ORIX Corp (IX) 2008 Q4 法說會逐字稿

Welcome, and thank you for joining the Orix Corporation fiscal 2008 annual results conference call. At this time, all participants are in a listen-only mode. I'm now turning you over to your first speaker, Mr. Nigel Simpson. Thank you sir, you may begin.

Good evening to you all. My name is Nigel Simpson and going forward I will assume duties for Investor Relations or overseas Investor Relations, here at Orix. I'm joined here this evening by Mr. Haruyuki Urata, Deputy President and Head of the Office of the President. During this evening's call, Mr. Urata and myself would like to provide an overview of the earnings presentation made earlier today here in Tokyo, and then we will open up the line to questions.

I will presume that everyone has in front of them the document entitled Earnings Presentation 080331E that was posted on the IR section of our website at 6pm. Now, if you could all please turn to slide four, I'll ask Mr. Urata to begin the conference with an insight into the current business environment and strategies, an overview of the latest fiscal year's performance, and finally, projected forecasts for the coming fiscal year.

Thank you, Mr. Simpson. Hello everyone. My name is Haruyuki Urata and I oversea corporate development, corporate running, corporate communications, and overseas business development here at Orix. The (inaudible) economic outlook still remains bleak with a position to the subprime crisis proving elusive.

(inaudible) comment that the present economical crisis is of historical proportion for the United States, with the affirmation that subprime prices being the most critical since the end of the war, has highlighted the severity of the situation. This became [overtly] evident with the collapse of Bear Stearns, and the resulting emergency lifeline offered by the Federal Reserve and JP Morgan.

Extensive losses suffered by US and European financial institutions, and the interjections of funds by Central Banks respectively, have further gone to raise question marks about the future direction of the world economy and the capital markets. The situation remains severe for Japanese SMEs as the rate of the corporate bankruptcies rise, and signs of the slowdown in the domestic Japanese economy are now evident, as recently confirmed by the Bank of Japan's report in April.

Moving on to slide five, with an end to the turmoil still far off, we feel it best to continue our strategy by prioritizing soundness over growth. Having foreseen the circumstances of [the situation], the decision was made to revise our corporate strategy to a more defensive stance from the third quarter, modifying the original strategy of pursuing expansion [to the asset accumulation]. Despite the severity of the environment, we have achieved a revised purchase target of net income of JPY170 billion, thereby confirming that the decision to instigate a revision on all front approval to be in the best interests of all.

We believe continued maintenance of our strategies to be appropriate for the present context. In particular, we will continue to be cautious in the Americas' segment, especially in relation to risks, and, domestically we will be similarly cautious concerning credit risk in areas such as SME financing, where risk of default is on the rise, and also in [relative] financing, where reliance on funding from the -- from foreign international institutions is high in the sector. We would further look to improve credit control and take executive measures to minimize losses. We are forecasting results to be flat for this fiscal year.

Turning to slide six, first this gives a general overview of the results for the previous fiscal year. Later, Mr. Simpson will give a more detailed rundown of the segment results, however there are a couple of points I would just like to mention.

In the Corporate Financial Services segment, risk costs have increased and with the continuing worsening environment for SMEs, this increased cost is projected to be a challenge for the foreseeable future. Reasons behind the decrease in profits for the other segments are due to a lack of appropriate exit [of assurities] on investments and a JPY29.2 billion gain, recorded in the previous fiscal year, as a result of the sale of shares in Aozora Bank. However the [cargo] operations better than expected due to fewer complications related to industry related settings.

In the Americas' segment, to satisfy some further asset expansion, we contained the risk exposure and although in no way as extensive as other media financial institutions, [the relatively] market valuation losses on investment securities were recorded. Despite [proven to] uncertainties, we have literally just started to be proactive in capturing our (inaudible) opportunities.

Moving forward, we would look to maintain our opportunistic business stance, [physically] targeting those products that we believe to have solid return potential. On the other hand, the real estate segment saw large increases due to a timely turnover of segment assets, and sales of assets are predicated to continue.

We will also be looking to interchange assets [when just advantages]. As a result of our recent forecast on the Asia, Oceania and Europe segment, especially in diversifying operations, we are now starting to see positive effects in areas such as private equity, investment, and real estate. This we will be further looking to expand on.

On slide seven, you will see that despite a decrease in profit for the fiscal year due to the shifting our stance, our earnings power under ROA has remained strong. From a medium to long term growth perspective, we see the present time as one of opportunity. Although looking to contain risk, maintain prudence in your choice of appropriate proposals, and further interchange assets, we would look to further expand our client base, make the most of Orix's strengths to take advantage of any opportunities that may arise both home and abroad, and sow the seeds for future growth. Again, the present environment contains many factors that could potentially negatively affect the results. However, on the other hand, we believe there is to be also opportunities for the upside.

