ORIX Corp (IX) 2016 Q3 法說會逐字稿

Good day everyone and welcome to ORIX Corporation third-quarter financial results conference call. At this time I would like to turn the call over to your moderator, Mr. Chun Yang. Please go ahead sir.

Good evening. This is Chun Yang of ORIX Corporate Planning Department and I would like to welcome you to ORIX's conference call to review our third-quarter consolidated results for the nine-month period ended December 31, 2015. I'm joined here this evening by Mr. Kazuo Kojima, Deputy President and CFO, as well as Mr. Shintaro Agata, Head of the Treasury Headquarters, and Mr. Takao Kato, Head of the Accounting Headquarters. During this evening's call I will go through the third-quarter results and then we will open up the line to Q and A with Mr. Kojima with assistance of an interpreter.

I presume that everyone has in front of them the presentation material that was 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 their 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 earning presentation as it contains additional important disclosures on this topic. You should also consult our report 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's shareholders, as referred to in the latest financial statement titled Consolidated Financial Results April 1 to December 31, 2015.

Then, without further ado, I would like to start the presentation from slide 1. The net income for the third quarter was JPY54.1b. On a year-to-date basis the nine month period ended December 2015 generated JPY215.4b in total. This figure represented a 15% increase year on year and also a profit growth for seven consecutive years for the same period. Total revenues and net income for the period were both record high in the Company's history. The annualized ROE continues to improve, this time up from 12.3% to 13%.

Compared to the first half of this fiscal year, although there was no significant capital gains from sales of investments, each business segment, through expansions of its existing operations, has steadily contributed to the overall profit growth. As we have pointed out in our mid-term strategic direction, I think we have made good progress in the expansion of non-financial businesses and the level of base income has been further elevated since the last fiscal year.

Please turn to slide 2. Total segment profits for the three quarters have increased by 17% year on year. Similar to the first half of this fiscal year, four business segments -- they are overseas business, investment and operation, real estate and corporate financial services -- have all achieved significant profit growth, while maintenance leasing segment remained a stable contributor. In retail segment, due to the large capital gains recognized last fiscal year, segment profits have decreased year on year. More detailed result relating to these business segments will be explained in separate slide.

Please turn to slide 3. Total segment assets have decreased by 3% (sic ? see slide 3 "2%") since the end of last fiscal year. Assets in certain segments such as overseas business and maintenance leasing segments have increased due to decreases in life insurance assets associated with Hartford Life Insurance run-off business and the continuous sales of assets in real estate segment. As a result, overall segment assets have decreased compared to the end of last fiscal year.

If you compare segment assets between quarters, the third quarter actually achieved positive growth of JPY213.6b after four consecutive quarters of asset decline prior to that. Details on the asset movements will be explained in later slides.

After tax ROA on an annualized basis has improved from 2.9% in the last fiscal year to 3.2% as of the end of the third quarter.

Please turn to slide 4. This slide shows major components responsible for the overall profit and asset changes year on year. The chart on the left shows the year-on-year changes in the pre-tax profits. Compared to the same nine months during the last fiscal year, the three quarters this fiscal year, the pre-tax profits there has in total increased by JPY56.4b.

How this figure came about is explained in the chart on the left. First, the existing operations increased by 61.5% -- JPY61.5b and then there is a gains on sales of investments and others, JPY93.9b, and also gains on sales of real estate, JPY21.1b. And then you deduct the gains on sales of investments and gains on sales of real estate recorded during the first three quarters last fiscal year, the result was a net plus of JPY56.4b.

On the asset side, overall segment assets decreased by JPY230b with notable asset reductions in Hartford Life Insurance, which is about JPY325b, and real estate business by about JPY90.5b. And we would like to highlight that the existing operation here has increased by roughly JPY360b.

Asset increase in the existing operation mainly came from overseas business, which accounted for JPY190b of new assets, namely new investments in the aircraft-related business and new acquisitions in Asia, and increased assets in the corporate loan portfolio in our US operation. Other businesses that have achieved asset growth include environment and energy business, which mainly conducts mega-solar projects at the moment, as well as organic growth in our auto-related business, life insurance and banking businesses.

