ORIX Corp (IX) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to ORIX third-quarter results conference call. [OPERATOR INSTRUCTIONS] I would like to turn the call over to Mr. Raymond Spencer and I will be standing by for the Q&A session. Please go ahead. Thank you.

Welcome everyone to ORIX's earnings call for the three and nine month ended December 31, 2005. My name is Raymond Spencer. I am joined here today with Mr. Shunsuke Takeda, who is our Vice Chairman and Chief Financial Officer, as well as the Mr. Tadao Tsuya who is the Executive Officer in charge of Accounting. I will assume that everyone has a copy of the document called the ORIX presentation 0512-E dated February 8, 2006 that has been posted under the calendar section of our IR website. I will now ask Mr. Takeda to give a brief summary of the results for the first nine months of this fiscal year. Please, Mr. Takeda.

Hello, everyone, I am Shunsuke Takeda, CFO for ORIX. Today I would like to give a brief statement on our results for the nine months ended December 31, 2005. Then I will ask Mr. Spencer to make a short presentation. I am very happy to announce that net income grew 86% to 126 billion yen in the first nine months of fiscal 2006. This is the highest net income to date exceeding the full-year recorded profits achieved in fiscal 2005.

In light of the acceleration in the growth of our business, we have revised our results forecast for the second time in fiscal 2006. We now focus net income of 150 billion yen for the fiscal year ended March 31, 2006. In addition, we have also revised up our forecast for the dividend for fiscal 2006 from 40 yen to 90 ten, based on the recent business environment. We are also aiming for higher profitability and growth while maintaining financial stability in our operations. In terms of our profitability, we are able to achieve an annualized ROE of 20.7% and annualized ROA of 2.64% in this past nine months of this fiscal year. At the same time, our shareholders equity ratio also improved to 13.4%. Now I'll ask Mr. Spencer to make a short presentation on our latest results. Mr. Spencer.

Yes, thank you, Mr. Takeda. I would now like to ask everyone to turn to slide 3 of the presentation. Today I would like to make an overview of the presentation made by Mr. Takeda and Mr. Tsuya at the earnings announcement today in Tokyo. In today's presentation, I will cover five points through this presentation, which include, number one, ORIX's next business strategy. Number two, revisions of fiscal 2006 dividend forecast. Number three, overview of the nine months April 1, to December 31, and that should be 2005. Forecast for fiscal 2006. Number five, segment information and there's also some supplemental information at the end of the presentation for your reference.

Please turn to slide 4. Economic recovery is continuing in Japan after a long period of economic stagnation after the burst of the bubble. Considering this present economic recovery we have decided to alter our strategy somewhat. Under economic stagnation, ORIX's strategy was to grow profits without increasing assets. In addition, we worked to expand value-added finance and focus on debt, and equity businesses, for example. In terms of value-added finance as shown under number 2 on the left, we strategically emphasized our automobile maintenance leasing operations to increase profits under a very low interest rate environment. We have increased the number of vehicles under management by about 255 -- 250,000 over the last five years and we presently have more than doubled this, making us number one in the industry.

In addition, we have improved our Risk Management system to deal with the increasing diversification of our business. We have also optimized the allocation of risk capital to our various businesses based upon the risks to maximize management efficiency. Now that we have entered a period of economic recovery, we are adopting a strategy that aims for further growth in our business. We received a lot of inquiries from investors regarding competition with large city banks that have cleaned up their NPL problems and returned to health. These city banks are trying to move into the regional areas by competing with regional financial institution in the field of noncollateralized lending to SMEs. ORIX is turning competition into cooperation by working with regional financial institutions. We have 87 sales and marketing offices through our Corporate Financial Services segment throughout Japan that has always focused on SMEs.

