ORIX Corporation (NYSE:IX) Q1 2024 Earnings Call Transcript

ORIX Corporation (NYSE:IX) Q1 2024 Earnings Call Transcript August 6, 2023

Operator: So it is now time to get started. Thank you for joining us for the First Quarter Consolidated Financial Results for the three-month period ended June 30, 2023. This is the ORIX Corporation meeting. And today, we have the attendee Hitomaro Yano, Executive Officer responsible for Accounting and IR. [Operator Instructions] There’s going to be a presentation by Mr. Yano, followed by Q&A, and the whole meeting should last approximately one hour. Mr. Yano, the floor is yours.

Hitomaro Yano: Thank you for the introduction. I am Yano, Head of the Treasury and Accounting and Investor Relations. Thank you very much for joining us today. Well, without further due, I will give a brief overview of the first quarter FY ’24 March end results. Please see Page 2 of the deck that shows you the executive summary just as usual that covers today’s main points. The first is net income and ROE. ORIX posted a 2% year-on-year increase in net income to JPY63 billion, and annualized ROE of 7%. The segment that performed well was corporate financial services and maintenance leasing, fueled by expansion of our auto-related businesses, PE investment, where industries continue to grow in insurance, driven by higher investment income that is.

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As a result, the first quarter base profit hit JPY82.2 billion, surpassing pre-COVID level. The second is acceleration of reopening momentum. The rapid increase in inbound tourists visiting Japan has led to growth in earnings of concession including Kansai International Airport and facilities operations hotels and inns. In the aircraft leasing business, earnings continued to recover from the pandemic on the back of strong performance at airlines. Third is capital recycling, the yen we converted during the first quarter as a result of rising US dollar and euro interest rates. This environment has allowed ORIX to seek high returns on the sales of domestic assets primarily in real estate such as logistics centers. In addition, some industries are suffering from labor shortages, which has led to business opportunities for ORIX, which can capitalize upon the expertise the company has built efficiently managing physical assets.

The fourth point is shareholders’ return. In May 2023, we announced a JPY50 billion share buyback program. As of the end of July, we have completed JPY17.8 billion in buyback or 36% of the program. Please turn to the next page. As I previously discussed, the first quarter net income came in at JPY63 billion, up 2% year-on-year, and this translates to an annualized ROE of 7%. The right-hand chart shows quarterly trends in net income and ROE for the last two years. The first quarter net profit was the second highest in the four years since the start of COVID pandemic. Please note that from this fiscal year, we have retroactively adjusted our past and needs to reflect changes to the accounting standards for the insurance segment. As a result, FY ’23 March net income changed from [JPY1273.1] (ph) billion to JPY290.3 billion.

The following pages which focus on segment-level information also reflects some changes to the way we calculate segment profit. Specifically, we reduced the method to distribute profit for business shares between two different segments. As a result, although it may be small amount, segment profits in the corporate financial services and maintenance leasing segments increased while building the energy and environment segment decreased. Please note that these changes have also been affected retroactively for the past fiscal year. Now, please turn to the next page. This page shows the breakdown of segment profit. Segment profit rose 6% year-on-year to JPY91.5 billion. Please look at the right-hand chart, which shows segment profits by quarter.

The light blue indicates base profits, the dark blue, investment gains. Base profits were up 12% year-on-year to JPY82.2 billion. This figure was higher than the first quarter for FY ’20 March end or FY ’19 March end. Profit growth was skewed primarily by progress in opening and healthy earnings in insurance. I’ll explain the details in the following segment page. Now meanwhile, investment gains were down 27% year-over-year to JPY9.3 billion, owing to a lack of large-scale exits during the first quarter when ORIX only recorded several smaller exits. Investment gains, as you can see on the right-hand chart, tend to fluctuate substantially depending on the quarter. Please note, however, that is shown on the left-hand chart, ORIX has consistently utilized a certain level of investment gains for the past five years, averaging more than JPY100 billion per annum.

