ORIX Corp (IX) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the ORIX Corporation first quarter financial results conference call. As a reminder, today's call is being recorded.

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 first quarter consolidated results for the period ended June 30, 2011.

I'm joined here this evening by Mr. Haruyuki Uruta, Deputy President and CFO; as well as Mr. Shintaro Agata, Corporate Executive Vice President and Head of the Treasury Headquarters; and Mr. Takao Kato, Executive Officer and Head of the Accounting Headquarters.

During this evening's call, Mr. Uruta will discuss the first quarter results, and then we will open up the lines for question and answer.

I presume that everyone has in front of them the presentation materials that were posted on the IR section of the website earlier 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, consolidated financial results April 1 to June 30, 2011.

And without further ado, I'd like now to turn the call over to Mr. Uruta.

Thank you, Greg. Good evening, everyone. This is Uruta, CFO of ORIX Corporation. Thank you very much for your joining to this conference call.

I would like to begin my explanation starting on slide 3. Let me start with a summation of the first quarter results for the fiscal year ending March 31, 2012. Net income for the first quarter was JPY23.7 billion, a 44% increase year on year. This represents progress of 31% towards our initial full-year target of JPY77.5 billion. We are on a smooth trend with profitability in all segments.

Please take a look at the pie chart on the right. The Overseas Business segment continued to make a high profit contribution during the first quarter, as it did in the previous fiscal year. Segment assets were JPY6,040.7 billion, a 2% decrease compared to the end of the last fiscal year.

Return on assets, ROA, is on the rise in all segments, due to the increased pace of financial services and asset turnover, which I will be speaking of in more detail later on.

We are very fortunate to have got off to a fairly good start, although elements still remain that require a sense of caution, such as global financial instability and a slow recovery in Japan from the earthquake.

Please turn to slide 4. Next, I would like to explain the results and topics from each of the segments. The figures in light blue in the top row are for the first quarter, and the figures from the same quarter of the previous fiscal year are on the bottom. Segment ROA is after tax and has been annualized.

The Corporate Financial Services segment recorded JPY3.1 billion in segment profit during the first quarter, compared to JPY1.7 billion in the same quarter of the previous fiscal year, an increase of 83% year on year. ROA improved from 0.3% during the first quarter of last fiscal year, to 0.8%.

A further decrease in provisions was one of the contributing factors to the significant increase in profits. However, profits before provisioning solidly increased with robust trends in leasing and fee-based revenues, in addition to growth in environment-related revenues.

In addition to demand from the (inaudible) there is also new demand stemming from the shortage of electricity in Japan. We are focusing on securing transactions through the provision of Group products and services such as environment services, including the sale of solar panels, construction equipment leasing such as cranes, and rental of diesel generators.

The Maintenance Leasing segment recorded a segment profit of JPY8 billion in the first quarter, compared to JPY6.8 billion during the same quarter of the previous fiscal year, an increase of 19% year on year. Although the new business volume was stretched by [increasing] of the new car provision by manufacturers resulting from the earthquake.

ORIX [Auto] had strong revenues, due to an increase in lease renewals and strong Auto revenues including gains on the sale of used autos.

The Real Estate segment profit was flat year on year at JPY1.1 billion, as leasing revenues increased while sales of assets progressed. First quarter impairments were JPY3.9 billion. This is a significant decrease, compared to the same period of the previous fiscal year, and the fourth quarter of last fiscal year.

Assets decreased 2%, compared to the end of last fiscal year, with reductions progressing towards JPY1,480 billion at the end of the current fiscal year.

Please turn to page 5. Continuing with the Investment Banking segment, we have no large capital gains from exit on investments. However, the segment recorded a JPY5.1 billion segment profit in the first quarter, compared to JPY3.4 billion in the same period of the previous fiscal year, an increase of 48% year on year. We recorded robust profits primarily from loan servicing, and profits from affiliates also increased.

Next, the Retail segment recorded a segment profit of JPY9.9 billion in the first quarter, compared to JPY8.1 billion in the previous first quarter, an increase of 22% year on year.

In the Life Insurance business, insurance-related investment income improved, compared to the same period of the previous fiscal year. And the insurance-related gains grew steadily in line with increases in the number of policies in force, or new products.

Both the corporate lending and the individual home loans steadily increased in the Banking business. ORIX Trust & Banking will change its name to ORIX Bank on October 1 and will be referred to as the Banking businesses.

Last, but not least, the Overseas Business segment recorded a segment profit of JPY14.9 billion in the first quarter, compared to JPY11.4 billion in the first quarter of the previous fiscal year, an increase of 30% year on year.

Profits were equivalent to the fourth quarter of the previous fiscal year, maintaining stable revenues, despite the absence of large capital gains. There were stable contributions from Houlihan Lokey, RED Capital, and Mariner Investment in the United States. Gains on the sales of municipal bonds also continued to be strong.

Furthermore, there were contributions from stable leasing revenues from local subsidiaries in Asia, and increasing aircraft-related revenues.

Please turn to slide 6. Now I'd like to discuss our future directions, which I described at the end of the previous fiscal year, and talk about the progress so far.

