ORIX Corp (IX) 2007 Q4 法說會逐字稿

Welcome to the Orix annual results conference call, held by Mr. Raymond Spencer. For the duration of the presentation, all lines will be placed in listen-only mode. A Q&A session will follow the presentation and instructions on how to register for questions will be given at that time. I would like to hand this call over, now, to Mr. Spencer and I'll be standing by for the Q&A. You may begin. Thank you.

Welcome, everyone, to Orix's earnings conference call for the fiscal year ended March 31, 2007. My name is Raymond Spencer. I'm joined here today with Mr. Haruyuki Urata, who's the Corporate Senior Vice President and the 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 0703E dated May 11, 2007 that has been posted on our IR website. I will now ask Mr. Urata to give a brief summary on the results for the fiscal year ended March 31, 2007.

Hello, everyone. My name is Haruyuki Urata and I am the Corporate Senior Vice President in charge of the corporate development, corporate clients and investor relations. Today, I would like to give a brief statement on the results for the fiscal year ended March 31, 2007. Then, I will ask Mr. Spencer to make a short presentation.

Regarding our results for the fiscal year ended March 31, 2007, net income grew 18% to JPY196.5b, which marks our fourth [consecutive] year of the record profit. Our [real estate] financing and development operations, investment [management] operations and corporate finance operations focusing on SMEs here in Japan achieved strong growth in profit, due to the favorable operating environment. Furthermore, our overseas operations also contributed to growth and continued to be important to Orix as we further diversify our business on a global scale.

Orix is aiming for [above among] growth, profitability and financial stability. As a result of our initiatives, we have achieved a diluted earnings per share of JPY2,100.93, an ROE of 18.3% and a shareholders' equity ratio of 14.6%. 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 will make an overview of the presentations made at the annual results earnings announcement today in Tokyo by our President and COO, Mr. Fujiki, 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. First, I would like to give an overview of the financial results for the past three fiscal years. Regarding our results for the fiscal year ended March 31, 2007, net income grew 18% year on year to JPY196.5b, marking the highest profit to date.

Although our profit level grew rapidly, as net income expanded 69% and 82% in the previous two fiscal years, we are happy to be able to report to you that our strong financial result surpassed this past high profit level. Even though our profit growth has been aided by favorable economic conditions and an expanding economy, our growth has been fuelled by each segment as we have flexibly reacted to changes in the market by staying one step ahead of the competition.

As seen on slide five, Orix will strive to sustain growth in diluted net income per share, maintain and improve ROE and sustain an appropriate shareholders' equity ratio, according to the changes in the level of risk. Over the past three years, we have achieved an annual growth rate for the diluted net income per share of 52%. Under the current business portfolio, ROE of 18.3% is above our target of 15% and we believe that shareholders' equity ratio of 14.6% is at an appropriate level. As you can see from these figures, we have been able to sustain steady growth with a balance between profitability and financial stability over the past three years.

Now, I will explain our financial results over the past three years on a segment basis, starting here on slide six. The nine business segments have been categorized into three growth stages - the stable profit segments, accelerated growth segments and future growth segments. I will now explain the trend in profits, ROA and assets for each segment over the past three years, starting from 2004.

On the horizontal axis are the profits, vertical axis the pre-tax ROA and the size of the sphere denotes the asset size. Shown here are the stable profit segments. Starting from the right, we have four segments - Corporate Financial Services, Asia, Oceania and Europe, Rental and Life Insurance. That has shifted up and to the right, indicating an increase in profit as well as profitability.

Specifically, in the Corporate Financial Services segment, which is the core of our operation, segment profits have more than doubled from JY27.2b in the fiscal year ended March 31, 2004 to JPY56.9b in the fiscal year ended March 31, 2007, ROA increased from 1.85 to 3.28% and assets also grew from JPY1.4 trillion to about JPY1.9 trillion during this period.

Next, on slide seven, we have our accelerated growth segments, which are highlighted by an expansion in our two real estate related segments. In the real estate segment, segment profits increased from JPY13.8b in 2004 to JPY51.2b in 2007. ROA improved from 3.48 to 6.47% and assets grew significantly from JPY387b to JPY901b during this period.

