ORIX Corp (IX) 2009 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question and answer session of today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Nigel Simpson. Thank you, sir, you may begin.

Evening to you all. This is Nigel Simpson. I'd like to welcome you to Orix's first quarter results conference call.

I'm joined here this evening by Mr. Haruyuki Urata, Deputy President and Head of the Office of the President, Mr. Tadao Tsuya, Executive Officer of the Accounting Department. During this evening's call, Mr. Urata and myself would like to provide a brief overview of the Japanese earnings conference call made earlier today and then we will open up the lines to Q&A.

I will presume that everyone has in front of them the document entitled Earnings Presentation 080630E that was posted on the IR section of the website at six this evening here in Tokyo. I will now hand over to Mr. Urata.

Thank you, Mr. Simpson. Evening, everyone. My name is Haruyuki Urata and I oversee corporate development, corporate planning, overseas business development and corporate communications here at Orix.

If I can ask you to turn to slide four. Confusion and uncertainty continue within the markets and the financial sector as a whole, with the situation here in Japan also having began to deteriorate. However, this comes as no surprise to management and is well within the parameters of expectations. We envisage these circumstances to continue for the time being.

Slide five once again restates our present strategies. There has been no change since the beginning of the third quarter of the last fiscal term and we continue to prioritize soundness over growth, and particularly do this in risk management. However, our operating base and financial standing remains firm, leaving us in a good position to take advantage of attractive opportunities we judge to be appropriate.

Slide six gives the performance overview of the first quarter. With the ROE of 10.3% and ROA of 1.44%, despite the challenges faced, we have maintained strong earnings power. In addition, our shareholders' equity ratio of 13.9% and the upgrade from Moody's in May position us well to take advantage of rising opportunities.

Moving on to slide seven, here you can see perfect trends for the past four quarters. In the quarter just past, due to the overriding situation in the markets, our Investment Banking and Overseas operations underperformed. However, despite the [volatile financial sector] growth, we have continued to effectively manage risk and maintain healthy profitability.

Slide eight gives you a breakdown of the Group's assets. Since the latter half of the previous fiscal year, we have taken particular care in relation to credit risk and have slightly decreased asset levels in the Corporate Financial Services segment.

Turning to slide nine, this gives some background to the quarter's results. The Real Estate segment saw the best performance and as for reasons behind the drop in profits, the slide gives you some insight into the main factors.

This finishes the first part of the presentation and I will now hand over to Mr. Simpson to give an overview of the segment performance and the present funding situation.

Thank you, Mr. Urata. First, the Corporate Financial Services segment, which can be found on slide 10. Segment profits were JPY5.7b for the quarter. Revenues from direct financing leases declined. However, due to an increase in revenues from loans, overall revenues were up 15% compared to the first quarter of last year.

However, an increase in provisions, chiefly on loans to real estate businesses, in addition to increases in interest expenses, saw profit levels decrease year on year. The situation for SMEs is worsening, with bankruptcies on the rise, and with the tightening of credit in the domestic real estate sector the segment is starting to feel the effects. In response, we continue to be careful in pricing risk and extending credit, making all efforts to improve profitability on loans.

Turning to slide 11, here you can see the trends in provisions ratios and asset levels of the Corporate Financial Services segment during the past couple of years. In the first quarter, provisions were JPY4.7b. The rise, as mentioned a moment ago, is due to an increase in provisions for real estate related businesses. Effectively managing credit costs, increasing collateral requirements and swift collection of problem loans and potentially problematic loans, particularly in the real estate sector, will continue to be the main focus of the segment.

As can be seen on slide 12, the Maintenance Leasing segment's profits were JPY7.5b. Although there was an increase in operating lease revenues in the auto rental and leasing operations, profits were down year on year. Main reasons behind the decline were increased expenses related to the auto maintenance service operations, caused by the effects of increased oil prices, and increases in depreciation expenses on increased levels of rental assets.

Despite a recent weakening in demand, increased competition and increases in maintenance costs in the auto leasing business, expansion is expected in the medium to long term. We will look to optimize Group synergies to bring down costs and maximize operational efficiency, therefore placing us in a position to continue offering high-quality, value-added services to existing and new clients.

As for the rental business, a decline in demand is also being seen. We will continue efforts to improve efficiency through effective inventory control and increased selectivity during the purchasing process, whilst maintaining a tiny turnover of assets.

