ORIX Corp (IX) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to Orix Corporation's second quarter financial results call. At this time I would like to turn the call over to your moderator, Mr. Gregory Melchior. Please go ahead, sir.

Thank you, Maureen. Good evening, this is Gregory Melchior and I would like to welcome you to Orix's conference call to review our second quarter results for fiscal 2010. I am joined here this evening by Mr. Haruyuki Urata, Deputy President and CFO, as well as Mr. Yuichi Nishigori and Takao Kato, Deputy Heads of the Corporate Planning and Financial Control Headquarters.

During this evening's call Mr. Urata will discuss the second quarter results 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 090930E that was posted on the IR section of the website at 3.30pm this afternoon here in Tokyo.

The following live broadcast is copyright 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 demands 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 in our earnings presentation as it contains additional information -- 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 Corporation, referred to in the financial statements second quarter results September 30, 2009.

And so without further ado I will turn the call over to Mr. Urata.

Thank you, Greg. Hello, everyone. Thank you very much for your joining to this meeting. My name is Urata, CFO, of Orix Corporation. Today I would like to explain the progress we've made during the first half, first on page three.

Net income was JPY20.2b. We have achieved 67% of that JPY30b forecast for fiscal year '10 due to profit contribution from the overseas business segment, retail and the real estate segment. Our performance is recovering successfully with income before income taxes improving for three consecutive quarters since the fourth quarter of the previous fiscal year.

[Particularly] measures to counter the financial crisis are being implemented ahead of schedule. As a result, forecasts of the debt to equity ratio and asset reduction targets for the fiscal year are being achieved and the enhancement of our financial strength is progressing swiftly.

Real estate related assets were reduced JPY133.9m mainly due to decreases in both loans to real estate companies and non-recourse loans.

Provisions were JPY39.5b, which is 51% of the JPY78b forecasted for fiscal year '10. Those reductions were (inaudible) assets and credit cost management are [progressing] as planned.

Next on page four. Moving on to operating revenue, expenses and net income. As we focus on stringent selection of new transactions and enhanced collections under the uncertain economic environment, operating revenues were JPY471.4b, which is in line with the fiscal year forecast of JPY960b. Investment securities was back in the black during the first two quarters, having recorded a loss in each quarter of the previous fiscal year. JPY6b of gains on investment securities were recorded in the United States. (inaudible) some point SGA expenses (inaudible) were down 8% year on year as a result of cost reduction programs, [which are] on schedule. Provisions were also in line with the forecast.

A breakdown of JPY39.5b in provision is as follows. JPY22.7b in Corporate Financial Services segment. JPY6.4b in Investment Banking. JPY5.6b in Retail and JPY3.7b in Overseas Business.

Non-performing assets are predicted to decrease in the second half as enhanced collection of non-performing assets are progressing. Write-downs of securities remained flat compared to the same quarter of the previous year.

Equity in net losses of affiliates were recorded mainly due to Joint Corporation filing for protection under the corporate rehabilitation law in the first quarter. Gains on sales of subsidiaries were recorded mainly due to the sale of Orix Credit Corporation. After the second quarter a profit from Orix Credit Corporation will be recorded as equity net income of affiliates.

Both income before income taxes and net income are on schedule with 67% of the yearly forecast achieved.

Moving on to the segment performance, on page five. Four out of six segments recorded profits with our Overseas Business segment performing especially well. The Retail and Real Estate segments also showed robust performance. Losses were recorded in the Corporate Financial Services segment [show] increasing provision in the second quarter, as well as the Investment Banking segment, which recorded a loss due to Joint Corporation filing, as I said.

The Corporate Financial segment recorded a loss of JPY9.1b. That also was mainly due to JPY22.7b of provisions resulting from reappraisal of collateralized properties and enhanced collection of non-performing assets. However, it should be noted that we are forecasting it to achieve the future fiscal year forecast.

