ORIX Corporation (NYSE:IX) Q3 2023 Earnings Call Transcript

ORIX Corporation (NYSE:IX) Q3 2023 Earnings Call Transcript February 6, 2023

Operator: It is time to start. Good evening, and thank you for joining us for this telephone conference of ORIX Corporation for the third quarter consolidated financial results for the nine months period ended December 31, 2022. I am from . My name is Nakone. I’ll be the Master of Ceremony for today. Thank you for this opportunity. Today’s conference is attended by Mr. Hitomaro Yano, Executive Officer responsible for Accounting and IR and I would like to ask the participants to kindly either turn off your mobile phone or other communication devices or move them away from the telephone in order to prevent feedback. Mr. Yano will give the presentation followed by Q&A and we expect this meeting to take about one hour. Mr. Yano, the floor is yours.

Hitomaro Yano: Hi . Good afternoon. This is Hitomaro Yano, Executive Officer responsible for Accounting and IR. Thank you for joining us in this financial results briefing today despite your busy schedule. I will begin by explaining the results for the third quarter of fiscal year ending March 2023. Please refer to Page 2 of the materials on hand. I will first review the executive summary. First, please note that net income for the first nine months of the fiscal year was JPY211.4, although it was only several millions at the end, but we did manage to record year-over-year. The annualized ROE was 8.6%. Net income for the third quarter increased by 50% from the second quarter. This is ORIX’s second highest quarterly net income since the pandemic started following the fourth quarter of the previous fiscal year in which we recorded an investment gain on the .

Second, thanks to progress in reopening businesses that have been strongly impacted by COVID-19 and continuing to recover towards higher profits. The Insurance segment also experienced a significant decrease in COVID-19 related payout expenses compared to the first half of the year. Third, I would like to highlight on capital recycling. In the second half of the fiscal year, we’ve continued to both make new investments and exit mainly in our focused businesses of overseas renewable energy and domestic PE. Through this we are increasing profitability by replacing assets. The fourth key point is shareholders return. Last May, we approved a share buyback program of JPY50 billion and have already completed the acquisition and cancellation of 23.43 million shares, which is approximately 2% of our signing shares.

We plan to pay big dividends for the full year as previously indicated. So please refer to Page 3 for third quarter FY ’23 March end ORIX recorded sharp increase of 50% versus second quarter for the quarterly net income. The aforementioned recovery in the Insurance segment played a part while strong performance at Transtrend in ORIX Europe led to booking of a performance fee. The partial sale of our stake in leading geothermal energy producer, Ormat in the Environment Energy segment also contributed. Now please turn to Page 4. The page shows breakdown of segment profit. Nine months segment profit was up JPY290.7 billion. Please see the bar chart on the right. The breakdown of quarterly segment profit for the past two years is shown. Net income for the third quarter increased 15% year-on-year and 44% quarter-on-quarter to JPY120.7 billion.

Please look at the left hand side bar chart where you can see that investment gains for the fiscal year have returned to a usual level. I’ll explain the details on individual segment pages later. Now please turn to Page 5. This page describes the earnings improvement due to progress in with opening of the economy. The bar chart on the left shows the trend in segment profit for the three COVID impacted businesses of Aircraft and Ships facility operations and concessions. In the fourth quarter of the previous fiscal year, we posted losses of JPY11.2 billion, but a steady recovery in profits thereafter resulted in a positive JPY5.6 billion in segment profits for the third quarter. In Aircraft and Ships the passenger market in North America and Europe remained strong, and aircraft leasing profits are in an up-trend.

Hotels and Inns and other facility operations have recently achieved an occupancy rate of about 80%, thanks in part to the government’s nationwide travel support program and ADR has mostly recovered the FY ’20 March level. In the concession business, the number of progress on international routes has increased rapidly following the Japanese Government’s easing of border measures in October, 2022. Kansai Airport results are reflected in ORIX’s Group’s earnings with a three months lag, so we expect a full flash recovery in profits to take away in the next fiscal year. However, based on the current number of passengers, we believe that we are within striking range of returning to black. We expect further improvement in performance in all our COVID impacted businesses as travelers from China return.

