ORIX Corp (IX) 2010 Q4 法說會逐字稿

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

Good evening. This is Gregory Melchior and I would like to welcome you to ORIX's conference call to review our annual results for the fiscal year ended March 31, 2010. I'm joined here this evening by Mr. Hari Urata, Deputy President and CFO, as well 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 the annual results and then we'll open up the lines to question and answers.

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 report filed with the SEC for any additional information, including risk factors specific to our business. Also, please note that the net income used in this presentation is the same as the quarterly net income attributable to ORIX Corporation referred to in the financial statement results for the fiscal year ended March 31, 2010.

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

Good evening. This is Hari Urata, Deputy President and CFO of ORIX Corporation. Thank you for attending the annual results conference call. Today, I would like to announce that ORIX Group's performance during a deep recession over the previous fiscal year, followed by a discussion about the current year, which I believe will be more promising.

Please turn to slide three. In April 2009, the beginning of the previous fiscal year, global economic stagnation caused by the unprecedented financial crisis was expected. Under those circumstances we made very conservative assumptions in our business planning. One was that this will take significant time for the finance and the real estate markets to normalize, and the second was that the recession would become even more apparent in the highly uncertain macro economic environment.

Our basic management policy was to further enhance the soundness of operations and outline strengthening the Corporate Structure and the Operational Realignment of the basic measures. Under such a management policy we fully implemented the four specific measures shown at the bottom of the slide. For financial stability we feel that it was necessary to reduce the size of the balance sheet in response to the dysfunction of the financial market.

Please turn to slide four. This slide shows our achievements over the past three years. We achieved all numerical targets, which is profit, financial stability and enhancement of risk management as planned. I would like to point out that we achieved JPY37.8b net income, approximately 25% over the original forecast of JPY30b. Our financial base has improved dramatically due to the implementation of our crisis-response measures, enabling us to effectively respond to the delayed recovery of the financial markets.

Please turn to slide five. During the last fiscal year we reduced the balance sheet by approximately 7.5%. Total revenues slightly decreased in line with this reduction. However, income before income tax is increased six-fold, to JPY55.6b, and net income increased by 72% to JPY37.8b from the same period over the previous fiscal year. Although the profit has dropped significantly compared to the level before the financial crisis, we feel that we have entered a recovery stage with a result of our fiscal year 2009 as the bottom.

Our leverage ratio was already at a low level for a financial [finance] Company, but we reduced it further in response to the financial crisis by continuing to reduce assets. Also, we increased our shareholders' equity through a public offering, leading to enhanced financial strength. Our debt/equity ratio has nearly reached the bottom for that of the financial -- a financing Company. The year-end dividend has been increased slightly to JPY75. We would like to measure our expectations by showing the stable growth of the Group.

This year we are aiming to accumulate quality assets, mainly by [depreciating various risk] assets, capitalizing on our [flat] financial (inaudible). Our balance sheet size is near the bottom and we are not currently thinking of further reductions.

Please turn to slide six. This slide shows our 10-year net income trend. As you can see, net income from the previous fiscal year is the same level as the early 2000. Profits have returned to the level of (inaudible). We are aiming for a 50% increase, to JPY57b, in the fiscal year ending March 31, 2011. We are able to put together a plan to swiftly recover from the drop in profit levels resulting from the Lehman bankruptcy.

Since the mid 2000 ORIX profits grew dramatically as a result of continuously heightening of our acquired (inaudible). We had to take a temporary break because of the financial crisis. However, we will get our business back on track by further improving our expertise, the largest asset of ORIX (inaudible).

Please turn to slide seven. Although profits shrunk we remained profitable even during the unprecedented financial crisis and, following the economic stagnation, it can be clear that our solid implementation of business diversification and funding diversification [helped] the cash mechanism in the crisis environment.

Currently, our business diversification is, for accounting purposes, represented by six segments with vastly different characteristics. However, we have actually managed the Company divided into 15 segments to 20 segments. We started as a leasing Company and increased our expertise and expanded (inaudible) which resulted in our diversified business portfolio. Each business is increasing its own profits while mutually cooperating with each other.

