ORIX Corp (IX) 2008 Q1 法說會逐字稿

Good day, everyone. And welcome to the ORIX first quarter 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). Now I would like to hand the call over to Mr. Yui Takamatsu. And I'll 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 first quarter of the fiscal year ending March 31, 2008. My name is Yui Takamatsu. I'm joined here today by Mr. Yasuhiko Fujiki, who is our President, Chief Operating Officer and Chief Financial Officer, and Mr. Haruyuki Urata, who is a Director, 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 the ORIX presentation 07063, dated August 10, 2007, that has been posted on our IR website. In today's conference call, we would like to first spend about 20 minutes, and provide an overview of the presentation made of the first quarter results earnings announcement today in Tokyo by Mr. Urata. We will then open up the line for any questions that you may have.

During the Q&A segment, we ask for your patience as Mr. Fujiki, our President, COO and CFO, will speak in Japanese, and I will provide a consecutive English interpretation. Please turn to page four. I will now ask Mr. Urata to give a brief summary on the first quarter results.

Hello, everyone, thank you very much for joining for our conference call. My name is Haruyuki Urata, and I am a Director and the Corporate Senior Vice President in charge of the Corporate Development, Corporate Planning and Corporate Communications. Today, I would like to give a brief statement on our results for the first quarter of the fiscal year ending March 31, 2008.

Net income for the three months ended at June 30, 2007, decreased 3% or JPY1.3b year-on-year, to JPY45.8b due, in part, to the [operating] expenses. Accordingly, the results for the period were within our expectations.

Please turn to page five for an overview of the segment performance in terms of revenues. Looking at segment revenues, [each] segment are in line, reported an increase in revenues year-on-year.

The Real Estate segment reported a decrease in revenues, but this saw an increase in the number of residential condominiums, developed through certain joint ventures, which are not recorded as segment revenues, but as equity net income of affiliates. And, also, due to a decrease in gains on sales of real estate under operating leases.

Please turn to page six. Looking now at segment profit, as can be seen five segments recorded an increase in profits, while four segments were down year-on-year. The Rental Operations, Life Insurance, Other, The Americas and Asia, Oceania and Europe segments recorded an increase in both revenues and profit.

On the other hand, the Corporate Financial Services, Automobile Operations and Real Estate-Related Finance segments recorded a decrease in profits despite an increase in revenues.

Profits decreased in the Corporate Financial Services segment due to the increase in interest expense and provision, as well as the recognition of write-downs of intangible assets.

Profits have decreased in the Automobile Operations segment due to the increase in expenses associated with the operating leases and maintenance services.

Profit decreased in the Real Estate-Related Finance segment due to the absence of gains from real estate sales, which were recorded in the same period of the previous fiscal year.

In the Real Estate segment, although profits within the residential condominium operations were almost flat year-on-year, the segment profit decreased due to the decrease in gains on sales of real estate and operating leases.

Overall, despite the increase in the expenses, the sales and marketing operations for each segment continued to be steady. And our business performance has been progressing close to our expectations. Therefore, I would like to report to you that we do not believe there are any changes in our trend of medium and long-term growth.

Furthermore, although net income decreased 3% year-on-year, I would like to reassure you that we have been actively expanding our operations for profit growth in each of our nine segments. And we will continue to focus on maintaining our [plan] between growth, profitability and financial stability in our operations.

Now I will ask Mr. Takamatsu to give an overview of the segment results.

Thank you, Mr. Urata. I would now like to explain the year-on-year performance, business environment and measures taken for each of our nine business segments.

On page seven, we have a slide explaining the Corporate Financial Services segment. The following eight slides will explain each business segment in the same format. We have segment profits on the left-hand side of the slide and year-on-year segment performance, business environment and measures taken on the right-hand side.

