ORIX Corp (IX) 2004 Q2 法說會逐字稿

Welcome to the Orix Interim Results Conference Call. (OPERATOR INSTRUCTIONS.) I would like to hand over the line now to Mr. Raymond Spencer.

Welcome everyone to Orix’s conference call for the six months ended September 30, 2004. My name is Raymond Spencer. I am joined here today with Mr. Yasuhiko Fujiki, who is our President and COO, as well as Mr. Masaru Hattori, who is the Corporate Senior Vice-President in charge of accounting.

In this conference call today, we are going to have a short comment by Mr. Fujiki. Then I will make a presentation for about 20 minutes. Afterwards, we will open up lines for questions. I will now pass things over to Mr. Fujiki, as he would like to introduce himself.

Good morning everyone. I am Yasuhiko Fujiki, the President and COO of Orix. I will be very happy to answer any questions that you may have on Orix’s results and strategies at the end of this presentation. I will now ask Mr. Spencer to make a short presentation on our results.

Now, before we get started, I would like to mention that this conference call may contain forward-looking statements about expected 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 that could cause such a difference include, but are not limited to, those described in the risk factors in the Company’s Annual Report on Form 20-F, filed with the United States Securities and Exchange Commission. Now I will assume that everybody has a copy of a document called Analysis of the Interim Results dated October 26, 2004. This document will be used in today’s presentation.

Now if I could ask everyone to turn to page 1 please. Yesterday we announced that revenues in the first six months of the fiscal year ending March 31, 2005 increased 17% year-on-year to 402.4b yen. Income before income taxes rose 24% to 69.2b yen. And net income grew 36% to 42.7b yen.

Now revenues from operating leases, interest on loans and investment securities, brokerage commissions and net gains on investment securities, and other operating revenues, grew during the period. In addition, interest expense and provision for doubtful receivables and probably loan losses decreased in the same period, while gains on sales of affiliates contributed to higher earnings. In terms of segments, all were up but one.

Now assets were up slightly on March 31, 2004, and the shareholder’s equity increased, and the shareholder’s equity rose from 10% at March 31, 2004 to 10.8% at September 30, 2004. At the same time, we have further strengthened our balance sheet, as the debt to equity ratio improved from 6.8 times at March 31, 2004 to 6.3 times at September 30, 2004.

Also, if you look at our profitability on an annualized basis, ROE improved from 12% to 14.4%, and ROA went from 1.08% to 1.5% year on year. Now our goal over the last couple of years has been to increase profits without increasing assets. From this fiscal year, we have not completely changed our strategy. But we will look to increase good assets while we aim for higher profitability.

At the same time, we will also continue to concentrate on high value added products and services. Our strategy is to continue to expand our existing franchises, and create new franchises. We believe that our results show the success of this strategy.

Please take a look at page 2 of the analysis of interim results, which covers new business volumes. Our new business volumes refer to the new asset-based transactions that occurred during the first half. Here you can see that new business volumes were up 19%, compared with the same period of the previous fiscal year.

In terms of those items that significantly increased or decreased year on year, installment loans were up, due mainly to the increase of loans, including non-recourse loans, to corporate customers in Japan. Investment in securities were up, due mainly to the replacement of some assets in the portfolio at Orix Life Insurance. On the other hand, other operating transactions were down, due to a decrease in the purchase of land for residential condominiums.

Next please turn to page 3 of the analysis. That shows operating assets. As can be seen, operating assets were up just over 1% on March 31, 2004. While all operating assets on the whole were up in terms of volume, the installment loans were up the most, due mainly to the increase of loans, including non-recourse loans to corporate customers, followed by investment and securities. That was up mainly due to the purchase of securities at Orix Life Insurance.

Now we are on page 5 of the analysis of interim results. Here you can see that revenues were up 17% year-on-year to 402b yen. Here again, concentrating on the major items that were up or down, revenues from operating leases increased through the expansion of the precision measuring and other equipment rental businesses, and expansion of the automobile rental operations.