As previously announced in January, slide eight gives the overview of how the Group has been realigned as of April 1. Segments in which strategic planning, allocation of management resources, and portfolio (inaudible) issues are taken will be realigned into the following six categories. Corporate financial services, maintenance leasing, real estate, investment banking, retail, and overseas businesses.

In light of the Orix rapid expansion and transformation during the past four to five years, management believes the consolidation into six segments to be a crucial factor in ensuring a position of strategic advantage in maximizing corporate body. Through the effective allocation and monitoring of equity, capital, and human resources, we look to maximize corporate values under this new structure.

Referring to slide nine, I would now like to give an overview of this fiscal year's projections and management strategies. The corporate financial services segment will continue to operate in a tough environment. We will look to further concentrate our efforts on tightening controls on new loans and leases, while pursuing the improvements on returns. Through more stringent approval procedures, including the increasing credit risk deployment, we promise to keep risk exposure on bankruptcies to a minimum. We are forecasting provisions will slightly increase on the previous fiscal year, and profits to be flat.

The maintenance leasing segment is projecting increases in profits through implementing measures such as further diversifying value-added services, increasing assets, and improving profitability.

Although gains on sales of rental properties are predicted to decrease from last year's level, the real estate segment will continue the sale of rental properties and look to investing in new opportunities in order to maintain asset turnover. We will also reduce investments in the residential condominium business. Total profits for the segment are forecast to still maintain high levels but slightly down on [the previous] year.

The investment banking segment, whilst continuing to maintain our vigilant stance in relation to choices of projects, will look to further increase spreads on non-recourse loans and expand operations into mezzanine and equity financing. We are also expecting improvements on the losses [made] at the fiscal year in the domestic corporate rehabilitation businesses, and therefore profitability for the segment. In the retail segment, through the offering of attractive products and servicing, an expansion in the client base that will be pursued and an increasing profit is forecast.

As for the overseas business segment, in the United States, we will bide our time whilst taking advantage of any appropriate chances that may arise. Whilst in Asia we will continue to pursue the diversification of investments in NPLs, real estate and the infrastructure. These South Asian operations are at a juncture where upfront investment is necessary, a decline in profit is forecast for the year. However, thanks to the strength contained within our business alliance with Houlihan Lokey, in the United States we will further expand on the positive relationship and thereby aim to achieve similar profit levels for this fiscal year for the segment as a whole.

And finally, as mentioned in the third quarter earnings presentation, we believe that a strategy of expansion is presently unfeasible.

In light of this, as you will see from slide ten, we have increased our dividend payment at this time, whilst also having executed two buybacks during the fiscal term.

The first being at the end of the year and the second in April constituting a total of [JPY60 billion]. Therefore, that rounds up the first part of this presentation and now, I would like to hand over to Mr. Simpson who will provide an overview of segment results.

During the previous fiscal year the rental operation segment, real estate segment and Asia, Oceania and Europe segments saw profit increases whilst the other fixed segments saw declines.

On slide 12 you will see that the corporate financial segment's profits decreased by 38%. Despite increases in operating revenue and operating assets, provisions had increased due to a worsening in environment of Japanese SMEs, our dominant client base. In addition to the aforementioned are the reasons behind the decline where a narrowing of spreads due to the flattening of interest rates, an increase of SGA owing to a one-off amortization and intangible assets and finally a decrease in securitization profits.

The automobile operation segment saw a decrease in profits of 9% year-on-year. Despite an increase in operating lease revenues the decrease was due to increases with interest payments in SGA. For the fourth quarter asset levels remained flat and profits increased. The rental operation segment's profits increased 7%. This was chiefly due to increases in the number of operating leases for precision measuring equipment.

Moving onto the next slide, as you can see the real estate related finance segment profits decreased 6% to JPY42.1 billion. Despite large increases in revenues from non-recourse loans, the lack of gains from real estate sales in the loan servicing operations and a decrease in gains from securitizations in the housing loan operations contributed to the overall decline.

The non-recourse loans business saw a slight drop in asset levels but an increase in profits during the fourth quarter. Real estate segment profits were up 58% to JPY80.8 billion. The main reason behind this being large increases and gains on sales of real estate under operating leases. In addition contributions from condominiums mainly developed through certain joint ventures helped to bring the segment strongly into the black. The life insurance segments are a 20% decrease in profits to JPY7.3 billion. This was due to a decrease in investment profits and an increase in provisions compared to the previous fiscal year where reversals had been recorded.

