Good day, everyone, and welcome to ORIX Corporation's Third Quarter Financial Results Conference Call. At this time, I would like to turn the call over to your moderator, Mr. Chun Yang. Please go ahead, sir. .

Good evening. This is Chun Yang, and I would like to welcome you to ORIX' conference call to review our third quarter consolidated results for the period ended December 31, 2014..

I'm joined here this evening by Mr. Haruyuki Urata, Deputy President and CFO; as well as Mr. Shintaro Agata, Corporate Executive Vice President and Head of the Treasury Headquarters; and Mr. Takao Kato, Corporate Senior Vice President and Head of the Accounting Headquarters..

During this evening's 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 material 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 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 beyond our control.

You should read the forward-looking disclaimer in our earning 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 statement titled Consolidated Financial Results April 1 to December 31, 2014..

And without further ado, I will turn the call over to Mr. Urata. .

Thank you. Hello, everyone, and thank you for participating in today's conference call announcing ORIX' results for the third consolidated quarter of the fiscal year ending March 31, 2015. My name is Urata, CFO of ORIX Corporation..

Please turn to Slide 1, where I would like to start with an overview..

Net income for the consolidated third period was JPY 186.7 billion, a 58% increase compared to the same period last fiscal year. ROE was 12.4% on an annualized basis. We already achieved 89% progress towards the original full year net income target of JPY 210 billion, which was announced at the beginning of this fiscal year.

Furthermore, considering the path that there are no foreseeable material negative concerns on our business environment, for in the fourth quarter, as of this moment, we have decided to revise our full year target upward by JPY 5 billion to JPY 215 billion. Doing so, our current progress towards our new full year target becomes 87%..

reserve contributions from Robeco, Hartford Life Insurance, new subsidiaries that we acquired under our private equity investment business; and large capital gains recorded as fund in the first half of this fiscal year; and the bargain purchase gains from Hartford Life Insurance.

In addition, the fact that each segment continued its solid performance into the third quarter was also a major factor behind our decision.

Amidst all of these, we realized that we're already approaching closely to the goals that we announced in the beginning of this fiscal year while achieving new record net income and realizing profit increase for the sixth consecutive year.

While each business segment continued to generate solid profits, we will seek new growth opportunities in the ever-changing business environment. And to continue doing so, we'd like to achieve a sustainable double-digit growth for the next fiscal year and onwards..

Please turn to Slide 2. On Slide 2, I'd like to talk a bit about our dividend forecast for this fiscal year. The forecast for the full year dividend per share is at JPY 33, up JPY 10 or 43% from the previous fiscal year. The implied dividend payout ratio counted based on the revised full year net income target of JPY 215 billion is approximately 20%.

Moreover, in an effort to expand our retail investor base, we have decided to change the number of dividend payments per year from 1 full year dividend to 2 interim dividend payments per year, starting from the next fiscal year.

With regard to the dividend forecast for the next fiscal year, we are scheduled to make such announcement in May this year simultaneously to the release announcement of the full year consolidated financial results..

Our investing policy towards capital allocation is to utilize such cash out to actively invest in growth opportunities, and this policy has not changed. Nevertheless, we will continue to search for the ultimate balance between investments and shareholder returns in our capital allocation..

Please turn to Slide 3. Starting from the third quarter, we have made a number of changes to certain line items in the consolidated balance sheet and the statement of income due to factors such as the increase in our fee revenues does not rely on using assets.

[indiscernible] business, where we operate our sales such as the 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 known finance revenues have increased in recent years.

The changes that we have made to the line items in the financial statement this time are an attempt to better reflect the changes to our revenue structure that I just mentioned.

For example, revenues arising from private securities 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 a 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 finance and non-finance revenues aggregated from all 6 segments. The red bar is finance revenues, which consists of revenues from various finance entities and the installment loans.

Finance revenues have been decreasing, while the non-finance revenues have been growing significantly..