Revenues increased through the expansion of corporate loans as demands for funding from SMEs continues to be strong. On the other hand, segment's profits decreased 38%, or JPY4.4b year-on-year, to JPY7.1b, due to the increase in provision in addition to the recognition of approximately JPY3b in write-downs of intangible assets.

In our efforts to strengthen our regional sales and marketing base, we have opened new offices, and actively hired senior employees who have retired from regional financial institutions and companies for our newly opened branches. And, in doing so, [expand for us] transactions by utilizing their customer network. We have also strengthened our relationship with financial institutions and partnering accountants.

Although segment profits for the first quarter were down year-on-year, due to temporary factors, we will continue to expand business opportunities going forward.

Please turn to page eight for the Automobile Operations segment. Segment revenues increased due to the increase in revenues from operating leases and maintenance services in the automobile leasing operations.

On the other hand, segment profits decreased 7% to JPY5.8b year-on-year, due to the increase in expenses accompanying an increase in revenue from operating leases, as [upward] cost reported faster for operating leases than for direct financing leases. This is in addition to the increase in expenses associated with the opening of new stores and vehicle purchases in the automobile rental operations.

Although competition is intensifying in the auto-leasing market, with the consolidation of major leasing companies, we are promoting the sales and marketing of leasing services with added value, including support for submissions of environmental reports and offering telematic services. As a clarification, the term 'telematic' is coined from the words 'telecommunications' and 'informatics' and refers to the next-generation vehicle maintenance systems.

We are also expanding our sales and marketing operations in the field of logistics by focusing on our strength in truck leasing. Furthermore, we have been developing the market for MyCar Lease, used car sales and car sharing for our future growth. As we also begin to see results in our truck leasing operations, we look to grow our sales and marketing operations going forward.

Please turn to page nine for the Rental Operation segment. Segment profits more than doubled year-on-year to JPY2.8b, as there were no losses on the sale of investment securities, which were recorded in the same period of the previous fiscal year. And, due to the increase in revenues from operating leases, including precision measuring equipment.

Demand for rental has been on a recovery trend, due to the increase in both capital investment and needs to improve information security measures by companies.

We have been expanding our product offering into the fields of environmental analysis and medical-related fields, as well as aiming to develop our overseas operations for further growth.

Please turn to page 10 for the Real Estate-Related Finance segment. Segment revenues increased due to an expansion of non-recourse loans. On the other hand, segment profits decreased 3% to JPY10.2b year-on-year, due to the absence of the reversal of provisions. As well as the absence of gains from real estate sales of properties acquired in the loan servicing operations, most of which were recorded in the same period of the previous fiscal year, in addition to the increase in interest expense.

Although certain transactions seem to be overheated, real estate market activity in Japan continues to be strong, due to the inflow of money from both Japan and overseas, while demand for funding, primarily for [REIT] is active.

We have been accumulating non-recourse loan assets, while implementing strict risk management measures. We also look to actively pursue loan securitization by utilizing the know-how that we have accrued.

Please turn to page 11 for the Real Estate segment. The segment profits decreased 12% to JPY18.3b year-on-year, due to the decrease in gains from sales of real estate under operating leases. Although the income from condominiums sold to buyers were almost flat year-on-year.

Although competition is intensifying in residential condominium operations, we look to differentiate ourselves from other companies by offering high value-added residential condominiums unique to ORIX, such as condominium development that incorporates senior housing.

The real estate market, centered around office buildings and city centers, continues to be strong. We have been steadily making new investments, including logistics facilities, office buildings and the development of senior housing.

Please turn to page 12 for the Life Insurance segment. Although revenues from life insurance premiums were flat year-on-year, segment profits almost tripled to JPY2.9b year-on-year, due to an increase in life insurance-related investment income. We will continue to expand the sales of guarantee-type products centering around Medical insurance CURE.

Please turn to page 13 for the Other segment. Although gains on investment securities at the venture capital operation decreased due to the downturn in the market environment, segment profits increased 20% to JPY12.8b year-on-year. Due to an increase in contributions from equity method affiliates in Japan, including DAIKYO and Fuji Fire and Marine.