In addition, over the years, we have set up several joint venture leasing companies with regional financial institutions, allowing us to develop strong relationships as trusted business partners. We have also strengthened these relationships by setting up Corporate rehabilitation funds and by providing loan guaranteed services to regional financial institutions. Prior to this, from November 2000, we have also worked to expand our business partner loans which are noncollateralized loan products.

In terms of exits for our principal investments, in October 2005, we have successfully sold off our investment in Casco which we invested in 1999 and Minami Sports which we invested in 2002. Other investments that we still hold include Aozura Bank, KREE Life Insurance and Daikyo for an example. We have expanded our investment banking activities to SMEs during a period of economic stagnation and we would like to actively participate in helping them sell off businesses or with their M&A activities.

Last month we established a new company that combines the operations of Houlihan Lokey Howard & Zukin, a U.S. investment bank that we purchased last October, and the Corporate Financial Group -- Finance Group of our U.S. operations. Houlihan, Lokey is the top investment bank in the U.S. for deals in the middle market. This new company will not only focus on growing the operations in the U.S. but will also leverage ORIX's network in Japan and Asia to provide Investment Banking services here.

Finally, I will make a short comment on our ALM activities. First, we have seen the CPI move into positive territory for the last two months. The market, therefore is forecasting an ending to the monetary easing policy of a BOG in spring. We have made our own simulations based upon an increase in interest rates that may follow. In fact, about one-third of our leases and about one quarter of our loans are turned over each year. Also about 60% of our loans are floating; therefore, as funding costs increase, we will be able to also increase the rates that we charge on leases and loans, which means that there is a very low possibility that we would experience any losses. ORIX has achieved strong growth both last fiscal year and this fiscal year and we believe that we have entered a new stage of growth. We are, therefore, attempting to further grow our business under this period of economic recovery.

Please see slide number 5 please. Yesterday, ORIX's Board of Directors announced that it had increased the dividend forecast for the fiscal year ending March 31, 2006. ORIX is attempting to achieve further growth and increased Corporate value over the mid to long term by appropriating retained earnings to business deals that are expected to achieve high earnings while distributing profits to investors through a steady dividend. In consideration of the above policy and the recent business environment, we have revised the dividend forecast from 40 to 90 yen for the fiscal year ending March 31, 2006.

Please see slide 6, please. Now I will cover three topics which highlight our results for the first nine months of fiscal 2006. First of all, we have seen revenues from loans and direct financing leases and operating leases in Japan and overseas grow. In particular, we saw an acceleration of growth in loans that experience strong growth last fiscal year as well. At the same time, revenues from direct financing and operating leases are trending upward. Next we achieved increased gains on sales of Real Estate and net gains on investment securities thanks to the favorable market environment. In addition, we also exited one of our principal equity investments. Finally, we saw a reduction in the provisions and we do not expect provisions in fiscal 2006 to exceed 20 billion yen.

On slide 7, you can see income before income taxes increased by 71% to 192 billion yen and net income increased 86% to 126 billion yen on top of very strong performance in the same period of the previous fiscal year. This strong performance can be attributed in part to the favorable market environment and to investments that we have made in the past that have started to bear fruit.

Next on slide 8, for fiscal 2006, we have revised our consolidated results forecast for a second time this fiscal year. We have revised our original net income forecast from 96 to 140 billion yen at our interim results announcement. Yesterday we announced that we have, again, revised up our forecast for net income for fiscal 2006 to 155 billion yen which is up 69% compared to fiscal 2005. We have revised up our earnings for three primary reasons. First, we had a larger-than-expected expansion of new business volumes for direct financing leases and installment loans that led to higher revenues. Second, brokerage commissions and net gains on investment securities made a larger contribution to profits than expected in the previous forecast due to the active stock market. Third, we had a larger-than-expected contribution from equity and net income of affiliates.

Referring to slide 9, you can see that we achieved higher profits in eight out of nine segments. We have essentially seen a continuation in the trend that we saw in the first half of this fiscal year. Now I will spend a few minutes to go through the individual segments.

