ORIX Corp (IX) 2015 Q3 法說會逐字稿

Good-day, everyone, and welcome to Orix Corporation's third-quarter financial results conference call. At this time, I would like to turn the call over to your moderator, Mr. Chung Yang; please go ahead, sir.

Good evening, this is Chun Yang and I would like to welcome to Orix conference call to review our third-quarter consolidated results for the period ended December 31, 2014.

I'm joined here this evening by Mr. Haruyuki Urata, Deputy President & CFO; as well as 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 result and then we will open up the line 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 Tokyo time.

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 beyond our control.

You should read the forward-looking disclaimer in our earning 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 the net income used in this presentation is same as the net income attributable to Orix Corporation shareholders, as referred to in the latest financial statement, titled Consolidated Financial Result April 1 to December 31, 2014.

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

Thank you. Hello, everyone, and thank you for participating in today's conference call announcing Orix results for the third consolidated quarter of the fiscal year ending March 31, 2015. My name is Urata, CFO of Orix Corporation.

Please turn to slide 1, where I'd like to start with an overview. Net income for the consolidated third period was JPY186.7 billion, a 58% increase compared to the same period last fiscal year. ROE was 12.4% on annualized basis.

We already achieved 89% progress towards the original full-year net income target of JPY210 billion, which was announced at the beginning of this fiscal year.

Furthermore, considering the fact that there are no foreseeable material negative concerns on our business environment, or in the fourth quarter as of this moment, we have decided to revise our full-year target upwards by JPY5 billion to JPY215 billion. Doing so, our current progress towards the new full-year target becomes 87%.

Our decision to revise the net income target upwards attributes to a number of factors: greater contributions from Robeco; Hartford Life Insurance; new subsidiaries that we acquired under our private equity investment business; and large capital gain recorded as planned in the first half of this fiscal year; and the bargain purchase gain from Hartford Life Insurance.

In addition, the fact that each segment continued its solid performance into the third quarter was also a major factor behind our decision. Amid all of this, we realized that we are already approaching closely to the goals that we announced in the beginning of this fiscal year, whilst keeping the new record net income. The other is achieving profit increase for the sixth consecutive year.

While each business unit continues to generate solid profits, we will seek new growth opportunities in the ever-changing business environment. And continue doing so, we'd like to achieve a sustainable double-digit growth from the next fiscal year and onwards.

Please turn to slide 2.

On slide 2, I'd like to talk a bit about our dividend forecast for this fiscal year. The forecast for the full-year dividend per share is at JPY33, up JPY10 or 43% from the previous fiscal year. The implied dividend payout ratio currently is based on the revised full-year net income target of JPY215 billion, is approximately 20%.

Moreover, in our effort to expand our retail investor base, we have decided to change the number of dividend payments per year, from one full-year dividend to two interim dividend payments per year, starting from the next fiscal year.

With regards to the dividend forecast for the next fiscal year, we are scheduled to make such announcement in May this year, simultaneously to the release announcement of the full-year consolidated financial results.

Our [basic] policy towards capital allocation is to utilize such capital to actively invest in growth opportunities, and this policy has not changed. Nevertheless, we will continue to search for the optimal balance between investments and shareholders' return in our capital allocation.

Please turn to slide 3.

Starting from the third quarter, we have made a number of changes to certain line items in the consolidated balance sheet and statement of income.

Due to factors, such as the increase in our fee revenues that does not rely on using our assets; expansion in business where we operate ourselves; such as the facility operation business; acquisition of Robeco; and increasing revenues coming from consolidated subsidiaries that we acquired under our private equity investment business, it is clear that the proportion of non-finance revenues has increased in recent years.

The changes that we have made to the line items in the financial statements this time are an attempt to better reflect the changes to our revenue structure that I just mentioned.

For example, revenues deriving from service-related transactions, which we used to classify them under other operating revenues in the past, will now be reclassified together with revenues from asset management and servicing into a new line item, titled services income.

For further details on this, please refer to the third quarter financial results supplemental information.

Please take a look at the graph on the left, which shows the changes in the composition of finance and non-finance revenues [originated] from all six segments.

The red bar in finance revenues, which consist of revenues from various finance leases and [the instrument on]. Finance revenues have been decreasing while the non-finance revenues have been growing significantly.

The graph on the right shows the changes in segment profit in the recent years. Among the six segments, retail, overseas business and real estate have contributed significantly to our profit growth. While corporate financial services and the maintenance leasing segments remain solid and showed modest profit growth, the investment and operation segment has experienced a profit decline.

Please turn to the next slide. From here and onwards, I would like to explain third-quarter results for each segment individually. I would like to start with corporate financial services.