The graph on the right shows the changes in segment profits in the recent years. And on the 6 segments, Retail, Overseas Business and Real Estate have contributed significantly to our profit growth, while corporate finance services and the Maintenance Leasing segments remain solid and showed modest profit growth.

The Investment and Operation segment has experienced their property decline..

Please turn to the next slide. From here and onwards, I would like to explain third quarter results for each segment individually. I would like to start with corporate finance services.

Mainly from this quarter, we have changed the format of the slides by disclosing segment revenues, segment expenses, their breakdowns and gains and losses from affiliates and the equity method. More details and financial numbers are separated [indiscernible] in the consolidated financial results supplementary information.

For this presentation, I will mainly focus on the main points in each side..

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 revenues based on the sales of solar panel and life insurance products have been robust.

And the services income increased significantly by 43% compared to the same period last year. As result, segment profits increased by 4% year-on-year to JPY 18.7 billion..

Segment assets reached JPY 1 trillion, a 9% increase compared to the end of the last fiscal year. This is due to the consolidation of roughly JPY 100 billion 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 across Japan.

And this acquisition allows us to secure a 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 aim to expand this segment's overall fee revenues by extending all its 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 rapid expansion in the auto leasing businesses. Services income coming from maintenance and other value-added services also increased by 3%.

Although costs have increased in line with revenues growth, overall segment profits increased by 4% to JPY 31.6 billion because of additional profits generated from steady asset growth over the period, which have offset the increase in costs..

Segment assets increased by 9% or roughly JPY 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 the Real Estate segment. Segment revenues have decreased by 4% year-on-year, mostly due to the continued downsizing the assets and also a decrease in condominium sales.

However, a closer look shows that gains on rental property sales, which is included in the operating lease revenues, have increased dramatically on the back of a 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 market margins..

Now on the expense side. Expenses have decreased, along with a reduction in asset class. For example what we'll receive around the impairment loss has also decreased. As a result, segment profits have increased by 43% to JPY 22.5 billion compared to the same period last fiscal year. ROA has improved to 2.1%..

Regarding segment assets, we continued to downsize our assets, mostly focusing on selling down rental properties. Segment assets compared to the end of the second quarter have decreased by JPY 8 billion. And if compared to the end of the last fiscal year, it has decreased by JPY 85 billion..

Please turn to the next slide, moving on to the Investment and 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 business.

To give you a better understanding 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 account for the biggest shares, revenues from the environment and energy-related business now account for 24% of total services income or JPY 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 have 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, segment profits have decreased by 15% to JPY 25.2 billion..

Regarding segment assets. Assets of loan servicing business have decreased, but those of the investment business and the environmental and energy-related business continues to show solid growth. As a result, the total segment assets have increased by 7% or JPY 40 billion compared to 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 gain is recorded under equity net income of affiliates.

We have also gains from sales of shares of Monex Group in the past quarter..

Our increase in life insurance premiums driven by growth in the number of policies in-force contributed to higher segment profits. Finance revenues generated by ORIX Bank also increased steadily. As a result, segment profits increased by 2.4x to JPY 96.6 billion..

The increase of JPY 1.6 trillion in segment assets compared to the end of last fiscal year, while contributed by the consolidation of our investments in securities, was over JPY 1.5 trillion that is being held by Hartford Life Insurance, which is managed.

Segment assets growth in the banking and life insurance business also contributed to the segment assets growth..

Please turn to the next slide. Finally, we come to the Overseas Business segment. Robeco's bureau base [ph] net fee revenues have been growing significantly. Quarterly results on Robeco's profits and AUM are enclosed in Page 19 in the appendix of this presentation material.

In addition, fee business in the United States, specifically Houlihan Lokey, has been delivering strong numbers. As a result, services income increased significantly..

As for the segment profits. With the gain from sales of partial shares of STX Energy recorded during the first quarter, segment profits have increased by 62% to JPY 84.8 billion year-on-year..

