ORIX Corp (IX) 2009 Q2 法說會逐字稿

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to ORIX fiscal 2009 second quarter results conference call. For the duration of the presentation all lines will be placed on the listen-only mode. A question and answer section will follow the main presentation. Please follow the instruction given at that time if you would like to ask a question.

I would now like to hand you over to our moderator for today, Mr. Nigel Simpson. Mr. Simpson, you may begin.

Thank you, Rebecca. Good evening, everyone. This is Nigel Simpson. I would like to welcome you to ORIX's conference call to review our interim period results for fiscal 2009. I am joined here this evening my Mr. Yukio Yanase, President and COO, Mr. Haruyuki Urata, Deputy President, Head of the Office of the President, Mr. Tadao Tsuya, Executive Officer, the Accounting Department.

During this evening's call Mr. Yanase will provide a brief overview of the analysts' meeting held earlier today here in Tokyo, and then we will open up the lines to Q&A.

I presume that everyone has in front of them the document entitled, Earnings Presentation '08/'09 30E, that was posted on the IR Section of the website at 6pm this evening here in Tokyo.

The following live broadcast is copyrighted to ORIX. Statements made today may contain forward-looking information. While this information reflects management's current expectations or beliefs, you should not place undue reliance on such statements as our future results and business activities may be affected by a wide variety of factors that are out of our control.

You should read the forward-looking disclaimer on our earnings presentation as it contains additional important disclosures on this topic. You should also consult our reports filed with the SEC for any additional information, including risk factors specific to our business.

And with that, I will turn over the call to Mr. Yanase.

Hello everyone. My name is Yukio Yanase, the COO of the ORIX Corporation.

Today, I should like to express how the ORIX top management is dealing with the unprecedented national crisis and adjust our management and strategies for the new (inaudible) occurred in this environment.

We have had so many meetings to digest the essence of the crisis and (inaudible) the content of the crisis and inference to the people concerned, and in order to take appropriate actions among the ORIX Group.

So now we are having the, as I said, unprecedented worldwide financial crisis and, as slide explains, the crisis is coming to business structure change in Eastern Europe and America national universe and the crisis is now coming to Japanese market too.

So, our apologies, I have repeatedly expressed in IR meetings, this is the third IR meeting I have attended. We have shifted our management philosophy from profitability to rather a soundness, so prioritizing stability soundness over growth this last fiscal year. And at the same time we try to pursue attractive investment opportunities.

Let's go slide six. Under these circumstances risk management is quite important, so we have qualified risk management which have got four major points. One is we have placed a target of earnings further flat and even we have lowered that level. But, secondly, we have tried to monitor asset level and portfolio management. In fact, we subdue new transactions under tougher criteria and reviewed existing portfolio quite in detail.

The third point is the enforced ALM. We also adopted weekly enterprise risk management meetings among senior executives.

Now let's go to -- and take a look at our performance overview, page five. I'm sorry, page five. Please take a look at total revenue line. We have kept very consistent trend for total revenue which has reflected by ORIX's structure of very steady asset level and business model. And total asset remains at same level, although we have sharply decreased net income to a great deal.

And the shareholders' equity ratio remains 14%. And also this chart doesn't show, but we have got very conservative debt/equity ratio; it's about one to four.

Let's go to operating revenues, shown on page seven. Operating revenues maintain the level of JPY15 -- JPY550b for the interim period. Fundamental business platform are firm and diversified, and the core business of ORIX are customer-related business, 101 contract basis. These characters reflect the very stable operating revenues.

Let's go to page eight. This shows the yields on assets. Direct financing leases and installment loan yields, trending very steady. And also, if you go to the next page, it shows trend in funding costs. Funding costs are always very stable, even under very uncertain market conditions.

As a result, trends in interest rate spread remains very stable. But, as I just said, the -- there is some reasons we have got decreased net profit. One of the main causes is credit cost. As shown on page 11, credit costs increased, despite enhanced credit management.

So operating environment is particularly severe, with even profitable companies going bankrupt as a result of credit crunch, and liquidity difficulties in Japan especially. And the credit cost levels and ratio are highest they have been in recent years.

Slide 12. This slide shows market collapse resulted in losses on the investment securities, first quarter and second quarter, both terms. Losses recorded on the investment securities within the investment banking and overseas segments are one of the main reasons for the underperformance in Group's interim results.

Page 13, overview of segment profits. We have got six business segments and, unfortunately, all six segments recorded a decline in profits compared to the previous fiscal year. However, a healthy profitability maintained in spite of the changing environment. Taking the Overseas result, it doesn't show separately, but US Operation is profitable still.

Let's go back to the risk management; this is funding status on page 14. We have got very diverse funding sources. Borrowing from financial institutions; 230 financial institutions including mega-banks, regional banks and the insurance companies. This is a base.

