ORIX Corporation
Q3 2019 Earnings Call Transcript

Published: 28 Jan 2019

[Operator:]

Good evening, ladies and gentlemen. Thank you for joining this Telephone Conference of ORIX Corporation for Third Quarter Consolidated Financial Results for the 3 months period ended December 31, 2018. The attendees at today's conference are Director and Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Mr. Yano will give you a presentation on the third quarter financial results for about 20 minutes. And we will move to a Q&A session. The whole conference will take about an hour. At this time, I'd like to turn the call over to Mr. Yano. Please go ahead.

[Hitomaro Yano:]

Thank you very much. This is Yano, Head of Treasury and Accounting Headquarters of ORIX. Thank you very much for attending today's call. First of all, I will present - give a presentation on third quarter results for the fiscal year ending March 2019, but before that, I'd like to make one comment. So every time, we disclose the results at 3

[Operator:]

Thank you, Mr. Yano. We are now ready for the question-and-answer session. [Operator Instructions]

[Masao Muraki:]

Thank you. I'm Muraki from Deutsche Bank. I have two questions. One question is NXT and Avolon, the profit and loss situation. I'd like to know about that. And in third quarter, respectively, how much is - was there the contribution to the profit, respectively? And NXT ¥10 billion per year and Avolon ¥12 billion per year contribution can be expected with that. So the projection has - what's has been correct? Could you explain that? And second question is NXT and ORIX existing U.S. business. Leveraged loans and CLO or loan from Dallas, how much are there? And going forwards, the total credit portfolio would be maintained or it be altered. Could you explain that as well, please?

[Hitomaro Yano:]

So first of all, talking about NXT Capital and Avolon's contribution to profit. So NXT Capital, so from this September, we have captured their contribution. And as I mentioned earlier, it has been - so September, October, November, December, four months, so there is the certain elements, but it has been quite strong - it's about ¥5 billion of profit has been generated. And also, Avolon, so we incorporated in November, and it will be incorporated a month later. So there is some investment expense. So there was no particular contribution in this particular fiscal year. There was due diligence as well. And regarding the contribution going forwards, the annual contribution for Avolon, about ¥20 billion will be incorporated. And then we can charge the P&L's interest. And then the - we can incorporate the annual contributions or profit. In the fourth quarter, probably it might be a bit over than this number, hopefully. So it has been good in terms of starting this business. And next question is NXT loans. Basically, until now, this company is generating leveraged loan by itself, and they are borrowing from banks and using CLO for funding. That is what they are doing. So basically in this market we are only are facing difficulties. So in the third quarter - so for individual loan, we're trying to revise or review it, and ORIX USA also is included in this effort. So we reviewed. So the provisions are not P&L, but individual provision is adopted. So we did conservatively and accumulated the provision, but that number itself is not really impactful but we are doing conservative measures. And CLO, in our case, so we are procurement side. So in such sense, in last year funding side in the last year, September, so we were able to so - effectively did funding. And then - but it increased a little bit. We were AAA, LIBOR plus 100. So last year, September is at really low price, which was not normal. So now it's a normal phase. So as of now, there is no particular impact. Talking about going forwards, so far, NXT Capital or ORIX USA assets would not replace dramatically in our schedule, but as we said already, we can be flexible in this market, we believe. So depending on the situation, we might liquidate the assets. Or - so and also - hold on, please. So loan amount is - majority is NXT. NXT and ORIX Corporation U.S.A., both of them together, ¥200 billion also we have. And so that's the answer to your question. Thank you very much. So talking about the first question, so this time - so the funding cost was increased by about ¥4 billion or so. So it seems like total funding cost is increasing, but without contribution of Avolon, the cost seems to be incurred at upfront. Yes, partially yes, but obviously the cost incremental for that leveraged loan, so it is a variable interest if adopted, so there are - revenue also increased. Overall, the dollar assets in the U.S. and aircraft business are just about - we have ¥1.5 trillion, which is ¥15 billion or so we have to that. So the - Avolon's funding has also been fixed. So roughly speaking, there is some mismatch between fixed interest and variable rate. So ¥200 billion or so is mismatch of fixed rate and variable rate. So this amount can be manageable, we believe, but overall we are properly hedging this. Thank you very much.

