ORIX Corp (IX) 2012 Q4 法說會逐字稿

Good day everyone, and welcome to ORIX Corporation's annual 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.

Thank you. Good evening. This is Gregory Melchior, and I would like to welcome you to ORIX's conference call to review our annual consolidated results for the fiscal year ended March 31, 2012.

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

During this evening's call, Mr. Urata will discuss the annual 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 ORIX website here in Tokyo.

The following live broadcast is copyright to ORIX. The statements made today may contain forward-looking information. While this information reflects management's current expectations or beliefs, you should not place undue reliance on such statements as our future results and business activities may be affected by a wide variety of factors that are out of our control.

You should read the forward-looking disclaimer in our earnings presentation, as it contains additional important disclosures on this topic. You should also consult our reports filed with the SEC for any additional information, including risk factors specific to our business.

Also, please note that net income used in this presentation is the same as net income attributable to ORIX Corporation, referred to in the financial statements consolidated financial results, April 1, 2011 to March 31, 2012.

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

Thank you for your continued support of ORIX Corporation. This is Urata, CFO of ORIX Corporation.

I'd like to start this earnings result conference on slide 3 of the presentation materials.

The fiscal year ended March 31, 2012, reconfirmed ORIX's growth trajectory, and management shifted from defense to our offensive stance.

This resulted in JPY86.2 billion in net income, exceeding the initial target of JPY77.5 billion by more than 10%; and achieving a 28% increase from the previous fiscal year.

Taking performance into consideration, the dividend for the fiscal year has been raised JPY10, to JPY19.

Although the environment remained opaque throughout the previous fiscal year, we were able to expand and strengthen each business through the policies of increasing the pace of financial services and embracing the roles of emerging markets, including Asia, and grow by entering into neighboring areas.

During the year, there was a great deal of uncertainty regarding the economy of Europe. This issue does not have a simple resolution, and will continue for the time being. We still don't have a clear view of how [bloated] financial functions will decrease and change.

The ORIX Group needs to approach the environment with a fresh mindset, and then to move forward, while maintaining a sense of caution. This is the environment that we find ourselves in.

Conversely, growth in emerging economies, primarily in Asia, is strong; and there are still positive factors, such as GDP growth and the recovery of demand in Japan.

Given this business environment, this year will be one where we continue to both strengthen our stability and increase profitability by year where ORIX becomes a better company.

Using the combined strengths of the ORIX Group and attributable investments, the target for the current fiscal year is JPY100 billion; a 16% increase year on year.

Please turn to slide 4. I stated earlier that the opaque business environment will continue. However, I believe the area of growth, based on finance centers, on credit creation and lending, has ended.

ORIX needs to find new businesses, where it can skillfully entwine finance with ancillary services. I am thinking about that [nation] that creates a flow of debt to equity, and then on to operations.

What this means is increasing profitability by volume in the lending business, and intensifying investment activity. On top of this, we want to add expertise in businesses that we can operate.

We won't abandon debt and lending. We will continue with our finance business, and, using our expertise, aim for high returns. We will also increase the speed of transitioning from domestic to overseas, and from financing to Maintenance Leasing.

We want to increase (inaudible) lending through ORIX Bank, using their deposit base. In addition to expanding the finance business at the Bank, we would prepare the capability to accept third-party capital in the form of funds and joint investment.

In order to do so, we need to have top caliber expertise. The same applies to the real estate business as well.

We have been steadily decreasing real estate holdings, to the scale where we can create a business with a 4% to 5% yield. The direction is to change the business by capitalizing on expertise to provide services which we have been steadily achieving.

Equity and the investment activities are areas where we have both a track record and expertise, such as domestic and overseas private equity investment, and aircraft and ship-related operations. We will continue to further focus on these.

There are many different (inaudible) involvements, and our intention is to capture growth. For example, we are considering private equity investments in Asia, corporate rehabilitation in Japan, and finance business-related investments in emerging markets.

However, the aircraft and ship-related business, similar to [real estate] investments, has its highs and lows. In this type of business, you need to have the ability to discern between good and bad times, and have the flexibility to take opportunities to invest when it is good and recognize bad timing. This is why it is necessary to control the size to within a certain range. We will do this by increasing our ability to judge timing to the level of expertise, and, therefore, manage volatility.

Next comes Operations, which requires (inaudible) expertise. We have two (inaudible), experience and the expertise, in our expansion into neighboring business fields, such as through the rehabilitation business.

