Nomura Holdings Inc (NMR) 2007 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to today's Nomura Holdings first quarter operating results for fiscal year ending March 2007 conference call. Please be reminded that today's conference call is being recorded at the request of the hosting company. Should you have any objections, you may disconnect at this point in time.

Please note that this telephone conference contains certain forward-looking statements and other projected results which involve known and unknown risks, delays, uncertainties, and other factors not under the company's control which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiment, liquidity in secondary markets, level and volatility of interest rates, currency exchange rates, security valuation, competitive conditions and size, number, and timing of transactions.

[OPERATOR INSTRUCTIONS] Following the Q&A session, we would like to ask for you to please stay on the line to participate in a brief questionnaire concerning the presentation.

Now, I will turn it over to Mr. Masafumi Nakada and I'll be standing by for the Q&A session. Thank you, sir. You may now begin.

Thank you very much. Good evening, ladies and gentlemen. Thank you for taking time out to join Nomura Holdings conference call to review our financial results for the first quarter ended June 2006. I am Masafumi Nakada, CFO of Nomura Holdings, Inc.

Overall, the first quarter proved to be very tough. However, looking at the business segment totals, revenue was up compared to the first quarter, last year, and is comparable with the second quarter. Taking into account the first quarter market environment and the seasonal factors, we believe our businesses are showing steady performance. In addition, we are making progress with the three issues for further growth we outlined, earlier this year.

In our retail operation, we made steady progress to strengthen our domestic client base and increase revenue sources during the first quarter, despite the tough market environment, spurred on by the ongoing shift from savings to investment. In particular, investment trust, and variable annuities posted solid growth.

Net asset inflow during the first quarter was also very strong, reaching 2 trillion yen for the first time since the third quarter of the fiscal year ended March 2005 when there was a rush to deposit share certificates not held in brokerage accounts. To further increase contact points with customers, we will open 14 new branches matched to the characteristics of the local area.

In the wholesale area, we built up our track record for delivering solutions that make use of our own capital in such major deals as the MPO for Sojitz and the management buyout of Skylark. We also saw the investment and exit cycle gain traction in global merchant banking through the sale of investment assets.

In terms of revamping our international operations, we worked to increase profitability, both the Americas and Europe, good profit for the first quarter.

In developing new businesses, Joinvest Securities started operations in May and we strengthened the functions of Nomura Capital Investment by actively expanding our loan-related business with bridge loans and leveraged buyout financing. In addition, a unified partner has built up its business over its first year of operations and is starting to contribute to earnings.

Other business involvement continues to change significantly. We will remain focused on strengthening our revenue base through initiatives, such as those I have just outlined, in order to position ourselves for further growth.

Lastly, the dividends for the first quarter will be the target dividend of 8 yen per share, in line with our dividend policy we announced recently.

So, now, I will hand you over to Mr. [inaudible] for a detailed discussion of our results. Thank you.

Thank you. Good evening. I will now give you an overview of our financial results for the three months ended June 30, 2006, reading the document titled consolidated result of operations. Please turn to Page 4.

This page provides you the consolidated financial highlights for the first quarter of the fiscal year ending March 31, 2007. Net revenue for the first quarter was 205.9 billion yen, a 37% decline from the previous quarter and 10% year-on-year increase. Income before income tax of 33.4 billion yen, was down 84%, sequentially, and up 9% compared to the prior year, first quarter. Net income declined 84%, quarter-on-quarter, and increased 2.4 times, year-on-year, to 20.1 billion yen. The return on equity for the first quarter was 3.9%.

The graphs on the left and in the middle give a breakdown of net revenue and the income before income taxes. Business segment totals for net revenue and income before income taxes, shown in blue on the graph, declined on a sequential basis. [inaudible] investment and equity securities held for relationship partners, shown here in green, was 20.6 billion yen due to a slump in the stock market.

I'll now discuss the business segment totals, shown in blue, in more detail. Please turn to Page 5. Total net revenue from business segment for the first quarter was 209.8 billion yen, a 26% decline from the prior quarter and 22% increase compared to the same period, last year. Income before income taxes from the business segment was 54.4 billion yen, down 46%, sequentially, and up 46% from the year-ago quarter.

Next, let's turn our attention to the performance of each business division. Please turn to Page 6. In domestic retail, net revenue was 105.6 billion yen, a sequential decrease of 15%, and a year-on-year rise of 25%. Income before income taxes declined 17%, quarter-on-quarter, and increased 40%, year-on-year, to 43.5 billion yen. Net asset inflow for the quarter was approximately 2 trillion yen. However, domestic client assets declined by 3.8 trillion yen, compared to the end of March, to 76.7 trillion yen, mainly due to the slump in the stock market.

