ORIX Corp (IX) 2010 Q3 法說會逐字稿

Good day everyone. And welcome to ORIX Corporation's third quarter financial results conference call. At this time, I'd like to turn the call over to your moderator, Mr. Gregory Melchior. Please go ahead, sir.

Thank you, Stacey. Good morning, good afternoon, and good evening. This is Gregory Melchior. And I would like to welcome you to ORIX's conference call to review our third 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 Mr. Takao Kato, Deputy-heads of the Corporate Planning and Financial Control Headquarters.

During this evening's call, Mr. Urata will discuss our third 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 091231E that was posted on the IR section of our 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 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 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 that are 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 third quarter results December 31, 2009.

And without further ado, I'd like you to open to slide number three and I will turn the call over to Mr. Urata.

Thank you. Hello, everyone. My name is Urata, CFO of ORIX Corporation. Thank you very much for joining this conference today. First, I would like to explain the progress we made so far. Please see the slide page three.

Net income was JPY27.4 billion; a 2.1 fold increase from JPY13.3 billion from the same period of the previous fiscal year. We have achieved 91% of the initial JPY30 billion forecast for fiscal year '10, mainly due to profit contributions from the Overseas Business and the Retail segments. The fiscal year forecast for net income has been revised upwards to around JPY36 billion.

Number two and three were set challenging goals to respond to the financial crisis. As a result, the full-year target for the debt-to-equity ratio and asset reduction have been achieved, as I mentioned in the second quarter, and we are swiftly enhancing our financial strength.

Real estate-related assets were reduced JPY234.9 billion, mainly due to decreases in both loans to real estate-related companies and non-recourse loans. This represents 81% progress, compared to the 46% progress in the second quarter.

Provisions were JPY48.8 billion, which is 63% of the JPY78 billion forecast for fiscal year '10. Provisions were kept at low levels.

Please turn to page four. We have revised net income forecast upward from the initial forecast of JPY30 billion to around JPY36 billion. I will go into detail later on -- in the segment information slide. However, the main reason for the revision is the strong performance in the Overseas Business segment.

[Although this is similar to 2009], we achieved net income of JPY27.4 billion, which is 91% of the initial forecast I said.

Furthermore, capital gains from the share exchange with [Manix Group] are predicted during the fourth quarter. Concerning this and other factors, we made around a 20% upward revision.

Slide five gives you an overview of segment performance. Segment profits were JPY49.4 billion, achieving 90% of the initial forecast. The Overseas Business and the Retail segments are trending favorably.

Losses were recorded in the Corporate Financial Services segment due to increasing provisions in the second quarter, as well as in the Investment Banking segment due a loss from joint corporation in the first quarter.

Slide six charts the segment-by-segment information. You can see the trend in segment profits in the upper left-hand corner. Revenue declined as a result of a decline in financing leases and installment loans due to a stringent selection of new transactions and enhanced collections in advance.

Provisions remains in line with the initial forecasts as a result of new occurrences of non-performing assets having declined significantly since its peak in the [third] quarter of the previous fiscal year. Due to these circumstances, a loss of JPY10.6 billion was recorded.

Last year, we focused on [halving] non-performing assets. Early this year, we have replaced the management team of this segment as we want to promote a back-to-basics approach and proactively offer services to a wider range of clients.

This segment will play a central role in the Group offering solutions, such as environmental-related and overseas expansions to domestic companies with finance product services as the key word.

Page seven shows our Maintenance Leasing segment. Segment revenue is generally stable, although segment assets have decreased due to economic slowdown. This segment has maintained a virtually stable profit by capitalizing on its top positioning in the industry, helped by [ORIX Auto] and ORIX Rentec, and providing high value-added services.

Segment profits were JPY16.7 billion, due to an increase in depreciation resulting from conservative reserve value estimates.