We plan to realize further investment gains during the remainder of the fiscal year and achieve a typical year of investing gains. Now, please turn to Page 5. This page focuses on reopening related businesses. The left-hand side chart shows segment profit trends for the three COVID-impacted businesses, aircraft and shipping, facility operations and concessions. For the first quarter, both the facility operations and concession posted their highest level of quarterly segment profits since the start of the pandemic. Aircraft and ships are seeing this earnings recovery trend and the three businesses in total recorded segment profit of JPY4.6 billion, a dramatic improvement from the JPY300 million in losses a year ago. Now, aircraft concession centers on Kansai International Airport, so loss has shrink dramatically following a strong rebound in international passenger numbers.

Please note that owing to a lapse in reporting Kansai Airport’s earnings in ORIX Group, the first quarter figures reflect results for the January to March 2023 quarter. Kansai International Airport boasted 1.06 million international passengers in March, and that figure surpassed 1.35 million in June, reaching 63% of their June 2019 level. In facility operations, a robust increase in inbound tourists has helped over-expense ABR while still maintaining high levels of customer services. And RevPAR in June at directly operated hotels were 119% of the June 2019 levels, while those facility inns were 114%. They helped the business achieve the first quarter profit in the first quarter since the start of the pandemic. Aircraft leasing are expected to recover further as narrow-body lease rates already surpassing their pre-COVID levels and are continuing to rise.

In order of the COVID-impacted businesses, we anticipate additional growth as Chinese tourists return to Japan. On the following page, you can see the latest trend in indices that illustrate recovery in each businesses, so please take a look at these as well. Please skip Page 6 and move on to Page 7. Auto user segment specific tries to explain each segment’s results. First is corporate financial services and maintenance leasing. Segment profit rose 20% year-on-year to JPY19.9 billion. In corporate financial services, fee-related businesses performed well, including insurance sales and real estate intermediary services. Segment profits rose sharply year-over-year as we booked the valuation loss of our stake in an industry a year earlier. Profit growth in the auto business as a result of profitability-focused sales activities, we have been carrying out over the last several years, and growth in the rental car business.

In addition, prices for used cars remain high. Rental profits were down year-over-year, owing to higher depreciation expenses caused by upfront investments in rental ICT equipment, ahead of expected Windows-related upgrade demand. The business also booked costs associated with the operation of new large fully automated warehouse, the third location in Japan. Excluding these, results were solid. So please turn to the next page. The page shows the real estate segment. Segment profits were down 17% year-over-year to JPY10 billion. In the real estate investment and facility operations unit, earnings improved in the facility operations business, hotels and inns as outlined earlier. Meanwhile, profits were down year-over-year, owing to the absence of investment gains booked a year earlier from the sales of large logistics facilities and other properties.

Now, DAIKYO secured a strong year-over-year increase in profits, bolstered by healthy sales of high-priced condos by procuring sites with excellent locations. Please turn to the next page. Next is PE investment and concessions. Segment profit rose 151% year-over-year to JPY5.7 billion. In the PE Investment business unit, financial performance improved on the completion of Kobayashi Kako-related costs as well as contributions from indices that were purchased on FY ’23 March, DHC and HEXEL Works. Please note that the first quarter results include just two months, February and March 2023 of profits from DHC consolidated in the ORIX Group earnings. The concession unit posted smaller losses for the fourth consecutive quarter, aided by the recovery in international passengers, as I mentioned earlier.

The unit is on track to return to profitability on a full-year basis for FY ’24 March. Please turn to the next page. The page shows the environment and energy segment. Segment profits were down 14% year-over-year to JPY3 billion. In the domestic energy business, profits were down on lower income from power sales caused by output caps on solar power generation in some regions. In the overseas energy business, profits were down slightly year-over-year at Elawan, owing to poor weather in Spain and a higher euro interest rate. Despite this, Greenko earnings were up year-over-year. Now demand for renewable energy assets remains strong globally, and we are expanding our capacity with Elawan as the center. Profits are continuing to grow. Please turn to the next page.