In the real estate related finance segment, segment profits increased from JPY10.5b in 2004 to JPY44.7b in fiscal 2007. ROA improved from about 1.27 to 3.26% and assets also grew from JPY831b to about JPY5 -- JPY1.5 trillion during this period.

In our future growth segments, as seen on slide eight, we have the Other segment, which we have positioned for the future growth. We have also entered a phase where we are seeing results from our principal investment operations. In the Americas segment, we have reported gains on the sale of our real estate related operation for the past three years and have now shifted our profit source mainly to Corporate Finance and Investment Banking.

On slide number nine, looking at the three stages of growth as a whole and assessing the current alignment of the nine business segments, I think that you can see that each segment has developed into a solid pillar, supporting our growth as a whole. Going forward, each segment will strive for a further improvement in growth and profitability, without being confined to the existing categories of these three stages.

Now, I'd like to talk about our medium- and long-term business strategies on slide 10. First is strengthening our regional sales platform. Second, expanding our financial service products. Third, utilizing our strengths as we see more real estate being offered as financial products. And finally, the diversification and regional development of our overseas operations.

Now, I will go into more detail about each strategy. Slide 11 explains our first strategy, strengthening our regional sales platform. Our growth has been supported by our sales and marketing network, providing financial services to small and medium-sized enterprises, which has been developed over the past 43 years since our establishment. We believe that solidifying and expanding our regional sales platform will provide the foundation for future growth.

We are involved in various transactions and partnering with regional financial institutions for loan guarantee transactions, shown here, is just one of them. As of March 31, 2007, we have partnered with 103 financial institutions nationwide in Japan. Going forward, we will respond to the needs of our customers by actively recruiting personnel, including the middle-aged, in each local region and expand the number of sales and marketing offices as well.

On slide 12, I will talk about expanding our financial service products. In the field of financial services, reliance on the traditional style of indirect financing has decreased, leading to an expansion of market-oriented indirect financing. We are also seeing an increase in investment banking methods of operations as well as rapid development towards the unification of banks and securities companies. This trend has accelerated the globalization of the financial services market. On top of the existing sales platform for SMEs, Orix looks to assist not only with the procurement, but also the operation, by offering various investment products, in addition to M&A, business succession and overseas expansion needs.

Our strategy, on slide 13, is utilizing our strengths as more real estate is being offered as financial products. Over the past few years, more real estate has been offered as financial products and we have securitized non-recourse loans originated by Orix, for example. We are seeing a development of the environment of selling real estate to REITs, real estate investment trusts. This slide also shows the overview of our two real estate related operations.

Going forward, we expect more business opportunities in this trend of offering real estate as financial products. In our real estate operations, we will provide attractive real estate for investors by expanding our investment coverage to include office buildings and logistics facilities. In our real estate related finance operation, we will strive to reach out to more investors by utilizing our strengths in the entire securitization process.

Although a certain portion of the real estate market seems to be overheated, the offering of real estate as a financial product has continued to change. Going forward, we will actively develop this business by thoroughly assessing the risks with each case.

In our overseas operations, seen on slide 14, we will seek various opportunities for regional development going forward. Needless to say, Asia and the Middle East will be regions of specific interest to Orix. On top of our core business of traditional leasing operations, we look to actively pursue real estate related lending and investment in non-performing loans, develop in the U.S. and Japan, as well as the investment in products. For our investment banking operations, which include M&A and financial advisory services, Houlihan Lokey established an office in Hong Kong, which joined the Orix Group in 2006, establishing a framework for responding to cross-border M&A deals in Europe, Japan and Asia.

Next, on slide 15, I would like to talk about some issues we are working on in order to strengthen our corporate foundation. Currently, we have four specific measures to strengthen our corporate foundation. Regarding transactions with customers, we believe it is important to provide quality products and services to meet their needs. Orix, as an organization, must also continue to be a workplace of value for each and every one of our employees. Additionally, we will implement an advanced risk management system, which properly measures the risks for each transaction and, in doing so, further improve our financial structure. By achieving these four measures, we are striving to sustain growth for a middle- and long-term perspective and maximize shareholder value.