Please turn to slide number 5. From this slide and onwards I will explain the third quarter results for each segment individually and I would like to start with the corporate financial services. Segment profit here has increased significantly compared to the last fiscal year to JPY34b or an 82% increase year on year. We consolidated Yayoi during the fourth quarter last fiscal year, but even if you disregard the profit contribution from Yayoi, the segment profit here still would have achieved 60% growth year on year.

In addition to the contribution from Yayoi, the original core fee business in this segment targeting corporate customers continued to be in good shape, generating a significantly higher level of services income compared to last fiscal year. The services income from our fee business here mainly come from commissions from acting as life insurance agent, and sales and brokerage services in the environment and energy-related fields.

As for Yayoi, we expect to see new business opportunities arriving from the upcoming implementation of the new social security and tax number system in Japan, and also changes in the consumption tax rate in the future.

During Q1 and Q3 this year we sold some of the investment securities that we held, which generated roughly JPY6b in capital gains together.

In terms of assets, we continue to defend the level of profitability in this segment by being selective on new transactions. Furthermore, due to the securitization of around JPY43b worth of assets that took place during Q1 this year, segment assets has decreased by 7% year to date. On the other hand, fee business which is asset-light has achieved large increase, boosting the annualized segment ROA to 2.7%.

If you disregard the capital gains, which is of one-time nature during this fiscal year which I just mentioned, the segment ROA becomes 2.3%.

Please turn to slide number 6. The maintenance leasing segment profit have increased by 7% year on year to JPY33.7b. ORIX Auto and ORIX Rentec both continue to contribute stable profits, with increases coming from services income such as maintenance services and other value-added services provided by ORIX Auto. Segment assets have increased by 8% since the beginning of this fiscal year. ROA continued to stay above 4%.

Please turn to the next slide. In real estate segment profit increased to JPY44.4b, almost doubling compared to the same period last fiscal year. The real estate market in Japan continued to be very active and we have continued to sell our rental properties, generating higher gains on sale compared to last year. During Q3 we sold our holdings in a commercial property in Ginza -- the facility's name is Kirarito Ginza -- to a foreign investor and such sale generated a capital gain a little over JPY3b. On the other hand, the facility operation business, especially our hotels and Japanese inns continues to be very strong generating significant profit for the segment.

Segment asset here decreased by 11%, down below to JPY750b, due to the continuous sales of rental properties. And because of this the ROA had a significant decrease to 5% as of the end of Q3.

Please turn to the next page. In investment and operation segment profits for the three quarters have reached JPY46.7b, which basically doubled that of last fiscal year. Such profit growth was largely driven by capital gains from sales of two private equity investments which we closed during Q1. And the ROA has reached a high level of 6.4% on an annualized basis. As for new private equity investments, we made a new investment in a spring-water producer/distributor called Cosmolife during the third quarter. [Daiko], one of their investments, has been making a stable profit contribution this fiscal year, which was within our expectations.

In the environment and energy business, which is shown as the light blue color on the segment asset bar-chart on the right of the slide, basically in this business our mega-solar project are gradually starting operation and which is reflected in our financial statements as well.

As of the end of December the segment assets for the environment and energy business is around JPY190b, which is a JPY43b increase since the beginning of this fiscal year. Segment assets decreased by 5% year to date due to factors such as collections of loan assets by our loan servicing unit and sales of private equity investments which I just mentioned. There are areas where assets are increasing such as environment and energy business as well as new private equity investment also.

Please turn to slide 9. In retail segment, segment profits have decreased by 49% down to JPY48.8b compared to the same period last year. Last year we recognized two large capital gain items. One was the sales of our shares in Monex and the other was a bargain purchase gain recognized in association with our acquisition of Hartford Life, and together these two contributed about JPY51b. If we disregard these two large items, the year-on-year segment profit comparison would have resulted a positive profit growth.

In our life insurance business, life insurance premiums have increased due to the increased underwriting volumes following the renewal of our life insurance product in October last year.