We will continue to increase profits by developing new clients, capitalizing on Group networks, and the improving performance of rental and other assets. We will also continue to improve profitability by controlling maintenance expenses and promoting cost reduction programs.

The IT business department in ORIX has been consolidated into ORIX Rentec, aiming to achieve strong growth by integrating IT equipment expertise and marketing strength.

Please move on to page eight. In the condominium development businesses, profits were down in line with a decrease in the number of condominiums sold, despite a dramatic decline in write-downs during the current fiscal year.

We have recently restarted a new development after thorough market research, but the inventories in the market as a whole are declining, construction costs are coming down, while the number of competitors is decreasing.

Although [no gain] on the sale of large property was recorded in the second quarter, gains on sales of real estate under operating leases fell dramatically as activities among medium-sized and larger properties remained stagnant.

As you can see from our rental property vacancy rate and NOI yields, which are 5.3% and 5.6% as of the end of December respectively (sic - see press release), it is fair to say that the assets are well controlled. As a result, JPY10.9 billion of profits were recorded.

We will fund as a stable revenue base by strengthening the asset management structure, increasing added-value, and promoting the sales of small properties.

Page nine shows the Investment Banking segment performance. Segment revenues were down due to a decline in the balances of installment loans and the investment in securities, in line with enhanced non-recourse loan collections.

The market for non-recourse loans under CMBS, mainly for large [relative] projects, remained stagnant due to the price conditions of the overall real estate finance market. We are currently shifting our non-performing finance-related assets to schemes where we can manage our own revenues and risks.

Provisions, mainly for non-recourse loans were kept to JPY8 billion. Despite a loss from Joint Corporation's filing for protection under their corporate rehabilitation loan during the [third] quarter, equity net income of affiliates improved dramatically.

There were no major losses and write-downs on investment in DAIKYO and Fire and Marine. As a result, the segment recorded a loss of JPY16.5 billion, but the amount of the quarterly losses continues to decrease.

We will continue to promote non-recourse loan collections and the enhanced monitoring of (inaudible) investments.

[Despite] (inaudible) of non-performing assets from financial institutions are below expectations. However, we are anticipating the investment opportunities, including our investment in (inaudible) assets.

We plan to rebuild this segment through a wide range of functions, such as finance; development; servicing; and asset management; and the restructuring businesses.

Please turn to the page 10. Gains on the sale of our ORIX Credit shares were recorded during the second quarter. The Life Insurance and the Trust Fund businesses are both trending favorably. The segment has a low level of provisions and generated a stable profit. As a result, JPY19.9 billion of profits were recorded.

In the Trust and Banking businesses, we will continue to expand corporate loans and diversify its operations. The Life Insurance business will increase revenues by developing new products and strengthening sales channels. We especially want to cultivate our corporate client base.

In the Consumer Finance and the Securities Broker businesses, alliances with new partners will be further strengthened to increase revenue.

Finally, we want to move on to the Overseas Business segment. In the United States, where the real economy remains weak, (inaudible) is increasing but controlled within the understated range. Increased gains on investment securities contributed to the profit, and the capital market, including stocks and bonds, have recovered in the same manner as the first and second quarters.

In Asia, profit contributions from principal investments were recorded. As a result, segment profits were JPY28.9 billion.

In the US, we will continue to take a cautious management stance focus on strengthening requirements and correctional work, existing loans, and maintain asset quality.

In Asia, we will seek organic growth of our existing leasing and rental businesses. In addition, we are planning to expand and develop government-rated finance-related services and the equity investment in China by establishing a holding company.

This concludes the segment information. Now, I would like to move on to the two main topics for the [third] quarter. Please see the page 12. The first topic is the establishment of a Chinese operational headquarters.

We started operations in Mainland China in 1981. We described it as small-scale, and we operated businesses through local subsidiary companies in which we have invested. Our Chinese headquarters was establishing volume in December, and Chinese operations will become full-scale.