Commissions for distribution of the investment trust remained high at 28 billion yen, relfecting the delivery of product matched to the diversifying needs of our customers, such as a frequent distribution type fund and absolute return funds. Stock brokerage commission, meanwhile, declined 37%, quarter-on-quarter, to 28 billion yen due to a drop in equity transaction value resulting from a correction in the domestic stock market.

Please turn to Page 7. Global market net revenue decreased 46%, quarter-on-quarter, and increased 38% compared to the prior-year period to 68.9 billion yen. Income before income taxes of 14.3 billion yen was down 78% from the previous quarter and grew by 16.1 billion yen compared to first quarter of last year. Fixed income net revenue declined 60%, quarter-on-quarter, to 30.8 billion yen as revenue from the other finance business is off from the revenue generated in the previous quarter and trading revenue declined due to the slower sales of foreign currency bonds and structured bonds.

Net revenue in Equity declined 41%, quarter-on-quarter, to 34 billion yen, reflecting declining order flow from block trades and lower trading revenue due to the stock market decline.

Please turn to Page 8. Global investment banking net revenue totaled 18.8 billion yen, a sequential decline of 48% and a year-on-year rise of 47%. Income before income taxes declined 67%, quarter-on-quarter, and increased by 2.6 times, year-on-year, to 5.6 billion yen. The quarter-on-quarter decline [comes] as the overall value of equity financing in the market due to the seasonal factors.

In equity underwriting, we acted as lead manager for such deals as the offering of Mitsubishi UFJ Financial Group shares by the Resolution and Collection Corporation. We topped the Equity and Equity-Related table for the six months through June 2006.

In our solution business, MPO results for the first quarter totaled eight deals and 342.2 billion yen, including a 300 billion yen deal for Sojitz. In M&A, we acted as financial advisor on such deals as the sale of Wakodo by Sankyo to Asahi Breweries and the deal to turn Kirin Beverages into a wholly-owned subsidiary of Kirin Brewery. [

Please turn to Page 9. Global Merchant Banking net revenue totaled 12.1 billion yen and income before income tax was 9.8 billion yen due mainly to realized and unrealized gains from the partial sale of Terra Firma Investee companies. In addition, gains from the sales of Nomura Principal Finance's stake in Resort operation to [inaudible] and unrealized gain/loss from the Investee companies, were also booked during the quarter.

In terms of new investment, NPF conducted a tender offer for Skylark, a major restaurant chain in Japan, via a special purposes vehicle in which it holds a majority stake. As recently announced, a 94% stake in Skylark was acquired through the tender offer.

Please turn to Page 10. Asset management net revenue declined 4%, quarter-on-quarter, and increased 26%, year-on-year, to 17.6 billion yen. Income before income taxes decreased 9% from the previous quarter and increased 32%, year-on-year, to 5.2 billion yen. Distribution of funds offering increased distribution, continued to expand during the quarter with the My Story Profit Ditribution-type fund, hitting [650] billion yen in assets under management.

Distribution of newly launched funds, such as absolute return funds and regional index funds are also robust. However, total assets under management in asset management at the end of June declined by 150 billion yen from the end of March to 23 trillion yen due to the stock market decline.

Assets under management in funds for bank customers totaled 890.5 billion yen at the end of June, up 89.7 billion yen from the end of March. Assets in the Nomura Global 6 Diversified Fund distributed by Japan Post totaled 166.4 billion yen, representing a 76.4 billion yen increase and 73% market share of funds distributed by Japan Post.

Please turn to Page 11. Non-interest expenses, excluding the effects of consolidation [inaudible] of certain credit equity investing companies decreased 14% from the previous quarter to 165.3 billion yen. Compensation and benefits decreased 9%, quarter-on-quarter, to 79.5 billion yen and the information processing and communications declined 16% to 23 billion yen. The graph on the right shows fixed and variable expenses related to the compensation and benefits. Fixed type compensation and benefits for the first quarter totaled 41.7 billion yen while variable type compensation and benefits was 37.7 billion yen.

That concludes today's review. Now, I'd like to take any questions you may have.

[OPERATOR INSTRUCTIONS]. And we have a question from Jessica Rutledge with Lazard Asset Management.

