ORIX Corp (IX) 2008 Q2 法說會逐字稿

Welcome to the Orix Corporation interim results conference call. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's call is being recorded; if you have any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Yui Takamatsu. Sir you may begin.

Thank you. Welcome everyone to Orix's earnings conference call for the interim period of the fiscal year ending March 31, 2008. My name is Yui Takamatsu. I'm joined here today by Mr. Haruyuki Urata, who is the 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 0709E dated November 8, 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 at the interim results earnings announcement today in Tokyo by Mr. Urata and myself. We will then open up the lines to any questions that you may have.

Please turn to page four. I will now ask Mr. Urata to give an overview of interim results.

Thank you Mr. Takamatsu. Hello everyone, my name is Haruyuki Urata, I'm in charge of Corporate Development, Corporate Planning and Corporate Communication. Regarding our interim results, although interest expense trend (inaudible) and (inaudible) expenses and provisions increased, net income increased 1% or JPY0.7 billion year-on-year to JPY92 billion which is the highest interim to date. (Inaudible) investment operations in companies and real estate which Orix sees as well its core businesses may on occasion not be recorded under operating income or income before income taxes. While operating income and income before income taxes decreased, net income increased due mainly to the strong performance of our investment operation which resulted in an increase in contributions as seen here.

Finally there is no direct impact of the US subprime loan program and the effect on Orix of the turmoil in the credit and capital market has been limited.

Please turn to page five for an explanation of trends in our four major segments. First starting with trends in the Corporate Financial Services segment, while revenues increased, segment profit decreased to JPY17.3 billion. The main cause of the decrease in segment profit is the rising costs and this can be explained by three factors.

Firstly we have seen an increase in provisions. As can be seen from the increasing SME bankruptcies, the SME market has seen a polarization between competitive SMEs investing to achieve growth and those inevitably impacted by the current imbalance.

In the previous fiscal year [revenue] levels were lower due to reversals being recorded reflecting an economic recovery. The absence of (inaudible) in the first half of this fiscal year led to higher provision levels. As a whole, provisions have exceeded initial expectations.

Secondly, a rise in short-term interest rates and flattening of the yield curve has led to a decrease in loan spreads due to an increase in our funding costs. It has taken us some time to pass on the rising costs to our customers.

Finally a one-off write-down of our intangible assets was recorded in the first quarter of this fiscal year.

In response to these trends we will further implement rigorous credit evaluation and the approval measures to address the polarization of SMEs. Our credit exposure to the (inaudible) and consumer finance industries is on a downward trend.

Going forward we look to strengthen the Orix franchise by taking advantage of the strength of our Group-wide network.

Please turn to page six, the trend or prioritization on diversification can also be seen in the Japanese real estate market. Orix Real Estate segment profits have increased significantly by responding to these changes in the market as shown on the table below. For rental purpose real estate we are pursuing diversification from office buildings to logistics facilities and working to secure assets that meet the needs of real estate investors.

That said, for the large scale (inaudible) condominium development, (inaudible) between the currencies per year and the mix can be expected to contribute to profits. The Real Estate segment will, while achieving growth in profits, endeavor to build a stable revenue base through diversification.

Please turn to page seven. Regarding our US operations, Orix has total assets of JPY507.6 billion in the United States and the breakdown is shown in the above table. However, I would like to mention again that Orix is not involved in subprime loan operations. Our investment in securities, including CMBS and high yield bonds totals JPY109.8 billion and our unrealized and realized gains and losses in CMBS and the high yield bonds are shown in the table below.

Although the subprime problems have impacted the US bond market on the whole, the effects on Orix earnings is extremely limited.

Please turn to page eight where I would like to explain actions for global expansion to ensure Orix's medium and long-term growth; this slide introduces some of our investments in Asia and the Middle East. Going forward, we would like to diversify the overseas businesses from leasing to investment in the same fashion as our Japanese operations, teaming up with local business partners with whom we have established strong relationships in joint operations such as leasing; we will expand the business by obtaining local information and carefully scrutinizing risk and return.

We look to achieve the next stage of growth by the expansion of equity-type fields the addition to our established debt type businesses in areas where high economic growth is expected.

In conclusion, I would like to explain three of Orix's strengths within the current operating environment. First, while global financial institutions have struggled in the recent turmoil and uncertainty in financial markets, Orix has been able to properly manage its operations, not only overseas but in Japan as well.

Second, we feel that the decrease in profits in the corporate financial services segment is manageable as we have experienced and overcome various [other struggles] in the past 40 years, including increased credit risk and fluctuations in interest rates. The corporate financial services segment continues to be the core of our operations and we expect this segment to record stable growth going forward.

