ORIX Corp (IX) 2004 Q4 法說會逐字稿

Good morning, good afternoon, and good evening, all sides. Welcome to the Orix 2005 annual results conference call. For duration of the presentation all lines will be in listen-only mode. I would like to inform all participants that call is being recorded as per request from the host company. If you have any objection, you may disconnect at this time. I would like to hand over the line now to Mr. Raymond Spencer, and I will be standing by for the Q&A session. Please go ahead, Mr. Spencer.

Thank you. And welcome everyone to Orix's earnings conference call for the fiscal year ended March 31, 2005. My name is Raymond Spencer. Today, I am joined here 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. I will ask Mr. Fujiki to give a brief summary on the results for the fiscal 2005. I will assume that everyone has a copy of the document called "Orix Presentation 05-03-E", dated April 27, 2005, that has been posted under the calendar section of our website. Please, Mr. Fujiki.

Hello, everyone. My name is Yasuhiko Fujiki, and I am the President and COO of Orix Group. And today, I would like to give a brief statement on our results. Then, I will ask Mr. Spencer to make a short presentation. I'm very happy to announce that our net income grew 69% to 91.5 billion yen. This is the highest net income that we have received to date. Our goal over the last two years have been to increase profit, result in increasing assets.

Now, from this fiscal year, we have not completely changed our strategy; but we will continue to look to increase good assets. We will also aim for higher profitability and growth, as well as concentrate our further improvements in the soundness of our operations. Here, we saw total assets up 8% from March 31, 2004. At the same time, we have focused on the profitability of our business. And were able to achieve an ROE of 14.2% and ROA of 1.56% in fiscal 2005. Now, I will ask Mr. Spencer to make a short presentation on our last quarter.

Thank you, Mr. Fujiki. Today, I will make a short overview of the presentation that Mr. Fujiki and Mr. Hattori made in today's analyst presentation here in Tokyo. Now if I could ask everyone to turn to slide four. As for Mr. Fujiki's presentation, I will focus on 17, as you can see here. Now please turn to slide 5. Orix aims for a balance between profitability, growth and soundness in its operations. In terms of net income, we have exceeded our original forecast of 60 billion yen that we readvised for the second time this fiscal year to 80 billion yen in the third quarter, and achieved 91.5 billion yen for fiscal 2005, which is up 69% from the previous fiscal year.

As you can see, Orix has made great progress over the last year in terms of profitability and has been able to improve its ROE to 14.2%, and ROA to 1.56%, for the fiscal year ended March 31, 2005. Going forward, we would like to keep our ROA above the 12% line and will aim for a 15% ROE. On slide 6, you can also see that we have further increased the strength of our financial base, as our shareholders equity ratio increased to 12%. We believe that this is an appropriate level for Orix. Slide 7 covers our strategic targets and structural reforms that we have carried out to date.

The favorable business performance of the previous fiscal year is attributable in part to efforts undertaken over the past several years to make structural reforms to our sales and administrative departments in accordance with our strategic objective of pursuing growth while strengthening our financial position. In terms of structural reforms for our sales department, we accomplished a series of awareness-raising reforms. For example, we have stressed profitability and promoted asset turnover under the model of increasing profitability without increasing assets. We have also promoted risk pricing that provides risk match returns, and improved our risk measuring systems to allocate capital risk for each business unit, and promoted the cost of capital concept as well.

Compliance must come first, then profit. This is our idea. And we have also instituted a number of reforms in our administration department. Next, on slide 8, you can see that profits were up for all segments. Here, you will notice that we have separated automobile leasing and rental operations out of the corporate financial services and rental operation sections, respectively, and formed a new segment called Automobile Operations. In addition, the rental operations now only includes the operations of Orix Rentec.

Furthermore, we have integrated the Europe segment due to its decreasing significance into the Asia and Oceania segment, which has been renamed the Asia, Oceania and Europe segment. In terms of contributors, the largest segment continues to to be our corporate financial services segment, which forms the basis of our operations. In addition, you can see that the rental operations have a very large segment profit in relation to its asset level. Slide 9 covers the theme of expansion of our franchises and knowledge sharing. As for each segment activities, we have summarized these based on the categories of existing and new franchises.

Orix's strength is its ability to develop new franchises by sharing knowledge between segments. For example, we are able to use the know how that we developed in the United States in terms of CMBS and transfer that to Japan. Slide 10 covers the strengths of the Orix Group. Our strength stems from the fact that each sales department continuously and proactively embraces new challenges. When combined with our governance system, this brings each department and group working together in concert. Orix's DNA is comprised of the concept of a challenging spirit, collaboration and the ability to generate ideas that can be quickly put into action.