[Kazuki Watanabe:]

This is Watanabe speaking, from Daiwa Securities. Thank you very much. My first question, in the supplement materials, Page 19, unrealized P&L straight bonds, corporate bonds. Towards the end of the year, the credits spread fluctuated. And from September to October, there was an increase in the P&L of corporate straight bonds. What is the reason? The second question is about the pipeline towards the fourth quarter. You said you announced the sale of ORIX Golf. And you said you are going to get the profits from DAIKYO gain, asset sale, in Q4. In the Q4, is there any impairment you are planning to make? So this fiscal year, the pattern of P&L seems to be the same, so you don't have to record an impairment in Q4 this year like other years?

[Hitomaro Yano:]

Thank you very much for your question. Regarding your first point, we have to apologize because we don't have immediate answer to your question. The unrealized profits and gains has not drastically decreased in the United States, but in life insurance business there were some asset sales. But on this point we have to double check and come back to you later. We don't want to make a mistake. Therefore, we would like to come back to you on this point. Regarding your second question. For the fourth quarter, we are not planning to make any major divestiture other than ORIX Golf, which is expected to generate a sizable profit and gain, but other than that we are not planning to make any major divestitures. And as you know, for recent years, in the fourth quarter, we have recorded impairment. And in the case of last year, there was a Sri Lankan loss from sale of assets which generated high IRR. Therefore, we had to record an impairment. However, for this fiscal year, so far, we do not have any plan. Of course, wherever there is a need, we'd like to do so, but so far we do not have any plan for impairment.

[Kazuki Watanabe:]

Understood. Thank you.

[Natsumu Tsujino:]

Thank you. First question - it is Tsujino of Mitsubishi UFJ Morgan Stanley. So do you hear me?

[Hitomaro Yano:]

Go ahead.

[Natsumu Tsujino:]

The first point is Page 19, in appendix. So unrealized - ¥7.5 billion of unrealized gain, loss. And that part - and did you fair value P&L? And also, Page 2. So there are corporate financials. Obviously, the impact - is impacted by that and also, overseas, second line from the top in Page 11. So also, that includes such impact. And so in Page 19 - excuse me, Page 10. And also, Page 19 is also impacting. So this ¥7.5 billion is which segment? This ¥7.5 billion is impacting to which segment? So that is my question. Because otherwise the reason why the Corporate Financial Services is declining cannot be - really be explained. Or I can't really see what the reason was. That was the first question. And second question is - may I say the second question too?

[Hitomaro Yano:]

No. Let me answer to your first question. So the ¥7.5 billion of the profit is mainly because of ORIX Life available-for-sale securities. So this is government bond, and so that became...

[Natsumu Tsujino:]

No. I am talking about loss.

[Hitomaro Yano:]

So well then, also talking about a loss. As you say, the Corporate Financial Services segment, the domestic [ph] equity evaluation, they made a loss of ¥1 point some billion. So yes, there was a loss. And the other hand, as you pointed out on Page 11, so securities, negative ¥3.8 billion, so mainly this was due to the ORIX Europe. So Robeco - in the past. The Robeco Group, there were main entities. So this is ORIX Europe, we used to call it before. Then somewhat - so they had a seed capital, so with seed money, so they were funding themselves. Then - so due to the market deterioration, it became negative. However - actually, this is a bit complicated, but Robeco Group and ORIX Europe, through - for seed capital - so they didn't want to get loss on gain, so they are hedging with derivatives. Therefore, this loss is - in full is included in others. So derivative valuation gains is also generated, so it doesn't hit the bottom line, the impact.

[Natsumu Tsujino:]

So ¥4.1 billion is others gain?

