Orix (IX) Q1 2015 Results - Earnings Call Transcript

| About: Orix Corporation (IX)

Orix Corporation (NYSE:IX)

Q1 2015 Earnings Conference Call

July 30, 2014 05:30 ET

Executives

Haruyasu Yamada - IR

Haruyuki Urata - Deputy President & CFO

Analysts

Raj Chaudhary - Odey Asset Management

Operator

Welcome to Orix Corporation’s first quarter financial results conference call. At this time I would like to turn the call over to your moderator Mr. Haru Yamada. Sir, you may begin.

Haruyasu Yamada

Thank you. Good evening, this is Haruyasu Yamada and I would like to welcome you to ORIX conference call to review our first quarter consolidated results for the period ended June 30, 2014.

I am joined here this evening by Mr. Haruyuki Urata, Deputy President and CFO as well as the Mr. Shintaro Agata, Corporate Executive Vice President and Head of the Treasury Headquarters.

During this evening’s call Mr. Urata will discuss the first quarter results and then we will open up the lines to Q&A. I presume that everyone has in front of them the presentation material that were posted on the IR section of the website this afternoon here in Tokyo.

The following live broadcast is copyrighted work. Statements made today may contain forward-looking information. 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 out of our control.

You should read the forward-looking disclaimer in our earnings presentation as it contains additional end point disclosures on this topic. You should also consult our reports filed with the SEC for any additional information including risk factors with respect to our business.

Also please note that net income used in this presentation is the same as net income attributable to Orix Corporation shareholders referred to in the financial statements, to the consolidated financial results April 1st to June 30, 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 first consolidated quarter of the fiscal year ended March 31, 2015. My name is Urata, CFO of Orix Corporation. Please turn to slide one. I would like to start with an overview. Our completed first quarter net income was ¥68.6 million 52% increase year-on-year and 33% against the full year target of ¥210 billion. As a result the ROE are shown by that red line has continued its upward trend surpassing the 10% mark recorded there in the same period over the previous fiscal year to reach 14.2% on annualized basis at the end of the first quarter.

All in all the first quarter results have given us a solid start towards achieving a record net income this year. Please turn to slide two, trends in segment profits are shown on this slide. The overall profit growth of the group was strongly driven by the Overseas Business segment as shown in red and the Retail Segment as shown in green. Both of these segments recognize value gains on the sale of shares. Compared to the previous fiscal year the Real Estate segment in purple has almost doubled its profit and Corporate Financial Services segment in orange have achieved double digit growth.

On the other hand maintenance Leasing yield also continues to be robust during this quarter. Despite reduced profit compared with the same period over the previous fiscal year the investment and operational segment continued to recognize stable profits.

Please turn to slide 3. Next I’d like to explain trending segment assets. Total segment asset decreased by approximately ¥100 billion compared to the end of the previous fiscal year. This decrease was mainly caused by the continued reduction of the Real Estate segment assets and those of the sale of STX Energy shares. The line graph showing segment asset ROA on after tax basis has improved significantly to 3.8% on a underwriting basis.

Please turn to slide four, from here onwards I’d like to explain first quarter results and the latest topics for each segment intermediary. In the Corporate Financials segment base profits have exceeded that of the same period last fiscal year due to increase in financing lease and fee based revenues. [Write back] [ph] has been recorded at around the same level compared to the same period of last fiscal year.

As a result segment profit increased by 12% to ¥5.9 billion year-on-year. Segment asset balance remains at around the same level at the end of the previous fiscal year at ¥994.8 billion. As for the segment profit we have continued expanding sales of solar panels as well as the financing that accompanies it. In addition to the solar panel sales, life insurance sales and other fee businesses are also performing steadily.

Please turn to slide 5, in the Maintenance Leasing segment there was no significant change in the base profit year-on-year because the [fiscal] [ph] strong [inaudible] revenues while partially offset by the lower gains realized from the sales of second hand cars. There are no additional provisions on the impairment and the segment profit ended up at ¥11 billion. Segment assets increased at a stable pace as a result of steady order rate in new transactions and the overall impact from the construction tax hike was quite limited.

As a result segment asset increased by ¥15.1 billion to ¥637.1 billion. The ROA was 4.5% in the first quarter. As for the topics demand for truck rental across Japan has increased significantly due to the current strong demand in the construction sector. In response of this market environment we have opened four new car rental locations and increased our fleet size by about 20% last fiscal year.

During this first quarter we have opened four new rental locations in Chiba and Miyagi Prefectures expanding our nation-wide network to 50 locations. Another area in the automating business that we’re currently expanding is retail auto leasing market.

Based on the market trend that the average vehicle usage per period is lengthening we have accordingly launched a [nine year] [ph] lease product. We have also launched new lease product specifically customized to our female customers.

