ORIX Corp (IX) 2007 Q1 法說會逐字稿

Good day everyone and welcome to the ORIX first quarter results conference call. For the duration of the presentation all lines will be placed in listen-only mode. A question and answer session will follow the main presentation. [OPERATOR INSTRUCTIONS]. 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 ending March 31, 2007, this is the first quarter. My name is Raymond Spencer. I’m joined here today with Mr. Shunsuke Takeda, who is our Vice Chairman and Chief Financial Officer, as well as with 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 0606E dated August 11, 2006 that has been posted on our IR website.

I will now ask Mr. Takeda to give a brief summary on the first quarter results.

Hello, everyone. My name is Shunsuke Takeda and I’m the CFO of ORIX. Today I would like to give a brief statement on our results for the first quarter of the fiscal year ending March 31, 2007. Then I will ask Mr. Spencer, Manager at our Corporate Communications, to make a short presentation.

I’m very happy to announce that net income grew 25% to JPY47.1b in the first quarter of fiscal 2007, which is a record high quarterly earnings. We are also aiming for higher profitability and growth, as well as maintaining financial stability in our operations. In terms of our profitability we were able to achieve an annualized RoE of 19.4% and an ROA of 2.6%. At the same time, our shareholders’ equity ratio also improved to 13.7%.

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, and net income of JPY177b, up 6%, unchanged from our previous result announcement.

Now I’ll ask Mr. Spencer to make a short presentation on 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. Now, today I would like make an overview of the presentations made at the earnings announcement today in Tokyo by our CFO and Vice Chairman, Mr. Takeda, as shown in part one, and our Head of Accounting, Mr. Tsuya, as shown in part two.

Please now turn to slide four for an overview of our first quarter results. Our results can be characterized by three main points. First, corporate lending has continued to be steady, both in Japan and overseas. In Japan, revenues associated with loans to corporate customers, including non-recourse loans, were strong, while there was also good contribution from loans to corporate customers in the U.S.

Second, we have seen an expansion of our Real Estate operations, primarily in the area of condominium development, due to an increase in the number of condominiums sold to buyers and due to the development, rental and sale of office buildings.

Finally, we have also seen an increase in SG&A due to an increase in personnel and related expenses associated with Houlihan Lokey, as well as an increase in the number of employees in the Corporate Financial Services and Automobile Operations segments in an effort to further expand our sales platform here in Japan.

The highlights of our segment profits for the first quarter can be broken down into three areas, as seen here on slide five. First, segment profits increased for the Real Estate-Related Finance segment, due to contributions from corporate loans, including non-recourse loans, and the loan servicing operations, the Real Estate segment due to a contribution from the condominium and office building development operations, and the Other segment due to a contribution from the principle investment, venture capital and securities operations.

Second, segment profits for the Corporate Financial Services and Automobile operations segments were basically flat year-on-year as a result of the upfront costs associated with an increase in the number of employees in an effort to expand our operations in the future.

Finally, segment profits for the Americas segment declined year-on-year due to the lower gains on the sale of real estate under operating leases, while segment profits were higher for the Asia, Oceania and Europe segment due to the steady performance of the Automobile Leasing operations there.

Please turn to slide six for an overview of our Corporate Financial Services segment. In this segment lending to SMEs - small, medium-sized enterprises --remains strong and assets were up 9% year-on-year. Although segment revenues increased, segment profits were almost flat year-on-year at JPY11.1b due to an increase in SG&A expenses as a result of upfront costs associated with an increase in the number of employees by about 100 compared with the first quarter of the previous fiscal year, in part due to efforts to expand our sales and marketing base. An increase in segment profits is expected from the second quarter onwards.

Segment profits for the Rental Operations segment, seen here on slide seven, decreased 22% to JPY1.3b accompanying the decrease in segment revenues, due mainly to the losses on the sale of investment securities.

Segment profits in the Life Insurance segment, seen here on slide eight, decreased 30% year-on-year to JPY1.1b due to the lower segment revenues, mainly as a result of a decrease in life insurance-related investment income.

