ORIX Corp (IX) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Orix Corporation's First Quarter Financial Results Conference Call. At this time, I would like to turn the call over to your moderator, Mr. [Gregory Milcher]. Please go ahead, sir.

Good evening. This is Gregory Milcher and I would like to welcome you to Orix's conference call to review our first quarter results for fiscal 2010. I'm joined here this evening by Mr. Haruyuki Urata, Deputy President and CFO, and Mr. Takao Kato, Deputy Head of the Corporate Planning and Financial Control Headquarters. During this evening's call, Mr. Urata will discuss the first quarter results and then, we'll open up the lines for Q&A.

I presume that everyone has in front of them the document entitled Earnings Presentation 090630E that was posted on the IR section of the website 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 activity may be affected by a wide variety of factors that are out of our control.

You should read the forward-looking disclaimer in 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. Also, please note that net income used in this presentation is the same as quarterly net income attributable to Orix, referred to in the financial statement first quarter results June 30, 2009.

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

Thank you, Greg. Good evening, everyone. This is Urata, Deputy President and CFO of Orix Corporation. If I can ask you to turn to slide three. Today, I would like to first explain how we have made progress in the first quarter in terms of revenue, finance, and risk management. First, net income was JPY7.6 billion, 25% of the of the JPY30 billion forecasted for 2010 was achieved.

Number two, we are planning to reduce interest-bearing liabilities by JPY800 billion in fiscal year '10. In the first quarter, successful progress has been made with about JPY200 billion reduction. The debt to equity ratio decreased to 4.3 times at the end of June from 4.5 times at the end of the last fiscal year. The ratio further decreased to 4.0 times due to the excellent capital base after the JPY83.4 billion public offering in July.

Three, we reduced our total assets by approximately JPY230 billion, mainly in the corporate financial services, investment banking, and overseas segments. This reduction is 37% of the JPY620 billion for this fiscal year. Four, provisions were JPY12.4 billion, which is 16% of the JPY78 billion forecasted for fiscal year 10. We are past the peak of new occurrences of non-performing loans in the corporate financial service segment. However, we still have to monitor that condition closely.

Five, real estate related assets were reduced by JPY60.8 billion, compared to the end of last fiscal year. We are gradually shifting away from financing other companies and moving towards businesses where we can manage our own revenues and risks. Six, joint corporations filing for protection under the Corporate Rehabilitation Law resulted in loss of approximately JPY10 billion. Seventh, also investment securities, while the financial and the capital markets show signs of recovery, gains on investment securities were recorded mainly in the US and Japan. As a result, both realized and unrealized gains increased.

Please turn to slide four. Moving on to operating revenues and net income. Operating revenues decreased compared to the same period of the previous fiscal year. However, gains on investment securities which recorded a loss in all four quarter of fiscal year '09 returned to profitability. Operating revenue was JPY239 billion, which is 25% of the JPY960 billion forecasted for this fiscal year.

From an expense standpoint, provisions and write-downs of securities were up compared to the same period of the previous year, but they decreased compared to the previous three quarters of fiscal year '09. 25% of the fiscal year 10 forecast for both income before income taxes and net income has been successfully achieved.

Please turn to slide five for an overview of segment performance. Five out of six segments recorded profit. The investment banking segment recorded loss as a result of a joint corporation filing. Revenue was down in the corporate financial services segment due to a decreased asset balance resulting from stringent selection of new transactions and enhanced collections. Projects were recorded due to a decrease in provision, although a loss is expected for the fiscal year.

Segment profit of the maintenance leasing segment increased overall due to a decrease in costs. This segment has seen stable profit each fiscal year. In the real estate segment, no large gains on the sale of real estate were recorded in the first quarter as initially planned. Segment profits were JPY300 million. The real estate refinance business in the investment banking segment has seen a decline in both revenues and profit due to a reduction in the balance of assets. Segment profits were negative as a result of the loss from joint corporation filing again.

The retail segment had a solid start thanks to the recovery of operating income from the life insurance businesses. The overseas business segment recorded JPY11.3 billion in profit, with gains on sales of subsidiary affiliates resulting from the IPO of our company in Asia, in which we had an equity stake as well as gains from investment securities in the United States.

