ORIX Corporation (NYSE:IX) Q3 2024 Earnings Call Transcript February 7, 2024
ORIX Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: We will now begin the financial results briefing of KDDI Corporation for the Third Quarter of Fiscal Year Ending March 2024. I am Nakoji [Phonetic] of Public Relations Department and will serve as the moderator today. This briefing will be held in this venue and also broadcast live on YouTube and other media. Three financial results related materials are posted on our KDDI IR website. For the attendees in the venue, please check your handout. Let me introduce the four participants today, Makoto Takahashi, President, Representative Director and CEO; Nanae Saishoji, Managing Executive Officer, CFO and Executive Director of Corporate Sector; Kenji Aketa, Executive Officer and Executive Director of Corporate Management Division; Shigeru Ezoe, General Manager of Accounting Department. President Takahashi, please.
Makoto Takahashi: It’s time to start the meeting. Thank you for joining us for this conference of ORIX Corporation’s for the Third Quarter Consolidated Financial Results for the nine months ended December 31, 2023. I’m the MC. My name is Nakane from IR Sustainability Department. Thank you for this opportunity. The attendee at this conference is Kazuki Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we have a request for the participants. In order to avoid feedback, if you have a communication device such as mobile phone nearby, please make sure that it’s turned off or it is away from the telephone. Yamamoto will provide the explanation followed by Q&A session and we will spend approximately one hour for this meeting. Mr. Yamamoto, please start.
Kazuki Yamamoto: Thank you for the introduction. Good afternoon and thank you for joining us for ORIX Group’s earnings despite of your busy schedule today. Thank you very much indeed. My .name is Kazuki Yamamoto, Head of Corporate Planning and Investor Relations at ORIX. I have taken over this role from my predecessor, Mr. Hitomaro Yano. Let me start with a brief explanation of Q3 FY24 March results. Please turn to page two for the executive summary. So there are three points that I would like to explain. The first is the third quarter net income. Net income came in at 91.1 billion yen, base profits rose in inbound tourism-related businesses, real estate, domestic PE investments and insurance allowing ORIX to post the second highest levels of those base profits and segment profits in the four years since the start of the pandemic.
Quarterly profits were the second highest after the year in which gains on the Yayoi exit was booked. The second is year-to-date net income for the nine month ending December 2023. Net income rose 3% year-over-year to 219.2 billion yen. As we discussed in the first half results briefing, we expected that most of the realization of capital gains would come in the latter half of FY24 March end. We’re continuing to make steady progress in realizing this investment gains in numbers of deals which are currently under negotiation, which would allow us to attain a full year net income target of 330 billion yen, which was left unchanged. So the third point is shareholders return. In May of last year ORIX approved a share buyback program a 50 billion yen.
We have executed the full amount of the program and retired a total of 19.89 million shares. There are no changes to our dividend policy, which was announced back in May. Now please turn to the next page. Net income for the nine months ended December 2023 rose 3% year-over-year to 219.2 billion yen with annualized ROE for the same period coming in at 8%. The right hand chart shows trends in quarterly net income and ROE for the past four years. ORIX achieved its second highest ever quarterly net income since the start of the pandemic in the third quarter of 91.9 billion yen, an increase of 40% to QonQ. The ROE in that chart in annualized net income for each quarter, which improved to 9.7% in the third quarter. So we should be able to achieve the full year target so that we’ll be able to achieve our target for the ROE for the year.
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Q&A Session
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Please turn to page four. Here I will discuss the breakdown of segment profits. Segment profits for the nine months ended December 2023 rose 9% year-over-year to 319.2 billion yen. The chart on the bottom of the slide show historical trends in segment profits on a full year, quarterly, and nine months basis from left to right. The dark blue is base profits, while the light blue is investment gains. Please refer to the far right chart of third quarter year-to-date nine months performance. Base profits in dark blue rose 16% year-over-year to 268.8 billion yen. In addition to a recovery in businesses related to inbound tourism, expansion in investment income in the insurance segment and higher domestic PE earnings contributed to the strong number.
The light blue investment gains for the nine month period indicate an 18% year-over-year decline to 50.4 billion yen but ORIX posted investment gains from real estate and PE exit in the third quarter of 26.9 billion yen; multiplying this figure by four equals more than 100 billion yen in investment gains. In fact, as shown in the chart, the amount consistently averaged more than 100 billion yen for the first five years. As I mentioned earlier, we are aggressively moving towards — forward with exits during the second half. Now, please turn to page five and page six. These pages outline profits and assets by segment. ORIX domestic businesses were strong and are on track to meet their full year targets. Overseas businesses saw profits for fall owing to the impact of elevated interest rates and outstanding limiting risks considering economic uncertainty.
