ORIX Corp (IX) 2004 Q3 法說會逐字稿

Good morning, good afternoon, and good evening to all participants. Welcome to the ORIX Corporation conference call. For the duration of the presentation, all lines will be placed in listen-only mode. A question-and-answer session will follow the main presentation. (OPERATOR INSTRUCTIONS) I would also like to inform you that the conference is being recorded. If you have any objections, you may disconnect at this time.

Now it would like to turn the call over to your speaker, Mr. Raymond Spencer, and I will be standing by for the question-and-answer session.

Thank you. Welcome, everyone, to ORIX's earnings conference call for the 3 and 9 months period ended December 31, 2004. My name is Raymond Spencer. I'm joined here today with Mr. Shunsuke Takeda, who is our Vice Chairman and CFO; as well as Mr. Masaru Hattori, who is the Corporate Senior Vice President in charge of accounting.

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 that involve risks and uncertainties. Please see Slide 2 for details. I will assume that everyone has downloaded the presentation material that has been posted under the calendar section of our IR website at 6:00 PM Tokyo time today.

I will now ask Mr. Takeda to give a brief summary on the results for the first 9 months of this fiscal year.

Hello, everyone. My name is Shunsuke Takeda. And I am the Vice Chairman and CFO for ORIX. Today I would like to give a brief overview of the results and the forecast. Then I will ask Mr. Spencer to make a short presentation. On February 4, 2005 we announced that net income grew 48 percent to 67.7 billion yen and diluted EPS was up 46 percent to 743 yen for the first 9 months of this fiscal year. Our goal over the last couple of years has been to increase profits without increasing assets (ph). In this fiscal year we have not completely changed our strategy but we have continued to increase good assets while we aim for higher profitability by growing the top and bottom lines.

Here we saw effort up 4 percent for March 31, 2004 and were able to achieve an annual rate of ROI of 1.57 percent and ROE of 15 percent in the first 9 months of this fiscal year. Furthermore as a result of our strong performance, we have revised up our forecast for the fiscal year as we expect a situation in the trends that we have seen in the past 9 months. We forecast revenue of 810 billion yen; income before income taxes of 134 billion yen and net income of 18 billion (ph) yen for the fiscal year ending March 31, 2005.

Now I ask Mr. Spencer to make a short presentation of our results.

Thank you, Mr. Takeda. Now if I could ask everyone to turn to Slide number 3, today I will make an overview of the presentations made by Mr. Takeda and Mr. Hattori at the earnings announcement today in Tokyo. Mr. Takeda's presentation is from Slide 3 to Slide 8 and Mr. Hattori's presentation will cover the remaining slide.

In the first section I will concentrate on three points throughout this presentation which include an overview of the 9 months ended December 31, 2004, our outlook and forecasts for this fiscal year, and our business portfolio.

Slide 4 lists the top four events of our latest earnings announcement. First of all, all segments with the exception of the Asia and Oceania segment had higher profits compared to the same period of the previous fiscal year. This also marks the highest profits for a 9 month period and a full year-to-date. Although Asia and Oceania was down 2 percent, please remember that in the same period of the previous fiscal year we had the recognition of deferred tax assets of about 5.4 billion yen for KLI, Korea Life Insurance, attributable to a change in the tax rules in Korea. Taking out this one-off factor, the Asia/Oceania segment would have been up by about 50 percent.

The second point I would like to cover is the expansion of our franchise value. Here we were able to strategically grow this through the expansion of our corporate financial services segment by concentrating on an automobile maintenance leasing operations and corporate lending while at the same time working to reduce the level of provisions needed.

The third point to make is that we have been able to create new franchise value by growing or Real Estate-Related Finance segment. This has been accomplished through the contribution from loans, which include nonrecourse loans and our loan servicing operations.

Finally the last topic I would like to discuss is that our venture capital operations here in Japan and securities investment operations in the U.S. have made a large contribution through net gains on investment and securities.

