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Wall Street Breakfast

ORIX Corporation (NYSE:IX)

F1Q08 Earnings Call

August 10, 2007, 8:30 AM ET

Executives

Yui Takamatsu - IR Officer

Haruyuki Urata - Director, Corporate Sr. VP and Head of the Office of the President

Analysts

Presentation

Operator

Good day everyone and welcome to the ORIX First Quarter Conference Call. For the duration of the presentation, all lines will be placed in listen-only mode. A question and answer session will follow the main presentation. [Operator Instructions]. And I would like to hand the call over to Mr. Yui Takamatsu, and I will be standing by for the Q&A session. Please go ahead. Thank you.

Yui Takamatsu - Investor Relations Officer

Thank you. Welcome everyone to ORIX's earnings conference call for the first quarter of the fiscal year ending March 31, 2008. My name is Yui Takamatsu. I am joined here today by Mr. Yasuhiko Fujiki, who is our President, Chief Operating Officer and Chief Financial Officer and Mr. Haruyuki Urata, who is a Director, Corporate Senior Vice President and Head of the Office of the President as well as Mr. Tadao Tsuya who is the Executive Officer in charge of Accounting.

I will assume that everyone has a copy of document entitled the ORIX Presentation 0706E dated August 10, 2007 that has been posted on our IR website. In today's conference call, we would like to first spend about 20 minutes and provide an overview of the presentation made at the first quarter results earnings announcement today in Tokyo by Mr. Urata. We will then open up the lines to any questions that you may have. During the Q&A segment, we ask for your patience as Mr. Fujiki, our President, COO and CFO who will speak in Japanese and I will provide a consecutive English interpretation.

Please turn to page 4. I will now ask Mr. Urata to give a brief summary on the first quarter results.

Haruyuki Urata - Director, Corporate Senior Vice President and Head of the Office of the President

Hello everyone. Thank you very much for your joining for our conference call. My name is Haruyuki Urata and I am a Director and the Corporate Senior Vice President in charge of corporate development, corporate planning and corporate communications. Today, I would like to give a brief statement on our results for the first quarter of the fiscal year ending March 31, 2008.

Net income for the three months ended June 30, 2006 decreased 3% or 1.3 billion yen year-on-year to 45.8 billion yen due in part to the occurrence of temporary expenses. Accordingly, the results for the period were within our expectation.

Please turn to page 5 for an overview of the segment performance in terms of revenues. Looking at segment revenues, 8 segments out of 9 recorded a increase in revenues year-on-year. The real estate segment recorded a decrease in revenues as it saw an increase in the number of residential condominiums developed through certain joint ventures which are not recorded as segment revenues but as equity net income of affiliates and also due to a decrease in gains on sales of real estate and operating leases.

Please turn to page 6. Looking now at segment profits. As can be seen 5 segments recorded an increase in profits while 4 segments were down year-on-year. The Rental Operation, Life Insurance, Other, the Americas and Asia, Oceania and Europe segments recorded an increase in both revenues and profit. On the other hand, the Corporate Financial Services, Automobile Operations and Real Estate-Related Finance segment recorded a decrease in profits despite an increase in revenues.

Profits decreased in the Corporate Financial Services segment due to the increase in interest expense and provisions as well as the recognition of write-downs of intangible assets. Profits decreased in the Automobile Operations segment due to the increase in expenses associated with the operating leases and maintenance services. Profits decreased in the Real Estate-Related Finance segment due to the absence of gains from real estate sales which were recorded in the same period over the pervious fiscal year. In the Real Estate segment, although profits in the residential condominium operations were almost flat year-on-year, segment profits decreased due to the decrease in gains on sales of real estate and operating leases.

Overall, despite the increasing expenses, the sales and marketing operations for each segment continued to be steady and our business [ph] performance months has been progressing close to our expectations. Therefore, I would like report to you that we do not believe there are any changes in our trend of medium and long-term growth.

Furthermore, although net income decreased 3% year-on-year, I would like to reassure you that we have been actively expanding our operations for profit growth in each of our 9 segments and we continue to focus on maintaining a balance between growth, profitability and financial stability in our operations.

Now I will ask Mr. Takamatsu to give an overview of the segment results.

Yui Takamatsu - Investor Relations Officer

Thank you, Mr. Urata. I would now like to explain the year-on-year performance across business environments and measures taken for each of our 9 business segments.