Furthermore, our strength is that each individual business have solid [portionings] and [such] competency as our independent business, combining the high profitability and growth of each segment. In addition, each mutually provides products and services each other, and this synergy has brought further growth. I would like to emphasize that its strong individual business and networking is the biggest strength of ORIX's [work]. This is what makes us different from our (inaudible).

Please turn to slide eight. Next, I would like to explain our funding diversification. Historically, we have maintained roughly a 50/50 ratio of direct funding and indirect funding. We have also maintained stable relationships with a diversified base of more than 200 financial institutions.

Moreover, we have maintained our long-term debt balance as the result of aggressive long-term bond issuances in the past, in combination with the CP and other short-term debt. This structure was especially effective during the financial crisis. As a result, there was an overall funding reduction with (inaudible) complete stock. Our funding cost both in Japan and overseas has been stable, even after experiencing the financial crisis.

Please turn to slide nine. This slide shows our enhanced risk management. We enhanced the screening and monitoring in all fields, including routine risk management and especially strengthened risk management related to real estate-related assets. We dramatically reduced real estate-related assets in the loan portfolio, specifically in non-recourse loan and loans to real estate companies. Based on our conservative outlook we have made sales and write-downs appropriately.

On the other hand, we have maintained the asset level in our own Real Estate business. Although the real estate market is still unstable, we strove to increase the occupancy and yields of our properties by capitalizing on our leasing expertise, which is the Group's greatest strength, through such measures as capping the Corporate Financial Services client base to introduce tenants to all [buildings]. We will maintain the assets which we can manage profit and risk by ourselves for the foreseeable future.

Please turn to slide 10. Next, I would like to talk about the management policy for this fiscal year. We have learned many lessons by experiencing the financial crisis. We operated with a brief that the financial market would continue to increase [in sophistication]. However, going forward, it is necessary for management to assist profit growth with a safety net of financial stability and enforcing risk management, given that we cannot fully depend on the financial market. This is what can be called a sustainable growth.

We are aiming for robust business and stable growth by adding the enhanced financial stability and risk management, on top of the sophisticated expertise I mentioned earlier. For the fiscal year ending March 31, 2011 we forecast profitability in all segments resulting JPY57b in net income, a 50% increase year on year. We are also setting the mid-term target of a 10% ROE.

Please turn to slide 11. Now the question is where should we look for future growth. Basically, we are thinking of the further growth of our existing 15 businesses to 20 businesses. Additionally, we believe the following three areas to be promising. The first area is Asia. As you may well know, we established a Chinese (inaudible) and there are many profitable opportunities to capture potential growth in Asia, especially in China. We have already developed the Asia-related business to some extent and this will continue to profit rather quickly, probably within a year or two.

The next area is Finance plus Services. This is a field with a -- where we can capitalize on the sophisticated expertise of the Group. We will exploit new business areas, turning the (inaudible) of the Company and we expect profit contributions in two years to three years' time.

Last is the New Areas, such as the Environment and Energy. There is budding growth in each segment, for instance, [car insuring] and sellable electricity. However, these new areas (inaudible) somewhat high. This combination of the existing and the new businesses in both the short and medium term will achieve steady growth moving forward.

Please turn to page 12. Now, I would like to introduce two examples. As we announced the other day, ORIX USA has purchased a Company that arranges specialty loans for real estate companies and obtains a fee through loan servicings. This is a fee-based business that has considerable US market penetration and was purchased to enhance fee-based income companies in the United States. This is one example of increasing profits without losing assets.

The second example is in China, as you can see on slide 13. We would promote alliances in environmental-related projects with the Chinese Academy of Science, a 100% State-owned institution that is basically the of Ministry of Science and Technology in China. This alliance will be a footfall for new business in the expansion in Chinese market. Through this kind of new growth we will look to add entirely new segments through alliances and M&As.

Please turn to slide 14 for segment performance. Now, I would like to cover the performance and forecast by segment. As a whole, four out of six segments were profitable. Unfortunately, two segments recorded consecutive losses for the last two years. On the other hand, the Overseas business segment showed good performance both in the US and Asia, and the Retail segment has surpassed the original forecast and significantly increased total segment profit. The Investment Banking segment experienced the bankruptcy of the ORIX Corporation. However, the amount of losses decreased [through new countries]. We are targeting profitability in all segments for the current fiscal year.