On Slide 5, here you can see that segment profits were 136.2 billion yen in the first 9 months of this fiscal year, which is 45.2 billion yen higher than the same period of the previous fiscal year. As shown here, 4 segments that include the corporate financial services segment, Real Estate-Related Finance segment, the other segment, and the America segment account for about three-quarters of the increase in segment profits.

As Mr. Takeda has already covered our forecast provision, I will make just 1 additional point here on Slide number 6. The reason that we have made the forecast that we have is due to the uncertainties surrounding the market environment in terms of net gains on investment securities. Second, we are not expecting any substantial gains on sales of affiliates. And finally, we expect equity and net income affiliates to be much lower in the fourth quarter compared to the third quarter.

Slide 7 here has been prepared to help you understand ORIX's management strategy and how it manages its business portfolio. One of the characteristics of ORIX's business is that it has become diversified as the needs of our customers have change over time. As a result, we have had to manage the profitability and risk of a variety of businesses in our portfolio. When managing our portfolio of businesses, we look at profitability, growth, and stability when allocating capital and divide our business portfolio into 3 groups, namely Group A, Group B, and Group C. Group A includes businesses that focus on our existing franchise that centers on the provision of financial services to SME's and the retail market in Japan.

Group B comprises businesses that have evolved out of financing. This group includes such businesses as automobile related operations, the rental and precision measuring equipment, and our real estate-related operations. Group C includes our principal investment in corporate rehabilitation businesses. Now in the first 9 months of this fiscal year, Group A and Group B both made up about 40 percent and Group C, 20 percent of our profits.

Looking at the trend over the last 5 years you can see that the income before income taxes for Group A here in Slide 8 has increased at a stable rate and Group B and Group C which are both growth drivers have made large contribution over time. Group B was low in fiscal 2003 with the write-downs of long-lived assets in our real estate segment. We believe that we will see a continuation of the trend that we have seen in the first 9 months of this fiscal year for the full year. ORIX will continue to try to achieve the sustainable growth by establishing Group B and Group C as new franchises and into new core businesses.

From Slide 9 I will now cover the presentation made by Mr. Hattori earlier today. Here I will concentrate on our financial information. Slide 10 looks at revenues and expenses. Revenues were up 19 percent to 611.9 billion yen, while expenses were up only 16 percent at 519.8 billion yen.

Slide 11 covers income before income taxes and net income. Here income before income taxes increased 40 percent to 113.5 billion yen and net income was up 48 percent to 67.7 billion yen which even tops our highest net income for our full fiscal year that we recorded in the last fiscal year.

Slide 12 looks at assets, debt and shareholders equity. We were able to raise our shareholders equity by 14 percent while operating assets were up just 5 percent year-on-year.

Slide 13 shows 4 financial indicators. Here we have been able to increase our profitability by achieving an ROE and ROA on an annualized basis of 15.0 percent and 1.57 percent respectively. At the same time, we have worked to further strengthen our balance sheet by improving our shareholder's equity ratio to 10.9 percent while further reducing our debt to equity ratio to 6.3 times. Furthermore as we have presently about 40 billion yen in convertible bonds outstanding that mature at the end of March, 2005, there is the possibility that our shareholder's equity ratio will increase into the mid 11 percent range upon their conversion.

Slide 14 shows the segment profit for the 9 segments in descending order of contribution. The largest contributor to segment profit is the corporate financial services segment, which forms the core of our operations. This segment was able to grow profits by over 10 billion yen.

Now I will quickly go through the 9 segments concentrating on the results for the 9 months ended December 31, 2004 starting with the corporate financial services segment here on Slide 15. Here segment revenues were up 9 percent due to the expansion of the automobile leasing operations and the loans to corporate customers. Segment profits increased 30 percent to 43.5 billion yen thanks in part to lower provisions.

Next on Slide 16, segment revenues were up 16 percent for the rental operation segment due to the steady performance of the precision, measuring and other equipment rental operations and expansion of operating leases for automobiles. As a result, segment profits were up 56 percent.