Segment profits in the Asia, Oceania and Europe segment, seen here on slide nine, increased 54% year-on-year to JPY11.6b due to an increase in segment revenues owing to the steady performance of the Automobile Leasing operations that includes operating leases, as well as the recognition of gains on the sale of operating lease assets and the steady performance of Korea Life Insurance, which is accounted for by the equity method. In addition, segment assets were up 6% on March 31, 2006 to JPY597.6b due to an increase in installment loans and the purchase of a real estate company in Australia in the first quarter of this fiscal year.

Now, segment profits were flat year-on-year in the Automobile Operations segment, the first of the so-called accelerated growth segments, here on slide 10, at JPY6.3b due mainly to an increase in SG&A expenses as we increased the number of employees by 200 year-on-year in an effort to further develop our customer base, focusing on increasing our automobile-related business to individuals, in addition to our core business focusing on corporations. We are expecting an increase in segment profits from the second quarter.

Segment profits for the Real Estate-Related Finance segment, seen here on slide 11, increased 54% year-on-year to JPY10.6b due to the higher segment revenues as a result of the contribution from revenues associated with corporate loans, including non-recourse loans, the loan servicing operations, the steady performance of the housing loan operations and as a result of a decrease in provisions.

Segment profits for the Real Estate segment, as seen here on slide 12, increased 62% to JPY20.7b in line with the increase in the revenues associated with condominium sales, where we sold approximately 780 units in the first quarter of this fiscal year compared to 414 units in the same period of the previous fiscal year. In addition, sales associated with Real Estate under operating leases were also up year-on-year with the sale of several properties here in Japan.

Segment profits of the Other segment, here on slide 13, increased 34% to JPY11b due to the higher revenues as a result of an increase in gains on investment securities at the venture capital operations, revenues associated with securities operations and steady trend in revenues at the car loan operations. In particular, gains on the investment securities at the venture capital operations increased from JPY3.3b in the first quarter of the previous fiscal year to JPY5.1b in the first quarter of this fiscal year, while revenues from the securities operations increased from JPY1.3b to JPY2.1b. Finally, Daikyo, an equity-method affiliate, also contributed to profits.

Now please turn to slide 14 for the Americas segment. The business performance was steady for Houlihan Lokey, which joined the ORIX Group in January of this year. Segment profits decreased 28% to JPY5.2b in line with plans, due mainly to two factors. First, we had lower sales of real estate under operating leases, as we had already actively sold off real estate in fiscal 2006. Second, there was a lower contribution from the equity and net income of affiliates, as we liquidated our investment in the company involved in futures trading last June.

In conclusion, we have not made any changes to our original forecast for the fiscal year ending March 31, 2007. We forecast revenues of JPY1.1 trillion, income before income taxes of JPY295b and net income of JPY177b, up 6% on -- year-on-year.

Now, that is the formal part of the presentation, I will now open up the lines to any questions that you may have.

[OPERATOR INSTRUCTIONS]. Our first question will be coming from Stephen Hill from MFC Global. Please go ahead.

Good evening. That was a breathtaking presentation. I could hardly take it all in. One can only think you are trying to hide something. Would you please like to tell us something about your problems about -– regarding your Real Estate subsidiary and its pricing policy to REITs, and also about your investments in the Murakami Fund? Thank you.

This is Takeda speaking. As for Real Estate-related operations, which include so-called Real Estate-Related Financing and Real Estate development, such as condominium and office buildings, as you can already notice, the earnings from these operations contributed substantially to our [inaudible].

I’m not asking about earnings, I’m talking about pricing policy, to your REITs. Could you please answer the question?

REIT?

Yes. You’re selling property by REIT -– to the REITS. Of course you’ve made profits if you -- of course you’ve made a lot of profit if you’ve sold them at exalted prices.

Yes.

Can you please address the question?