I will cover each segment in more detail, starting on the following slide. There are two slides for each segment. The first slide shows the recent segment performance and the second slide shows segment forecast. Corporate Financial Services segment revenues were JPY113.7b, a 17% decrease compared to the same period of the previous fiscal year. The segment recorded a loss of JPY17.6b due to the continued high levels of provisions for doubtful receivables and probable loan (inaudible). We (inaudible) reduced assets, mainly down to real estate-related businesses. The new occurrence of non-performing assets increased rapidly over the last two fiscal years. However, this has already peaked out and asset quality has significantly improved.

Please turn to the next slide. The Corporate Financial Services segment filled the rollover sales platform for the Group. In expanding Finance plus Services the segment will capitalize on expertise by promoting corporation with Group companies, such as ORIX Auto and ORIX Rentec, to further meet customer needs.

The segment has already shifted its operations to focus on providing services through cooperation with other segments. And plain vanilla loans will be extended through ORIX (inaudible) Bank. We aim to increase quality assets that are both small and diversified, while continuing to enhance collections and management of non-performing assets. This segment is forecast to return to profitability this fiscal year.

Please turn to slide 17 for the Maintenance Leasing segment. Maintenance Leasing segment revenues are relatively stable, recording JPY223b, a 6% decrease from the previous fiscal year, despite decreased demand for large transactions due to the stagnant domestic business environment as well as decline in gains on sales of leased vehicles caused by a downturn in the (inaudible) market.

Segment profit was JPY21.7b, a 15% decrease year on year, mainly due to conservative [risk] value estimates, resulting in increased depreciation. The segment performed solidly based on the high level of its expertise, despite an overall severe industry environment.

Please turn to the next slide. This segment is aiming to expand (inaudible) such as ORIX Auto's Comprehensive Auto Management Services and Rentec's IT Asset Management Services, and promote Group-wide cross-functional collaboration. At the same time it will venture in to the Asian market, increasing assets and profits.

Please turn to slide 19 for the Real Estate segment. Real Estate segment revenues were JPY189.5b, a 30% decrease from the previous fiscal year. Segment profit decreased 81%, to JPY9.4b, due to the drastic decrease of gains on sales of real estate and operating leases. The financial crisis significantly impacted the Japanese real estate market. However, we were able to achieve gains on sales that were above target through prudent property sales to investors with [actual] demand. Also, the [vacancies issue] is steadily improving through our [rescue-leasing] efforts. We have sufficient capability and strength to maintain the current scale of the Real Estate business.

Please turn to the next slide. This year we will continue to promote asset turnover by seeking various exit strategies while maintaining and improving rental property yields. We are also aiming to create new value through the promotional project, such as (inaudible), our largest scale redevelopment project next to (inaudible) station. By implementing this measure profits are forecast to be flat year on year without relying heavily on capital gains, given in an unstable market.

Please turn to slide 21 for the Investment Banking segment. The Investment Banking segment reduced the non-recourse loans balance through cooperation with the Real Estate and Corporate Financial Services segments, but the non-recourse loan market has [crashed]. Segment assets decreased 12% to JPY1,166.7b. Also we focused on maintaining asset quality of non-recourse loans by responding [thoroughly] to each transaction through negotiations for additional investment, rate increase and (inaudible).

We also responded through foreclosures and the leasing and sales of the repossessed properties. The segment recorded a loss of JPY12b due to the Joint Corporation's filing for protection under the Corporate Rehabilitation Law. However, the amount of loss was significantly reduced compared to the previous fiscal year.

Please turn to the next slide. The finance market remains unstable, yet we think that this also presents many business opportunities. ORIX Services is one of the largest services and has both a high rating and large market share. There may be attractive opportunity for profit in areas such as CMBS-related and corporate rehabilitation business. We will reactively pursue equity investment, searching suitable business projects.

For non-recourse loans we will continue to respond thoroughly to each transaction. The risk of loss from investments, such as those experienced last fiscal year from joint private equity fund and venture capital, has significantly decreased. Therefore, we expect the segment to return to profitability this fiscal year.

