ORIX Corp (IX) 2009 Q4 法說會逐字稿

Good morning, good afternoon, and good evening, and thank you all for holding. At this time, I'd like to inform all parties that your lines will be on a listen-only mode until the question and answer segment of today's call. (Operator Instructions).

I would now like to turn the call over to Mr. Melchior. Sir, you may begin.

Okay, good evening to you all. I would like to start off by welcoming you to Orix's end of year results conference call. My name is Gregory Melchior, and I'm joined here this evening by Mr. Yanase, President and Chief Operating Officer, 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. Yanase will provide a brief overview of the Japanese earning results presentation made earlier today, and then we'll open up the lines to Q&A.

I presume that everyone has in front of them the document entitled the earnings presentation 090331E that was posted on the IR section of the website at 6:00 pm this evening here in Tokyo. Therefore, without further ado, I'd like to hand over the call to Mr. Yanase; Yanase san?

Okay. Thank you all. Excuse for my voice. I'm not taking swine flu, but my voice is a bit higher today. So thank you anyway, again, for attending this call this evening, and if I could ask you to turn to slide three.

During this evening's call, I'd like to give an overview of fiscal 2009, on the backdrop of what I have been saying since the beginning of last year. Looking back over the year, operating environment certainly took a turn for the worse, with another half being particularly tough, which will come as no surprise to you.

In a nutshell, the fiscal year was colored by numerous phenomena; the worsening financial crisis after the Lehman Brothers bankruptcy filing, the severe credit crunch, and the deteriorating [real] economy, forcing the Group as a whole to pull together to overcome one by one the individual challenges it faced.

As a result, in spite of 87% decline in profits being the greatest victim of the overriding conditions, JPY22 billion in profit was achieved, with the US operations even managing to record profitability. I believe a great deal of this achievement is thanks to the diligence and (inaudible) executed by all Group's companies and the individual divisions.

However, the actions taken to enhance the Group's financial positioning and stability, in addition to strengthen the real estate mismanagement are just two of the many positives that have arisen from within this turmoil. I feel the Group is well-positioned to continue reversing the present operating environment and, at the same time, to evolving economic condition.

Now, slide three; total revenues declined 7% to JPY1.0758 trillion. This was due to [7%] reduction in asset level and JPY35.4 billion decline on gains on the sales of investment securities. For fiscal '10, we are forecasting an 11% decline to JPY960 billion, due to a reduction in asset levels and the decline in yield on the real estate portfolio.

Total expenses increased 6% to JPY1.0211 trillion. The main reasons behind the increase were JPY43.8 billion increase in provisions and JPY10.3 billion increase in write-downs on investment securities.

Operating income declined 10% to JPY547 billion. Income before income taxes, excluding discontinued operations, showed a 90% decline to JPY29.9 billion. We are forecasting JPY50 billion for fiscal '10.

Net income declined 87% to JPY21.9 billion. Overseas revenues increased JPY11 billion, thanks to changes in the tax code. We are forecasting a 37% increase to JPY30 billion for this fiscal year. Asset levels were reduced by JPY625 billion in fiscal '09, and we plan to -- further reduction of JPY620 billion in fiscal '10.

Slide four; as can be seen from slide four and all six segments saw a significant decline in profits for the fiscal year. Unfortunately, the Corporate Financial Services and the Investment Banking segment recorded a loss. The main reason behind the loss in the Corporate Finance Services segment was due to increased provisions on loans to the earlier stage companies, and for the Investment Banking segment write-downs on our shareholdings in DAIKYO and Fuji Marine and losses from both companies to our operating results. [We have seen], well, it is hard to manage the declines in market-related asset value.

Losses from DAIKYO and the Fuji Fire and Marine reached JPY61.5 billion, accounting for the majority of the decline in profit. The largest (inaudible) being sales for the coming fiscal year is an increase in provisions for the Corporate Financial Services and the Investment Banking segment. For this reason, we are expecting these two segments to also record a loss at the end of fiscal '10.

Slide six -- sorry, on slide five, excuse me, you can once again see the corporate strategies and policies announced at the third quarter in February, and which are currently being executed. There will be no change in this plan for the coming year, and before we move on to discussing the individual segments, I'd like just to take a moment to discuss this.

Slide six; after Lehman bankruptcy filing, a sudden disruption in CP market and bond market, credit crunch, and [revision] of the ABS and securitization market caused management's focus to swiftly shift to prioritizing the stability and liquidity over any other issue. The result being that as of end of fiscal '09, the debt equity ratio was below 4.5 times; CP level stood at JPY226 billion; borrowing from financial institutions declined by only JPY104 billion; and our dependence on bank debt rose from 58% to 62%.