When we sell property to a REIT -– mainly a REIT or [ex-REIT], of course, we normally take a couple of appraisals from independent appraisers, in order to secure the so-called fair market value towards each property. This is the basic policy, of course.

But yet I believe you don’t.

Oh, yes. Unfortunately, some of our such transactions already done in the past, pointed out by the FSA, it’s not appropriately valuated, unfortunately. And so there are some the inappropriate such practices in the past and we have already revised and amended such practices, so that we could have a better or more appropriate valuation policy. So it was quite unfortunate for us and of course the investors to a REIT that we had such appraisal practices.

Okay, so you say you’ve adjusted practices, but what about past costs? Are you going to have to reimburse the REIT for any previous property sales?

For example, some of the points which were [inaudible] by the FSA, there are space -- the floor space which has been rented to our tenant, the -- smaller than the so-called stipulated space in the rental contract. And this happened due to such inappropriate appraisals obtained. I can tell you that the Japanese market appraised here when we transact or buy any properties, I mean particularly a second-hand property, the common practices here is that not undertake such a, how shall I say, estimation of the floor space. And we transact on such a document basis, not undertaking the space appraisal. But the change of this point has been arranged by the FSA and now we have changed such a policy. While there is still such a common -- commercial practices in the property transactions here in Japan, but we’d like to because it’s a more disciplined appraisal policy.

Yes, I accept that you are changing policy now but I said the question was how much is it going to cost you on past policy? Are you going to have pay anything back?

Yes, so that the -- as for the particular properties are included in the program transaction, we are now negotiating or talking with the tenant but we could give -- pay back some money to them. But it is not a large amount.

So there’s nothing in your first quarter accounts for that possibility?

It’s quite a small amount. It will not give any substantial impact to the profitability.

Okay. And the second point of the question was your relationship with the Murakami Fund.

Well, we’ve been quite embarrassed with this unfounded allegation, the rumor spread in the market the past couple of months. We could clearly say that we are not -– definitely not related to such an indictment. It’s an indictment for Mr. Murakami. While we supported him upon their starting the operation, because we had such the sympathy or such an aspiration to promote so-called shareholder activation in Japan. And so that’s why we provided some seed money to them for their [new share] operation in 1999, I think.

And since then their operation has been expanding substantially, in particular in the past two years. Murakami-San and their colleagues obtained a huge amount of funds provided by investors. And so with this such huge amount of fund, their original initial objective of the fund, unfortunately I think, has changed substantially.

Right. I would suggest, therefore, that your involvement was a plus point for a lot of those investors to take part, because ORIX is held in such high esteem. And it’s taken you 30 years to build up a very good reputation. I’ve known the Company when it was called Orient Leasing. And now you’ve lost it in six months.

And secondly, I have to question whether you’re involved with any other people that may or may not have contracted contracts that are outside of the social and legal framework. Do you think Murakami-San is the only investment where you’ve made a mistake?

When we got the quite substantial investment fund -- related to investment fund, we have put up our fund towards the very different type of investment fund, such as the buyout fund and mezzanine buyout fund, actually quite different type of fund. And we have already put up more funds to these funds already. And Murakami’s case is quite unusual; very, very unusual. And, of course, we didn’t expect such legal issues related to this fund. And so this is a quite unusual, rare case and I don’t think there are any other same type of inappropriate fund which we are related to.

Okay. Well, thank you very much for answering my questions and I look forward to seeing you in London. I’m quite happy to hand over to other questions. Thank you.

Of course, thank you very much. See you then.

Hello, sir, does that conclude your question?

Yes, it does, thank you. I’m quite happy to hand over. Yes, thank you.

Thank you very much. [OPERATOR INSTRUCTIONS]. We have another question from [Fred Barker]. Please go ahead with your question.

Hello, Mr. Takeda. Thank you for the presentation. I’d like to ask a little about your operation, your investment in Korea Life. I understand it’s an equity-method operation and there’s very little disclosure it appears. Could you give us a little bit more color on condition of the company at this time, your intentions, what you think is the value of this organization, the amount of, say, contribution that this unit has made to your profits this term?