On page 7, we have a slide explaining the Corporate Financial Services segment. The following 8 slides explain each business segment in the same format. We have segment profits on the left hand side of the slide and year-on-year segment performance, business environment and measures taken on the right hand side. Revenues increased due to the expansion of corporate loans as demand for funding from SMEs continues to be strong. On the other hand, segment profits decreased 38% or 4.4 billion yen year-on-year to 7.1 billion yen due to the increase in provisions in addition to the reorganization of approximately 3 billion yen in write-downs of intangible assets.

In our efforts to strengthen our regional sales and marketing base, we have opened new offices and actively hired senior employees who have retired from regional financial institutions and companies for our newly opened branches, and in doing so, expand transactions by utilizing their customer network.

We have also strengthened our relationship with financial institutions and partnering accountants. Although segment profits for the first quarter were down year-on-year due to temporary factors, we will continue to expand business opportunities going forward.

Please turn to page 8 for the Automobile Operations segment. Segment revenues increased due to the increase in revenues from operating leases and maintenance services in the automobile leasing operation. On the other hand, segment profits decreased 7% to 5.8 billion yen year-on-year due to the increase in expenses accompanying an increase in revenue from operating leases as upfront costs are recorded faster for operating leases than for direct financing leases. This is in addition to the increase in expenses associated with the opening of new stores and vehicle purchases in the automobile rental operation.

Although competition in intensifying in the auto leasing market with the consolidation of major leasing companies, we are promoting sales and marketing of leasing services with added value, including support for submission of environmental reports and offering telematic services. As a clarification, the term telematics is coined from the words telecommunications and informatics and refers to next generation vehicle maintenance system.

We are also expanding our sales and marketing operations in the field of logistics by focusing on our strength in truck leasing. Furthermore, we have been developing the market for MyCar Lease, used car sales and care sharing for our future growth. As we also begin to see results in our truck leasing operation, we look to grow our sales and marketing operations going forward.

Please turn to page 9 for the Rental Operations segment. Segment profits more than doubled year-on-year to 2.8 billion yen as there were no losses on the sale of investment securities which were recorded in the same period of the previous fiscal year, and due to the increase in revenues from operating lease including precision measuring equipment. Demand for rental has been on a recovery trend due to the increase in both capital investment and need to improve information security measures by company. We have been expanding our product offering into the fields of environmental analysis and medical-related fields as well as aiming to develop our overseas operations for further growth.

Please turn to page 10 for the Real Estate-Related Finance segment. Segment revenue increased due to an expansion of non-recourse loans. On the other hand, segment profits decreased 3% to 10.2 billion yen year-on-year due to the absence of the reversal of provisions as well as the absence of gains from real estate sales of properties acquired in the loan servicing operations, both of which were recorded in the same period of the previous fiscal year in addition to the increase in interest expense. Although certain transactions seem to be overheated, real estate market activity in Japan continues to be strong due to the inflow of money from both Japan and overseas. While demand for funding, primarily from REIT, is active. We have been accumulating non-recourse loan assets while implementing strict risk management measures. We also look to actively pursue loan securitization by utilizing the know-how that we have accrued.

Please turn to page 11 for the Real Estate segment. Segment profit decreased 12% to 18.3 billion yen year-on-year due to the decrease in gains from sales of real estate under operating leases, although the income from condominiums sold to buyers were almost flat year-on-year. Although competition is intensifying in residential condominium operations, we look to differentiate ourselves from other companies by offering high value-added residential condominiums unique to ORIX such as condominium developments that incorporate senior housing. The real estate market, centered around office buildings and city centers, continues to be strong. We have been steadily making new investments including logistics facilities, office buildings and the development of senior housing.

Please turn to page 12 for the Life Insurance segment. Although revenues from life insurance premiums were flat year-on-year, segment profits almost tripled to 2.9 billion yen year-on-year due to an increase in life insurance-related investment income. We will continue to expand the sales of guarantee-type products centering around Medical Insurance CURE.

Please turn to page 13 for the Other segment. Although gains on investment securities at the venture capital operations decreased due to the downturn in the market environment, segment profits increased 20% to 12.8 billion yen year-on-year due to an increase in contributions from equity method affiliates in Japan including DAIKYO and Fuji Fire and Marine. M&A is becoming a common part of corporate strategy and we look to expand our M&A advisory operations by utilizing our Corporate Financial Services segment network. We have also announced a business merger with Internet Research Institute or IRI. I will elaborate on this topic later in the presentation.

