ORIX Corporation (NYSE:IX) Q4 2023 Earnings Call Transcript May 13, 2023

Operator: Good evening, ladies and gentlemen. Thank you for joining this telephone conference by ORIX Corporation for Consolidated Financial Results for the Fiscal Year Ended March 31, 2023. From IR sustainability, my name is Nakane. I’m the Master of Ceremony today. Thank you for this opportunity. We have two attendees today. Makoto Inoue, member of the Board of Directors, President, Executive Officer and CEO; and Hitomaro Yano, Executive Officer responsible for Accounting and IR. [Operator Instructions] Mr. Yano will take the first half and second half will be taken by Mr. Inoue, followed by Q&A. We expect the duration of the meeting to be approximately one hour. Mr. Yano?

Hitomaro Yano: Good evening. This is Hitomaro Yano, Executive Officer responsible for Accounting and Treasury and Investor Relations at ORIX. Thank you so much for joining us today despite your busy schedule. Let me start by giving an overview of FY ’23 March end results. Please turn to Page 2. Net income fell 12% year-over-year to ¥273.1 billion. For FY ’23 March, it was disappointing to see earnings decline, but we substantially exceeded our forecast of ¥250 billion announced on November 7. ROE was at 8.3%. The right-hand chart shows quarterly trend in net income. Fourth quarter net income was ¥61.7 billion, investment gains and asset management fees from ORIX Europe fell as compared to the third quarter. As we booked some impairments in the fourth quarter, growth was less evident than in the first quarter and the second quarter, but progress in reopening has helped a solid trend for the quarter.

Please turn to the next page. This is a breakdown of segment profit. Segment profit totaled ¥381.3 billion, down 28% year-over-year. Please look at the left-hand chart, which shows trends in segment profits. The light blue bar indicates investment gains, while the dark blue bar shows base profit. Base profits fell by 13% year-over-year to ¥297.8 billion, while performance among segments varied, but overall, we were able to secure stable base profits despite our big operating comment. I will go into further details later. The light blue investment gains were down 55% year-over-year to ¥83.5 billion, owing to the absence of last year’s substantial gain on the sales of Yayoi. ORIX typically books investment gains of around ¥100 billion each year.

Even in a tough environment, we were able to continue our effort of capital recycling and maintain a level of investment gains mostly on par with that of a normal year through the partial sales of our Ormat stake and logistics centers. Please turn to Page 4 and 5. These are segment earnings. Here, we have broken down segment profits and assets by segment. This will give you a broad view of each segment, and the details can be found from Page 18 onwards in the presentation deck, I’ll focus on an overview for now. First is the Corporate Financial Services and Maintenance Leasing segment. Segment profits reached ¥73.2 billion, excluding the sales of Yayoi booked last fiscal year profits were up. The auto business unit reported profits that surpassed [FY ’22] March, which was a record high, bolstered by continued strong market for used cars and the recovery in rental car demand from pandemic lows.

In the Corporate Financial Services unit, fee income was strong, and demand for rental equipment at Rentec is growing. For segment assets, while assets in the auto units so owing to a shortage of new vehicle supply, assets and Corporate Financial Services increased as the unit selectively added new deals. Overall assets were almost flat year-over-year. Next is real estate. Segment profit rose ¥19.5 billion year-over-year to ¥51.5 billion. The development and rental unit posted profit growth fueled by sales of logistics facilities primarily to overseas investors. And with — at the facility operation business, hotels and inns, both occupancy and average daily rates recovered sharply, thanks to recovery in inbound tourism and national travel support campaign.

The DAIKYO unit also posted higher profits year-over-year. Segment assets were up ¥24.9 billion despite property sales, offsetting some new investments. Next is PE investment and Concession segment profits improved by ¥14.3 billion year-over-year to ¥2.6 billion. The private equity business in Japan was in the red last fiscal year, owing to Kobayashi Kako related losses, but on end measures related to the business and strong performance and current investees helped the business return to the black despite booking due diligence costs related to the recent DHC acquisition in the fourth quarter. In the concession business, passenger numbers are growing on both domestic and international flights helping losses to shrink. According to data recently released by Kansai Airport, passengers on international routes exceeding 1 million for the first time in three years since February 2020 on a single-month basis in March 2023, domestic routes also reached 2.35 million passengers, 99% of March 2019 level, showing the strongest recovery to date since the start of the pandemic.

