ORIX Corp (IX) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Orix annual results conference call. For the duration of the presentation, all lines will be placed in listen-only mode. [OPERATOR INSTRUCTIONS]. And I would like to hand the call over to Mr. Raymond Spencer, and I will be standing by for the Q&A session. Please go ahead. Thank you.

Thank you. Welcome, everyone, to Orix’s earnings conference call for the fiscal year ended March 31, 2006. 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 Mr. Tadao Tsuya, who is the Executive Officer in charge of Accounting.

I will assume that everyone has a copy of the document called Orix Presentation 0603E, dated March -- May 15, 2006, that has been posted on our IR website. I will now ask Mr. Takeda to give a brief summary on the results for the fiscal year ended March 31, 2006.

Hello, everyone. I am Shunsuke Takeda, CFO for Orix. Today I would like to give a brief statement on our result for the fiscal year ended March 31, 2006. Then I will ask Mr. Spencer to make a short presentation.

I am very happy to announce that net income grew 82% to JPY166.4b in the fiscal year ended March 31, 2006. This marks the third consecutive year that we have achieved record profits. In addition, we have announced a dividend for fiscal 2006 of JPY90 per share, up from JPY40 in the previous fiscal year.

We are also aiming for higher profitability and growth, as well as maintaining financial stability in our operations. In terms of profitability, we were able to achieve an ROE of 19.8% and an ROA of 2.50% in fiscal 2006. At the same time, our shareholders’ equity ratio also improved to 13.2%.

For the fiscal year ending March 31, 2007, we are forecasting revenues of JPY1.1 trillion, up 16% compared with the fiscal year ended March 31, 2006, income before income taxes of JPY295b, up 17%, and net income of JPY177b, up 6%.

Now I’ll ask Mr. Spencer to make a short presentation of our latest results. Mr. Spencer, please.

Thank you, Mr. Takeda. I would now like to ask everyone to turn to slide three of the presentation. Today, I would like to make an overview of the presentations made at the earnings announcement today in Tokyo by our CEO and Chairman, Mr. Miyauchi, as shown in part one, and our Head of Accounting, Mr. Tsuya, as shown in part two. In part one of today’s presentation I will cover four points, as can be seen here on slide three. At the end of the presentation, you will also find some supplementary information for your reference, starting on slide 19.

Please turn to slide four. Over the last three years, Orix has been able to achieve a good increase in its corporate value. Both profits and market capitalization have reached a considerable level and, as a result, our responsibility within society has also grown larger. In addition, the improvement in our credit rating has been achieved through an improvement in our financial strength.

On slide five, all segments have grown to the point where they are all significant contributors to earnings. When comparing to the fiscal year ended March 31, 2001, you can see that the share of the Corporate Financial Services segment for fiscal 2006 has decreased to 18%, while the share of the Real Estate-Related Finance and Real Estate segments now account for about 23% of our overall profits. In addition, the Other segment that includes new businesses has also improved significantly.

Overseas, while the Americas segment is unchanged in terms of percentage, the Asia, Oceania and Europe segment has performed well, after the Asian currency crisis.

Please turn to slide six. We have decided to take a fresh look at our medium and long-term growth policy, considering that our corporate scale has grown to where it is. At the same time, we’d like to further strengthen our foundation. In order to continue to grow over the medium and long term, we need to consider strengthening our foundation from three perspectives. First, we need to further improve our financial position. Second, we need to further develop an operating platform that is capable of creating new value. And third, we need to establish a workplace environment that is valued by employees.

In terms of the need to further improve our financial position, although we have seen excellent results over the last three years, we would like to continue our efforts to make further improvements. In terms of the need to further develop an operating platform that is capable of creating new value, we will focus on expanding our customer base, enhancing our sales and marketing network, and fostering improvements in intangible areas such as cross-functional collaboration and teamwork, individual employee effort and our corporate culture.

With the aim of establishing an optimal workplace environment, we will promote increased awareness among management as to their roles and responsibilities, while extending efforts to realize a value-creating environment in which employees can fulfill their potential, irrespective of nationality, age, gender, education and employment type. At the same time, we will instill among our employees a deeper understanding of the impact of our corporate activities in an effort to better contribute to the prosperity of the economy and society.