I understand. Regarding Korea Life, at this time this company, as you know, it’s an equity-method company and in the meantime we’ve been seeking an opportunity to dispose this company to a third party, provided that we could have sufficient pricing. In the past couple of years our initial objective acquiring this company, together with Korean local partner called the Hanwha Group -- this is a ForEx -- this should be the so-called kind of financial investment for making [this small] investment expecting the exit in the appropriate time.

Since our investment to this company, the company has been improving substantially. And at this moment the company is doing quite smoothly, showing good profit, but we got such two [more] targets still are seeking such a possibility of a disposal to third party. At the same time, we could maintain the current status, maintain the company as an equity-method affiliate, in order to take in the net income from the company. So we are in such a situation –- position, but we haven’t decided yet. We’re actually continuously seeking such two possibilities.

Can you give us any indication as to, for instance, what kind of trends you’re seeing in the embedded value of that entity since you acquired it? Has it doubled, has it tripled? What kind of contribution is it making to your organization today?

As the company, as I mentioned, is an equity-method company, so far we have already -- we have taken in their net income in accordance with the percentage stake, currently 17, 1-7%. But that is the only meaningful contribution to ORIX. No so-called synergistic –- the synergy to the other operations.

Well, apparently the contribution is large enough that Raymond mentioned it in his segment summary. Can you give us some indication as to if it -- was this a large part of the Asia -- the reason for the increase in profits in the Asia division? Is it a small amount or is it 50% in the -- just some kind of color?

Yes, among the -- this company is included in the Asia, Oceania Europe segment. And among -- of this segment, contribution from Korea Life is [March], I think.

Okay, alright.

I think in our total, the net income, this is comparatively small, as you can understand.

Okay, but for the Asia, Oceania Europe segment it is a fairly large contribution?

Yes, that’s right.

Okay, alright. And I would also like, if I may, to ask about your interest in Daikyo. I am just trying to understand how you intend to maximize the value of your investment in Daikyo. Part of the problem, as I see it, is that there’s a tremendous amount of potential dilution coming from the preferred shares that ORIX itself owns in the entity. And I hear many -- I don’t think there are many people who would disagree that the fundamentals of Daikyo have improved tremendously. However, very few sell-side analysts are willing to cover, or write research reports, on the company until the full issue of dilution is cleared up. And, unfortunately, that can only come from ORIX. So, I’m wondering what your intentions are here to maximize your investment in Daikyo.

Daikyo is the -- I think a little bit unique position in the ORIX Group. At this moment, that’s also one of our equity-method affiliates from which we take in the net income on a basis of our percentage of stake from the company.

But in the meantime, Daikyo is still one of the major condominium developers here. And at the same -- as you know, ORIX is also the [inaudible] in the condominium development operations. So, as long as we maintain substantial share -- stake of the Daikyo, we like to seek some synergy between Daikyo and ORIX, the condominium development operations. And we are now talking with them what we could find any such synergistic business opportunities.

And also, as you just pointed out, beside common stock, we have -- we got such the option of the so-called convertible bond which could be converted for more stock in due course. And we still have such an option. But we haven’t decided yet how we could deal with this option, whether we exercise the option or not, we haven’t decided yet. But in the meantime, as I mentioned, we’d like to seek some synergies between ORIX and Daikyo, from the operation.

Do you have any kind of timeframe as to when you might clear up this whole issue with the preferred shares, whether it’s going to be some time within this year or next year?

No, such clear cut timeframe at this moment, and the -- fortunately, since we invested to Daikyo and providing our management, ORIX provided some staff or executives to the Daikyo’s management for restructuring, improving management skills. And also, thanks to the [inaudible] of property market here, Daikyo is improving quite substantially in the past six months or something. And we are expecting further improvement of their performance. Actually the recent -- last November, I remember, Daikyo have announced that their profit for all of this fiscal year should be revised up. So, I think I know Daikyo is now doing quite, quite satisfactory from the viewpoint of ORIX.

