ORIX Corp (IX) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the ORIX Corporation's second quarter financial results conference call. As a reminder, today's call is being recorded. Now, at this time, I'd like to turn the call over to your moderator, Mr. Gregory Melchior. Please go ahead, sir.

Thank you. Good evening. This is Gregory Melchior, and I would like to welcome you to ORIX's conference call to review our second quarter consolidated results for the period ended September 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 second quarter results, and then we will open up the lines to Q&A. I presume that everyone has in front of them the presentation materials that were posted on the IR section of the website 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, and referred to in the financial statements, consolidated financial results April 1 to September 30, 2011.

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

Thank you, Greg. Thank you for participating in today's conference call. This is Uruta, CFO of ORIX Corporation. I would like to start out with a short explanation of the business environment and the future direction of ORIX. Please turn to slide 3.

The worst case scenario resulting from the current [Greek] issue in the EU, one way or another, Asian crisis is possible due to investment capital being pulled out from Asia, is something that we need to keep in our view. We experienced the Asian crisis in 1997, and we need to remain cautious.

Each country in Asia treated its own circumstances, and I cannot make an all-encompassing statement about the region. Our policy of [re-funding] the Leasing business and pursuing the equity and business investments, responding to the situation of each country has not changed. We are pursuing opportunities aggressively, but the overall prudent stance of the overseas business segment remains the same.

In Japan political issues remain, but domestic demand and the recovery from the earthquake will start to be seen from March of next year. Please turn to slide 4 for ROA by segment.

Net income for the first half was JPY45.3 billion. ROE was 6.8%, a 33% improvement over the 5.1% from the end of the previous fiscal year. Total assets after tax ROA improved to 1.08%, and segment asset ROA increased to 1.5%. However, further strategy and improvements are needed for a 10% ROE.

We recorded JPY45.3 billion in the first half, but we will not revise our March 2012 target of JPY77.5 billion upward. We still need to watch the conditions closely as the situation remains opaque surrounding the EU issues, the appreciated yen, and the slower than expected speed of domestic recovery.

Asset reductions have stopped. We are focusing on profitability, and while not considering rapid asset accumulation, we are looking to acquire quality assets with the aim of achieving improved ROA and 10% ROE. There are plans for investments in the second half along these lines. Please turn to slide 5.

Here you can see the ROA by segment. Let me begin with Corporate Finance Services. The ROA is currently 1.1%. Assets will remain around JPY1 trillion level for the time being, with a ROA target of 1.5%. Although it pales in comparison to other segments, we want to discern how much the ROA can improve by placing the emphasis of activities on the services aspect of Financial Services.

The main theme for the Real Estate segment for the time being is asset reduction. [Defined] ROA is 0.3%. We will increase the ROA by continuing to turn over assets and focusing on asset management in the operating business.

The Retail segment numbers fell due to the writedown recognized for Monex. Excluding a writedown, the segment has around a 1.4% ROA. The main operations of the Retail segment are the Life Insurance and Banking businesses. A dramatic ROA increase isn't possible, but they are carrying out independent ALM and, going forward, they will focus on increasing the ROA by developing a wide range of products and heightened added-value services.

ORIX Insurance and Banking changed its name to ORIX Bank in October and is considering starting a new card loan business as a way to increase assets and profitability. Please turn to slide 6 for the next three segments.

In the Maintenance Leasing segment it is difficult to develop a domestic strategy for ORIX Auto and Rentec. The market for used autos was strong in Japan and we were able to record gains on sales of used auto, as well as renewed leasing contracts. However, the domestic market remains difficult.

Again, against this background we are aiming to expand automobile operating leases in India, and to enter into operating leases in China. Domestically, we will increase profitability through streamlining operations and reducing costs.

The future of Rentec lies in overseas expansion, and expanding from products of Japanese manufacturers to include tie ups with overseas manufacturers is vital. We are currently expanding operations in Singapore, China, South Korea and the United States. Currently, the scale is small, but we are looking to increase revenues going forward. Currently, the ROA is 4.3%.

The Investment Banking segment has been renamed the Investment and Operation segment, and the Environment and the Energy-related businesses, which were previously included in the Corporate Financial Services segment, have been included in this new segment. The core businesses of the Investment and Operation segment are, Loan Servicing, Private Equity investment in Japan, and the Environment and Energy-related businesses.

The particular mission for this segment is increasing assets and expanding this area of operation in the Environment and the Energy-related businesses. The ROA is 3.5%, which includes a gain from the sale of our Aozora Bank shares. We want to maintain this level of ROA while we expand assets. The Overseas business segment ROA is 3.7%.

