ORIX Corp (IX) 2009 Q3 法說會逐字稿

Good morning and afternoon, all sites. Welcome to the ORIX fiscal 2009 third quarter results conference call. For the duration of the presentation, all lines will be in listen-only mode. And now I'd like to hand over to Mr. Simpson. I will be standing by for the question-and-answer session. Over to you, sir.

Good evening, and welcome to ORIX' third quarter results conference call. I'm joined here this evening by Mr. Haruyuki Urata, Deputy President and CFO, and Mr. Tadao Tsuya, Corporate Senior Vice President and Head of the accounting department. During this evening's call, Mr. Urata will 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 presume that everyone has in front of them the document entitled EarningsPresentation081231E, that was posted on the IR section of the website at 6:00 pm this evening here in Tokyo.

Therefore, without further ado, I will hand over to Mr. Urata. Urata-san?

Thank you, Nigel. We find ourselves in very interesting times, to say the least, and I can only presume uncharted waters for us all. Some of you attending the call will be existing shareholders, others not, either way, many thanks for taking the time out of what I can only presume are extremely hectic schedules these days to attend, and I look forward to [fielding] any questions you may have later.

Therefore, if I could please ask you to turn to slide four. Due to the dramatic changes in the operating environment since the Lehman bankruptcy filing in September of last year, the operating conditions for the Group as a whole have become very challenging. With liquidity and credit in the Japanese capital market becoming scarce overnight, in addition to a continual roller coaster ride in the equity markets, restricted bank lending, a deterioration of results throughout the corporate world, and black-ink bankruptcies becoming commonplace, ORIX also has not been immune to the negative effects presently being witnessed here in Japan and around the world.

In response, we swiftly took action to realign the balance sheet, placing particular emphasis on reducing CP letters, commercial paper letters, and limiting our reliance on funding direct from the market. Proceeds and write-downs on investment securities as well as the provisions are experiencing an upwards trend and, as a result, there have been large declines in profit levels accordingly.

On slide five, major items from the income statement provide light on the consolidated results for the nine-months' period ending December 31, 2008, and also the third quarter, which unfortunately was the first quarterly loss recorded since the fourth quarter of fiscal 2003.

As can be seen, there are three main reasons for the decline in profit. Firstly, net income from DAIKYO and Fuji Fire and Marine equity measures up-to-date, recorded a decline of JPY55.9 billion, compared to the third quarter last year, and a total loss of JPY65.7 billion year-on-year at the end of December.

Secondly, losses and write-downs on investment securities, chiefly in the United States, were down JPY15.2 billion, compared to last year's third quarter, and down JPY31.8 billion year-on-year. And finally, as a result of our increase in provisions, mainly to [real estate] companies, [risk] costs were up JPY14.3 billion compared to the third quarter last year, and up JPY27.5 billion year-on-year, for the nine months ending December 31. Unfortunately, risk costs are predicted to rise further in the fourth quarter, thereby pushing the total for the fiscal year beyond the highest level seen to date in the Company's history.

As can be seen from slide six, the nine-month period ending December 31 that Corporate Financial Services and the Investment Banking segment recorded a net loss due to an increase in provisions and a recognition of losses from equity method affiliates respectively. However, all other segments still achieved profitability despite tough operating conditions.

Now moving on to individual segment performance. The Corporate Financial Services segment recorded a loss of JPY2.1 billion due to increases in provisions on loans to real estate companies and goodwill impairment raises the subsidiary of IRI, and the impairment of equity method affiliate [proceeds.]

A major focus of the segment continues to be a stringent [protection] of new loans, particularly to real estate companies, immunization of credit costs through revenues of all existing transactions, in addition to shifting efforts toward increasing the pace of recovery of loans. For the future, capitalizing on our Group-wide expertise and capabilities, we will look to promote a diverse array of fee-based advisory services particularly in the field of M&A and succession planning.

The Maintenance Leasing segment saw a 19% decline in profit to JPY21.9 billion, due to the impact of increased depreciation expenses and the increase in maintenance service costs. The segment maintains the highest competitive position in the industry, and we feel comfortable that profitability levels can be sustained moving forward. As the impact on the real economy becomes increasingly evident, cost-cutting trends are coming to the fore, and we believe that this will give rise to plentiful business opportunities for the segment to be able to take advantage of.

As for the Real Estate segment, recognition of write-downs on condominium projects under development and increases in cost of operating leases resulted in the segment recording a 13% decline in profits to JPY40.8 billion. The real estate market remains especially severe, making it difficult to project gains on sales of rental properties. This situation is expected to continue for the foreseeable future, and, as we put together our business plans for the next fiscal year, it is hard to know what sort of level of capital gains can be expected. Needless to say, we are continuing to downsize our condominium operations. We ceased purchasing new land in September 2007, and have stopped development altogether in March 2008, although the intention is to keep a watchful eye on consumer demand.

As mentioned earlier, the main reasons behind the losses in the Investment Banking segment has been recorded losses from equity method affiliates namely, DAIKYO and Fuji Fire and Marine, and also write-downs on investment securities. In addition, investment in private equity funds and alternative investments have suffered from turmoil in the markets, impacting the final results accordingly.

The main focus of operations at present is the heightened monitoring of non-recourse loans and investments made in outside corporations. We remain vigilant and cautious concerning both new and existing businesses, and although it is certainly a time to batten down the hatches, we maintain our positive stance concerning our [real estate related]asset investment opportunities that fulfill our criteria.

