ORIX Corp (IX) 2011 Q1 法說會逐字稿

Hello and welcome to the ORIX Corporation First Quarter Financial Results Conference Call. At this time, I would like to turn the conference over to your moderator, Mr. Gregory Melchior.

Please go ahead, sir.

Thank you, Jake.

Hello, this is Gregory Melchior and I would like to welcome you to ORIX's conference call to review our first-quarter results for the fiscal year ended March 31, 2011.

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 head of the financial control headquarters.

During this evening's call Mr. Urata will discuss the results and then we will open up the lines to Q&A. I presume everyone has in front of them, the document entitled Earnings Presentation 100630E that was posted on the IR section of the website at 3.30 pm this afternoon 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 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 specific to our business.

Also, please note that the net income used in this presentation is the same as quarterly net income attributable to ORIX Corporation, referred to in the financial statements first-quarter results June 30, 2010.

Without further ado, I will now turn the call over to Mr. Urata.

Thank you, Greg. Hello, everyone. My name's Urata, CFO of ORIX Corporation. Thank you very much for joining our conference call.

Let me start with the information of the first quarter results for the period ended March 31, 2011, on page three. Net income for the first quarter was JPY16.5b, a 2.5 fold (sic -- see press release) increase from JPY7.2b during the same period of the previous fiscal year. Net income increased 129% compared to the same period of the previous fiscal year, and achieved 29% of its fiscal year target of JPY57b. All six segments achieved profitability for first time since the second quarter of the fiscal year ended March 2009 just prior to the financial crisis, and profits in all segments exceeded the same period of the previous fiscal year.

Credit cost and impairments are decreasing as expected by control through thoroughly responding to each transaction. Regarding assets, segment assets remained flat from the end of the previous fiscal year at JPY6.24 trillion. Please refer to the Appendix of this presentation for more detail.

In response to the changes in the business environment, each [section] further increased its strategy and is striving to expand the quality and type of services they provide to their clients. These services will be provided in conjunction with existing assets, while others will be provided individually. In this manner we are aiming to increase profitability without increasing assets. I will go into more detail regarding the segment activity later on.

We had forecast a 50% increase in net income to JPY57b, and are aiming for profitability in all segments throughout the fiscal year. The real economy was significantly impacted by the financial crisis and the recovery has been slow, but we think that we are off to a smooth start through our [50s] capitalizing on our operating base, client base and expertise.

Now I would like to start by covering the major topics for each segment. Please see the page four. [The] figures for this fiscal quarter are shown at the top and the same quarter from the previous year are on the bottom.

The Corporate Financial Services segment reported a profit for the first time in four quarters due to a decrease in provisions as the new occurrence of non-performing loans are decreasing dramatically. Although small, revenues from the environment and energy business are growing. Also, fee revenues in this segment are expanding, utilizing the high value-added products and services provided by ORIX Auto, Rentec and Life Insurance as our Group stays flexible. It is currently accumulating small-sized quality assets such as (inaudible) and [Sandell] Company through such measures as M&A.

The Maintenance Leasing segment continued to maintain stable profits by providing (inaudible) expertise and rich lineup of value-added services. This segment proposes ORIX value-added service to corporations that are sensitive to cost effectiveness, risk management and the environmental response and is well received by clients.

The Real Estate segment achieved higher than expected sales of real estate under operating leases and maintained a low vacancy ratio and high yield by continuing to focus on these. Real Estate transactions are slowly becoming more active and the sale of a large-scale property was made. We will continue to facilitate turnover, increase the value of the held properties and aim for higher returns.

Now please turn to the page five. The Investment Banking segment continued to maximize non-recourse loan collections by thoroughly responding to each transaction. The outstanding loan balance is decreasing and the risk-return balance is improving. We are continuing to increase the value of rental properties and make sales demonstrating the abilities of our Group-wide value chain. Opportunities are steadily increasing for loan servicing businesses to show its superiority based on its high level of expertise.