Please turn to slide 23 for the Retail segment. Retail segment revenues are JPY155.9b, a 15% decrease compared to previous fiscal year, due to the change in status of the [card] loan business and securities brokerage to equity-method affiliates. Segment profit more than favorable to JPY31.1b compared to the pervious fiscal year, due to strong performance in the life insurance business and gains on the sales of ORIX [20] and ORIX [Securities]. The Retail segment is steadily growing.

In the Life Insurance business Life Insurance premiums and related investment income significantly improved, recording over JPY10b of pre-tax income. Some [sector insurance] products, such as medical and cancer insurance, are selling extremely well. ORIX Trust and Banking increased assets in accordance with diversification of its lending portfolio.

Please turn to the next slide. In this fiscal year ORIX Life Insurance aims to expand its business by developing distinctive third sector products, such as medical and cancer insurance, and enhancing its agency sales channel. The Life Insurance business is currently in a growth stage and the importance of this business has dramatically increased. We will aim to further increase business profits.

In the Trust and Banking business we will continue to expand corporate lending and enhance the client base. This segment recorded gains on the sales of ORIX (inaudible) and ORIX Securities in the previous fiscal year. However, the segment is forecast to report an incremental profit excluding the gain from [these] sales.

Please turn to slide 25 for the Overseas Business segment. Overseas Business segment revenues increased 11% and segment profits were JPY37.1b, an 85% increase year on year. US operations have accumulated a high level of expertise and generated a [5.9%] increase in profit, despite deterioration in the economy from being the epicenter of the financial crisis. Asia also increased profits due to the robust Leasing business and the gain on the sales of equity investments.

Please turn to slide 26. The US operations aim to expand Finance plus Services based on the accumulated high expertise and aggressively expand operations, including M&As, as I mentioned earlier, regarding the purchase of the loan servicing company. In Asia we will embrace growth and seek out high profit initiatives, especially in the Chinese headquarters in Dalian. The Overseas Business segment is forecast to maintain high profits.

In conclusion, we will strive for sustainable growth, targeting a 50% profit growth and profitability in all segments, while paying strict attention to financial stability and risk management. Your continued support is greatly appreciated. Thank you very much for your attention.

Okay, thank you. This concludes the presentation portion of the conference call. I would like to open up the lines now to Q&A. Mr. Urata, Mr. Nishigori and Mr. Kato are here to answer any questions that you may have.

Thank you. (Operator Instructions). And we do have a question from Hiro Kato from SAC Capital. Please go ahead, sir.

Hi, thank you for the call; it was very informative. I would like to ask a question regarding the real estate view. What is your outlook for the real estate sector as a whole in Japan? And if you could break that down into office, condo and commercial buildings. Is it a good opportunity to buy or do you think there's still a holding period?

All right. Regarding the Japanese real estate market situation, I think there are various aspects. For example, in the area condominium [sales], you probably understand this is not good supply for the time being and with a little bit high level of prices, or there are some gaps between the supply and the demand in the past. But recently we have found that a further we can offer the [reasonable] price, say, like JPY40m per unit, then demand is very, very strong. So, especially in the case of ORIX Real Estate, as you know in the past we have already experienced some write-downs of the existing projects, so currently we can -- very smoothly we can sell our units to the individual.

And in other areas like (inaudible) development still as a whole the market is quite quiet, because -- mainly because of lack of finance. Although, in spite that, many new investors who are getting very much interest in the Japanese real estate market, they are still waiting for the Japanese banks to come back into the Japanese real estate markets.

So from our point we think -- regarding the price of the real estate market, within this year we think that the price will be bottom. But for the time being, due to lack of finance as a whole as the market, we feel that it's better for us to wait for the next timing so that we can try to acquire the new real estate. But to some extent in the condominium areas we already -- we entered into the new projects not so aggressively, but very slightly.

Just to follow up, are you starting to provide financing for these companies if they are willing to invest on their own?

