ORIX Corp (IX) 2005 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded and if you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Raymond Spencer. Sir, you may begin.

Welcome everyone to Orix's earnings conference call for the interim period ended September 30, 2005. My name is Raymond Spencer. I'm joined today with Yashuhiko Fujiki, who is our President and COO, as well as Mr. Masaru Hattori, who is the Corporate Senior Vice President in charge of Accounting. Mr. Fujiki will now make a brief statement.

Hello, everyone. My name is Yasuhiko Fujiki. I'm the President and COO of Orix. Thank you for participating in our conference call. I will be very happy to answer any questions that you may have on Orix's results and strategy at the end of this presentation. I will now ask Mr. Spencer to make a short presentation on our results.

Thank you, Mr. Fujiki. I will now give a summary of the results of the interim period. I will assume that everyone has a copy of the document entitled Earnings Presentation, 0509-E, dated November 9, 2005, that has been posted under the calendar session section of our IR website.

Please turn to slide 3. As seen here, I will a presentation based on an analyst earnings presentation made earlier today in Tokyo and you can see the contents of the presentation numbered one through eight here.

Slide 4 covers the highlights of the interim results. As we announced yesterday, we were able to achieve a large increase in net income in the first half of this fiscal year. Now I would like to talk about the three highlights of our interim results.

First, all segments, which cover a variety of businesses, achieved higher profit. Second, we have enabled to expand revenues from corporate loans in Japan and overseas due to increased demand from companies. Third, we have achieved an increase in gains on sales due to the strong real estate and securities markets.

While we did not expect to see as many gains on real estate in the first half of this fiscal year, the flow of capital into the real estate market upon an improvement in the Japanese economy allowed us to realize greater gains than we had initially forecast.

Slide 5 looks at our forecast for the fiscal year ending March 31, 2006. Yesterday, we announced a revision to our full-year forecast for revenues, income before income taxes and net income. We revised our forecast up for net income from 96 billion yen to 140 billion yen, which represents a 53% increase compared to the previous fiscal year.

As we achieved 84 billion yen in the first half, we are expecting to book about 56 billion yen in net income in the second half of this fiscal year. We do not expect net income in the second half to be as high as in the first half since we do not forecast same level of gains on the sale of real estate and investment securities as we had in the first half.

If we are able to achieve this goal, this will mark a 53% increase in net income on top of the 69% increase in the previous fiscal year. One of the primary reasons for these good results lies in some of the investments that we have made in the past in our businesses and measures that we have taken, such as the strengthening of our risk management system.

In addition, our business has also benefited from the improvement in the Japanese economy.

Next on slide 6, we cover the details of our acquisition of a U.S. investment bank. Presently, Orix's business segments are classified into three groups, as shown on this slide, that include the stable profit segments, accelerated growth segments and the future growth segments. Today, we will provide an example of a new business opportunity in the Americas segment, which is classified as a future growth segment. Here we have been able -- or we have been looking to expand the operations for over the last year.

On October 31, we announced that we had acquired an investment bank in the U.S., of which the details are shown on slide 7.

In January of 2006, we plan to establish a new company. This new company will combine the investment banking operations of the Houlihan Lokey Howard & Zukin and Orix USA's Corporate Finance Group. At first, this new company will concentrate on expanding its operations in the U.S. and Europe. The mid- to long-term goal of this company is for it to leverage Orix's sales and marketing network and further expand investment banking services into Asia, including Japan and Oceania.

Orix set up its own investment banking headquarters in December 1999 and has focused on private equity investments since then. However, with the addition of Houlihan Lokey, we will now be able to develop a broader range of investment banking activities, which is an area that we see a lot of potential for the future growth of the Orix Group.

Please turn to slide 8 where we will provide an overview of the interim results in more detail. Orix has been able to achieve good results in the first half of this fiscal year which marks a continuation of the favorable result that we saw last fiscal year. Here, we saw top income before income taxes up 93% year-on-year to 133.1 billion yen. Net income was up 97% to 84 billion yen, which marks a strong improvement on the back of a very strong first half in the previous fiscal year.

Next, we will take a look at the segment information starting on slide 9. As one of the stable profit segments, the Corporate Financial Services segment, which forms the foundation of our operations, achieved an increase in revenues from loans to corporate customers. Furthermore, lower provisions also contributed to the large increase in segment profits.

In addition, the Asian, Oceania and Europe segment saw a steady performance in its Corporate Lending and Automobile Operations. Furthermore, higher revenues were recorded from the Ship-related Operations, which added to the large increase in segment profits.