For segment assets, along the additional JPY 300 billion recorded since the end of last fiscal year, roughly JPY 200 billion of which was due to impact from foreign exchange rate changes, after deducting the foreign exchange rate impact, Americas increased by around JPY 160 billion, Asia increased by around JPY 40 billion and then Greater China increased by around JPY 30 billion.

On the other hand, segment assets and after deducting the portion of our investment in STX Energy decreased by around JPY 130 billion [ph]..

Please turn to the next slide. On this slide, I'd like to highlight some of the recent business developments..

In the corporate finance services segment, apart from the acquisition of Yayoi, we have taken new initiatives to expand our products and services such as providing information on overseas companies and prepared -- prepaid card issuance systems.

In the auto business, demand for truck rentals continues to be strong because of rising demand in the steel construction sectors. And we are acting on this trend by funding our rental location network. In addition, we are also enhancing our services to accommodate our customers' wide range of safety and compliance needs..

In our Real Estate operation business, we have opened 2 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 certainly of making investments both in Japan and abroad, we have invested this -- in INNOMEDICS, a leading company that markets and sells medical equipment.

By continuing to invest in players in this industry, we hope to be a supportive force behind healthy resourcing in the industry..

As for our environment and energy-related business, we are trying to further grow this business by introducing new products and services to the market. One interesting example to share here is that we have established a new lease and rental services for solar panels and home-storage batteries, bundled together for houses.

This service is a first of its kind in Japan..

By developing and gathering leads of these business one by one, despite that they may not contribute significant revenues immediately, they do help to diversify our non-finance businesses.

We believe that by deepening our business investments and ensuring the synergy potentials with our customers' inventories, we shall see more sizable revenues from these new business initiatives..

Please turn to Slide 11. I'd like to conclude this presentation with a summary..

Net income for the third consolidated period increased to JPY 186.7 billion. Annualized ROE was 12.4%..

We have revised our annual net income target from JPY 210 billion to JPY 215 billion. At the same time, we have also announced our decision to increase both the dividend for the fiscal year by JPY 10 per share, by way of the dividend payout ratio.

Furthermore, starting from the next fiscal year, we plan to issue an internal dividend and we are going to announce dividend forecast in the beginning of every new fiscal year. For 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 prospects, as we are currently in the process of finalizing our business plans and budget for the next fiscal year, it is still premature to discuss them in concrete numbers, but our CEO, Mr.

Inoue, has mentioned during the interim financial results announcement this fiscal year sustaining a double-digit growth is the basic premise that our business is based on, and this is also something that we are fully committed.

Nevertheless, many analysts seem to be a little over-pessimistic in their projections on ORIX' future profit growth, either being nearly or flat at most. The heart of overcoming double-digit growth is not a concern to the ORIX management team. Our job is to keep our growth and develop the numbers. The numbers will do that job..

My presentation concludes here. I would like to thank you for your attention and your continued support for ORIX. .

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

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

This is Rajesh Chaudhary from Odey Asset Management. I appreciate the additional disclosure you've 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. And therefore, if interest rates were to rise, those gains would disappear but you would have an offsetting benefit in your spread business.

Is that one of the things that gives you confidence that you can carry on delivering double-digit growth?.

Thank you very much for your interest. And regarding the kind of the capital gains through the sales and investment in securities, one part is, for example, regarding our private equity fund investments, we can recognize that sometimes, at certain times, through the actual exit of some of the investment through the fund.

So that is also included in those -- these types of capital gain. And also in your case, we have made some or based our capital parts of the investment under the active capital market, especially in Japan, but we also enjoy some capital we gain from the sale of our major capital businesses.

So regarding the operations, our capital gain from the sale of the investment security is not really is through the sale of the fixed-income rate in the investment securities. So of course, some capital gain from the sale of the new start [ph] bonds or in the United States, that has also created some capital gain.

And that area, of course, creates some of the change of the interest standards later [ph]. But in your case, mostly, those investments have been hit or in terms of the [indiscernible] of the interest rate. So we don't have any concerns about that old portfolio.