M&A is becoming a common part of corporate strategy, and we look to expand our M&A advisory operations by utilizing our Corporate Financial Services segment network.

We have also announced the business merger with Internet Research Institute, or IRI. I will elaborate on this topic later in the presentation.

Please turn to page 14 for the Americas segment. Here, segment revenues increased, due mainly to the increase in revenues associated with corporate loans. As a result, segment profits increased 5% to JPY5.4b year-on-year, accompanying the increase in segment revenues. Our corporate loans in this segment are diversified among a wide range of businesses, including healthcare and energy.

The U.S. macro economy is becoming increasingly uncertain, due to the turmoil caused by sub-prime loan problem in the financial market. Although there has not been any direct impact to our earnings in the first quarter, we will proceed by carefully monitoring the credit market and its effect on related markets.

Please turn to page 15 for the Asia, Oceania and Europe segment. Segment profits increased 8% to JPY12.6b year-on-year, due to the expansion of automobile leasing in Australia and Korea, and the recognition of real estate sales and ship-related revenues.

The Asian economy continues to grow, led by China. We have strived to expand our operations in Asia, including the acquisition of shares in Oman National Investment Corporation Holding, and business cooperation with a major commercial bank in Kazakhstan.

That concludes the overview of segment results. Please turn to page 16 for a discussion of major topics. For the first quarter of this fiscal year, the yield for installment loans has increased 0.26% year-on-year to 5.51% on an annualized basis. On the other hand, the percentage of interest expense to the average balance of debt and deposits has increased 0.29% year-on-year.

While the yield for installment loans has decreased 0.43%, compared to the fourth quarter of the previous fiscal year, we recorded profits from securitization and a higher contribution to revenues from the loan servicing operation in the fourth quarter of the previous fiscal year. We will continue to strive for profitability going forward.

Please turn to page 17. In the first quarter of fiscal 2008, provisions for direct financing leases was JPY1.9b, provisions for loans not individually evaluated for impairment was JPY3.0b, and provisions for loans individually evaluated for impairment was JPY2.2b, for a total of JPY7.1b.

Since the second half of the previous fiscal year provisions have been on an increasing trend. We will continue to carefully monitor the cash flow of each loan, as well as industry trends of our borrowers. And carry out investment and loans with appropriate risk and return to assets.

Please turn to page 18. We established the International Real Estate Business Headquarters on June 22, 2007, to jointly develop operations with local business partners, primarily in Asia, Middle East, Eastern Europe and Oceania. This slide shows, as part of our overseas real estate investment, examples of joint projects developed with local partners.

And, finally, please turn to page 19. This slide explains the business merger with Internet Research Institute, or IRI, which was announced on June 4, 2007. Since its establishment in 1996 IRI, as a research and development-based IT venture company, has been providing basic technologies for the Internet as its core operations. As shown on this slide, ORIX is looking to achieve four goals through the business merger.

Following the approval at IRI's General Shareholders' Meeting, to be held on September 26, 2007, we look to conclude the business merger through a stock swap after November 1, 2007.

That ends the presentation portion of our conference call.

Now, Mr. Yasuhiko Fujiki, who is our President, Chief Operating Officer and Chief Financial Officer, or Mr. Urata, who is a Director, Corporate Senior Vice President and Head of the Office of the President, will answer any questions that you may have.

We apologize in advance for the time it may take. As, after I translate your questions into Japanese, Mr. Fujiki will answer in Japanese and then a consecutive English translation of the answers will be made. We thank you for your patience in advance and look forward to your questions.

At this time, we'll open the floor for questions. (OPERATOR INSTRUCTIONS). Our first question will be coming from [Wil Bozick]. Please go ahead.

Hi, this is Wil Bozick, Putnam Investments. Could you please give me some more color on bad debt expense, was it a specific credit?