In terms of our accelerated growth segments, the two Real Estate-Related segments -- the Real Estate-Related Finance segment and the Real Estate Segment -- both contributed to the large increase in the Group's profits. Here, contributions came as a result of our ability to capitalize on business opportunities afforded by a large flow of funds into the CMBS, REIT, real estate private funds. Here we saw a large increase in profits from the sale of rental purpose real estate.

In terms of future growth segments, we saw an increase in revenues from interest on loans to corporate customers and gains on sales of real estate that led to the increase in the Americas segment profit.

Here on slide 10, we have divided the increase in profits into three categories. In terms of business expansion, we saw a continued increase as seen in the previous fiscal year in revenues from corporate loans, including non-recourse loans in Japan. In addition, there was an increase in revenues from direct finance leases. Overall, we were able to grow our asset business which forms the base of our operations.

In terms of improved asset quality, we saw lower provisions on our leases and loans due in part to the improvement in the economy. We do not expect provisions to exceed 20 billion yen for the full fiscal year.

In terms of gains on sales, we are able to take advantage of the strong real estate and securities markets here in Japan. As a result of the contribution from our business expansion, improved asset quality and gains on sales, we were able to outperform the results of the same period of the previous fiscal year which also experienced very strong growth at that time.

Next on slide 11 segment, here we have the Corporate Financial Services segment. Here we saw an expansion of loans to corporate customers and also the recognition of gains from securitization. In addition, lower provisions contributed to the higher segment profit. For the full fiscal 2006 year, we expect to see segment profits to be higher compared to the previous fiscal year.

Next on slide 12, segment revenues were down year-on-year for our rental operations segment as the Precision Measuring and Other Equipment Rental operations had fewer orders from electronics and communications equipment manufacturers, despite an increase in revenues from transactions we accounted for as direct financing leases. Although segment revenues were lower, the recognition of gains on investment securities contributed to the higher profits. In the Rental Operations segment, we expect full-year segment profits to be about the same as in the previous fiscal year.

Next, please see slide 13 for the Life Insurance segment. Although life insurance premiums were flat, life insurance-related investment income improved year-on-year. In addition, lower insurance payments contributed to the higher segment profits. In the Life Insurance segment, we expect higher full-year segment profits compared to the previous fiscal year.

On slide 14 in the Asia, Oceania and Europe segment, corporate lending and automobile leasing of a number of companies in the region performed steadily while revenues from the Ship-related operations also increased. In addition, the steady performance of equity in net income of affiliates and the contribution from the gain on the sale of an affiliate also contributed to higher segment profits. We expect to see a good increase in segment profits in the Asia, Oceania and Europe segment for the full fiscal 2006 year.

Segment profits interest for the Automobile Operations, seen here on slide 15, due to an expansion of the automobile leasing operations. The Automobile Operations segment is a key growth driver and we expect this segment to achieve solid growth throughout fiscal 2006. Segment revenues also increased for the Real Estate-Related Finance segment here on slide 16 due to an increase of revenues associated with corporate loans, including non-recourse loans, and the loan servicing operations.

In addition, lower provisions contributed to the higher segment profits. We are expecting higher growth in segment profits for fiscal 2006 in this segment.

Next, please see slide number 17 for our Real Estate segment. Gains associated with the sale of real estate under operating leases increased year-on-year and revenues associated with our Integrated Facilities Management Operations also expanded. Although revenues associated with the sale of residential condominiums were flat year-on-year, we reported gains on sales of the office buildings under operating leases which were concentrated in the first half of this fiscal year, as planned. We expect to achieve high growth in this segment for the full fiscal 2006 year.

The increase in revenues from the Securities Operations here on slide 18 and the lower provisions associated with our current loan operations contributed to higher segment profit in the Other segment. We are expecting an increase in segment profits for the full fiscal year compared to the previous fiscal year.

Segment revenues were up due to an increase in revenues from interest on loans to corporate customers and the real estate and sale of real estate in the Americas segment here on slide 19. We also had an improvement in equity and the net income of affiliates. We're now expecting a large increase in segment profit in the Americas segment for the full fiscal 2006 year.

Next, we will talk about Orix's debt structure, as shown starting on slide 20, and look at the effect of a rise in interest rates on our business. Our debt increased 3% on March 31, 2005, along with a rise in assets to about 4.3 trillion yen. At the same time, we did not see a change in our direct funding ratio from the capital markets which stood at about 46% at September 30, 2005. We are continuing to focus on the diversification of our funding sources and methods to strengthen the stability and lower the cost of our funding.

In addition, as shown here on slide 21, there has been very little variation in the ratio between short- and long-term debt over the last couple of years. As of the end of September 2005, long-term debt made up about 76% of debt.