Please turn to page 14 for the Americas segment. Here, segment revenues increased due mainly to the increase in revenues associated with corporate loans. As a result, segment profits increased 5% to 5.4 billion yen year-on-year, accompanying the increase in segment revenues. Our corporate loans in this segment are diversified among a wide range of businesses including healthcare and energy. The U.S. macro economy is becoming increasingly uncertain due to the turmoil caused by sub prime loan problems in the financial market. Although there has not been any direct impact to our earnings in the first quarter, we will proceed by carefully monitoring the credit market and its effect on related markets.

Please turn to page 15 for the Asia, Oceania and Europe segment. Segment profit increased 8% to 12.6 billion yen year-on-year due to the expansion of automobile leasing in Australia and Korea and the recognition of real estate sale and ship-related revenues. The Asian economy continues to grow, led by China. We have strived to expand our operations in Asia including the acquisition of shares in Oman National Investment Corporation Holding and business cooperation with a major commercial bank in Kazakhstan. That concludes the overview of segment results.

Please turn to page 16 for a discussion of major topics. For the first quarter of this fiscal year, the yield for installment loans has increased 0.26% year-on-year to 5.51% on an annualized basis. On the other hand, the percentage of interest expense to the average balance of debt and deposits has increased 0.29% year-on-year. While the yield for installment loans has decreased 0.43% compared to the fourth quarter of the pervious fiscal year, we recorded profits from securitization and a higher contribution to revenues from the loan servicing operations in the fourth quarter of the previous fiscal year. We will continue to strive for profitability going forward.

Please turn to page 17. In the first quarter of fiscal 2008, provisions for direct financing leases was 1.9 billion yen. Provisions for loans not individually evaluated for impairment was 3.0 billion yen and provisions for loans individually evaluated for impairment was 2.2 billion yen for a total of 7.1 billion yen. Since the second half of the previous fiscal year, provisions have been on an increasing trend. We will continue to carefully monitor the cash flow of each loan as well as industry trends of our borrowers and carry out investment in loans with appropriate risk and return to assets.

Please turn to page 18. We established International Real Estate Business Headquarters on June 22, 2007 to jointly develop operations with local business partners, primarily in Asia, Middle East, Eastern Europe and Oceania. This slide shows as part of our overseas real estate investments examples of joint projects developed with local partners.

And finally, please turn to page 19. This slide explains the business merger with Internet Research Institute or IRI, which was announced on June 4, 2007. Since its establishment in 1996, IRI, as a research and development-based IT venture company, has been providing basic technologies for the Internet as its core operation. As shown on the slide, ORIX is looking to achieve four goals through the business merger. Following the approval at IRI's general shareholders meeting to be held on September 26, 2007, we look to conclude the business merger through a stock swap after November 1, 2007.

That ends the presentation portion of our conference call. Now, Mr. Yasuhiko Fujiki, who is our President, Chief Operating Officer and Chief Financial Officer, or Mr. Urata, who is a Director, Corporate Senior Vice President and Head of the Office of the President, will answer any questions that you may have. We apologize in advance for the time it may take as after I translate your question into Japanese, Mr. Fujiki will answer in Japanese and then a consecutive English translation of answers will be made. We thank you for your patience in advance and look forward to your questions.

Question And Answer

Operator

At this time, we'll open the floor for questions. [Operator Instructions]. Our first question will be coming from Will Bojuque [ph]. Please go ahead.

Unidentified Analyst

Hi this Will Bojiqe [ph] Partner Investments. Could you please give me some more color on bad debt expense? Was it a specific credit?

Yui Takamatsu - Investor Relations Officer

Excuse me, can you say that again?

Unidentified Analyst

I had a question about bad debt expense. First of all, was it a specific credit and can you comment on general trends?

Yui Takamatsu - Investor Relations Officer

Okay. What I am going to do now is I am going to translate that into Japanese, so I am going to put you on mute for a second, if you can hold on, okay?

Unidentified Analyst

That's fine.

Yui Takamatsu - Investor Relations Officer

Hello, can you hear me?

Unidentified Analyst

Yes, I can hear you. Hello. Yes, please go ahead.

Yui Takamatsu - Investor Relations Officer

Can you hear me?

Unidentified Analyst

I can hear you now.

Yui Takamatsu - Investor Relations Officer

Okay. In terms of provisions we had reversals of provisions in the previous fiscal year plus we had a reflection of increase in installment loans. And what you are seeing is that assets are increasing, there is about a 12% increase year-on-year and you can see that provisions for the previous fiscal year were very low. So we were approaching more of a normalized level and there is not specifically a trend or a specific sector that we are leaning towards.

Unidentified Analyst

So it's not particular-related [ph]?

Yui Takamatsu - Investor Relations Officer

It does include it, but it's not... we don't lend to one particular sector that doesn't account for more than 10%.