Third, in terms of our investments, our principal investments have established a solid track record including the previous [fiscal year's] gain on the sale of our shares in (inaudible) Bank and the sale of our shares in Korean Life Insurance this fiscal year. Our other investments have also progressed favorably.

In terms of our growth strategy going forward, in our Real Estate investment, although the market is showing trends of polarization and diversification, we feel we can take advantage by utilizing our unique strengths of having [capabilities] for both real estate development and real estate finance which will continue to be the key driver of earnings.

Also, we believe that taking advantage of opportunities in regions such as Asia through our network developed through local business partners and (inaudible) will ensure Orix's medium and long-term growth.

Finally, I would like to mention that there is no change to the forecast for net income of JPY202.5 billion for the fiscal year ending March 31, 2008. Thank you very much.

Thank you Mr. Urata. Starting on page nine I would like to give you an overview of segment results.

Looking at segment profits, four segments recorded an increase in profits while five segments were down year-on-year. The Rental Operations, Real Estate, Other and Asia, Oceania and Europe segments recorded an increase in profits. On the other hand, the Corporate Financial Services, Automobile Operations, Real Estate-Related Finance, Life Insurance and The Americas segments recorded a decrease in profits.

Now, I would like to explain the year-on-year performance for each of our nine business segments. Please turn to page ten. I will begin with the Corporate Financial Services segment. The following slides will explain each business segment in the same format. We have segment performance on the left-hand side and trends in segment assets, revenues, profits and ROA on the right-hand side.

As Mr. Urata explained earlier, in this segment, in addition to increases in credit costs and a flattening of the yield curve, a one-off approximately JPY3 billion write-down of an intangible asset was recorded in the first quarter of this fiscal year. As a result segment profits decreased 41% year-on-year to JPY17.3 billion.

Please turn to the next slide where you will find a graph explaining the trend in asset quality in provision for doubtful receivables and probable loan losses in the Corporate Financial Services segment.

Provisions for the Corporate Financial Services segment for the interim period was at JPY6.4 billion and the annualized ratio of provisions to segment assets is 0.66% with credit costs rising slightly. With reversals of provisions recorded in the previous fiscal year as well as the fiscal year before that, the current rise can be seen as a rebound from previous low levels.

Although provision levels did increase with the increase in assets, the ratio of provisions is below the level of fiscal period ending March 2005 and while uncertainty exists in individual industries, we do not feel that there has been a large change in our overall asset quality. However, we will continue to conduct strict risk management going forward.

With regards to our exposure to the Pachinko industry and the consumer finance industry, total leases and loans to the Pachinko industry is approximately JPY350 billion. And for the consumer finance industry it is approximately JPY15 billion. A large majority of these have been collateralized and we feel that our portfolio to these industries has been properly managed.

For more information regarding provision levels for our overall operations, please refer to page six of the interim results supplementary information which can be downloaded by accessing our website as shown on the very last page of this presentation.

Although competition in the market is increasing with the recovery of the so-called mega-banks and regional banks, we are closely managing revenue and asset growth as well as credit risk. As a result we expect downside to be limited and still consider the Corporate Financial Services segment to be the core of our operations and look to record stable growth going forward.

Please turn to page 12 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. If securitization is taken into consideration, assets have been steadily expanding.

On the other hand, segment profits decreased 7% to JPY12.4 billion year-on-year due to the increase in expenses accompanying an increase in revenues from operating leases as upfront costs are recorded earlier for operating leases than for direct financing leases. This is in addition to the increases in interest expense and advertising costs.

Although competition is intensifying in the auto leasing market with the consolidation of major leasing companies, with our industry-leading added value services and number of vehicles under management, we look to maintain our advantage within the market.

We would also like to promote new ideas for vehicle utilization, including the development of the non-sweep market and retail market as well as car-sharing and rental and sales.

In terms of our rental car operations, following the opening of a rental car station in Hokkaido in April, we have opened the largest rental car office in Okinawa. We look to expand the number of rental car offices and improve the quality of services offered.

Please turn to page 13 for the Rental Operations segment. 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. Segment revenues increased due to an increase in revenues from operating leases, including precision measuring and other equipment. Segment profits also increased 51% year-on-year to JPY5.9 billion as there are 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 revenue from operating leases.

For further growth we look to improve operating rates while striving to expand our product offering into the fields of environmental analysis and medical related fields.