Now, I will go into the individual segments, and I would like to start with our stable profit segments, so could you please turn to slide 16 for our Corporate Financial Services segment. On this slide, and for those following, you will see a segment outlined on the top left, a year on year change below that. Under segment plan, in the middle of the slide, we have a graph of our performance for the past three years, which shows, from top, segment profits, ROA, and segment assets. On the right side of the slide is the operating environment and actions for growth.

The Corporate Financial Services segment expanded in the backdrop of strong funding needs of small and medium-sized enterprises. Segment assets increased 14% on March 31, 2006 to JPY1.85 trillion and segment profits increased 17% year on year to JPY56.9b. The Japanese economy is expected to continue to sustain its gradual expansion. We look to meet the needs of our customers by solidifying our regional sales platform and expanding the offering of financial products and services.

Please turn to 7 -- slide 17 for the Automobile Operations segment. Here, segment profits have increased 6% year on year to JPY28.2b, due to the steady expansion in revenues from operating leases and maintenance services, primarily. We have also been focusing on expanding our Automobile-related business to individuals, which led to an increase in personal costs, system costs and advertising expenses.

Competition in the automobile leasing market is heating up, with further consolidation possible. We look to improve the quality of our services and meet the needs of our customers by developing a wide range of Automobile-related businesses, including leasing, rental cars, car sharing and used car sales.

Please see slide 18 for the Rental Operations segment. Here, segment profits were up 10% to JPY10.9b, as a result of an increase in revenues from operating leases, including precision measuring and other equipment rentals. With the improvement in rental demand, we look to expand our product offering to include environmental research and medical care related fields and also improve our utilization rates.

Slide 19 focuses on the real estate related finance segment. Here, segment profits increased 34% to JPY44.7b, due to an expansion of our real estate finance operations, including non-recourse loans, as well as loan servicing operations and housing loans. Segment assets increased 24% on March 31, 2006 to JPY1.52 trillion.

As the fusion between real estate and finance continues to accelerate, we look to secure profitability and differentiate through providing a wide range of solutions, by utilizing our strength in both real estate development and finance capabilities. These solutions include providing investment and loans in senior, mezzanine and equity financing and securitization of loan receivables, as well as their subsequent servicing.

Please turn to slide 20 for the real estate segment. Segment profits increased 79% to JPY51.2b, due to the expansion of the economy of sales operation, real estate development and rental operations, including office buildings, and the management operations, including training facilities and golf courses. Segment assets increased 32% on March 31, 2006 to JPY901.2b, due mainly to the expansion of operating assets, including investment in operating leases.

Our real estate operations began in 1993 with our condominium development business, which now accounts for just under 30% of our overall -- of this overall segment. We have also diversified our operations to include office buildings and logistic center development. In addition, we also manage training facilities, hotels, golf courses and senior housing. Furthermore, we are also providing integrated facilities management, allowing us to expand and strengthen our operations along the entire value chain.

With the continuing flow of global capital into the Japanese market, there is a lot of attention on the real estate market and the investment banking. Under this environment, we are looking to leverage our capabilities, both in real estate development, financing, as we further diversify our real estate operations in terms of products and geographical location, as a driver of profits going forward.

Please turn to slide 21 for the Life Insurance segment. In the Life Insurance segment, segment profits decreased 25% year on year to JPY9.9b, due to a decrease in life insurance premiums and related investment income.

Slide 22 covers the Other segment. With the contribution from -- well, we had a contribution from equity in net income of affiliates, as well as gains on sales of subsidiaries and affiliates under principal investments and brokerage commissions declined year on year. Segment profits increased 48% year on year to JPY61.7b, due to an increase in gains on investment securities after venture capital operations and gains on the sale of a portion of our shares in Aozora Bank.

The M&A market is expanding, despite increased competition between investors to capture M&A transactions in Japan. By cooperating with other segments, including the Corporate Financial Services segment, we look to utilize our strength and capture investment opportunities.