Yes, well, I would have to agree with you on that. But from an investor perspective, I think many people are reluctant to take advantage of those improving fundamentals until they can gain a clearer picture of how many shares are going to be outstanding ultimately. That’s one issue which stands in the way of perhaps realizing -- maximizing the full value of your investment.

But I would also -- just one last question on this. Would you ever think of consolidating Daikyo into ORIX’s operations? It is a large operation. It may give you too much exposure to real estate. Of course, if you do convert your preferred equity, I believe you’ll be forced to -- you’d be over 50%. So, I’m just wondering what your intentions are. Would you ever consider consolidating this entity?

As such, whether we are going to consolidate Daikyo to ORIX Group, at this moment we don’t have any particular plan or something. And at the same time, in the meantime, [you are such] confirm that ORIX’s exposure to the property market is getting larger and larger. That might be true. But we anticipate our property market here are going to be more the -- be farther recovered, [grewed]. I mean even we got the higher property prices in the metropolitan Tokyo area, comparing the current level of properties, Tokyo with, for example, the late ‘80s before such a bad property economy, still the current level of property prices are not so high enough.

And in the meantime, Japanese economy is now recovering quite rapidly. So, I think with such the backdrop of Japanese economy and we could expect the other steady market in the property. So, I don’t think our exposure to this property sector, the risky -- not so risky. And, of course, we have already -- we have been already watching the market very carefully, cautiously. And so, once we get some uncertainty in the property market, we’d like to take some appropriate measures.

Thank you very much.

Okay, thank you.

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

Yes, it does.

Thank you very much. Our next question will be coming from Neil Doying from ING Investment Management. Please go ahead with your question, sir.

Thank you for your presentation. A question about your others division or segment. It’s one of your future growth segments and it has grown quite nicely. It’s now about 20% as of last March, 20% of your profits. And I was wondering if you could break that down for us in terms of profit contribution between what I understand the three main operations are. They are consumer finance, venture capital and the investment banking/private equity.

Those three operations are included in the other segment. And maybe if we break down the profit contribution from these three operations, for example the -- as for venture capital operations, we’ve got approximately 50 -- sorry, JPY5b capital gains from our venture capital operation. And security brokerage operation, the commission from security brokerage is approximately JPY2b. And as for principal investment, there are several such principal investment. One of them, of course, is the Daikyo, and one of -- some others, such as the Fuji Family, so there are several such equity-method affiliates which could be, generally speaking, as a principal investment.

Have I answered your question?

And what’s the contribution of consumer finance to the others profits?

Okay, consumer finance, yes, I understand. Consumer finance -- our consumer finance operation is pursued by our subsidiary 100%, all the subsidiary, called ORIX Credit. And this company rather unique among the general consumer finance companies Japan. It’s still medium-sized companies, particularly engaged in the car loan operations. And they’ve been targeting some niche customer base, the more quality consumers, such as employees at the large companies, and so their credit funding is comparatively better than other customers for consumer finance companies.

And we’ve been offering the lower interest rate charge to these customers, such as maybe from 8 -- less than the 20% interest rate charged to them. And so that could be quite realistic that the -- and the reasonable interest rate charged because those customers’ credit standing is comparatively better than as for other consumer finance company. And this company contribute a profit to the Group’s consolidated profit.

So, consumer finance company, venture capital, security brokerage, principal investment, those operations are included in this other segment. And the other segment maybe did substantially for the quarter profit [generation].

And so the actual profit contribution of ORIX Credit was about -- how much was it last quarter?

Let’s see, just hold on, please. I just check with my staff the amount. We are not prepared to disclose the amount of profit of this ORIX Credit consumer finance company. But I can tell you that the [inaudible] loans outstanding of this car loan company is approximately JPY300b equivalent.