In the Retail segment, insurance premiums and the related investment income significantly increased in the life insurance businesses. We are expanding the product lineup which now includes [Keep], a new income security insurance launched in July and [Sure] a popular medical insurance, and (inaudible) insurance launched in March. Also, corporate loans are increasing at ORIX Trust and Banking, and assets have passed the JPY1 trillion mark. Both revenues and profits are showing robust growth.

The Overseas Business segment made major contributions last year, and the high profits are continuing in both Asia and the United States. Despite the absence of the large amount of capital gains that were recorded during the same period of the previous fiscal year, profit continues at a high level due to contributions from operating leases revenues in Asia, fee revenues from Houlihan Lokey. In the United States, RED Capital, a loan-servicing company that is a recent Group addition is already contributing to profits. We will continue to expand our existing stable revenue base of leasing and fee businesses while actively looking for new investment opportunities.

Next on page six, I'd like to talk about funding. We have continued the steady issuance of a straight bond from the previous fiscal year and have raised JPY266b, approximately 75% of that, JPY355.5b, in maturities for the current fiscal year. We recognize that diversified funding is the basis for stability, and based on this we issued $750m in global dollar-based bonds in April to accelerate overseas expansion. The funding environment has dramatically improved and while spreads on new issuances are tightening, we have issued long-term bonds. Please refer to the Appendix of this presentation for more details.

On page seven, in line with the application of a new accounting standard starting this fiscal year, variable interest entities used for (inaudible) investment by the special transfer businesses in the United States and the securitization of leases and the installment loans are consolidated. In line with the Houlihan Lokey consolidation, both total assets and the total liabilities increased by up approximately JPY1 trillion from March 31, 2010. However, this is just a change in accounting, and there has been no change in the actual economic condition. There is no change in the cash flow from investments and creditors of the consolidated liabilities have no recourse to other assets of the company. There are no additional risks.

Segment assets have not changed as a result of the implementation of this accounting method, rather this has been classified as managed assets. Similar non-risk assets that have previously been on the balance sheet have also been reclassified as managed assets. As accounting changes it is just a change in accounting. Management indicated targets based on actual economic conditions will be used as an indication of ORIX's condition from here on. That is to say, ROA 1.0% have been calculated based on segment assets and the liability related indicators such as debt equity ratio, and share of long term debt re calculated using short-term and long-term debt, excluding deposit, ABS and CMBS. The debt equity ratio is 3.3 times.

From page eight, now I'd like to talk about ORIX's growth strategy going forward. Mr. Miyauchi spoke about this during the annual results announcement and I would like to follow up with an update of what we are doing.

First introduce our corporate strategy which forms the foundation of our growth strategy. ORIX is constantly anticipating market needs and working to contribute to society by developing leading financial services on a worldwide scale and striving to offer innovative products that create new value for customers. Based on this philosophy, ORIX has continuously aimed to shape itself into the best form since it was established. However, the environment is continuously changing and there's no perfect (inaudible). Therefore, ORIX will continue to change and continue to grow.

We are currently looking at three main directions for evolution as can be seen on page nine. These are Finance plus Services, Asia, and the New Areas such as environment and energy. There are some areas with the possibility of short-term results while others will take time to nurture. Based on our operating platform, we will [basically] move in these three directions.

Now I'd like to explain each of the three directions giving detailed examples. On page 10 the first example of Finance plus Services in Houlihan Lokey in the United States. Houlihan Lokey is an investment bank with locations in the United States, Europe, Hong Kong and Tokyo. Its main functions are financial advisory, M&A advisory and restructuring advisory, all of which are top performers in the industry, and it's constantly achieved high revenue regardless of the business environment. As you can see from the graph, revenue contributions from each department changed in line with the business environment. Over the last four years total fee revenues have increased 1.3 fold. Houlihan Lokey will continue to seize opportunities from a changing business environment and secure a high level of stable revenue.

The second example of Finance plus Services is the Automobile operations as can be seen on page 11. ORIS Auto began as a leasing company in 1973. Since then it has expanded its value-added services in response to client needs. In Japan ORIX Auto leads the industry in terms of the vehicles under management and provides a rich lineup of services ahead of the competitors. Service leasing revenues, the pink portion on the graph, have grown to account for 40% of auto leasing operation revenues and form the foundation of the stable revenue base.

