ORIX Corp (IX) 2017 Q3 法說會逐字稿

Good evening, this is [Shinyan] of ORIX's corporate planning department and I would like to welcome you to ORIX's conference call to review our third-quarter consolidated result for the nine-month period ended December 31, 2016.

I'm joined here this evening by Mr. Kazuo Kojima, Deputy President and CFO; as well Mr. Shintara 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&A with Mr. Kojima.

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 the future results and business activity 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 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 Results April 1 to December 31, 2016.

And without further delay, I would like to start the presentation from slide 1.

The net income for the nine-month period ended December 2016 was JPY217.1 billion; a 1% increase year on year.

The annualized ROE remained largely unchanged from the first half of this year at 12.2%, which is higher than the management's target range of ROE between 11% to 12%.

Compared to the same period last year, where we recognized sizeable gains of JPY39.6 billion associated with the Houlihan Lokey IPO, we think the level of earnings we generated this fiscal year so far is still a solid performance overall.

Please turn to slide 2.

Total segment profits for the three quarters were JPY329.1 billion; an increase of 2% year on year.

I will explain segment performance in more details later but, basically, the third quarter continued the same trend as in the first half of this fiscal year.

The following three business segments continued to deliver positive profit growth. They are investment and operations, real estate and retail segments.

The overseas segment, which is represented by the beige color at the top of the bar, continued to contribute a significant amount of profits. For instance, in the third quarter we recognized gains of about JPY20 billion from exiting of one of our investments in the Americas.

Please turn to slide 3.

Total segment assets have decreased by 1% or JPY75.8 billion since the end of the last fiscal year; down to JPY8.8967 trillion.

Segment assets decreased in all segments except for the overseas business, which actually grew by 6% year to date, driven by increased investment in the Americas and the aircraft-related businesses.

Segment assets decreased in the corporate financial services segment, primarily due to decreases in installment loan balance as we continue to be selective on new transactions based on profitability.

The maintenance leasing segment issued ABS, which decreased the asset balance. Otherwise, the volume of its new transactions actually was higher than last year's.

Segment assets decreased in the real estate segment, due to continued sales of rental properties.

In the investment and operation segment segment assets remained flat, as additional private equity investments and mega-solar assets were offset by exit of private equity investments in sales of securities.

In the retail segment segment assets decreased, primarily due to the life insurance assets associated with Hartford Life Insurance run-off business and the cashing in on fixed income assets held by ORIX Life Insurance. These more than offset the modest asset growth by our banking business in the same segment.

Annualized after-tax ROA was 3.2%, indicating our asset efficiency overall remains high.

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 pretax profits. Pretax profit for the first three quarters stays at the same level as last year, despite a negative JPY12.5 billion of ForEx impact from the strong yen this year.

And, looking to each of the major components in the pretax profit, pretax profit from existing operations decreased by JPY14.8 billion this year. We recognized about JPY98.2 billion of gains on sales of investments. And, at the same time, we also recognized gains on sales of real estate assets JPY30.9 billion. And together they account for JPY129.1 billion.

Compared to the same period last year we also recognized a similar level of gains: JPY93.9 billion of gains on sales of investments and also JPY21 billion of gains on sales of real estate assets and last year's total amount was JPY114.9 billion.

The chart on the right gives the breakdown of the segment assets changes year to date.

As you can see, existing operation had an increase in assets JPY287.5 billion. And there were other decreased factors, including securitization, JPY77.5 billion; asset decrease in Hartford Life Insurance, JPY137.8 billion; JPY81.6 billion of sales of investments; and JPY59.4 billion of sales of real estate assets.

And also note that, cumulative basis for the three quarters, the asset decrease impact from foreign exchange rate movement, JPY7 billion. During the second quarter the number here was much larger; about minus JPY24 billion of negative impact on assets. But in the third quarter the exchange rate between US dollar and Japanese yen recovered somewhat and net, all in total for the three quarters, the impact was JPY7 billion.

Please turn to the next slide for more details in each segment.