In the insurance segment, profits were up 68% year-on-year to JPY19.2 billion. The weaker yen and high-interest rate contributed to growth in investment income. In addition, Japan’s May 2023 decision to legally reclassify COVID-19 led to further declines in COVID-19-related payout expenses. As I mentioned before, changes to accounting rules for the insurance segment has led to an increase in profit, particularly in the fourth quarter. Please turn to the next page. This is the banking and credit segment. Profits in banking were up year-on-year, helped by higher financial revenues from real estate investment loans on the back of higher long-term interest rates. In addition to fees rose on an increase in trust assets and one-time loss booked in FY ’23 March, first quarter also contributed to higher profits.

In the credit unit, we booked CECL reversal in the fourth quarter FY ’23 March, which led to a decline in FY 2024 March first quarter quarter-to-quarter, but earnings are mostly flat. Please to the next page. In aircraft and ships segment, 33% decline was posted in profit to JPY3.6 billion. The ship business posted lower profits on the absence of the sales gains from a year earlier when ORIX made the timely sales of its owned ship fleet. The income leasing profits were up year-on-year as recovery in passenger demand led to growth in the number of owned aircraft and higher lease income from rising lease rates. Avolon posted losses on par with previous first quarter owing to the higher dollar funding costs on that from when the investment was made.

As with [OS] (ph), Avolon profits on a current basis continue to grow fueled by growth in leasing income and the assets were higher owing to the increasing in higher aircraft holdings in the equity business, changes in forex also contributed. Please turn to the next page. ORIX USA profits rose 61% to JPY9.7 billion. ORIX USA has implemented strict risk management controls for both new and existing deals in light of the US business climate. And this has allowed the segment to control losses, including credit losses. On the three business verticals, credit business posted higher profits helped by stable financial revenues and gains on the sale of small deals. In the real estate business, Lument first quarter origination volumes were up quarter-on-quarter, and surpassed the year earlier level and earnings boost was seen from higher interest rates, leading to higher profits.

Meanwhile, the FY had lower fewer deals this quarter, which led to lower profits year-on-year. In private equity, there were limited capital gains in the first quarter leading to flat profits year-on-year. Please note that the assets rose owing to changes in forex and excluding that, it’s down slightly. Page 23 has features a breakdown of that business line, so please refer to this page as well. Please turn to the next page. This is ORIX Europe. Segment profits were down 55% year-on-year to JPY4.2 billion. AUM growth was sluggish in FY ’23, March, owing to the impact of high interest rates and Russia-Ukraine conflicts. However, AUM has recovered slightly with the launch of active ETF product and other measures. Nonetheless, higher euro interest rates resulted in higher funding costs, which led to year-on-year decline in profit.

Please turn to the next page. This is Asia and Australia. Segment profit was down 37% year-on-year to JPY8 billion, on the absence of a gain on the sale of a Southeast Asian affiliate a year earlier. Assets rose by JPY120.3 billion, of which JPY82 billion was due to changes in Forex. So excluding forex impact, the net asset has increased. Please to the next page. Now I would like to give an overview of first quarter results and progress using the categories we disclosed at the Q4 earnings announcement. For domestic segments, both financial and non-financial categories posted higher earnings year-on-year. The financial category, in particular, shows stable growth, showing a stable good start. Overseas segment, results were below year-earlier levels due to higher funding costs caused by higher interest rates and also ongoing uncertainty in the US economic outlook.

And we are taking strict risk management stance in the US, and we have maintained healthy asset quality and low non-performing ratio. Please note that the overseas category, energy category and some seasonal factors have come into play, which typically leads to lower profits in the first quarter. This completes my explanation about the Q1 results. And now I would like to talk about the business climate as well as the remainder of this fiscal year. Please turn to the next page, Page 18. I will start with a discussion on the macroeconomic climate and our current status. As for interest rates, as outlined in the past quarters, ORIX works to keep its profit entity to interest rate changes low through asset-liability matching. Although a 1% increase in euro interest rates is JPY2 billion to JPY3 billion, negative impact on annual pretax profit, we have worked to increase the fixed rate loans even after reduce this entity further.