We also got diversified funding resources from bonds, ABS and CP. And we always focus on long-term debt. We have got 90% domestic resources and 10% overseas dependence. And 70% of CP is direct issuance.

On page 15, this shows the funding status long-term debt against short-term debt. Long-term debt ratio is excess of 70% constantly. Intensive focus on increasing long-term debt ratio, especially during recent years.

Next page, 16, shows the fortified risk management. We have placed enterprise risk management meetings weekly, which enable us to observe any type of major risks occurring in ORIX Group. So this meeting has been held among senior executives. Weekly ERM meetings are held to detect potential risks in a timely fashion and, where necessary, a response rapidly are being executed Group-wide.

Now go to page 18; revised forecast. We have revised annual forecast for fiscal year downward, and announced on November 5. Here, again, you can see that our revenue remains almost same as previous forecasts or the previous year's results. Our net income decreased to 62% level.

So let's go back to page 17, which shows the breakdown of each segment forecast. Among six segments, Real Estate segment will meet the target but, except for that Real Estate business, the rest five segments won't reach the target. That makes almost 40% decrease against target.

And let's got to page 19. Even though with this result we try to compare our compatibility with possible peers, so at the end of June we try to pick up domestic bank's average and overseas banks, three, there are Citi, UBS and JP Morgan, three best banks, Goldman Sachs, Merrill Lynch.

At the end of June I understand the strong performance reached and made ORIX in healthy position. So with this competitive edge we can try to catch the investment opportunities which remains high side. So we can try to take chances being buy side for opportunities.

What kind of opportunity we have got? That show 20 -- page 20. We have analyzed the opportunities arising from fundamental restructuring of overseas financial institutions and difficulties in the domestic real estate market and credit crunch, especially in Japan.

And out of these opportunities, we could chase after potential opportunities like acquisition of high-quality assets, loans, equity, real estate. [Most property] in Japan are undervalued now and we may acquire new capabilities, not only in Japan but in Asian regions. So we also do not give up the enhanced Asian strategies of these long or mid-term objectives. So with our healthy situation we should like to try to take these opportunities for future growth.

This is a very rough and rapid explanation for my part. I should like to wait for your questions. Thank you.

Thank you.

Okay, we'll now open the lines up for Q&A, and please feel free to --

Thank you. We will now proceed to our question and answer section. For all participants, (operator instructions). Thank you.

Our first question is from the line of Camille Carlstrom, Putnam Investments. Please go ahead.

Yes, hi. Can you spend a little bit more time on the credit charges and give me a sense for are the charges broad based, are there particular segments, is it real estate related as such that your real estate exposure is actually hitting you not only in your real estate business but also on the credit cost side? I just need a little more color on the increase in credit costs and where you see it potentially going from here. Thanks.

Okay, let me see. You see, basically, the credit cost has been created from bonds to Real Estate business.

But if you take out the Real Estate business.

Yes, there is a series of bankruptcies in Japan. Even they have -- no recorded the profit. And what we have tried is we have examined the existing portfolio and tried to hold a meeting of the [owner's] borrowers and try to make up the collaterals or have asked cautionary payment such and such, even though the credit crunch and instances of bankruptcies have increased.

So we had to book the [reserves] to this extent. And so, as I said, we have subdued the new transaction on this line of business. And -- but I'm afraid that in the even the latter half of this fiscal year we have to perhaps book some resource to some similar extent as the former part of the year.

How comfortable are you -- how confident are you that second half won't have to be higher?

Mainly we have stopped new credit and we have examined and we have booked the reserves. Therefore, if we have to put additional loss -- no, there should be healthy or sort of -- yes, healthy companies at this moment.

Okay. Thank you.

Thank you. We continue to proceed our question and answer section. (Operator Instructions). Thank you once again for further questions. (Operator Instructions).

We have a follow-up question from the line of Camille Carlstrom. Please go ahead.

Hi, Operator, there's no other calls? Because if there are, then I will ask a question.

Please go ahead.

Okay. So can we talk about the Condo business and how concerned you are about inventories, given your long history in Real Estate? How long, or give me a sense of how long, it will take you to clear the inventories and how concerned you are about your inventories at this current time.

I think in the inventory of Condo, I think we have got roughly 200 [pieces]. And we have put up reserve for -- yes, we have depreciated -- no, okay. We have wrote down the existing portfolio already and we have stopped building the Condo. We just keep the land as it is. So, as far as the ORIX Real Estate business are concerned, I think we have prepared for -- not building new Condos. I think, first, we have to be patient a couple of years more.

Okay.

Maybe, at this moment, supply and demand is not matched; too much supply. But two years' time, supply and demand will meet reasonably.