On slide seven, now, I will consider the business development of our major segments. First of all, Orix will pursue business development in Japan, which covers a large portion of our operations. The Japanese economy has continued to recover, in part due to structural reforms, and there is a high possibility that this recovery will continue to spread throughout the rest of Japan, rather than come to a halt. Also, we are moving towards the normalization of the interest rate environment in the backdrop of the recovering Japanese economy. Within this environment, we expect to see new growth opportunities, as well as new competitors.

The Corporate Financial Services segment, seen here on slide eight, forms the core of our operations and the existence of this segment provides the base for us to grow the other segments. We provide order-made finance to meet the needs of our customers.

Going forward, we see more opportunities to provide investment banking services in addition to our regular menu of leases and loans. We take a very flexible approach to finance that allows us to adjust our business depending upon the market, and our cross-selling activities have evolved even further. We are looking to provide new financial services as we pay close attention to the risk-return relationship in transactions, rather than pursuing a volume approach.

In our Automobile Operations segment, here on slide nine, we are attempting to increase the number of vehicles under management by improving our vehicle management services, primarily for corporate lease. The first services that we provided, along with automobile leases, were vehicle maintenance and accident-related support. We have added to this menu in order to improve efficiency by providing pure information management and vehicle management system support.

Furthermore, on top of this, we have also been providing a broad range of consulting services related to vehicle management. Orix’s strength lies in its ability to continue to improve services in order to meet the increasingly sophisticated needs of its customers.

Orix’s strength in its Real Estate operations, seen here on slide 10, lies in its expertise in both the development, management and operation of real estate, as well as finance. In terms of our real estate segment, Orix is involved in the development and management of residential condominiums, office buildings and other real estate. In addition, we are also operating hotels, training facilities and golf courses.

Orix has also started to develop nursing care facilities to meet the need for senior housing and its first operations will begin in July 2006. We are planning to develop 50 such facilities within the next five years.

In terms of our Real Estate-Related Finance segment, we have been able to take advantage of structural changes in the real estate market over the last couple of years. For example, we have been providing non-recourse loan financing based on cash flows of individual projects. We are also active in the securitization of real estate, leveraging our trust banking function.

We would like to evolve our Real Estate-Related operations into core businesses. We believe that there is further upside potential for Japan’s economy to continue to improve through the further increase in functionality of large metropolitan areas. We are therefore looking to make active investment in this area.

Looking at our Overseas operations, here on slide 11, we can see that they have achieved good growth over the last three years in particular, with our Overseas operations accounting for between 20 and 25% of our overall profits. The development of the Asian and the Middle Eastern economies have been very noteworthy within the world economy, and Orix’s overseas network extends into these regions as well.

While we are expanding our existing leasing business in these regions, we believe that there is great potential to provide new products and services as these economies continue to develop, by using our accumulated expertise.

We are also looking to further evolve our Corporate Finance group in the Americas segment by leveraging the synergies with Houlihan Lokey Howard & Zukin, the investment bank we acquired last year. We are therefore attempting to further increase the share of our Overseas operations.

Slide 12 shows the results of the strategies that we have implemented in the past. What stands out is the trend in net income after the bubble, and most particularly over the last three years. If the bubble had not burst, we believe that we would not have seen a temporary decline in our earnings after fiscal 1993, but more of a steady climb in earnings up until fiscal 2006. Therefore, while the burst of the bubble affected our operations, the last three years of net income appear to have grown rapidly. However, this is not just the result of a sudden strengthening of our operations.

We would like to aim for medium and long-term growth on top of our foundation that we have strengthened over the years by securing business opportunities while flexibly -- while being flexible in our management of our operations. Another task for management is to develop the next management team, something we are presently working towards, to allow us to aim for growth over the medium and long term.

Turning to slide 13, now I will cover the presentation made by our Head of Accounting, Mr. Tsuya. This part of the presentation will look at an overview of the fiscal 2006 results and the reasoning behind the fiscal 2007 forecast.

The results for fiscal 2006 can be characterized by three main points, as seen here on slide 14. First, we were able to increase revenues from both loans and leases in Japan and overseas. In Japan, the economy continued to recover, and the economy in the U.S. was also steady, setting the stage for an increase in revenues as we actively expanded our marketing activities. Second, larger gains were recorded on the sales of investment securities and real estate, thanks to the better stock and real estate markets. Third, we had lower provisions for doubtful receivables and probable loan losses, as well as lower write-downs of long-lived assets.

While we had a write-down for an office building in the fourth quarter, due to the reclassification as a result of the change in use from office facilities to operating assets, overall the write-downs were down year-on-year.