Please turn to slide six. This slide gives you an overview of our funding. The debt to equity ratio decreased from 4.5 times at the end of the last fiscal year to 4.3times as of end of June. Thanks to the capital increase in July which was the first major step to conclude monumental forecast on stability, we have improved our leverage further fortifying our financial stability.

Despite -- deposits at Orix Trust Banking have successfully increased to about JPY700 billion, as individuals are starting to shift back to deposits. A reduction of about JPY160 billion for interest-bearing debt has been achieved compared to the end of last fiscal year. This comes to the 26% of the fiscal year 10 forecast. We have also maintained a level of about JPY400 billion in cash on hand in order to maintain such strong stability.

Please turn to slide seven. Here, you can see that our funding costs stably trending. Please turn to the next slide. In the first quarter, total assets decreased by approximately JPY230 billion in three months, mainly consisting of loans in three segments -- the corporate financial services segment decreased by JPY100 billion, the investment banking segment decreased by JPY35 billion, the overseas business segment decreased by JPY40 billion.

Retail segment assets increased by about JPY40 billion, mainly in the trust and banking and life insurance businesses. Our financial stability has further improved with a capital increase, but we will continue our policy of reducing assets and improving leverage.

Please turn to slide nine. Overall, credit cost or our provisions decreased compared to the first quarter of last fiscal year and we are above the peak of new occurrences of non-performing loans related with companies. JPY12.4 billion in provisions were recognized in this quarter, 16% of the JPY78 billion forecasted for this fiscal year.

Loans, individually evaluated for impairments, slightly decreased compared to the fourth quarter of the previous fiscal year. However, secondary losses from revaluation and sales acquired properties are possible and we are not optimistic, as real estate prices show no signs of bottoming out.

Moving on to slide 10, the next slide shows -- the next two slides show an overview of the real estate related assets of our group. There is a wide range of risk profiles which are divided into debt-related assets and held properties. With debt-related assets, we provide financing for real estate related businesses. With held properties, we manage our own revenues and risks.

Slide 10 shows debt-related assets. From the previous fiscal year, we are focused on collections of installment loans to real estate related companies and non-recourse loans. As a result, we have made a JPY113.8 billion reduction of debt-related assets. 36% of the amount forecasted for fiscal year 10 has been achieved.

We have acquired some non-recourse loans prioritized real estate in order to maximize collections, which can be seen in the rental property category on the following slide. Please turn to slide 11. This slide shows a breakdown of held properties. The properties are mainly rental properties, developed condominiums, minor facilities, and rental properties we acquire mainly in the process of collecting non-recourse loans.

Please turn to slide 12. This slide shows details of the three companies we have invested in. The performance of Daikyo and Fuji Fire and Marine are expected to recover in fiscal 2010. As the stock prices have remained strong, the possibility of recording a further write-down is low. Management will continue oversight of these two companies in order to enhance their corporate value.

Please turn to slide 13. This slide shows the breakdown of our investment in securities portfolio. Both realized gains for trading securities and unrealized gains for available-for-sale securities were recorded as the financial and capital markets showed signs of recovery. A significant increase in unrealized gains of equity securities was mainly due to improved annualized gains from outside the bank.

Please turn to slide 14 for further segment information. This slide outlines our corporate financial services segment performance. As a result of our restriction press on new impairment loans to real estate related companies, we are taking to increase priotary requirements and corporate financing assistant through government programs. The segment recorded profit of JPY1.9 billion for this fiscal year, due to limiting the amount of provisions.

Please turn to slide 15. Here, I would like to explain about asset quality and credit cost in the corporate financial services segment. Both new occurrence and balance of loans individually evaluated for impairment are declining since its peak in the third quarter of the fiscal year ended March 2007 -- 2009. On the other hand, the balance of the impaired loans requiring valuation allowance and the balance of valuation allowance increased compared to the end of the previous fiscal year.

This was chiefly due to a decrease in valuable [credit cost] for investing loans individually evaluated for impairment, resulting from a decrease in rental real estate prices and the resulting need for further provisions. As a result, provisions decreased in this country compared to the fourth quarter of fiscal year 2009. We will continue to enhance collections going forward.

Please turn to slide 16 for the maintenance lease impairments. The severe operating impairment has continued from the previous fiscal year. However, relatively stable revenues have been maintained by capitalizing on industry-gaining market share and by providing high value-added services.

