ORIX Corp (IX) 2007 Q3 法說會逐字稿

Welcome to the Orix third quarter conference call. Today's conference call is being recorded, so if anyone that has objections, to please disconnect at this time. Also, your lines will be on a listen-only mode until today's question and answer session. I'd like to turn the conference call over to Mr. Raymond Spencer. Sir, you may begin.

Thank you. Welcome, everyone, to Orix's earnings conference call for the nine months ended December 31, 2006. My name is Raymond Spencer. I'm joined here today with Mr. Haruyuki Urata, who is a Corporate Senior Vice-President and Head of the Office of the President, 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 entitled Orix presentation 0612E dated February 9, 2007 that has been posted on our IR website. I will now ask Mr. Urata to give a brief summary of the results for the nine months ended December 31, 2006.

Thanks Mr. Spencer. Hello everyone. My name is Haruyuki Urata, and I am the Corporate Senior Vice-President in charge of the Corporate Development, Corporate Planning and Investor Relations. Today, I would like to give a brief statement on our results for the nine months ended December 31, 2006, as well as comment on our news release from yesterday of our decision to file a petition for arbitration of exercising the put option to sell our stake in Korea Life Insurance, with the International Court of Arbitration. Then I will ask Mr. Spencer to make a short presentation.

Regarding our results for the nine months ended December 31, 2006, net income grew 20% year-on-year to JPY155b -- JPY151b, which is the highest net income for a nine-month period to date. This includes gains on the sale of a portion of our shares in Aozora Bank, one of our principle investments in connection with its listing on the Tokyo Stock Exchange in November last year.

Even without the JPY17.3b in capital gains of this sale, we will still have recorded the highest net income to date for a nine-month period. As a result, we achieved diluted earnings per share of JPY1,615 and an annualized ROE of 19.3%.

At the interim period, we made upward revisions in our forecast for the fiscal year ending March 31, 2007, for net income of JPY195b, up 17% year-on-year. I would like to mention that we have been making steady progress towards achieving this target.

Now, I would like to talk about our decision to file a petition for arbitration of exercising the put option to sell our stake in Korea Life Insurance with the International Court of Arbitration. As you may already know, in September of last year we notified the Hanwha Group of Korea, through our subsidiary, of our decision to exercise the put option to sell our shares in Korea Life Insurance.

We have been engaged in discussions with the Hanwha Group, but so far we have not reached an agreement on terms [of our] exercising the put option, including the sale price. Due to such circumstances, we have decided to file a petition with the ICC International Court of Arbitration for arbitration of this matter. The petition will be filed in the near future and will follow the arbitration procedures outlined by the International Court of Arbitration. We believe that it may take some time before the International Court of Arbitration comes to a decision.

I would like to add that since we have not taken into account the gains or losses on the sale of our shares in our forecast, there will be no effect on our results for this fiscal year.

Finally, regarding our forecast for this fiscal year, as well as the next, our operating environment continues to be positive, and we believe that the Corporate Financial Services segment and Real Estate and Real Estate-Related Finance segments will continue to be growth drivers going forward.

Now I will ask Mr. Spencer to make a short presentation on our latest results.

Thank you, Mr. Urata. 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 third quarter earnings announcement today in Tokyo by our Vice-Chairman and CFO, Mr. Takeda, as shown in part one, and our Head of the Office of the President, Mr. Urata, as shown in part two. In addition, we have provided some supplemental information for your reference, as shown in part three.

Please turn to slide four of the presentation for an overview of our results. Regarding our results for the nine months ended December 31, 2006, net income grew 20% year-on-year to JPY151b. In terms of the main points of our results, in Japan, the Corporate Financial Services segment, part of our Stable Profit Segments, along with the Real Estate and Real Estate-Related Finance segments, part of our Accelerated Growth Segments, recorded solid profit growth.

Overseas, we saw a steady performance of the automobile leasing and loan servicing operations in the Asia, Oceania and Europe segment. Capital gains for our principal investments, such as the gains on the sale of our portion of shares in Aozora Bank, as well as from our venture capital operations, also contributed to profits.