Here on slide 22, we see the repayment schedule for long-term debt. Presently, although there is no large change in the funding environment, we have received quite a few questions from investors regarding the impact of a rise in interest rates on Orix's business if the Bank of Japan and its quantitative easing (ph) policy. Today, we will talk about the impact that a rise in interest rates will have on our direct financing leases and loans.

Please turn to slide 23. Here, we have a certain mismatch between our assets and liabilities for the collection period of our leases and loans and the repayment period of our debt. Therefore, if there is a sudden unexpected rise in short-term interest rates, this will result in a period when interest expense could rise faster than we could raise rates on our operating leases. However, as this slide indicates, a substantial portion of our operating assets are turned over each year, which provides the opportunity to replace existing assets with those of higher rates in a rising interest rate environment.

The graph on this slide shows the rate at which direct financing leases and installment loans are expected to be recovered. As of March 31, 2005, over one-third of direct financing leases and one-quarter of installment loans are expected to be recovered within one year. This means that, even if interest rates rise, the assets that are collected can be replaced with higher-yielding assets.

While direct financing leases can be considered fixed assets, the graph on slide number 24 shows that over 60% of our installment loans as of the end of March were floating-rate instruments which are linked primarily to LIBOR, TIBOR (ph), or short- and long-term prime rates. Therefore, a rise in interest rates will be reflected in these floating rate loans in a relatively short period of time.

We have considered three major scenarios for rises in interest rates and the impact on our business. First, a scenario under which the yield curve becomes steeper; second, where there is a parallel shift in the yield curve and third, where the yield curve becomes inverted. Under the first and second scenarios, we do not expect any negative impact on our earnings. Under the third scenario, there would be a negative impact. However, let us look at the next slide to give you an idea of how often scenario three actually occurs.

Slide 23 shows the trend over the last 20 years for the overnight call rate, an indicator short-term rates, and 10-year JGB futures, an indicator for long-term rates. In fact, as you can say, there has only been to periods over the 20 years were short-term rates rose above long-term rate. In addition, these periods both occurred during a inflationary environment. Therefore, under the present environment, we believe that it would be unlikely to see short-term rates rise faster than long-term rates as described under scenario three; and that the first or second scenarios where long-term interest rates rise faster than short-term interest rates are more likely to occur, and thus, have a positive impact on our business.

And there's a couple of slide providing supplement to the information. We will not cover that, so that basically covers the presentation portion of this presentation. So I will open the lines up for any questions that you may have.

(Operator Instructions). Tommy Thomas (ph).

Hi, good evening Raymond, gentlemen. Congratulations on the good results. I was just wondering if you are going to be giving out some detail on the other operating revenues? It has become a significant source of revenues, about 17%?

We will put you on mute as we do the translation for Mr. Fujiki. Mr. Hattori will answer your question there, and then I will translate it for you. Just have to be patient while we go through the bilingual process.

There is not really one single item that makes up the majority of the operating revenues of this segment for other operating revenues. If you look, however, at the increase, the growth that came from, there's two big reasons for the growth in the revenues. One is building maintenance operations. This is 100% of (indiscernible) that provides some of the revenues from those operations.

The second one is that we have invested certain in companies as part of our corporate rehabilitation business. Actually, these are consolidated companies and revenues that come through those companies are reflected in other operating revenues. There's the one company for example that was invested in the middle of last year, and this year, the full amount of the revenues will be incorporated into the financial statement. Those are the two major reasons for the increased (ph) growth.

Thank you.

Neal Doyne (ph).

Thank you. Thank you for this results call, staying up late for us. I was wondering if you could give us a little bit more information on the Houlihan, Lokey, Howard & Zukin acquisition, and specifically, what business areas do you expect to bring to Asia through that new company, and what kind of timeframe?

Mr. Fujiki will answer your question next.

At this time, the company Houlihan, Lokey, Howard & Zukin has three major business lines. One is M&A Advisory Services, the second one is Restructuring Advisory Services, the third one is Other Financial Services, like fairness opinions, that are provided by the Company. When we start the new company, right now, we're looking at first and foremost to combine the operations, the existing operations of Orix's Corporate Finance Group now that's in part of Orix U.S.A. Corporation in the U.S.

And we would expect, therefore, that in the first stage, the development and the growth of this will occur in the United States and Europe where the existing operations are already taking place.

Then the next stage, after we've been able to successfully integrate those operations, is to focus on Asia, Japan and the rest of Asia. I think at this point right now, we're still working on the details, trying to find out the best way to fit it in the operations and we don't have necessarily a specific timeframe for all of those. I will say, however, that the initial stages are the U.S. and Europe, and then over time, we'd like to expand as the operations that fit within the Asian operations.

