ORIX Corp (IX) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the Orix Corporation's third quarter financial results conference call. At this time, I would 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 thank everyone for joining, and welcome you to Orix's conference call to review our third quarter consolidated results for the period ending December 31, 2011.

I am joined here this evening by Mr. Haruyuki Urata, Deputy President & CFO; as well Mr. Shintaro Agata, Corporate Executive Vice President & Head of the Treasury Headquarters; and Mr. Takao Kato, Corporate Senior Vice President & Head of the Accounting Headquarters.

During this evening's call, Mr. Urata will discuss the third quarter results, and then we will open up the lines for questions and answers.

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 risks, factors that are specific to our business.

Also, please note the 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 December 31, 2011.

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

Thank you, Greg. Thank you very much for participating in today's conference call announcing Orix's results for the third quarter of the fiscal year ending March 31, 2012. My name is Urata, CFO of Orix Corporation.

First we turn to slide 3, where I would like to start with an overview. Consolidated third quarter net income was JPY68.8 billion, up 35% year on year. The trend in net income is strong, having achieved 89% of our JPY77.5 billion full-year net income forecast.

On the right, you can see a graph of the breakdown of segment profits. The left-hand bar is for the fiscal year ended March 2011, and the right-hand bar is for the consolidated third quarter. The Overseas business segment shown in purple, and Maintenance Leasing segment shown in orange second from the bottom, continue to make a large profit contribution since the previous fiscal year.

Two high profitability segments are increasing both revenue and profit, and segment ROA improved to 1.5% in the consolidated third quarter, up from 1.1% last fiscal year.

We have announced that this fiscal year is one where we will be firmly placed on a growth track, and that we will evolve while growing. I will touch on this later in the presentation, but we are confident in our steady progress towards stability, profitability and soundness.

Please turn to slide 4. Here I would like to explain each of the elements in the trend in profits. For each year, the orange bar on the far left is segment profit. The blue is base profit which is explained in the box on the right. And the yellow extending downward is the sum of provisions and impairments.

Base profit is on a stable trend and is expected to recover to a level similar to March 2009 this fiscal year. At almost 3%, there is a trend of high base profit yield. There was a write-down of our investment in Monex in the second quarter, and provisions and impairments for the consolidated third quarter increased slightly compared to the same period over the previous fiscal year. However, the total year amount is expected to be within our initial guidance.

Please turn to slide 5. Here, I would like to discuss some topics for each segment up to the third quarter. As always, the figures in blue on the top are for this fiscal year, and the figures on the bottom are from the same period over the previous fiscal year. ROA is after tax and has been annualized.

Starting with the corporate financial segment, segment profit increased to JPY14.7 billion, up 77% from JPY8.3 billion during the same period of the previous fiscal year. ROA increased to 1.3% from 0.6% for the same period over the previous fiscal year. Both leasing and fee revenues are strong, and provisions are steadily decreasing. Assets continue to decrease, but new business volume is steady increasing, up 30% from the same period over the previous fiscal year.

In the third quarter, we announced some M&A with Kyuko-Lease. This will be consolidated in the fourth quarter, and I expect assets to once again increase.

Business activity continues to focus on recovery demand and demand for electricity. The amount for each transaction is small, a few tens of million yen, but transactions involving construction agreements and various material fees, and a higher (inaudible), are slowly increasing in the asset (inaudible) area. It will still take some time for real demand to materialize.

The Maintenance Leasing agreement recorded JPY27.1 billion profit, up 30% from JPY20.8 billion during the same period of the previous fiscal year. As you can see on the slide, gains on the sale of used autos and revenues from renewed leasing contracts, increased as a result of the earthquake.

New business volume for this has decreased due to a shortage of new automobile supplies during the first quarter, but it is currently recovering to the same level as the previous fiscal year, and the balance is stable.

Please turn to slide 6, where I will continue with the real estate segment. Unfortunately, the real estate segment recognized a JPY2.9 billion loss compared to a profit of JPY3.5 billion during the same period over the previous fiscal year. The combination of events and sales in the third quarter culminated in increased provisions and write-downs.