Please turn to slide five of the presentation. As you can see here, profits increased in six segments. These include the Corporate Financial Services, Automobile Operations, Real Estate-Related Finance, Real Estate, Other segments in Japan, as well as the Asia, Oceania and Europe segment overseas. On the other hand, profits decreased for the Rental Operations, Life Insurance and The Americas segment. I will now provide some more details on each of these segments.

First I would like to talk about our Stable Profit Segments. Please turn to slide six for our Corporate Financial Services segment. Here revenues increased, due mainly to the expansion of loans to corporate customers. Segment profits increased due to an increase in segment revenues, as well as a decrease in the provision for doubtful receivables and probable loan losses, due to a lower occurrence of new non-performing assets and an improving economic environment.

On the other hand, selling, general and administrative expenses increased as a result of upfront costs associated with an increase in the number of employees as a result of an effort, since last year, to expand their sales and marketing base in Japan. As a result, segment profits increased 9% to JPY41.9b. With approximately 100 offices across Japan, this segment serves as the core of our operations, providing a wide variety of financial services to our SME customers.

In addition to installment loans, we have been teaming up with the regional financial institutions to expand the provision of credit and evaluation guarantees of non-collateralized loans to SMEs on behalf of financial institutions. Currently, we have agreements with approximately 100 financial institutions, in an effort to deepen our relationship with these institutions to expand our business opportunities.

Please turn to slide seven for the Rental Operations. Despite a recovery of operating leases, including precision measuring and other equipment rentals, led by an increase in rental demand, segment profits decreased 4% year-on-year to JPY6.3b as a result of the recognition of losses on the sale of investment securities.

Next, please turn to slide eight for the Life Insurance segment. In the Life Insurance segment we have been shifting our product offerings from savings type to guarantee type insurance products in an effort to increase profitability. This shift has resulted in a slightly lower revenue from life insurance premiums. In addition, life insurance related income was down year on year. As a result, segment profits decreased 30% year on year to JPY7.2b.

Please turn to slide nine for the Asia, Oceania and Europe segment. Segment revenues here were up due to the expansion of operating leases, such as automobile leasing, as well as the expansion of loan servicing operations in Taiwan, and gains on sales of a portion of our operations in Australia. Segment profits increased 8% year on year JPY29.2b, due to an increase in segment revenues and the increase in equity in net income of affiliates, including Korea Life Insurance, despite a decrease in gains on sales of subsidiaries and affiliates.

Recently JCB and Orix announced an agreement on a Joint Venture for a Credit Card business with the MAF Group; a leading company in the UAE. Orix will take a 30% stake in this Joint Venture.

Overseas, Orix's operations began in Hong Kong in 1971, seven years after the establishment of Orix. Since then, Orix has worked aggressively to develop its business overseas. Currently, we are operating in 21 countries and regions in the Asia, Oceania and Europe segment, including the Middle East. Our operations in this segment focus mainly on leasing but, utilizing this network, we look to expand the wide variety of financial services that we have developed in Japan, as well as in the United States.

Next, I would like to talk about our Accelerated Growth segments. Please turn to slide 10 for the Automobile Operations segment. Segment revenues increased due to the increase in revenues from operating leases and maintenance services. Segment profits increased 6% year on year to JPY19.7b. We have been -- as we have been increasing operating lease assets, costs of operating leases were also up, accompanying the increase in revenues. Selling, general and administrative expenses increased as a result of an increase in the number of employees, in an effort to strengthen our operating base.

Segment assets decreased slightly on September 30, 2006, due to asset securitization. Specifically, we have been providing value-added services, including vehicle maintenance, in our core operations of automobile leasing to our corporate customers.

Starting in October 2006, we have been offering a vehicle maintenance system equipped with GPS, enabling improved vehicle maintenance efficiencies. We have also been focusing on expanding our Automobile-related business to individuals, including a two-year cancelable auto-lease program, and the sale of used cars through our premium used car stores.

We anticipate that these operations will further solidify and expand our business foundation and lead to profit growth.

Please turn to slide 11 for the Real Estate-Related Finance segment. Segment profits increased 15% to JPY30.7b year on year, due to contributions from the loan servicing operations and a lower provision for doubtful receivables and probable loan losses. Segment assets increased JPY175.9b on March 31, 2006, due mainly to an increase in corporate loans, including non-recourse loans.