In addition, having issued JPY150 billion of corporate bonds -- the convertible bond, sorry, in December time, the overall bond balance rose by JPY15 billion year-on-year, and with great care being taken in ABS issuance only a decline of JPY15 billion was end result.

Liquidity was also greatly assisted by an increase of JPY197 billion in deposits in Western banking operations.

Finally, thanks to reducing our reliance on CP, the long-term debt ratio increased to its highest level ever. That is 85%. And at the end of March, our cash balance stood at JPY460 billion.

Slide seven; thanks to the implementation of this policy, such as reducing asset levels and interest bearing debt, there are no issues with liquidity at this time. The intention is to continue in such a manner during this fiscal year. However, we will be paying particular attention to see whether there is any turn around in the markets after June time. And, if judged appropriate, we will take advantage of any opportunity to issue long-term debt safety or even equity.

In preparation for this I have established a Treasury and Accounting headquarters starting from June 1, incorporating the Corporate Planning Office, Treasury department, Accounting department and IR group.

Slide 8 gave an overview of total assets by segments. In line with global trend, Orix has reduced its asset level and will continue to during the coming fiscal year. The [disruption] being witnessed in city and bond markets has certainly added to the pressure faced. Last year total assets were reduced by JPY625 million and we will be looking to reduce the [amount] by a similar amount during fiscal '10.

As can be seen from the table, Corporate Financial Service segments assets declined by JPY410 billion, Investment Banking by JPY380 billion and Overseas by JPY88 billion. The reduction in the assets was chiefly achieved in the area of Real Estate, helping not only to alleviate funding pressures, but also assisting in limiting real estate related risk.

Moving on slide 9 and the policy of enhancing the monitoring of these companies invested in; raising the corporate value of these three companies will be the main focus of our efforts. For DAIKYO and the Fuji Marine alone, a loss of JPY61.5 billion was recorded.

However, due to a recent turn around in the share prices, the situation has improved as of late, especially for DAIKYO due to a JPY10 billion capital injection and the margin with Orix Facilities. We are projecting an upswing in total revenue thanks to an increase in condominium management fee based revenues.

Slide 10 shows the Group Real Estate exposure and portfolio breakdown by segment. This was disclosed at the third quarter and so I am sure that you all are aware of the make up. However, the Real Estate operations span five different areas. And, although there are links between elements and the individual performances, it is fair to say that there is a clear divide between them all.

During fiscal '09 specific efforts were made to manage and limit risk in high risk areas, such as existing insolvent loans and non-recourse loans through focusing on reducing asset levels and increasing the pace of collections. The result was JPY200 billion asset reduction in the area in the Corporate Financial Services segment and a JPY150 billion reduction in the Investment Banking segment. For the coming year we will continue to be proactive in this area and look to further reduce asset levels by further JPY130 billion respectively.

Slide 11; and finally, on the discussion of corporate strategies, I would just like to mention the recent announcement alliance between Orix Credit and SMBC, which is in line with our present policy of strengthening the corporate structure and operationally aligned.

Orix Credit business model is quite unique in the arena of consumer finance. And, in comparison with its peers, operating levels are extremely stable. However, with increasing competition in the industry and the new regulations being enforced, in order to achieve the goal of becoming the number one player in the field in Japan, it was judged that collaboration with one of the major bank groups was the most suitable option available.

I think that three points on the slide nicely summarize [benefits] of tie up and I have mentioned on previous occasions pursuing business alliances and operational collaborations with a wide cross spectrum of financial institutions moving forward will play a vital role in helping Orix target its next stage of growth.

Since we held a press conference here in Tokyo on Tuesday of last week -- I'm sorry Thursday of last week, I thought it is to be timely to mention it this evening. And sincerely hope that this reveals our commitment to the direction chosen.

Needless to say, the positive coming from a close working relationship between Orix Credit and [SMFG] are various and numerous; for instance, sharing funding thereby reducing Orix interest bearing debt.

Okay, thank you Mr. Yanase. Now moving on to the individual segment performance. I will walk you through the segments, if you can turn to slide 12. The Corporate Financial Services segment assets declined by JPY400 billion for the year resulting from stringent control and swift collection of installment loans to real estate companies. For the fiscal year ahead, this will continue to be the focus, targeting a further JPY280 billion reduction.

Segment revenues recorded were JPY137.7 billion, only a 1.6% decline. Compared to the JPY400 billion reduction in assets, the reason for such a small difference is due, firstly, to the fact that the majority of non performing loans were concentrated in the latter half of the fiscal year. And, secondly, due to the unpaid interest payment period being so short on those companies classified as black ink bankruptcies.

Unfortunately, the segment recorded an overall loss of JPY10.5 billion. The main reason for this being provisions on loans to real estate companies increasing by JPY44 billion.