Please refer to the following page for a summary of the trends and recovery indicators for each businesses. Now, the bar chart on the right shows the trend in segment profit for insurance, payouts to policy holders with COVID increase and segment profit fell to JPY2.1 billion in the second quarter, particularly in the wake of the seventh wave peak of the infections. However, the eligibility criteria for receiving benefits were changed from late September, 2022. Only policy holders meeting certain conditions are now eligible for payouts for quarantining at home. As a result, payout expenses have declined from the third quarter and profits have recovered. Please turn to Page 7. Next I will comment about capital recycling, which supports our sustainable growth.

Capital recycling involves constant monitoring of capital efficiency, making exits in assets and businesses as needed while continually making new investments. This will increase earnings growth rate and lead to improved ROA and in turn ROE. The box on the left shows exits and new investments in the overseas renewable energy business. As I mentioned earlier, in the third quarter, we sold 7.8% of 19.7% stake in Ormat shares in the marketplace resulting in a gain of about JPY15 billion in addition to retaining 10% or more of Ormat shares. We will continue to discuss outside directors to support further growth of the business. Furthermore, we plan to acquire the remaining 20% of Elawan where we acquired an 80% stake in July, 2021 and make it a wholly owned subsidiary in the fourth quarter of 2023.

In addition to that we will be able to make most of the result, we will be able to make more flexible and swift decisions regarding business and financial strategies such as acquisitions and new business development. Now the box on the right shows exits and new investment in our domestic PE business. In 2014, we acquired a major precious metal recycling company called NET Japan, which we sold in a trade sale in the third quarter. We achieved a high return on the deal of MOIC of three times and 16.4% of IRR. In addition, as recently announced, we acquired a majority stake in DHC, a leading Japanese manufacturer of cosmetics and health foods by promoting the smooth succession of DHC businesses further starting its compliance system, corporate governance, and implementing a new growth strategy, we to aim increase its corporate value while enhancing profitability and achieve an IRR of at least 20%.

Now, Page 8 and Page 9 are a summary of segment information, but today I will explain it by using the specific slides for each segment, so please go all the way to Page 12. The first segment is the Corporate Financial Services and Maintenance Leasing segment. Segment profit decreased 9% year-over-year to JPY56.4 billion, but excluding the set of YoY in FY 2022 and investment and valuation gains on an investee recorded in the previous fiscal year, segment profit increased. In Corporate Financial Services, service revenues increased from the previous fiscal year due to strong performance in various fee businesses. The auto unit posted a year-over-year increase in segment profit versus the previous year when it achieved a record high. This was thanks to the continued higher market, high market price for used car and the recovery in car rentals for the pandemic from the rent posted record high profits as well.

Now please see Page 14. The page shows Real Estate segment. The investment and operation unit showed an increase in profits due to improved earnings at Hotels and Inns, thanks to progress in reopening as I explained earlier. In Daikyo profits declined versus the previous year. A number of condominium unit FY 2022 skewed to the first half of the fiscal year and in line with our full year forecast. In real estate too, we operate a capital recycling type business model whereby we procure and develop land by ourselves, lease up property and then sell it at the right time in the market. Please see Page 16, PE Investment and Concession. Now PE Investment unit posted a loss in the previous fiscal year due to losses at Kobayashi Kako, but the investment portfolio has been sorted for this fiscal year.

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Even excluding losses at Kobayashi Kako, segment profits increased. In the Concession unit the number of passengers in international routes continued to increase in addition to those in the domestic routes and this shrunk the loss. Again, I expect earnings to grow at an exciting pace as earnings are already on recovery track and inbound tourists from China begin to arrive in near earnest. Please see Page 18, this is Environment and Energy segment. Profit increased 86% year-on-year to JPY34.1 billion. As I explained, in addition to the partial sale of stake in the energy company, we also benefited from higher electricity spot prices in some of overseas regions, which led to higher electricity sales revenues. In the domestic market sales increased in the solar power generation business due to the continued fine weather.

We expect the global shift towards renewable energy to accelerate, partly due to the prolonged war in Russia and Ukraine. We are already operating 3.4 gigawatt energy production facilities in Japan and abroad, and we plan to grow this to 10 gigawatt by the fiscal year ending March, 2030. In addition to we will have Greenko, a major Indian renewable energy company where we hold a 20% stake to develop its pipeline. Please turn to Page 20, Insurance segment. As I mentioned, profit decreased compared to previous year due to an increase in COVID-19 related payout expenses for patients isolating at home. Meanwhile, since last September of last year, eligibility for benefits has been limited to those with high risk of severe symptoms. So we expect the COVID-19 related expenses picked out in the first half of this year.