Please turn to slide 6, for the Real Estate segment the segment assets have been further reduced by about ¥46 billion in the first quarter lowering the assets base to ¥916.1 billion. Although base profit including rental and interest income decrease compared to the same period over the previous fiscal year by taking advantage of that sliding market environment, we have recorded capital gains that are significantly larger than any [quotas] [ph] during last fiscal year. As a result segment profits almost doubled year-on-year at ¥10.8 billion and ROA improved to 3%. First quarter topics in this quarter we have acquired Unazuki New Otani hotel located in Toyama Prefecture as a step towards strengthening our facility operation business.

Furthermore we have internally approved the plan to develop our logistics center in [Kyoto] [ph] City in Ibaraki Prefecture. Within the e-commerce business gaining momentum in this expansion we expect the demand for large logistics warehousing facilities to grow in the same direction. This particular transaction marks Orix’s 35th investment in the logistics facilities area.

Please turn to slide 7, moving on to our Investment and Operations segment. Base profits have decreased partially due to the decreased profit from the loan servicing business. However base profit in the private equity investment and the environment and energy related business have shown solid growth compared to the same period of the previous fiscal year.

Further capital gains have increased year-on-year, as a result the segment recorded a profit decrease on year-on ¥9.8 billion. Segment assets on the other hand remains on the same level compared to the end of last fiscal year while we continue to turn over the assets.

There are two topics in this segment that I would like to mention. First following the project in Okuhida which we announced at the end of last year, we have commenced commercial feasibility study on geothermal business in two new sites, one in Hokkaido Prefecture and the other in Aomori Prefecture. The other topic is that we recently announced our decision to invest in two companies, Net Japan, the largest precious metal recycling company, and the Arrk Corporation, a leading company that provide various development support services to auto makers.

Please turn to slide 8, for our Retail segment the investment gain from life insurance business and equity method profit for Monex Group are lower than that in the previous fiscal year. However with stable growth in the number of life insurance policies and housing loan assets, the base profit maintained at the high level. Further the gain on sales on Monex Group shares was recorded and made a significant contribution to the increase in this quarter’s capital gains and as a result segment profit increased 68% [year-on-year] [ph] to ¥29 billion.

As for segment assets, [whereas assets were] [ph] temporary decreased due to the turnover of ORIX Life Insurance assets under management, loan balance remain at a healthy level resulting in a marginal decrease compared to the end of previous fiscal year to ¥2.13 [million] [ph].

Regarding this quarter on July 1st, we have completed the acquisition of Hartford Life Insurance. In addition we have launched a new whole life insurance product named Rise. And also renewed our [inaudible] income guarantee insurance product Keep. These two initiatives will help us to strengthen our presence in the first sector. [Inaudible] the first sector is an important strategy for our life insurance business as we seek additional growth outside of the third sector.

Please turn to slide 9 for the last segment, Overseas Business. For Overseas Business despite strong performance by Orix USA during the same period over the previous fiscal year the base profit this quarter has achieved decent 27% growth year-on-year with solid contribution from Robeco. The segment has recorded capital gains greater than in the previous fiscal year partly due to the gain on sales of STX Energy shares. Overall segment profit increased by 2.6 times year-on-year to ¥39.7 million partially contributed by decrease in the previous and the provisions under impairment.

Segment assets maintained at just below [inaudible] decrease that result from the unconsolidation of STX Energy which was partially offset by asset increase in the U.S. operation.

Two topics included in this slide, first, as we have recently announced we have reached a basic agreement with Hyundai Group of South Korea to acquire Hyundai Logistics. The total acquisition price is expected to be around ¥12 billion. The second topic is Robeco where net new money inflow has been very strong helping the company to achieve record high AUM.

Please turn to slide 10. Next I would like to explain about the company’s base profits and capital gains. The graph on the left illustrates how our base profits and capital gains have changed over the years.

You may have also seen this graph before but as you can see here base profits have continued its high level of growth while contribution from capital gains remain quite stable every year. The graph on the right hand side shows the capital gain breakdown. This is the first time we have compiled this graph and please note that it excludes large valuation gains in the fiscal year ended.

In the same graph you can also see that the real estate related and investment related capital gains are shown separately constantly producing a certain level of profits every year.

Please turn to slide 11. Here I would like to explain a bit about base profit structure. The base profit can be divided into interest related revenues and service related revenues. As for the company strategic direction of finance product services we have reiterated before we have been trying to gradually expand [inaudible] service related revenues.

The result of our effort is shown in the graph on the left where you can see the breakdown of the service related revenues. Other operating profits are [net] [ph] accounts of other operating revenues and other operating expenses. the graph shows clearly that the other operating profits are expanding quite significantly. The graph on the right shows changes in the other operating profit among each segment. For the fiscal year ended March 2014 the Overseas Business in red achieved outstanding growth compared to the previous year but this is mainly due to strong performance by [inaudible].

Apart from Overseas Business Maintenance Leasing in yellow, Real Estate in purple, and Investment and Operation in blue are also showing some improvements when you compare with say the fiscal year ended March 2011.

I would like to go over the performance in Investment and Operation in greater detail on slide 12. The graph on the left hand side provides a closer look at the other operating profit generated from the investment and operating segment, I briefly covered in the previous slide.