For example, our sales department is in constant contact with our customers in order to develop products and services, or what we like to call the "Orix Answer" in order to meet their needs. Furthermore, our monthly strategic meetings, of which there are about 25 a month, and investment and credit committee, which meets about three times a month, provide a governing system that serves to bring these departments together to work as a team. Slide 11 covers our business focus for the 2006 fiscal year. Orix is focusing on three specific areas that includes the corporate financial services segment, the automobile operations segment, and the Asia, Oceania and Europe segment.

Here, we will aim to achieve double digit sustainable growth. Next, on slide 12, we look at the forecast for fiscal 2006. For the fiscal year ending March 31, 2006, we forecast revenues of 880 billion yen, income before income taxes of 162 billion yen, and net income of 96 billion yen, which is up 5% year on year. Now, from slide 14, entitled "Fiscal 2005 Growth Drivers", I will now cover the presentation made by Mr. Hattori which focuses more on financial results for the fiscal year ended March 31, 2005. As seen here on slide 15, this part of the presentation covers an overview of the financial results for fiscal 2005. Please turn to slide 16.

In terms of features of fiscal 2005, again we had record profits again this fiscal year, with net income up 69% year on year to 91.5 billion yen. Fortunately, the profits were higher for all segments. We also made a significant improvement in ROE and ROA. As well, Orix announced earlier today that it will increase its dividend from 25 yen to 40 yen. On slide 17, we have shown the profit for our segments in order of their contribution. Here, the largest contributor continues to be the corporate financial services segment that forms the basis of our operations. The segment profits more than doubled for the other, the Americas, and the real estate segments. In all, all segments were able to achieve double digit growth.

Slide 18 provides an overview of the main segment profit drivers. Here, we have divided the drivers into three categories that include contributions from improved asset qualities on the far left; in the middle, the realization of gains on sales; and on the far right, from business expansion. Slide 19 looks at the results of our corporate financial services segment. Here, there was a large increase in segment profits, thanks to the expansion of loans to corporate customer, and the recognition of gains from the securitization of direct clients and leases. In addition, the lower provision points to the lower level of nonperforming assets also contributed to the higher segment profits.

On slide 20, the segment profits were up at our automobile operations due to the steady performance centering on the maintenance leases. On slide 21, segment profits were up at our rental operations segment due to the steady performance of the IT-related equipment direct financing lease transactions. Segment profits at our real estate related finance segment, here on slide 22, were up despite the increase in provisions, as a portion of nonperforming assets were sold off to accelerate charge-offs, as revenues associated with corporate loans, including nonrecourse loans and housing loans, increased and the loan servicing operations also made contributions.

Segment profits for the real estate segments, here on slide -- on the next slide, were up despite the lower revenues associated with sales of condominiums, due to the reduction in the number of condominiums sold to buyers, as revenues associated with the sale of office buildings and other real estate developments and our building maintenance operation increased. Furthermore, lower write-downs of long-lived assets also contributed to the higher segment profits. Segment profits were also up at our life insurance segment, here on slide 24, due to a shift to more profitable life insurance products that resulted in an increase in the number of new contracts that led to higher premiums. In addition, the recognition of gains on the sale of affiliates also contributed to the higher segment profits.

Segment profits more than doubled for the other segment, seen here on slide 25. The contribution from the consumer car loan operation has decreased as a result of a stricter credit screening process that led to a lower loan balance and subsequent lower interest on loans. At the same time, the provision associated with our current loan operations was lower. On the other hand, net gains on investment securities were up at our venture capital operations, and brokerage commissions at our securities brokerage expanded due to the high trading volume on the stock market.

In addition, higher equity and net income on affiliates and gains on sales of affiliates also contributed to the large increase in segment profit. Segment profits also more than doubled for the Americas segment. Here on slide 26, there was a large increase in segment profit, as revenues increased as a result of records of net gains on investment securities due to the sale of some CMBS gains on the sales of real estate, and a lower provision, even though revenueS from direct financing leases and interest on loans to corporate customers were down, owing in part to the depreciation of the yen against the dollar as well as the recording of the loss associated with an equity method affiliate.

Finally, on slide 27, segment profits were up for the Asia, Oceania and Europe segment, due to the steady performance of the automobile leasing and corporate lending of a number of companies in the region and the expansion of the ship related operations that led to higher revenues. Despite the lower contribution from equity and net income of affiliate, as the previous year included the recognition of deferred tax assets of about 5.4 billion yen for Korea life insurance attributable to a change in tax rules in Korea, in addition to the contribution from regular operations.

In conclusion, all segments performed well, with double digit growth in fiscal 2005. That ends the formal part of our presentation. I will now open up the lines to any questions that you may have. In addition, please note that I will be translating the questions and answers for the management, though it may take a bit of time. So therefore, I would appreciate your patience. Thank you.

