ORIX Corporation
Q3 2014 Earnings Call Transcript

Published: 31 Jan 2015

[Chung Yang:]

Good evening this is Chung Yang and I would like to welcome you to welcome you to Orix Conference Call to review our third quarter consolidated result for the period ended December 31, 2014. I am joint here this evening by Mr. Haruyuki Urata Deputy President and Chief Financial Officer as well as Mr. Shintaro Agata Cooperate Executive Vice President and Head of the Treasury Headquarter and Mr. Takao Kato Cooperate Senior Vice President and Head of the Accounting Headquarters. During this evenings call Mr. Urata will discuss the third quarter result and then we will open up the line to Q&A. I presume that everyone has in front of them the presentation materials that were 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 belief you should not place undue reliance on such statements as our future results and business activities may be affected by wide variety of factors that are beyond 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 net income used in this presentation is the same as net income attributable to Orix Corporation shareholders as referred to in the latest financial statements, titled Consolidated Financial Results April 1st to December 31, 2014. And without further ado I will turn the call over to Mr. Urata.

[Haruyuki Urata:]

Hello everyone and thank you for participating in today’s conference call announcing our results for the third consolidated quarter of the fiscal year ended March 31, 2015. My name is Urata, CFO of Orix Corporation. Please turn to Slide 1, here I would like to start with an overview. Looking on with our consolidated third quarter was ¥186.7 billion 58% increase compared to same period last fiscal year. ROE was 0.4% on an annualized basis. We have already achieved 89% progress towards the origin of full year net income target of ¥210 billion which was announced at the beginning of this fiscal year. Furthermore concerning the path that there are no foreseeable material negative concerns on our business environment or in the fourth quarter as of this moment we have decided to invite our full year target upwards by ¥5 billion to ¥215 billion. Doing so our current progress was a new full year target becomes 87%. Our decision to revise the net income target upwards attributes to a number of factor. Retail configuration from Robeco, Hartford Life Insurance, new subsidiaries that we acquired under our private equity investment business and large capital gain recorded as planned in the first half of this fiscal year and bargain purchase gains from Hartford life insurance. In addition the first that each segment continue its solid performance into the third quarter was also a major factor behind our decisions. Amidst overall deal we realize that we already approaching closely to the goals that we had announced in the beginning of this fiscal year while achieving record net income and realize our achieving process increase for the sixth consecutive year. While each business units continue to generate service profit we receive new growth opportunities in the ever gaining business environment and continue doing so we like to achieve our sustainable double digit growth from the next fiscal year and downward. Please turn to Slide 2, on Slide 2 I would like to talk a bit about our dividend forecast for this fiscal year. The forecast for the full year dividend per share is ¥33 up ¥10 or 43% from the previous fiscal year, the implied dividend payout ratio currently is based on the revised full year net income target of ¥215 million is approximately 20%. Moreover in our effort to expand our retail investor base we have decided to change the number of dividend payment per year from one full year dividend to two interim dividend payments per year, starting from the next fiscal year. We'll revised to the dividend forecast for the next fiscal year, we are schedule make such announcements during May this year simultaneously to the release announcements over the full year consolidated financial result. Our basic policy towards capital allocation is to utilize such capital to actively invest in growth opportunities and this policy has not changed. Nevertheless we will continue to search for the optimal bond between investment and shareholder return in our capital allocation. We will turn to Slide 3, starting from the third quarter we are made a number of changes to certain line items in the consolidated balance sheet and the segmental income. Due to factor such as increase in our fee renewal that does not rely on assets expansion in business where we operate ourselves, facility operation business acquisition of Robeco and increasing revenues coming from consolidated subsidiaries that we acquired under our private equity investment business, it is clear that the proportion of non-finance revenue has increased in recent years. The changes that we’ve made to the line items in the financial statement this time are attempted to better reflect the changes to our revenue structure that I just mentioned. For example, revenues deriving from service related transactions which we used to classify them under other operating revenues in the past, will now be reclassified together with revenues from asset management and servicing into our new line item titled services income. For further details on this, please refer to the third quarter financial results supplemental information. Please take a look at the graph on the left, which shows the changes in the composition of financed and non-financed revenues originated from all our six segments. The red bar in finance revenues, which consist of revenues from various financing leases and interim results. Finance revenues have been decreasing while the non-finance revenues have been growing significantly. The graph on the right shows the changes in segment profit in the recent years. Among the six segments retail, overseas business and real estate have contributed significantly to our profit to growth. While corporate finance services and the maintenance leasing segment remain solid they showed modest profit growth, the investment and operational segment have experienced a profit decline. Please turn to the next slide. From here and onwards, I’d like to explain third quarter results for each segment individually. I’d like to start with corporate finance services. Beginning from this quarter we’ve changed the format of the slide by disclosing segment revenues, segment expenses via breakdown and gains and losses from affiliate under equity method. More details of financial numbers are separately disclosing the consolidated financial result supplementary information. For this presentation I will mainly focus on the main points in each slide. For the corporate finance services, finance revenues have decreased on a year on basis primarily due to a decrease in the revenues from installment loans. On the other hand fee business based on the sales of solar panel and life insurance products has been robust and the services income increased significantly by 43% compared to the same period last year. As a result, segment profit increased by 4% year-over-year to ¥18.7 billion. Segment assets reached [indiscernible], 9% increase compared to the end of the last fiscal year. This is due to the consolidation of roughly ¥100 million worth of assets from Yayoi, the software service provider that we acquired in December last year. Yayoi has over 1.25 million users who are mostly small businesses out of Japan and this acquisition allows us to secure stable income generating business under our group. Furthermore, we do not only expect additional profit contribution from Yayoi on a standalone basis but we also have to expand this segment’s overall fee revenues by expanding ORIX wide range of products and services to Yayoi’s users. Please turn to the next slide. In the maintenance leasing segment, operating leases revenues increased by 6% year-on-year primarily due to the continued asset expansion in the operating businesses. Services income coming from maintenance and other value added services also increased by 3%. Although cost have increased in line with revenues growth, overall segment profit increased by 4% to ¥31.6 billion because of additional profit