Slide 14 gives a breakdown of those projects that contributed chiefly to the real estate segment's profits during the fourth quarter. The residential condominium business, Tokyo Towers, Tower Residence Tokyo and Seeds Seishinminami were completed on schedule. 1,750 units sold with the segment's total unit sales being 3,710 units for the year.

Sales of real estate rental properties were also strong. Segment assets for the end of March totaled JPY1 trillion. With the amendments to the building standards law and the rising costs of resources and materials, the real estate market's present environment of uncertainty is forecast to continue for the foreseeable future. However, Orix's portfolio is presently well balanced and positioned to yield good returns. Orix has maintain high levels of profit growth thanks to increased diversification, operations expansion and timing asset turnover.

Moving on to slide 15 you'll be able to see that the other segments' profits decreased 59% to JPY24.7 billion. As mentioned earlier by Mr. Urata, a major reason for this being that [sales shared] in Aozora Bank had contributed JPY29.2 billion to profits last year.

Furthermore, the decrease in revenues from the venture capital operations and losses incurred by subsidiaries in the domestic corporate rehabilitation business had a negative impact on this year's results.

The Americas' segments are a 48% drop in profits, JPY16.2 billion for the year. Despite an increase in revenues from corporate loans there are writedowns on high yield bonds leading to an overall decline in profit.

And finally, the Asia, Oceania and Europe segment. This segment saw a 20% increase to JPY45.4 billion. The chief reasons behind this being an increase in real estate sales and ship and aircraft finance related revenues. Although contributions from equity [method affiliates] decreased due to the sale of our interest in Korea life insurance, again on the sale of this, interest was recognized. An expansion of operating leases especially on automobile leases also contributed to the strong performance.

Slide 16 gives a breakdown of the Americas' segment, assets and investments and securities. Asset levels at the end of March were JPY4.53 billion, a decline of JPY7.3 billion on December levels. In the fourth quarter a realized loss of JPY4.7 billion was recognized with a loss of JPY3.6 billion for the year. Unrealized gains also declined JPY4.2 billion in the fourth quarter. Therefore whilst it is hard to say that the subprime crisis has had zero impact, it would be fair to say that it has been minimal considering.

On slide 17, aside from OUC's losses on trade and securities, you will be able to see that Orix's portfolio as a whole is in good condition. A special debt securities item refers to investments in debt securities issued by an SPC and are equivalent to non-recourse loans.

Government bonds, municipal bonds and debt securities are investments held by Orix Life Insurance Corporation. As for realized gains and losses by Orix Life Insurance they're recorded under life insurance premiums and related investment income on the statements of income.

Slide 18 gives an overview of the condition of Orix's fund raising status. Orix has continued to see stability in its fund raising through a diverse array of methods and sources. As a result of proactively pursuing liquidity in assets, including the securization of housing loans, leases, automobile, maintenance leases to name a few, although debt levels have increased compared to the end of fiscal 2007, the level of CPs have decreased and we have managed to maintain a high ratio of long term borrowing.

Despite the credit crunch in foreign markets, Orix is borrowing from foreign financial institutions is comparatively low, around the 10% mark with most of our CPs and bonds being issued in the domestic market. In this respect, we have been little affected by the turmoil concerning issues of liquidity and fund raising.

And finally, slide 19 shows the fund raising costs of our overseas and domestic Group companies. In domestic fund raising which accounts for 90% of interest bearing debt. The annual trend revealed that although short term market interest rates have risen, they're still within our initially projected estimates.

Overseas funding costs have declined with this being due to the decline in US interest rates. We have also issued bonds and CPs within expected ranges. Many of the forms recently issued have targeted individual investors and this is something that we will be periodically executing moving forward thereby further promoting diversification. Foreign credit markets are still in a state of increasing uncertainty but Orix, as a result of having carried up-to-date a diverse and long term focus fund raising strategy, has been able to remain predominantly unscathed within the turmoil maintaining stable sources of funds.

That ends the presentation part of the call and now Mr. Urata will be happy to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS).

We have a question from [Camille Carlstrom], your line is open.

Good evening. I have one question. We've talked a lot about declining profits and most of the declining profits have to do with the topline, but can you talk a little bit about what you guys are doing on the cost side of the business to rein in the decline and try to get profits up?