That said, we think it is necessary to continue to carefully watch for the timing where interest rates and economic climate will burn them out. Now, as shown on page six, some segments posted growth in assets due to ForEx impacts, new PE investment, insurance, reflecting higher securities investment and greater investment across and leases in Asia and Australia. A detailed overview of trends in each segment will be shared later. Now, the base — what has contributed to the base profit, airport concession and the facilities operations; please turn to page seven. The chart shows segment profit trends for or at least three COVID impacted businesses of concession, facilities operations, aircraft and ships. The left shows a full year segment profits, while the right shows quarter trends.
Total segment profits for the three businesses for the nine month period were net 26.6 billion yen, up by 17.7 billion yen year-over-year. Even though there is still one quarter left in the fiscal year, these businesses have recovered by about 50 billion again, from the worst period or losses marked during the pandemic. Although there are some seasonal fluctuations, steady growth should allow us to achieve additional expansion on the way to recovery to the 70 billion yen in annual segment profit. Now, inbound traffic from all countries and regions, excluding China, continues in an upward trend. Airport concessions returned to the blacking in second quarter, and profits continued to expand in the third quarter. In December last year, Kansai International Airport opened its new international terminal departures area, which it had been working on during COVID closures.
This leads to large scale renovation of the airports scheduled for completion in spring 2025. The airport is taking measures such as increasing smart lane baggage inspection facilities in an effort to combat labor shortages and ongoing expansion in inbound tourism, should lead to further growth in ORIX Group’s earnings. Now, by the way, Kansai Airport earnings are included in ORIX Group’s consolidated earnings, with a three-month lag, so the third quarter figures represent July, September 2023 numbers. Now please turn to page eight. In aircraft leasing, lease fees are continuing to rise, as passenger demand in the US and Europe is at a record high levels, airline earnings recovery and tight supply demand for aircraft. Although dollar-based interest rates are pushing capital costs higher, there is strong demand in the secondary market for aircraft purchases and the three types of fee income these direct revenue gains on the sales of aircraft management fees are all rising.
In the facilities operations segment, we have endeavored to raise RevPAR by delivering superior services to our customers and maintaining high post-COVID occupancy rates. As a result, in December 2023, RevPAR stood at 138% of the 2019 level for directly operated hotels and at 128% for in. As shown in the slide, segment profits for the nine months ending December 2023 in the facilities operation business were 7.7 billion, already higher than the 5.6 billion yen for the full year of 2020 March end. We believe further profit growth remains possible, as we see room for additional hikes in RevPAR and should benefit from the second block of our new luxury Karaku brand, which opened at end of 2023. Now please turn to page nine. Next I will share the progress we made with the result for the third quarter versus the full year target using the four categories we started to employ last fiscal year.
Within Japan, segment profits in both the financial and non-financial category businesses were up year-over-year making strong progress vs. a full year target in particular. Domestic non-financial businesses were helped both inbound-related demand and the real estate segment were strong demand for properties from overseas investors fueled by Yen’s weaknesses that the property sells. For this reason, it could overshoot our full year target for the category. Now, the overseas segments, so profits declined, owing to an absence of investing games booked on the sale of a [Indiscernible] in the environment and energy segments in the previous fiscal year, and higher Euro intersect. While we have some distance from meeting our full year targets, we will focus on building up earnings while continuing to control this.
Moreover, assets in these regions remain healthy. Please note that RX USA has very little exposure, either direct or indirect to commercial real estate. International market in the aircraft and ships remain strong and we aim to continue to grow our earnings through capital recycling. As for the baseball club, the posting fee from pitcher Yoshinobu Yamamoto’s transfer was booked as pre-tax earnings in the other non-fin segment area. Please refer to page 10. Our exclusive net income of 219.2 billion yen for the nine months ended December 2023, representing progress of 66% post our target of 330 billion yen. In order to achieve this target, ORIX will need to book net income 110.8 billion yen on pre-tax profits of 165 billion yen in the fourth quarter.
In addition to growth in base profits, we are moving steadily forward with several of these which are in the negotiation phases with buyers, and aim to achieve our full year earnings targets. Regarding shareholder returns, our DPS plans remain unchanged at either 85.6 yen per share or a payout ratio of 33% whichever is higher. This translates to DPS of 94 yen if we achieve our FY24 margin net income target of 330 billion yen. As mentioned earlier, we completed our entire share buyback program of 50 billion yen and of which some has already been cancelled. Regarding of our FY25 margin net income target of 400 billion yen, the global macro economic climate has changed significantly since our initial outlook. So we will discuss the path towards achieving this target and specific measures, as part of our FY25 margin business planning processes.
Regarding our view on monetary policy and its impact, we think there is — I’d like to take this opportunity to share. We think there is a possibility that negative and interest rates could end in Japan around spring, which will push up the interest rate upward. Higher yen interest rates should positively impact ORIX Group earnings, particularly at ORIX Bank and in the insurance segment. However, we accept only a gradual pace to interest rate hikes, and therefore, please note we have no plans to change our current portfolio strategy or so policies. We expect cuts in US dollar interest rates to start around summer. Lower US dollar interest rates should provide support to expansion in earnings, particularly ORIX USA’s real estate and PE businesses.