Unidentified Analyst

Okay.

Yui Takamatsu - Investor Relations Officer

And if you'd like more information on that, we have a release regarding the amount of loans on the entertainment industry as well on the news release. And you can download that through our website.

Unidentified Analyst

Okay. May I ask a second question?

Yui Takamatsu - Investor Relations Officer

Sure. Go ahead.

Unidentified Analyst

This relates to goodwill write-downs, what was that associated with?

Yui Takamatsu - Investor Relations Officer

Okay, one moment please. Hello. Can you hear me?

Unidentified Analyst

Yes.

Yui Takamatsu - Investor Relations Officer

Okay. Basically, it's a negative goodwill in our investment in our subsidiary.

Unidentified Analyst

And which one?

Yui Takamatsu - Investor Relations Officer

It's Nittetsu Lease, which changed its name in July to NS Lease. And that's approximately 3 billion yen. So for three months, we are using the name that's the brand name.

Unidentified Analyst

Okay.

Yui Takamatsu - Investor Relations Officer

So the negative goodwill on that.

Unidentified Analyst

Okay. Thank you very much.

Yui Takamatsu - Investor Relations Officer

Okay.

Operator

Thank you, sir. Does that complete your question? Thank you. [Operator Instructions]. Our next question will be coming from Mr. Fred Barker from Mccanna Capital [ph]. Please go ahead.

Unidentified Analyst

Yes, thank you for doing this conference call, very helpful.

Unidentified Company Representative

Thank you.

Unidentified Analyst

Could you elaborate a little bit more on the liability side of your balance sheet, particularly your short-term financing through commercial paper? Just give us a little more color or some comments as to the stability of this as a funding source given the turbulence we are seeing in the markets today, whether you have back up commitment lines etcetera to support your financing in this market.

Yui Takamatsu - Investor Relations Officer

Okay. I am going to put you on mute again. One moment please. I think you are referring specifically to the decrease in available credit commitment lines while you are seeing an increase in CP.

Unidentified Analyst

Well, if you could just give us a discussion about your circle [ph] liability side, and really what we are looking for is comfort that it's very stable and it's not going to be disrupted by what's going on right now.

Yui Takamatsu - Investor Relations Officer

Sure. What we are seeing is that we are seeing an increase in acquisition of assets and a decrease in the securitization of assets. And we are seeing that the increase in temporary borrowing from commitment lines in CP issues. However, the increase in CP came from say like an overall increase in assets, and there is significantly no significant change in the composition of our funding and we'll continue to secure liquidity in our funding.

Unidentified Analyst

Do you have... in an event that the commercial paper market becomes more difficult, you have... what other sources of funding do you have in mind as of time being?

Yui Takamatsu - Investor Relations Officer

Okay.

Unidentified Analyst

You have other sources lined up?

Yui Takamatsu - Investor Relations Officer

Okay. In terms of CP we have diversified sources and we have plenty of back up.

Unidentified Analyst

Such as?

Yui Takamatsu - Investor Relations Officer

Do you have the file entitled First Quarter Consolidated Financial Results Supplementary Information?

Unidentified Analyst

I don't have it open in front of me, but it's --

Yui Takamatsu - Investor Relations Officer

Okay, yes. If you look on page 4 of that file, it shows the amount of commitment line.

Unidentified Analyst

Okay.

Yui Takamatsu - Investor Relations Officer

And that shows pretty much in detail as well as our funding how it's diversified.

Unidentified Analyst

And are you seeing any changes in either availability or pricing or anything in this... any changes to this area?

Yui Takamatsu - Investor Relations Officer

No, not that we know of. We haven't seen it.

Unidentified Analyst

Okay.

Yui Takamatsu - Investor Relations Officer

In terms of what I just said earlier is that the available credit for commitment line is decreasing, but the CP is increasing. But we have been continuing to secure liquidity in our funding, so we don't see a problem there at all.

Unidentified Analyst

Okay. Can I ask another question on that?

Yui Takamatsu - Investor Relations Officer

Sure, go ahead.

Unidentified Analyst

You show the yield on your installment loans declining, and if you go back the past year, up until now the spread between the yield and your interest cost has been fairly well maintained. I think it was the first quarter that you showed a decline. Could you explains to us why the yield on installments are declining?

Yui Takamatsu - Investor Relations Officer

Okay. One moment please. In terms of the yield for installment, what we are seeing is that we recorded profit from securitization in the fourth quarter and we also saw a higher contribution to revenues from the loan servicing operation in the fourth quarter. Therefore, we see a slight dip quarter-on-quarter. But if you see it on a year-on-year basis, you are seeing that it has increased.