Thank you, sir. We'll move on to the Q&A part of this conference call. If you have any questions, just press star one on the telephone key pad. The pound key to cancel. Once again, that's star one for questions. Our first question for today's call coming from the line of Camille Kolstrom [PHONETIC] from United States. Please go ahead.

Good evening. Quick two questions. Can you please give us some numbers around the securitization gains for the CMBS and the securitization gains of the lease portfolio? And then secondly, your tax rate was relatively high for the year. What do you think a sustainable tax rate is going forward?

Thank you, Ms. KollStrom. I will just put you hold there for a second while I translate the questions. [pause] Yes, I'm back with the question. As for the gains on CMBS in the United States, it was approximately 6.5 billion yen. And the gains attributable to the securitization of the direct financing leases was about 3 billion yen. As for the tax rate, it's very difficult to say what it will be next year. But just to give you an idea, over the last couple of years, it's been about 40%.

Great. Thank you, Raymond.

Do you have any more follow-up questions, ma'am?

Well, since you asked, can we talk a little bit about your dividend payout? And if you maintain an equity ratio of 12%, would you buy back after -- if you went above 12% or would you raise your dividend? [SPEAKING JAPANESE]

In terms of the dividend, I will do this one first, we have increased our dividend as we had in fiscal year terms of profit. Our overall fiscal -- our overall dividend policy has not changed in that we will use, or continue to use retained earnings for future growth prospects. [SPEAKING JAPANESE] Next, in terms of the shareholder's equity ratio, the level right now, as you know, is about 12%. We believe that that is a good percentage for Orix at this point in time. In terms of the assets, we expect that the asset level will grow going forward to some extent. We will look towards such things as increasing equity investments. For example, [INAUDIBLE] would be one example of that. So in terms of the overall number of 12%, we believe that that is an appropriate number for the present point in time.

Thank you.

Thank you.

Thank you, ma'am, for your question. Once again, that's star one for any questions. Once again, that's star one for any questions. Once again, if have you any question, please do not hesitate to press star one. Next question coming from the line of Mr. Tommy Thomas from New York. Please go ahead.

Hi, good afternoon. Just calling to find out if you can give us a little flavor about your auto operations now that you've broken that out. Do you -- are you seeing some head winds there? Obviously things are going very well. Can you just give us a little flavor about some of your competitors and how things are going overall? What can you forecast for us?

And when you say what can you forecast, in terms of profits, in terms of what exactly would you be pointing to?

Just overall growth.

In the number of vehicles?

Yes.

Okay. [pause] [SPEAKING JAPANESE]. In terms of the automobile lease -- the automobile segment, here, what we did in January of 2005 is we integrated seven automobile leasing and rental companies into a company called Orix Auto Corporation. In terms of the competitive environment, it's not as competitive as the direct financing lease business is. The reason for this is because we're concentrating on the maintenance of the vehicles and we're able to maintain our profitability in this area. In addition, we have a very good infrastructure that allows us to provide products and services to our clients.

In terms of our business going forward, we're looking to have a product -- a seamless product mix between leases and rentals and to develop a new market in this area. In terms of the number of vehicles, presently we have about 500,000 vehicles for the leasing and rentals. It's actually 540,000 vehicles. And by March 31 of 2008, our goal is to double the number of vehicles from this number to approximately 1 million vehicles. Does that answer your question, sir?

Yes. Thank you.

Thank you.

Thank you, Mr. Thomas, for your question. Once again, that's star one for any questions. Once again, that's star one for any questions. Next question is comes from the line of Mr. Walter Russic [PHONETIC] from the United States. Please go ahead are, sir.

Yes, hello. I was hoping you could expand a bit on the expansion of ship-related operations in Asia, Oceania and Europe, you know, how much profit came from that, and what do you see going forward for this segment?

And do you mean the amount of profits that the ship-related operations contributed to this segment? Is that your point?

Sure, yes. And also, what do you see going forward?

Okay. Just hold on a second, please. [pause] In terms of the ship-related operations, it was in a pretty good boom for this fiscal year. Going forward for the next fiscal year, we do not expect it to be as good as it was last fiscal year, but it will still be a good contributor overall. [SPEAKING JAPANESE] And we expect the overall Asia, Oceania Europe segment to continue to contribute to overall segment profit, so it will be doing very well as well for this fiscal year, we believe. Does that answer your question?

Well, yes. Thank you.

Thank you.

Thank you, sir, for your question. Once again, that's star one for any questions. Once again, that's star one for any questions. Next question coming from the line of Mr. Mike Gosh [PHONETIC] from U.K. Please go ahead, sir.

