ORIX Corp (IX) 2014 Q3 法說會逐字稿

Good evening. This is Haru Yamada and I would like you welcome you to Orix's conference call to review our third quarter consolidated results for the period ended 31 December, 2013.

I am 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, and Mr. Takao Kato, Corporate Senior Vice President and 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 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. All this information reflects management's current expectations or beliefs. You should 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 shareholders referred to in the financial statements consolidated financial results 1 April to 31 December, 2013.

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

Thank you, Yamada. Hello everyone and thank you very much for your participating in today's conference call announcing Orix's result for the third consolidated period of the fiscal year ending 31 March, 2014. My name is Urata, CFO of Orix.

Please turn to slide 1 where I would like to start with an overview.

Our consolidated third period net income was JPY118.2b, or a 31% increase compared to net income for the same period of the previous fiscal year of JPY90.1b.

ROE was 9% on an annualized basis.

When we announced our first-half results at the end of October, we revised our full year target upwards to JPY145b. We have achieved 82% of the JPY145b at the end of the third quarter.

Please note that valuation gain or loss that may be recognized in accordance with conversion of Daikyo's preferred shares has not been determined at the moment. We will make a separate announcement if there will be a significant impact on our results.

The external environment is positive and business opportunities for Orix are expanding even further. We are in the midst of discussions confirming next fiscal year's budget. And with Mr. Inoue, who was appointed the Co-CEO on 1 January, as our leader, we are proceeding with discussions with a strong desire to maintain high growth by launching a new class of business that will lead to the mid- to long-term growth of the Orix Group.

Please turn to slide 2. Trend in segment profits are shown on this slide. The bar chart shows the result for the third consolidated period of this year compared with those of the past two years. Segment profit increased JPY36.2b compared to the same period of the previous fiscal year, driven by the overseas business segments and real estate segment. In addition, retail segment and maintenance leasing segment also increased segment profits compared to the same period over the previous fiscal year.

The investment and operation segment also continued to record high net profits despite reduced profits compared with the same period of the previous fiscal year when we recognized large gains on the sale of shares.

Please turn to slide 3. Next I would like to explain trends in segment assets. Total segment assets increased approximately JPT650b compared to the end of the previous fiscal year, to stop at JPY7 trillion. In particular, there has been a large increase in assets in the overseas business segment due to the consolidation of Robeco and also in the retail segment.

On the other hand, asset values of the real estate segment reached approximately JPY1 trillion as undoubtable continued asset turnover. The percentage of the real estate assets out of the total segment assets decreased to 14%. The line graph showing segment assets ROA has further improved to 2.3% on an annualized basis.

Please turn to slide 4. From here on I would like to explain the third quarter results and the latest topics for each segment individually. I would like to start with corporate financial services.

In the third quarter, we transferred the management of our ICT business department whose main customers are primarily media, telecommunications carriers from the maintenance leasing segment. The figures for previous periods have been reclassified accordingly.

At the end of the fiscal year ended March 2013, ICT business development assets were JPY50b.

Segment profits fell 6% to JPY18b year-on-year. Base profits are below the level of the same period over the previous fiscal year primarily due to a decrease in internet grown revenues.

Segment assets increased JPY11.3b to JPY954.6b compared to the end of the previous fiscal year.

Also, annualized ROA was 1.6%.

As for the topics, we are adding solar power generation. We are concentrating not only on solar panel sales but related to finance.

Generally, the spread for good companies is low and it is difficult to provide credit to SMEs for a period of 20 years. However, by securing mobile portability of the transactions either by providing a one-stop service from partner purchases to arranging the construction and management companies, or by creating a framework or putting in certain specs that would allow for Orix to focus properties in case it is necessary. We have been able to create transactions that need to meet with our objectives.

Please turn to slide 5. In our maintenance leasing segment, base profits increased 17% year-on-year, in line with an increase in segment assets.

Segment profits also increased 17% to JPY30.3b. Segment assets increased to JPY46.9b compared with the end of the previous fiscal year and JPY27.1b compared with the end of the first half due to our increase in new transactions for automobiles.

ROA was 4.3%. We are achieving asset growth by maintaining a high level of ROA.

[Plenty agreements] is strengthened the [critical] services surrounding its rental business. Also, car sharing business started a new service of large scale shared housing.

Please turn to slide 6. This is the real estate segment. Segment assets continued to decrease during the third quarter to JPY1,008 trillion.

Base profit increased 10% year-on-year as fee revenues and the facilities of operation continued to be robust in the third quarter after a great first half.

Total provisions and impairments were JPY22.2b, a decrease of JPY3b year-on-year.

Capital gains were JPY17b, an increase of JPY6.8b year-on-year.

