ORIX's (IX) CEO Makoto Inoue on First Quarter 2016 Results - Earnings Call Transcript

| About: Orix Corporation (IX)

ORIX Corporation (NYSE:IX)

Q1 2016 Earnings Conference Call

July 26, 2016 05:30 AM ET

Executives

Chun Yang - Corporate Planning Department

Kazuo Kojima - Deputy President & CFO

Shintaro Agata - Head of the Treasury Headquarters

Takao Kato - Head of Accounting Headquarters

Analysts

Chun Yang

Good evening. This is Chun Yang of ORIX Corporate Planning Department, and I would like to welcome you to ORIX Conference Call to review our First Quarter Consolidated Results for the Three Month Period Ended June 30, 2016. I am joined here this evening by Mr. Kazuo Kojima, Deputy President & CFO, as well as Mr. Shintaro Agata, Head of the Treasury Headquarters and Mr. Takao Kato, Head of Accounting Headquarters. During this evening’s call, I will go through the first quarter results and then we will open up the lines for Q&A with Mr. Kojima.

I presume that everyone has in front of them the presentation materials that were posted on the IR section of the Web site 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 our future results and business activities 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 same as the net income attributable to ORIX Corporation shareholders as referred to in the latest financial statements titled consolidated financial results April 1st to June 30, 2016. And from here on, I would like to start the presentation from Slide 1 of the presentation materials.

The net income for the first quarter was ¥76.8 billion, which was 3% less compared to the same quarter for the previous year. Meanwhile, the annualized ROE for the first quarter was 13.2%, which exceeded our mid-term ROE target range of 11% to 12%. During the same quarter last year, there was significant profit contributions from Hartford Life Insurance and Robeco, and the absent of these profits this time explains the lower earnings in the first quarter this fiscal year. The other factors that quarter lower earnings was the foreign exchange rate fluctuations as strengthened yen has reduced the profits of our overseas operation when we translate send back to Japanese yen for foreign currencies.

Nevertheless, we have continued to generate capital gains and closed the investments in operation segments and the real-estate segments. Our environment and energy business including the mega solar projects continue that grow steadily and we have also made new investments both in Japan and overseas, which are expected to contribute to future profit growth. Overall, considering the fact that the external environment continues to unstable with many uncertainties, as shown by the increasing volatile stock market and foreign exchange market after the Brexit, we think the Company still make solid progress in this first quarter.

Please turn to Slide 2. The total segment profits were ¥115 billion, which was 5% lower than the same period last year. Among the three segments, real-estate segment and the investment and operations segments, both generated capital gains and achieved profitable growth year-on-year. Later in this presentation, I will talk about each segment first quarter results in more details. But basically the three main factors behind the lower earnings overall were; one, in the retail segment, there was a significant reduction in Hartford Life Insurance profit due to a favorable market condition; two, in overseas business segment, Robeco recognized sizeable one-time gain in first quarter last year, and that did not repeat this time; and finally, the third factor was that yen strengthened this quarter, which reduced the profits from our overseas operations.

Please turn to next Slide. Segment assets were ¥8.5 trillion as of the end of the first quarter, a 4% decrease compared to the end of the last fiscal. And so the annualized ROA for the first quarter was 3.5%.

Please turn to Slide 4. On this Slide, I would like to talk about the major components behind changes in the pretax profit and segment assets for the first quarter. First, the chart on the left, pretax profits, decreased by ¥5.5 billion on year-on-year basis, existing operation had a minus ¥11 billion, which was mainly due to three factors that I just mentioned before; the one-time gain by Robeco last year; the unfavorable market condition affected Hartford Life Insurance; and impacts from foreign exchange fluctuations. If we disregard these three factors, then the existing operation we have resulted positive growth. On the other hand, gains on sales of both investments and real-estate assets in total were ¥48.7 billion, which exceeded the ¥43.2 billion achieved during the same period last year by about ¥5 billion.