Next, on slide 15, you can see that income before income taxes increased 63% to JPY252.2b, and net income rose 82% to JPY166.4b. This is the first time that net income has exceeded JPY100b in our history for a full fiscal year.

Looking at slide 16, you can see that we were able to achieve an increase in profits for all nine segments. In terms of year-on-year profit growth, our so-called Stable Profit Segments were up 26%, Accelerated Growth Segments up 51%, and Future Growth Segments were up 109%. For details on our segments, please refer to pages 10 to 13 of our consolidated financial results.

Next, on slide 17, for the fiscal year ending March 31, 2007 we are forecasting revenues of JPY1.1 trillion and net income of JPY177b. We have grown our net income to a high level, and we are forecasting an increase in net income of 6% in fiscal 2007, on top of a rise in net income by 82% in fiscal 2006. We expect to see a continuation in the increase in revenues from leases and loans in fiscal 2007 that we previously mentioned as one of the factors behind the rise in net income in fiscal 2006.

Now, considering gains on sales of investment securities and real estate under operating leases, in terms of gains on investment securities for fiscal 2007, while the stock market in Japan appears to be recovering, much depends on how the market trends going forward. In terms of gains on the sales of real estate, we expect this to be steady in fiscal 2007.

Finally, for the provision for doubtful receivables and probable loan losses and write-downs of long-lived assets, we are guiding the market at about JPY20b for provisions, a slight increase over fiscal 2006, and write-downs of long-lived assets under JPY5b.

Furthermore, the forecasts for revenues do not take into account income from discontinued operations, as this is difficult to forecast. For example, in fiscal 2006 the sale of the primary and master servicing operations in the United States - the Americas segment - was booked under discontinued operations. However, for fiscal 2007 we are not forecasting the sale of operations, subsidiaries or affiliates.

Finally, looking at the overall business environment in fiscal 2007, here on slide 18, we expect a monitor -- moderate increase in interest rates in the background of the sustained recovery in the Japanese economy. Overseas, the U.S. economy is expected to steadily -- be steady, despite concerns regarding the trend in crude oil prices. In addition, the Asian economy is also expected to continue to expand.

Now, let’s look at the business environment for individual segments. In terms of our four segments included in our Stable Profit Segments that we are attempting to achieve further growth in, we expect to see steady demand for rentals and funds from corporations in Japan and overseas. We are also expecting to see profits increase in 2007 in our Corporate Financial Services and Rental operations, due to an expansion of our marketing activities.

The profit of the Life Insurance segment will depend on the trend in the securities market, but we do not expect it to be as strong as in fiscal 2006. And we expect profits to be slightly lower in the Asia, Oceania and Europe segment, as we are not forecasting any revenues from the sales of ships or affiliates.

In terms of our Accelerated Growth Segments, we forecast high profits in our -- higher profits in our Automobile Operations segment, due to our expectation that vehicle management outsourcing will continue to increase. We are also forecasting increases in profits for our Real Estate-Related Finance and Real Estate segments, as we expect to see a steady real estate market here in Japan.

In terms of the Future Growth Segments, we are forecasting higher profits in our Other segment, as we expect to see steady demand from individuals in Japan for car loans, and a steady recovery of the stock market that will have an impact on our securities brokerage and venture capital operations.

In terms of the Americas segments, we expect to see steady demand for funds from companies, a favorable bond market and M&A market. However, as we are not expecting any sales of operations, such as the sale of our primary and master servicing in fiscal 2006, we forecast lower segment profits in fiscal 2007.

In conclusion, for the fiscal year ending March 31, 2007 we are forecasting revenues of JPY1.1 trillion, income before income taxes of JPY295b, and net income of JPY177b, up 6% compared to fiscal 2006.

That ends the formal part of my presentation. I will now open up the lines for any questions that you may have. Thank you.

[OPERATOR INSTRUCTIONS]. Our next -- first question will be coming from Julian Wellesley from Putnam Investments. Please go ahead.

[Technical difficulty] position of the investment bank in the U.S. last year, and what you’ve seen, just from working together so far?

Takeda speaking. After our acquisition of Houlihan Lokey in the States last year, as you may know, we have set up a kind of holding company, which contained Houlihan and also in the -- our corporate financial operations, used to belong to [Horlicks] U.S.A. And with this consolidation, Houlihan and corporate finance operations, we are now expecting a kind of a synergy between two entities. However, it’s just started. We haven’t seen any significant things, such as synergistic in the result so far, but we are expecting a more substantial result, or maybe a contribution, from this operation -- investment banking operation in the States.