As a result, segment profits were JPY15.7b, exceeding our JPY4.2b during the same period of the previous fiscal year by JPY11.5b.

As for the topics, we are opening a commercial facility on the main street of Ginza this autumn. This project is a joint investment with overseas investors. We have also invested in two other projects through joint investments, including investment in the Sheraton Hotel, located in Maihama during this fiscal year.

Please turn to the next page. Moving on to investment and operation. Due to gains on the sale of (inaudible) share recorded in the third quarter of the previous fiscal year, segment profits decreased 9% year-on-year to JPY29.9b. However, excluding the related gains, profits increased by 40%. The reasons for this increase includes consolidation from collection revenues in the loan servicing business and gains on sale of the newly listed shares which continue to contribute to profits in the third quarter on top of the first half.

In addition, profits from private equity investments have also been steadily increasing. Segment assets remain flat compared with the end of the previous fiscal year, while we continue to turnover assets.

Recent topics include the announcement regarding the establishment of a joint venture with Toshiba which will proceed to build a 2 megawatt scale geothermal power station at Okuhida hot spring resort in Gifu Prefecture.

Further, as we announced on 17 January this year, we have decided to combine all the preferred shares Orix owns in Daikyo except Taiwan to common shares. Our equity share will increase from 31.7% to 64.1%.

Daikyo is making steady progress with internal reform and we believe that it can accelerate this movement even further. We expect further profit continuation from Daikyo in the long run, although it may cause fluctuation Orix's profits if valuation gain or loss is recognized. As valuation gain or loss is dependent upon the share price at the time of conversion, we will make separate announcement if this will have a significant impact on our result.

Please turn to the slide 8.

Retail segment profits increased 18% year-on-year to JPY39.6b.

Base profits increased 22% year-on-year.

Insurance-related investment income was strong in the first half of the year and the assets of both Orix Bank and the Orix Life Insurance continued to grow, driving our increase in profits.

Segment assets reached JPY2,096.9 trillion. Asset growth is strong with assets increasing almost JPY100b compared to the end of the previous fiscal year.

Also, ROA increased to 1.6%.

Regarding topics, in December, the number of Orix Life Insurance individual life insurance policies in force exceeded 2m. We first launched the product CURE in 2006. In September 2010, we reached 1m policies in force. In three years and three months, we have succeeded in doubling this figure.

In addition, we have already had 100,000 applications for New CURE which went on sale in September.

Please turn to slide 9.

Finally, we come to the overseas business segment. Segment profit increased 53% year-on-year to JPY52.4b, an increase of JPY18.1b which rivals the previous fiscal year's full year figure.

Robeco made a JPY5.9b contribution to profits in the third quarter as there were one-time expenses associated with its acquisition in the previous quarter. Combining this with a profit contribution made in the second quarter, Robeco is responsible for JPY7.3b increase in profit. Information regarding Robeco's AUM can be found on slide 25 of the presentation materials.

Base profit increased 83% year-on-year and even without Robeco, base profit increased by nearly 40%, reflecting the solid performance by the US and the Asian operators.

The non-performing ratio and provisions of our Asian local subsidiaries continued to remain low level. There were no large gains on sale in the third quarter, but total capital gains remains higher than those of the same period of the previous fiscal year.

Segment assets have shown a large increase of JPY610b compared with the end of the previous fiscal year. Among the reasons for the increase are around 60% is due to Robeco, approximately JPY120b is due to currency exchange and approximately JPY100b is due to STX Energy which was temporarily consolidated.

On a regional basis, excluding the currency exchange impact, assets in Asia, excluding STX, are growing while assets in the US are decreasing.

Also, ROA was 2.7%.

Topics include our decision to invest in the largest Cambodian Bank, ACLEDA. This is the first time for Orix to enter Cambodia. ACLEDA's strength is microfinance and SME financing and although it is only a minor estate, we believe that we have gained a valuable entry gate to the Cambodian market.

Please turn to slide 10.

Finally, I would like to introduce the progress of our strategies. As the slide shows, the main new investments we have made this year. On the left-hand side under the theme of acceleration of finance plus services, there is Orix's largest-ever acquisition Robeco, joint real estate investment with overseas investors and the aircraft leasing.

With respect to real estate, while making JPY76b in sales by the third quarter, we were also engaged in new transactions in the form of joint investments worth a total of approximately JPY80b. Including three existing transactions, the total amount of joint investment projects has increased to almost JPY200b.

In the center, under the theme of debt to equity, we have gained entry gates into markets in Saudi Arabia, Cambodia and Mongolia which are emerging nations where economic growth is expected in the future.

On the right-hand side under the theme of on to operations, we are devoting our efforts to operations including the environment and energy rated businesses covering the mega-solar project.

