ORIX Corp (IX) 2004 Q1 法說會逐字稿

Good morning and thank you all for holding. All parties will be on listen only until the question and answer segment of today's conference call. I would like to turn the call over to today's speaker, Mr. Raymond Spencer. Thank you, sir, you may begin.

Welcome, everyone to ORIX earnings conference call for the 3 months ended June 30 2004. My name is Raymond Spencer, I'm here joined with Mr. Takeda, Shunsuke. Mr. Shunsuke Takeda who is our Deputy Vice-President and Chief Financial Officer as well as Mr. Masaru Hattori who is the Corporate Senior Vice-President in Charge of Accounting. I will now ask Mr. Takeda to give a brief summary of the first quarter results. However before we get started I'd like to mention that this conference call may contain forward-looking statements about future events and financial results and involve risks and uncertainties. Such statements are based on our current expectations and are subject to uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors thats could cause such a difference included but are not limited to those described in the risk factors in the Company's annual report on form 10F filed with the United States Securities and Exchange Commission. Now, I'll assume that everyone has a copy of the document called the Analysis of First Quarter Results dated July 29, 2004. This document will be used in today's presentation, so now please turn to page number 1. And I will ask Mr. Takeda to do a short presentation.

Hello, everybody my name is Shunsuke Takeda and I'm the CFO for ORIX. Today I'd like to talk about 3 things. First I'll give a brief introduction, go over financials, next I'll talk about our automobile leasing business, and then finally I'll comment on the forecast before I ask Mr. Spencer to make a short presentation on our first quarter results. Yesterday we announced that net income grew 67% to 23.5 billion yen and that was up 66% in the first quarter. Our growth over the last couple of years has been to increase profit without increasing assets.

From this fiscal year they have not completely changed our strategy but we look to increase good asset while we aim for higher productivity. At the same time we also continue to consent on high value added product and segments such as automobile maintenance leases and loan [stores] for example. I believe that our results show the success of this strategy. On the revenue side in Japan the automobile leasing operations, corporate renting and precision measuring and other equipment rental, and other financial operations performed steady.

In addition, we had larger contributions than usual from net gains on sales of investment securities associated with venture capital corporations. Overseas in the Asia and Oceania region we saw a steady performance from our automobile leasing and corporate renting operation and Europe moved back into the black. On the cost side, we have seen a drop in provisions due to efforts to improve asset quality over the last couple of years through it's careful selection of new assets. Furthermore, there are no write-downs among these assets this quarter. On the other hand, although assets were brought to March 31, 2004, the shareholders' equity increased and the shareholderers' equity rose from 10 points 1,000 to 10 points 5,000.

At the same time we have further strengthened our balance sheet as the debt equity ratio improved from 6.85 at March 31, 2004, to 6.5 times at June 30, 2004. Also if you look at the profitability an annualized basis ROE improved 10.9% to 16.2% and ROA went from 0.95% to 1.67% year over year. Now, I'd like to talk a little bit about our automobile operations. Earlier this month we announced our decision to integrate 7 of our automobile related group companies into a Company called ORIX Auto Corporation on January 1, 2005.

Combined these Companies account for just over 500,000 vehicles. Automobile leasing is the radial for strategic forecast for ORIX. Therefore, we believe that the integration of these 7 Companies will help us further expand our automobile renting business to take advantage of the resulting [market] and allow us to create new value added solutions. The largest metric will allow us to improve our bargaining power with the dealers and the maintenance shops when it comes to the purchase of vehicles and parts. At the same time, we will be able to reduce our costs and increase efficiency by integrating the so-called back yard function of our automobile related businesses.

In addition, we'll be able to create a seamless product mix that can meet the needs of customer for both long-term business and short-term rentals so the integration of the automobile leasing and rental operations as we fully take advantage of the network and experience of these Companies. In terms of our target for the number of vehicles under management we are aiming to achieve 1 million vehicles by end of March 2008. Which is double the number we presently have through organic growth and M&A. By expanding our reach we expect that we'll be able to increase our [share gain] as we take advantage of larger scale [metrics] while creating new value added solutions. Now as a final topic that I'll cover is the forecast for this fiscal year.

For the fiscal year ending March 31, 2005, we forecast revenues of 760 billion yen, income before income taxes of 190 billion yen net income of 60 billion yen 11% year on year. At this time we have not made any changes to our original forecast. As we just have started out the past quarter. Now I like to ask Mr. Spencer to make a short presentation on the past quarter results. Mr. Spencer

Thank you, Mr. Takeda. As Mr. Takeda has already given a summary of the first quarter results I will ask to you please look at page 2 of the Analysis of First Quarter Results which covers new business volumes. Our new business volumes refer to the new asset based transactions that occurred during the fiscal year. Here you can see that the new business volumes are flat compared to the previous fiscal year as we have continued to carefully select new assets. In terms of those item that's increased year-over-year installment loans were up mainly to the increase of loans to corporate customers in Japan.