Yen weakness and lower interest rates in Japan have encouraged overseas investors to increase investment in Japan. This environment should allow ORIX to improve our returns even further through exits in domestic assets, including real estate properties like logistics facilities. Regarding inflation, while this does impact a variety of ORIX businesses, we have been able to pass along higher costs through maintenance leasing rates, rental fees like condominium prices, hotel and inn RevPAR and product prices for overseas renewable energies, among others. Finally, labor shortage is a critical issue for automobile and aircraft maintenance operations and for management of solar power generation facilities. Outsourcing of management of these assets is likely to increase, and this should allow ORIX to capitalize on the expertise in capably managing these assets to expand business opportunities.

Our asset management portfolio is outlined on Page 30 of the presentation material. Please refer to that as well. Moving on to the last page. The key theme for the fiscal year continues to be capital recycling. As explained earlier, we have noticed a stronger momentum for investment among our overseas investors for domestic real estate NPE assets. Demand is particularly robust in real estate. ORIX consistently generates a certain level of investment gains each fiscal year and plans to continue exits going forward in this fiscal year as well. In domestic PE investment, we have improved the value of a number of investees following a period of active management and have multiple companies close to exit. And environment and energy segment, Elawan, which ORIX acquired in ’21, has been steadily developing new assets and expanding its operating capacity, and the company plans to sell some of these assets during the fiscal year.

And like other segments, continued capital recycling. In ORIX USA, we maintain a cautious stance in new investments, but most of our existing PE investees have enjoyed their growing earnings. So we continue to look for opportunities to exit at the right time. And for this fiscal year, we will continue to see uncertainty in climate, but we see some positive aspects as well, such as progress in reopening and in weakness. And we will continue to work towards achieving a full-year target of JPY330 billion in net income, which we announced in May and also then reach JPY400 billion in net income and ROE of 10.4% for fiscal 2024 March. While caution is still necessary, we plan to continue to grow proactively while looking for more investment opportunities.

Thank you for your kind attention. That’s all from me.

Operator: Thanks for your attention and interest. We’re now ready for the Q&A session. [Operator Instructions]. So we have from Daiwa Securities, Watanabe, asking the question to begin with.

Kazuki Watanabe: I am Watanabe from Daiwa Securities. I’m referring to Page 41, and that is to do with capital usage ratio going up to 39%. It was, I think, the end result of acquiring DHC. What is your total level? So I know that you have been explaining about capital recycling today, which was pretty positive. But JPY100 billion of five years investment gain was to be achieved. But based on this capital usage ratio, do you think that there may be some acceleration?

Hitomaro Yano: Thank you very much for asking the question. So as to the capital usage ratio, yes, we were impacted by DHC acquisition as we have been sharing with you from some time ago. So whether this is correct or not, but we are constantly referring to this level. And whether it goes up to the level of 90% or not is a yardstick that we would apply. In other words, we would not like to end up having excess amounts of capital for the sake of the investors, the shareholders and also remain to be agile in carrying out the M&A, if it proves to be right from the timing perspective. So we have just gone over that level currently, so which means that we may perhaps consider exiting from some of the investments and with 90% [indiscernible].

And so we are making a slow start, as we have explained. But the real estate, in fact, the demand remains to be strong. At the time when we put together the plan, if we were to sell a certain property, we had kind of estimated or simulated the amount of investment gains on the sales of the properties, but we are now beginning to feel that this assumption currently, the price may be higher than initial assumption or expectation. So the PE investments here in Japan as well as domestic real estate investment and also overseas renewable energy investments, and there could be some other businesses as well. So we would continue to, of course, manage all these businesses. And although I said JPY100 billion of an average investment gain could be generated just like any other usual years.

