ORIX Corp (IX) 2011 Q2 法說會逐字稿

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

Thank you, Arian. 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 the fiscal year ended March 31, 2011. I'm 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 Financial Control Headquarters.

During this evening's call, Mr. Urata will discuss the results, and then we will open up the lines to questions and answers. I presume that everyone has in front of them the document entitled Earnings Presentation 100930E that was posted on the IR section of the website 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 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, that is referred to in financial statement second-quarter results September 30, 2010.

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

Thank you, Greg. Good evening or good morning. This is Urata, CFO of ORIX Corporation. Today, I would like to cover two major areas. I will first go over the results for the second consolidated quarter and then I will talk about ORIX's overseas business expansion. Now, please turn to slide three.

At the beginning of this fiscal year, management has implemented the four management policies that's shown here to get back on the new growth trajectory. One, over 50% increase in net income, profitability in all segments. Two, fortify financial stability. Three, enhance risk management. Four, increased profitability through further sophistication of expertise.

In this presentation, I will explain the results and the accomplishments from the first half. Please turn to slide four.

Let me start with the first item, over 50% net income increase and profitability in all segments. To give you a clearer picture of first-half performance, net income for the second quarter was JPY17.6 billion and the consolidated first half total was JPY34.1 billion. 59.7% of the JPY57.0 billion full-year target has been achieved and we are on a smooth trend.

All segments were profitable in the first and second quarters, achieving our goal of productivity of all segments. This is especially meaningful because we achieved this goal with a buildup of our own operations without [significant] capital gains.

Please turn to slide five. Compared to the previous fiscal year, both revenues and profits increased with total revenues increasing 104% and net income increasing 169%. Segment assets were 95% of March 2010 levels, mainly due to a reduction of real estate related assets. However, due to the application of the new accounting standards, total assets increased 109%. Shareholders' equity ratio and debt to equity ratio which we use as yardsticks to measure the strength of our corporate structure continue to improve and remains robust.

Slide six shows segment profit. Profitability has been maintained in all segments on the three-months basis during the first two quarters, and things are smoothly normalizing. The Corporate Financial Services segment, which has struggled with the cost of working through non-performing real estate related loans has finally come down and has achieved profitability for two consecutive quarters.

The investment banking segment has similarly achieved profitability for three quarters in a row due to a decrease in provisions and the impairments of real estate investment and lending.

Two years have now passed since the Lehman shock, and the risk of large-scale provisions and the impairment has eased. Increased profitability of the assets in each segment is returning and I believe that this is shown here numerically.

Please turn to slide seven. The Corporate Financial Services segment was profitable in the first half with profits returning to JPY4.9 billion. Loan to the real-estate-related companies have been dramatically reduced. Going forward, this segment will take a back-to-basics approach.

We will continue transactions with existing clients, reestablish contact with previous clients in addition to increasing new business volume. Also, we have implemented a finance process scheme to promote commission-based businesses, and our new activities in Asia and the environmental businesses are progressing.

Please turn to slide eight. The Maintenance Leasing segment continued to have stable profit through the provisions of its sophisticated expertise and the rich service menu. The segment income increased 20% compared to the same period of the previous fiscal year and ROA increased 5.4%.

Corporate client needs for businesses in [learning], outsourcing and the environmental response are increasing. We will profitably meet client needs by capitalizing on our size and expertise. We will improve performance by drawing on the balance and the positioning of financial services and the Group-wide sales promotion.

Please turn to slide nine. We shifted to a conservative operating policy in response to the dramatically worsening business environment. We limited the developments and the controlled asset levels. In addition, we worked to improve the NOI yields of existing assets by focusing on leasing. We are also striving to make sales to overseas investors. We cannot expect much in terms of revenues this year given the business environment. We will continue operations with caution.

Please turn to slide 10. The Investment Banking segment returned to profitability with JPY4.3 billion as there were no major losses such as joint corporation during the previous fiscal year. The real estate finance division focused on reducing the balance of nonrecourse loans. We are persistent doing our collection efforts, and in true ORIX fashion we are using our Group-wise capabilities to seek repayments, additional investments, promote sales, and improve leasing.

We are striving to prevent repercussions from real estate asset prices. Capitalizing on the services -- survivor's merit, we have rearranged the structure to improve business efficiency. The main business unit in the Investment Banking segment with the loan services. The real estate finance group was merged with ORIX real estate to combine management. Private equity investment will focus on Asia as the Global Business and Alternative Investment Headquarters.