Please turn to slide 17 for the real estate segment. Segment profit was JPY300 million due to the absence of gains on sales of major rental properties and the decrease in profit from the condominium operation. We forecasted no gains on sales of rental properties in the first quarter and the performance was in line with the forecast.

Please turn to slide 18 for the performance of rental properties. The NOI yield of rental properties was 5.7% at the end of June, the same level as the end of the March. We will continue to focus on improving occupancy rates of rental properties and securing stable revenues under the assumption that the real estate market will remain sluggish for the foreseeable future. On the other hand, the market for small properties has started to see an increase in sales activity, mainly by individual investors.

Please turn to slide 19 for condos and operating properties. As for the condominium development businesses, while the steady operating environment continues, we have taken measures ahead of other companies in the industry to maintain the soundness of our assets while holding the purchases of new land and recording write-downs of our inventories. During this fiscal year, we will control the supply for condominiums by closely monitoring the timing of a decline in construction costs as well as recovery of the market. The number of completed inventory decreased successfully to 84 units as of the end of June 2009.

Please turn to slide 20 to move on to the investment banking segment. The segment recorded a loss of JPY10.2 billion. We expect one-time losses resulting from write-downs of marketable assets will be needed in the future. However, concerning the current real estate market condition, we still need to keep a close watch on the condition of our non-recourse loans. We will keep focusing on asset reduction through accelerating collections, enhancing write-downs, develop or improve response rates over the acquired real estate further by capitalizing on the expected [on the ground].

Please turn to slide 21 for non-recourse loans and specified bonds. This slide shows real estate prices for non-recourse loans by type and location, as well as redemption schedule. Over 80% of real estate collateral is located in three main metropolitan areas, centered on the 23 wards and Tokyo. As far as diversifying types, bearing from office buildings, residential, commercial facilities, hotels, tourist facilities.

Please turn to slide 22. The profits of senior and mezzanine loans are 74% and 26%, respectively. Of the mezzanine portions, there are some cases where Orix has also taken a senior portion. Taking that into consideration, the total for senior portion becomes 84%. The development non-recourse loan total is 14% and non-development non-resource loans is 86%. Location of development non-recourse loan is limited to the major five Tokyo wards, Osaka and Nagoya. Mezzanine development non-recourse loans consist of five projects. We are currently closely monitoring the progress of only one of the five projects.

Please turn to slide 23 for the rental properties. This slide shows the rental properties of the investment banking segment. The properties were mainly reported from non-recourse loans. Of the JPY112.6 billion balance as of June 30, constructions of one-third have just been completed. The NOI of all properties, including this one-third, is 3.1%. We will promote sales of properties while improving occupancy rates and securing stable revenues. As two-thirds of the properties are located in the 23 Tokyo wards, there is not much concern.

Please turn to slide 24 for the retail segment. In the trust and banking agencies, revenues increased in line with the increased income withdrawn but profits remained flat year-on-year, as a result of an increase in SG&A expenses due to business expansion. Segment profits in total were JPY5.2 billion in the first quarter. Despite 29% decline year-on-year, profits recovered substantially from the first quarter of the previous fiscal year, mainly contributed by life insurance agencies.

Please turn to slide 25 for the overseas business segment. Gains on investment securities were recorded as a result of recovery in the equity and bond market in the United States. In Asia, the Preferred Investment business recorded a gain resulting from an IPO of a company in which Orix has an equity stake which contributed to segment profit. As a result, the segment has achieved profit of JPY11.3 billion for this quarter, which was a significant increase compared to any of the quarters of the previous fiscal year.

Please turn to slide 26. This slide provides an overview of assets and performance in the United States. In the US, profits were recorded despite the difficult operating environment. As I mentioned before, JPY3.3 billion of gains from higher bonds and stock investment were recorded in line with the recovery of financial and capital markets.

As for CMBS and RMBS, unrealized losses from the CMBS portfolio increased. Going forward, we will continue to enhance monitoring of our CMBS portfolio. There is still uncertainty in the economy of the United States. In fact, the deposit rate is increasing significantly in the US market. As impaired loans and provisions in the US as well are increasing, we will keep a close eye on the situation to maintain asset quality.