Unidentified Analyst

Okay. So it's securitization-related --?

Yui Takamatsu - Investor Relations Officer

Yes.

Unidentified Analyst

Issue. I see. All right, thank you.

Yui Takamatsu - Investor Relations Officer

Thank you.

Operator

Thank you, sir. Our next question will be coming from Miles Wickses [ph]. Please go ahead.

Unidentified Analyst

Thank you for the call.

Yui Takamatsu - Investor Relations Officer

Thank you.

Unidentified Analyst

Can you just walk through briefly what drove the large increase in equity and net income of affiliates and also the gains on discontinued businesses? Thank you.

Yui Takamatsu - Investor Relations Officer

Okay, one moment please. Hello.

Unidentified Analyst

Yes.

Yui Takamatsu - Investor Relations Officer

In terms of the first question you had, that was from... what you are seeing is that there was an increase in equity net income of affiliate as we saw the JV, joint venture due to the increasing number of residential condominiums developed through certain venture. So you see a big spike there such as DAIKYO.

Unidentified Analyst

Okay.

Yui Takamatsu - Investor Relations Officer

Okay. That's not included in a segment per se. It goes in... it's recorded as equity and net income of affiliates. That's why you saw a spike in the equity and net income of affiliates whereas the real estate segment, it looks on paper that it didn't do so well because it's not reflected there. But it's actually reflected in equity and net income of affiliates.

Unidentified Analyst

Okay.

Yui Takamatsu - Investor Relations Officer

That's why you are seeing an increase there.

Unidentified Analyst

And the gain on --?

Yui Takamatsu - Investor Relations Officer

It was part of joint ventures, JV projects.

Unidentified Analyst

And the gain on discontinued businesses?

Yui Takamatsu - Investor Relations Officer

Okay. The second one is we had gains on sales of real estate under operating leases and related revenues. That would be --

Unidentified Analyst

Can you hear me? Can I ask another question?

Yui Takamatsu - Investor Relations Officer

Sure, go ahead.

Unidentified Analyst

I know they are very lumpy businesses, but in the past you have highlighted your pipeline is very strong for the next year or two in terms of real estate for the gains that you should be harvesting.

Yui Takamatsu - Investor Relations Officer

Okay.

Unidentified Analyst

Should we expect the first quarter to be a run rate for the rest of the year or would you characterize the first quarter as being weak in those areas?

Yui Takamatsu - Investor Relations Officer

In terms of real estate, that's what you are saying?

Unidentified Analyst

Yes. In terms of revenue of real estate sales and gains on sales of rental real estate.

Yui Takamatsu - Investor Relations Officer

Okay. One moment please. Hello?

Unidentified Analyst

Yes.

Yui Takamatsu - Investor Relations Officer

If you look at the Real Estate segment profit year-on-year; actually, if you look on slide 11, you see that in fiscal '07 segment profits in the first quarter were 20.7 billion yen. And for the first fiscal year... first quarter of this fiscal year it was 18.3 billion yet, and it looks on paper that it went down 12%. However, you see that the first quarter last fiscal year was phenomenal. It was very strong. So it did go down, but if you look at it on a quarter and if you compare it to the other three quarters, it's still very strong. And we expect the segment to be up going forward and also we might see that the JV that I just mentioned earlier might be very strong this year as well.

Unidentified Analyst

So the first quarter you think is too low?

Yui Takamatsu - Investor Relations Officer

No, no, we are not saying it's too low. The first quarter is strong. But if you compare it to last... first quarter of last year, that was very strong. So if you look at it and compare it side by side to 20.7, 18.3 is down. But we think it's a very good quarter and we feel it will continue going forward, and it will be a strong --

Unidentified Analyst

You seeing it level or it should grow off the 18.3 base?

Yui Takamatsu - Investor Relations Officer

One moment please. Okay, for the full fiscal year, we expect the segment to be better than last year.

Unidentified Analyst

Thank you.

Yui Takamatsu - Investor Relations Officer

Thank you.

Operator

Thank you, sir. [Operator Instructions].

Yui Takamatsu - Investor Relations Officer

Okay. Well, if you don't have any other questions, we'll call it a night here. Thanks for joining us and if you have any additional questions, please feel free to contact me. My contact information is at the very end of the presentation. So thank you for joining us everybody. Have a great day and goodnight. Thank you.

Operator

Thank you. And that concludes today's conference call. We would like to thank everyone for participating. All lines may now disconnect and good day to you all. Thank you.

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