Please turn to slide 11. ORIX Life Insurance performance is improving in the retail segment. ORIX Life has completed the product line shift to include medical reinsurance and is maintaining strong insurance revenues and related investment income. This shift has been well-received by the market. ORIX Life has a wide product lineup of medical, cancer insurance and the income security insurance. It is expanding its sales channels to include direct sales, Asian sales and bank insurance -- bancassurance. We expect the smooth increase in performance to continue.

ORIX Trust and Banking is steadily increasing business volume centered on corporate clients. In addition, our gains on the sale of ORIX Trust shares for the purpose of our joint venture are including during the second quarter of the previous fiscal year.

Please turn to slide 12. In the United States we are expanding our commission business that is not very dependent on the balance sheet. Houlihan Lokey achieved a stable commission income even during the financial crisis and it continues to do so. Likewise, the performance of RED Capital, our residential and mortgage [company] loan originator also remained robust.

Contributions from Mariner's asset management business will be added in the second half. Through this shift in strategy, ORIX USA is steadily improving its performance. The Asian region is strong, backed by the strong macroeconomics of each country. The improving results of our auxiliary and local subsidiaries' [Sri] business and IL&FS, our joint venture in India, are drawing attention.

Our higher level of profits continued despite the absence of the significant capital gains that were recorded during the same period of the previous fiscal year. There will be some capital gains from real estate investment in the Asian region in the second half.

Next, I will talk about the progress of fortifying the financial stability as shown on slide 13. Borrowing from financial institutions is mainly through 200 banks in Japan. In addition to strengthening our relationship with these institutions, we are expanding our relation to include overseas institutions such as Chinese banks.

We have increased our bond issuance, paying closer attention to the market. We have lengthened the maturities and tightened the spread of our bonds. Deposits at ORIX Trust and Banking are increasing in line with increased loan assets. Major financial stability indicators such as shareholders' equity ratio, share of long-term debt and debt-to-equity ratio are all improving.

Please turn to slide 14. Here I would like to make some additional comments about bond issuance. JPY363 (sic - see Press Release) billion in bonds were issued in the first half, this is almost the same amount as is due for maturity this fiscal year. Spreads on new bond issuance continued to tighten, although it was recorded for the first quarter we have issued a 10-year bond of JPY10 [billion] to institutional investors in November.

Please turn to slide 15. Now, I would like to explain how we have enhanced risk management of real-estate related assets which represent a large portion of our asset portfolio. On March 31, 2008, we had JPY2.7 trillion in real-estate related assets and the risk was divided into three areas. For loans, the real-estate related companies which represents the most risk we are focusing on early collection and reducing impairments. This is represented by the red portion in the graph.

Nonrecourse loans and specified bonds represents medium risks of which we are reducing by pursuing a collection policy and asking the equity holder for additional investment. This is shown in the (inaudible) section of the graph.

Rental properties, condos and operating facilities represent our own operations where it is easier to manage risk. However, we have been holding back the business in light of the real estate market trend. This can be seen in the blue section of the graph. As a result, real-estate related assets decreased from JPY2.7 trillion at the end of March 2008 to JPY2.1 trillion at the end of September 2010. We have especially focused on reducing finance-related assets which has decreased by 46%, nearly half, from March 2008.

Please turn to slide 16. Now, for a little more detail regarding the condition of assets in the real estate segment. The graph on the left shows the rental property NOI and the vacancy rate. We have been able to maintain the NOI and decrease the vacancy rate by focusing on leasing while turning over our rental properties. We will continue to decrease risk, given the fact that the domestic real estate market will continue to remain weak.

We have been successful in selling property where we have increased the value of overseas investors. We will continue to increase the value of the properties to the level that meets the expectations of investors. On the other hand, we will be involved in real estate transactions backed by real demand in Asia, an area that we have continued the high growth, keeping an eye on timely exit.

Please turn to slide 17. The final part of this year's management policy is the increased profitability through further sophistication of expertise. I will touch on the three areas -- financial services, energy and the environment, and Asia in the following slides. Please turn to slide 18 for an example of financial services.

As we announced in the previous quarter, we purchased RED Capital, our US real estate loan servicing company with the aim of increasing our commission-based business. ORIX USA has a history of investment in securitized commercial real estate loans, involvement in loan servicing, and it has a good understanding of the market. We expect the combination of know-how from these two businesses to result in new synergies. As expected, performance has been good after the purchase.