Please turn to page 14 for the Real Estate-Related Finance segment. Segment profits decreased 3% year-on-year to JPY20.4 billion. This segment comprises largely of our operations in non-recourse loans, loan servicing and housing loans. Non-recourse loans continue to expand and have contributed strongly to the increase in segment assets and revenues as well as largely increased in profits.

For our loan servicing operations, although new purchases have seemed to reach a peak, loan recovery continues to be steady. However, due to the lack of large gains from sales of real estate acquired through our loan servicing operations, profits decreased.

For housing loans, while assets and revenues steadily grew, securitization of housing loans is scheduled for the second half of the fiscal year. As a result profits were down for the interim period. Although there are concerns regarding the effect on real estate related transactions in Japan, stemming from the US subprime loan problems, demand for funding for good properties is still strong and non-recourse loan operations continued to be extremely favorable, which is still the case in the second half of this fiscal year.

Furthermore, there is no major turmoil in the CMBS market in Japan, and we issued in September, JPY37.8 billion in CMBS, with terms in line with initial expectations.

Please turn to page 15 for the Real Estate segment. Segment profits for the Real Estate segment increased 32% year-on-year, to JPY41 billion, due mainly to the large contribution made by gains on sales of rental purpose real estate. Condominium sales, including joint ventures accounted for under the equity method, decreased year-on-year by 427 units to 1,545 units. While gains from condominium sales were slightly down year-on-year, sales of condominiums for a large project is scheduled for the fourth quarter of this fiscal year, and we expect profit contributions to be above the previous fiscal year.

As Mr. Urata explained earlier, Orix's Real Estate operations for the business model were in addition to ensuring a diversified portfolio we actively make new investments and turn over these properties after improving their value. We expect the Real Estate segment to continue to be a growth driver for the Orix Group going forward.

Please turn to page 16 for the Life Insurance segment. Segment assets and revenues were generally flat year-on-year. Segment profits were down 12% to JPY3 billion year-on-year, due to an increase in provisions where some reversals were recognized in the same period of the previous fiscal year, as well as a decrease in investment income in the second quarter, due to the downturn of the Japanese stock market. Segment profits for the second quarter was only JPY0.1 billion.

Sales for our CURE medical insurance product continues to be favorable. We look to continue to expand the sale of guarantee-type insurance products going forward.

Please turn to page 17 for the Other segment. Due the varied results produced by the diverse businesses in this segment, segment profits increased overall by 16% to JPY21.4 billion. In the principal investment operations, profits from equity method affiliates in Japan, including [Daiko] and Fuji Fire & Marine, increased. In our card loan operations, while problems such as overpaid interest are mounting for the surrounding market, revenues from this operation have maintained previous fiscal year levels, due to our consistent business expansion within the interest rate limits. Revenues from our venture capital operations decreased due to the downturn of emerging markets in Japan.

In our Investment Banking operations, we are looking to achieve business expansion by utilizing the sales and marketing base of our Corporate Financial Services segment, as well as combining the expertise of Houlihan Lokey who opened their first Japan office in September, and the know-how of Internet Research Institute who joined the Orix Group in November.

Please turn to page 18 for the Americas segment. As Mr. Urata explained earlier, regarding the impact of US subprime problems on our investment securities operations in the Americas segment, effect on earnings is extremely limited. This is primarily due to our team of professionals in our US operations who continue to properly manage risk in the same fashion that have helped weather past crises, including 9/11 and the GM crisis in the market.

Corporate loans increase in segment assets and revenues also increased. However, while gains from the sale of real estate under operating leases increased, segment profits decreased 38% year-on-year, to JPY11.1 billion due to one-off contributions made by gains on investment securities and interest on investment securities in the second quarter of the previous fiscal year, which were not recorded in the second quarter of this fiscal year.

Segment profits for the second quarter was above the first quarter JPY5.4 billion figure, at JPY5.7 billion. With the exception of the aforementioned one-off contributions, business for the Americas segment is trending smoothly. While the extent of the subprime loan influence on the actual US economy must be carefully watched, we currently have not seen any deteriorating trends in our loan portfolio in the US.

Regarding investment banking operations, while large scale M&A deals have decreased due to the subprime loan problems, by having always concentrated on the middle market, Houlihan Lokey's fee income has maintained results level with the previous fiscal year, which were steady.

And finally, please turn to page 19, for the Asia, Oceania and Europe segment. Segment profits increased 47% to JPY26.4 billion, year-on-year. Our leasing operations in various countries, in particular, automobile leasing in Australia and South Korea, performed favorably overall. Also contributions from real estate, airplane and ship-related profits and equity method affiliates, all expanded. As many of you are aware, Orix's shareholding in Korea Life Insurance was sold to the [Hanwha] Group in September of this year. Since acquiring the shares in December 2002, it has steadily recognized profits, and has made a concertable contribution to Orix earnings.