Please turn to the next page for Overseas. I would like to expand on the opportunity of global expansion of the Automobile operation. We have already expanded our Automobile operation to include 16 countries, mainly in Asia, Oceania and the Middle East. We provide the same high value-added services in Australia as we do in Japan, but the other areas are leasing-based. While growth may be limited in Japan, by shifting our gaze globally, especially to emerging nations, we can expect growth in line with the economic expansion. Utilizing the know-how from Japan, we can provide services that meet new needs in each country, and expand our operation in line with the growth of each country. We will also support the global expansion of clients from Japan.

The third example of Finance plus Services is our Servicer businesses on page 13. Currently, an ORIX subsidiary, OAMLS, has now approximately a 40% market share for CMBS master servicing and it is growing as Japan's top servicer. The market is at a turning point. Servicers have the ability to manage real estate cash flows, and can provide a variety of function, such as refinance arrangements. Capitalizing on such functions, there is plenty of room to expand fee revenues. In addition, ORIX invested in Tokyo Star Bank in June and entered into a capital and business alliance. We will provide partner (inaudible) support and credit management and professional know-how.

Next I will talk about Asia and evolutionary direction for ORIX from page 14. ORIX established its Hong Kong subsidiary in 1971, and contributed to the spread of the leasing business across Asia. When expanding overseas, ORIX joined with a bank of the essential local partner and established a joint venture. Also, ORIX nurtured local management to provide services mainly to local corporate clients at the local company. Although, we faced severe difficulties during the Asian currency crisis, ORIX stayed in the region and maintained its operating base. ORIX will organically grow its leasing business platform, in line with the growth of each company. There is plenty of room for additional services.

I'd now like to talk about potential in Asia from a different angle on page 15; that is businesses where we closely work with subsidiary but control it from Tokyo. On the right-hand side there is an example of a joint investment in Vietnam. Similar to Korea, we are aiming to increase our presence in Asia and are looking for profitable opportunities in addition to organic growth of local subsidiaries.

Now I'd like to focus on China, on page 16. ORIX established the first leasing company in China in 1981. Its partner was (inaudible) Beijing. The Chinese subsidiary unfortunately had to halt new transactions in 1993 and since then we continued to approach China through Hong Kong. In the 2000s, ORIX invested in funds sponsored by the Chinese Academy of Science, and the subsidiary was once again established in 2005. After reexamining the potential in China we established a Chinese headquarters in Dalian in December 2009. You can see example of our activities on the bottom right.

Finally, I'd like to touch on the direction of the New Areas, such as the Environment and Energy. ORIX began its energy and environment operations in the mid-1990s. We have expanded our menu as you can see on the left, and there is room for further growth. Regarding future potential, we established ORIX Electric Power, a joint venture with DAIKYO, and started the sale of condominiums with the solar panels by ORIX Real Estate. To achieve the aims of our philosophy, ORIX is constantly one step ahead of the competition in meeting client needs. I believe that this effort will bring the next growth for ORIX. We'll continue to face challenges in (inaudible) expansion, starting with a blend of original (inaudible) and continue to evolve.

Now this is the end of our -- my presentation. Thank you very much for your attention.

Thank you, Mr. Urata. That does conclude the presentation portion of this conference call. We would now like to open up the lines to question and answers.

(Operator Instructions). We'll pause for just a moment to assemble the queue. It looks like our first question will come from Kelvin Teo with UBS.

Hi, good evening, Urata-san, thanks for doing the conference call. Just a question on this special purpose vehicle or VIE debt that has been included or consolidated into your balance sheet this quarter. Can we get a little bit more detail regarding the assets? It's quite sizeable, roughly -- over JPY1 trillion of assets that were added to your balance sheet. Can we get some profile of the assets? I understand they're in installment loans based on the balance sheet changes. Details such as geography of these installment loans, collateral assets, loan to value and all this other information that you can provide.