And, at the same time, we are planning to launch investment banking -- more sophisticated investment banking operation here in Japan, getting the expertise from Houlihan Lokey, and other [partners]. We now exchange [from] each other, and -- but this is also one of our targeted operations for this fiscal year.

Okay, thank you.

Alright for you?

Yes. Thank you.

Okay.

Thank you, sir. And does that complete your question?

It does, yes.

Thank you very much. [OPERATOR INSTRUCTIONS]. Next question will be coming from Julian Wellesley. Please go ahead.

We’ve seen very sharp dollar -- sorry, yen appreciation recently. Can you talk about the impact of currency on your business, as you expect it, for this fiscal year?

Okay. For -- in [these] operations, this is our policy, traditional policy, that we have -- we shall not be incurred any fluctuation of the currency by the exchange risks, basically. And so the -- for example, the -- for U.S. operations, we borrowed U.S. dollar currencies, and also from time to time we utilize derivatives in order to avoid such dollar/yen exchange risks. So that for our profit income statement, as you can see, we don’t have any substantial [inaudible] exchange risks -- exchange loss or maybe profit. Just a small amount of currency fluctuation, loss and profit.

However, we have been traditionally incurred a rather large amount of so-called innovative translation, particularly dollar/yen translation profit and losses. And so if the yen appreciates against dollars, that means we shall be incurring such translation losses in our so-called other comprehensive income.

Right.

So for this fiscal year, now we are seeing largely the substantial appreciation of the yen against the U.S. dollar, our so-called translation, [mostly] slightly larger than in previous fiscal year. But we don’t see any impact for the profit and loss statement.

Okay, thank you.

Alright for you?

Yes. Thank you.

Thank you, sir. Does that conclude your question?

It does. Thank you.

Thank you very much. [OPERATOR INSTRUCTIONS]. There is a follow-up question from Julian Wellesley. Please go ahead.

A question on your ROE. Clearly, last year was an excellent result. Do you think this level of ROE is sustainable over the medium term or do you think that -- maybe more like 15%, or 15 to 18%, is a more realistic longer-term target?

Well, based upon our forecast for this fiscal year, which is the net income for this fiscal year is going to be JPY177b. So that, if we achieve this net income, the -- our ROE are going to be slightly decreased from the previous fiscal year’s 19.8%. Because at this moment we don’t see any increase of our trading capital or common stocks for this fiscal year, except the increase which we realized from the conversion of our convertible bond. But I don’t think that such a conversion is [not for us].

But anyway, so our projected net income of 17 -- sorry, JPY177b and our outstanding of common share is approximately 89m shares. Our ROE are going to be slightly lower than the 19.8%, but I don’t think any substantial decrease from the current level of the ROE.

Okay, thank you.

Okay.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]. Follow-up question from Julian Wellesley. Please go ahead.

Your dividend payout ratio is very low, and effectively what this means is that you’ve de-leveraged over the last several years with shareholders’ funds growing much more rapidly than total assets. How do you think of an appropriate equity ratio? And do you have any plans to change your dividend policy for maybe a more appropriate payout and a more targeted capital level?

As for our equity ratio, currently we maintain that about 5 times and -- which is, I think, the appropriate level of debt/equity ratio, in particular the [inaudible]. Through a dialogue with our rating agencies you know that we maintain the current level of ratings, grade ratings. I think this level of equity ratio is [indispensable]; I mean the 5 times.

And as for our dividend policy, while we have decided to increase the dividend from our previous JPY40 per share to JPY90 per share for the previous fiscal year, I think this -- the increase is, for the time being, a rather appropriate dividend amount. Because the Orix basic policy for the [holding] of our shareholders is to buy up our corporate value, particularly the [inaudible]. We like to have the increase of share prices at the stock market.

And so [inaudible] the increase of share prices, the [frequent] reward to our shareholders, the larger capital gains expected. And so this is our policy, to utilize such retained earnings as possible to have [the cash] for further growth. And the growth -- our -- the Company’s value should be increased accordingly. We hope share prices also increase. And I think this is our basic policy, rewarding our shareholders. Not only the higher dividend, or the emphasis is to increase share price, rather than the larger dividend payout.

Does that answer to your questions?

I understand your intentions. My concern is that, as you continue to earn a high return on equity and build your capital base, then effectively that will reduce your potential ROE over time, and that your -- you will become increasingly under-leveraged. So you -- I think you both have room to raise your payout ratio quite significantly, and also to reinvest in areas of the business that you see as attractive.