And on your relationship with Daikyo with the new preference shares that you are going to be taking, what kind of IRR or ROE or ROA are you targeting now that you've had to put more money into the business? What are you thinking your return would be if you had to sell this investment once you put the new money in it?

That's very good question. But at this time this is emergency help for Daiyko. We understand that Daiyko is monoline business, so we try to stabilize the income stream and profitability of the company. So not only injecting the capital, we transfer or we actually sold our building maintenance company to Daiyko; that's the one thing. And another thing is we ask Daiyko to write down the existing portfolio and so to squeeze the operations. So they will recover gradually from next fiscal year. This is the worst year they will have.

So perhaps for the one-year term our investment is not very high, and we should be patient. As I said, we have to be patient for Condo business two years. After two years pass, Daiyko's name and sales capability will take some market share. They will recover. That's our philosophy -- idea.

Okay, thank you.

Thank you.

Thank you. Our next question is from the line of Marc Zimman, Highbridge Capital.

Yes, good evening. Can you hear me?

Yes, hello there.

Hello. I was curious. You have a couple of large long-term debt maturities upcoming in the next 12 months. Could you talk about what pre-funding you've potentially done to pre-fund those maturities?

Sorry, could you repeat the question again?

Yes, so if I look at the maturity schedule of your long-term debt that's in your annual report, there are a couple of large maturities coming in the next 12 to 18 months. And I'm curious, given the credit crisis, what you've done to pre-fund some of those larger maturities or if your intent is to fund those maturities with cash on the balance sheet or other short-term instruments.

Okay. Well, as far as this year is concerned, we have already issued the bond to renew the maturity. And from next fiscal year -- well, perhaps we have -- still we have to wait. I understand that under these circumstances in Japanese bond market only Toyota [mandate] issued; that's all. And so we have to wait for the opportunity. But, anyway -- and that is no serious situation at all.

Okay, thank you.

We have our next question from the line of Paul Heaton from Pyrford International.

Hi, thank you very much for the presentation. What I'd like to ask you about is a bit more about the Condos. You mentioned you had 200 Condos in inventory. What about Daiyko? How many Condos do they have in inventory which haven't been sold?

Let's see. At this moment, I haven't got the exact figure but, as I said, they have already wrote down unsold portion. And roughly, I'm not quite sure so --

We can get back to you on that if you need.

I think I should get back with the figures later.

Okay, that would be very kind of you. Now, just one other element I wanted to enquire about. You've acquired a company called Suginoi Resorts.

Suginoi, yes, hot springs, yes.

Where exactly are the hot springs in that case?

It's in Kyushu; a very famous hot springs.

Okay. And --

And we have received 0.5m visitors yearly and roughly 20% or 30% are from China, Korea, East Asian people.

Right. And you now own 100% of that company?

Yes.

Is that right?

Yes, we -- yes, we have 100%.

Okay, all right. Tell us a bit more about the funding issues generally. Do you expect that interest rates on your funding -- you've got plenty of long-term funding I see, that 70%. But, say in a year's time, do you think, based on current market situations, funding costs will rise or not?

As I said, long-term debt from long-term relation with the bank -- Japanese banks consist of 230 national institutions which has got long-term relationship.

Yes.

And so, as the chart shows, our funding cost has not risen dramatically, so some basis points. And [each] with the bond issuance is difficult, we ask the banks to send the money for the time being until the market will stabilize or recover.

I'm convinced that you will have no difficulty raising the money because of the factors you say, that you've got 200 separate funding sources. But what I'm really asking about is, is there an environment of rising interest rates, say, on some of your short-term funding? Is that showing signs of higher rates or not at all?

Yes, short-term rate is some increase, of course.

About how many basis points?

Less than five basis points or something like that.

Five basis points. Right, fair enough. That's good. That's excellent. It's presumably because you're a very large Company and that's very positive, actually.

Basically, you see (inaudible) money out of bank's pocket but due to the -- perhaps the stock market situation all the banks try to squeeze their balance sheet, but even though they have to choose the right company to lend money, like us.

Yes. Okay, good.

Thank you.

Thank you very much indeed.

Thank you. We continue to proceed our question and answer section. (Operator Instructions).

Thank you. There appears to be no further questions at this point in time. I pass the call back to you, Mr. Simpson.

Thank you, Rebecca. Thank you for taking the time to attend our conference call today. We obviously greatly appreciate your presence here and, obviously, your continued support.

If you have any further questions, obviously feel free to contact myself or any of the other IR team members at any time.

And obviously we look forward to keeping in touch and seeing you maybe sometime soon here in Japan. Thanks very much.

Thank you. That concludes today's conference call. We would like to thank you all for your participation in this call. All lines may now disconnect. Thank you.