The chart on the right hand side shows how segment assets have changed over three months period. During the first quarter, segment assets have decreased by ¥402 billion And the bigger factors behind that was foreign exchange rates which was responsible for ¥207 billion decrease in assets. In addition, Hartford Life Insurance assets been run-off and assets that we sold in our private equity investment business and real-estate business, as well as the securitization we executed in our maintenance leasing business, all contributed to the decrease in the segment assets, overall. As for our finance business in Japan, the housing loan and the car loan business on the ORIX Bank has been growing. I have just explained the first quarter earnings with summary and from next Slide and onward I will explain each segment’s result in more details.

Please turn to Slide 5. The corporate financial services segment generated ¥8.5 billion of segment profits, a 31% decrease year-on-year. This is due to the assets of the ¥3 billion gains on sales of securities recognized during the same period last year. Finance revenues decreased somewhat due to the decrease in installment loan assets, however, services income is on basis of, if you exclude gradually portion, has displayed solid growth year-on-year. Segment assets decreased by 2% down to ¥1 trillion and ¥33 billion as a result of the decrease in installment loans.

Please turn to Slide 6. The maintenance leasing segment achieved segment profit of ¥9.9 billion, a decrease of 15% year-on-year. Gains on sales of leased up vehicles, which is recorded under operating lease revenues was slightly lower than the first quarter last year by about ¥1 billion. Segment assets decreased by 4% year-on-year down to ¥700 billion. The main factor behind the decrease in assets was the securitization of the leasing assets of about ¥37.5 billion, excluding the fact that the segment assets here would have continued to increase.

Please turn to Slide 7. In the real-estate segment, segment profit increased by ¥22.6 billion or 63% growth on a year-on-year basis. We have recognized gains on sales of rental properties on the back of an active real-estate market. Meanwhile, the facilities operation business remained largely stable during the quarter. Segment assets decreased by 5% year-on-year down to ¥705.6 billion in line with the sales of rental properties that continued during the quarter.

Please turn to next Slide. In the investment and operations segment, segment profit was ¥31 billion, 18% increase year-on-year. During the first quarter, we sold two investments; one is, WingArc1st , this is a business software vendor that we sold in May; and the other is Global Business Power Company, this is a power company in the Philippines that we sold in June. And both of these exits generated capital gains.

As for our environment and energy business, with the gradual addition of mega solar project in operations and the expansion of the electric power retailing business, earnings there has been grown steadily. As a result, the services income has increased by 30% year-on-year. Segment assets have decreased by 4%, down to ¥678.2 billion as of the end of the last fiscal year, and this is mainly due to the investments that we sold during the period. Assets in environment and energy business however have been growing. As of the end of June this year, we have secured 819 megawatts of solar power generation capacity, among which, 470 megawatts have started operation now.

Please turn to next Slide. In the retail segment, segment profits in the first quarter was ¥12.5 billion, a 42% decrease year-on-year. For Hartford Life Insurance due to unfavorable market conditions, we have increased the provisions for our liability reserve. And as a result, Hartford Life had a minus 12.4% -- a ¥12.4 billion in segment profit year-on-year. If we exclude the negative contribution for Hartford Life, the retail segment would have a increase in segment profits of over ¥3 billion year-on-year. On the other hand, ORIX Bank had achieved profit growth.

The bar chart in the middle of the Slide shows how ORIX Life Insurance premium and related investment income had changed over the last three years, the medium portions represents that part of ORIX Life Insurance which has been growing year-after-year. Segment assets have decreased by 2% during the quarter, down to ¥3 trillion and ¥384.5 billion in segment assets. The decrease was mainly due to Hartford Life one-off business.