Excuse me, can you say that again?

I had a question about bad debt expense. First of all, was it a specific credit? And can you comment on general trends?

Okay. What I'm going to now is I'm going to translate that into Japanese, so I'm going to put you on mute for a second, if you can hold on. Okay?

That's fine.

Hello. Can you -- (technical difficulty)?

Yes, I can hear you. Hello? Hello? Hello (inaudible).

Hello. Can you hear me?

I can hear you now.

Okay. In terms of provisions, we had reversals of provisions in the previous fiscal year. Plus, we had a reflection of increase in installment loans. And what you're seeing is that after [some] increasing there's about a 12% increase year-on-year. And, you could say that provisions for the previous fiscal year were very low, so we're approaching more of a normalized level. And there's not specifically a trend or a specific sector that we're leaning towards.

So it's not [particularly] related?

It does include it but it's not -- we don't lend to one particular sector that doesn't account for more than 10%.

Okay.

And if you'd like more information on that we have a release regarding the amount of loans to the entertainment industry as well on a news release. And you can download that through our website.

Okay. And may I ask a second question?

Sure. Go ahead.

This relates to goodwill write-downs, what was that associated with?

Okay. One moment please. Hello. Can you hear me?

Yes.

Okay. It's, basically, it's a negative goodwill in our investment in our subsidiaries.

And which one?

It's [Memeta Lease], which changed its name in July to NS Lease. And that's approximately JPY3b.

Okay.

So of the trademark we're using the name [the] brand name.

Okay.

Okay, so that's the negative goodwill from that.

Okay. Thank you very much.

Okay.

[Mr. Bozick], so does that conclude your question?

Thank you.

(OPERATOR INSTRUCTIONS). Our next question will be coming from Mr. Fred Barker from [Makena Capital]. Please go ahead.

Yes. Thank you for doing a conference call, very helpful.

Thank you.

Could you elaborate a little bit more on the liability side of your balance sheet, particularly your short-term financing through commercial paper? Just give us a little bit more color, or some comments, as to the stability of this as a funding source, given the turbulence we are seeing in the markets today, whether you have back-up commitment lines, etc, to support your financing in this market.

Okay, I'm going to put you on mute again. One moment please. Are you -- I think you are referring specifically to the decrease in available credit for commitment lines, while you're seeing an increase in CP?

Well, if you could just give us a discussion about your entire -- your (inaudible) liability side. And, really what we're looking for is comfort that it's really stable and --.

Yes, okay.

And it's not going to be disrupted by what's going on right now.

Sure. What we're seeing is that we're seeing an increase in acquisition of assets, and a decrease in the securitization of assets. And what we are seeing is that the increase in temporary borrowing from commitment lines and CP issues. However, the increase in CP came from, say like an overall increase in assets. And there is significantly no significant change in the composition of our funding and we'll continue to secure liquidity in our funding.

Do you have -- isn't it that, that the commercial paper market becomes more difficult? You have -- what other sources of funding do you have in mind as a plan B?

Okay.

Do you have other sources lined up?

Okay. In terms of CP, we have diversified sources and we have plenty of back-up.

Such as?

Do you have a file entitled first quarter consolidated financial results supplementary information'?

I don't have it open in front of me, but it's --.

Okay, yes. If you look at on page four of that file, it shows you on the commitment line.

Okay.

And that shows, pretty much in detail, as well as our funding, how it's diversified.

And are you seeing any changes in either availability or pricing or anything in this, any changes to this area?

No. Not -- not that we know, we haven't seen it.

Okay.

In terms of what I just said earlier, is that, is the available credit for commitment lines is decreasing but the CP is increasing. But we have a continuum to secure liquidity in our funding, so we don't see a problem with that at all.

Okay. Could I ask another question while I'm at it?

Sure, go ahead.