And finally, as Mr. Urata explained earlier, we are aiming for investments in real estate, infrastructure and businesses in the Asia and Middle East region, to become one of the bases for Orix's growth going forward.

That ends the presentation portion of this conference, and now I would like to open up and floor to any questions that you may have.

Okay, thank you sir. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). It will be one moment please, for the first question. And our first question comes from [Chris Dodson]. Please state your company name.

Mizuho Securities.

Go ahead and state your question sir.

Yes, it's regarding your aircraft related business. I was wondering what, if any effect, delays in shipments by the two main aircraft manufacturers has on your business, one way or the other? Thank you.

Thank you very much for joining. Regarding your questions, our aircraft related business operations or related businesses, mainly in the area are used for aircraft businesses. We -- for example, we own all our used aircraft and leasing to various aircraft companies in the south east area. So in that sense, we don't have any problems from the point you expressed.

Thank you very much.

And our next question comes from [Julian Wesley]. Please state your company name, and proceed with asking your question.

Putnam Investments. I understand that you're not changing your full year forecast, but can you give us any more commentary about your expectations for the second half, and your comfort around your guidance?

You listened to my previous presentation. Right now, say, I want to explain a little bit about our (inaudible) investment for example. Although we don't have any fixed idea about the sale of our big investment in for example [Daiko] or [Alzera] but we have various investments in very different types of corporations. Most probably, from those investments to Japanese companies we think we'll be able to realize some high (inaudible) or sale to the third parties.

So through those operations we think we can enjoy additional profits or -- in addition to our normal operations. Of course we don't have a (inaudible) schedule about the same level of the big investment or the sale like [Alzera] bank in the previous year. We think we can find out different areas like real estate or development areas or others.

We have another five months to achieve our initial forecast. So at this moment our (inaudible) doesn't have an idea to change our forecast.

Okay, thank you.

(OPERATOR INSTRUCTIONS). And we have a question from Julian Wesley. Please state your company name and proceed with your question.

Putnam Investments. Orix is a mixture of relatively stable businesses with a fairly stable profit stream and then kind of one-off business where -- sorry one-off capital gains where you actually have one-off capital gains on a fairly regular basis. Can you talk a little bit more about the stable businesses and how they're looking for the second half?

So for example in the autos business, you mentioned that profits were down in the first half partly because of upfront costs for operating leases but also because of rising interest expense. How will this business do in the second half? To what extent is that profit fall due to upfront costs that will reverse itself over time? So if you could just talk a little bit more in detail about the ongoing businesses and how they're doing?

Sure. Yes and you say our business compares over two different sub businesses. One in a very stable or asset based business, another one is a very marketable auto businesses. And regarding with our corporate finance businesses and the automobile businesses and the rental businesses, for those areas we think in the last -- in the second half of fiscal year, for example our Corporate Finance segment will show another steady growth in terms of the profits and the asset base. Because of course there are some trends in the Japanese economy or in the downtrend in the Japanese economy. But our main clients who are SMEs, some of them are very much active in funding the operations. That's why we think we can expand our operations in the Corporate Finance segment.

And regarding with our automobile businesses, although the recent results cannot be shown all in the same way with the last couple of years, it's mainly because of the -- for example for the last couple of years the automobile business segment has shown a big profit expansion due to a [mandate] of the different rental businesses or [additional] assets.

So right now in terms of the profits or income we cannot show any big growth but in the second half we think -- continuously this segment will refund and as Mr. Takamatsu mentioned, our competitive strength still works very well in this competitive market. So of course we cannot show you probably the very big increase of the profits but a pretty steady growth can be expected.

In terms of the rental businesses or insurance businesses, those segments will also show a very steady growth in the second half of the fiscal year.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Okay and we do have a question, one moment please. And our next question comes from [Fred Barker]. Please state your company name.

[Online] Capital. Could you shed a little light on what to expect in terms of the real estate business in the second half in terms of the delivery or completions of condominiums etc.?

And also how the sales in the -- I believe you have, in the discontinued operations you have sales from operating leases as opposed to your Real Estate segment. How are these assets different?

Can you -- Fred can you give us the second half of your question? It kind of got cut off, sorry Fred.

Sorry. Under the discontinued -- profits from discontinued operations I understand these come from the operating lease business. And so I was wondering if you could explain to me how the assets are different between those in the operating lease and those in your real estate book?