During the presentation at the end of the previous fiscal year, I announced our strengths and future directions. Our foundation is built upon self-reliance, and our willingness to take on new challenges, which places an emphasis on constantly thinking of new possibilities and creating new opportunities in new areas.

Our greatest strengths are our ability to constantly create, based on this pace, and our ability to take action. In this sense, our aim is to constantly create new value and to grow while evolving, discovering the primary directions of increasing the pace of finance+ services and embracing growth in emerging markets such as Asia.

Please turn to slide 7. The bar graphs represent net income, and the line graphs illustrate segment asset ROA after taxes, which is calculated by dividing net income by the average segment assets for the period. ROA for the first quarter of the current fiscal year has been annualized. As you can see, the fiscal year ended March 31, 2009 was the bottom and profitability is recovering, [surfacing] 1.5% in the first quarter.

We often hear that revenues won't grow if assets don't increase. However, ORIX is [formalizing] our ability to invent ways of improving profitability. We will increase the profitability of each individual transaction and create a stronger revenue structure that can withstand changes in the business environment. The repetition of this will lead to us growing while evolving.

Please turn to slide 8. Let's take a similar look at the profitability of the Corporate Financial Services and Maintenance Leasing segment. The Corporate Financial Services segment is on the left and the Maintenance Leasing segment is on the right.

There are two bars for each year, with a thin blue outline bar on the left, illustrating segment profit. The yellow bar on the right represents profit before provisions and impairments, calculated by adding back provisions and impairments to segment profits. This is then divided by the average of segment assets for the period, or the yield before provisions and impairment, which is illustrated by the orange line.

Here, both the Corporate Financial Services and the Maintenance Leasing segments are at a similar level to that from the fiscal year ended March 2008. That is to say we have recovered to pre-Lehman shock levels. I would like you to understand that these segments are on the trend of increased profits, even including the effect of provisions.

We are seeing certain level of results from the improvement in profitability, due to our [facility] of finance+ services. We still do not see adequate strength in our asset [levels], however, we seem to gradually increase assets through a further focus on services.

Please turn to page 9. Next, I'd like to introduce some of the business initiatives of the Corporate Financial Services and the Maintenance Leasing segment that are being announced in press releases during the first quarter. The top two are examples of how we have incorporated new items that are in line with (inaudible), in this case, generators and digital signage, into our investing rental framework and network.

The bottom two examples are representing [schedules] where we provide services in areas that we have (inaudible) expertise, such as project management and business valuation. With these services as a further, we also seek to link them to areas where ORIX has the most strength, such as the provision of financial [funds] and expansion of assets. I will leave out the details for now, but if you are interested, please visit our website to read our press releases.

Please turn to slide 10. Now, I'd like to speak to you about our pursuit of embracing growth in emerging markets, such as Asia. On this slide, you can see a graph with two bars for each fiscal year. The bar on the left illustrates segment profits from overseas, while the bar on the right illustrates base profit, which is calculated by subtracting capital gains, such as gains on investment securities, from the pre-tax profit, and adding back provisions and impairments.

For both segment profit and base profit, the orange section on the bottom represents the United States, and the green portion on the top, represents Asia and Other. The dots illustrate base profit yield, which is base profit divided by the average segment asset [bands] for the period.

The United States' base profit is on a robust trend at around JPY20 billion. Asia has shrank a bit due to a decrease in earnings from equity-method affiliates. However, this is significantly increasing in 2011.

Capital gains may seem to occupy a large portion of revenues, however, there are measurable amounts of interest income, leasing income, and fee revenues from the United States and Asia. More important, we anticipate stable revenues contributions in line with the economic growth of each country in the Asian region.

Please turn to slide 11. Next, I'd like to show a slightly more detailed breakdown of Overseas Business segment operating assets. The chart is a breakdown at the end of March 2011. Greater China includes Hong Kong and Taiwan; also Other includes the ship and aircraft businesses.

The United States represents approximately 40%; Asia and Australia, 40%; and Greater China, 10%. (Inaudible) that haven't changed significantly over the past few years. The [red line] remains similar for the first quarter. Areas Other and the United States are an extremely diversified portfolio and each has room for growth.

Please turn to slide 12. Here, I would like to introduce a few examples of ongoing investments made in the Asian region in the last few years. When I announced, at the end of the previous fiscal year, that the Overseas Business segment would be a key growth driver for the fiscal year ending March 2012, I included a certain level of capital gains from these types of investment in addition to the base profits in the preceding page.

It depends on the transaction, but ORIX typically makes opportunistic investments, although it's [certainly] obvious to start taking good risks with (inaudible) existing in three to five years. However, we want to create a cycle where we constantly make investments, and constantly realize capital gains, as we approach this, as planned.

In addition, as I have always explained in the past, our policy is to make joint investments with partners. For example, we invested in a Shanghai fund management company last fiscal year that was serviced jointly with a major Taiwanese food and vegetable company, Uni-President, and Shanghai's (inaudible) institution, Shanghai International.

A JPY38 billion fund was established, which is a way to invest in [promising] Japanese, Taiwanese, Hong Kong and (inaudible) foodstuff and sundry companies focused on the expanding Chinese market.