You show the yield on your installment loans declining. And if you go back [four quarter] -- the past year, up until now, the spread between the yield and your interest cost has been fairly well maintained. I think it was the first quarter that you show a decline. Could you explain to us why the yield on the installments are declining?

Okay, one moment please. In terms of the yield for installment loans, what we're seeing is that we recorded profits from securitization in the fourth quarter, and, we also saw a higher contribution to revenues from the loan servicing operations the fourth quarter. Therefore, we a slight dip quarter-on-quarter, but if you see it on a year-on-year basis, you are seeing that has increased.

Okay. So it's securitization related issue?

Yes.

Issue. I see. Alright, thank you.

Thank you.

Thank you, sir. Our next question will be coming from [Mark Simpson]. Please go ahead.

Thank you for the call.

Thank you.

Can you just walk through briefly what drove the large increase in equity in net income of affiliates, and also the gains on discontinued businesses? Thank you.

Okay, one moment please. Hello.

Yes.

In terms of the first question you had, that was from -- what you're seeing is that there -- it was an increase in equity net income of affiliates as we saw the -- in the J.V., Joint Venture, due to the increase in number of residential condominiums developed through certain ventures. So you see a big spike there, such as DAIKYO.

Okay.

Okay. But that's not included in the segment per say, it goes in, it's recorded as equity and net income of affiliates. That's why you saw a spike in the equity and net income of affiliates. Whereas the Real Estate segment, it looks, on paper that it didn't do so well because it's not reflected there, but it's actually reflected in equity and net income of affiliates.

Okay.

That's why you're seeing an increase there.

And the [gain on discontinued businesses]?

[So it's positive] with Joint Ventures, J.V projects. [That's] (inaudible) (technical difficulty).

(Audio starts in progress) the gain on discontinued businesses?

Okay. The second one is we had gains on sales of real estate under operating leases and related revenue. That would be number (inaudible) (technical difficulty). Can you hear me okay?

Can I ask another question?

Sure. Go ahead.

I know they're very lumpy businesses, but, in the past you've highlighted that your pipeline is very strong for the next year or two in terms of real estate, for the gains that you should be harvesting.

Okay.

Should we expect the first quarter to be a run rate for the rest of the year, or would you characterize the first quarter as being weak in those areas?

In terms of real estate? Is that what you're saying?

Yes.

Okay.

In terms of revenue of real estate sales and gains on sales of rental real estate.

Okay, one moment please. Hello?

Yes.

If you look at the Real Estate segment profits year-on-year, and actually if you look on slide 11, you see that in fiscal '07 segment profits for the first quarter were JPY20.7b. And for the first fiscal year of this -- first quarter of this fiscal year was JPY18.3b, and it looks on paper that it went down 12%.

However, you see that the first quarter of last fiscal year was phenomenal. It was very strong. So it did go down but if you look at it on a quarter, and if you compare it to the other three quarters, it's still very strong. And we expect the segment to be up going forward. And, also, we might see that the J.V's that I just mentioned earlier might be very strong this year as well.

So the first quarter you think is too low?

No, no, we're not saying it's too low. It's -- the first quarter is strong, but if you compare it to last -- first quarter of last year, that was very strong. So if you look at it, compare it side by side, the JPY20.7b, JPY18.3b is down, but we think it's a very good quarter. And we figure, we feel it will continue going forward and it'll be as strong as before.

Continue at this level or it should grow off the JPY18.3b base?

One moment please.

Sure.

Okay. For the full fiscal year, we expect the segment to be better than last year.

Thank you.

Thank you.

Thank you, sir. Thank you, sir. (OPERATOR INSTRUCTIONS).

Okay, well, if you don't have any other questions, we will call it a night here. Thanks for joining us. And if you have any additional questions please feel free to contact me. My contact information is at the very end of the presentation. So thank you for joining us, everybody, have a great day and goodnight. Thank you.

Thank you. That concludes today's conference call. We would like to thank everyone for participating. All lines may now disconnect, and good day to you all. Thank you.