generated from steady asset growth over the period, which have offset the increasing cost. Segment assets increased by 9% to roughly ¥53 billion compared to the end of the previous fiscal year and the ROA remains at the high level of 4.2%. Please turn to Slide 6. This slide is a real estate segment. Segment revenues have decreased by 4% year-on-year most of these due to the continued downsizing assets and also decreasing condominium sales. However, a closer look shows that gains on rental property sales which is included in operating miscellaneous have increased dramatically on the back over strong real estate market. Services income has also increased primarily due to solid performance from the facility operation business and also increased fee revenues from asset margins. Now on the expense side, expenses have decreased along with the reduction in the asset class. Provision for that we receive and the impairment loss has also decreased, as a result, segment profits have increased by 43% to ¥22.5 million compared to the same period of last fiscal year. ROA has improved to 2.1%. The earning segment assets we continue to downsize our assets mostly focusing on paying down rented properties. Segment assets compared at the end of the second quarter decreased by ¥8 billion and this compared to the end of the last fiscal year it has decreased by ¥85 million. Please turn to the next slide. Moving onto the investment on the operation segment. For segment revenues, services income and sales of goods and real-estate have increased significantly due to the consolidation of Daikyo and other new subsidiaries acquired under our private equity investment deals. To give you a better understand of the composition of our services income, please look at the pie-chart in the bottom right of the slide. Here you can see that while real-estate management fees from Daikyo accounts for the biggest shares, revenues from the environment and the energy-related business now accounts for 24% of total services income or ¥40 billion in amount which is twice the size of that in the same period last fiscal year. This demonstrates the strong growth our environment and energy-related business has achieved over the years. On the other hand finance revenues from the loan servicing business have decreased and profits from Daikyo also decreased. As a result, segments revenues have decreased by 15% to ¥55.2 billion. Regarding segment assets, assets of loan servicing business have been decreased, but those of the investment business and the environmental and the energy-related business continue to show solid growth. As a result, the total segment asset have increased by 7% or ¥40 billion compared at the end of last fiscal year. Please turn to Slide 8. In the retail segment with the consolidation of Hartford Life Insurance in the second quarter, there were increases in both life insurance premiums and related investment income and accompanying expenses. There was also a bargain purchase gain. Such bargain purchase gains is recorded under equity net income of affiliates. We have also gains from sales this year [indiscernible] group in the first quarter. Our increasing life insurance premium driven by growth in the number of policies moving forward contributed to higher segment profit. Finance revenues generated by Orix Bank also increased steadily. As a result, segment profit increased by 2.4 times to ¥96.6 million. The increase of ¥1.63 million segment assets compared to at the end of last fiscal year was contributed by a consolidation of investment in securities was over ¥1.5 trillion that has been held by Hartford Life Insurance which it manages. Steady assets growth in the banking and life insurance business also contributed to the segment asset growth. Please turn to the next slide. Finally we come to the overseas business segment. Robeco [indiscernible] base net fee revenues have been growing significantly. Quarterly results on Robeco's profits and AuM are enclosed on Page 19 in the appendix of this presentation material. In addition, fee business in the United States especially Houlihan Lokey have been delivering strong numbers. As a result, services income increased significantly. As for the segment profit, with the gains on sales of the partial shares in STX Energy recorded during the first quarter, segment profits have increased by 62% to ¥84.8 million year-on-year. For segment assets along the additional ¥300 million deposit since the end of last fiscal year roughly ¥200 billion of which was due to impact from foreign exchange rate changes. After deducting the foreign exchange rate impacts, Americas' increased by around ¥160 billion, Asia increased by ¥140 billion and Greater China increased by around ¥30 billion. On the other hand, segment assets representing a portion of our investment in STX energy decreased by around ¥[130] billion. Please turn to the next slide. On this slide, I would like to highlight some of our recent business developments. In the corporate finance service segment apart from the acquisition Yayoi, we have taken new initiative to expand our products and services such as providing information on overseas companies and prepaid card issuance system. In the auto business, demand for truck rentals continue to be strong because of rising demand in the civil construction sector and we are acting on this trend by funding our inter-location network. In addition, we are also enhancing our services to accommodate our customers wide range safety and the comprehensive needs. In our real-estate operation business, we have opened two new private nursing homes. With this addition, our portfolio of senior housing now has [23] facilities with over 1,900 rooms. In the private equity investment business in line with our basic expansion strategy of making investment both in Japan and abroad we have invested this in leading company at market and sales mid-year equivalent. By continue to investing player in this industry we hope to be a supportive force behind healthy restructuring industry. As for embedment and M&G rate dividends we are trying to further grow this business by introducing new product and service to the market. One interesting example to share here is that we have started a new lease and rental services for solar panels and homes storage battery bonding together for housing. This servicing first to this kind in Japan, by developing and gathering each of these regions one by one despite everything they may not contribute significant the rate immediately they do have to diversify our non-financing industry. We believe that by deepening our business relationship and exploring the synergy potential with our customer eventually we shall see more sizable revenues from these new business initiatives. Please turn to Slide 11, I will like to conclude this presentation with the summary. Net income for the third consolidated year increase to ¥186.7 billion underwriting U.S 12.4%. We have revised our annual net income targets from ¥ 210 to ¥ 215 billion at the same time we have also announced our decision to increase both the dividend for the fiscal year by ¥10 per payout ratio furthermore starting from the next fiscal year we plan to issue internal dividend and we are going to announce dividend forecast in the meeting of every new fiscal year. So the next fiscal year after we obtain board approval in may we plan to announce a dividend forecast accordingly. On the topic of Orix future profit growth prospect as we are currently in the process of finalizing our business plan and budget for the next fiscal year it will see pretty mature to discuss the complete number. But as CEO Mr. Inoue has mentioned during the international guide announcements this fiscal year sustaining the double digit growth basic producer our [indiscernible] and this is also a company that we are truly committed. Nevertheless many analyst came to be a little over optimistic in their projections on Orix switch across growth either being nearly or furthermost. The hurdle of overcoming double digit growth is not a concern to the Orix management team as always we keep our words and deliver the numbers. The numbers we do that so presentation concludes here. I will like to thank you for your attention and your continue support for Orix.