The Maintenance Leasing recorded JPY10.7b of profits, which is 43% of the fiscal year forecast, due to weak demand for leasing and rental resulting from recession. However, given its leading position in the market we expect that this will be back on the figure for the initial fiscal year forecast.

The Real Estate segment recorded JPY10.7b of profit, which is 54% of the fiscal year forecast. Gains from the sale of the large property were recorded in the second quarter. It is unlikely that the large amount of gains from the sale of property will be recorded in the second half.

The Investment Banking segment recorded a loss of JPY13.7b of which JPY10.2b resulted from Joint Corporation filing. Also decreases in both revenue and profits were seen in real estate related finance in line with the reduction of assets.

The Retail segment recorded a profit of JPY14.8b with gains on the sale of Orix Credit Corporation shares. 74% of fiscal year forecast has been achieved in the first half and we are expecting the fiscal year forecast will be achieved as planned.

In Overseas Business segment, profits were JPY21.5b exceeding the fiscal year forecast. This was mainly due to contributions from realized gains on investment in securities in the United States and the profits from principal investments in Asia.

Please turn to slide six for the Corporate Financial segment. The segment recorded a loss of JPY9.1b. In the second half we will continue to offer our services to a wider range of clients other than real estate-related companies. At the same time we will continue our efforts to recover asset quality by enhancing collections. This segment will play a central role in providing solutions to domestic SMEs. While new occurrences of loans individually evaluated for impairment have passed the peak, JPY15.9b of provisions were recorded in the first half due to enhanced collection of assets that are predicted to result in impairment in the second half. We expect provisions to be on a decreasing trend in the second half.

Slide seven shows an overview of the Maintenance Leasing segment. This segment profits were JPY10.7b achieving 43% of the JPY25b fiscal year forecast. The Maintenance Leasing segment is a prime example of finance plus services. We are expecting this segment to be a stable revenue base for the Group. Although a dramatic increase in demand cannot be expected we hope to expand this business in environmental (inaudible), IT and asset management areas in the mid to long term. We are seeing some progress in our BPO operations in which Orix contracts total BPO management. We are currently in talks with many companies with large fleets and have signed numerous contracts. BP operations is another example of Orix's high value added services and we would continue expanding this business in the future.

Our performance has weakened due to [slackening] new auto purchases, decrease in gains on sales of used autos and increasing depreciation expenses and the deteriorating performance of assets in the rental business. However, we will aim for profitability by controlling maintenance expenses and through our cost reduction programs.

With regard to the car rental business signs of recovery have been seen in the secondary car market. Rental business profits are expected to be [held] on schedule in the second half as sales of non-performing assets are progressing.

Please turn to slide eight. Here you can see an overview of the Real Estate segment. Segment profits were JPY10.7b achieving 54% of the JPY50b forecast for the fiscal year. In the sluggish real estate market we recorded JPY10.2b of profit with sales of properties, progressing as planned. Our rental property vacancy rate is 6.2% as of the end of September, with an NOI yield of 5.7%. We are controlling assets in line with our initial policy.

Profits from the condo business increased as write-downs of condominiums under developments were minimal. We will restart the new developments in the condo businesses after current [marketing]. Nevertheless construction costs have come down in a return to recovery in the condominium market. Also, it is our intention to acquire operating facilities if opportunities should arise.

Regarding the rental properties, [standard] profits will be within the initial forecast although it is unlikely that large amounts of gains on the sale of real estate and operating leases will be recorded.

Regarding the condo businesses, occurrences of write-downs will be highly limited in the second half.

Regarding the operating businesses, operating rate is expected to improve in the second half. Accordingly, we are expecting the fiscal year forecast to be achieved as scheduled.

Please turn to slide nine. The Investment Banking segment recorded a loss of JPY13.7b. The production rate of non-recourse loans improved significantly due to increased [asset] repayment in the second quarter.). The first half production rate was approximately [60%]. We will keep focusing on asset reductions through enhance collection and improving occupancy rates of acquired real estate creditors by capitalizing on group expertise.