Okay regarding with your first questions about the real estate businesses for the second half of the current fiscal year. For example in the areas of the condominium businesses, as I said a little bit, especially in the fourth quarter we have a very big project which will be completed and delivered to the client. So in that sense for the first half quarter, our half year, we experienced the same level -- almost the same level as our profits compared with our previous fiscal year. But for the full year we think in the area of the condominium business project, we'll regain more profits than the previous year.

And for the area of the -- for example the sale of the real estate (inaudible) buildings, we don't have any fixed schedule for all types of our buildings, but for some areas we have already started to prepare the sale of the existing offices which we are now leasing.

So in that sense at this moment we can't say any fixed figures about the profits from the sale of the office buildings or others, but most probably through the full year you can most probably see at the end of the fiscal year the highest profit from this segment.

Regarding the second question. In the case of the -- for example after the sale of the office buildings still we have some relationship with the client. In that case which is recorded as a --

Gain on the sale of real estate and offerings.

And on the other hand in the case of no relationship after the sale of the buildings or offices those profits is recorded in the area as a bottom line after the pre-tax profits. Can you understand?

Yes. Can you give us some color in terms of your Real Estate business? What is the trend between third quarter and fourth quarter? Condominiums I know is a seasonable business, it tends to concentrate in the fourth quarter but in the third quarter, what do you -- what should we be expecting? Is it going to be fairly consistent year-over-year with the last third quarter or more or less? What can we expect?

At this moment we can't say any ideas but most probably I think for the third quarter you will not be able to see the very big profit from this segment. For the fourth quarter you can see more profit from this segment.

Okay. Alright thank you.

Thank you.

(OPERATOR INSTRUCTIONS). We have a question from [Hazuki Suzuki]. Please state your company name.

Kylin Management. Hi, thank you very much for having this opportunity. I have a question about your credit cost. I think you raised -- increased the credit cost guidelines to JPY30 billion from JPY20 billion this year and I'm wondering if there was any big borrowers who was in a tough situation or is generally SME's credit costs increasing? So could you explain a little bit more detail? For example was there any big borrowers or any specific products like a loan or a finance lease or operating lease? I would like to know the details of this increase.

Okay. Let me explain a little bit about our credit costs over the first half. We don't -- we didn't realize any big losses for certain companies but in general, as you probably know, or in Japan recently some of the SMEs have become a little bit difficulty in funding the operations or continuing their businesses.

So as you know, our main clients are the SMEs and as our assets increased our client base has expanded and so we have some new provisions for credit costs. And so, of course, in the area of Pachinko industry or consumer finance industries we have experienced some losses and/or we have some difficulties, so we have recorded some additional or provisions compared with say the same period of our last fiscal year.

But, as I said, as a whole, we think we can manage our credit risk properly and although we will have another non-performing loan but, as you know, our exposure mostly has been very well or characterized by various rare assets or some securities. So in that sense, as a final base we don't think we will have some big losses from those areas.

So in that sense, in general, as you know, the Japanese economy is right now struggling in some new stages and our client base for SMEs have some difficulties but our main target is the upper level of SMEs in Japan. In that sense, compared with other financial institutions, we think we can limit or reduce our risks.

Do you think this JPY10 billion additional credit cost is mainly from bond business?

Yes. In the area of Corporate Finance segment, at this moment we don't have any big differences between the loan businesses and the leasing businesses.

Yes I'm just wondering because your (inaudible) loan balance is only JPY2.2 trillion and JPY10 billion increase of credit cost is not small.

You are saying about the increase of the three years provisions?

Yes.

So compared with our initial expectations about the provisions the three years, the economy and some limited industries the situation has changed we think. In that sense we think we should more carefully monitor the market or industry.

I see. So then do you think your balance of this loan business is not growing so fast as before, or do you think you can charge higher interest rates?

Of course as the Japanese economy or our market conditions have changed or we think we should increase our spreads to the clients and judging from past experience we think we can do that.

Okay thank you.

And as a whole, this segment, as you know, will not show any substantial increase in terms of the profits or assets. But we believe this segment will show a steady growth in terms of the assets or profits.

Okay thank you very much.

Thank you [Suzuki].

(OPERATOR INSTRUCTIONS).

Okay well if we don't have any additional questions perhaps we'll finish off the conference call here and please feel free to contact us any time if you have any questions. Our contact information is shown on the very last page of this conference call presentation. And before I say goodbye I'd like to wish Mr. Urata a very happy birthday -- today is his birthday.

Thank you for joining us everybody, have a nice day and goodnight.

Thank you.

And that concludes today's call. Please disconnect your line at this time.