Yes. We’ve always tried to be -- we’ve been increasing the capital base, due to such a -- the increase of our net income every fiscal year. And -- but with such an increase in retained earnings, we like to utilize those -- the funds for new business opportunities. This is our policy, and we are not sure that we are going to have, going forward, more interesting business opportunities coming to Orix. We don’t see any earnings surprise of capital gains. We need more -- further capital for the future growth strategies.

And in terms of our debt/equity ratio, as I mentioned already, I think our current debt to equity ratio, 5 times, is appropriate for the time being, particularly to maintain the current grade ratings from rating agencies.

Thank you. If you could just -- maybe, just as a follow-on question from that, could you talk about what acquisition opportunities, if any, that you see at the moment, and what areas look attractive to you for potential acquisitions?

Yes. Unfortunately I couldn’t tell you the details of projects, the acquisitions, but generally speaking we are interested in acquiring [inaudible] portfolio, automobile leasing portfolio from other companies. And maybe we acquire the medium-sized automobile leasing company in Japan. And also the -- as you know, we’ve been rather active for the private equity business in Japan.

So if we identify any interesting private equity investment opportunities, particularly [all around] investment opportunities, we’d like to make an investment towards those companies. So still there are many investment opportunities here in Japan and so we like to pursue such policies for this fiscal year, and also for the coming couple of years’ time.

And, just on the subject of private equity, can you give us an update on [Daiko]?

As for Daiko, after our investment to this company, the company has been doing quite well. And thanks to the economy -- general economy here in Japan, but also in our effort to strengthen the management system at Daiko, the company has been recovering rapidly and we are rather satisfied in [inaudible] such a situation at Daiko.

And can you talk about Daiko’s strength of balance sheet? I see that it’s still rated CCC for its credit rating.

I’m not sure. I think the ratings -- the correct rating is better than [such CCC, something like that]. Sorry, just I check. Sorry, I forgot exactly what the current rating of Daiko is, but I think it’s not such a CCC or something.

Alright. Okay. Thank you.

Thank you. And does that conclude your question?

Yes, it does. Thank you.

Thank you very much. [OPERATOR INSTRUCTIONS]. There is a follow-up question from Mr. Julian Wellesley. Please go ahead.

Just a general question on how you put together your guidance. Looking at past earnings, it looks like a lot of your earnings are one-off earnings that effectively are recurring but somewhat exceptional in nature, if you look at each individual item. How do you think about one-offs or lumpy profits or exceptional earnings when you’re doing your earnings guidance?

Looking at the previous fiscal year’s earnings structure, approximately 30% of the earnings from so-called any gains from disposable assets or maybe operations. And of this, the 30% gains from the sales or disposals of assets or maybe operations, perhaps some of them may be regarded as one-off gains, such as our disposal of invested companies or investments in terms of principal investment. And also in the disposal of the principal investment -- invested companies, principal investment is not one-off, it may be recurring. It’s kind of a recurring operation.

Perhaps one-off transactions may be our disposal of the CMBS Servicing -- service operations in the States. We -- as you may know, we have disposed some part of CMBS Servicing operation in the States last fiscal year. And also, we have disposed our factoring operation which has been pursued at our Australian subsidiaries, and those may be so-called one-off, but other gains or maybe income, I mean the realized gains through a disposal or sales of assets, it’s recurring. Because, from time to time, each transaction is different.

However, this is Orix’s business model, to acquire some assets or maybe accumulate some assets and add that to these assets, and dispose of those assets to the market. And so this is now our basic business model.

So, again, the 30% of the gains for the previous fiscal years, maybe most of those gains should be regarded as recurring, not the one-offs, except the disposal of some business operations.

And how conservative do you consider your guidance to be for this fiscal year?

Yes. These -- the gains more or less depend on the market environment, particularly stock market, maybe the [arrested] market. So the -- it is rather -- not so easy to set up any targets or forecasts for these gains, what amounts should be for these gains, is not so easy. But basically, we are rather conservative to estimate forecast those gains from the sales or disposal of assets. This is our basic policy.

Thank you.

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

Okay. I would like to thank everybody for their participation in the fiscal 2006 annual conference call. If you have any follow-up questions, you can contact me. My address is at the end of the presentation. And thank you for everybody for participating. Good night, good evening, good day.

Thank you. Bye-bye.

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.