There will be no large provisions or write-downs in the fourth quarter, and the total amount will be within our initial expectations. The segment, we record profit on the fiscal year basis.

Segment assets decreased 9% from March 31, 2011, to just over JPY1.4 trillion. In reverse to our year-end target of JPY1.45 trillion in assets, we achieved this goal during the third quarter. This achievement doesn't mean that we will stop. We will continue to decrease assets going forward.

When you have the chance, please take the time to look at slide 22 of these presentation materials, where you will see decreased [margins] resulting from [non] (inaudible) collection, Condo sales, and completion of properties under development.

The yield on the vacancy ratio remain stable, and we actively continue the sale of properties under lease. Also, operating facilities were impacted in the first quarter by the earthquake, but they are now performing better than the same period over the previous fiscal year.

Furthermore, we successfully exited from the Naruko Hotel, our famous Hot Springs resort in Miyagi Prefecture, in which we participate as part of our Japanese [rehabilitation] business through the sale back to its previous management. This is symbolic of our hands-on approach in the rehabilitation businesses.

Next, I'd like to continue with the Investment and Operations Segment. This segment recorded JPY17.8 billion in profit, up 57% from JPY11.3 billion during the same period of the previous fiscal year.

As I have mentioned before, there was a large contribution from DAIKYO in the first quarter, and gains from the sale of Aozora Bank shares during the second quarter.

Despite no special events during the third quarter, the five-star business continued to contribute large profits by capitalizing on its competitive advantage.

Please turn to slide 7 for the Retail segment. The Retail segment profit JPY15.3 billion in the third quarter, down JPY5.8 billion compared to the same period of the previous fiscal year due to a write-down that was recorded for Monex Group here during the second quarter.

However, profit growth at Orix Life Insurance and Orix Bank remain extremely steady, and the amount of profit decrease is small compared to the amount of the Monex write-down.

New policies in force at Orix Life Insurance are steadily increasing, and the revenue base is increasing.

Both the top and bottom lines of Orix Bank are increasing due to increased lending to corporate clients in addition to its traditional home mortgages.

Orix Bank will start a car loan business in the fourth quarter as planned. It will require some initial expenses, but will foster its growth to become a third pillar next to mortgages and corporate lending.

Finally, the Overseas Business segment. The segment recorded a JPY39.3 billion profit, up 27% from JPY31 billion during the same period of the previous fiscal year. Although there continued to be no large capital gains, general and automobile leasing in Asia, as well as the (inaudible) related operations, made revenue contributions.

In the United States, revenues from municipal bond trading and fee income from Group companies such as RED Capital, Mariner and Houlihan, continued to remain strong.

Segment assets are down 4% to JPY933.9 billion compared to March 31, 2011, due in part to the effect of the exchange rate. However, general and automobile leasing assets in Asia, as well as their (inaudible) related assets are increasing.

This portion of the presentation has been rather long, but now I would like to conclude the performance portion of the conference call.

Please turn to page 8, where I would like to continue with an explanation of future potential.

First, I would like to touch on the potential of domestic corporate clients. I mentioned earlier that recovery demand is slowing appearing, but naturally this is a period of emergency measures focused on public works. It will take a considerable amount of time to rebuild the lives and the businesses that have been affected. We saw the area and the developed [urban] areas that are resistant to natural disasters.

Orix Group would like to contribute to the maximum extent through our business operations. Furthermore, there are a few examples on the slide of business challenges that are causing larger challenges to small and medium sized businesses than before, such as a lack of electricity. Reassessment of business [continues as planned] in addition to the [yen optimization].

In response to these challenges, Orix established Group representatives across the country in the summer with the aim of improving information sharing, blending of expertise, and shifting from intra-group introductions to a framework where we can solve customer issues together.

Each domestic corporate client service will take time, as it is our response to sophisticated needs, will be very individualized, and won't attract much attention as we amounted for. However, we feel that the timing is right as we establish our client base after the (inaudible).