And we may have to exceed that as well. So as an issuer or a developer, we would like to continue to recycle the capital so that we would like to continuously generate profit on a recurring basis and this is what we want to display and prove to investment community. I hope this answers your question.

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Q&A Session

Kazuki Watanabe: Thank you very much. So from that perspective, the investment gain this year from JPY100 billion, do you think that there could be an overshoot from JPY100 billion, that is expected?

Hitomaro Yano: Well, as for the investment gains, it’s not something that is controllable to hit that on JPY100 billion. So therefore, there could be a possibility of overshooting such a guideline.

Kazuki Watanabe: Okay. Thank you very much.

Hitomaro Yano: Thank you.

Operator: SMBC Nikko Securities, Muraki. Please, ask your question.

Masao Muraki: Yes, this is Muraki. I have one question. JPY330 billion profit plan for the full year. Is this still your best estimate at this point in time. On Page 17, you are showing the progress. Well, if we calculate the progress from this, most of them are below 25%. And investment gain plan progress is just about 10%. And I think you’re saying that you can catch up. But I think the base profit on Page 18, there is a downward arrow. How much of a concern is this, so financing costs, interest rate and also inflation impact? And over it doesn’t really say there is a limit to the output of solar power generation. And against the base plan, is this going to be a material impact? Can you please elaborate?

Hitomaro Yano: Thank you for your question. I clearly understand where your question is coming from. With regard to base profit, looking at the past to the second half, base profit tends to increase. And I have mentioned the reopening situation and the concession clearly is showing a recovery. The base profit may not shoot up, but every quarter, we expect gradual growth in base profit. That is my current scenario. And then you can add investment gains on top of that. In the first quarter, the progress rate, as you mentioned, is quite low, but there is no need to see this inadequate decline. So things will be built one by one, step by step in order to achieve the full-year objective. That’s the scenario. With regard to macroeconomy, euro interest rate.

Well, most of the other interest rates are mostly neutral. So there is not much concern and euro was the biggest concern, but JPY2 billion to JPY3 billion was mentioned earlier. Now in this fiscal year, compared to the previous fiscal year, we have started to increase the hedge volume slowly. And as of today, the sensitivity is much lower than what’s indicated on this slide. So going forward, the annual sensitivity is below JPY1 billion level, which means that euro interest rate increase should not have a material negative impact on us. Well, we don’t believe that we should hedge against everything, but we believe that the current level is probably appropriate. With regard to inflation, I believe that was the next part of the question. Material costs increase and labor shortage can result from inflation.

So material cost, of course, and the construction cost has gone up. But the real estate price increase and further lowering of expected yield and increase in price is much larger than the increase in other cost. So I believe that the inflation is actually positive for us. These are some of the smaller impacts, but in hotels and inns, occupancy cannot really be increased very much because it’s harder to find people to work there. But still, within the limited number of headcounts, we can increase the services and we can increase ADR, and in the end, we are having a positive situation. So we are coming back to the pre-COVID level. In other words, we’re taking advantage of the inflation in order to increase the service prices that we offer. So in that sense, we want to be able to ride this wave and we’re actually able to increase the top-line.

And we are also seeing an increase in the bottom line as a result of that. I think that should be it. Am I right? Or was there anything else?

Masao Muraki: Solar power generation.

Hitomaro Yano: Yes. Up on output, yes, that is true, but we do not expect a major impact from that. We’re actually selling energy as well and the market is volatile. The cost may go up or down or there may be a competition against other companies, and we may not be able to increase the price that we sell the electricity at. So we have to look at this carefully. But in terms of solar power generation, the profit contribution is very stable. I see. So maybe the arrow on Page 18, I think there are more upward arrow downward arrows, yes. That’s how I prepared this material. That was the meaning of this slide.

Masao Muraki: Thank you.

Masao Muraki: Thank you very much for the question.

Operator: From [indiscernible] Securities, we have Otsuka asking the question.