Slide 17 covers the real estate-related finance segment. Segment revenues increased 60 percent due to the expansion of corporate loans which include nonrecourse loans and the contribution from the loan servicing operations, which include servicing fees. Although provisions increased related to small corporate loans and housing loans, segment profits were up 46 percent to 19.8 billion yen.

Slide 18 looks at the real estate segment. Segment revenues here were up 3 percent despite the decline in residential sales and decline in sales of office buildings as revenues from our building maintenance operations were up. The fewer write-downs of long-lived assets in this segment contributed to a 56 percent increase in segment profits to 12.5 billion yen.

Please turn to Slide 19 for the life insurance segment. Segment revenues increased 5 percent here due to the shift to more profitable life insurance products and an increase in the number of new contracts. Segment profits which include the recognition of gains on sales of affiliates increased 33 percent to 5.8 billion yen.

Slide 20 aligns the other segment. Here the contribution from the consumer car loan operations decreased as a result of a stricter credit screening process that led to a lower average loan balance and subsequent lower interest on loans. However, net gains on investment securities were up at our venture capital operations and brokerage commissions that are securities brokerage expanded due to the high trading volume on the stock market.

In addition, companies in which we invested as part of our corporate rehabilitation business in the second half of the previous fiscal year made contributions to revenues. As a result, segment revenues increased 100 percent year-on-year to 102.6 billion yen. Also, provisions associated with our card (ph) loan operations decreased while equity and net income of affiliates increased year-on-year. As a result, segment profits more than tripled to 16.3 billion yen.

Slide 21 looks at the Americas segment. Segment revenues were up 4 percent despite the lower revenues from direct financing leases and interest on loans to corporate customers as net gains on investment securities increased due mainly to the sale of some CMBS and the reporting of net gains on the sales of real estate. Lower provisions due to improved asset quality and the contribution from an equity method affiliate that went from a loss in the first half to a gain in the first 9 months of this fiscal year supported an increase in segment profits which more than doubled to 12.2 billion yen.

Slide 22 looks at our Asia and Oceania segment. Segment revenues were up 4 percent due to the steady performance of the automobile leasing and corporate lending of a number of companies in the region, along with the expansion of our ship related operations. However, equity and net income of affiliates was down as the first half of the previous fiscal year included the one-time recognition of deferred tax assets of 5.4 billion yen for Korea Life Insurance attributable to a change in tax rules in Korea. As a result, segment profits were down 2 percent to 16.1 billion yen.

Our final segment, Europe, is shown on Slide 23. Here segment profits were 1.4 billion yen for the first 9 months of this fiscal year compared to a segment loss of 1.4 billion yen in the same period of the previous fiscal year as this segment recorded losses on certain equity method investments from which we withdrew in the previous fiscal year.

In conclusion, all segments have performed very well and we expect to see a continuation of the trends seen in the first 9 months of this fiscal year throughout the full fiscal year. This ends the formal part of this conference call. I will now open up the lines for any questions that you may have.

Thank you, sir. At this time we are now ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS) At this time, I am showing there are no questions. Todd Jacobson (ph).

Thanks very much for doing the call as usual. In the Americas segment, could you just provide a bit more specifics as to what the gains were in real estate, CMBS, and just so we get a little more granularity exactly what is driving the segment growth? And what kind of sustainability we should expect in terms of earnings going forward?

Takeda speaking. As for our U.S. operations, as you may know we are engaged in similar operations in the states. One is CMBS-related operations and the investment for the high-end bonds and also we are operating the so-called equipment operations in the (indiscernible) market and also we develop properties mainly office buildings, shopping centers, and also we are engaged in commodity futures management operations. And we are not prepared to disclose the detail, the breakdown of these operations segment profit but I can tell you at this moment the major factor for increase of our U.S. operations that (indiscernible) such as capital gain realized through the sales for those CMBS high-yield bond portfolio. Did that answer your question, sir?

Yes it did. Thanks very much.

At this time I am showing there are no further questions. I am showing a question from Mr. Jacobson.