[Hitomaro Yano:]

Yes. So that is reflection. Sorry. It was complicated. All right, so regarding domestic equity, ¥1 point some billion of FVTPL [ph] was included in Corporate Financial Services impact too. And the bottom of Page 19, so the equity method, ¥7.5 billion. So that - this is what I was talking about, right? Excuse me. So the breakdown is - in the ¥1 point some billion is domestic equity and overseas. Robeco seed capital is also included here - well, no. I don't think so. Hold on, please. Wait a moment, please. Well, sorry. So again, OCE and Corporate Financial Services amount is included in this line. And also, several hundred million of equity is held in Investment and Operation. So the - so financial service and others about ¥2 billion or so of valuation loss or so, ¥2 point some billion, yes, okay? ¥2 point some billion, okay? So that - without that, Corporate Financial Services could have been probably around ¥5 billion or so, but life insurance or others result was not so strong enough.

[Natsumu Tsujino:]

Okay. And second question is so the dividend projection is ¥46 and 30% payout ratio. And that could be ¥325 billion. Then - so Hartford and net profit. So Hartford accounting had hedging error [ph] of ¥5 billion also. And also - so ¥7.5 billion on Page 19 was also impact. So probably when you are making this - you are calculating this number, you had not assumed this would happened, right? Then - so this is a number which rely on market very much. So by - it might be remained till the end of March, right?

[Hitomaro Yano:]

Yes.

[Natsumu Tsujino:]

Then - so the market element or Hartford, the - having the technical hedging error by Hartford, this number has been decreasing. So ¥325 billion number should not be seen by investors or this ¥325 billion had some meaning in your intent?

[Hitomaro Yano:]

So the fourth quarter the projection cannot be mentioned here in my position. So obviously we are aiming at growth of 4% to 8%. And of course, it doesn't mean that we give up easily because of market situation and deterioration. However, it's true that - and Hartford, for example hadn't expected result, of course. And in the three months, we don't have assumption that we can recover it, so then that's why the number has been a bit negative. But initially we have set our goal, and you can't say - we don't say that we give up only because of market situation. So we work hard for the fourth quarter too. I'm sorry. I can't make any commitments to the results now. So I think that's all that I can say now. Right. Thank you very much.

[Shinichiro Nakamura:]

From SMBC Nikko. My name is Nakamura. I have two questions. The first question, Page 34. Existing business minus ¥17.7 billion, that's a decline. From the first half, you were saying that there was ¥10 billion-plus from India and that there was appraisal loss and that there was DAIKYO. And in Q3, there was the impact from typhoon. But excluding all these, even today, are you thinking that the business trend is overall positive? Has there been any change in the business - overall business trend? That's my first question. Second question, because of the changes in the market situations, as far as possible, could you explain the changes in the valuation as well as the pipeline at the moment? Your book multiple is less than 0.8. So what is your review and perception about this?

[Hitomaro Yano:]

Yes, it is true that there was a decline of ¥17.7 billion in the existing business. That is something that we had to state and unfortunately, but if I could make some excuse, included in this existing business, included are the losses from IL&FS. And for the - resident existing businesses, we are picking up the gains from sale of assets. And the rest is summarized and defined as the existing businesses. So even in the existing businesses, there are some special factors. Please keep that in mind. So for us, we believe that, so far our business trend has been in line with our expectations. We do not have any particular concern at this point in time. On the other hand, having said that, clearly in Q3 there has been changes in the trend. What we are hearing from the market is that towards acquisitions and M&As the multiple trend has been going down. That is something that we are hearing. That means that - opportunities for us. When the multiples go down, that's an opportunity for us. If not immediately, we would like to take this opportunity to acquire and take action. As of today, compared with the past, we are beginning to think that we should take a cautious decision while monitoring the market carefully. In the first half, the market was too strong. Therefore, we were being cautious as well, but we found this Avolon deal which was possible only with ORIX. And whenever there is such an opportunistic project, we would like to take these opportunities. But at the moment our stance is to take a cautious stance regarding the market. Did I answer your questions?

[Shinichiro Nakamura:]

Regarding the valuation of your stock price, if you have any comments, please.

[Hitomaro Yano:]

Unfortunately, regarding the stock price, we are not in a position to make positive statements about that. But we are just hoping that shareholders will have a better view of our company. That's all. Thank you.