The amount of our acquired real estate assets were JPY125.7b and the NOI yield was 3.2%.

Regarding investment in distressed assets, here are some transactions from foreign international institutions withdrawing from the domestic markets. However, the financial crisis has presented fewer non-performing loans from financial institutions than expected. We will continue to look for opportunities to invest in distressed assets.

Further restructuring of the corporate and the real estate finance sector is expected and we will continue to seek new business opportunities that arise.

We are anticipating opportunities in CMBS as our servicer business is highly rated and has a large market share. The real estate finance business has seen a decrease both in revenues and profits due to a decrease in the asset [brands] in line with the stringent selection of new transactions and the focus on collections.

Going forward we expect one-time losses resulting from write-downs of the market related assets to be limited. We are expecting that sufficient level of provisions have been set aside for non-recourse loans. We have no big changes or a little bit bigger losses in line with segment profits forecast for the fiscal year.

Please turn to page 10. The Retail segment profits were JPY14.8b achieving 74% of the JPY20b fiscal year forecast. The trust and banking business will expand corporate loans to complement its mortgage for individuals in order to diversify its portfolio and continue to increase the profits.

The life insurance business will expand is revenues by increasing the product lineup and strengthening our sales channel. The corporate finance business and (securities brokers continue to face a significant operating environment but management will be enhanced under their new risk [partner] network. Preferred banking business assets are on a steady increased trend. Life insurance related investment income is expected to improve in the life insurance operations.

Gains on sales of subsidiaries were recorded for Orix Credit and going forward it will be recognized as equity net income of affiliates. We still think the fiscal forecast to be achieved as scheduled.

Please turn to the next slide for details of our Overseas Business segment. Overseas Business segment profits were JPY21.5b achieving 143% of the JPY15b fiscal year forecast. As the financial and capital markets have seen a recovery in the first half, profits exceeded initial forecast due to gains on sales of investment in securities in the United States and profits from principal investments in Asia. These types of capital gains are not expected in the second half.

As the US real economy continues to stagnate we will focus more (inaudible) on the collection of existing assets while stringently accepting new transactions. Credit costs are on increasing trend in line with the deterioration of existing impaired loans, a trend that we believe will continue in the second half. We will continue to cautiously maintain asset quality.

The leading base operations in Asia are [securing] sound profits. Credit costs in the second half are expected to be limited as a result of our focus on stringent sales from new transactions and our intention to prevent deterioration of existing loans. We will prepare for new business opportunities through private equity investments mainly in Asia, which will continue with strong growth in the future.

The total profits for fiscal year '10 are expected to exceed the initial forecast.

Please turn to slide 12. The (inaudible) prices was a result of the bursting of our inflated financial market. We have continued to be focused on strengthening the corporate structure in response to the financial crisis. Our main efforts were fortification of financial stability and bolstering risk management.

We focused on four points, balance sheet reduction, reduced leverage, management focus on cash flow, and bolstered risk management. Due to these measures our performance is recovering successfully with the income before income taxes improving for three consecutive quarters since the fourth quarter of the previous fiscal year. As we have implemented the measures ahead of schedule the corporate structure has been increasing its strength.

Please turn to the next slide for the (inaudible) results of the crisis response measures we have taken so far. Here I would like to explain the results of our crisis management countermeasures we have taken so far from a (inaudible) point of view.

You will see show the numbers of our countermeasures have been fully successful. The first point is the fortification of financial stability. The debt to equity ratio decreased to 3.7 times due to decreased assets, increased capital and increased deposits. Our target of below 4 times at the end of the fiscal year has been already achieved.

We reduced assets by JPY451.2b or 73% of the JPY620b reduction forecasted for fiscal year '10, mainly in the Corporate Financial Services and Investment Banking segments. Our capital base increased by JPY83b through a public offering in July and the shareholders' equity ratio increased to 16%. Our high long term debt ratio has been maintained at 85% despite the credit crunch resulting from restricted CP issuance [advance] and the CP issuance in 2008. We have increased cash on hand available and available commitment lines maintaining substantial liquidity. This significantly [feeds] the CP balance.