Inbound tourism should begin to recover in earnest as Japan significantly reduced travel restrictions for Chinese tourists last month. Earnings from the concession units are reflected in group results with a 3-month lag. So we expect considerable growth in profit for this business in FY ’24 March. Segment assets were up ¥251.9 billion year-over-year as a result of the acquisition of DHC and HEXEL Works that offset the sale of Net Japan. In Environment and Energy business, segment profits were up ¥32.6 billion to ¥35.7 billion. In addition to the partial sale of our stake in geothermal energy company, Ormat, higher prices in the electricity spot market at Elawan, which became a fully consolidated subsidiary in Q4 and other firms led to growth in revenue from power sales.

Domestic energy, the solar business also saw higher revenues. Segment assets grew substantially owing to changes in ForEx and additional stake taken in Elawan, up by ¥70 billion versus end of FY ’22. In Insurance, segment profits were down ¥15.3 billion to ¥38 billion. Rising infection rates recovered earlier in the fiscal year resulted in an increase in COVID-related payouts, causing a major drag on earnings. However, changes implemented since last September means that only patients at high risk of serious complications are eligible for policy payouts for patients being at home. And payout related expenses have since peaked and declined as a result. Japanese government classification of COVID as a category for infectious disease from [six] means that policyholders are no longer able to make claims from hospitalization insurance policies for in-home isolation regardless of the risk.

For this reason, we expect the COVID-related payout to decline dramatically going forward. Although segment assets were down due to lower variation of mark-to-market assets affected by higher interest rates of [indiscernible] Japanese yen, liabilities, mark-to-market value also declined and therefore, there’s no problem. Banking and Credit segment profits were down ¥3.9 billion to ¥37.6 billion. In banking, profits were down owing to the absence of year earlier onetime profit. Earnings from investment real estate loans remains high and healthy. Credit business posted a decline in profit owing to aggressive advertising to support the launch of the new ORIX Money product. However, this is in line with the projections and loan balances after increasing in this business and guarantee business is healthy.

In aircraft and ships, segment profits were up ¥20.9 billion year-on-year to ¥18.6 billion. Aircraft and ships reported strong profit growth year-on-year. Lease revenues rose in the aircraft leasing business, primarily in North America and Europe, but also supported by the delayed recovery in the agent passenger market. Service revenues from arranging various securitization vehicles amongst [string] investor demand was also positive. Avolon posted Q1 ’23 earnings announced at the end of April, up 36% quarter-by-quarter, while [this one] posted losses at the segment profit level owing to funding costs charged investment to Avolon, earnings are improving on a market recovery. Ships unit profits were up sharply, aided by sales of owned vessels during the period of strong marine shipping prices and higher contributions from financial revenues from ship financing deals.

Segment assets were flat year-on-year, excluding the changes in ForEx as sales of vessels was offset by an increase in aircraft acquisitions, primarily narrow-body aircraft, and we continue to grow that portfolio, and we will take a close watch on market conditions. Profits rose sharply at ORIX USA, down ¥26.6 billion to ¥49 billion compared to FY ’22, when the segment booked a record profit owing to changes in the macroeconomic climate, there are few the exits and origination fees of Lument and mortgage origination was also down. We maintained disciplined risk management at ORIX USA and have taken a conservative stance on new investments. Segment assets appear to have increased on yen basis owing primarily to changes in ForEx, but we are controlling the size of the asset base and the dollar-denominated assets are down slightly.

Next is ORIX Europe. Segment profits were down by ¥8.7 billion to ¥40.7 billion. Starting in the U.S. interest rates have written globally, fueling series of a recession, which led to retreat in both equity and fixed income markets. This caused AUM to shrink and profit to decline. Net inflows turned positive, however, in the fourth quarter, and AUM has increased. Last is Asia and Australia. Segment profits were down ¥16.8 billion year-on-year to ¥34.3 billion. Profits were lower owing to the absence of investment gains booked last fiscal year and impairments of an affiliate booked in the fourth quarter. As reopening progresses in Asian countries, new business execution is rising steadily in Australia, South Korea, Southeast Asia as well as in India.