[Koki Sato:]

Thank you. So this is Sato from - of Mizuho Securities. First point is ORIX Europe. Earlier - so if - there is no specific element or factors. You said that there wouldn't have any concerning factors on ORIX Europe. So the budget or looking at the commission fee, so the result has been decreasing. In particular, in the past two quarters, the net outflow also has been large. So could you explain how you are evaluating this current situation around Europe? And also, in addition, is there any measures, specific measures, that you are discussing? Could you talk about that, please? So that is the first question. And second question is about the Kansai airport. So the disaster measure, your measure against the disaster, and you have ¥54 billion for the budget and for Kansai airport. And new international airport will have half of respectively. And for the disaster measures, the expense burden of how it will impact into the profit from Kansai airport business, could you share the information so that clearly the...

[Hitomaro Yano:]

All right, thank you. So I'm talking about ORIX Europe, anticipating it is nothing a good situation. And overall, so - I would say it's stable because we have many different portfolios and we were executing different businesses, and they are complementary to each other. So that's what I meant. And so you pointed out, so asset momentum in the business industry is, once a valuation goes down, asset management fee also goes down; and also and overall, you might know this about some activity passive trend. So the net new money goes down and decreases, and valuation also decreased in the third quarter. So initially we had expected a different level of profit, which doesn't - which didn't come from the ORIX Europe. And of course, regarding this term's profit, that portion has already been expected, and we are discussing measures based on this assumption. So but - of course, it's not that we don't do anything, we don't take any measures. However, it's not that we can do something dramatically immediately. But in harbor [ph] states like this, we have already changed our asset manager. And also, there are - sales, management's costs can be reduced, so meaning we can outsource some operation. So that we can transfer from fixed costs to the variable costs for the sales and management cost. So we have to monitor this kind of cost status. And also overall industry-wise, if the situation gets worsen, we may invest in other asset management, which we couldn't do before. There could have been opportunities. This is about the Europe situation. And the second question, ¥54 billion for Kansai airports. That is expense, but as I said, first, so Kansai airport, we incorporate profits with a 3 months lag. So for December closing, we knew that. So we incorporate profits up to September end for Kansai airport. So we will incorporate the profits up to December for this fiscal year, but due to typhoon, the profits were from October to December dropped a little bit. But we can almost offset with our insurance profit for this fiscal - this term. So there our profit is expected to increase. And as newspaper article said, Kansai airport users, despite typhoon, in the last year the number of users increased. So the environment is not bad for us. So for the next term, so the CapEx indicator said. So in cash flow perspective, so we have lot retained earnings, so we can manage it. And the CapEx is booked in asset, as asset, so there is no direct impact to the profit and loss. So there is no much impact to the profit and loss during the term. So the - we are out making the detailed plans now, so I cannot say anything specific. However, we don't think there is a huge negative impact. That is all.

[Koki Sato:]

So sorry for asking in details. So the disaster measures. So you are expecting to increase the wall to prevent water. So is it also booked as asset in - of Kansai airport too?

[Hitomaro Yano:]

Well, actually - well, there are several patterns. So in my change - excuse me, I cannot say anything specific. So let us confirm which is...

[Koki Sato:]

I'm sorry. It was a very minor question.

[Hitomaro Yano:]

Right. So yes, but I am aware of that issue. Okay. Thank you very much.

[Futoshi Sasaki:]

This is Sasaki from Merrill Lynch Japan. I have a question. Earlier, there was a question about leveraged loan in the United States. For each loan, you said that you are conducting a review of the - each loan asset. As a result of that, how much was the impact? If you could share with us, could you give us a rough number? Other than leveraged loan, how about other assets? Especially in overseas countries, in the credit area, have you changed your stance in lending or credit extension? Are you having a negative outlook going forward for credit extension? I'm asking about the credit cost and credit stance at the moment in overseas countries? That's my first question. And the second question is as follows. The market has been fluctuating a lot these days. And regarding your management of the balance sheet, compared with three months and today, has there been any changes in your view about the balance sheet? That's my second question.