The number of policies enforced has continued to increase and the premium income has risen. In addition, asset management has seen steady results and investment incomes have been increasing. Segment assets decreased. This is mark-to-market and rise in both Japanese and interest rates resulting in our lower valuation. However, the market value of debt has also declined since the duration of policy reserves of, or liabilities longer than that of assets. The rise of interest rates, particularly in yen, has been a positive for embedded value. So in other words, interest rate rise and revenues rose faster than increasing insurance expenses and profits increased. Please turn to Page 22, Banking and Credit. Banking unit revenue from real estate loans for investment continued to be firm despite the absence of a one-time profit booked for the previous year.

In the credit business, we are actively investing advertising to develop a new ORIX money product which resulted in decline in profits. However, performance is in line with expectations and loan balance is increasing. Please turn to Page 24, Aircrafts and Ships segment. Profit increased JPY14.2 billion year-on-year to JPY17 billion. As mentioned, the aircraft leasing business has the benefits from rebound from passenger markets, particularly North America and Europe. In addition to leasing revenue, service revenue from aircraft management is strength and it grew. Avolon earnings are also on the upward trend reducing its losses. Please note that the financing costs from investing in Avalon are included in the profit report. The Ships unit boosted earnings, but partly reflecting the sale on ships in response to federal market prices as well as financial income from ships financing deals.

Please turn to Page 26, ORIX USA. Segment profit fell sharply from the previous year when it had shipped record high to JPY33 billion. The decline was primarily due to fewer PE exits caused by changes in the macroclimate and the origination fees and in the real estate lending limit. The capital gains improved in the second and third quarter compared to first quarter. Please turn to Page 27. We currently are in the process of adjusting risk controls or CUs in light of the uncertain economic outlook in the U.S. We have strengthened our governance framework in order to achieve additional growth in our asset management business, utilizing investor capital such as establishing asset management investment and with our committee in addition to the investment committee.

The asset quality of ORIX USA is sound. It appears that the assets have increased due to the FX effect, but we aim to keep the asset sized to a certain level and the dollar denominated asset has actually declined.

Transtrend: Please turn to Page 32. Asia and Australia segment profit decreased 3% compared to the previous year to JPY34.1 billion amid ongoing re-openings in Asian countries. We expected new deals and in India and Indonesia in addition to Australia and South Korea, and the declined profit is due to absence of gain on sale of the previous fiscal year. This completes the segments. Please turn to Page 10. With regard to shareholder return, our basic policy is to distribute one third of net income to dividends, one third to investments and the remainder to retained earnings and the share buybacks. Dividend for the current fiscal year is JPY 85.6 or dividend payout ratio over 33%, whichever is higher. However, the dividend payout ratio will be 40% assuming the net income forecast announced November last year, over JPY250 billion can be achieved, including the share buyback of JPY50 billion the total payout ratio is 60% for the fiscal year.

Now, I would like to talk about our credit ratings. Last week S&P reduced the outlook from stable to negative to reflect our execution as investment in DHC. Although the downgrade itself is undesired change from our perspective, we undertake for our risk management, for our portfolio and plan to proceed with our capital recycling strategy while both maintaining and strengthening the financials. By providing appropriate information disclosure to rating agencies, we hope to improve mutual understanding. Meanwhile, please note that the rating action will not affect the basic policy of our shareholder returns. Lastly, we understand that the economic environment continues to be uncertain worldwide, and strengthening the risk management system is important.

Nonetheless, we do see some bright news on the horizon, such as the progress of reopening around the holdings in Japan. In the domestic PE and other fields we are seeing numerous inquiries for potential investments, including large project, while maintaining a cautious and selective stance we intend to actively seek investment opportunities towards achieving the midterm goal of what we announced last May, which is net income of JPY440 billion and the 11.7% ROE in the fiscal year ending March, 2025. Thank you very much for your kind attention. Now the floor is open for questions.