Please turn to slide 27. For this fiscal year, we will continue our basic policy since the previous fiscal year to enhance the soundness of operations, thereby adapting to the global economic slowdown and credit crunch, and engage in consolidating the corporate framework and realignment of operations. We had a very good start this first quarter, reducing the interest-bearing debt by JPY200 billion and JPY230 billion of total assets, including a JPY60 billion risk-weighted asset, compared to the end of the previous fiscal year.

In addition, we increased capital by a public offering last month, the first time in 80 years and the first step to conclude management forecast on dealing with the financial crisis. Thanks to the understanding of those concerned, we successfully completed the public offering and received a payment of JPY83.4 billion on July 21st. The debt to equity ratio decreased from 4.5 times in the end of that fiscal year to 4.0 times after the capital increase.

With the capital increase, we succeeded in improving the leverage as well as farther clenching our financial stability. While we expect serious economic environment to continue, we aim to achieve further stability and growth of the corporate space as we have told the shareholders, rating agencies, investors, creditors, and the financial institutions.

This concludes the presentation portion of the call, and now both myself and Mr. Kato will be happy to answer any questions that you may have.

Okay, and with that, we would like to open up the line to Q&A if you have any questions.

Thank you. (Operator Instructions).

We'll now pause for a moment to assemble the roster. Our first question today comes from Camille Carlstrom with Putnam Investments.

Good evening.

Good evening.

Quick question for you on the non-recourse loans. My first question is the delinquency status, are all these loans being paid at least on the interest side or is there some delinquency? And then secondly, what are the plans in terms of -- or how flexible you are being on either extending these loans and/or just calling them and forcing the sale of the assets underneath? And if you are planning on doing more extensions, would you switch them over to the Orix Trust Bank or would they stay in your investment bank?

Okay, the first question on the delinquency, could you explain which delinquencies you're looking at?

No, I'm asking the question, so in your non-recourse loan book, what is the delinquency or the NPL ratio or the delinquency status of the non-recourse book?

Okay, of the whole portfolio?

Yes.

Okay, thank you. Please hold on just a little more, Camille.

No, I'm sorry, thanks.

Okay, thank you for waiting, Camille.

Thank you.

Unfortunately, we don't have any numbers on hand for the total delinquency rate of the non-recourse loan portfolio. However, we do have numbers for the amount of loans that are individually evaluated for impairment.

Okay.

If you'd like to hear that, we'd have to happy to --

Yes, sure.

Okay, hold on one moment, please.

Sorry for keeping you waiting here. Out of the non-recourse loans outstanding, it was JPY436 billion at the end of June, out of them, roughly speaking, JPY100 billion are the non-performing loans.

Okay.

Okay, and the second part of your question was how flexible we are on extending these loans or --?

It certainly seems like a lot of the banks at least are rolling these loans over for either a one to three-year period, not to force the asset sale at a time when the market pretty much has no transactions, right? There's no transactions in real estate right now, so why push people? Most of the banks are rolling over these credits. And my question is, is that kind of the mindset as well of Orix if it's in decent NOI yield and they're servicing the debt that you would also extend the credit? And if you did do that, would you throw it into Orix Trust Bank or would you keep it in Orix Investment Bank?

As I said before, during the last fiscal year, we have a success rate for these investment loans when -- it comes at a much later date, but for this fiscal year it is very difficult -- has become very difficult for us to smoothly roll over, because under the current situation the price of real estate has dramatically decreased. On the maturity date, if we did provide -- are not willing to make additional investment.

So on maturity date, compared with the last fiscal year, roughly only 50% of the total amount can be collected. And lastly, half of the remaining cannot be successfully rolled over. So in that case, the only thing we can do is take over the property itself. We cannot switch to the Orix Trust Bank when the maturity or rollover cannot smoothly achieve the agreement.

Got it. Okay, thank you.

(Operator Instructions). And Mr. Milcher, there are no further questions today.

Okay, there are no further questions. Okay, well, if there are no further questions, I would like to thank you for listening to the call tonight. I hope that we have the opportunity to meet with you in person, whether it be here in Tokyo or in your corner of the world. So on behalf of Mr. Urata, Mr. Kato, and myself, and the entire Orix Group, I would like to say thank you for attending and good evening.

Thank you, that concludes --

Thank you very much.

That concludes today's conference. Thank you for your participation and you may now disconnect.