[Chung Yang:]

This conclude the presentation part of the call. Now Mrs. Urata, Mrs. Agata and Mrs. Kato will be happy to answer any questions you may have.

[Operator:]

[Operator Instructions] Our first question today comes from Raj Chaudhary from Odey Asset Management. Please go ahead.

[Raj Chaudhary:]

Thank you for the dividend increase. I appreciate the additional disclosure you have made with regard to the service income, and the split-out of gains on sales and on securities. Is it right to think of the gains on securities -- I imagine some of that relates to fixed income securities, and therefore as interest rates fall the bonds will increase in value. Therefore, if interest rates were to rise those gains would disappear but you would have an off-setting benefit in your spread business. Is that one of the things that gives you confidence that you can carry on delivering double-digit growth?

[Haruyuki Urata:]

Regarding the kind of the [indiscernible] as soon as I said on the investing saving deals on partly is a whole example or regarding our private equity and funding business we can record neither from time to time further as shown end it from the investment so with our fund so that is also included in those this type of capital gain and also in our case we’ve made some venture capital types of the investments under the active capital market especially in the Japan. We also enjoyed some capital gain from the sale of our venture capital businesses. So, regarding the operations, our capital gain from the sale of the investment securities are not limited to the sale of fixed income rated investment securities. So of course some capital gain from the sale of the new style bond in the United States that also created some capital gain and that area of course created some change of the interest standard -- . But in our case most of those investments have been hedged in terms of the volatility of the interest rate. So, we don’t have any concern about those portfolios. So coming back to original question, I have no real concern about various portfolios of investments securities in total.

[Raj Chaudhary:]

Okay, thank you. With regard to the shareholder return, did the Board discuss the possibility of a share buyback, given that the shares are trading below 0.9 times trailing book?