We also saw growth in other operating revenues, which was up by about 51b yen year-on-year, due mainly to the increase in revenues associated with companies that 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 over 40% of other operating revenues.

On the other hand, residential condominium sales were down, as fewer condominiums were sold to buyers in the first half, as planned for this fiscal year. We expect to see more condominiums sold in the second half of this fiscal year. In addition, the number of condominiums expected to be sold to buyers for this fiscal year is less than that of the previous fiscal year.

Next please turn to page six of the analysis of results, which shows expenses. Overall expenses increased less than revenues, and were up 16% year on year. Costs of residential condominium sales decreased, while other operating expenses increased, for the same reasons as given under revenues. Selling, general and administrative expenses were up about 10b yen, compared to the first half of the previous fiscal year, owing mainly to the increase in the number of consolidated companies in the second half of the previous fiscal year. Of this 10b yen rise, about 90% was due to expenses associated with our corporate rehabilitation business.

Write-downs of long-lived assets were up, due mainly to the write-down of about 7.7b yen that was associated with one building in Japan, which was reclassified from office facilities to rental purpose, after it was decided that the building would be rebuilt. We still believe that we will have roughly 10b yen in write-downs of long-lived assets for this fiscal year.

Referring to page 6 of the analysis of interim results, you can see that the provision for doubtful receivables and probably loan losses was down by 30%, to 16.8b yen, compared to the first half of the previous fiscal year. We believe that this was due to two factors.

First, the overall improvement in the economy has had a positive impact on asset quality. And second, we believe that our efforts to further strengthen our risk management function has allowed us to more effectively manage risks associated with our business. For the full year, we do not expect provisions to be larger than 40b yen.

Please turn to page 7 of the analysis of interim results. 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 24% and 36% to 69.2b yen and 42.7b yen, respectively. We had a steady performance from equity net income of affiliates, considering that in the first half of the previous fiscal year included the recognition of 5.4b yen for Korea Life Insurance, attributable to a change in tax rules in Korea.

We also recorded gains on sales of affiliates, as Orix Life Insurance sold a portion of the Orix (indiscernible) that it holds in the first quarter, and Orix sold its stake in (indiscernible) in the second quarter. Finally, the contribution from discontinued operations increased, due to the increase in the number of transactions.

Now please turn to page 9 of the analysis of interim results. What we’ve done here is to divide those segments with higher profits and those segments which saw lower profits. As you can see here, all but one segment posted higher profits, and segment profits increased 41% overall, compared to the first half of the previous fiscal year.

First, looking at those segments with higher profits, the corporate financial services segment was up, as installment loans for corporate customers expanded. In addition, the automobile leasing operations performed steadily. Furthermore, the lower provision for doubtful receivables and probably loan losses also contributed to higher segment profit.

For the rental operations, segment profits increased, as precision measuring and other equipment rental operations recovered, thanks to the pick-up in capital expenditure. In addition, the automobile lease operations were up with the acquisition of JAPAREN.

Real estate related finance also rose as the housing loan operations and corporate loans, including non-resource loans, performed steadily. In addition, the expansion of the loan servicing operations also contributed to segment profits.

Real estate saw fewer condominiums being sold in the first half, as expected for this fiscal year. One of the reasons for the lower segment profit was due to the cost associated with advertising. These costs must be recognized once they occur. However, we only recognize profits on the sale of condominiums once they had been sold. Therefore, there is a slight mismatch in terms of the recognition of costs and profits.

On the other hand, we expect to see more condominiums in the second half of this fiscal year. And the number of condominiums expected to be sold to buyers for this fiscal year is less than the previous year. Here we expect to build about 2,400 units for this fiscal year, which is about 300 less than anticipated, as the construction period has been moved forward for these units.

