more by a multiplier of 14 from 1.3 million EUR to 19 million EUR; an impressive result which deserves a vote of thanks to all employees whose commitment has contributed to the success of the GFKL Group.
Dividend policy
In view of GFKL’s strong profit situation, shareholders will naturally want to know how this affects the distribution of dividends. The executive and supervisory boards are endeavoring to maintain a sustainable, consistent dividend policy. The proportion of the profits not needed for medium-term planning can be released for distribution. However, the formal basis of distribution is not the consolidated net earnings for the year according to IFRS, which amounted to 14.1 million EUR during 2004, but the individual result of GFKL Financial Services AG according to the HGB (German commercial accounting). This individual HGB result is – except for dividends – of little economic significance and strongly influenced by questions of tax optimization and allocations to subsidiaries. For reasons which cannot be detailed here, there is at present – unfortunately – no formal basis for a distribution of dividends. The executive board is working on changing this in future, but at present cannot promise that it will be possible to implement this in full this year. However, as far as corresponding company developments allow, the formal conditions for a distribution of dividends will exist for the profit generated during the business year 2006 at the latest.
Forecast for the second half-year
In my letter to shareholders concerning the consolidated accounts for 2004, I explained the GFKL Group’s forecast for the business year 2005, i.e. our ambitious targets. After the first six months, I am able to inform you that GFKL has been able to adhere to the course planned. Staff and management are unswervingly committed to continuing this course in the second half-year.
Yours faithfully,
Dr. Peter Jänsch
GFKL Financial Services AG
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