Sorry, I figured I'd ask another question if no one had anything. In terms of -- and this is a little bit apart from your Q3 numbers -- The Daikyo investment, could you talk a bit about what level of risk you are willing to assume it in terms of venture capital investments? I think in the past you talked about a maximum of 10 percent of shareholders equity which you'll now exceed but any kind of framework that we should be using in terms of maximum exposure that we should expect ORIX to take in terms of these VC investments would be very helpful.

Okay, Takeda speaking again. Regarding our so-called private equity investment, or of course corporate rehabilitation investment activities, we have been very careful and cautious to making investments to these opportunities and it is true that we have told one day that we had such a feeling for those investments maybe 10 percent of shareholder's equity might be our profit; but nowadays, thanks to our very effective risk management system which have been developed in the past year or 1.5 years, we are able to calculate the risks related to any investment. That means our investments are marked, are not always just the same as the potential risks related to these investments.

When we calculate the potential risks based upon these calculation methods, actually it is a so-called barrier risk metric (ph). As you can point out, you pointed out, our total outstanding amount of these private equity investments have already exceeded our 10 percent of shareholder's equity. But again if we calculate there are risks in card (ph) and in investments, the actual risk amount should be far below those risks starting upon our investment.

So at this moment whenever we make an equity private equity principal equity investment we measure the potential risks and we always consider whether those risks should be within the scope of capital rates and in particular for proposed announced investment. Of course, Daikyo, which is going to the amount to more than 60 billion yen including equity, preferential shares, and a great, great trying for portfolio working capitals. The aggregate amount commitment towards Daikyo should be more than 60 billion yen; however, there are risks related to these commitments. It's far smaller than below the face value.

If we calculate or measure this opportunity, it is marginal (ph) calculations. But in the meantime, we don't think these investments or the private equity opportunities will become much larger than current level of investment which of course we should have proper (ph) level of investment and we should have a balanced portfolio among our traditional existing franchise, franchise value and maybe these investment activities in the so-called investment banking operations. Is it all right for you?

I will push it a little bit just to ask would it be possible to actually get what do you consider the value at risk to be for the Daikyo investment? It would be very instructive.

All right. I understand. We don't -- we publish the DR (ph) risks related to Daikyo investment but if you'd look at these investments inch by inch, we are taking up 44 percent -- approximately 44 percent of the stake of Daikyo through our investment of approximately 23 billion yen which is the equity investment. And at the same time we are purchasing their preferential shares amounting at 20 billion yen. And also for their working capital purposes, we are going to set up a great, great try of 20 billion yen. And naturally as you can easily understand, these risks related to these fees (ph) is a different type of commitment. You know, different. The most risky and the largest risk in this investment is on cost equity part, 23 billion yet.

And next is preferential shares and the least risky commitment is a credit line of 20 billion yen. And we are going to -- in order to manage those risks, potential risks, and to reduce the risks, incurred risks, one solution for us is to disclose the part of the preferential shares purchased by us. I mean that in due course we are going to force some portion of the preferential share and forming an investment fund in banking, a limited partner for those of each group to receive those preferential shares. That means that we -- while we purchase the preferential share amounting at 20 billion yen, in due course each preferential share are going to be disposed to such a (indiscernible) limited partners. That is the one solution for us to reduce the potential risk.

And always for us for our long commitment credit line, this is the so-called kind of a bridge financing. That means that those financings provided by us to Daikyo are going to be refinanced through forming essentially such a nonrecourse loan transactions. And I think that they could form nonrecourse loan transaction, our loan to them should be refinanced through such a nonrecouse transaction. That means also our potential risks are going to be substantially reduced. So in this totals 63 billion yen commitment, in share commitment, our real, real risks should the far smaller than (indiscernible).

Okay, thank you. Very helpful. Thank you very much.

Tommy Thomas (ph).

Good morning or good afternoon. I have noticed that in your latest results that the Asia Oceania section looks to be slowing. I was just wondering what do you attribute the slowdown to? Is it competitors? Is it market conditions? Also I would like to get some kind of guidance if you could provide on condo sales that you expect in '05 and going forward to '06.