Please turn to slide 7 for a breakdown of ROA by region.

Greater China has a 3.9% ROA. We will expand our Leasing and Auto Leasing operations and promote environment-related and private equity investment. Inflation, bursting of the bubble, and political risk have all sparked debate in the news, but despite this, the GDP continues to remain around 9%. Inflation is 6%, but as growth is higher than in Japan, we will continue with our prudent stance and not slow down our business activities.

The United States has 4.1% ROA. This includes gains on investment securities, but this level of ROA is the result of investing with a focus on the services aspect of Financial Services. We will continue to search for interesting opportunities for private equity and business investments.

We will also keep our eye on South America for investment opportunities. However, we will remain cautious towards South America, as experience tells us that it isn't easy, and is fraught with risks such as inflation.

Asia and Australia have a 3.7% ROA. We're expanding the Leasing business and pursuing the Equity business.

The possibility of a second Asian crisis stemming from the European crisis cannot be denied. But our financial standing is much stronger than it was in 1997, and we will be able to overcome such an event.

Also, the current stock market downturn has caused us to take a wait and see stance towards (inaudible) from private equity investments that we had planned for the current year. We want to watch the markets in order to time efforts appropriately, rather than to [finance] at an inappropriate time. This may result in the delayed recognition of capital gains.

In the Middle East and Europe, Saudi Arabia, which is a key driver of the region, continues to be strong. We are looking for investment opportunities in other areas, but remain cautious, as it located in Europe's backyard. We are considering investing in areas where we haven't yet reached, especially Turkey.

Please turn to slide 8. Here you can see the GDP growth rates of major regions around the world. Our business consists of Japan and overseas elements, and we want to continue to look for opportunities in China, India and Indonesia.

In order to achieve our 10% ROE, we need ROA above 2.5%. Looking at ROAs by region and segment, it is clear where we need to focus our expansion and human resource allocation. Domestically, we will allocate [partner] out to high ROA areas, with the aim of increasing ROA to above 2.5%.

Please turn to slide 9, where I'd like to give my explanation of the first half results for the current fiscal year.

Net income for the first half of JPY45.3 billion, a 33% increase year on year. This represents 58% progress towards our initial full year target of JPY77.5 billion.

Please take a look at the pie chart on the right, which shows a breakdown of segment profits. The Overseas business segment, shown in purple, continues to demonstrate the high level of the profit contribution from the last quarter.

In addition, I've mentioned using the graph on page 5. Segment asset ROA improved to 1.5% this quarter, compared with 1.1% in the same period of the previous year.

Please turn to slide 10. Next, I'd like to explain the first half result for each of the segments. The figures in light blue in the top row are for the first half of this year, and figures from the same period of the previous fiscal year are on the bottom. Segment ROA is after tax and has been annualized.

The Corporate Financial Services segment recorded JPY8.6 billion in segment profit during this first half, approximately double of the same period of the previous fiscal year, which was JPY4.2 billion. ROA improved from 0.4% in the first half of the previous fiscal year to 1.1%.

We are seeing increased pace of growth in new business volumes, robust lease revenues, and increased fees.

The Maintenance Leasing segment recorded segment profit of JPY18.3 billion in the first half, compared to JPY14.9 (sic - see slide 10) billion during the same period of the previous fiscal year, an increase of 30% year on year.

As I mentioned earlier, gains on sales of used automobiles and the renewal of leasing contracts was forecast resulting from the earthquakes in Japan continuing.

New business volume decreased in the first quarter, due to the shortage of the new auto supply. However, this has recovered to the level of the previous year.

The Real Estate segment recorded JPY3.5 billion in segment profits, exceeding the JPY2.4 billion from the same period of the previous fiscal year.

Revenues from rented properties has increased, due to the progress in sales of real estate and operating leases, and our increasing operating properties resulting from a focus of completing properties under development.

The Real Estate operating business struggled during the first quarter, due to the effects of the disaster, but it redeemed itself in the second quarter, demonstrating even better performance compared to the same period of the previous fiscal year. Profitability also continues to increase steadily.

The sum of provisions and impairments for the Real Estate segment was JPY3.9 billion in the first quarter and JPY5.6 billion in the second quarter. The consolidated first half amount was JPY9.4 billion, a JPY2 billion decrease from JPY11.5 billion during the same period of the previous fiscal year.

Segment assets have decreased 5% year on year, and the segment is steadily progressing towards the fiscal year-end target of JPY1.45 trillion.