The Retail segment recorded a 45% decline in profit to JPY11.3 billion, for reasons stated on the slide. In light of the new business [environment] since the Lehman bankruptcy, expansion of the Trust and Banking operations is the major theme for the short to medium-term. We are looking to further increase deposit levels, while at the same time shift the corporate loan function of the Corporate Finance Services segment over to ORIX Trust and Banking.

In tandem, we will promote collaboration between the car loan businesses and the ORIX Trust and Banking to help expand the depth and the breadth of the respective businesses while the Life Insurance business will continue to focus on increasing sales of medical insurance policies and products, such as CURE. The brokerage business whilst obviously experiencing the difficulties under the present market conditions, will look to increase the efficiency through targeted expansion. The Retail segment will certainly play a pivotal role in the Group's future.

Profits in the Overseas segment declined mainly due to increases in write-downs on investment securities in the United States. Declines in net income from equity method affiliates and the decreases in gains on sale of ships and aircrafts within Asia, a final profit of JPY11.9 billion was reported, a 76% decline year-on-year.

And while we expect that US operations have shifted its emphasis to heightened monitoring of the [PE] collection loans, while in Asia the emphasis continues to be on the leasing operations within stable revenue stream. Once again, as we [as we stand] in the Investment Banking segment, in both regions, we remain open to investing in any [overseas] opportunities of [distressed] assets that appear on the market.

That finishes the overview of segment performance. However, as you will see from slide 13, we have unfortunately had to once again revise downward our projected net income for the fiscal year from JPY105 billion to JPY15 billion, this year being after tax profit for the reasons given. And slide 14 reveals how we are expecting this to be reflected on the P&L. Although for the fourth quarter we are projecting risk cost to be at similar levels to the third quarter, and further losses from equity methods affiliates, we still forecast that the Group can maintain profitability, both for the fiscal quarter -- final quarter and for the fiscal year as a whole.

Slide 15 outlines management policies that will take center stage for the immediate future. Needless to say, the policies and measures are founded upon the assumption that recovery in the financial and real asset market will take some time to transpire, and that recessionary pressures from the macroenvironment will continue to exert a downward pressure on the Group's operating environment.

First, turning over to the next slide, enhancing our financial positioning. On the prediction that dysfunction in the capital markets will continue for the time being, our primary source of funding is to come from banks. By the end of the fiscal 2009, I intend to reduce CP levels to somewhere in the region of JPY130 billion, thereby further increasing the long-term debt ratio and further minimizing our reliance on the short-term money markets. At the same time, the Group would be looking to increase ORIX Trust and Banking's deposit base. In consideration of the present business environment, I believe this conservative stance to be, as I'm sure all of you will agree, the best and the safest course of action at this juncture.

The second measure, enhanced monitoring of companies invested in is obviously necessary, considering that duration we are presently seeing not only share in the Japanese economy, but also in the international arena at large. Slide 17 gives you an outline of those measures already taken to support DAIKYO and Fuji Fire and Marine. However, in light of the recent write-downs and losses recorded, we intend to shift up a gear our monitoring efforts, so as to be able to swiftly assist and support both companies with the means most appropriate to their respective circumstances.

And finally, on the topic of measures to be taken, enhanced monitoring of real estate risk. The ORIX Group has approximately [JPY3.5 trillion] in real estate rated assets, effectively managing and controlling the down-side risks on such a portfolio is critical, but at the same time, the importance of positioning the Group to be able to take advantage of any eventual upswing in the sector cannot be overlooked. We believe striking the bar to be imperative regarding this time of change.

The portfolio and real estate operations are a diverse growth spectrum of both [debt-rated] and equity-rated interests, and the strength of all this real estate value chain lies in the market diversified capabilities. While appropriately controlling risks and taking all the necessary measures to limit losses, stable long-term revenue streams are targeted by firstly capitalizing on our expertise in property investment and the servicing operations, and secondly, by expanding fee-based revenues from the assets and property management services.

I believe the data on slide 19 to be fairly straightforward, and I leave you to analyze and digest the final data at your leisure. However, I think you'll agree that the portfolio mix is sufficiently diversified.

And finally, I'd just like to spend a moment thinking about fiscal 2010. As can be seen from the right-hand side of slide 20, we'll be targeting a pre-tax profit of JPY50 billion to JPY60 billion, this is a similar level of that of March 2003. However, in comparison, the financial footing of the Company is more robust than at that time. Through further reduction of asset levels and interest-bearing debt, we will look to raise shareholders' equity ratio and lower the debt to equity ratio. And although we are projecting similar levels of provisions next year as for this fiscal year, due to the decrease in write-downs and the implementation of our cost reduction programs, we believe this profit target to be achievable.

That ends our presentation part of the call and once again, I would like to take this opportunity to thank you all for taking the time to attend and for your continued support.

Now, if there are any questions, please feel free to fire away. Thank you very much.

Thank you. (Operator Instructions). There appears to be no questions at this point in time.

Okay, well thank you, Jane. I don't actually have a list of the participants here, but thank you all. And just to reiterate what Mr. Urata said, thank you for taking the time today to attend the call, no doubt we'll be seeing some of you in the near future here in Japan, or maybe wherever you're based in the world. And we look forward to seeing you sometime soon. But once again, thank you for taking the time to attend the call today.

Thank you very much.

Thank you.

This concludes today's ORIX fiscal 2009 third quarter results conference call. Thank you for using Verizon conferencing, please disconnect.