ORIX Corp (IX) 2017 Q1 法說會逐字稿

Good evening. This is Chun Yang of Orix Corporate Planning Department, and I would like to welcome you to Orix conference call to review our first quarter consolidated results for the three-month period ended June 30, 2016.

I'm joined here this evening by Mr. Kazuo Kojima, Deputy President and CFO; and 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 first quarter results and then we will open up the line to Q&A with Mr. Kojima. I presume that everyone has in front of them the presentation materials that were posted on 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 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 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 the 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 June 30, 2016.

From here onward I would like to start the presentation from slide 1 of the presentation material.

The net income for the first quarter was JPY76.8 billion, which was 6% less compared to the same quarter from the previous year.

Meanwhile, the annualized ROE for the first quarter was 13.2%, which exceeded our mid-term ROE target range of 11% to 12%.

During the same quarter last year there were significant profit contributions from Hartford Life Insurance and Robeco. The absence of these profits this time explains the lower earnings in the first quarter this fiscal year.

The other factors that caused the low earnings was the foreign exchange rate fluctuation. The strengthened yen has reduced the profits of our overseas operation when we translate them back to Japanese yen from foreign currencies.

Nevertheless, we have continued to generate capital gains in both the investment and operation segments and the real-estate segment. Our environment and energy business, including the Mega-Solar project, continued to grow steadily. We have also made new investments both in Japan and overseas, which are expected to contribute to future profit growth.

Overall, considering the fact that the external environment continues to be unstable, with many uncertainties, as shown by the increasingly volatile stock market and foreign exchange markets after the Brexit, we think the Company still made solid progress in this first quarter.

Please turn to slide 2. The total segment profits were JPY115 billion, which was 5% lower than the same period last year. Among the six segments, real-estate segment and the investment and operation segments, both generated capital gains, and achieved profit growth year on year.

Later in this presentation I will talk about each segment first quarter result in more details. But, basically, the three main factors behind the lower earnings overall were, one, in the retail segment there was a significant reduction in Hartford Life Insurance profit due to unfavorable market conditions.

Two, in the overseas business segment, Robeco recognized a sizeable one-time gain in the first quarter last year, and that did not repeat this time.

And finally, the third factor was that the yen strengthened this quarter, which reduced the profits from our overseas operation.

Please turn to the next slide. Segment assets were JPY8.5 trillion as of the end of the first quarter, a 4% decrease compared to the end of the last fiscal year. As for the annualized ROA for the first quarter, it was 3.5%.

Please turn to slide 4. On this slide I would like to talk about the major components behind changes in the pre-tax profits and segment assets for the first quarter.

First, the chart on the left, pre-tax profits decreased by JPY5.5 billion on a year-on-year basis. Existing operation had a minus JPY11 billion, which was mainly due to three factors that I just mentioned before: the one-time gain by Robeco last year; the unfavorable market conditions affected Hartford Life Insurance; and impacts from foreign exchange fluctuation. If we disregard these three factors, then the existing operation would have resulted positive growth.

On the other hand, gains on sales of both investments and real-estate assets in total were JPY48.7 billion, which exceeded the JPY43.2 billion achieved during the same period last year by about JPY5 billion.

The chart on the right-hand side shows how segment assets have changed over the three-month period. During the first quarter, segment assets have decreased by JPY402 billion. The biggest factor behind that was foreign exchange rate, which was responsible for JPY207 billion decrease in assets.

In addition, Hartford Life Insurance assets in run-off, an asset that we sold in our private equity investment business and real-estate business, as well as the securitization we executed in our maintenance leasing business, all contributed to the decrease in the segment assets overall.

As for our finance business in Japan the housing loan and the card loan business on the Orix Bank have been growing.

I have just explained the first quarter earning result in the summary. From next slide and onwards I will explain each segment's result in more detail. Please turn to slide 5.

The corporate financial services segment generated JPY8.5 billion of segment profit, a 31% decrease year on year. This is due to the absence of the JPY3 billion gains on sales of securities recognized during the same period last year.

Finance revenues decreased somewhat due to the decreasing instalment loan asset. However, services income, even on the basis of if you exclude Yayoi portion, has displayed solid growth year on year.

Segment assets decreased by 2% down to JPY1.033 trillion as a result of the decrease in instalment loans.

Please turn to slide 6. The maintenance leasing segment achieved segment profits of JPY9.9 billion, a decrease of 15% year on year.

Gains on sales of leased up vehicles, which is recorded under operating lease revenues, was slightly lower than the first quarter last year by about JPY1 billion.

Segment assets decreased by 4% year on year, down to JPY700 billion. The main factor behind the decrease in assets was the securitization of the auto leasing assets of about JPY37.5 billion.

Excluding this factor, the segment asset here would have continued to increase.

Please turn to slide 7. In the real-estate segment, segment profit increased by JPY23.6 billion, or 63% growth on a year-on-year basis. We have recognized gains on sales of rental properties on the back of an active real-estate markets. Meanwhile, the facilities operation business remained largely stable during the quarter.

Segment assets decreased by 5% year on year, down to JPY 705.6 billion, in line with the sales of rental properties that continued during the quarter.

Please turn to the next slide. In the investment and operation segment, segment profits were JPY31 billion, an 18% increase year on year.