Furthermore, profits from the sale of office buildings were down. However, the lower write-downs of long-lived assets, as compared to the same period of the previous fiscal year, resulted in higher segment profit.

Next, looking at life insurance, here the segment profits increased, due to a shift to more profitable life insurance products, and the recognition of gains on the sales in the first quarter of this fiscal year.

The other segment saw less of a contribution from the consumer card loan operations, as a result of a stricter credit screening process that led to a lower loan balance, and subsequent lower interest on loans. However, lower provision for doubtful receivables and probable loan losses had a positive impact on segment profit.

In addition, brokerage commissions at our securities brokerage expanded, due to the increase in trading volume on the stock market. In addition, net gains on investment securities were up at our venture capital operations, and equity and net income of affiliates also increased.

In the Americas segment, net incomes on investment securities increased, due mainly to the sale of some commercial mortgage-backed securities,. And the sale of some real estate also contributed to higher segment profit.  Furthermore, the lower amount of non-performing assets resulted in a decrease in provisions for doubtful receivables and probable loan losses.

However, and equity method affiliate went from a gain in the first half of the previous fiscal year to a loss in the first half of this fiscal year. Europe turned around from a segment loss to a segment profit, as this segment reported losses on certain equity method investments in the same period the previous fiscal year.

Now, turning to those segments with lower profits, Asia Oceania had a very good performance from the automobile leasing and corporate lending of a number of companies in the region that performed steadily, in addition to the ship-related operations. However, equity in net income of affiliates in the same period of the previous fiscal year included the recognition of deferred tax assets of about 5.4b yen, for Korea Life Insurance, that was attributable to a change in tax rules in Korea. As a result, segment profits were lower.

Next please refer to page 12 of the analysis of interim results, which covers our funding and asset quality summary. In terms of asset quality, we have seen a considerable improvement over the last couple of years, as we have cleaned up our portfolio, as we have carefully selected new assets and focused on profitability of transactions.

Next please refer to page 13 of the analysis of interim results. First of all, we manage liquidity risk by diversifying our funding sources, establishing committed credit lines with financial institutions, and adjusting levels of short and long-term funding, in consideration of market conditions. Here we have worked to maintain a good balance in funding from the capital markets and from financial institutions.

Orix has continued to diversify its funding methods and sources, in order to maintain stable access to funding. Orix had borrowings from 203 institutions as of September 30, 2004. In April, 1998, Orix was the first company in Japan to directly sell CP to investors. Orix has worked to increase the number of investors to whom it sells directly, directly sells CP. The balance of CP issued directly to such investors in Japan accounted for 87% of Orix’s domestic CP.

In addition, in February, 2004, Orix was the first public company to make a public offering of electronic CP, while attempting to control risks and lower costs. At the end of September, 2004, electronic CP accounted for 75% of Orix’s balance of CP outstanding in Japan. And we aim to raise this to 100% by next fiscal year.

Orix separately issues bonds that are primarily for institutional investors, and those that are primarily for individual investors. So we are attempting to keep a balance between these two. We have also increased the ratio of long-term funding over the last couple of years, and have kept it at over 70% over the last several quarters. We would like to keep this ratio at about this level going forward, in order to reduce our liquidity risk.

In order to sustain the high level of liquidity, Orix has secured committed credit lines with a number of financial institutions. You can see that the total committed credit lines were 956b yen at September 30, 2004.

Now the final topic that I will cover is our forecast for this fiscal year. For the fiscal year ending March 31, 2005, before cash revenues of 780b yen, income before income taxes of 122b yen, and net income of 74b yen, up 37% year on year. In addition, basic earnings per share is forecasted to be 883.04 yen per share. And this forecast represents a revision to the numbers that we made in April of 2004.

Now that ends the formal portion of the presentation. I would like to open up the line for any questions that you may have for Mr. Fujiki or Mr. Hattori.

(CALLER INSTRUCTIONS). (NO QUESTIONS).