Beginning from this quarter, we have changed the format of the slide by disclosing segment revenues, segment expenses [via] breakdown and gains and losses from affiliate under equity method. More details of financial numbers are separately disclosed in the consolidated financial results supplementary information.

For this presentation, I will mainly focus on the main points in each slide. For the corporate financial services, finance revenues have decreased on a year-on basis primarily due to a decrease in the revenues from installment loans.

On the other hand, fee business, based on the sales of solar panel and life insurance products has been robust and the services income increased significantly by 43% compared to the same period last year. As a result, segment's profit increased by 4% year on year to JPY18.7 billion.

Segment assets reached JPY1 trillion, a 9% increase compared to the end of the last fiscal year. This is due to the consolidation of roughly JPY100 million-worth of assets from Yayoi, the software service provider that we acquired in December last year.

Yayoi has over 1.25 million users who are mostly small businesses out of Japan. This acquisition allows us to secure stable income-generating business under our Group.

Furthermore, we do not only expect additional profit contribution from Yayoi on a standalone basis, but we also aim to expand this segment's overall fee revenues by extending Orix' wide range of products and services to Yayoi's users.

Please turn to the next slide. In the maintenance leasing segment, operating leases and revenues increased by 6% year on year, primarily due to the continued asset expansion in the auto leasing businesses.

Services income, coming from maintenance and other value-added services, also increased by 3%.

Although costs have increased in line with the revenue growth, overall segment profits increased by 4% to JPY31.6 billion, because of additional profits generated from steady asset growth over the period, which have offset the increase in costs.

Segment assets increased by 9% to roughly JPY53 billion (sic - see slide 5, "JPY55 billion") compared to the end of the previous fiscal year and the ROA remains at a high level of 4.2%.

Please turn to slide 6. This slide is the real-estate segment. Segment revenues have decreased by 4% year on year, mostly due to the continued downsizing the assets and also a decrease in condominium sales.

However, a closer look shows that gain on rental property sales, which is included in the operating lease revenues, have increased dramatically on the back of a strong real-estate market.

Services income has also increased primarily due to solid performance from the facility operation business and also increased fee revenues from asset management.

Now, on the expense side, expenses have decreased along with a reduction in the assets [backed]. Provision for that we receive and the impairment loss has also decreased. As a result, segment profits have increased by 43% to JPY22.5 billion compared to the same period last fiscal year.

ROA has improved to 2.1%.

Regarding segment assets, we continue to downsize our assets, mostly focusing on selling down rental properties. Segment assets compared to the end of the second quarter have decreased by JPY8 billion and this, compared to the end of the last fiscal year, is a decrease by JPY85 billion.

Please turn to the next slide, moving onto the investment and operation segment. For segment revenues, services income and sales of goods and real estate have increased significantly due to the consolidation of Daikyo and other new subsidiaries acquired under our private equity investment business.

To give you a better understanding of the composition of our services income, please look at the pie chart in the bottom-right of the slide. Here, you can see that while real-estate management fees from Daikyo account for the biggest share, revenues from the environment and the energy-related business now account for 24% (sic - see slide 7, "25%") of total services income, or JPY40 billion in amount, which is twice the size of that in the same period last fiscal year.

This demonstrates the strong growth of our environment and energy-related business has achieved over the year.

On the other hand, finance revenues from the loan servicing business have decreased and profits from Daikyo also decreased. As a result, segment profits have decreased by 15% to JPY25.2 billion.

Regarding segment assets, assets of loan servicing business have decreased. But those of the investment business and the environmental and the energy-related business continued to show solid growth. As a result, the total segment assets have increased by 7% or JPY40 billion, compared to the end of the last fiscal year.

Please turn to slide 8. In the retail segment, with the consolidation of Hartford Life Insurance in the second quarter, there were increases in both life insurance premiums and related investment income, and our Company expenses.

There was also a bargain purchase gain. First bargain positive gain is recorded under equity net income of affiliates. There were also gains from sales of shares of (inaudible) Group in the first quarter.

Our increasing life insurance premium, driven by growth in the number of policies in force, contributed to higher segment profit. Finance revenues generated by Orix Bank also increased steadily. As a result, segment profit increased by 2.4 times to JPY96.6 billion.

The increase of JPY1.6 trillion in segment assets, compared to the end of last fiscal year, was contributed by the consolidation of investment in securities; whilst over JPY1.5 trillion that has been held by Hartford Life Insurance, which it manages.

Steady asset growth in the banking and life insurance business also contributed to the segment assets growth.

Please turn to the next slide. Finally, we come to the overseas business segment. Robeco (inaudible) [base] net fee revenues have been growing significantly. Quarterly results on Robeco's profits and AuM are enclosed in page 19 in the appendix of this presentation material.

