ORIX Corporation

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of OX Corporation for first quarter consolidated financial results for the three-month period ended June 30, 2019. The attendee today is Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Mr. Yano will give you a presentation on the first quarter financial results for about 20 minutes and we will move to your 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.

So this is Yano from Treasury and Accounting Headquarters. Thank you very much for your participation to this teleconference despite the busy schedule. So let us get started without further ado. On the first quarter results of fiscal period of 2020 March 1st, although the explanation was to be 20 minutes as being explained by the operator, but we'll be spending a little more than 20 minutes. Please refer to the second page of the deck that we have handed out to you, overview one, net income and ROE. As you can see, fiscal year 2020 March end, the first quarter net income was down by 13% YOY and at 69.2 billion yen. Annualized ROE was 9.6%. which was below the mid-term management target of 11%. However, as seen on the chart on the right-hand side of the same page, ROE tends to fluctuate from quarter to quarter, affected by the tightening of capital gain generation and for other reasons. Please turn to the next page. The page shows the breakdown of pre-tax net profit. In order to facilitate for the better understanding of the growth of ORIX, especially from a long-term perspective, we have applied a new way of showing the trend of our performance. The left-hand side chart shows the trend of pre-tax net profit for the past five years. The dark blue part of the bar chart shows the segment profit excluding gains on sales. By referring to this bar chart, you can see that the segment profit excluding gains on sales have been growing steadily over the past five years. Moreover, for the first quarter from the new investment, we made in NXT capital, in the prior year, that is, as well as Avalon, We managed to generate profit, which contributed to the growth of our profit. Segment profit excluding gains on sales includes some impairment, and thereby there may be some fluctuation anticipated over time. However, we think the fair level of stability can be expected. Now on gains on sales. Please look at the bar chart on the right. Gains on sales in the first quarter was 1%. Moreover, mile-wide, both in real estate as well as in other investments, the gains on sale for the quarter was 27.8 billion yen, which was lower than 41.1 billion yen of the same quarter last year. For Oryx, gains on sale is not a special profit, but a profit that is generated from our usual business activities. We construct a business portfolio that allows us to generate gains on sales constantly while we continue to exert efforts to enhance the value of our assets at all times. However, a single shot of gains on sales could be quite sizable. And for this reason, as you can see from the trend, it may result in a certain level of fluctuation on a quarterly basis. We said that 27.8 billion yen was so-so. So this 27.8 billion yen for this first quarter was about one quarter of the total amount on an annual basis. Now, please turn on the next page. Although details of segment profit will be explained later, just as a summary, let me share with you the trend for the profit by segment. Profit wore up for investment and operations and overseas business, and while the trend was flagged for retail and the profits were down in corporate financial services, maintenance leasing, and real estate. Segment assets increased by 276.7 billion yen as compared to the end of the last fiscal period. Out of this 276.7 billion yen of an increase, 207.1 billion yen comes from an impact caused by a change in accounting standard for operating leases. And therefore, if we were to exclude this impact, the segment asset grew by 69.6 billion yen. Now the next page. And this page shows the health of a financial structure. Employee capital ratio was at 88% with no major change from the prior fiscal year end. We intend to continue to pursue growth while controlling the total risk and making new investments. However, we will continue to operate our businesses by remaining to be vigilant in allocation of our capital in light of a rising trend in cautious outlook for the macroeconomic conditions. As for funding, as for funding, We will not just diversify the method of funding, but we will try to diversify the market for funding as well as geographical area of the funding itself. We will also further effort not just in diversification, but to proceed with the extension of the time period. And with this, we'd like to conclude the business performance summary. And please move on to the next page. Now, we would like to explain about the segmental performances. As at the end of 2019 March, we have been disclosing our segment performance by multiple numbers of units. So corporate financial services, the segment profit, was down by 3.8 billion yen, YOY, at the 4.1 billion yen. As to the life insurance sales to the corporates, we have changed our direction for the proposed products to the businesses, resulting in the decline of agency fee income. In so many loans, against the backdrop of a negative interest rate environment, acquisition for new deals, in fact, is becoming harsher. But as you can see from the right-hand side chart, we have been selective, and as a result, the loan has been trending at 2% plus. The business