There was a sharp increase in what's called black ink bankruptcies, due to banks refusing to re finance. One reason among many, and although I feel that, on one level we should have seen a peak of the occurrence of new NPLs for the coming fiscal year, we have set aside JPY35 billion in provisions to cover secondary losses such as under valued collateral.

During the fiscal year, Mr. Yanase realigned the division structure of the segments, merging the three head regional divisions into one headquarters. He also established an Eastern Japan unit, Western Japan unit and Specialist Business unit in addition to setting up a specialist Real Estate focused Loan Recovery unit. He has specifically instructed this specialist business unit to pursue opportunities in the environmental business related sector.

Finally, on the Corporate Financial Services segment, we shifted general elements of the corporate loan function over to Orix Trust and Banking Corporation to take full advantage of its expanding deposit base.

Moving on to slide 13, segment assets and revenues from the Maintenance Leasing segment were once again stable, and this is expected to continue for the coming year and the year after. The main reasons behind the JPY11.6 billion drop in profits as outlined on the top left of the slide, were increases in depreciation expenses and maintenance service costs.

Both Orix Auto and Rentec hold number one -- the number one spot in their respective industry. And although we're forecasting stable business development thanks to both companies high quality value added services, due to the tough operating environment, we forecast profit levels to be similar to the fiscal year just past.

Okay, moving on to slide 14. Slides 14, 15 and 16 give an overview of the Real Estate segment. The segment recorded a profit of JPY50.5 billion. The latter half of the fiscal year saw a sharp drop off in the number of transactions being made, resulting in declining gains on sales of real estate, which greatly impacted the final result.

Results were also affected by a freezing of new projects and write downs in the condominium operations. For the fiscal year ahead, we are projecting a profit of JPY20 billion. Continuing deterioration in the sector, declining trend in yields on rental properties in the portfolio, increased provisions to cover write downs and low levels of asset sales are behind the forecasted decline.

If you can please look at slide 15 regarding our rental properties. Keeping in mind that recently we have started to shift towards a model of holding onto properties for the long-term, if judged appropriate, we will be making all efforts to increase income gains on the portfolio through improving occupancy rates via enhanced management operations.

The policy will certainly not be one of one looking to push through sales. However, using exit strategies capitalizing on group wide expertise, we will carefully monitor market conditions and execute sales where the pricing is right, while at the same time continue to pursue [asset] turnover.

Now on to slide 16; so finally, on the Real Estate segment, this is slide 16, the condominium operations. Due to foreseen increased severity in the operating environment, we ceased purchasing new land lots in the autumn of 2007 and decided to write-down assets earlier than industry peers, greatly assisting us in maintaining the soundness of inventory assets.

During fiscal '10, while keeping a close eye on construction cost trends and indications of recovery in the market, we will target operations that suitably match the overriding environment.

As for concrete plans, strengthen regional sales and joint developments, in alliance with DAIKYO, will be pursued, along with a further reduction of JPY30 billion in assets and maintenance of inventory levels below 200 units.

Moving on to slide 17 and the Investment Banking segment; segment revenues declined by JPY33 billion owing to two main reasons; one, losses recorded for DAIKYO and Fuji Fire and Marine, due to deterioration in both companies operating results. And two, a JPY380 billion reduction in NRL asset levels as a result of prioritizing recovery of loans.

Losses on investments in PE funds and alternative investments in addition to write-downs on our shareholdings in DAIKYO and Fuji Fire and Marine, resulted in the segment recording an overall loss of JPY63.4 billion for the year.

As for the fiscal year ahead, although we believe losses recorded last year from market related write-downs to have been temporary, due to the present state of the real estate sector and projected increases in provisions on non-recourse loans, we are forecasting a loss of JPY15 billion for the year.

Once again, as mentioned earlier, we will be further fortifying our monitoring activities of companies invested in while, at the same time, look to reduce non-recourse loan asset levels further and increase overall net value.

Now turning to slide 18, I'd just like to emphasize a few points on the Group's Real Estate related businesses. The first is that, from a defensive view point, the Group is fully capable of dealing with the current economic downturn. At present, close knit cooperation is being executed Group-wide, particularly in the areas of collection and sales. The second is that, from an offensive viewpoint, because the current conditions are as they are, the Group is in an enviable position to be able to take advantage of opportunities as and when they arrive.

I'm hard pushed to name another company with the same depth and breadth of capabilities; our real estate related finance, securitization know-how, servicing and asset managing operations are reached, in addition to real estate development and sales expertise. I believe that Orix possesses a unique market presence, helped further by the rapidly declining number of foreign players and developers in the market place. On this background, Orix would like to announce that we do expect this fiscal year to give -- we do expect that this fiscal year will give rise to opportunity from both a defensive and offensive standpoint.