And the second question on the back of that is on the funding that's backing these assets. It looks like they are basically asset-backed securities. Do we have any indication, or can you give us some indication of the maturity profiles and refinancing schedule of the funding of these assets?

All right, so let me explain this more in detail. Regarding the increase of the asset side based on the changes in your accounting, mainly the net new additional come from our special servicing businesses in the United States. So as you know, ORIX plays an important role in the servicing industry in the States, especially in the CMB servicing industry.

And we -- in some cases, we have had a kind of an equity portion together with our servicing businesses. And under the current new accounting rules, we have had roughly JPY900b of the new installment loans in the other side. And in addition, the second area is our securitization of the leasing of loan or assets in the Japanese markets. That is roughly the JPY100b in finance leasing and partially, some loan businesses.

So basically, in the asset side, we increased JPY100b leasing, financial leases and JPY900b of the installment loan, and at the same time, we also increased our liability side roughly the same amount and also, we had recorded some amount of the decrease of the retained earnings because when we sold the bigger deal of the leasing or loans or assets in the past, we enjoyed a capital gain income type of income and right now, due to the new accounting rule, we recorded a decrease of JPY22b in retained earnings.

So that is a very large [page] of the -- each asset, liability and shareholder equity changing here.

But again, I would like to express that there is no change to the economic conditions of ORIX based on the new accounting standards.

Okay. Thank you. Just -- there was another question from earlier when I asked regarding the funding side. Do you have the financing schedule for the funding side in terms of the maturity, when will it need to be refinanced, by how much? Any such details would be helpful. Thanks.

All right. As I said, we already a substantial amount of the straight bond in Japan as well as in the overseas market during this new fiscal year and of course, we think that as I said, in line with the idea of the expansion of our overseas business area that we want to challenge again, the --for example, the issuance of the overseas bond issues.

And also -- yes, sorry, my misunderstanding. Regarding the schedule of the VIEs under the new accounting standard, I'm sorry, we don't have any such kind of schedule in detail. So, for example, we are not quite sure that our JPY22b or the decrease of the retained earnings when we can enjoy that reversal of that [tier] on the coming fiscal year. We are not quite sure when it will happen, for example.

Sorry, let me just clarify. I meant for the JPY1 trillion of assets that were put onto your balance sheet consolidated this quarter, there is an equivalent JPY1 trillion of debt that was added to your balance sheet as well. For that JOY1 trillion of debt, what is the refinancing schedule for that new JPY1 trillion of debt?

I am sorry, we don't have any schedules for such kind of refinance of our new liability based on the new accounting standard. But whenever, we have a timing of the refinance, we also -- we don't need any additional cash or alternative to that.

Okay. But I assume that if the debt matures, they need to be refinanced, right? They need to be rolled over just like any asset-backed security?

Yes, it is a case by case for each of those. There is a balance between rollovers and once that are restructured.

Okay, thank you very much.

Thank you.

(Operator Instructions). We will pause for another moment to see if there are any further questions. We will now hear from [Les Hoy] with Barclays Capital.

Hello, Urata-san. Thank you very much for tonight's call. I know it's very late for you so we will do this very quickly if we can.

A couple of things, again, I think a lot of investors are quite concerned about this new accounting rule. At first, they were quite excited because you had a substantial increase in assets, it looked like a good opportunity for you to seize some of the growth scenario coming forward but the focus again, I think, in this particular age of deflation is on the balance sheet.

And from the balance sheet, I have two questions. Number one, if you look at the other asset item, this number has increased quite substantially over the last few years. Back in 2007, it was JPY380b and now, it is up to JPY554b, it's even higher than it was in March of this year.

Can you please confirm what exactly are these other assets? How much are real estate related as it talks about in the annual report. And also, do these assets generate any revenue at all or are they just non-revenue generating assets?

And the second question has to do with your investment in affiliates. Right now, that number is about JPY400b. However, if you look at the equity method affiliate gains this quarter, it was only -- it was less than JPY2b and that makes an annualized number of about JPY8b, the ROE on those affiliate earnings is only about -- is less than 2%.

Can you explain a little bit why the affiliate earnings were so weak in the first quarter and what is your scenario going forward for the investment affiliates and the profitability of those investment affiliates. Thank you.