Okay, as for your first question, our Asia and Oceania activities, the Asia Oceania market for us should be very productive. And particularly under the current economic environment which is very, very hectic and particularly thanks to such a China economies substantial growth and I think the Asian market is going to be very, very important. So we've been seeing a more management reforces to these markets so that would we could expand market presence expecting more revenue profit. And as you know, our Asian operation was so diversified, I mean geographically, we have got the affiliates, subsidiaries companies in almost major Asian market.

But each operation in each market is not so large enough comparing with those in the domestic Japanese market. But potentially there should be large opportunities, large business opportunities in these markets. We would like to expand farther the operations. But for you it looks rather slow but I can tell you that we are pursuing on such a strategy in expanding our Asian operation farther.

Your second question as for our condo developments, the total number of condo units should be sold for this whole fiscal year are going to be expected at 2400 units which should be a little bit smaller than those compared with those in last fiscal year. But this number has been already set and as you know, the current condo of sales should be started development almost 3 years ago. I did find locations and started construction so that after maybe 2 years after such operation, the current condo can sell on the market. So this fiscal year we are going to a whole number of condo units, to maybe 2400. And for the next fiscal y ear, we have already made the necessary pursuit in preparation but we don't expect the substantial increase of condo units for the next fiscal year. Maybe at the same level of service or something like that.

And as for condo market here in Japan, it is now getting more and more competitive particularly through the Metropolitan Tokyo area. It is not easy for any condo developer to identify good location properties and --but still if we make our best efforts, it is still possible for us to identify some appropriate quality level of properties. So I think the condo market, while our condo market is getting more competitive, still there might be a good business opportunity for condo development in this Tokyo situation.

But in the meantime, there are local cities such as Osaka. Osaka economy as you may know is generally speaking one or two years behind the Tokyo exchange and after the long depression in property market, at the Osaka property market is now beginning to picking up and the Osaka area it is much easier for us to identify better locations or better properties. So we'd like to develop the condo in the Osaka market along with the existing Tokyo market. Does that answer your question?

Yes, thank you.

(OPERATOR INSTRUCTIONS) And at this time, I am showing there are no further questions. I'm showing another question from Tommy Thomas.

Yes, would you be able to give us some kind of guidance on when you're going to be spinning off some of your securities that you own, Aozora Bank, Korea Life, Ft. Worth (ph) Express or some of the other companies that you own? Spinning off in an IPO or bringing to market?

Okay, I understand. Those names you have just mentioned, they are important investing companies in the our private equity investments. As for Aozora Bank, I understand they have been doing quite well and I understand that they sooner or later they might go public, like the Shisei Bank. But I am not sure when it will be. I don't know the exact the timing of the IPO but as they are a majority-owned by the Cerberus which is an investment part. The natural course for them should be going public. And so as they are doing smoothly, their business smoothly, it is likely that they go public in the future.

As for our Korea Life investment, we still have a authoritative idea to dispose our stake in the company if we could have comfortable prices offered by some third parties. In the meantime, the company itself is doing rather well. So we are not in such a hurry to dispose our stake in the company. And what else are the other companies you mentioned? Aozora, Akali (ph), sorry, (indiscernible). (indiscernible) for the first time in the latest financial statement, we described their revenue and expenses independent from the other line items. The past line item, the other items. But works (ph) revenue and expenses have been substantial. We separated (indiscernible) those revenue expenses from the other line items for the first time for this year quarter. And as you can see from those line items, the company is going to be substantial and we are expecting their net income is going to be further increased in the near future. And I can tell you that they are forceful. Their restructuring process has been doing quite smoothly so far. Is that all right for you sir?

Yes, thank you.

At this time, I'm showing there are no further questions.

If we have no further questions I could perhaps suggest that we maybe end the call.

Thank you, sir. There are no questions.

Okay, if anybody has any further questions, further questions, if you could e-mail me at Raymond_Spencer@ORIX.CEO.JP, I would be very happy to get back to you in a timely manner. Thank you, everybody for your time today.

Thank you very much.