Please turn to slide 19. The recent acquisition of Mariner is one more example of how we are expanding our commission-based business. Mariner is a leading independent SEC-registered hedge fund founded in 1992. It boasts a large asset-under-management size that puts them at number 30 worldwide, as an asset management company that's specialized in fixed income.

Mariner has a high degree of expertise in addition to the infrastructure for structuring and managing funds. Mariner offers two kinds of businesses, asset management services for investors as a hedge fund and operation and management functions for [funds] that do not have their own infrastructure. ORIX will gain know-how in the asset management business with the acquisition of Mariner. Additionally, ORIX USA will be able to expand its customer network to include Mariner clients such as corporate investors like US pension funds and insurance companies.

Please turn to slide 20 for energy and the environment. The concept of leasing that is using [product] efficiency for a long period of time without owning it is an eco-friendly business model. ORIX has been pursuing various environment businesses starting with wind power generation business 15 years ago.

The table shown on the slide can also be divided as follows. First, resource recycling business, the collection of end-of-list items and its narration. Two, energy reduction, ESCO business and electricity power business. Three, CO2 reduction business, carbon offset, car sharing and environmentally friendly real estate development. As you can see, we have a history and track record of expanding the business by responding to the times and the client needs.

Please turn to slide 21. A myriad of eco products providers exist as the number of eco products and technologies have increased along with increased demand. On the other hand, additional service-oriented functions are required when customers try to use these products and technologies. There aren't many companies that can offer one-stop service that has the ability to combine these functions. ORIX Group aims to take on the role of an eco service integrator and grow its business as new commission-based businesses.

Please turn to slide 22. New environmental businesses that have received media coverage are summarized in this table. The market has tremendous future potential. And with the cooperation of the government, local authorities, corporations and academia, we have developed new businesses, intermediaries, and this [official] status as an eco service integrator in Asia.

Please turn to slide 23. And finally, Asia. A detailed explanation of our business strategy in Asia is included way down in this presentation.

Please turn to slide 23. To wrap up the first part of the presentation, the main trends we see in Retail and Overseas business segments had shown first-half profits. We believe this segment will release profits in the second half and beyond. New transactions have increased and the asset level seems to have bottomed out in the domestic sales department.

The domestic sales departments are returning to their [routes] and reestablishing relationships with clients, while accumulating small-size assets. In addition, the domestic sales departments don't just provide finance, they are also offering new additional services. This transaction is small. However, we feel we are headed toward the next growth stage that is suited to the new environment. We believe the speed of progress and the content of the first half will continue to the second half. The fortification of financial stability and the enhancement of risk management are also progressing as planned.

Please turn to slide 25 for the second half of this presentation, Overseas Business Expansion. Now I would like to talk about our strategy for funding business overseas, excluding the US, which is home to ORIX USA Corporation. We are primarily focusing on Asia, the Middle East, in addition to ship and the aircraft-related operations.

Profits are expected to be flat year on year at JPY13.1 billion primarily due to the appreciation of the yen, as most of the local currencies in countries in which we operate are pegged to the dollar. However, all companies are achieving their targets in local currency's basis. Assets, [JPY435.3] billion as of September 2010 with foreign exchange rate being the primary reason for the decrease.

Please turn to slide 27. GDP growth is strong in Asia, especially China and India. And it is expected that this trend will continue. Countries that are being performing well are Hong Kong, Australia, Saudi Arabia, India and Malaysia. Current performance has been hampered by political unrest as well as fiscal issues in Dubai.

We have minority stake in a leasing company. We believe that the impact from this will be minor. We have experienced the Asian crisis over the late 1990s. So we are keen on the risk side of our expansion in Asia. However, we think that the current growth will continue centered on China. Therefore, we are currently increasing the allocation of management resources with a basic policy of five-year turnaround on investments.

Please turn to slide 28. Here too, for primarily the Asian based local subsidiaries will be the central part of a shift towards finance-related businesses. We have been asking locally since we established our subsidiary in Hong Kong in 1971. We adjust the size of our business to match the operating environment of each country.

We are active in 14 countries in Asia, and 25 countries including Middle East. Pre-tax profits are still limited in size, but our target is $100 million to $200 million.

