GFKL Financial Services AG - Letter to the Shareholders
Essen, 8. April 2004
Dear Sir/Madam,
Although the economic situation in Germany continues to be tense, I am happy to be able to inform you today of the positive business developments in the GFKL Group.
Annual accounts for 2003
The audit reports for the business year 2003, certificated without qualification, are now available. Sales and earnings before taxes each increased by 15%. Sales amounted to 493.0 million Euro, earnings before taxes 20.2 million Euro. Due to the income from the phinware/ABIT transaction, which was in part tax-free, we were even able to increase earnings after taxes by 26% to 14.5 million Euro. The earnings per share amounted to 1,02 Euro, and the return on equity amounted to 24.1% before taxes and 17.3% after taxes.
We are delighted to say that our two business sectors made almost equal contributions to this good result. The leasing sector generated approximately 44% of this income, the financial outsourcing sector approximately 56%.
However, we are not yet satisfied with the ratio of recurring to non-recurring income between the sectors. As in the previous years, significant parts of the earnings from leasing and outsourcing were influenced by single projects. The income from these projects is on the one hand difficult to plan, and on the other strongly dependent on the performance of individual persons.
As before, our objective is to increase the proportion of »recurring« income in order to obtain the most attractive ratings possible, also for a later public offering.
Concrete measures for increasing sustained earnings were introduced in 2002 and continued in 2003. Further to a steady increase in the new leasing business acquired by ourselves, it is also particularly worth mentioning that Sirius Inkasso has now commenced operations.
In the leasing sector, the new business acquired by ourselves increased from 285.2 million Euro to 387.8 million Euro. This increase of 36% is far above the average for this sector, and must be rated even higher as it did not have a detrimental effect on the interest income. The cash value margin contained in this new business even rose disproportionately by 60% from 23.4 million Euro to 37.4 million Euro. The increase in new business in 2003 is largely due to the successful integration of the purchased leasing companies.
In 2004, we intend to effect a marked increase in the efficiency of the leasing sector by appointing a large number of new sales personnel while maintaining the same number of administrative personnel. Our more than ambitious goal for 2005 is to achieve 60% more new business compared to 2003, while increasing personnel figures by 20%. If we reach this target, and provided the losses from non-performing commitments do not increase more than usual, we should be able to report exceptionally good results in the leasing sector from 2005.
In 2003, earnings in the outsourcing sector were more than 60% up on the previous year, and at approximately 13 million Euro, made a major contribution (56%) to GFKL’s good result for the year. Numerous new mandates were obtained, and with the foundation of Sirius Inkasso GmbH, the basis was laid for sustained positive contributions to earnings. In future, Sirius Inkasso GmbH will deal with the collection of receivables from mass business. As the first clients, Victoria Versicherung AG and D.A.S. Deutscher Automobil Schutz Versicherungs-AG will give Sirius Inkasso GmbH sole responsibility for collecting their non-performing receivables in the next five years. In the coming years, we expect Sirius Inkasso GmbH to be awarded further mandates, resulting in a steady increase in earnings. Meanwhile, it was possible to set up Sirius Inkasso GmbH’s business activities within the time-frame and budget planned.
In the outsourcing sector, a large number of small and medium-sized portfolio purchases ensured that personnel capacities were exploited in full; nevertheless, the reorganization project REEP continued and was concluded after the end of the business year.
Moreover, with the acquisition of phinware AG and the subsequent merger with ABIT AG, our concern reached an important milestone on the way to strengthening its market position in the financial outsourcing sector. In the past, we as investors were able to achieve above-average returns on the purchase of receivables portfolios. On the basis of this positive experience, we intend to intensify our investments in this area in future, and anticipate that the cooperation with ABIT AG will clearly improve our access to potential sellers of receivables. After all, the new ABIT AG which arose from the merger with phinware AG has become the market leader in the area of receivables management solutions for banks and providers.
Forecast
In view of the considerable investments made in more efficient processes, and because of the generally difficult economic situation, we expect that the leasing sector will at best achieve the same level of earnings in 2004. If we develop according to plan, significant increases in earnings may be effected from 2005.
In 2004, business in the financial outsourcing sector will again strongly depend on obtaining new individual mandates. Sirius Inkasso GmbH commenced operations a few days ago, and will contribute a positive result as early as this year; however, with regard to absolute amounts, this company’s contribution to earnings will naturally be of lesser importance at first.
In all, the executive board’s forecast for 2004 is cautiously optimistic. As in previous years, the first quarter of 2004 was disappointing. We expect a good second quarter, which means that figures for the half-year should come up to schedule. Only in the second half-year will we see whether we will be able to increase earnings for the twelfth consecutive year.
In view of the measures implemented, we are decidedly more optimistic about developments from 2005.
Flotation
Since the stock markets have recovered somewhat in the last few months, we are frequently asked about our plans with regard to flotation. You all know that we wanted to make an initial public offering in 2001, and that the deteriorating market conditions from mid-2001 caused us to refrain from this.Almost three years have passed since this event, and GFKL can provide evidence of remarkable growth for these three years. The business model was developed further, and earnings have more than quadrupled, rising from 3.8 million Euro in 2000 to 20.1 million Euro in 2003. This increase in earnings corresponds to an average 74% per annum (CAGR).During these years, confidence in the sustainability of our business model and in the positive development of our earnings increased: therefore, it is not surprising that in view of the positive development of the capital markets for various articles, the press believes us to aspire to flotation in Fall 2004. Even though we are delighted by this positive view, we currently exclude the possibility of an initial public offering during 2004.In concordance with the supervisory board, the executive board is convinced that we should allow a medium term of 18-24 months to pass before considering an initial listing.There are many reasons for this conviction: first of all, it has not yet been proved that we stable capital market conditions really exist for business models in need of explanation. In addition, the capital market is currently much more critical of companies whose profit planning is strongly dependent on project business than it was three years ago. Moreover, we believe that if we floated the company in 2004, the potentials of our new business activities in the outsourcing sector would only be realized with significant reductions. After all, our company does not currently need further shareholders’ equity, either from a liquidity viewpoint or with regard to the balance sheet. Therefore, in the next 18-24 months, we will intensify our efforts to increase our »recurring« income and concentrate on the step-by-step expansion of our two business areas.In the last few weeks, various private investors have addressed the executive board on the subject of whether it might be possible to place some shares privately as an alternative to a public offering.The executive board is ready to coordinate such a sales process. In order to keep the associated pressure on the executive board as low as possible, we would be grateful if you could inform us by the end of the month whether you would be ready to buy or sell shares, and if so, how many and at what price. We currently believe that a purchase price of 12.00 – 12.50 Euro would be marketable.Here I would like to express my thanks to all staff and business partners for their commitment, and to our shareholders for their trust. The success of GFKL will remain our joint success in the future.Yours faithfully,Dr. Peter JänschGFKL Financial Services AG