In the [card loan] operations, under revised regulation, companies, in general, are focusing on securing quality customers, a customer base which Orix has been targeting for a long time. We have developed our business over the past 20 years within the interest limitation [law] and we'll continue our operations by utilizing our past experience and risk control and operation know-how, whilst securing quality customer as our utmost priority.

I would now like to talk about our overseas segments, starting with the Americas segment on slide 23. Although Houlihan Lokey contributed to profits from the beginning of the first quarter of this fiscal year and there was also an increase in revenues associated with corporate loans as well as securities investment, there were no contributions this fiscal year such as the gain on the sale of our loan servicing operations that we reported in the previous fiscal year. And therefore, segment profit decreased 10% to JPY31.3b.

It is expected that the economy in the U.S. will achieve a soft landing despite concerns and, under such environment, we look to further strengthen our ties between Houlihan Lokey and the corporate finance operations in the United States to create synergies. By utilizing the network of the Orix Group, we also look to enhance our system for the handling of M&A and financial advisory transactions.

And finally, please turn to slide 24 for the Asia, Oceania, and Europe segment. Here, segment profits increased 18% to JPY37.8b, due to the expansion of the leasing operations that include operating leases, such as automobile leasing, as well as the loan servicing operations, in addition to gains on the sale of a business unit in Australia as well as the contribution from equity in net income of affiliates.

The Asian economy is expected to continue to expand, with China leading the way, and we look to actively pursue real estate related investments and lending and [keyhole] investments, as well as project investment, on top of our leasing operation. This ends the formal part of my presentation. I will now open the lines to any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS]. We have a question from [Miles Wickses]. Go ahead, please.

Thank you for the call. My first question is with your capitalization. I know you want to get an upgrade from the rating agencies, but is there any reason that you'd need to take your equity to assets levels up over, say, 16 or 17%? Where does that max out in terms of where you think you need it to be?

Okay. I'm just -- We're going to [have] Mr. Urata, the Corporate Senior Vice President, answer these questions and I will, from time to time, have to do some translation for him, so if I could ask for your patience in this matter.

Regarding the shareholders' equity, [at the moment in] country [cost flow] is [at a high] level. Compared with a couple of years', business portfolio, our client portfolio is more diversified and [especially] into the area of real estate development and other investment equity. Therefore, we are now [receiving], compared with a pure financial services company, we should be more -- well, we should have more equity for our operations.

So compared with next stage of our portfolio, we may rethink about our equity level, but, right now, what we can say is that just the current level is a [comfortable] one that -- for the next couple of years at least. We will -- we think we want to expand our equity or our shareholders' equity in line of the future development.

And may I ask a second question?

Sure.

With your interest in Fuji Fire, I know you have publicly stated that AIG has right of first refusal on that. Within that agreement, is there anything that prevents you from selling Fuji Fire at a premium to the current share price?

Okay. I'm just going to translate that one for Urata. If you could hold on for a second.

Regarding with Fuji, we -- as you know, we initially invested in the company together with the AI Group and we have [good] relations between them to -- in order to increase the shareholders' equity of Fuji. So right now, our co-working is quite happy and very well, so we don't have any idea to sell the shares or to share the shares. So what I can say is, now, we have no idea about the value, [even if] we sell something to them or to the third party.

Is there anything in your agreement that prevents you, in the future, from selling them at a premium to where they are in the market?

What we can say is we have no agreement about the share prices to sell -- to sell to each other or to sell to the third party. So [basically], I assume [that should be at] fair value. That's only what I can say.

Thank you.

We have a question from [Margaret Moore]. Go ahead, please.

Thank you. My first question is regarding the auto business. You -- For the last couple of quarters, you have talked about adding personnel and building up costs to grow. And I was wondering if you could talk about when you expect the cost growth to flatten out and the revenue line that this additional personnel should be creating starts to have more of an impact. You also mentioned car sharing. I presume that's sort of like Zipcar in the U.S. Can you talk about what the potential for that might be? Thank you.