Good afternoon. I'm just wondering, on slide 18 of the presentation, could you just talk through the middle column of the realization of gains on sales and just how much of this is one-off in nature?

[SPEAKING JAPANESE] In terms of your question on the realization of gains on the sales, from slide number 18, first of all, there were significant gains from the resecuritization, repackaging of CMBS in the Americas segment. However, besides that, we still expect that we will be able to realize gains on the sales going forward as well. These are not one-offs. The only one-off with would be that repackaging of the CMBS in the Americas segment. Does that answer your question?

Yes. That's great. Thanks.

Thank you.

Thank you, sir, for your question. Once again, that's star one for any questions. Once again, that's star one for any questions. Next question coming from the line of Mr. Fred Barker from United States. Please go ahead.

Yes, my question is on the real estate sector, just if you could give us a little more color on the sustainability of earnings in the condominium business. You're continuing to find good opportunities here and able to sustain margin. And also if you could provide some color as to what benefit you expect to realize from the Daiku [PHONETIC] operations and what the time frame for that might be, thanks.

Okay. Thank you. [pause] [SPEAKING JAPANESE] In terms of the economy and development, as you know, we have developed less condominiums this year. However, the profits were flat, and they were about the same as last year. As for the profitability, we're looking at -- what about the same over the last couple of years of about 10%. [SPEAKING JAPANESE] In terms of the investment in Tokyo, we're looking at an exit of let's say five years from now. We have also not decided whether we will sell all of the shares that we have. Our goal for the next while is to add value to this company before we exit it. Does that answer your question, Mr. Barker?

Yeah, I guess. So I mean if you can't -- I was hoping for a little more information as to what kind of returns you're expecting, how you can grow value, how does that tie into your existing operations if at all, what is this stand-alone project? That would be helpful.

I will ask that as well. [pause] SPEAKING JAPANESE]. And as you heard there, Mr. Barker, looking at the risk-related return, we are looking at about an IRR, internal rate of return, of about 25%. In terms of synergy, again, we just started our investment, but we would look towards things, for example, of doing maintenance together, or maybe making investments together, for example, would be some of the areas that we might see some synergy between our existing operations, and that of [INAUDIBLE].

Thank you.

Thank you, sir, for your question. Next, we have a follow -up question coming from the line of Mr. Tommy Thomas of New York. Please go ahead sir.

I just wanted to ask you a question about your plans for Europe. You pretty much have gotten out of the aircraft leasing business, and you have really nothing to show for it going on in Europe. Is there any plans to re-enter the European market, and if so, what are you going to be concentrating on?

[SPEAKING JAPANESE] In terms of the aircraft leasing business, remember that we are still continuing our aircraft leasing business. We have aircraft of about 30 billion yen in the Europe region. As you may know, also, too, the Europe region is a very difficult market. We do have a leasing operation in Poland, or Polska; however, in terms of the overall strategy at this point in time, we are thinking about pulling back. There may be opportunities in the future where we may re-enter; but at this point in time, we are thinking about pulling back.

Okay. Thank you.

Thank you, sir for your question. Once again, that's star one for any questions. Mr. Spencer, there is no -- oh, there is one more question. Please stand by.

Yes, please, go ahead.

We have a final question coming from the line of Mr. Fred Barker, please go ahead.

Just if you could give us a little color as to what you're seeing in terms of loan and lease demand, particularly among the SMEs and the smaller -- many of the customers that you have at [INAUDIBLE], and what do you see going forward? Do you see demand for financing increasing or staying flat, or possibly even declining? What would you see out there?

[SPEAKING JAPANESE] In terms of the overall demand right now, it's not a huge demand. However, with the prevailing improving economy, we do expect that we will see more demand in the future. At the same time, we are still seeing very cut-throat competition in terms of rates. But we are being very careful in our -- rates. But we are being very careful in our credit screening to select those customers that provide us with a high return.

Thank you.

Thank you, Mr. Barker for the question again. Once again, that's star one for any questions. Once again, that's star one for any questions. There seems to be no more questions at this time. Mr. Spencer, over to you for your closing remarks.

Okay, thank you. As nobody has any further questions, if you have any questions, you can see on the last page of the presentation, there is an e-mail address. Also, my personal address is Raymond Spencer, that is raymond_spencer@orix.co.jp. Please feel free to drop me any questions that you might have. I guess that is all for today, and we thank everybody for your participation.

Thank you, sir. And that concludes -- go ahead sir.

Thank you very much for your time.

Thank you, sir, and that concludes our conference call. Once again, on behalf of Orix Japan, we would like to thank all of you for your participation, and thank you for using MCI conferencing. You may now disconnect your lines.