Starting in the fourth quarter and continuing the following fiscal year, I believe that this will slowly bloom and we [will fund] business as finance [plus] services that are uniquely Orix.

Please turn to slide 9. Next, I would like to talk about the Operating Facilities business. This business consists of approximately JPY150 billion, or roughly 11% of the Real Estate segment assets.

As I mentioned earlier, this business was impacted somewhat in the first quarter by the earthquake. However, excluding the (inaudible) net of expense prior to opening for business, all operations in this business are on trend of increased profits on a consolidated fiscal year basis.

Regarding the aquariums, new aquariums will open in March and May in Kyoto and in the base of the Tokyo Sky Tree. I am sure that some of you are wondering why Orix is involved with aquariums. Actually, we started operating the Enoshima Aquarium through the PFY initiatives roughly eight years ago in 2004.

Also, the former Osaka Welfare Pension Great Hall will be reopened as Orix Theater in April. The City Dome, Osaka, which is the home field of the Orix Buffaloes, is used as a large scale concert hall for what is called a dome tour on days where there aren't baseball games. We think that we can put this attractive track record and operating know-how to use.

The training facility, golf course and senior home business is growing through the (inaudible) facility, and I would like to see this business contribute to profit as a stable revenue base for the Real Estate segment.

Please turn to slide 10. Next, I would like to talk about logistic facility development. Although it is a niche market, there has been increasing demand for new facilities with advanced earthquake [resistance].

Also, there is a trend of consolidating logistics centers and increasing the number of facilities in line with the expansion of online shopping. Here, we have given three features and the strengths of Orix Logistic Facilities.

Using the know-how from our track record of developing 33 facilities, Orix has the planning capability to automate facilities. These facilities were once just warehouse to store packages, but recently work inside the facility has been increasing, with demand for layers to match.

For example, as work inside the facility increases, office space for administrative properties and administrative space for part time workers becomes necessary. Orix aims to differentiate itself by capitalizing on its history of developing of buildings and condos to create layouts that meet these types of needs.

Also, Orix announced the joint establishment of a specialized budget facility fund with Mitsui Group last month. Similar to Orix buildings, Orix's intention is to limit the amount invested in logistics facilities, while securing stable revenues from asset management.

Please turn to slide 11. The graph on the left shows the trend in assets and profits for the Asia and Other portion of the overseas business segment, excluding the United States. It has steadily recovered directly following the Lehman shock, and over the third quarter, [assets] JPY600 billion accounting for roughly two-thirds of the overseas business segment.

You can see from the pie chart on the right showing Asia and other assets by account that the profit is well balanced, our portfolio is well balanced.

Today, I would like to introduce four major local subsidiaries involving the Leasing business, starting with Thailand, which has experienced the flooding.

Competition over capital [recommence] for recovery has started, and increasing leasing demand is expected, resulting from insufficient capital from bank [debt] line. Orix's local subsidiary focused primarily on automobile and industrial equipment. However, it recently began rentals of precision measuring equipment and [PCs]. This is also expected to capture (inaudible) demand.

In Indonesia, Orix is involved in leasing of construction equipment and automobiles. New business volume is strong. We've been limited by GDP growth rate of 6% or 7%, and the start of a new truck leasing business. Assets are forecast to grow 20% on a fiscal year basis.

Next Malaysia. At 5%, GDP growth isn't as high as Indonesia, but domestic demand is driving the economy. Orix is focusing on areas with high expected future growth, such as timber, mining and construction industries. Similar to Indonesia, assets are forecast to grow 20% on a fiscal year basis.

Finally, South Korea. Automobile leasing represents the majority of the portfolio in South Korea. New business transactions are on a steady trend, and assets are forecast to grow nearly 30% on a fiscal year basis.