Now on to slide 19; Retail segment profits declined by JPY18 billion due to the following reasons. Declines in operating income and increases in provisions in the life insurance business, increases in provisions in the Trust and Banking operations, and declines in commission based revenues from the Securities business. However, we are projecting a JPY10 billion increase in profits for fiscal ten, due to increased operating income from the Life Insurance business.

Although an expansion of the Corporate Loan function with the Trust and Banking operations is projected to bear fruit in the long run, because of up front costs coming into play, it is unlikely that during the first year there will be any significant in profits, simply as a result of increased asset level. The expectation is for the new transactions executed under the present credit crunch to contribute to the segment's operating results next fiscal year, FY11.

Gains on the sale of a portion in Orix Credit and future revenue projections offset each other and, therefore, no impact is expected on profit moving forward.

Now, moving on to slide 20; the Overseas segment profit significantly declined to JPY20 billion for FY 09. Firstly, as a result of the absence of contributions after the sale of Asian equity method affiliate Korea Life Insurance; and secondly, increased market valuation losses on investment securities such as high yield bonds and CMBS in US.

Leasing operations in Asia provided stable revenues and the US operations achieved profitability thanks to fee based revenue contributions from Houlihan Lokey, stringent risk control and staff reduction. We will continue to manage the US operations with a cautious stance and borrowing any further losses on investment securities, forecast increase profits for the year.

As for the segment as a whole, we will maintain our doctrine of stability. So now, finally turning to slide 21, I'd like t hand it back over to Mr. Yanase.

Thank you, so slide 21; since fiscal 2003 we have expanded our balance sheet on the backdrop of economic recovery in Japan and a [global] booming economy. At the same time, we have carefully taken into consideration financial stability, improving our debt equity ratio and shareholders' equity ratio in tandem.

We have never managed the Company with tenfold (inaudible) level and nor have we ventured into the arena of intricate mechanisms, such as SIV.

As myself and the IR team have explained each quarter, is a terrible shock of August 2007. We have been closely observing the developments in global financial markets and the downturn in Japanese economy and implemented a shift in corporate management strategy from the beginning of last year to one that prioritizes soundness over growth and prudence in the Group's operations.

Since the Lehman bankruptcy filing, we have promptly taken further measures to counter the unprecedented crises and have made targeted effort to limit risk and minimize losses. Unfortunately, the fiscal year ended with an 87% decline in profit, stemmed from heavy losses recorded on uncontrollable market related assets. However, I believe that we have been successful in our effort to limit [risk].

This evening I have attempted to give an overview of the strategies we have implemented during the previous fiscal year and, also, measures to be implemented during the coming months of the year in response to the evolving economic crisis. Once fully implemented, this will complete our crisis management strategy.

I firmly believe that these actions will also position us to be able to take advantage of any growth opportunities arising from fiscal 2011 onwards. Therefore, I'd like to end this call on a positive note by asking for you to appreciate that our performance goals targeting recovery for the current fiscal year are moderate in nature.

Thank you for your time this evening and I will now be delighted to take any questions that you may ask. Thank you.

Thank you. (Operator Instructions). Our first question comes from Patrick Buchanan. Your line is open

Hi. I just have a question on -- inflows and NPLs were only JPY42 billion it looked like in Q4 versus 100 billion in Q3. Can you just talk about what caused the reduction in NPL formation despite the poor economy?

And then, the second question would be can you give us a sense of what you're seeing in NPL formation in Q1 thus far? Thanks.

Okay. The question was NPLs. If you'll gave me a moment to translate this into Japanese.

Let me try to answer in English. Okay. First of all, as I said, you see, we try to stop new loans to real estate developers since last April. And instead, we made tremendous efforts to collecting the loans over -- and securities on the existing loans. And understand, that's the main reason, you see.

So we have observed the highest -- perhaps the peak of the NPL has already been passed. But even this fiscal year we would prepare for additional losses arising from not new loans but from existing loans disposal and such.

Okay. Yes, the second part of that question was nonperforming loans for the first quarter of the current fiscal year.

No significant losses observed.

Okay. Yes we have not observed any significant losses yet.

Okay. So you would expect the increase in NPLs to be -- you would expect NPLs to not increase in Q1? Is that what you're saying?

Yes, that's correct.

Okay. Thank you.

We have no other questions at this time. (Operator Instructions). I have no other questions at this time.

Okay. Well, seeing as there's no further questions I would like to thank you on behalf of myself, Mr. Yanase and the Orix Group for listening to our conference call. And we look forward to speaking with you, whether it be during a trip to Tokyo or at some conferences in your corner of the world. Thank you and good morning, good evening and good night.

Thank you everyone.

Thank you everyone. Bye bye.

Thank you. That concludes today's conference. Thank you for your participation.