The next point is a reduction in real estate related assets. Loans to real estate related companies were reduced by JPY83.6b due to enhanced collections from March to September 2009. Non-recourse loan related assets decreased [JPY104.00b]. However, our real estate related provision increased by JPY63.8b. The net amount of reduction is JPY40.2b. Furthermore, real estate related assets where we can control the risk remained flat compared to March 31, 2009.

Due to these countermeasures we were successful in improving leverage and fortifying financial stability and the [leverage] was greatly stabilized. In the second half we will devote our overall efforts (inaudible) fiscal year targets laying the foundation for further recovery after the next fiscal year.

Moving on to slide 14. Up until this point we have focused on fortifying financial stability. However, we believe that we need to increase profits recovery from the second half leading into the next fiscal year. We will secure high profitability by providing high value added services that require expertise in addition to providing finance. We will restructure the balance sheet to seek new and higher growth for the business portfolio and funding purchase.

Regarding the restructuring of the branches we cannot set an immediate goal as the financial and capital markets are still recovering. We will continue to procure the branches to achieve an appropriate balance of asset and liabilities in line with the future new market.

We will focus our business on domestic SMEs and overseas. For domestic SMEs we will provide various services capitalizing on our solid operating base and broad network. Overseas we hope to gain new business opportunities aiming for further strategic expansion, especially based on our Asian network.

On page 15, (inaudible) complex needs, our unique brand is the ability to satisfy all these needs as a one stop financial provider. The corporate financial services segment will not be the sole service provider, it will play a central role in integrating the expertise over the six segments to provide various solutions such as SME management and finance. In other words, the asset liability and capital asset sections from the branches in addition to improving profitability and reducing costs. Our competitive advantages are a deep understanding of this kind of wide range of SME needs we have gained through our network, as well as our services to meet the needs that no other financial institution can provide.

Please turn to the next slide. We have expanded our franchise in Asia since we started the Hong Kong operation in 1971. In Asia we have developed relationships with global partners and have provided services to local clients with local management and employees. As a result we have achieved the highest customer loyalty and Orix has become a highly recognized brand. Going forward we will further our strategic expansion in Asia region. We will view both of the Asian regions as a chance for Orix to grow. We will continuously increase good assets through the leasing business in each country. In the future we will put greater emphasis on providing high value added services as we have done in Japan. We will seize opportunities in the investment business [countries] capitalizing on our (inaudible) expertise and presence in Asia.

Please turn to the next slide for details about the alliance between Monex Group and Orix. This is a second step in strengthening alliance with financial institutions for Orix Corporation joint venture between Orix and the SMB]. Considering the current online securities brokerage business environment we decided that an alliance with a major company was a better option than expanding the business on our own. Orix Securities and the Monex team will be [part allies] as each has their own distinct client base. A 100% stake of Orix Securities and a 22.5% partner stake on Monex will be exchanged, planned for January 17, next year.

After that exchange a merger between Monex Securities and Orix Securities is planned for May 2010, tightening the biggest and the best online security brokerage in Japan. Orix will acquire a 22.5% stake of Monex Group and Monex Group will become our equity (inaudible).

This concludes the second quarter presentation. Thank you very much.

Okay. This concludes the presentation portion of our call. Now, Mr. Urata and Mr. Nishigori and Mr. Kato will be happy to answer any questions that you may have.

(Operator Instructions).

Mr. Melchior, there are no questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

Okay, thank you, Maureen. If there are no questions I would like to thank you for attending tonight's conference call and hope that you will meet with us whether you're in Tokyo, or we can meet you if we travel to your corner of the world. So, on behalf of Mr. Urata, Mr. Nishigori and Mr. Kato, myself and the entire Orix Group, thank you all for your participation, and have a wonderful morning. Good afternoon and good evening.

Thank you very much.

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