Sorry for keeping you waiting. Regarding your first question, the other operating assets --

Not the other operating assets but the other assets. Not the other operating assets but the other assets, the JPY550b of other assets.

Regarding the other asset of JPY0.55 trillion of the other side, the other assets, I'm simply -- I've never been asked on this topic. So later on, is it all right for me to send you an answer by e-mail or something like that?

Yes, please, because it's a very big number. It's JPY555b, it's one of the biggest asset components you have and it's still growing and I'm not sure, I just want to know, does it generate revenues or not? And what is going to happen overall to those assets going forward?

And yes, you can send an e-mail...

But the story -- this kind of assets, basically do not produce any income.

Okay, that's good. And what about the affiliates, the equity method affiliates? What is the background for the weak numbers in the first quarter and what are your -- what is your - sort of your view going forward?

Regarding affiliate equity income, we have currently, as you know, DAIKYO and ORIX First -- ORIX Credit and Monex. Those are our three major Japanese affiliates. And in some areas in the Asian areas, we have some leasing company together with -- jointly with local partners. In some cases, for example in India, that is our affiliate company.

So basically - currently, as you see, we don't have any big substantial amount of income but if I remember correctly the -- from our Indian affiliates, we used to enjoy that very big amount of income. So from time to time, based on this kind of investment, we sometimes enjoy the lot of income and we enjoy -- in some cases, a smaller amount of the income.

But in two areas, one area -- in one area that we have in the near future, have a plan to exit from that investment. And in some area, like leasing company in Asian areas or ORIX Credit or Monex Group or -- those are solid investment, so in that case, we want to continuously hold that equity and we want to continuously enjoy income. So currently, the --

Yes, very good. I understand now. If you look at the last three quarters, you've had anywhere from JPY4b to over JPY8b in that equity method earnings. And this quarter, it fell down to less than JPY2b. What was the reason why the equity affiliate earnings were so weak in the first quarter of this fiscal year?

For example, for the first quarter of the last fiscal year, we enjoyed a kind of capital gains from our DAIKYO equity finance.

That's right. Okay.

So -- but on the other hand, it is true that our last quarter figures are relatively small compared with other quarters. That's true.

Okay. Thank you very much.

Okay. Thank you very much. We are sorry for keeping you waiting for long.

And we will hear, once again, from Kelvin Teo with UBS.

Sorry. One follow-up question. Sorry to focus a little bit on this but back on to the new assets that were added, I have one follow-on question. Could you tell us the asset quality of this roughly JPY1 trillion worth of installment loans and leasing assets in terms of information on NPLs or days past due -- any information you have on that would be helpful.

The second follow-up question on that is how much more of these off balance sheet VIEs are there outstanding outside there where potentially, you might have to bring on balance sheet? Thank you.

Yes, all right. Thank you very much. Regarding the first question, basically, we don't have any concern about the downside risk of our increased asset because as I said, this is -- there is no change to the economic conditions or risks.

So if such kind of asset will have some downside damage, then we don't have to -- say, how can I say, record such losses in our accounting. We don't need such kind of losses. So, this is not a direct answer to your question but in that way, we haven't had any ideas about the quality of our new assets.

Regarding your second question, under the new accounting standard, we already of course, corresponded all kinds of the figures to the balance sheet and the income statement. So going further, when the assets will be decreased going on or we'll have fewer additional balances.

But of course, we make new businesses, for example, servicing businesses, then at the same time, if we may have some equity investment in such kind of the -- with such kind of the new servicing businesses, then we will have the big amount of the asset in the same way with the new accounting standards.

Okay, thank you.

And at this time, there are no additional questions in the queue. (Operator Instructions). And with no additional questions, I'll turn the call back over to your host for closing remarks.

Okay, if there are no further questions. I would like to take this opportunity to thank everybody for participating in tonight's conference call. I 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 for your participation and have a good morning, good evening, and good night.

Goodbye, everyone.

That will complete your conference for today, we do thank you for your participation. Everyone have a good day or evening.