Please turn to Slide 10. In the overseas business segment, segment profit was ¥29.9 billion, a decrease of 13% on a year-on-year basis. And of this, about ¥3.4 billion decrease in profit was due to the foreign exchange rate changes. Furthermore, Robeco’s first quarter earnings was ¥3 billion less than that of the same period last year, because there was a reversal on the reserve associated with earn-out provisioning, which contributed ¥2.5 billion of gain in the first quarter last year. The earn-out provision was agreed during our acquisition of Robeco. Our aircraft related business had profit growth. Segment assets have decreased by 9% during the quarter and that ¥2 trillion and ¥58 billion. In yen terms, segment assets decreased by ¥217 billion and ¥207 billion of that was the result of the strengthened yen.

Please turn to next Slide. During the full year earnings announcement for the last fiscal year, we have introduced a new way to look at our business in three different categories i.e., finance, operation and investments. For the finance category, the corporate finance and services segment had a profit decrease. However, the banking and ORIX Life Insurance business -- banking business under the finance category had a profit increase year-on-year. For the corporate financial services segment, while the interest rate competition there continue to be very clear, we continue to avoid competition on interest rate and we’re focused on enhancing our fee earning services.

For the operation categories, in the environment and infrastructure businesses, mega solar and the electric power retail have been growing steadily, and thus for the infrastructure business, and we expecting our concession business to stop contributing profits on second quarter. In the financial service sub-category, we have recently announced the acquisition of Boston Financial in the United States. This company is the largest syndicator of low income housing tax credit in countries. With this acquisition, and together with our other U.S. subsidiary, Red Capital, we will pursue further growth by strengthening our business platforms in finance market and rental housing in the United States.

And as for the investment category, aircraft related business has contributed positive increase in the quarter. And for the equity investments, in Japan, we have made the decisions to acquire two investments in largest veterinary pharmaceuticals in Japan. Going forward, in the coming years, we will continue with our strategy of avoiding direct competition and seek new and quality for investments in the healthcare, IT, food and lifestyle supporting services industries.

Please turn to next Slide. Here I would like to conclude the presentation with a summary. We have achieved net income for the first quarter of this fiscal year at ¥76.8 billion. This is slightly lower than the same period last year. However, this has actually exceeded our internal budget. And given the current environment where the interest rate continues to go lower and the foreign exchange rate market still looks very unclear, as for which way we’ll go, we will continue to act cautiously and focus on operation and investments towards the Company’s goal of long-term sustainable growth.

This ends my presentation. Thank you for listening.

Question-and-Answer Session

Operator

Our first question today comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you very much for your presentation Chun. Tonight, can I ask whether the sales in the real-estate segment. Is that just due -- are you making concerted efforts that increase the pace of sales as a result of a increased conviction that we might be need at top of the market? Or is that -- is it more just a function of offers that you happen to have received on buildings et cetera.

Chun Yang

Please let me clarify the question. Are you asking whether we are pulling bag or refrain from selling our assets?

Unidentified Analyst

No, whether you’re accelerating the real-estate expense…

Chun Yang

The answer to your question is we did not intentionally try to accelerate the sales of those rental properties in the real-estate segment. They were the result of actual -- well, no more market activities.

Unidentified Analyst

And so just to clarify that no change in view regarding the real-estate market, you don’t think that it's getting your view of the risk in that market hasn’t changed?

Chun Yang

That’s correct.

Unidentified Analyst

Thank you.

Chun Yang

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

Kazuo Kojima

This is Kojima. With many uncertainties in the external environment, and the financial market conditions become the increasingly challenging. Together with the strong yen, I think the first quarter still show the relative results in ForEx including number of new investments that we made. We continue to work together our medium term goals. We will have during the caution and reporting on our focus on expanding our operations and investment businesses. Having said that, I appreciate your interest and continuous support to ORIX and to now and also in the future. Thank you.

Chun Yang

Thank you for participating in tonight’s conference call. If you have any questions or comments, please do not hesitate to getting touch with us using the contact information on the last page of this evening’s presentation material. Also a replay of this conference call will be available shortly on ORIX IR Web site. You can join halfway through and would like to listen to certain sections again. On behind of the management and the entire ORIX group, thank you for your participation. I hope we have the chance to meet whether it is in your call over the world, or here in Tokyo.

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