As you can see on the left-hand side of the diagram, we will promote existing leasing and rental businesses and enhance diversified financial services, such as automobile and aircraft [ratings].

On the right-hand side, you can see that through our strategic investment approach, that is ORIX Know-how plus Capital, we will diversify investment activities, which will allow us to capitalize on economic growth in Mainland China.

We have a service ORIX China investment in order to build-up a platform for this approach. All the business operations will be gathered under ORIX China, which will become a holding company, [obligations as planned], with the aim of operational freedom to raise funds with unrestricted use in [Chinese/]Europe.

We will also promote alliances with local partners in true ORIX tradition. Business expansion will be accelerated by [cultivating] multiple influential business partners and capitalizing on their respective networks, as well as ORIX know-how.

Our financial capital markets have remained uncertain after the Lehman Brothers bankruptcy. We have closely watched the market conditions to determine the best time to restart straight bond issuance. As our spreads have tightened, we returned to the capital markets in December in order to further diversify funding. We issued a total of JPY105 billion in straight bonds for institutional and regional investors.

We have secured a substantial liability through such sanctioned deposit [drivers] and other commitment lines as a buffer against future downsize risks and for future growth. We will continuously raise a certain level of funds from the capital market. We aim to tighten the credit spread through further discussions with investors and demonstrating a robust performance.

Please turn to the page 14. We are focused on four growth management measures to counterpart the financial and the economic crisis. The measures are balance sheet reduction; reduce leverage; cash flow focus; bolster risk management.

Due to these measures, our performance is recovering successfully, with income before income taxes improving for four consecutive quarters since the fourth quarter of the previous fiscal year. I believe this shows that we have consistently achieved a [satisfactory] results from these measures, which is the first step towards our next growth.

Currently, we are in the second step, where we need to demonstrate to the market our capacity to respond by creating products and increasing earnings capacity in a new operating environment.

We will aim at net income growth by 50% in fiscal year '11. [Profit] is forecast for two segments in the current fiscal year, but we will achieve profit recovery by aiming for all segments to return to profitability in the next fiscal year.

The next one to two years will be a rough period for the next growth stage. We will steadily recover profitability to prepare for the third step, where the mid to long-term strategy is required to be implemented.

Please turn to the next slide for details of our domestic and overseas strategies throughout the next growth stage. Domestically, our focus will go to finance plus services. We will increase profitability by meeting the needs of our clients through the combination of ORIX expertise and diverse services, on top of our existing finance-related services, such as loans and leasings.

We will focus on three main points. The first point is to expand and improve Maintenance Leasing services. We will further strengthen relationships with clients in this segment, which is representative of finance plus service, in which expertise is combined with capital. For example, ORIX ICT business department has been integrated into ORIX Rentec, aiming to achieve strong growth by combining IT equipment expertise and their marketing strengths.

We will continue to expand the service menu to meet client needs.

The second point is to cultivate our corporate client base in the Trust and Banking and Life Insurance businesses. For the Trust and the Banking businesses, the key word is diversification. Particularly, we will expand from mortgage loans to individuals to corporate loans, which will lead to the development of a new client base for the entire Group.

The Life Insurance business is improving its revenue base through development and the improvement of products. Capitalizing on the Group network, we will continue to introduce products that meet the needs of SME businesses.

The third point is the environment-related businesses. Eco-service is a service providing all the functions necessary to use eco products supplied by (inaudible) in line with client needs. ORIX aim is to become an eco-service integrator that provides comprehensive and one-stop services, combining manufacturers' environment technology and client needs through ORIX finance; maintenance; sales; and operational expertise.

Please turn to the next slide for our overseas strategy. Another focus of growth is overseas business. Particularly, we will capitalize on development in Asia. It's been nearly 40 years since we started expanding our franchise in Asia. ORIX has become a highly recognized brand, even more so than within Japan.

We have strengthened our relationship with local partners, and have provided services to local clients with local management and employees, which is a strength of the ORIX Group.