Okay. And you said that some of those consumers are charged lower interest rates. What is the --?

Yes.

So, will there be no material impact to these operations if the interest rate ceiling is lowered to below -- 20% or lower?

That’s right. No such real negative impact, even though such a regulation is changed in the future.

Thank you.

Okay.

Thank you, sir. Does that conclude your question?

Yes, it does.

Thank you very much. Our next question will be coming from Camille Carlstrom from Putnam Investment. Please go ahead with your question, ma’am.

Good evening. I have two questions. My first question is on real estate you’ve started to make a real business out of buying properties, either renovating them or getting them leased out, and then selling them up to your REITs. And, given the opportunities now in Japan, I’m questioning what’s the size -- when you think about that business, what is the potential size of opportunity for you in that space, either on a penetration or real estate basis, or something to help me think about how big of an opportunity that business can actually be for you in the future? That’s the first question.

And then the second question, SG&A in the quarter was running at a higher level as a percentage of revenue. I understand that it has the U.S. investment bank in there and a couple of other things. But I’m curious as to how long you think it will be before the requisite revenues come along, such that ratio will go back down to where it’s been running for the past year or so.

Okay, answering to your first question, as I already explained, the property market here is now expanding.

Yes.

And so we shall be able to identify more further interesting attractive business opportunity in the property-related operations. And ORIX is quite unique, as you know, because the reason for such capability of the financing for the property-related operations. And at the same time, we’ve got the capability for the development and management of properties. And looking at the market, there are many such large property developers, and also large financial -- property financial. But none of them having facilitated such to boost the ability -- capability property development and property financing.

So, we did see a differentiated strength. We’d like to penetrate. We’d like to develop further the property-related operation. Yes, following that market, developing its funding satisfactorily, and particularly the property-related financing, this operation going to be continuously very profitable because, for example, we originate the non-recourse loan for the property project, and securitized loans, non-recourse loan portfolio. That’s CMBS, commercial mortgage bank securitization. And set out to close security to the institutional investors. And at the same time, sometimes we provide a loan [subsidy] function to those securities.

But our property-related financing are such a combination of various functions related to property operation. And at each stage of such operation, we [could enjoy some] income or profit. And so, combined, those income profits, our property-related financing businesses are comparatively profitable than other [inaudible] type of property business, so that we’d like to expand this type of operation further in this property market in Japan.

Did I answer to your first question?

So, a big opportunity, yes.

And as for your second question, the increase -- the substantial increase of SG&A, there are two major factors for this increase, current SG&A increase. One is as we consolidated our newly acquired investment bank in the States called Houlihan Lokey. And we -- this is one factor for such an increase of SG&A.

The other factors, as Mr. Spencer explained, we have increased substantially the number of staff for two operations. One is the so-called corporate financial services segment; the other is automobile operation segment. In view of expanding these two operations further, because we anticipate this operation going to be further -- still large potential in the future, further expanding. And I couldn’t tell you the detail at this moment.

But as for corporate financial sub segment, we are now planning to start up a new type of business model for this corporate financial operation. And as for automobile operation, we are also beginning to start a new business model for automobile-related operation. And for that part we need a substantial number of staff to be employed. But that’s another reason for that, the SG&A for this quarter of operation.

This is alright for you?

Yes, thank you.

Okay.

Thank you. And does that conclude your question, ma’am?

Yes, it does.

Thank you very much. Our final question will be coming from Mr. Stephen Hill from MFC Global. Please go ahead with your question, sir.

Yes, hi. It’s fine. I think you’ve just answered it and my last question was there any chance to cancel. Okay, thank you.

Thank you, sir.

No more questions?

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.

Yes. I would like to thank everybody for participating in the conference call. And, as always, my email address is at the end of the presentation. So, if you have any follow-up questions, I would be happy to answer those by email.

Thank you, everybody, again for the participation on the conference call and good evening, good morning and good night.

Thank you.

Thank you. And that concludes today’s conference call. On behalf of ORIX, 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.