Well, I don't know, we have different types of our businesses, so for each department there are a little bit different ideas for reducing costs. For example, or in view of our corporate finance department or segment, as I mentioned, the one with the most important costs is credit costs. So in that case, right now, we are trying to, for example, for our existing asset, we are trying to request to our client a further (inaudible) for example. Or if they cannot meet our request, in some cases we are trying to end our finance agreement with [such kind of the clients].

So through those activities, we are trying to reduce our operating costs. And for example, relating to our funding costs, of course it's a little bit difficult for us to reduce our funding costs in accordance with the market rates. So in that case we try to request to our clients a rise of our interest rate to those clients. As a result, we can enjoy certain further higher profitabilities.

And in other areas, for example in automobile or business areas, we have a lot of human resource expenses. In that case, we try to hire temporary staff instead of the full time basis person. So we can, for example, recruit very young staff or in -- on the other hand, we can also hire very talented but old people whose rate is relatively lower.

So through various variations of the human resources, we can totally enjoy the little bit lower cost of operations. So such kind of combination of challenging to reduce costs will result in further profits we think.

Okay. Thank you.

Thank you.

Thank you. The next question comes from [Fred Barker]. Your line is open.

Hi. Thanks for doing the conference call. I just want to get a little clarification on the corporate finance side, where you indicated that write-downs of intangibles and smaller gains in securitization, these are reasons for why your profits are lower. Could you give us a little more detail what these write-downs were for, how much it was -- this accounted for the decrease? And also in terms of securitization, how much of that accounted for the decrease?

Yes, regarding our temporary costs for the tangible assets, we announced that the first quarter, it cost around JPY3 billion. And we almost now, five years ago, we bought this new company from the Japanese steel company and we follow the company's name because that [relating] company [sold]to that steel company group. But in the first quarter of the last fiscal year we were requested by that steel company to change this new company's name. So we experienced such kind of goodwill or reduction of cost.

And regarding with the lower profit from the securitization of our leasing assets, I'm sorry, I don't have any details here right now but under the current [position] where the interest rate is going up compared with existing assets, we -- compared with the last fiscal year, we had to pay further higher expenses for our securitization.

And, I'm sorry, what about for credit costs, is this simply a normalization of your credit cost levels? Is this a -- do you think the current levels are (inaudible) levels or (inaudible)?

Yes, for the last two years, we experienced a reverse of the credit costs in the past, so we enjoyed a very lower level of the provisions of the credit costs. But for the last fiscal year, in the corporate finance segment, the ratio of the provisions was almost 0.8% against average assets outstanding. And that figures are almost equal to the -- three years ago. So we think the current situation or -- is not so bad situation, judging from our past experiences.

And based on what you're seeing right now, are you expecting this ratio to increase or are you -- have you found some stability here?

Yes, actually for the new fiscal year, the amount of the credit costs will a little bit increase compared with the last fiscal year, and the operating assets for the corporate finance segment will remain at almost the same level or a little bit decreased. So in the sense, the ratio will a little get higher but that said I don't think (inaudible) to achieve that -- our over 1% or something like that.

Okay. And also --

But still very stable I think.

Okay. Also in terms of your investments, you have non -- the special debt and it's -- the [footnote] said it's mostly non-recourse loans? Could you tell us a little bit more, are these non-recourse loans made to -- for real estate purposes in Japan?

Yes in Japan when we provide a client with a non-recourse loan types of financing, there are two types. One is just loans, another one is issuing the bond and we buy the bond. So there are some differences of the tax treatment or something like that. So our economical effectiveness is completely equal. So in the sense, the number of special securities is completely the same as non- recourse loans.

And is it correct to assume that Orix finds these non-recourse loans attractive in today's market and we'll continue to see these balances increase?

Right now, our relative business activities are -- remain very active. But as you know, for many non-Japanese financial institutions stopped financing to those areas. So in the sense, we have become very busier. But on the other hand, as I've said, we should be very cautious about increasing our assets on the non-recourse loan businesses.

So in the sense, we effectively provide a non-recourse loan to the -- sell to clients with a higher profitability. So that's our client strategy for non-recourse loans.

Thank you.

(OPERATOR INSTRUCTIONS).

Currently there are no questions. I'll turn the meeting over to Mr. Simpson.

Very well. If that's -- if there are no more questions, then I think it's -- we'll wrap the conference call up here.

Thank you -- I'd like to thank you all for your time, wish you a good morning or a good afternoon or a good evening wherever you are in the world. And obviously myself and Mr. Urata and everyone here at Orix, thank you for your time today.

If you have any further questions obviously feel free to contact us at any time. Thank you.

Thank you very much.

Thank you. That concludes today's conference, you may disconnect at this time.