On the other hand although assets associated with the automobile leasing operations were steady new receivables were down for direct financing leases due to the continued cautious acquisition of new assets in Japan and an effort to hold down growth of assets in the United States. Operating leases were flat with increases in Japan due to the increase in assets associated with the precision measuring and other equipment rental operations and automobile operating leases which was balanced by a decrease overseas due to the the purchase of real estate. Finally investment in securities was down in the first quarter compared to the previous first quarter as we had a replacement of some assets in the portfolio out of ORIX life insurance in the first quarter of the previous fiscal year.

Now, please turn to Page 3 of the Analysis of First Quarter Results that shows operating assets. As can be seen here following the same trend as new business volumes operating assets were also flat. While investment and securities was up on March 31, 2004, due mainly to the purchase of securities at ORIX's life insurance this was balanced by the decrease in operating assets associated with installment loans due to the decline overseas and the slight decline associated with operating leases. Now we are on slide number 5 of the Analysis.

Here revenues were up 14% year on year to 193 billion yen. Although the automobile leasing operations performed steadily. Revenues from direct financing leases fell compared to the same period of the previous fiscal year as a result of a lower balance of assets. As we have continued to carefully select new assets and focus on the profitability of each transaction for assets other than those associated with operating - - or other than those associated with the automobile leasing operations. Life insurance premiums and related investment income was flat year on year as we have continued to shift to more profitable insurance products.

Residential condominium sales were down as fewer condominiums were sold to buyers in the first quarter as planned for this fiscal year. We expect to see more condominiums sold in the second and fourth quarters. In addition although gains on sales of real estate under operating leases were down, if we combine this figure with the figure for discontinued operations there was only a slight decline year on year. On the other hand revenues from operating leases increased due to the recovery of the precision measuring and other equipment rental business and expansion of the automobile rental operations.

Interest on loans and investment securities was up due mainly to the strong contribution from corporate loans including nonrecourse loans. In addition, brokerage commissions and net gains on investment securities increased due to the growth and brokerage commissions owing to the improvement of the stock market in Japan and increase in net income - - or sorry, net gains on the sales of investment securities associated with our venture capital operations. We also saw growth in the other operating revenues due to the strong performance from our building maintenance operations and from the increase in revenues associated with companies we invested in as part of our corporate rehabilitation business in the second half of the previous fiscal year.

In total, our corporate rehabilitation business accounted for about 40% or 20 billion yen of other operating revenues. Next please turn to slide - - or page number 6 of the Analysis of Results which shows expenses. Overall expenses increased less than revenues and were up 9% year on year. First of all depreciation for operating leases and other operating expenses increased year in year in line with increases in revenues.

Selling, general and administrative expenses were up only 4% despite the expenses associated with the increase in the number of consolidated companies in the previous fiscal year. On the other hand interest expense declined due mainly to the lower levels of operating assets. Life insurance costs decreased mainly as a result of the change in the product mix due to shifts towards more profitable insurance products. Costs of resident condominium sales decreased in line with lower residential condominium sales.

In addition the provision for doubtful receivables and probable loan losses declined. And we expect it to be about 40 billion yen for the entire fiscal year. Also, write-downs of securities were down compared to the same period of the previous fiscal year. Furthermore there were no write downs of long lived assets in the first quarter of this fiscal year. Next slide, page number 7, please of the Analysis.

Here we can see that both income before income taxes and net income were up substantially compared to the same period of the previous fiscal year as they rose 51% and 67% which is equivalent 37.1 billion yen and 23.5 billion yen respectively. We had a steady performance from equity and net income of affiliates and also recorded a gain on the sale of affiliates as a wholly owned subsidiary ORIX life insurance sold a portion of the ORIX J. REIT that is holds. Finally the contribution from discontinued operations due to the increase in the number of transactions contributed to the net income.

Please now turn to page number 9 of the Analysis. What we've done here is to divide those segments with higher profits and those segments which had lower profits. As you can see here we had 7 segments that had improved and 2 segment that had lower profits compared to the first quarter of the previous fiscal year. First looking at those segments with higher profits.

The corporate financial services segment saw higher profits due to the steady performance from the automobile leasing operations, the increase in the insolvent loans to corporate customers and the reduction in provisions. Next the rental operations was up thanks to the recoveries of Precision Measuring and other equipment rental operations. The real estate related finance segment improved a result in the increase in housing loans and the steady performance from the corporate lending operations that includes nonrecourse loans.