As far as we can understand from our clients and partners, there is no direct impact from the European crisis. Looking at local subsidiary clients by industry, agriculture, forestry, fishing and manufacturing are weighted more heavily than in Japan. But the economy continues to develop, and the secondary and tertiary sector business growth, I believe that the leasing items and services that Orix provides will naturally expand alongside of this. I want to actively capture these parts of growth by creating a mini Orix in each country.

Please turn to slide 12 for a summary. As I have explained throughout this presentation, performance is on a robust trend. A change in the tax code was also a factor increasing income amounting to JPY7.7 billion.

I don't believe there to be any significant downside risk in the fourth quarter, but I believe that it is still necessary to keep our eye on the impact that the European crisis will have on the global economy and financial and capital markets.

We have not revised our forecast at all at the current moment, but naturally, we'll be working for the next two months to exceed JPY77.5 billion.

At the conference call during today in Japan, I discussed in this way. Currently, the average forecast of the net income among the various analysts in Japan for Orix is around JPY83 billion, and we would like to achieve more profits, this level, or 10% upwards.

Orix has almost no European exposure, and I believe that asset sales by European banks resulting from the European crisis provides Orix with a chance for businesses.

There are some concerns about capital [price] from Asia in the market, but Orix has few clients or transactions that could receive significant [drive] impact, and we are instead viewing this as a chance to increase assets.

Furthermore, recovery in demand in Japan is finally starting to appear, and with our accumulated expertise, I believe that we will remain half a step ahead of other companies in taking good risks.

This completes our presentation of the third quarter performance and the future potential for Orix. Thank you very much for your attention.

Thank you Mr. Urata. This concludes the presentation portion of the conference call. Now Mr. Urata, Mr. Agata and Mr. Kato will be happy to answer any questions that you may have.

Thank you. (Operator Instructions). Theo Hadiwidjaja, JPMorgan.

I have just a couple of questions. In regards to your future potential businesses, one is the Aquarium and Theater business and the other one is the Logistics facilities, are these assets that you develop and then own? Or are these assets that you just have operating leases on and you have some kind of concession agreements to brand these assets?

(Technical difficulty).

Raj Chaudhary, Odey Asset Management.

(technical difficulty)

Thank you very much for your interest. So first, regarding our businesses in the areas, various operating facilities including Aquarium or Orix Theater, and so on, we actually by ourselves developed these projects. Of course, at first, we jointly entered in this business with various skilled partners, but right now, this time in the Kyoto and Tokyo aquarium areas and the addition in the area of our Orix Theater, we basically are the independent leader in involving these kind of other businesses, because based on our past expertise over last three to four years, or something like that.

In the area of real estate (inaudible) funded development, we also have investment in these kind of business areas over a couple of years in the various subsidiaries. And we -- as can be seen on the slide, page 10, we have already the experience in the 33 facilities all by ourselves. And for the first couple of cases, we just established these kinds of facilities for the investing clients.

But recently, we first involving the new project in these kinds of facilities and then we try to find the new tenants. So we believe that we have various -- already various expertise in these business areas, and right now, Orix is one of the top players in these areas.

(Operator Instructions).

Excuse me, Dave, I believe the second question was from Mr. Chaudhary from Odey Asset Management.

Yes. Mr. Chaudray, your line is open.

I had three questions, if I may. Firstly, can you talk about the trends you're seeing when you raised wholesale funding; whether the availability and cost of that is changing and how?

Secondly, with the European crisis, we are seeing some institutions, such as Royal Bank of Scotland, perhaps looking to dispose of asset portfolios in the Asian region, and I was wondering whether you're seeing that in areas that are interesting to you and whether the pricing might be attractive.

And finally, if we look at the Group for the last two years, there has not been any increase in the asset base and the leverage of the Group. Is increasing the leverage still an objective for management? And if so, in which segments might we expect such growth?

Thank you.

Yes, thank you very much for your interest. So first, regarding your questions about our wholesale funding. Right now here in Japan, we don't have any difficult situations for our funding operations, including the costs of funding. For example, it can be seen on page 18, under [same] materials. You can see that our client liquidity, cash availability is in our hands. As can be seen on this slide, we have assets, enough liquidity in our hands right now, and we haven't had any dramatic increase of our cost of funding for these kinds of purposes.