There are three types of servicing operations, namely, special servicing, which is the collection of --

Please stand by. We are trying to reconnect the leader. Please stand by.

Thanks sir, you're back in conference.

Many apologies, everybody. It looks like we were disconnected for the first time in many years. We will continue on, however, from the Real Estate segment.

Please turn to slide 12 for the Real Estate segment. Segment profits increased 61% year on year to JPY42b, due primarily to two reasons. First, we were able to manage well-timed sales of real estate under operating leases in the backdrop of the expanding real estate rental market. Within this business, we develop or purchase office buildings, add tenants, and in the short time period thereafter, sell off the REITs. Second, more condominiums were sold to buyers, including large-scale condominiums, in the first nine months of this fiscal year compared with the same period of the previous fiscal year.

As real estate prices continue to rise in larger cities, we are carefully evaluating the locations and their potential use before making new investments. In our real estate rental operations, we have been focusing on the development and operation of office buildings, as well as logistics facilities. As of December 31, 2006, there were 21 logistics facilities, including those under development, totaling approximately JPY120b in assets.

Now I'd like to talk about the Future Growth segments. Please turn to slide 13 [sic - see presentation] for the Other segment. Segment profits increased 97% year on year to JPY59.6b, while gains on sales of subsidiaries and affiliates decreased year on year. An increase in gains on investment securities at the venture capital operations, gains on the sale of a portion of our shares in Aozora Bank and contributions from equity and net income of affiliates, including Daikyo, led to the higher segment profits.

Now I would like to talk about the -- slide 14, here, looking at The Americas segment. Segment revenues increased 84% year on year, or JPY39.2b, due to the contribution from the beginning of the first quarter of this fiscal year of Houlihan Lokey, and the increase in revenues associated with corporate loans. Segment profits decreased 13% to JPY23.9b year on year, as the previous fiscal year benefited from the gain on the sale of the primary and master servicing business, as well as gains on sales of real estate under operating leases.

Segment assets increased JPY53.1b on March 31, 2006, due mainly to an increase in corporate loans. Last year the business merger of the New York Stock Exchange and Euronet was announced, and Houlihan Lokey was chosen as one of Euronet's independent experts.

In addition to expanding M&A and financial adviser -- advisory operations in its existing operating bases in the United States and Europe, Houlihan Lokey is looking to develop operations in the Asia and Oceania region. As a start, the Company has already set up an office in Hong Kong.

And, as it appears that we did miss the Real Estate-Related Finance segment, I would like everybody to turn back to slide 11. Here, for the Real Estate-Related Finance segment -- here profits -- segment profits increased 15% to JPY30.7b year on year due to contributions from the loan servicing operations and a lower provision for doubtful receivables and probable loan losses. Segment assets increased JPY175.9b on March 31, 2006, due mainly to an increase in corporate loans, including non-recourse loans.

There are three different types of servicing operation, namely, special servicing, which is the collection of non-performing loans, primary servicing, the collection of performing loans, and master servicing, the integrated management of primary servicing, special servicing and other servicing tasks. Orix is the only major Company in Japan with the three servicer rating.

Utilizing this advantage, we look for reasonable investment opportunities for non-performing loans and to capture business opportunities, including primary and master servicing operations in the expanding securitization market.

And, in conclusion, to mention again, Orix has achieved JPY151b in net income for the nine months ended December 31, 2006, and this is a record for a nine-month period.

I will now turn the line over to any calls that we may have.

Thank you. [OPERATOR INSTRUCTIONS]. I do have a question from Margaret Moore from American Century. Your line is open.

Thank you. Could you talk about the continued rise in costs in the auto loan, auto leasing business? At what point do you expect that cost expansion to run its course, or be met with similar levels of revenue?

Regarding with automobile [related] segment, [inaudible] we have tried to expand our operations in the new areas, such as individual loan -- car businesses, sale of the used cars and so on. So for these purposes we have basically tried to make new advertisements or set up new locations and so on. So in that sense, at this moment, we have spent money for the future profit. So we hope -- we believe our current efforts to expand our new businesses will result in more profits in the near future.

At this time I am showing no further questions. [OPERATOR INSTRUCTIONS]. I have another question from Margaret Moore. Your line is open.