We continue to forecast organic growth of overseas subsidiaries and expand our business in the Asian market.

In China, we will specifically expand business by diversifying the investment to substantially manage risks, while cultivating not one but many local partners and capitalizing on their network.

In the US, we continue to capitalize on the high level of expertise and crisis response ability, through which we were able to maintain profit even during the financial crisis.

In closing, I would like to explain our performance forecast. Please see page 17. We have revised net income forecast upwards about 20% from the initial forecast of JPY30 billion to around JPY36 billion. We forecast 50% year-on-year net income growth in fiscal year '11 compared to our current forecast of JPY36 billion. We aim to achieve double-digit growth thereafter.

Concerning our current situation in which we are required to achieve both profitability and stability, we are targeting a 10% ROE in the medium-term, and a return of all segments to profitability in fiscal year '11, and achieve profitable growth in all segments thereafter.

The next one to two years will be a run-up period for the next growth stage. We will achieve the initial forecast before further achieving the new profit targets.

This concludes our third quarter presentation. Thank you very much.

Okay. This concludes the third quarter presentation portion of the call. We'd like to move on and open up the lines to Q&A. Mr. Urata, Mr. Nishigori, Mr. Kato are here ready to answer your questions, so let's go ahead and open up the lines.

Thank you. (Operator Instructions). And we'll take our first question from Charlie Jobson of Delta Partners.

Yes, hello. A question about your market-related assets, investment securities. Now that in the corporate debt market and some of the equities have had big runs, are you planning to hold those securities? Or are you planning to reduce your asset base substantially after the big run-up?

Charlie, you see the -- page 29. Yes, as can be seen on this slide, we have held to maturity securities by JPY43.7 billion at the end of this fiscal year, our [third] quarter. This is helped by ORIX Life Insurance. So, they hold Japanese government bonds for 20 years because they can earn a very high return on these securities.

And they can also enjoy higher solvency margins with this. So that's why they roughly -- let's say, 15% to 20% of their whole segment will be this kind of maturities securities.

Okay. So, they'll hold them for the long term? It's matched against their investment returns?

Yes, that's right. For their [area of] management.

Okay, okay. And just also, on page 23, appendix -- in the appendix, you have the redemption schedule for the non-recourse loans and specified bonds. Can -- for the redemption schedule for April of this year through March of 2011, can you give us a little bit of color whether you think you'll be able to collect on that 135? Or do you think that there'll be a problem with some of the collections there.

To be honest, for example, last -- during the last fiscal year we have been able to collect roughly the 70% of the maturities. And for this fiscal year, most probably we are collecting, let's say, 50% to 60%. And for the new fiscal year, we have not researched in detail but probably, under the current market situation, we feel that we only can collect, say, 40% to 50%.

Okay. Okay, thank you very much.

Thank you very much.

(Operator Instructions). Mr. Melchior, there are no further questions today so at this time I'd like to turn the conference back over to you for any additional closing remarks.

Okay. If there are no further questions, I would like to take this opportunity to thank you for participating in tonight's conference call, and hope that we have the opportunity to meet you, whether it be here in Tokyo, or if it be when we travel to your corner of the world.

On behalf of management and the entire ORIX Group, thank you again for your participation. And have a good morning, good evening, and good night.

Pardon, Mr. Melchior, we have had a question just queue.

Okay, good.

And it'll be Camille Carlstrom from Putnam Investments.

Hi, how are you? It's Camille.

How are you?

I'm well, thank you. I actually have a couple of questions, if that's okay?

Okay.

Can ORIX talk a little bit about why it did not participate in the equity raise by DAIKYO?

That is why we have not participated in the DAIKYO's equity finance, because if they can raise capital from the other parties [from the world] it should be better -- much better than with our investments. And from our point, we can get third party money; it's better from our point as well.