As you can see in this graph, Environment and Energy Related business in green has achieved remarkable growth. In addition [inaudible] new investment has also boosted the Private Equity Investment related profits in orange in this segment.

The graph on the right is an updated version of the one that was included in our interim financial results presentation for the previous fiscal year. We’re currently funding our renewable energy business at a rapid speed. The target budgeted from mega solar power business in the fiscal year ended March 2017 is almost double the size of the budget we previously stated in our interim financial reporting last year.

Please turn to slide 13. I would like to conclude this presentation with a summary. The net income for the first quarter was ¥68.6 billion, a 52% increase year-on-year and 33% progress towards the full year target. Segment asset ROA was 3.8% and annualized ROE was 14.2%. This is a strong start for this fiscal year and a step towards achieving record full year net income.

Regarding the actual business activities in the first quarter we have decided to make a number of new investments in the investment and operations segment and overseas segment and at the same time we have also realized large capital gains through the process of our asset turnover. We have broadened our operation business portfolio with investment in new facilities. We also have strengthened our service platform with the opening of new rental locations. Furthermore in the environment and energy related field we have planted seed for future profit growth in the form of further expansion in the mega solar power generation business as well as taking initiatives in developing new geothermal power business.

I think overall we have not only had a great start towards achieving record net income this year but we have also accelerated implementation of our strategy of finance plus service this quarter.

This concludes my presentation. Thank you very much for your attention.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today comes from Raj Chaudhary from Odey Asset Management.

Raj Chaudhary - Odey Asset Management

Thank you for doing the base profit breakdown in slides 10 and 11, I think those are calculations that many investors will be doing themselves, so, it's very helpful that you do it for us. I had a couple of questions, firstly I wanted to understand in the investment and operation segment when you mentioned the pressure on the loan servicing, is that to do with rates being low or are there some other factors that perhaps you could expand on?

Haruyuki Urata

Regarding our servicing business, our investment and operation segment, that is our core - so called non-performing loan businesses. So around 10 years ago here in Japan under the new regulations we have started non-performing loan businesses and for the past couple of years many Japanese banks gave us opportunities to do businesses in the non-performing loan business areas but recently as we see that here in Japan we don’t see any new bigger size of the non-performing loan assets from the banking side. So for the last couple of years we have basically the focus on [death only] [ph] the reduction of our collections existing non-performing loan assets and so basically unfortunately for the last two years under the quite active real estate market situation, we have earned much better revenues profit through the sale of our real estate [inaudible].

But in this segment as you see that we have currently much more want to focus on the private equity investment as well as the environment and new energy business areas that’s the current situation and the strategy in this segment.

Raj Chaudhary - Odey Asset Management

So in a way you are suffering from the economy improving, because the NPLs are not being formed at the same rate?

Haruyuki Urata

[Inaudible] but on the other side of course under the very good environment of the Japanese economy we can expect more activities in different areas. So in these situations we believe that should be a big difference [inaudible] opportunities here in Tokyo.

Raj Chaudhary - Odey Asset Management

Just you highlighted how you have achieved 1/3rd of your guidance, what’s holding you back from raising that guidance?

Haruyuki Urata

To be honest our first quarter results are some of the very strong start for target of this fiscal year but as of today we don’t have an idea to change target to upside because there are still three quarters remaining and most probably in the second quarter because of the final ending of the transaction for Hartford Life Insurance acquisition. So during the second quarter we can expect some good financial results again but those -- the first half financial results, basically within our original plan or overview, our forecast. So of course during the first quarter we have shown a very good track record and result but to be honest a little bit better than our original plan for the first quarter but not so big a jump to be honest compared with the original plan.

Raj Chaudhary - Odey Asset Management

And so the Robeco performance looks impressive, that was within your plan?

Haruyuki Urata

To be honest a little bit better than original plan regarding the results by Robeco.

Raj Chaudhary - Odey Asset Management

Okay and just one last one quickly, there is a story today about you issuing a note in the U.S. Would that be a fixed income instrument or more equity, it wasn’t clear?

Haruyuki Urata

Are you asking of our U.S. operations, right now?

Raj Chaudhary - Odey Asset Management

There is a story about issuing 144A/Reg S dollar note. Is that looking for dollar funding?

Haruyuki Urata

We have not fixed any ideas about next opportunity to issue the U.S. bond so still over the year we’re always looking for opportunities. So after various discussions for the future expectations of the U.S. operations or our Europe operations, or maybe the Asian currencies operations we will determine at the final phase. So other than that we have not fixed any ideas about next issuance of the U.S. bond.

Operator

Mr. Yamada, there are no further questions today. So at this time I would like to turn the conference back over to you for any additional or closing remarks.

Haruyasu Yamada

Thank you. If there are no further questions I would like to take this opportunity to 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 re-listen to certain sections.

On behalf of management and the entire ORIX Group thank you for your attention and participation. I hope that we had a chance to meet whether it is in any corner of the world or here in Tokyo. Thank you.

Haruyuki Urata

Thank you.

Operator

Thank you. That concludes today’s conference. Thank you for your participation and you may disconnect.

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