Comparing the [profit size] that have been achieved through this, we can see that it takes time, energy and a lot of expense to accumulate expertise. However, we already have (inaudible) businesses with exciting futures, such as Equipment Rental, Rent a Car, Car Sharing, Japanese Inns, Golf Courses, Aquariums, and Senior Facilities.

It is because we have this type of expertise that we are able to gather information about the next business opportunity, which is why Operations in our important business area.

Using the expertise acquired through the Finance and the Equity businesses, we would pursue our own operations and create new added value.

The ORIX Group started as a [listening] business, and has naturally expanded its business area through its expansion into neighboring fields in pursuit of businesses with added value. This is why businesses are not separated by (inaudible). Rather, they are intertwined and incorporated with the synergy occurring naturally.

The ORIX Group is not (inaudible). We aren't a group of individual statements. Our strength is the ability to provide [answers], customer aid, customer need, through the management of diverse segments as a single entity, giving ORIX a unique presence.

Corporate management is different from baseball in the park. That is it's not a [sitting] game; it is always in progress. The ORIX of today is also only a moment in progress. We are working for tomorrow with the idea of making the current ORIX even just a little better. I am certain that we can expand the business through Debt to Equity, and then on to Operations.

If we are able to skillfully shift in this direction, we can achieve stable, diverse business expansion. If we create a diversified portfolio, that means that we'd only increase through a further heightening of each segment's expertise and overall collaboration, and the portfolio will be extremely stable from a risk management standpoint.

This was proven during the financial crisis, and we want to maintain this strategy moving forward. Today, as a next step, the ORIX Group will find a unique and even more interesting expansion.

Please turn to slide 5. We need to always be concerned about the sufficiency of shareholders' equity as long as we are in the finance business. I believe that this is especially important to be thinking about this in the current condition of the world. However, I also think that it is more important to use it in a robust, meaningful way to deliver firm results.

Profitability wise, our mid-term target for ROE is 10%. In these few years, we have been getting closer to achieving this target. However, I would also think that we should not set a time limit for achieving a [single] data, such as ROE, in the current business environment, which can be described as a transitional phase where there is a massive velocity. One thing I can say at the moment is that we will move forward steadily towards 10% going forward.

Currently, all of the segments are in the condition to move further forward. First, we will aim to make use of accumulated shareholders' equity. I believe that there are also many chances during the transitional way. Further, ORIX at the moment has the capital and the expertise to capture those opportunities.

Going forward, our goal is to steadily grow ROE and earnings per share.

In addition to growing each and every business of different characteristics with care, we will further pursue on generating new value by promoting cross-function collaboration. This is what we believe to be ORIX's distinctive business model, unlike no other in the world. Over the course of years, we hope to further evolve this business model.

Please turn to slide 6. Starting on page 6, I would like to discuss the performance for the fiscal year ended March 2012 and the business strategy for the current year. Let me begin with segment profits.

The slide shows the five-year trend of segment profits for the fiscal year ended March 2009 to the target for the current year. As you can see, there were segments that recorded losses and segments that were able to endure the financial crisis. The fact that ORIX business has diversified into different areas proved to be very effective.

In the previous fiscal year, all segments, excluding the Retail segment, increased profit, with pre-tax income increasing 48% and net income increasing 28%. The Corporate Finance services and the Maintenance Leasing have especially contributed to the increased profits. This fiscal year, we aim for increased profits in all segments.

Please turn to slide 7. Next is the trend in segment assets. Similar to the trend in segment profits, this slide shows the five-year trend from the fiscal year ended March 2009 to the target for the current year.

Segment ROA after tax for March 2012 increased to 1.4% as a result of a controlled low leverage asset turnover and the accumulation of quality assets, while reducing assets in the Real Estate and Corporate Finance Services segments after the financial crisis.

This fiscal year we'll continue to reduce assets in the Real Estate segment, but we will increase assets as a Group.

In the Retail segment, assets are expected to grow by JPY150 million, in line with the share buyback, of ORIX Credit that was announced last month.

Please turn to slide 8. Now I would like to give you an overview of segment performance, and explain the strategy for the current fiscal year.

This time we have disclosed a base profit trend, along with the segment profit. Base profit, shown in orange, is the segment profit minus capital gains, such as gains on sale of the real estate and operating leases, and provisions and impairments have been added back. Please see slide 32 of the appendix of this presentation for a detailed definition.

Starting with our Corporate Finance Services segment, the base profit trend was stable, primarily due to leasing revenues and fee income, in addition to our significant decrease in provisions.

Segment profit increased over twofold, and ROA also increased to 1.4%, as can be seen from the line graph on the bottom.