In our Corporate Financial Services segment seen on slide 10, segment profits were up due to the expansion of loans to Corporate customers, and increasing contribution from direct financing leases, the recognition of gains from securitization, and the lower provisions as a result of the lower level of nonperforming assets. We are seeing an increase in spreads on leases and loans, and we have been successful in competing with the banks where we are growing these books based upon the working capital needs of our customers that have shifted focus to growth away from restructuring. For the full fiscal 2006 year, we expect to see segment profits to be higher compared to the previous fiscal year.

Next on slide 11, segment profits 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. In the rental operations segment, we expect full-year segment profits to be about the same as or slightly lower compared to the previous fiscal year.

Next please, see slide 12 for the Life Insurance segment. Here segment profits were up due to higher insurance-related income and lower insurance payments. In the Life Insurance segment, we expect segment profits to continue to grow for the full fiscal year and to also outpace the results of the previous fiscal year.

On slide 13, the Asia, Oceania, and Europe segment achieved a steady performance for automobile and machine equipment leasing at a number of companies in the region. Revenues from the ship-related operations also increased. In addition, the steady performance of Korea Life Insurance and other equity method affiliates and gains on the sale of an affiliate also contributed to higher segment profits. We expect to see segment profits continue to grow for the full fiscal year and to outpace the results of fiscal 2005.

Segment profits increased for the automobile operations segment seen here on slide 14, due to an expansion of the automobile leasing operations. Presently, we have over 550,000 vehicles under management combining our auto leasing and rental operations. In addition to its focus on corporate customers, ORIX auto has also tied up with credit card companies such as Credit Saison and JCB as well as Autoback 7 to expand its business to individuals. ORIX auto has been continuing to make efforts to expand the number of vehicles under management. Here we expect segment profits to be higher in the automobile operations segment in fiscal 2006 compared to 2005.

Segment profits increased for the Real Estate-related finance segment seen here on slide 15 due to the increase in revenues associated with corporate loans, including nonrecourse loans and gains from securitization and the loan servicing operations as well as the contribution from the housing loan operations and net gains on investment securities. In addition, lower provisions contributed to the higher segment profits. We are expecting continued high growth in segment profits for fiscal 2006 in this segment.

Next please see slide 16 for our Real Estate segment. Gains associated with the sales of Real Estate under operating leases increased year on year and revenues associated with our integrated facilities management operations also expanded. Revenues associated with the sales of residential condominiums were up only slightly year on year as a result of the up-front recognition of advertising expenses. We expect this business, however, to continue to perform steadily. Segment profits are pretty much in line with our expectation and we expect to see the segment to perform steadily for the full 2006 year.

In the Other segment on slide 17, segment profits increased as we recognized profits in our corporate rehabilitation business, upon exiting two investment, namely Minami sports and Casco. Due to the contribution from a company that we invested in the previous fiscal year. In addition the securities operations and net gains on sales of investment securities also made contributions while our lower provisions associated with our card loan operations contributed to higher segment profits. We are expecting a further increase in segment profits for the full fiscal 2006 year.

Finally, segment profits were up due to an increase in revenues from interest on loans to corporate customers and gains on sales of Real Estate in the Americas segment seen here on slide 18. We also had a contribution due to the sale of the primary and master servicing operations. Furthermore, lower provisions in SG&A expenses also contributed to higher segment profits. We expect segment profits in the Americas segment to continue to grow for the full fiscal 2006 year. That ends the formal part of the presentation. I will now open the lines to any questions that you may have. Thank you.

[OPERATOR INSTRUCTIONS] First question will be coming from Margaret Moore from US. Please go ahead, man.

Hi, Ray, it's Margaret. I am interested in a comment on the Real Estate segment where you indicate that you are currently seeing profits affected by advertising costs for condominium launches but you expect that the profits for the full year to be steady. Earlier, I believe ORIX had been a bit concerned about the dramatic rise in land prices and had indicated that, I guess, essentially, most of the easy money had been made. Have you changed your mind? Or are you finding it easier to access attractive development projects now than you were earlier?