[Haruyuki Urata:]

Of course I have before meeting I have made some feedback about the idea of the shareholders, our market as a whole in terms of the possibility of the share buyback and of course with our Board members, we’ve exchanged various ideas about the balance between new investment for future growth and there is a shareholder return. But as of today we have just determined to increase our dividend and dividend payout ratio and we have not reached to the any conclusion about the share buyback facility in the future. So going forward as we’ve discussed before basically we’d like to use our internal money, our capital for our future growth through various new investment or challenges but at the same time we want to basically, first, focus on the dividend policy but from time to time we are not going to completely close the window for the share buyback.

[Raj Chaudhary:]

Thank you once again. I would urge you to at least review it, compared to your alternative uses of capital. Once again, I appreciate the disclosure to show the importance of services income. Hopefully, that will help the stock market to recognize the value of that annuity.

[Haruyuki Urata:]

I fully appreciate also and I expect the capital market will respond to positivity of that to this kind of result.

[Operator:]

Our next question comes from [Keita Arisawa] from TPG-Axon Capital please go ahead.

[Keita Arisawa:]

Hi, it’s Keita Arisawa from TPG-Axon Capital. Thank you for accepting my question. You've raised the full-year guidance on net profit, if we subtract the first three quarters, the fourth quarter net profit assumption is ¥28 billion, that seems quite low relative to the third quarter results. Is there some sort of seasonality in the fourth quarter assumption that we should expect? And also I understand that the corporate tax cuts in Japan should be favorable to you, so expecting gains on the fourth quarter. I know you haven't assumed that yet in your full year guidance, but could you give us a ballpark number of what that gain could be? Thank you.

[Haruyuki Urata:]

Thank you very much and regarding your first question about our forecast for the just our first quarter. To be honest, judging from the past experiences from time to time, the first quarter have not shown that very good numbers in the past but as of today I haven’t had any real concern for some or special investment for our portfolios in our asset quality so just based on the current situations and with some uncertainties on a global basis, we believe that at this moment this revision from ¥210 million to ¥250 million [indiscernible] as of today. And second question was related to the corporate tax situation there. Of course as we point out basically the lower corporate tax should impact positively to our financial results and we have not included any forecast to this revisions of the three year target. And I'm sorry I don’t have any good number responding to your question relating to the what kind or which level of the impact, what amount of the impact can be expected with certain number of the reduction of the corporate tax rate, sorry.

[Keita Arisawa:]

The second question is that your third-quarter net profit recorded 20% growth year-upon-year, which is a very strong number. My understanding is that there was no big capital gains in this third quarter and I know you don't disclose the base profits any more, but can I understand this 20% earnings growth year-over-year to be kind of a sustainable growth and that it does not include any major one-time profit?

[Haruyuki Urata:]

And regarding our this quarter result of course as you see that always we have created some or capital gain tax as the income over years and of course through this third quarter we have made some such kind of the income, but so for example, in the various segment you can see some figures or kinds of capital gains from the sale of various portfolios, but in overall our result have any big size of the capital gains from the various investment portfolio so basically the comparison with previous third quarter's result the growth have been made through the various business results for the base profit we have used in the past.

[Keita Arisawa:]

Last question, if you don't mind, in your overseas segment your credit cost, including the valuation losses at the third quarter was 6.6 billion, it went up quarter-on-quarter and also year-over-year, so it's a little bit of a high number and I was just wondering, obviously we've see a big move in the oil price, commodity price, big moves in Swiss francs, so a lot of volatilities in the overseas market. I would like to ask if there had been any of those impacts towards your third-quarter credit cost and if there are any asset that we should be worried about that you hold in your exposures towards commodities or any other volatile assets in your overseas segment? Thank you.

[Haruyuki Urata:]

Regarding the impact by the various volatile or segments in the many different types of commodities market but especially in the energy and oil market, we don’t have a big size of the exposure in this industry, it’s very-very small and very-very limited. So very lucky that we don’t have any negative impact to our performance by the price decline of the energy or oil markets and also as you point out there has been various volatile markets on the global basis, very lucky that in our case we don’t have any concern about those volatile markets in terms of our existing impact to possibilities. Of course, through those volatile markets various uncertain situations in this fiscal year to increase so investment are we have a some ideas in our mind to respond to the uncertainty. But kind of the uncertainties have being increasing all the time or based by that to be honest I don’t have any concerned investing the portfolio for future growth strategy. And regarding this quarter impairment we are overseas here as lot of limited to the ending six to five year. So I don’t have any concern.

[Keita Arisawa:]

Okay, thank you very much, that was my last question. Thank you.

[Chung Yang:]

If there are no further questions I would like to take this opportunity to thank you for participating tonight conference call. If you have any questions to comment please do not hesitate to getting touch with us using the contact information is found on the last page of this evenings presentation material. Also a replay of this conference call will be available short on the Orix IR website if you joined part way through or would like to listen to certain sections again. On behalf of management and the entire ORIX Group thank you for your participation. I hope that we had a chance to meet whether it is in your corner of the world or here in Tokyo. Thank you.