Yes, hello. Thank you for holding this call. In global markets, could you tell us a little bit more about what was behind the drop-off in asset finance revenues? It had looked like you were seeing a sort of structural increase in that source of income and it's not clear to me how tied to the market that is.

Okay. So, first of all, we see quite big decline in the global markets with the trading revenue, but [inaudible] let's say more than [half] basically come from, we don't have any asset finance in Europe in the first quarter. Fourth quarter, we had quite a lot. So, decline of the [GM revenue is mostly comes from that part.

Is asset finance seasonal in a way that makes it -

Basically, in this type of business, we cannot expect it will be [big], quarter by quarter. So, maybe once or twice we see in a yearly basis. So that in the fourth quarter, we see that but, the first quarter, we didn't.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. We'll return to Jessica Rutledge.

As long as we're still waiting for everyone else to get their questions ready. Could you tell us a little bit what you're seeing with the investment banking pipeline for the next few quarters?

Let's see. In [inaudible] equity I think so we see it's reasonable, [inaudible] big deals for the rest of this year and together with mid-class and small class of that.

Do we need the market to - to recover so that we get those deals coming in or do you expect to see them regardless?

According to some part of that depends on the equity market is seasonal. But basically we see the levels that as a corporation recurrent needs of equity finance or [inaudible - accent hard to expand their business.. So that basically, I cannot say [inaudible - accent] bank but anyway they will come to the market sooner or later.

Okay. And then last question. It looks like costs are scaling in the investment banking division, has there been some additional investments in there in the last few quarters?

Yes, of course as we explained already, we are trying to increase in our investment banking in Japan as well as Asia and Europe. So that's part as of we keeping [testing] at this moment. So we - of course we cannot financial results but we still have some kind of plan to expand - further expansion.

Okay, much appreciated. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]. And we'll go to Greg Norton-Kidd with Omega Advisors.

Hi, yes. Just a financial question about the net gains on hedging activities. I think it's shown on page 20. Can you just talk us through what the main drivers were behind in that figure for the quarter? I think it's 11 billion yen, which is down from about 36 billion in the prior quarter. So that area's been a little volatile. Perhaps you could just talk us through the major swing factors there.

It's really difficult to say it was that. As you know, it's a kind of hedging matching of gap. For our financing side, using structured model and I'm sorry, hedging for the derivative side. So ome part of that we cannot outright hedging accounting.

So that means some - hedging part of the profit and loss is appearing on this part. Net gain [unfortunately] it is [inaudible - accent] hedging transaction. Of what these finals are foreign currency related to fixed income are related one so that I cannot say in exactly which part is affected in a downside or an upside, but let's see.

Okay, it's just a matter of the time difference. One side is in the realized gains and losses going to be, the match-ups are going to be zero in the future.

Okay. And - thank you. Can - I know a lot of it's related to a foreign currency bonds. Can you comment on how sales of how foreign currency bonds were during the course of the quarter? Is that in the materials somewhere?

That's - you can see the figure for the foreign currency bond on sales for the retail side, page 23. So that declined a bit at the last 2 quarters from the 300 billion level to the 150 level at this moment.

Ah, page 23? Sorry, which is the line there?

The bottom line. You see the retail foreign country, 1-0.

Okay, thank you.

Yes, you're welcome.

[OPERATOR INSTRUCTIONS]. And we'll return to Greg Norton-Kidd.

Hi [inaudible]. Anything you can tell us about business in the July quarter. We're - I guess almost at the end of the month now.

Sorry, I'm not in a position for talking about our current situation. But you see at least the equity market, is still in the kind of a very down period.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. And that will conclude our Q&A session for today. We would like to ask you to conduct - sorry to participate in our brief online survey.

After I finish reading the entire question and all of the possible responses, please answer by firmly pressing the star key followed by the number on your touchtone phone that corresponds to your choice.

If you are using the speakerphone please make sure your mute function is turned off to allow your signal to reach out equipment.

There will be a brief pause between each question to allow everyone a chance to respond.

Our first question, how would you evaluate our financial results? Star 1, better than expected. Star 2, in line with expectations. Star 9, worse than expected.

Second question. In what way has your investment stance towards the company changed as compared to before the results announcement? Star 1, positively. Star 2, no change. Star 9, negatively.

Question three, how would you assess our telephone conference? Star 1, good. Star 2, average. Star 9, needs improvement.

Question four, how would you rate our presentation material? Star 1, good. Star 2, average. Star 9, needs improvement.

That does conclude today's presentation. We thank you all for your participation. Have a great day.