Takeda speaking. Answering to your question, as to the -- as for the Real Estate operations, particularly focusing on the condo development operations. It is true that the land price is, particularly in metropolitan total areas have been increasing but comparing with a situation of a couple of years ago, but still we could identify the reasonable price, at this site, and currently, for example, the -- we are building a high -- very tall, the condominium. And due to such the large-scale high, tall condominium development, so-called the expenses for advertising and other advanced payments regarding these construction of condominiums, they recognize in our current, profit and loss statement. So I would like to say that the price here is going up steadily. But still we could identify, the good properties for condominium development. Have I answered your question?

Yes, thank you.

Okay.

Thank you, ma'am, does that conclude your question.

Yes, it does.

Thank you very much. Next question will be coming from Mr. Neil Downey from the U.S. Please go ahead.

Yes. Thank you for your call this morning and the results are very encouraging in terms of your various businesses. In order to get a better understanding of the long-term earnings potential for ORIX, could you break out what would be considered recurring and nonrecurring out of the expected 63 billion yen increase in this year's net income.

Well, Takeda speaking again. The -- breaking down our revenue sources for future fiscal year, as you just mentioned, -- actually could break those revenue sources into two categories, one is the recurring and the other one is nonrecurring. As for recurring, the [Inaudible] as you may know, we got the stable -- so called stable operations of the chain of the main business line so-called corporate financial strategy segment engaging Corporate loan and leasing to our SME customers. And also, you can expect increasing revenue from [Inaudible] financing, particularly our operations with [Inaudible] to the property related project. Also, the -- we are increasing our property development, increasing condominium development, and so these operations should be regarded as stable, we have the recurring revenue sources, and we expect further increase. Partly thanks to a recovery of the Japanese general economy. As for nonrecurring operations, there might be some operation, for example, the capital gains realize through our disposal of some business lines and also the disposal of some part of -- sorry, some equity invested already, but the -- these capital gains, the -- of course from time to time the content of these capital gains might vary for the coming year, but overall a month near rates through those capital gains might be sustainable I think. Because, for example, we have already invested for the various -- the companies, particularly companies called turn-around opportunities and also invested in the form of so-called principal investment in the past. From these -- some of these already invest in these companies, we are going to see some exit and from these exit, we could expect a rather stable capital gain from coming -- for coming years. Is this all right for you, sir.

Well, I guess if that's the best we can get. I was really looking for a number. But if you are unable to provide the number. You mentioned that you have made investments in the past that you expect to continue to contribute to your capital gains flows for the coming -- coming periods. Are you continuing to make such investments as well and build up and maintain a book?

As for corporate [Inaudible] investment due to recovery of Japanese macroeconomic, I think I know such opportunity for our investment coming -- going down I think. In the meantime, the so-called principal investment opportunity we shall be able to identify the investment opportunity even for the recovery in the Japanese [Inaudible]. So the problem is the pricing. Investment price going to the higher, but we'll actually look at all investment opportunity very carefully and that means that unless we got the confidence of such a business pricing we'll not make any investments.

Okay. Thank you.

Okay. Thank you.

Thank you, sir. This does conclude your questions?

Yes, sir.

Thank you very much. [OPERATOR INSTRUCTIONS] Next question will be coming from miss Margaret Moore from the U.S. Please go ahead, ma'am.

Thank you again. I was encouraged by the growth in Corporate lending that you see in your Corporate Financial Services segment in Japan. And I was wondering if you could just put some color on where you are seeing demand for funds. Whether you are seeing significant competition from the mega banks who have also ostensibly targeted this SME segment for their growth in loans? And your expectation for the trend over the next year or two in terms of margins of that business. Thank you.