For the corporate financial services segment profit decreased by 22% year on year to JPY26.3 billion. Finance revenues have decreased in line with the lower outstanding balance of installment loans. Gains on sales of securities also was lower than that of last year.

Services income, including those from Yayoi, continued to grow steadily. It has increased by JPY2.9 billion year on year.

In terms of revenue contribution, services income has surpassed finance revenues and is now the largest revenue generator for this segment.

Segment assets decreased by about 1.% down to JPY1.0389 trillion at the end of the nine-month period. However, segment assets grew by JPY4.5 billion in the third quarter on a standalone basis.

Please turn to slide 6.

In maintenance leasing segment profits have decreased by 15% year on year down to JPY28.6 billion. This decrease in profit was mainly due to the auto-related business. Earnings from sales of used vehicles, which is included in the operating lease revenues in the financial statement, had decreased.

Segment assets have maintained pretty much flat at JPY731.5 billion after a minor increase of JPY0.2 billion on a year-to-date basis.

Increased volume of new transactions in the auto-related business was the main driver behind the segment assets increase, which more than offset the JPY37.5 of securitization conducted during the first quarter this year and also the decrease in rental asset on the ORIX Rentec.

Please turn to slide 7.

In real estate segment profit increased by 12% year on year to JPY49.7 billion. The real estate market in Japan continues to be strong and we have continued to sell our rental properties, generating higher gains on sales compared to last year.

Operating facilities, a major source of our services income, including our hotels and hot spring resorts, continued to contribute stable incomes despite a limited level of impact from the Kumamoto earthquake during the first quarter.

We also continued to make new investments selectively in operating facilities that generate stable cash flow.

Segment assets decreased by 8% down to JPY680.2 billion due to the continued sales of rental properties. Annualized ROA increased from 3.6% last year to 6.4% as of the end of the third quarter.

Please turn to next page.

In investment and operations segment, this segment consists of environment energy business, our private equity investment business in Japan, DAIKYO, and from this year a new addition of concession business, the segment profit for the three quarters had reached JPY68.8 billion; an increase of 47% year on year.

During the first quarter we sold two of our private equity investments. In the second quarter we sold one investment. All these transactions generated capital gains.

Our environment and energy business continued to grow in the third quarter with additional power generation capacity from Mega Solar and a steady expansion of our electricity retailing business.

Service incomes from the environment energy business grew by 21% year on year.

Our concession business which, after incurring some expenses in the first quarter, started contributing profits from the second quarter and continued to contribute more profit into the third quarter.

Segment assets decreased by 1% in the nine-month period down to JPY697.6 billion due to sales of private equity investment, which I just mentioned.

Segment assets in environment and energy business, namely, Mega-Solar assets, are growing steadily. As of the end of December 2016, we have secured 940 megawatt, of which 520 megawatt have commenced operation.

Please turn to slide 9.

In retail segment segment profits have increased by 23% to JPY60.1 billion compared to the same period last year. A higher number of policies in force with ORIX Life Insurance and the sales of fixed income assets, such as JGV, have contributed to the segment's profit growth.

Finance revenues also increased in line with the growth in housing loan and card loan balance under our banking business.

Segment assets decreased by about 4% down to JPY3.3316 trillion year to date. The main reason behind such decrease were the cashing in on fixed income assets held by ORIX Life Insurance, where some of the cash received was kept as cash and cash is not recognized as segment assets, and also the continuing asset decrease in Hartford Life Insurance run-off business.

Housing loan and card loan asset balance, on the other hand, have increased compared to the beginning of this fiscal year.

Please turn to slide 10.

The last segment is the overseas business segment. Segment profits have decreased by 18% year on year, reaching JPY95.6 billion after the nine-month period.

Despite a negative impact of JPY12.5 billion from the ForEx movement, this segment continued to make strong contributions, including JPY20.2 billion worth of gains on sales of private equity investment in the Americas in the third quarter.

Segment assets have increased by 6% since the start of the fiscal year to JPY2.4169 trillion, mostly due to expansions in the Americas and our aircraft-related assets.