In addition, fee business in the United States, especially Houlihan Lokey, have been delivering strong numbers. As a result, services income increased significantly.

As for the segment profits, with a gain from sales of a partial share in STX Energy, recorded during the first quarter, segment profits have increased by 62% to JPY84.8 billion year on year.

For segment assets, among the additional JPY300 billion recorded since the end of last fiscal year, roughly JPY200 billion of which was due to impact from foreign exchange rate changes.

After adjusting the foreign exchange rate impacts, America increased by around JPY160 billion; Asia increased by around JPY40 billion; and Greater China increased by around JPY30 billion. On the other hand, segment assets representing the portion of investment in STX Energy, decreased by around JPY130 billion.

Please turn to the next slide. On this slide, I would like to highlight some of the recent business developments.

In the corporate finance service segment, apart from the acquisition of Yayoi, we have taken new initiatives to expand our products and services, such as providing information on overseas companies, and prepared -- prepaid card issuance system.

In the auto business, demand for truck rentals continued to be strong, because of rising demand in the (inaudible) contracting sector. And we are (inaudible) on this trend by funding our inter-location network. In addition, we are also enhancing our services to accommodate our customers' wide range of safety and comprehensive needs.

In our real-estate operation business, we have opened two new private nursing homes. With this addition, our portfolio of senior housing now has 23 facilities, with over 1,900 rooms.

In the private equity investment business, in line with our basic expansion strategy of making investments, both in Japan and abroad, we have invested in INNOMEDICS, a leading company that markets and sells medical equipment. By continuing to invest in players in this industry, we hope to be a supportive force behind a healthy restructuring in the industry.

As for environment and energy-related business, we are trying to further grow this business by introducing new products and services to the market. One interesting example to share here is that we have started a new lease and rental service for solar panels, and home storage batteries, bundled together for houses. This service is the first of its kind in Japan.

By developing and gathering each of these new businesses one by one, despite that they may not contribute significant revenues immediately, they do help to diversify our non-finance businesses. We believe that by deepening our business relationships and exploring the synergy potentials with our customers, eventually we shall see more sizeable revenues from these new business initiatives.

Please turn to slide 11. I would like to conclude this presentation with a summary.

Net income for the third consolidated period increased to JPY186.7 billion. Annualized ROE was 12.4%. We have revised our annual net income target from JPY210 billion to JPY215 billion. At the same time, we have also announced our decision to increase both the dividend for the fiscal year by JPY10 per share, as well as the dividend payout ratio.

Furthermore, starting from the next fiscal year, we plan to issue an internal dividend, and we are going to announce dividend forecasts in the beginning of every new fiscal year. For the next year, after we obtain Board approval in May, we plan to announce a dividend forecast accordingly.

On the topic of Orix future profit growth prospects, as we are currently in the process of finalizing our business plans and budget for the next fiscal year, it is still premature to discuss them in concrete numbers.

But our CEO, Mr. Inoue has mentioned, during the international results announcement this fiscal year, sustaining a double-digit growth is the basic [premise our] business is based on and this is also something that we are fully committed to.

Nevertheless, many analysts seem to be a little over-pessimistic in their projections on Orix future profit growth, either being negative or flat at the most. The hurdle of overcoming double-digit growth is not a concern to the Orix management team. Our job is to keep our word and deliver the numbers. The numbers will do the talking.

My presentation concludes here. I would like to thank you for your attention, and your continued support for Orix.

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

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

Thank you for the dividend increase. I appreciate the additional disclosure you have made with regard to the service income, and the split-out of gains on sales and on securities.

Is it right to think of the gains on securities -- I imagine some of that relates to fixed income securities, and therefore as interest rates fall the bonds will increase in value.

Therefore, if interest rates were to rise those gains would disappear but you would have an off-setting benefit in your spread business. Is that one of the things that gives you confidence that you can carry on delivering double-digit growth?

Thank you very much for your interest, and regarding the (inaudible) through the [sale] of the investment figure, one part is for example regarding our private equity fund investment. We can recognize from time to time through the actual (inaudible) [on the] investment through the fund. That is also included in those -- this type of capital gain.

Also, in our case we have made some venture capital-types of investment under the active capital market, especially in Japan. We also enjoyed some capital gains from the sale of our venture capital businesses.

Regarding the operations, our capital gains from the sale of the investment securities are not limited to the sale of the fixed income rated investment securities.

Of course, there are some capital gains from the sale of the new style bond in the United States; that also created some capital gain. That area raises some change of the interest standard [later].

But in our case mostly those investments have been hedged in terms of the volatility of the interest rate. We don't have any concerns about that [old] portfolios.