The bar chart in the middle shows the breakdown of life insurance premiums and related investment incomes, and you can see that ORIX life insurance on a standalone basis has been growing quite steadily. On the other hand, as for Hartford Life Insurance, if you were to look at this performance since last year after taking out the bargain purchase gain, segment profits have increased year on year, even though its operating revenues in this fiscal year were squeezed by the investment loss in the separate account during Q2. This is because revenues and expenses relating to the separate account basically correlate to each other and move in the same direction.

Segment assets decreased by JPY190b or about 5% decrease year to date primarily due to the JPY320b of asset decline in Hartford Life Insurance asset, which is in run-off at the moment. In other parts of the retail segment, housing loans and car loan assets as well as our assets in the life insurance business, generally have all increased.

Please turn to slide 10. Okay, overseas business is the last segment here. Segment profits have increased by 37% year-on-year reaching JPY116b for these three quarters. This amount includes the capital gains, the valuation gains, associated with the IPO of Houlihan Lokey during Q2, which made significant contribution to the profit growth. Segment assets, despite a minus of JPY40b due to Asian currency fluctuations, have increased by roughly JPY100b, which is a 5% increase year to date. Contributors of this asset increase include new investments in aircraft, acquisition of auto-loan company in Indonesia.

And I would like to briefly go through each of the major businesses in this segment. First, in Americas, financial revenues have been increasing which is in line with the increased balance of this corporate loan portfolio. Since the last fiscal year in anticipation of the interest rate increase we have been controlling our portfolio by shifting our assets from fixed-rate assets to floating-rate ones. The business portfolio there is widely diversified by sectors and its exposure to energy and resource sector is very limited so there is almost no direct impact from the recent market volatility in that sector.

With regard to our business in Asia, while the concerns for economic slowdown in China and its impact to its neighboring countries have been widely shared, our assets in Asia are well spread out and diversified across different sectors and as of now we do not see any material deterioration in overall asset quality. Furthermore, our direct exposure to China is rather limited.

While we have not seen any major negative impact on our lease assets in emerging markets, we do believe that it is necessary to continue our cautious stance towards this region for the time being. Meanwhile, as the market is approaching an adjustment phase, with a degree of caution we will continue to seek new investment opportunities.

For Robeco, during August last year we experienced the so-called China soft market shock, which has shown in our Q2 result where Robeco's AUM actually had a decrease. But this was reversed in Q3. This time the AUM had a positive growth. And so far Robeco's performance is in line with the annual business budget so far.

With regards to our aircraft and shipping business, our aircraft-related business this fiscal year we have, so far we have made JPY100b investment to buy, to purchase 19 aircraft. During the same time we sold some of the aircraft as well. So overall, anyway overall we purchased more than what we have sold so it's a net plus.

Now please turn to the final summary slide on slide 11. Here I'd like to conclude this presentation with the summary. We have achieved net income for the first three quarters for the current fiscal year of JPY215.4b, which is a 16% growth year on year. The ROE has reached 13%. And overall we feel that in each business segment good progress has been made towards our mid-term target of JPY300b, which we would like to achieve by 2018 March.

In terms of the business environment, the outlook of the global economy is becoming increasingly unclear due to factors such as slowdowns in China as well other emerging markets, and there's also the oil price decline. But there is no direct impact to our business portfolio and also under such an environment we see opportunities as well at the same time. So going forward we will continue to proactively seek new investment opportunities and aim for a timely execution of those new investments.

My presentation ends here. Thank you for listening. So now, Mr. Kojima, Mr. Agata and Mr. Kato will be happy to answer any questions you may have.

(Operator Instructions). Mr. Yang, there are no 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 then Mr. Kojima has some final comments to share with you.

This is Kojima. Without much surprises, our third-quarter results have demonstrated that solid progress was made towards our mid-term target of JPY300b net income by year 2018 March. Particularly in the external environment continues to increase and we are very aware of it, nevertheless under such environment we will focus on areas we have competitive advantage in, maintaining our financial and risk management discipline, and proceed with caution toward our mid-term target. Having said that, I appreciate your interest and continuous support to ORIX until now and also in the future. Thank you.

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 partway 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 the chance to meet, whether it is in your corner of the world or here in Tokyo. Thank you.

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