Please turn to slide 13. Finally, I'd like to go into more detail about our investments made during the first quarter, which were included in the previous page. We made an investment in Mirae Asset Life Insurance through a private fund. Mirae Asset Life Insurance is ranked number five in the South Korea life insurance industry, and is under the umbrella of Mirae Asset Group, a major asset manager in South Korea.

ORIX is (inaudible) a new joint investment fund with LTI Investments, a South Korean investment company, and acquired the newly-issued preferred shares of Mirae Asset Life Insurance. The fund has the participation of nine companies, including the National Pension Services and the Korea Teachers Pension, both of which are major South Korean institutional investors. ORIX will receive fees of as the fund GP and will aim for capital gains as an LP fund investor.

We have an extensive investment track record in South Korea, including Korean Life Insurance, (inaudible), STX Metal, and ORIX (inaudible) in which we invested in November last year. ORIX' presence is increasing in South Korea. We were able to create a current fund and make our investment in Mirae Asset thanks to this track record.

We also have a subsidiary active in the leasing business in South Korea. With our general approach of expanding base profits and recording capital gains from constant investment, we are aiming to embrace the growth in emerging markets, such as Asia.

This concludes my explanation of the first quarter results and the future direction. Thank you very much for your attention.

This concludes the presentation portion of tonight's conference call. I'd like to go ahead and open up the lines to question and answer at this time.

(Operator Instructions). Karan Sodhi, Putnam Investments.

Mr. Uruta, could you comment on seasonality within your operating results? What sort of seasonality should we expect the remainder of the year?

To be honest -- thank you very much for your journey. To be honest, we don't have any kind of seasonable [calculations], especially for the first quarter result, because we didn't have -- make an expense in the very big capital gains tax of the income. And of course, there was some impact of the earthquake, but quite small, related to our financial results.

So we think that -- as you know, during the current fiscal year, we will closely and carefully watch the trend of the Monex Group shares, because of the possibility of write-downs, but other than that, we believe that this is a very steady growth, which is explicit during the fiscal year.

And the first quarter, to be honest, of course performed much better than our original forecast, but still, just a very small progress compared with just one-fourth of the full-year's target. So at this moment, we don't have any idea to change our forecast. But I think that we were able to start on a very smooth way.

What's the potential write-down from Monex that you're anticipating?

Yes, I didn't want -- I can't say any specific figures, but as you know, our current investment in the Monex Group is (inaudible) with JPY[53] billion, something like that, and (inaudible) at the current level of the share prices, we may need, say, JPY10 billion (inaudible) or something like that. But that figure is already included in our original forecast for this fiscal year, so you don't have to have any surprise.

Okay, thank you.

(Operator Instructions). Karan Sodhi, Putnam.

A question on asset growth. Is there a particular asset growth number that you're targeting for the year?

Well, of course, as I said before, we don't think that this kind of level is quite suitable for us. In other words, we want to maintain at least the current levels where the debt is 3 times debt to equity ratio. And unfortunately, at the end of the first quarter, the debt to equity ratio was at 2.9 times, and compared with our original expectations of the growth of the assets, unfortunately, the first quarter's results has shown some decrease of the assets.

But you can see each segment's trend of the assets. For example, we experienced some unexpected decrease of the assets in the Corporate Financial segment, partially due to the securitization of our leasing assets, (inaudible) non-participation in our existing loan portfolios to the third parties. So I think that -- but on the other hand, you can see as a result, the increase of the profitability.

So, I believe that if we cannot experience or expect the original increase of the asset, we believe that we can achieve the original forecast of the income at the end of the fiscal year.

And in the overseas business areas, unfortunately, you see some decrease of the assets compared with the first fiscal year end. But this is mainly because of the sale of our investment securities portfolios in the United States, or our municipal bond portfolios. So I think that in the Asian businesses, there is a (inaudible) ship finance business areas, our asset synergies are increased.

So I don't think that -- I don't have any concerns about the trend of our new investment opportunities or actions.

Could you also comment on real estate? I believe you haven't budgeted for any capital gains, and any gains on sales of real estate. Do you think, given the change or improved environment, you might think of revising that outlook?

Actually, this is before the -- just before the earthquakes in Japan, there has been seen that some or more overseas real estate investors had more interest in the investment in the Japanese real estate, but after the earthquakes, they currently are just watching the trend of the Japanese economy, or the area [they see].

Also, we see the attitude of the financial institutions in Japan, they are continuously either in providing finance to the real estate field, so for the time being, we cannot expect more transactions in the Japanese real estate market, but soon, or you can see the recovery of the Japanese real estate market.

So as a result, at this moment, we don't expect a big amount of the capital gains taxes profit from our real estate activities, but in say one year or something like that, we believe that we can expect some capital gains after the income, in addition to the very stable fee types of the income.

Okay. Thank you.

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

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

Also, if you have any questions or comments, please do not hesitate to get in contact with us using the contact information found on the last page of today's presentation materials.

On behalf of management, and the entire ORIX Group, I'd like to thank you for your participation.

Thank you very much for joining.

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