On slide 13, Real Estate segment profits were up 8% on last year to JPY21.1b. Gains on sales of rental properties and profits from the condominium business saw increases. And although the total number of condominiums sold during the quarter saw a drop from 830 units last year to 739 units this year, due to the purchased units being at the high end of the market overall profits were up for the condo business.

As everyone is aware, the present condominium market environment is becoming ever more increasingly difficult and therefore a stance of extreme prudence is being maintained in relation to new projects. However, unfortunately, write-downs on projects presently under development were recorded for the quarter.

Vacancy rates for office buildings have seen slight increases, although rent levels have also increased and so property cash flows remain stable. Within this environment, properties with particularly attractive rates of return have started to appear on the market and the segment will look to proactively sell rental properties and turn over portfolio assets on a timely basis, to maintain steady revenue streams.

Slide 14 gives a breakdown of the Real Estate portfolio. At the end of the quarter, total assets stood at JPY1.1 trillion, with a diversified and well-balanced cross-section of asset classes that continued to maintain high levels of revenue and profits. As for a breakdown of office building locations, 50% are in the Tokyo metropolitan area, 30% in the Osaka metropolitan area, 10% in the Nagoya area and the final 10% spread across other regions.

The present uncertainty and turmoil in the sector is forecast to continue for the foreseeable future. However, the aim is to maintain the profitability and diversity of the portfolio, whilst being cautious in relation to risk.

The Investment Banking segment's profits for the quarter stood at JPY7.3b. The decrease on last year's results was due to losses recorded on investments in private equity funds and a decline in profits from the loan servicing operations and equity method affiliates in Japan.

This segment, also consisting of the Real Estate related finance operations, being particularly susceptible to the present confusion and turmoil in the markets, is experiencing understandable difficulties. However, the environment is also giving rise to various advantageous openings, especially in the area of non-recourse loans and principal investments, and an opportunistic stance will be maintained moving forward.

Slide 16 gives a breakdown on the Investment Banking segment's assets. Segment assets at the end of June were JPY1.7 trillion, with over 50% being installment loans, including non-recourse loans and NPLs. Included within, the investment in securities portion of the chart of JPY362.4b worth of specified bonds, which are the equivalent to non-recourse loans, resulting in over 70% of the segment's assets being debt-based, the underlying foundation of the segment's profits.

In the Retail segment, profits stood at JPY7.3b at the end of the quarter. Despite increases in revenues from the housing loan operations and life insurance premiums on new insurance products, a decrease in profits from the brokerage business resulted in a 9% decline in profits compared to last year.

The operating environment for this segment remains tough. However, we will continue to look to capitalize on our unique positioning in niche markets and related expertise in operational efficiency, in order to further develop high-quality services and products that meet the evolving needs of retail customers in the market.

The Overseas segment recorded JPY5.8b in profit. In the US, due to a decline in profits on securities and an increase in credit costs, overall profits were down year on year. In Asia and Oceania, although the auto operating lease business performed well, segment profits were down due to the absence of contributions from Korea Life Insurance and a decrease in aircraft sales and ship-related revenues.

Slide 19 gives an oversight of the status of the Group's assets in the US. In relation to installment loans, due to the absence of reversals of provisions that had been recorded during the same period last fiscal year, credit costs have increased year on year. However, at present, asset quality is not being compromised thanks to collateral on the loans and the portfolio being especially diverse.

During the first quarter, realized losses of JPY200m were recorded chiefly on trading securities. And in view of the present uncertainty surrounding US markets, continued volatility is forecast in this area. As the slide shows, as of the fourth quarter of the previous fiscal year, tentative investments have started to be made in reasonable priced AAA RMBS. However, just to clarify for everyone, we have no exposure to Fanny Mae and Freddy Mac or any other US government related financial agencies.

As for the Group's investments in securities, on slide 20 you will see that losses have been recorded this quarter chiefly on investments in domestic private equity funds, caused by the confusion in the markets. This environment is projected to continue for the time being.

In relation to securities available for sale, of the JPY452.7b disclosed as level three under FAS157, 8% consists of specified bonds which, as mentioned earlier, are equivalent to non-recourse loans.

On slide 21, Orix, thanks to having pursued a diverse range of funding methods and sources to date, is presently having no issues with financing. Despite the troubles being experienced in foreign credit markets and prevailing liquidity issues, Orix's overseas funding only accounts for approximately 10% of its total funding. And since the vast majority of Orix's CP and bond issues are here in the domestic market, Orix continues to experience no negative impact at this time.