For example, regarding with -- our relationship with various banking areas, we have maintained -- we have been able to maintain great, good relationships without any increase of our funding costs. And in the Japanese straight bond market, the commercial paper market, the funding costs have been maintained at a very low level, as you know.

And just on the -- in the area of our new bond issuance on a global basis, we need to pay additional spread under the current uncertain situation. But still, the basic market rate is quite low historically, so we can enjoy the actual rate of interest, or we can enjoy the low level of the cost of funding. So at this moment, we enjoy this kind of situation for our funding operation.

The second question regarding the possibility of our new investment in the asset which will be sold by the European banks in the Asian areas, we believe that there should be various opportunities, and already we have had a lot of transactions introduced by various European financial institutions.

But still I believe that at this moment, from the point of [discount return], the prices are relatively high from our point. So towards the end of June, there should be another -- various opportunities from the European banking areas. So we are looking continuously, they are looking for those opportunities. And that should be one area for our future growth, I believe.

Regarding our leverage, as you know, at the end of the last fiscal year, our debt equity ratio was 3 times, and as the management, we want to maintain this kind of level of the leverage. Because in order to achieve the 10% ROE, we need to have the higher ROA together with a little bit higher leverage compared with the current level. So hopefully, we want to control the, say, stay 3 times to 4 times debt equity ratio with, say, a 2% to 2.5% ROA in the near future to achieve the 10% ROE. So we want to increase our assets in our portfolios going forward.

Regarding our real estate related exposure, we still continue to -- we are going to continue to decrease our portfolios. But in other areas, real estate, including the Japanese corporate finance businesses, maintenance leasing businesses, and of course our overseas business areas, those should be the key areas for future growth in terms of the profitability as well as asset volume. So that's our kind of basic ideas for our future growth.

Thank you very much. Could you just maybe tell me on the wholesale funding, you explained that availability remains good and that cost remains low. Could you tell me roughly what you're paying today for domestic bank loan, domestic commercial paper and overseas bonds?

Yes. For example, in terms of our funding costs, you can see that on the different materials. For example, on the quarterly basis, you can see that our supplementary information materials. And on that materials, on page 8, you can see the quarterly trend of our funding costs. And quite recently for the third quarter of our current fiscal year, domestic currency funding costs was 1.2%. And foreign currency funding costs, mainly the US dollar, 3.7%. And those funding costs have been maintained for the past couple of quarters at the same level.

And currently, we can enjoy the similar levels of funding costs, even when we want to have that longer-term duration of the funding, including the bank [relations] borrowings, [straight] bonds in the Japanese market.

Thank you. Just one follow-up. On the EU bank disposals, you mentioned that the price expectations are relatively high. What are they asking for? What do you consider to be unreasonable in terms of the multiple of assets or however you think about it?

So regarding our funding diversifications, we want to continue to diversify into various fields, especially in order to support our future expansion of our overseas business areas. We need to concentrate the assets with the overseas market increasing the dollar bond market. So as you know, last year, we issued a dollar bond in January and in April, and under the current situation, of course, it may be a little bit difficult for us to enjoy a similar level of the spread.

But as I said, at a rate when we believe we can enjoy the similar level of the funding costs, we want to continuously assess the US dollar bond market in order to support our funding operations.

So at this moment, most probably our spread will be, say, from the 280 basis points to 350 basis points, or something like that will be necessary, but that is acceptable level, I believe.

Thank you.

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

Thank you. If there are no further questions, I would like to take this opportunity to thank everyone for participating in this evening's conference call. 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 materials.

Also, a replay of this conference call will be available shortly on the Orix IR website if you joined part way through, or would like to re-listen to certain sections.

On behalf of the management and the entire Orix Group, I would like once again to thank you for your participation. And I hope that we have the chance to meet, whether it is here in our office in Tokyo or in your corner of the world.

Thank you very much. Have a good day.

Thank you.

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