Okay. And then, can you talk a little bit about deflation and the expectation of continued deflation? And going back into deflation I guess, and what potential would pressure your balance sheet more than you might have thought? Or is the deflation trending as you would expect it, in terms of how you think about your balance sheet?

Yes, actually, in the Japanese current situation, yes, as I said, we have been experiencing depreciation of the Japanese market. And in general for ORIX or our financial service companies, this kind of deflation, basically, good for our operations. But, currently, we have already overcome the past difficult period, including the deflation period.

So from my point, we believe that we cannot have more difficult situations there, even the current deflation would continue for another couple of years.

And regarding our asset reduction were deleveraging, we think that, basically, we -- probably this kind level of the asset side is bottom line for our operations. And most probably, from this fiscal year you will not see the additional deduction on the asset side.

So, this is the year ending March 2011?

So, for fiscal year '11, we will probably similar -- maintain a similar level the asset side. Because under the current uncertain financial market, at the same time it's not so good idea for us to dramatically expand our asset side for the time being.

So what has to happen to actually help you guys to re-lever? What has to happen that changes your mindset? Is it small? Or is it something huge that would actually have you change and start to re-lever?

Yes, actually, the -- probably in the past I think I have mentioned something about the other time the possibility of the raised issue of the bonds in the Japanese bond market. And lucky that we have been able to issue the bonds regularly right now under the current situation.

So, in that sense, with the successful equity financing July last year, we believe that we can have a very -- enough liquidity in our hands right now. And so in order for us to show you the -- again the growth of our profitability, we believe that we can -- it's better for us to stop the further reduction of the asset side.

Of course, with some profits, the [net debt-to-equity ratio] is still far -- we will still continue to show you some recover down or to say 3.5 or 3.3, something like that.

And then, can you give a comment on where you actually think the real estate business or the real estate environment or cycle is in Japan right now? Do you think -- I was looking to your appendix, you show all the data there of course. But you're in the business, so are we near the bottom on real estate do you think? Or do you think we're still declining?

Yes, actually, unfortunately, I think that Japan's real estate market will, for the time being, continue be slow mainly because of the lack of the finance. We believe that many investors want to -- begin to want to provide equity to the Japanese real estate market, but without any big finance they cannot.

So if at some point banks or other Japanese financial institutions begin to provide some finances for real estate market, then dramatically the Japanese real estate market will be recovered.

And then the last question, I was looking at the Investment Banking numbers, and I know there are a lot of provisionings and impairments in there, but it still was a little than break-even. So what is driving that business? And it looks like the losses are ahead of expectations and so I'm wondering if this is an area for concern?

To be honest, our Investment Banking segment will from now on have to find new business areas. For the time being, basically, the -- regarding our non-recourse loans businesses, we try to reduce continuously the asset side. And in the area equity investment, for the time being, we don't have an idea to -- or make a big amount of the investment in these areas.

That's only in the servicing business areas we believe that there should be various business opportunities. Because, especially in the non-recourse loans and CMBS areas, our servicing businesses share more than 50% in the Japanese market right now.

So from now on, in the -- during the difficult period of the maturity of the existing loans and CMBS, our ORIX servicing company can have the right to handle those various assets or can involve in the restructuring business areas.

So, we believe that servicing business should be the only business profitable areas for the time being in the Investment Banking segment.

Right. Great, thank you.

Thank you very much.

Have a good evening.

Thank you.

Again, Mr. Melchior, there are no further questions.

Okay. We'll wait just another minute or two just in case there is somebody with a question they want to ask.

(Operator Instructions). And again, sir, no one has signaled.

Okay. I guess, if there are no further questions, at this time I would, once again, like to take the opportunity to thank you for participating in tonight's conference call. We hope we have the opportunity to meet you face-to-face here in Tokyo, or whether it's when we travel to where you're at in the world.

So on behalf of management and the ORIX Group, thank you, once again, for your participation in the conference call this evening.

Okay, thank you very much for everyone.

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