Transtrend: Please turn to Page 32. Asia and Australia segment profit decreased 3% compared to the previous year to JPY34.1 billion amid ongoing re-openings in Asian countries. We expected new deals and in India and Indonesia in addition to Australia and South Korea, and the declined profit is due to absence of gain on sale of the previous fiscal year. This completes the segments. Please turn to Page 10. With regard to shareholder return, our basic policy is to distribute one third of net income to dividends, one third to investments and the remainder to retained earnings and the share buybacks. Dividend for the current fiscal year is JPY 85.6 or dividend payout ratio over 33%, whichever is higher. However, the dividend payout ratio will be 40% assuming the net income forecast announced November last year, over JPY250 billion can be achieved, including the share buyback of JPY50 billion the total payout ratio is 60% for the fiscal year.

Now, I would like to talk about our credit ratings. Last week S&P reduced the outlook from stable to negative to reflect our execution as investment in DHC. Although the downgrade itself is undesired change from our perspective, we undertake for our risk management, for our portfolio and plan to proceed with our capital recycling strategy while both maintaining and strengthening the financials. By providing appropriate information disclosure to rating agencies, we hope to improve mutual understanding. Meanwhile, please note that the rating action will not affect the basic policy of our shareholder returns. Lastly, we understand that the economic environment continues to be uncertain worldwide, and strengthening the risk management system is important.

Nonetheless, we do see some bright news on the horizon, such as the progress of reopening around the holdings in Japan. In the domestic PE and other fields we are seeing numerous inquiries for potential investments, including large project, while maintaining a cautious and selective stance we intend to actively seek investment opportunities towards achieving the midterm goal of what we announced last May, which is net income of JPY440 billion and the 11.7% ROE in the fiscal year ending March, 2025. Thank you very much for your kind attention. Now the floor is open for questions.

Operator: Thank you. So the first person is from Nomura Securities. Sakamaki San, please?

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Q&A Session

Naruhiko Sakamaki: Thank you very much. My name is Sakamaki from Nomura Securities. Thank you for the opportunity. Now, I would like to ask you a question, and at this time the Ormat their holding that are remaining, I think you’re going to be holding onto 10% or more stake. Is your strategy or I believe that it is the expression of your intending retaining the rest of the 10% or more. And also with regard to geothermal energy, I read an article saying that there has been some changes in the earnings, so any, so if you could be so kind enough to tell us your involvement and also your intent in the geothermal businesses?

Hitomaro Yano: As to Ormat, so this time we’ve sold about 8% of the stake, and I think we would like to maintain the rest of the stake for the time being. And the capital recycling, in fact is a strategy that we are pursuing as we have been explaining. I don’t know how long we will be retaining the shares, but for the time being, we’d like to hold onto it. And the reason why we have decided to sell 8% of the stake is because for the reason of this chapter recycling in the areas of geothermal, yes, we are trying to en engage ourselves in the geothermal businesses here in Japan, but getting consent, the approval is not that easy because you need to of course excavate and there seems to be not very many deals that you can engage yourself in.

On the other hand, renewable energy, of course, is remaining to be strong with the share price being steady as well. So therefore, we have decided to set off some stake of Ormat and post some capital gain and we use the capital that we have gained from the sales of Ormat and dedicate the capital to renewable energy elsewhere. So this is the decision that we have made. And talking about renewable energy businesses, for sure, we have every intent in wanting to expand our businesses in the renew energy, but it doesn’t mean to say that we quit our idea on the geothermal, but it’s just that we have decided to make a selection and concentration and Elawan of course, is 100% Greenko. The new development is going to be proceeded and for the timing and there could perhaps be a possibility of M&A of new renewable energy related businesses.

I hope this answers your question.

Naruhiko Sakamaki: Yes, thank you very much. That was very helpful.

Operator: Thank you. from BofA Securities please?

Futoshi Sasaki: Yes, this is Sasaki from Bank of America. Just one question, thank you for this opportunity. We’re now in February and next fiscal year is the business plan must be probably formulated within your organization. And at this point in time, how do you see the fiscal year ending March, 2024 in terms of business as well as performance as much as you can share with us? Thank you.

Hitomaro Yano: Yes. With regard to next fiscal year’s numbers, we were hoping to talk about that in May when we conduct our next earnings call. JPY250 billion for the fiscal year is the number that we have announced and we want to achieve JPY440 billion in two years time. Compared to two years ago when we formulated this plan, of course the environment is different now. And last May how much profit in two to three years? I think we showed you our outlook, but we may have to revisit these assumptions and that’s exactly what we’re doing right now. So looking into the next two years, we would like to share some of the information about next fiscal year in coming May. Well, recovery from COVID-19 is in sight, which is positive news.