Despite a year-on-year decrease in segment assets, shown in blue on the bottom, they bottomed out in the third quarter and are starting to increase.

This segment is central to the Group, as it consolidates Group expertise, a wide variety of products and services, [other] client network, and is charged with the role of strengthening relationships by identifying client issues and needs.

This segment has been working the last few years to re-establish relationships with clients that have been lost, due to the Lehman shock, and the client base and business opportunities are steadily growing. We will continue to move ahead with these activities.

Please turn to slide 9. Next is the Maintenance Leasing segment. This segment achieved stable revenues, by providing a (inaudible) expertise.

Leasing transactions decreased early in the fiscal year, due to a shortage of new vehicles, resulting from the disaster. However, new transactions increased, along with the recovery in supply, and assets have surpassed the level of the previous fiscal year end.

Profits are also on a robust trend, due to strong gains on sales of assets and revenue from renewed leasing contracts.

This segment is at the forefront of providing financial services within the Group, yet it still has room to grow in the provision of high value-added services.

Also, we are pursuing increased profitability through honest efforts to help operation reform and cost controls.

Please turn to slide 10. Next is the Real Estate segment. This segment reduced assets, at a pace that exceeded the initial forecast of JPY1.350 trillion, and segment assets at the fiscal year end were JPY1.370 trillion. Base profit is steadily increasing.

I'll go into further detail about the Real Estate statement later, later on in the presentation, but provisions and impairments increased during the first quarter, but the full-year amount decreased compared to the previous fiscal year.

We will continue to decrease Real Estate assets, but, in tandem with this, we will also continue to shift towards service provision, by enhancing our operating (inaudible) and joint investments with the aim of growing stable base profits and increased profitability.

Please turn to slide 11. Next is Investment and Operation segment. During the fiscal year that just ended, collections from the service business and fee income made stable revenue contributions.

Regarding our investments, there was a gain from DAIKYO in the first quarter, and a gain on the sale of a portion of shares of Aozora Bank during the second quarter.

New investments were made in the form of capital participation in Kawachiya, a major liquor distributor, in February, and KINREI, a frozen food and restaurant supplier, in April. ORIX invested in these two companies, with the aim of supporting increased corporate value, capitalizing on all its expertise and business platform.

Additionally, we entered into a [capital] and business alliance with the Towa Bank, capitalizing on the loan servicing business, corporate rehabilitation capabilities.

We are aiming to achieve the profitable structure with this segment, over the medium term, from one that is centered on the servicing business, to a three-pronged approach that also includes the energy and environmental business, and the equity investments.

Please turn to slide 12. Next is our Retail segment. Segment profit decreased year on year, due to the impairment recorded on the investment in (inaudible) of shares. Excluding the impact of the [modest] impairment, the Retail segment's profits increased.

ORIX [driving] insurance and ORIX [Bank] both traded strongly and base profit increased. The life insurance business contributed through increased policies in force, and strong investment rated income.

The product line up was expanded even further during the recent fiscal year, and the term insurance product, that is only available through the Internet, was released in April 2011. In September 2011, new whole life insurance product was also launched.

The banking business steadily increased its corporate lending assets, in addition to its retail mortgage loans. It entered into the card loan business, [a stable] business line, in March, to strong accolades.

Last month, ORIX announced the acquisition of all the shares of ORIX Credit. We will consolidate management with ORIX Bank, and in doing so, shall expect a large contribution from strengthening our retail market businesses, as a [rule].

With a base of the life insurance, banking and credit businesses, the Retail segment's assets will represent more than 30% of the Group. We aim for it to continue to grow, at a stable revenue base.

Please turn to slide 13. Finally, the Overseas Business segment. [Direct finance and lease] revenues in Asia, automobile and aircraft operating lease revenues, fee income in the US and gains on the sale of municipal bonds in the US, all continued to perform steadily.

Segment profit and base profit maintained a stable trend. Segment assets remained flat, year on year.

In Asia, assets grew, due to new business volume in China and South Korea, the consolidation of an auto leasing subsidiary in India, and increased local subsidiaries in [contracts], offsetting a decrease in municipal bonds and loans in the US, to remain flat overall.

This segment established a joint 50/50 automobile leasing company, with Panda, China's largest auto dealer, in April. We aim to expand auto leasing operations in China and India, in addition to the provision of value added services.

Please turn to slide 14. Continuing on, I would like to give some concrete examples of the future direction of ORIX, using the Real Estate and Overseas Business segments.

I will start with the Real Estate segment. The graph on the left shows the trend in the breakdown of the Real Estate base profit, from March 2010. Rental operational income is shown in red, operating facilities and fee income is shown in orange, and the interest income is shown in green. Below this, interest expense is shown in yellow, and SG&A in blue.