Please turn to slide 11. The Investment and Operations segment recorded JPY14.9 billion in segment profit in the first half, compared with JPY6.4 billion in the same period of the previous fiscal year, a [2.3% fold] increase year on year due to gains on the sale of our Aozora Bank shares and the robust performance by the servicing businesses.

Next is the Retail segment. Due to the writedown that was recorded for Monex Group shares, first half segment profit was JPY6.9 billion, compared to JPY15.2 billion during the first half of the previous fiscal year.

The Life Insurance and Banking businesses are exceptionally strong. The number of new contracts in the Life Insurance business is increasing steadily. The Banking business continued to increase its corporate lending and individual home mortgages, and expand its asset base.

Finally, the Overseas business segment; first half profit increased 29% to JPY29.1 billion, compared to JPY22.5 billion during the first half of the previous fiscal year. Despite the absence of large capital gains, the general leasing in Asia, auto leasing, and the aircraft operating leases made stable contributions.

In the United States, profits continued to be recorded on municipal bonds and Red Capital and Mariner, which we acquired last year, contributing to revenues, continuing to make a significant contribution to stable growth.

Segment assets decreased, compared to the end of the previous fiscal year, due to the effects of the appreciated Japanese yen, and [the action to decrease the inventory] in the United States. However, new business volumes of our Asian subsidiaries are increasing steadily, and the asset increased, despite seeing -- to a decrease on a yen basis.

Profits from the second quarter include a press release announcing the nearly 100% accretion from 42% equity method holding of our Indian auto-related Company. Also, our real estate development project in the Philippines has started with a local partner.

Please turn to slide 12. Here I would like to continue with an explanation of the Overseas Business segment.

This slide showing the trend in the base profits was also shown during the first quarter. On the left side is our Overseas business segment pre-tax profit. The right side shows what can be called base profit, which is calculated by subtracting capital gains, such as the gains on investment securities from pre-tax profit and adding back provisions and impairments.

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

You can see that both the United States and Asia have stable base profits. There was a drop right after the Lehman shock, but I would like you to see the insuring trend, which continued during the first half of the current fiscal year.

I'd like to continue with an explanation of the Overseas business segment by the regional asset base and ROA on page 13.

The bar graph on the far left shows the Overseas business segment asset base by region. As I explained during the first quarter results conference call, roughly 40% is the United States, one-third is Asia and Australia, and 15% is Greater China. Other, which is on the very top, consists of the ship and the aircraft related businesses.

I covered ROA by regional area, so please look at the pie chart on the far right, which is a breakdown of Overseas business segment assets by account.

There is variation, if you look at it by region and country, but looking it as a whole, you can see that the portfolio has a well balanced structure with approximately 40% leasing and installment loans and investment in securities each representing one quarter. This structure has not changed significantly over the course of the last few years.

On the final slide, on page 14, I'd like to talk a little about liquidity. This slide shows the amount of liquidity versus the amount of direct funding that is expected to reach maturity within the coming year. The ratio of this is shown by the red dots, representing the liquidity coverage ratio.

Liquidity on hand is shown by the blue bar on the left, with a dark blue portion representing available commitment line, and the light blue representing cash and cash equivalents.

The orange bar on the right shows short-term borrowings with the dark orange portion representing bonds and the medium-term note that will reach maturity within the coming year. And the light orange portion represents commercial paper.

Since the Lehman shock, we have been working to enhance our financial stability by decreasing the amount of interest bearing liabilities primarily focusing on short-term borrowing, while at the same time, working to smooth the maturity level.

Conversely, in order to respond to [adversity] in the capital markets, we are maintaining our available commitment line and focusing on maintaining our liquidity.

As you can see, we are currently maintaining a high level with more than 200% liquidity on hand in relation to the amount of short-term direct funding.

This is the end of my presentation. Thank you very much.

Thank you, Mr. Uruta. That concludes the presentation portion of tonight's call. I would like to go ahead and open up the lines to question and answers.

Thank you. (Operator Instructions). Mr. Melchior, it appears we have no questions today.

Okay, if there are no questions, I'd like to take this opportunity to thank you for participating in this evening's conference call. Hopefully, we'll have the opportunity to meet, whether it be 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 contact with us, using the contact information found on the last page of this evening's presentation materials.

On behalf of management and the entire ORIX Group, thank you for your participation, and have a good day.

Goodbye.

Thank you. (multiple speakers) That does conclude today's conference, and we thank you for your participation. You may now disconnect.