[Hitomaro Yano:]

Regarding your first question, in the United States provisions were made in the third quarter to the amount of several billion yen. In leveraged loan, we had ¥200 billion. In our case, whenever we put aside provisions, mostly those are for loans. So that will be the rough amount. This is - it has been made very conservative. That's the first point. And for overall - overseas operations, well, for the United States, because the market is a little bit unstable compared with other countries, the U.S. is better off. And more - we are more concerned about Asia. We do not stretch ourselves too much in Asia at this moment because the kind of this business we have in Asia is a very traditional orthodox business. We haven't seen any major increase in provisions amounts in Asia. We don't want to be too aggressive in Asia at the moment. In the case of Asia, Tokyo side always try to control the credit extension and level in Asia, whether which they accelerate or decelerate credit extension. But that's how we are controlling the business at the moment. In that sense, in the U.S. and China, because the markets are unstable and the country or area that suffers as a result is Asia. That's why we do not want to be too aggressive in Asia at the moment. On the other hand, in Middle East, over the last several years, we have been making the same statement, but we do not have such a favorable, strong business in leasing business in Middle East. So that's the overall comment. Next, if there has been any changes in the market view

[Futoshi Sasaki:]

If you look at Page 17 of the appendix, there are details by business. The second chunk from the top is the reversal and provisions you have disclosed. In the third quarter, there was a provision for loans, there was ¥800 million. In this amount, the factors you have just mentioned are included in this amount, ¥800 million. In the U.S. GAAP, leveraged loan, is it included in securities? Maybe not included here in this number because ¥800 million seems to be a small number. That's why I want to double check.

[Hitomaro Yano:]

We are sorry. We cannot answer your question right away, so let us come back to you later.

[Futoshi Sasaki:]

Okay. For the medium term, your profit target is 4% to 8%. Is it unchanged or are you becoming more - less bullish about this target?

[Hitomaro Yano:]

Well, for the very, very short term, overall we have not changed our stance, but at the moment it is a little bit down. But overall we have not changed our view about the target or for the long term, we are rather optimistic about opportunities.

[Futoshi Sasaki:]

Understood. Thank you.

[Koichi Niwa:]

Thank you very much. This is Niwa, Citigroup. So domestic loan and also residential loan should be explained. So you said that it is increasing, so mostly I'd like to ask you that in the current environment and also current competition, so can you explain about the current situation? And second point is on return on shareholder in dividend. So it seems it might be repetitive, but you said that there is no major change, but full year dividend payout ratio and dividend amount, if there was any change, what kind of changes should we expect? Could you explain that a little bit, please?

[Hitomaro Yano:]

First of all, regarding the mortgage loan, so we are actively working on this, and - but the investment loan has two parts. So metropolitan areas, like one-room studio type of a mortgage loan. And also, the other one is a condominium loan in the remote area not too far from the metropolitan area. So there were two pillars. So regarding the condominium loans, we are decreasing it - or we are not very proactive in that part. On the other hand, for the one-room studio type of room investment, we are still active. I think there are more opportunities rather. So we explained about this before in a briefing session, if the location is good and relatively good rents can be expected and if we're investing. And then if the [indiscernible] even the rent income is stagnant, they can still pay back, so we are selecting those third parties for investment. So now that our competitors are reluctant into this business, but instead we are more active in this part, so the asset is increasing slightly. That is for the first question. And the other one is return to shareholders. I'm sorry. There is nothing new that we can say about this. So as we previously announced, 30% of a return ratio is what we've act to succeed [ph]. So sorry, this is very simple answer, but there is nothing new that I can add at this point in time. Is that okay?

[Koichi Niwa:]

Right. Thank you very much. Understood.

[Operator:]

We are now ending the Q&A session. Mr. Yano, please go ahead.

[Hitomaro Yano:]

Thank you very much for participating in our earnings call. Sorry. I couldn't answer all the questions. I would like to come back to you later. We would like to continue to have active communication with investors going forward. Thank you very much.

[Operator:]

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