Income from rental properties has been increasing steadily, due to increased properties and operations and the enhanced leasing, while interest income has decreased, due to reduced balance of non-recourse loans and specified bonds. Also, you can see that income from operating business and fee income is increasing.

Going forward, we will continue to decrease non-recourse loans, specified bonds and rental properties, and, as such, interest income and rental operational income will decrease. Operating facility revenues and the fee income are expected to increase.

The operating business is expected to make continued profit contribution, as a stable revenue base, with a continued expectation for offering of new facilities under the (inaudible) facilities, such as Japanese inns, concert halls, aquariums, golf courses.

In the Real Estate development, we will shift to accepting third-party capital in the form of funds and joint investments and earn fees by providing services.

In this way, we will transform the Real Estate segment into a portfolio that is able to produce stable profits, through business expansion, that capitalize on the expertise that ORIX gained through its long years of involvement in the real estate businesses.

Please turn to slide 15. And next, the Overseas Business segment. In terms of the overseas assets, on the regional base, as shown in the pie chart on the left, America had JPY340 billion, Asia and Australia had JPY370 billion, and Greater China has JPY150 billion, as of the end of the previous fiscal year.

Asia and Australia and Greater China are growing the assets, while assets are decreasing in America. Leasing assets in Asia are increasing significantly, as can be seen in blue, from the graph on the right.

Going forward, we want to capture high growth corresponding with economic growth.

Additionally, we will increase our auto and aircraft assets, by promoting efforts that combine value-added services, in addition to pure financial basis.

We will increase the speed of our shift from domestic to overseas, and direct finance leasing to maintenance leasing. In terms of the equity investments, we also plan to actively promote investment in each country, to embrace the growth in Asia.

We are currently considering the areas where significant growth is expected, and where ORIX can capitalize on its expertise.

Meanwhile, we are steadily decreasing the scale of the finance business in America, and expanding the service providing business based on high expertise. We are pursuing investment that will further evolve such businesses.

Please turn to page 16. The business environment, strong in ORIX, is expected to continue to remain opaque. As such, it is our policy to achieve improved ROA and ROE, by using ORIX expertise to further develop high value-added services, and not to put major strain on the balance sheet.

In order to do so, we will evolve our existing debt business, and, along with making opportunistic investment, pursue more operations in areas where we have expertise.

Furthermore, outstanding [combative] bonds reach maturity during the next fiscal year, ending March 2014. We want to make meaningful use of this expected additional shareholders' equity by using it for steadying further growth.

As I stated at the beginning, the net income target for the current fiscal year is JPY100 billion; up 16% year on year. Towards the achievement of this goal, we will grow to the next level by responding swiftly to the changing environment, and providing more value and services to our customers. This year ORIX will achieve further growth with a sense of speed and dynamics.

Thank you very much for your attention.

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

And thank you. Ladies and gentlemen, today's question-and-answer session will be conducted electronically. (Operator Instructions). Karan Sodhi, Putnam.

I was wondering if you could elaborate as to the contribution from ORIX Credit to your improvement in profitability in fiscal year '13?

Thank you. Well, it's great cooperation in the past made, for example, for 2011 or made roughly (inaudible).

JPY2 billion.

JPY2 billion on a previous tax basis. And at the end of the last fiscal year, we didn't get any final (inaudible), but much more than that. So hopefully we can enjoy the higher returns from the [accretion] of the ORIX Corporation.

Later on, say in starting June or in the middle of June, we will be able to announce the amount we will acquire. And then maybe there are some signs you can get about the profitability.

So would it be fair to say then the improvement in profitability is -- only a small portion of that is coming from ORIX credit?

Yes, actually from the 49% involvement to the 100% subsidiary there, our opportunities will increase from the [client], say 0.8% or 0.9% to 1% something like that.

But in billions of yen would it be -- you said in 2011 it was JPY2 billion, so if you take on another 15%, is it roughly JPY1 billion in 2013?

No, no, no. JPY2 billion is all profit, or pre-tax income for ORIX Corporation on the 100% base.

Correct. So if you had half of -- 50% last year, that would be JPY1 billion and then this upcoming year, if it's 100% again, it would be JPY2 billion to JPY3 billion, somewhere in that range?

Something like that, yes.

Okay, thank you.

(Operator Instructions). And, 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 you for participating in today's conference call, and hope that we have the opportunity to meet, whether it be here in Tokyo, or when we travel to your corner of the world.

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

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

Thank you very much.

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