Coming back to your original question, I have no real concerns about our various portfolio of our investment securities in total.

Okay, thank you. With regard to the shareholder return, did the Board discuss the possibility of a share buyback, given that the shares are trading below 0.9 times trailing book?

Well, of course, at every Board Meeting I have made some feedback about the idea of the shareholders, our market as a whole, in terms of the possibility of a share buyback. Of course, with our Board Members we have exchanged various ideas about the balance between new investment for future growth and the shareholder return.

But, as of today, we have just determined to increase our dividend and dividend payout ratio. We have not reached any conclusion about a share buyback facility in the future.

Going forward, as we have discussed before, basically we want to use our internal money, our capital, for our future growth through various new investments or challenges. But, at the same time, from time to time, we want to basically, first, focus on the dividend policy. But, from time to time, we are not going to completely close the window for the share buyback.

Thank you once again. I would urge you to at least review it, compared to your alternative uses of capital.

Once again, I appreciate the disclosure to show the importance of services income. Hopefully, that will help the stock market to recognize the value of that annuity.

I fully appreciate also and I expect the capital market will respond positively to this kind of result.

Mr. Konishi, TPG-A Capital.

Keita Arisawa, TPG-Axon Capital. You've raised the full-year guidance on net profit, if we subtract the first three quarters, the fourth quarter net profit assumption is JPY28 billion, that seems quite low relative to the third quarter results. Is there some sort of seasonality in the fourth quarter assumption that we should expect?

And also I understand that the corporate tax cuts in Japan should be favorable to you, so expecting gains on the fourth quarter. I know you haven't assumed that yet in your full year guidance, but could you give us a ballpark number of what that gain could be? Thank you.

Regarding your first question about our forecast for just our fourth quarter then, to be honest, judging from the past experiences, from time to time, the fourth quarter has not shown that very good numbers in the past. Although today, I haven't had any big concern for some or special investment for our portfolios in our asset quality.

So just based on the current situations with some uncertainties on a global basis, we believe that, at this moment, this revision from JPY210 million to JPY215 million it should be appropriate [as of] today.

Second question is related to the corporate tax situation there. Of course, we point out, basically, the lower corporate tax should impact positively to our financial result and we have not included any forecast to this revision of the three-year target.

I'm sorry I don't have any [specific] numbers responding to your questions, relating to what kind of -- or which level of the impact -- what amount of the impact can be expected with a certain number of the -- reduction of the corporate tax rate, sorry.

Okay, thank you. The second question is that your third-quarter net profit recorded 20% growth year upon year, which is a very strong number. My understanding is that there was no big capital gains in this third quarter.

I know you don't disclose the base profit any more, but can I understand this 20% earnings growth year over year to be a sustainable growth and that it does not include any major one-time profit?

Thank you for your interest. Regarding this quarter's results, of course, you'll see that always we accreted some or -- capital gain tax as the income over years. Of course, this third quarter, we have made some such kind of an income. So for example, in the various segments you can see some figures, the capital gains from the sales of various portfolios.

But, overall, we don't have any big size of the capital gains from the various investment portfolio. Basically, the comparison with the previous third-quarter's result, the growth has been made through the various business result, so for the best profit we have used in the past.

Okay, thank you. Last question, if you don't mind, in your overseas segment your credit costs, including the valuation losses at the third quarter was JPY6.6 billion, it went up quarter on quarter and also year over year, so it's a little bit of a high number.

I was just wondering, obviously we've see a big move in the oil price, commodity price, big moves in Swiss francs; so a lot of volatilities in the overseas market.

I would like to ask if there had been any of those impacts towards your third-quarter credit costs; and if there are any assets that we should be worried about that you hold in your exposures towards commodities or any other volatile assets in your overseas segment? Thank you.

Thank you. Regarding the impact by the various [monetary] situations and the many different types of the commodities market, but especially in the [area] -- our markets. We don't have a big size of the exposure in this industry, very, very small and very limited. So very lucky that we don't have any negative impact to our performance by the practical line of the energy or oil market.

Also, as you point out, there has been various volatile markets on the global basis, very lucky that, in our case, we don't have any concerns about those volatile markets in terms of our existing impact to our possibilities.

Of course, through those volatile markets are various uncertain situations is expected to increase. So investments we have some idea in our mind to respond to the uncertainties, but that are kind of the uncertain have been increased over the time. So basically, to be honest, I don't have any real concerns about investing our portfolio or -- as well as our future growth strategy.

Regarding this quarter's impairment in the overseas areas, not so limited to any specified area, so I don't have any concerns.

Okay, thank you very much, that was my last question. Thank you.

Thank you very much.

(Operator Instructions). 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.

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 found 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 listen to certain sections again.

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

Thank you.

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