And finally, slide 22 shows the status of domestic and international funding costs. In relation to domestic funding costs, accounting for 90% of total debt, although short-term interest rates have risen, the trend is well within expectations. Overseas funding costs have obviously decreased, due to the lowering of dollar interest rates. CPs are being issued without any difficulties. And in relation to bond issues, the markets' and the investors' appetite continues to be hesitant and the present stance concerning bond issues overseas is one of wait and see.

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

Thank you. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). And we are showing no questions at this time.

Okay, then. We'll take that as a positive sign. Obviously, if anyone does have any questions or any questions come to mind at a later date, obviously feel free to contact myself and Mr. Urata at any time. And obviously, we look forward to seeing you here in Japan. I'm presuming (inaudible) attendees for the Merrill conference, so hoping some people will be attending there. We'll be seeing you in late September or mid September. Otherwise, thank you for your time today and, well, as I say, get in touch if you have any other questions.

Thank you very much.

Excuse me, Nigel.

Yes. Hello, Angela.

Hi. We did have a couple of parties queue up for questions. Did you want to go ahead and take those?

Okay, yes. Right, yes. So there were questions?

Well, right after you started talking, after I said there were no more, a couple came in. So, let me go ahead. The first one is Miles Wixon. Go ahead, Miles. Your line is open.

Hi. Can you talk about the full year outlook and why you didn't change that, and your outlook for credit costs in particular?

Yes. As I said in the beginning, just since the last call we have seen our environment should be continuously downwards and at that time we changed our strategy. And since then, we have not changed our strategy, which is resulting in our past quarter's performance. So, at this moment, we don't have any idea to change our forecast.

Of course, for example, our Corporate Finance segment, at the beginning of this year we estimated that those segments will keep the similar level of the profits compared with the last fiscal year, but maybe the profit level will be a little bit down. But on the other hand, for example, in the Real Estate segment, judging from the current situation, we believe that those segments will be able to achieve a similar level of profit compared with the last fiscal year, although we said at the beginning of this year that segment will be a little bit lower than the previous year. So, again, in the total, right now we don't have an idea to change our forecast.

How about credit costs?

Regarding the credit costs, at the beginning of this year we said that, in total, compared with the last fiscal year, credit costs will be a little bit increased, and right now almost in the line of that forecast.

And do you have a lot of back-loaded earnings towards the second half of the year, in terms of real estate?

Actually, at this moment, we don't say clearly when, but for the Real Estate development business is in the similar way with the previous years. On a quarterly basis, it will show some volatile results, but at the end the total profit will be almost the same level compared with the last fiscal year.

And one more question, if I might. Hypothetically, if you were to pursue a merger with a primarily retail-based company, would you be willing to do that if it were only revenue synergy based and not cost synergy based?

Regarding the news from the Nikkei, today I also said to the journalists in the daytime there are no real stories about that. Many analysts gave us very positive comments. But I'm sorry; we are not right now in a position to think about that kind of M&A.

Why not?

Because we have had no real deal right now.

Thank you very much.

Thank you.

And our last question is from [Mark Burrell]. Go ahead, Mark. Your line is open.

Good evening. Thanks very much for your time. Just given Orix's role in the domestic economy, I was wondering if you can comment on your perspective of SMEs right now and what the outlook looks like for the second half, for the rest of the first half and then the second half as well.

Yes. Actually, it has become very clear that the Japanese economy should slow down and especially in the real estate business areas in the SME field. Those SMEs are facing difficulties in [proceeding with] their businesses right now. So, in that sense, most probably not only for this fiscal year but also for the next year, Japanese economy will not recover, we think. So, in that sense, Japanese SME market will continuously be facing the difficulties for the time being.

Thank you. And in terms of the increase in the ratio of provisions that's on slide 11, where do you see these peaking out for you?

Actually, as can be seen in the slide, our provision ratio in the past experienced higher than the 1.0%. And most probably, for this fiscal year, that ratio will be almost, say, 1.0% or something like that.

So you don't see a return to the 1.08% level that we saw back in March of 2004?

Actually, maybe this year the provision ratio may reach the 1.08%, but most probably we don't have, say, 1.5% or something like that. We do not expect such kind of the high ratio.

I understand. Thank you very much for your time.

Thank you very much.

Okay. And now we have no further questions.

Okay. Well, once again, thank you for your time this evening and the questions, and we look forward to seeing you here in Tokyo or elsewhere in Europe or America again. Thank you very much.

Thank you very much.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.