Yes, after the -- basically, as I said [earlier], in these areas our own real estate development, or we believe that we can manage the revenues, profits and risks by ourselves, then we have the idea to expand such kind of our own real estate projects. But in the areas loan businesses the real estate risk should be taken by the client, not by us. So at this moment we don't have an idea to aggressively expand our loan businesses to real estate (inaudible).

Just one more follow up. What would it take for you restart the loan business? What do you like to see?

Yes, I'd say, basically, at some point many (inaudible) institutions will come back to the Japanese real estate market, then a little bit earlier than those players, we want to re-enter into the finance business to the real estate field.

And Mr. Kato, do you have any other questions?

That was great, thank you.

Thank you.

Thank you very much.

Our next question will come from [Tom Fleming] with ACI. Please go ahead, sir.

Good evening. Could you tell us a bit more about the medium-term ROE target and, essentially, what kind of balance sheet size and what kind of leverage it entails in your eyes to hit that number?

Yes. For the last roughly two years we have reduced our leverage and total assets balance sheet. And at this moment, as I said, we don't have and idea to continue to reduce our assets and leverage. But on the other hand, still the financial market is uncertain, and we continue -- we think we have to continuously exchange ideas with the market players about what kind of leverage would be suitable for ORIX's future growth.

So at this moment, for the time being, in order to try to lock in the 10% ROE, without increasing the leverage, we want time to try to achieve 10% ROE. For example, as I said, one area's not only to -- by providing the financial very pure loans, we want to add various services to such kind of finances to clients. Then we want to try to increase our profitability.

Or, for example, we want to more shift our business clients from the debt-related business to the equity-rated businesses. (Inaudible) we enter into the more aggressive [promising] areas, like Asia. In those areas we can extend higher growth compared with our existing Japanese markets. The fourth one is, for example, we want to -- we try to use new personnel resources. By having the new alliance with new partners we want to expand our activities going forward.

So such kind of various combination of methods we want to challenge 10% ROE without increasing the leverage. But we think that at some point the time will be coming when we can be allowed from the market players to have higher leverage. We have discussed with our top management.

All right, thank you. And if I may ask an unrelated question, can you tell us a little bit more about your credit cost assumption for you management forecasts for March 2011?

Yes. Actually, during the last fiscal year each area we forecast roughly JPY78b of the provisions for all businesses. And the result was JPY71.5b over the period. And, further, we have seen the new occurrence of the impaired loans in the corporate finance segment and our [Retail] operations. We have seen the dramatic decrease of those new occurrence of the impaired loans. So in that sense we believe that we can dramatically reduce our provision for the next -- this fiscal year by, say, 30% or something like that, or more than that.

Very good. Thank you very much.

Thank you.

(Operator Instructions). We'll now take our next question from Raj Chaudhary from Odey Asset management. Sir -- Raj Chaudhary, your line is open.

Hello, can you hear me?

Hello.

Good evening. Thank you for the presentation. I had two questions. Firstly, in your Leasing business you mentioned an issue with the residual values. Could you give us a bit more color in terms of what's happening to secondhand auto values, and the also the size of the write-downs you're having to take related to the asset base?

All right. Regarding our Automotive Leasing businesses, as you know, we based our asset residual value at the beginning of the leasing businesses. But recently, especially in the overseas market, we -- it has become a little bit difficult for us to enjoy a similar level of profit by the sale of vehicles at the end of the leases. So first we have to -- we change our estimated residual value more conservatively.

In other words, we change our residual value to the much lower level. Then at the same time we recorded a (inaudible) depreciation -- a higher depreciation at the same time, thereby, our profit reduced for the last fiscal year. But this period our residual values have been very conservative, so even after the market -- the assembly market has become shrinked, still, we have been able to enjoy some profit from the sale of the vehicles.

Thank you. Can you maybe give me some indication of how much you've changed your residual value assumption?

I'm very, very sorry that we don't have such kind of figures with me.

(Operator Instructions). And it looks like, 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 or closing remarks.

Okay. If there are no further questions I would like to take this opportunity to thank everybody for participating in this evening's conference call, and hope that we have the opportunity to meet, whether it be here in Tokyo or 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. Thank you.

Thank you.

Thank you, that does conclude today's conference. We want to thank you for your participation and you may now disconnect.