So coming back on original questions, I have no big concern about various portfolio of investment securities in total. .

Okay.

And with regard to the shareholder return, did the board discuss the possibility of a share buyback and given that the shares are trading below 0.9x trailing book?.

Well, of course, at every board meeting, I have made some feedback about the idea of the investment shareholders or our market as a whole in terms of the possibility of the share buyback.

And of course, so with the board members, we have exchanged various ideas about the balance between our new investment for future growth as well as the shareholder return. But although today, we have just decided to increase our dividend and the dividend payout ratio.

And we have not reached any conclusion about that share buyback possibility in the future.

So going forward, as we have discussed before or basically, we want to use our internal money or capital for our future growth through various new investment opportunities, but at the same time, from time to 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.

.

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

I fully appreciate also. Then I expect the capital markets will respond positively to this kind of the result. .

Our next question comes from Mr. Konishi from TTO Capital. .

It's Keita Arisawa from TPG-Axon Capital. You've raised the full year guidance on net profits. If we subtract the first 3 quarters, the fourth quarter net profit assumption is JPY 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 a 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 very much. And regarding your first questions, about forecast for the just the fourth quarter, to be honest, judging from the past experiences, from time to time, the fourth quarter has not shown that very good numbers in the past.

But as of today, I haven't had any big concern for some or special investments for our portfolios in 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 the JPY 210 billion to JPY 215 billion should be appropriate as of today.

And the second question is related to the corporate tax, the change on that. Of course, let me point out basically the lower corporate tax should impact positively to our financial results. And we have not included any forecast to this revision of the full year target.

And I'm sorry, I don't have any numbers responding to your questions relating to what kind of the -- or which level of the impact or what amount of the impact can be expected with a certain -- about the reduction of the corporate tax rate. Sorry. .

The second question is that your third quarter net profit recorded 20% growth year-on-year, which is a very strong number. And my understanding is that there was no big capital gains in this third quarter.

And I know you don't disclose the base profits anymore, 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 onetime profits?.

Thank you for your interest. And regarding this quarter's results, of course, as you see that, always, we have created some of capital gains in terms of the income over years. And of course, through this third quarter, we have made some -- such kind of that income.

So for example, in the Real Estate segment, you can see some figures of kind of the capital gains from the sale of the Real Estate portfolios. But in overall, we don't have any big size of the capital gains from the Real Estate investment portfolio.

So basically, the comparison with the previous third quarter results, the growth have been made through the various businesses' results, so for the base profit we have used in the past. .

And last question, if you don't mind. In your overseas segment, your credit costs, including the valuation losses, at the third quarter was JPY 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 seen a big move in the oil price, commodity price; big move seen on Swiss franc, so lots of volatilities in the overseas market.

I would like to ask if there had been any of those impacts towards your third quarter credit costs and if there are any assets that we should be worried about that you hold in your exposures towards commodities or any other volatile assets in your overseas segments. .

Thank you. Regarding the impact by the various volatile situations in the many different types of the commodities markets but especially in the energy or oil markets, we don't have a big size of the exposure in this industry, very, very small and very, very limited.

So never lucky that we don't have any negative impact to our performance by the price decline of the energy or oil market. And also as you point out, there have been various volatile markets on a global basis, but very lucky in our case, we don't have any concerns about those volatile markets in terms of the existing impact to our profitabilities.

Now of course, through those volatile markets, various uncertain situations is expected to increase, so in that sense, we have some ideas in our mind to respond to the uncertainties, but that kind of the uncertain have been increased all the time, so -- or basically, that's to be honest, I don't have any big concerns about our existing portfolio or as well as our future growth strategy.

And regarding this quarter's impairments in the overseas areas, those are limited to the [indiscernible] areas, so I don't have any concerns. .

[Operator Instructions] 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. .

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 partway through or would like to listen to certain sections again..

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

Thank you. .

Thank you. That concludes today's conference. Thank you for your participation, and you may now disconnect..