Well, regarding with the Automobile business, especially to individuals, I'm sorry, I don't have any [details clear] about the United States market. [Now], compared with the United States, here in Japan, much less popularity in leasing business to individuals, so there are many -- lots of [business] opportunities there.

And at this now, at this moment, we have just started this business, as you know, so most probably you see our figures as a whole for Automobile segment, we are not comfortable with the current profitability compared with a couple of years or compared with our expectations. But after the combination of the leasing and Rental business [in this period] for our Group, we almost [fear] to solve the difficulties of the combination. And we still are in the process of developing of the new business by a new set of -- new products to individuals or corporations and, for example, we started a new location for our businesses and so on.

So profitability is still now under the -- our expectation, but [inaudible] leasing business to individuals are becoming popular in Japan, so we hope for the, say, within a couple of years, this segment [will yield] some net profit for our operations.

Could I ask further questions? Can you talk about what you can do to improve the utilization rate in your rental business? You mentioned shifting from rental of precision to shifting of environmental or medical-related equipment. I would presume that that would take, also, a couple of years to have an impact, but can you talk about that?

Yes. Basically, our rental business has a more than [50-year] history and, in this segment, we have expanded our [presence in here over the] just -- So we have expanded -- we have diversified from the very beginning agreements to, for example, [partner] a computer. And right now, we are trying to further expansion or diversify into other areas, as I mentioned. So we cannot say any figures in detail right now, but those new areas [should] be mature more than 10 percentage, or something like that, within a couple of years.

Okay. Finally, can you talk about whether you have any exposure to the U.S. sub-prime market or what impact you might have as you expect a U.S. market downturn, as you [reflected]?

We have no exposure to those areas.

Okay. Thank you.

Thank you.

We have a question from [John Leonard]. Go ahead, please.

Good afternoon or good evening. I wonder if you could comment a bit, after obviously a very strong year for the condominium development and real estate development business, what the pipeline of projects that are likely to reach sale [of] maturity in the coming [areas], how many projects are to a point where they should be available for sale and how does the pipeline look?

Right now, I'm sorry, I don't have any figures at this moment. So, if possible, I would like to answer later by email or something like that.

That would be fine.

So, basically, as you know, in the real estate projects in Japan right now, we are very happy to [chart] the front end of this market so far. And for a while, we believe the Japanese real estate will expand for a while, especially together with [the combination] of the real estate and financial.

Thank you.

So -- yes. Thank you very much.

We have a question from [Arnold Challenger]. Go ahead, please.

Hello, yes. Maybe as a follow-up on the real estate issue, you mentioned it's quite a hot market at the moment and that may indicate to me that you also think it's a little bit too hot. Are you doing things to protect you from possible downside in this real estate market? I.e. are you putting more aggressive return targets on projects right now? Or do you see that this is only just the beginning of a pick-up in real estate?

Basically, as a whole, for another couple of years, we believe the Japanese real estate market will continue to expand and there will basically be more business opportunities here in Japan for us. Of course, there are some kind of [bubble areas] for special properties, but it is quite limited to a certain area or to a certain type of real estate. So that's a very general idea about our future business opportunities.

And in addition, in order to, as much as possible, to decrease our risks, we sometimes do business together with other real estate development companies, or we try to diversify into various areas other than Tokyo, or we try to also diversify into various [office], not only for condominiums but also other offices or different types of real estate. Such kinds of [diversification] to be also helpful for maintain of our [project] portfolio.

Thank you.

[OPERATOR INSTRUCTIONS].

Okay. It appears that there may be not any more questions. My email address is at the end of the presentation and I will be happy to answer questions by email over the next couple of days.

This is the operator. We have no further questions in the queue. Is there anything else you would like to say to close?

Okay. Well, it appears that we have no questions and, as I mentioned, my email address is at the end of the presentation, so if you have any follow-up questions I'd be happy to answer by email. And with that, I will end the call and thank you for your participation today.

Okay. Thank you very much, sir. That concludes today's conference call. We'd like to thank you all for your participation and all lines may disconnect at this time. Thank you.