The majority of subsidiaries are managed by currently the local managers, with Japanese staff involvement limited to risk management. Each country is different, but we want to expand our operations from leases to the provision of integrated financial services, especially in China.

We are aiming to set up our operating lease business centered on cars in China. Car sales increased in Indonesia, Thailand, and Malaysia where we want to pursue the provision of auto leases.

Please turn to slide 29. We will actually pursue private equity investment. Our basic policy is to have strategic local partners, which is a key factor to ensure investment policy. As ORIX is a Japanese company, we will invest with local partners and obtain a minority share. This does not mean, however, that we will be passive. We will make sure that we have a voice and veto power.

The maximum turnaround time will be around five years, and we will secure exits through IPO, put-call or through sales through our partners. Our investments will be diversified with market-niche investments of JPY1 [billion] to JPY10 billion in equity value. We will also hedge our [foreign] exchange rates. We have a service headquarters in Dalian. It has its own financial base, and there will be no guarantee from ORIX in Tokyo.

Investment in China will be funded locally. Our affiliation with the Dalian government has allowed us to participate in some activities such as real estate development. Another area is the environmental business in China and Asia. The investment -- we are in talks to conclude a tie up with one of the three major local fund managers and their investments will be decided within this year.

We have also participating RMB3 billion foodstuff-related fund with Shanghai International and Taiwan's Uni-President. We will also use the know-how from our Dublin-based aircraft management company to expand leasing operations in China.

Please turn to slide 30. The items in the top box are transactions for which exits have already been made. We made a 17% investment in Korean Life in 2002, and exited by (inaudible) in 2008. The value of this investment rose 3 times at the time of exit. We invested in YK Steel in 2002, and the exit is in 2008 with a value of 3.5 times at the point of exit.

We also achieved significant capital gains from STX. Pureun 2 is an ongoing transaction where we're planning to acquire an 86% stake as soon as we obtain approval from the relevant authority in Korea.

In Manila, we are participating in the joint condominium venture with Metrobank. Currently, 350 of the 863 units have been sold. We believe that sales will continue smoothly. That's in par with 100-unit condo development in Singapore. Construction started in 2008. And there will be no impact or writedowns as fallout from the Lehman shock.

Air Asia X in which we have a 10% stake recently started a flight to Haneda airport in Tokyo. We will continue to increase corporate value. In the shipping businesses, there is a strong demand for Chinese flagships, and we are currently hammering out the details.

Please turn to slide 31. This page shows our private equity investments. Companies shown in the top row represents successful exits. The bottom two rows are companies in which we have invested and they are in the process of increasing value and looking for an exit. Excluding our investment in Pureun 2, we have a minority stake in all investments with a voice and a veto power.

Our strategy is to seek an exit from all of these companies in three to five years either through IPO, [straight] sale or sale to our partner.

Please turn to slide 32. Here are our business partners. UOB and DBS are major partners in Singapore. ORIX Singapore is a partner in the leasing business and we have over a 35-year history. We also have major investment in Nassim Park with UOL, a member of UOB group. ORIX Rentec has a recent joint venture with the Chinese Academy of Sciences. We will also participate in environmental related project together. CRM is a rental joint venture in China. We expect to expand our joint operations with them in China.

Please turn to slide 33. Here you can see our consolidated subsidiaries. ORIX Aviation Systems, the third from the right on the bottom is our Dublin-based airport asset management company. We are currently operating 100 planes, 15 owned by ORIX and 85 owned by investors. We have recapitalized on this know-how to expand operations in China and the Middle East.

This page shows our non-consolidated subsidiaries, page 34. IL&FS is an Indian infrastructure-related investment bank with good profit levels. We will strive to expand in India, and IL&FS will be the key factor in this strategy.

This concludes the second half of this evening's presentation. Thank you very much.

Okay, this does conclude the presentation part of the conference call this evening. I would like to go ahead and open up the lines to Q&A.

(Operator Instructions) We will now pause a moment to assemble the roster. There is no one queued up at this time. (Operator Instructions)

And Mr. Melchior, there appear to be no questions. I'll turn the conference back over to you for any additional or closing remarks.

Okay, if there are no questions, I would like to take this opportunity to thank you for participating in tonight's conference call. And also we have the opportunity to meet you whether it is here in Tokyo or when we travel to your corner of the world. Also if you do have any questions or comments, please do not hesitate to get in touch with us using the contact information that can be found on the last page of this evening's presentation material.

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

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