Although only representing our activities up until the end of the third quarter, we believe that we have made firm progress making investments which agree with our policy projection so far for accelerating finance plus services and shifting from debt to equity and on to operations.

Please turn to slide 11.

I would like to conclude this presentation with a summary. Net income for the third consolidated period increased 31% to JPY118.2b year-on-year.

Annualized ROE was 9%. In order to stably produce 10% ROE, we intend to continue our basic policy of always actively but carefully taking good leaps in our investments and also increasing possibilities by enhancing the content of our base businesses.

In the past year there has been a significant upturn in the business environment surrounding Japanese companies thanks to events, including the Tokyo to host the 2020 Summer Olympics and Paralympics. As the wind is blowing in Orix's direction, I believe that now is the time for Orix to embark on establishing new pillars for business that will lead to mid- to long-term growth while maintaining a high growth.

This concludes my presentation. Thank you very much for your attention.

(Operator Instructions). Raj Chaudhary, Odey Asset Management.

Hello. Good evening. This is Raj Chaudhary from Odey Asset Management.

Good evening.

I wanted to ask, the last time we met, you mentioned that you were looking to reduce your exposure in real estate and benefit from the price gains that we have seen. This seems like a sensible strategy but it also means that you will be further deleveraging as a business. How long should we expect that to continue before asset growth in other areas increases the leverage ratio?

Thank you very much. First of all, as a whole, as you see that we are currently focusing on the increase of the size of the total assets, or our total base in assets in various areas. Especially for the last couple of quarters, our overseas business has shown a key driver for the expansion of our total operating assets.

And -- but regarding the real estate business activities here in Tokyo, we believe that this is a very good timing for us to sell the investing portfolio to the market because of the very hot market right now. And -- but at the same time, of course, in the real estate businesses, we have been continuously focusing on these business areas as one key areas for our future growth.

So, as I said at the presentation -- during the presentation, at the same time we have already made various new investments together with our overseas investors in some areas. We are -- we believe that we can show some differentiations compared with other players. So, again, in the total, we are trying to increase our leverage right now and we -- although we have increased our shareholders' equity recently but at the same time, we have increased total operating assets. Therefore, our debt to equity ratio has been maintained at the same level. Not at the level it is right now.

And going forward, we want to continue to focus on the new business challenges in various areas, including the new [environment] types of that region.

So, in the real estate segment in Japan, we want to continue to decrease our existing portfolio. But, furthermore, in other areas, including overseas or in Japan, for the leasing or loan businesses, or retail businesses, or -- may need a much more focus on the new environment or new energy business activities further. Based on that, we believe that we can continue to show you the increase of our leverage.

Thank you. Because, at the moment, say compared to the first quarter, you have continued to improve the ROA but the build-up in equity means that the return on equity has come down slightly. Is that something that the Board talks about?

Yes. I appreciate if you could not so much focus on the quarterly basis results. Of course, on a quarterly basis you can see there's some fluctuations of our ROE. But, basically, we want to continue to show the improvement of our ROE based on the improved ROA as they are the same level or higher levels.

Okay. Thank you. And I think you mentioned on the overseas business in Asia asset quality has remained okay. So the tighter credit standards that you have put in place are working for the moment. There's no deterioration in emerging markets?

First of all, of course, for the very short term view, right now, we are very much closely seeing -- watching the change of the market situations as there is asset quality in our portfolios.

First of all, regarding the -- our leasing assets are mainly in the Asian areas. We believe that we can continue to try to expand our recent activities going forward, even under the current situation because regional assets have been very much widely diversified and spread out various clients. And, of course, in various operations, we have to be very careful. For example, this area should be negatively impacted by the current change of the market situations and so on. But, as a whole, we believe that we can challenge the expansion of our existing business.

Of course, in here there are new private equity types of investments in various areas, including a [flattening] investment. Recently, the -- and you know that in terms of the pricing, that has been relatively expensive, from our eye level. But after the current situations of the market in the world, especially in the emerging markets, we believe that this is going to be the new business -- investment opportunities here because of the lower level of the pricing level.

So, for the time being, for our private equity types of investments, or our strategic investment, that's for -- we continue to look for the opportunities, but maybe we should much more focus on the US areas rather than the Asian or emerging markets. And, in a certain period later, we want to again try to conclude our current due diligence in the emerging market areas.

Thank you. that makes sense.

Thank you.

Mr. Urata, there are no further questions today so at this time I would 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 tonight's conference call. If you have any questions or comments, please do not hesitate to get in touch with us using the contact information panel on the last page of this evening's presentation material.

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, thank you for your participation. I hope that we have the change to meet, whether it is in your corner of the world or here in Tokyo. Thank you.

Thank you.