So it doesn't sound like Houlihan, Lokey, Howard & Zukin has Asian operations currently. To expand into Asia, will it be necessary to make another acquisition?

Well, we have seen from the Houlihan side, they don't have any operations in Asia, but they very highly evaluate Orix's marketing network within the Asian region. And so I think that the idea is that they are looking to use Orix's existing network together with their services to grow the businesses. So rather than an acquisition, it would be leveraging Orix's existing market that would fit in Asia.

Thank you.

(Operator Instructions). Margaret Moore (ph).

Thank you. I was wondering if you could talk about in your Rental Operations Division, you indicated that the slackening demand for precision equipment has affected your growth rates there. I was wondering if you could give us an idea of when you expect, or if you expect, that business to recover?

There was a slight improvement quarter-on-quarter for the first and the second quarter, and we are hoping that that trend will continue into the second half of this fiscal year. It was not a huge increase, but there was a slight improvement quarter-on-quarter, and hopefully that will (inaudible).

Okay, thank you.

Did that answer your question?

Yes, it did, thank you.

I'm showing no for the questions at this time. We do have a question from Sean Tikakara (ph).

Hello, gentlemen. Just a quick question on some of the equity method and affiliate companies. Like everyone, like Daikyo (ph), is of course well-flagged as (indiscernible). Is there a potential for an exit strategy? It seems that time-wise, potentially talking about buying in your stake. And is there a way we could kind of value that? And as a second piece, could you just explain a bit more about Orix's relationship with Morikami (ph) in M&A consulting and really the economic interest, if any?

Fujiki (indiscernible) will answer the question for you.

As for your first question, we are in discussions with a number of parties now. We're trying to sell a portion of our stake in Korea Life (ph). However, nothing -- details have been decided. Obviously, the price and the timing of that -- nothing has been set at this point. Han Fat (ph) is reportedly part of the group that are in these discussions. Again, however, we cannot give any details of when and the exact month that would be (indiscernible).

Okay, thank you.

To your second question there with regards to the connection with Munikomi (ph), we do have investments in his (ph) fund as a pure investor. From ourselves, looking at his (indiscernible) fund, for example, it's unique in the Japanese market. We believe that it's a very effective way to increase corporate values from the companies that he has invested in and we've been very happy with the performance of the fund to date. At the beginning when the company began its operations, we were part of that and offering some advice and supporting him at the beginning of the operations. At this time, however, we are basically just an investor in one of his funds (indiscernible).

Thank you for clearing that up, because I think there has been some talk in some of the local papers that Orix at one point, and I guess even now, had a 45% equity interest in the fund itself. And when it's a couple of hundred dollars, I guess no one cares. But now that it's up to 4 billion or 5 billion or whatever it is, then of course that could be very meaningful.

Okay, just one second here please. Fujiki-san (ph) would like to clear up one point on that.

Of course, thank you.

The 45% does not represent the investment in the fund. The fund itself has become very large and Orix's investment is just a small portion of that. What the 45% refers to is the actual management company itself. Orix has a 45% stake in the management company, but that does not represent a 45 stake in the entire fund.

No, agreed. So would it be correct for me to say that Orix owns 45% of the Company that takes fees on that $4 billion? Meaning, do you won 45% of an asset management company run by Mr. Morokai (ph)?

That's right.

Okay and again, I have a (multiple speakers).

That's right. We own that 45% of the company that manages those funds.

Again, forgive my ignorance, but I have not seen the detail on any economic interest, any profits that might have flowed through. Has that number been released?

We have not given out any specific information on the individual funds. At this point in time, we have -- the numbers, they fluctuate obviously, depending on the time. But we have, for example, certain investments in maybe 100 different types of funds and Murakami (ph) is just one of those investments. So we don't disclose the particular investment for each individual funds that we have. Obviously, these change depending on performance and depending on the timing, these -- we will replace them or get rid of or increase these funds. And therefore, we have not provided that separate disclosure.

I apologize for wasting everyone's time, spending so much time on this, but I didn't really mean the performance of the underlying fund, I meant the earnings contribution of the asset management company. Because that, in my mind, becomes a very kind of recurring stable income stream, as opposed to does the fund go up or down a little bit, if that make any sense.

It's included in equity in net income of affiliates. However, we don't give the -- there's many different companies that are involved there. We have not given the separate disclosure for each individual company, but the line item in the P&L would be the equity and net income of affiliates.

Okay, thank you.

(Operator Instructions). I'm showing no further questions at this time.

Okay. We will end the call then, and we are available after the call or tomorrow morning. So if you want to give us an e-mail, it's orixir@orix.pl.jp (ph), and we would be happy to answer any questions that you may have. Thank you for your time everybody.

That concludes today's conference. Please disconnect your line at this time.