The life insurance segment achieved higher profits thanks to the shift to more profitability life insurance products and the sales in shares of an affiliated company. In our overseas operations Asia and Oceania was up due to the contributions from automobile leasing and corporate lending of a number of companies in the region, in addition to an increase in equity in income of affiliate. While Europe moved back into the block after experiencing a segment loss in the same period of the previous fiscal year when we reported losses on certain equity method investments. Now turning to those segments with lower profits.

First of all our real estate segment was down despite the gains from the sale of office buildings as we sold fewer condominiums as planned, to buyers in the first quarter than in the previous fiscal year. Finally the Americas was lower compared to the first quarter of the previous fiscal year as we experienced a loss from an equity method affiliate there. Now if I may ask to you turn to page number 12 of the Analysis and Results which covers our funding and asset quality summary. I will not go into detailed however I would like to make 2 points.

First, on the one hand we have increased the ratio of long term funding over the last couple of years. And have kept at at over 70% over the last several quarters as we are anticipating a rise in the long term interest rate. At the same time we have maintained a good balance in funding from the capital markets and from the financial institutions. And second, in terms of our asset quality we have seen a considerable improvement over the last couple of years as we've cleaned up our portfolio, as we've carefully selected new assets to buy and focused on the profitability of transactions. Now we will turn to the Q&A session so please free to ask management any questions that you may have. And thank you for your time.

Thank you. Thank you at this time if you do have a question, press star 1 on your touch tone phone. To remove your question from the queue you press pound or the hash. You will be announced prior to asking your question. Again press star 1 on your touch tone phone . Once again to ask a question press star 1 on your touch-tone phone. Once again if you do have a question please press star 1. Okay. We do have one question. We have Margaret Moore. Your line is open. You may go ahead.

Thank you for having the conference call and congratulations on the quarter. I was wondering if you could talk about your expectations for the sustainability of some of your businesses in terms of the real estate business both on the office side and the condominiums. Are you seeing prices on land low enough to find new investments a attractive? Similarly on the corporate rehabilitation side what is - - can you talk about demand in the form of new client inflow or new business inflow? And given the recent moves you've made in your up in North America do you think you have the businesses right sized in terms of assets and costs? And are you looking to just maintain them at their current level? Thanks.

And I'll just have to talk to management here for a second so I'll put you on hold.

Okay.

So that we can discuss the answer.

Hello, this is Takeda speaking, I'd like to answer your questions. Your first question is the sustainability of condominiums development business. As for condominiums development investment has been holding steady in the past couple of years mainly in the total [and metal pole] area and while there is some, you know, the sign of slow down of the condominium sensed in the total area, still we could see good business opportunity. Once we could identify a better location of property and so I think you know this trends are going to be maintained for awhile. And as you know the sales in the Japan property market is you know decreasing. While there has been such degree of decline has been mitigated now days. But anyway from our viewpoint there might be a good opportunity for us to sustain to perform in the sustainable you know the sustainable property - - sorry, condominium development operations . And office buildings, the same situation. As for corporate - - so-called corporate rehabilitation business which is, you know, the still new business opportunities here and in Japan in the major markets. But still supporting their loan portfolio to the market and along with such, you know, the [quota] from the major banks we could identify. There are plenty of opportunities for such a corporate rehabilitation business. And the important thing for such a corporate rehabilitation operation is of course you know the funding capability but also you know the other important factor is how we could, you know, manage the invested company from the so-called hands on basis. Without such, you know, capability to provide a management support to those invested companies, it's very difficult to be successful in the corporate rehabilitation business. But as far as ORIX operations in this sector is concerned, as we got such a capability to provide management support to our invested company, we could expect, you know, good business opportunities in this sector. Your third question, our operations. As you may know we have been struggling to restructure U.S. operations in the past couple of years. But finally we have completed the restructuring last year. And we are now expecting some upside [mobile] in our U.S. operations and particularly in the period of so-called commercial mortgage bank, business and loans operations we got substantial expenses. But we like to pursue this sort of CMBS operation we are one of the major players in the market. But other operations such as equipment leasing, we've been pursuing this business very carefully and - - anyway, you know, as for U.S. operations we like to, you know continue as we've stated for our operations. That's all. Did that answer your question?

Yes. Thank you.

Okay. Thank you.

Once again if you do have a question, please press star 1. We're showing no further questions at this time.

Okay. Well I'd like to thank everyone for participating in the call please feel free to contact me at ORIX IR at orix.co.jp if have you any further questions. Thank you. Good day, good afternoon, and good night.

Thank you. That concludes today's conference call. You may disconnect at this time. Thank you.