Thank you. Most of the banks and other financial institutions are not seeing further rises in non-performing loans. If anything, they are writing back earlier-made provisions as non-performing statistics continue to get better. To what extent are you still seeing growth in non-performing loan opportunities for you, whether in the regional work-out business or in the special part of your Real Estate Finance business?

Well, regarding with the non-performing loan businesses, as you know, we have operated especially in the area of media [with our banks] in Japan, and as you mentioned, right now [at the big stage] local institution -- financial institutions, including local banks have tried to escape from their [first] difficulties. And our non-performing loan segment has tried to challenge these areas. In Japan, still, local banks have suffered from bad loans and we still believe there should be some room for new business opportunities.

In addition, we have also expanded our non-performing loan business in overseas areas, including Taiwan and other areas. In those areas we have not had so substantial amount of non-performing loans but, in the Asian areas, including China, we believe this will be a big business opportunity.

Okay. Could I ask a follow-on question? Can you comment on the impact from the changes to the consumer finance industry that are expected to go through in the next couple of years? My understanding is you have very little exposure to it right now, but if you could comment in a more broader aspect of how you see it impacting you in the future? Conversely, what sort of business opportunities it might afford you, or how it might affect some of your clients [inaudible] or to the entertainment industry? If there's any kind of knock-on effect that you anticipate?

As for our consumer finance business in Japan, as we mentioned there have been various types of difficulties these days. And we currently discussed about our business opportunities in two aspects. One is our direct -- the direct impact from those new conditions is our current exposure in consumer finance businesses. As you mentioned, we have very little proportion of the exposures in these areas, and so basically there are no big impacts on this segment.

On the other side -- on the other hand, we currently have direct consumer loans [for] individuals, as you know, and -- but the interest rate we have provided has -- [under the] so-called grey zone interest rate, so we have not been any [inaudible] with -- by the current business options -- business conditions.

And we, right now, are discussing about the -- our business opportunities in terms of the -- after the current media consumer finance enterprises have had big difficulties with the current conditions, and most of them would be [assuring you] about the current business amounts. So we believe for a while -- for some period -- for some years, this will be some difficulties within these areas, and we will wait and see until the market conditions will become calm. At that time, I think, while waiting, we will -- this will be a new business opportunity for our operations.

[OPERATOR INSTRUCTIONS]. Ms. Moore, your line is open.

Thanks again. A follow-on question regarding Houlihan Lokey. Can you give us a bit more detail, now that the purchase has been bedded down, on how you are achieving synergies between the operations in North America and what you can bring to your clients in Japan?

Yes. First, in the United States our Leasing Corporate Financing business we think would be -- have more business opportunities together with Houlihan Lokey. That means -- as you know, Houlihan Lokey has not given any new financing after the financial restructuring for the clients. But on the other hand, our U.S.A. leasing operations can provide corporate financing. In that sense, we believe, yes, it will be a very big synergy impact in the future.

For [these properties] currently, we try to join the offices and human resources between the combination of Houlihan Lokey and our existing U.S.A. operations. Especially in the Dallas, New York and Los Angeles and San Francisco, both of our U.S.A. operations have had different offices, but step by step we have become -- we have had -- we begin to have the same offices together.

And in addition, in the Asian areas, we have, as Mr. Spencer mentioned, we have already set up the new offices in Hong Kong for Houlihan Lokey and we together hired a new person in those areas to expand our operations jointly in the Hong Kong and China, and so on. And, especially in Japan, as you know, Orix Japan has operated and is funded in different banking businesses in the [embassy] areas and we believe, through a combination between Houlihan Lokey's know how and expertise and Orix's Japanese network, we believe, yes, there will be more business opportunities in the investment and banking-related services.

Thank you.

I am showing no further questions, and I would like to turn the conference call back over to Mr. Raymond Spencer.

Okay. As there are no further questions, I will end the conference call, but at the same time please note that at the end of the document my contact information, raymond_spencer@orix.co.jp is there, so if you have any follow-up questions, please do not hesitate to contact me by email or by phone. And, again, thank you everybody for contacting -- for participating in the third quarter conference call for Orix Corporation, and that is the end of the call.

Thank you. Good evening, good night, and good morning.

Thank you.