and succession support that we have started back in 2018, we have managed to conclude the deal by two so far, and there has been a number of inquiries that have been forwarded to us. So we would like to, of course, grow the business by making use of our nationwide network. As a matter of fact, for Yayoi, the members who are paying the charges, we have managed to increase the profit. Next page, please. Maintenance lease segment. In this segment, the segment Profit, was 7.9 billion yen down 1.8 billion yen year-on-year. In the presentation material on page 26, you can find the year-on-year comparison of each accounting item, but the main reason for the decline in profit was an increase in SG&A. However, in this segment, part of this segment profit decline was due to the change in the accounting standards. And excluding that impact, the ROA would have been around 3%, which is a high level. Next page, please. Real estate segment. The segment profit was affected by the large gains on sale of assets recorded last year and fell by 16 billion yen to 4.5 billion yen. On the right-hand side graph, you can see the unrealized gains on rental properties chronologically, and this is the information we disclose every year in the part of report or securities report. You can see continuously higher unrealized gains of ORECs despite the shrinkage of the or the promotion of the sale of assets in this real estate segment. Next, regarding Daikyo, which was made a holding order subsidiary in the last fiscal year, We are promoting the integrated management of all real estate related businesses under the same umbrella of ORIX, and we are sharing know-how and resources for development and distribution and construction management. Next page, please. Investment operations. Segment profit was up 4% to 14.2%. In the environmental energy sector, the profit is down because of the power retailing going down due to weaker prices. However, the solar power generation was solid with 840 MW operating at the end of June. For the concession business, we had a strong business with the inbound tourists and the merchandise sales. Investment operations Profit is up 1.3 billion yen year-on-year to 7.8 billion yen. Next page, please. This is the retail segment. The profit is down 1% year-on-year to 21.6 billion yen. In the life insurance business, in view of the increasing... insurance policies, we need to enhance the administration function of policies and the premiums received from customers. And as part of that, we have expanded the call center located in Nagasaki in April this year. Because of those expenses, there was some increase in STMA. However, we believe that this was a necessary investment for the future. And in the same time last year, we recorded a gain from sale of assets. And that was another factor pushing down the year-on-year profit growth. And in the banking business, we have a high loan-to-deposit ratio of 90%, and spread is 2%, which is quite high, which makes our bank one of the highest profitable banks in Japan, which is still growing. Next page, please. This is the last segment, overseas segment. The segment profit is up 20% year-on-year to 48.1 billion yen. Last year, we had profits from new investments such as NXT Capital and Abolon. We also had a gain from sale of investees in Asia. And because of this, the profit increased. In OCU, or Oryx Corporation USA, we suffered from a decline in asset sales profits. And segment profit went down year on year. However, the asset management business is too strong. In OCE, this is a former Robeco asset management company. Because of the fee pressure compared with the last year, the profit declined. In terms of the business environment, there still is a trend of investors shifting from active to passive investments. But because of the favorable market condition in the last six months, AUM has slightly gone up to 298.4 billion euros. and we would like to continue to secure high top line and at the same time we would like to drive cost reduction going forward. Lastly, I would like to summarize. For FY20 March Q1, net income was 69.2 billion JPY and annualized ROE was 9.6%. Gains on sales of assets decreased year-on-year, however, It was kept at a reasonably high level, and the profits other than gains on sales grew as new investments continued. And lastly, I'd like to mention the KPIs defined as part of the medium-term strategy direction. In the financial results meeting held in May 2019, as Mr. Inoue, CEO, said, in late October, we planned to hold the interim results meeting and where we would like to announce an updated medium-term strategic direction, including shareholder returns. The current KPIs of profit growth of 48%, ROE of 11% or higher, credit rating of single A, can be the KPIs which can be sometimes mutually contradicting to each other. And also, despite the high pipeline for new investments, The uncertainty still is there for the business outlook and the economic outlook, so we are internally discussing how exactly we should update the midterm direction. This concludes my explanation. Thank you for your kind attention.

Thank you, Mr. Yano. We are now ready for the Q&A session. If you wish to ask a question, please press 01 on your telephone keypad. After you are announced, please ask your question. If you wish to cancel the question, please press 02. If you wish to ask a question, you may ask up to two questions. If you wish to ask a question, please press 01 on your telephone keypad. If you wish to cancel the question, please press 02.