I understand, Takeda speaking again. As for corporate lending of corporate financial services segment. As you know the -- our core customer base, based on the so called SME and we have been lending loans to those SMEs in the past, and we have accumulated expertise or created variation and the other , no how to transact with these SME customers. And as you know, the transacting with those SMEs require a special type of expertise. Because normally we couldn't ask them for some [Inaudible] or something. So that is -- in the meantime, the so-called mega bank -- mega banks. Traditionally they are lending opportunities are based on [Inaudible] and at this moment, first, they don't have any such meaning through expertise to evaluate the SME customer without any such [Inaudible] so that's -- in this sense, the ORIX has the competitive edge, and maybe in the long run, they might catch up, of SMEs and lending activities. But it will take some time. And in the meantime, as the -- Mr. Spencer already explained, the -- those mega banks now competing with regional banks with SMEs, however ORIX have been incorporating with those local banks, regional banks. For example, I am setting up a leasing company with them, setting up so-called corporate rehabilitation bank with them, and also, ORIX is providing guarantee lending to their customer and with these majors, we have already set up quite close collaborative integration with those regional banks. So we have the competitive edge for financial lending trying to compare those bigger banks nd I don't think, our SMEs for lending might be seriously jeopardized by these mega banks and we might be able to [Inaudible]. Did I answer your question?

Yes, thank you, Mr. Takeda.

Thank you, Ma'am. Does that conclude your question?

Yes.

Thank you very much Ma'am. Next question will be coming from Mrs. Camille Carlston from Putnam U.S.A., please go ahead, ma'am,

Good evening. I have just one question. Your provisioning level for this past year actually is quite low, especially when you look backwards, and I am wondering if you think this lower level of provisioning can prevail going forward in future years.

Okay. Takeda speaking again. Approaching ending up quarters, the provisioning among the approach maybe 12 billion yen. This is almost half -- less than half of the -- than the previous fiscal. And for the coming quarter, fourth quarter, we are not expecting the large amount of provisions coming up. So at this this moment, I can tell you that roughly speaking the total provisioning for the whole fiscal year might be less than 20 billion yen, which is, vast more than the previous year. Is that all right for you, sir, -- or you madam.

Well, I have one question. So in the past, historically, you really haven't had a large problem with credit. And as you have been doing more lending on the nonrecourse lending side, you have more collateral, so is it a healthy assumption that going forward, your provisioning levels will actually be lower than what it has been in the past? Going into even next -- just thinking it on a one-to-three-year basis. If the economy keeps going with the types of lending that you are doing, you might actually be providing on a lower basis.

Just for the little sec. Okay, I understand. Yes. That might be true, thanks to the recovery of Japanese economy for coming years, our provisioning might be getting lower, but traditionally, the -- as we -- we have been -- the [Inaudible] side or the very active ending operations, we shall have to prepare for some many smaller amount of -- the accumulation of the smaller lending and the total provisioning for the coming years even such improved economy recovery. We should have some appropriate level of provision. And so now I couldn't -- the -- very unfortunate the concrete number of provisioning for provisions, but the provisioning number is now for getting to the bottom. So so we couldn't accept another large number of the reduction of a provision for the coming years.

Thank you.

Okay.

Thank you, ma'am. This does conclude your question?

Yes.

Thank you very much. [OPERATOR INSTRUCTIONS] There appears to be no further questions at this point, and I would like to hand the call back to Mr. Raymond Spencer for closing remarks.

Okay. Well, we would like to thank everybody for participating the third-quarter conference call. I am available by e-mail. It is Raymond_Spencer@ORIX.co.jp as on the last page of the presentation. Please contact me if you have any further questions and thank you. Good morning, good evening, and good night.

Thank you, bye-bye.

Thank you.

Thank you and that concludes today's conference call on behalf of ORIX Corporation, we would like to thank everyone for participating in today's conference. All lines may disconnect now and good day to you all. Thank you.