For our shipping business, as already reported in the media, we have agreed to acquire JPY289 million worth of shipping loans from the Royal Bank of Scotland and part of that had been reflected on the financial statement from the third quarter.

Please turn to the next slide.

Slide 11 provides a snapshot of the segment profits under the three business categories framework for the past three years.

Please do note that, for the purpose of illustrating normalized earnings trends, gains of significant size and of one-time nature, such as capital gains from the Houlihan Lokey IPO and bargain purchase gain recognized in the acquisition of Hartford Life Insurance, are excluded in these graphs.

For details on how these three categories are composed with different sub-categories please refer to page 31 in this presentation material.

Finance category generated lower profits on the year-on-year basis. Overseas finance business had a lower profit year on year, due to the recognition of some impairment and provisions for doubtful receivables. Domestic finance business, on the other hand, achieved profit growth through housing loans and card loans.

In operation category maintenance services generated less profit than last year, due to lower gains from used vehicle sales, which is reflected in the operating lease revenues.

On the other hand, environment infrastructure and financial services both achieved profit growth year on year.

Environment and energy business continued to expand. Concession business also got off to a good start this year. As for financial services, our life insurance businesses delivered higher earnings, supported by a greater number of new policies in force and also investment gain.

In investment category overall strong capital gains from equity investment and tangible assets have driven this category to a higher profit than last year.

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

For the first three quarters, which ended December 2016, we have achieved net income at JPY214.1 billion (sic - see slide 12, "JPY217.1 billion") and the equivalent level of earnings as the previous fiscal year. Annualized ROE was 12.2%; a solid result overall.

Looking ahead, the foundation of our future growth will come from investment and the operation businesses. We will continue to expand our existing operation in these fields and also seek new business opportunities that have potential to become the next major profit contributor for the Group.

This ends my presentation. Thank you for listening. And now Mr. Kojima, Mr. Agata and Mr. Kato will be happy to answer any questions you may have.

Raj Chaudhary, Odey Asset Management.

I have two questions, if I may. The first one's on the retail segment. If I understood correctly, you mentioned that, as some of the life insurance fixed income investments have matured, you have held those assets in cash. Presumably that's due to the interest rate environment.

So can you give us an idea of how big that is and how you can still achieve the required return on assets? Do you need to buy more equities? Or can you afford to wait for a while before you need to invest that? That's the first question. Thank you.

Please hold on while I check with Kojima-san on this. I will help to interpret. So, regarding your first question, you're partially correct. Since the beginning of last year with the negative interest policy, the so-called fixed income assets that we sold, they were not actually matured assets. They were our investment in Japanese Government bonds that we sold off before they actually matured. And, under such environment, we considered it was the right thing to do.

And it's correct that some of that is kept as cash. And we did not reinvest immediately because we are currently looking very closely at the interest rate environment and we believe there might be a better timing than now to start reinvesting in other fixed income assets in the future.

Okay, I see. And a few months doesn't change -- doesn't put you at risk of not meeting the return requirements.

That's correct.

Okay. Thank you. The second area, if I may, is in the overseas business. What can you tell us about the RBS shipping loans in terms of the type of discount you are buying them at, maturity duration and what kind of return you expect to achieve on that investment?

Because of the nature of this transaction, a lot of the details, unfortunately, we cannot disclose. But, basically, one thing we can share with you is after the discount on these assets our own estimation of return was roughly around 7% or so.

Okay. Thank you very much for your answers.

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

Thank you for joining today's conference call. Nine months have passed in the current fiscal year and we have delivered roughly the same level of earnings as last year, while maintaining the ROE above our management target range. I consider this to be a solid performance, given the strong yen we faced here.

While we see the business environment continuing to change at a rapid pace, we react with prudence as we adapt and discover potential business opportunities. At the same time, we will focus on expanding our operation (inaudible) as we continue our path toward our medium-term goal by March 2018.

Once again, I appreciate your interest and continued 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 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.