During the first quarter we sold two investments; one is [Wing Art] first. This is a business software vendor that we sold in May. The other is Global Business Power Company, this is a power company in the Philippines that we sold in June. Both of these exits generated capital gains.

As for our environment and energy business with the gradual addition of mega solar project in operation, and the expansion of our electric power retailing business, earnings there have been growing steadily. As a result, the services income has increased by 30% year on year.

Segment assets have decreased by 4% down to JPY678.6 billion as of the end of -- since the end of the last fiscal year. This is mainly due to the investment that we sold during the period.

Assets in environment energy business, however, have been growing. As of the end of June this year we have secured 890 megawatts of solar power generation capacity among which 470 megawatts have started operation now.

Please turn to the next slide. In the retail segment, segment profits in the first quarter was JPY12.5 billion, a 42% decrease year on year.

For Hartford Life Insurance, due to our favorable market conditions, we have increased the provisions for our liability reserve. As a result, Hartford Life had a minus 12.4% -- JPY12.4 billion in segment profit year on year.

If we exclude the negative contribution from Hartford Life, the retail segment would have had an increase in segment profits of over JPY3 billion year on year.

On the other hand, our expense had achieved profit growth.

The bar chart in the middle of the slide shows how life insurance premium and related investment income has changed over the last three years.

The navy portion represents that of Orix Life Insurance, which has been growing year after year.

Segment assets have decreased by 2% during the quarter down to JPY3.384.5 trillion in segment assets. The decrease was mainly due to Hartford Life run-off business.

Please turn to slide 10. In the overseas business segment, segment profits were JPY29.9 billion, a decrease of 13% on a year-on-year basis. Of this, about JPY3.4 billion decrease in profit was due to the foreign exchange rate changes.

Furthermore, Robeco's first quarter earnings was JPY3 billion less than that of the same period last year, because there was a reversal on the reserve associated with the earn-out position, which contributed JPY2.5 billion of gain in the first quarter last year. The earn-out provision was agreed during our acquisition of the Robeco.

Our aircraft-related business had a profit growth.

Segment assets have decreased by 9% during the quarter and ends at JPY2.067.8 trillion. In yen terms segment asset decreased by JPY217 billion, and JPY207 billion of that was the result of the strengthened yen.

Please turn to the next slide. During the full-year earnings announcement for the last fiscal year, we have introduced a new way to look at our business in three different categories. That is finance, operation and investment.

For the finance category, the corporate financial services segment had a profit decrease. However, the banking and Orix life insurance business -- I'm sorry, banking business, under the finance category, had a profit increase year on year.

For the corporate financial services segment, while the interest rate competition there continued to be very fierce, we continue to avoid competition on interest rate and we are focused on enhancing our fee-earning services.

For the operation category in the environment and the infrastructure businesses, Mega-Solar and the electric power retailer have been growing steadily.

As for the infrastructure business, we're expecting our concession business to start contributing profits from the second quarter.

In the financial service sub-category, we have recently announced our acquisition of Boston Financial in the United States. This Company is the largest syndicator of low-income housing tax credit in the country. With this acquisition, and together with our other US subsidiary, RED Capital, we will pursue further growth by strengthening our business platform in the finance market for rental housing in the United States.

As for the investment category, aircraft-related business has contributed profit increase in the quarter.

For the equity investment in Japan, we have made the decision to acquire -- to investment in the largest veterinary pharmaceutical in Japan.

Going forward in the coming years, we will continue with our strategy of avoiding direct competition and seek new and quality investments in the healthcare, IT, food and lifestyle supporting services industries.

Please turn to the next slide. Here I would like to conclude the presentation with a summary.

We have achieved net income for the first quarter of this fiscal year at JPY76.8 billion. This is slightly lower than the same period last year. However, this has actually exceeded our internal budget.

Given the current environment where the interest rate continues to go lower and the foreign exchange rate market still looks very unclear as for which we'll go, we will continue to act cautiously and focus on operation and investments towards the Company's goal of long-term sustainable growth.

This ends my presentation. Thank you for listening.

[Harish Azam], (inaudible).

Thank you very much for your presentation, Chun. Could I ask whether the asset sales in the real-estate segment, is that just due -- are you making concerted efforts there to increase the pace of sales, as a result of perhaps an increased conviction that we might be near the top of the market? Or is it more just a function of the offers that you happened to receive on buildings, etc.?

Please let me clarify the question, are you asking whether we are pulling back or refraining from selling our assets?

No, no. Whether you're accelerating the real-estate asset sale?

Accelerating?

Yes.

I see; I see. Okay, hang on a second. Thanks for waiting. The answer to your question is, we did not intentionally try to accelerate the sales of those rental properties in the real-estate segment. They were the result of actual -- well, normal market activities.

Okay, thanks. Sorry, just to clarify, there's no change in view regarding the real-estate market? You don't think that it's getting -- your view of the risk in that market hasn't changed?

That's correct.

Okay, thanks.

Thank you. If there are no further questions, Mr. Kojima has some final words to share with you.

This is Kojima. With many uncertainties in the external environment and the financial market condition becoming increasingly challenging, together with the strong yen, I think the first quarter result showed a relatively solid progress, including a number of new investments that we made.

As we continue to work together our medium-term goal, we will act with caution and are focusing on expanding our operation and the investment businesses.

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 Orix's IR website if you joined halfway 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 we have the chance to meet, whether it's in your corner of the world or here in Tokyo.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.