Segment assets grew sharply, owing to changes in ForEx and new execution. And this is going to be my last slide. Please turn to Page 6. I briefly went over results in different segments. And this graph explains FY ’22 results versus this fiscal year. Our CEO, Mr. Inoue, will explain in detail. But there were strong and weak performance among various segments during FY ’23. Some segments like insurance, ORIX USA and ORIX Europe posted lower profits owing to COVID and rapid market changes. Meanwhile, some businesses benefited from COVID-related reopening and did well. Focus areas for ORIX such as overseas renewable energy and domestic PE also grew. Also in the Maintenance Leasing segment and facility operations were also strong performance. We expect the insurance segment to rebound in FY ’24.

And the segments that grew and recovered during this fiscal year should achieve further growth. For these reasons, we hope to secure profit growth in FY ’24 and ’25. That’s all from me. And now I would like to hand over to Mr. Inoue, our CEO.

Makoto Inoue: I’m Inoue from ORIX. I would like to start from Page 7 of the handout. So FY ’23, March, net income was down 12.5% year-over-year to ¥273.1 billion. EPS came in at ¥232.35. So for the fiscal year ending March 2023, we will pay a dividend of ¥85.6 per share, same as the prior year. So end of the year dividend, the second half dividend, in other words, will therefore be the same as the first half dividend at ¥42.8. Taking into the account ¥50 billion worth of share buyback, ORIX total shareholders’ return ratio will be 55.2%. Unfortunately, FY ’23 March ROE was 8.3% below our 10% target. We will continue to, however, to work to fulfill this target. Now last March — last May, when we made the announcement of FY ’25 March net income outlook of ¥440 billion.

However, we will need to revise this figure downward in light of current market conditions. We now forecast FY ’24 March net income of ¥330 billion and revised downward our FY ’25 March net income target to ¥400 billion. Now as a result of this downward revision, ROE will be 2% in ’24 March end and 10.4% for ’25 March end. So for ’24 March end, the shareholders’ return, we would maintain ¥50 billion worth of shares buyback and the DPS of ¥55.6 per share or payout ratio of 33%, which ever higher. So I would like to further explain referring to the three pages of six, seven and eight. And firstly, let me basically discuss ’23 March end results. So firstly, let me discuss the primary reason for FY ’23 March net income of ¥273.1 billion. As mentioned at the first half results announcement, COVID-related payout expenses, particularly for patients isolating at home had a substantial negative impact on the life insurance segment, changing eligibility requirements in September 2022 led to a decline in COVID-related payout expenses in the second half.

But this factor brought ¥20 billion worth of increase in costs for the whole year. And secondly, profits at ORIX USA fell by $200 million. For the full fiscal year against our initial target due to an increase in credit card, a slowdown in agency-related transactions for affordable housing. And for other reasons, as I said, it was below about USD200 million. In addition, management fees fell by [€116 million] owing to lower AUM at RobecoGroep, which also had a direct impact. Despite the profit contributions from the domestic real estate auto, ships and Environment and Energy segment and the boost from the weaker yen, overall profits were down, unfortunately year-over-year. On a brighter note, we foresee the Kansai Airport concession business and real estate operations, boosting earnings in FY ’24 March, thanks to a strong recovery in inbound tourism following COVID opening.

The Aircraft segment is still on a recovery track. However, higher Eurozone and U.S. interest rates have led to an increase in hedging costs, meaning it will take some time longer before this business contributes significantly to profit. Meanwhile, the outlook for financial markets, including U.S. real estate is become increasingly uncertain following turmoil in the financial system caused by Silicon Valley Bank and the Credit Suisse, whether the authority will move to prioritize inflation control or stabilization in financial system uncertainty remains to be seen. Many regional banks have unrealized losses on their commercial real estate parties, which could lead to credit downgrades, a rapid increase in interest rates and [indiscernible] in the real estate market.

So vicious cycle may start, we think. So experience tells us that financial authorities will most likely search on [indiscernible]. Nonetheless, given ORIX USA’s position in the U.S., we feel the necessity to prepare for a possible increase in credit provisions and funding costs. For FY ’24 March and beyond, we will continue to execute our business with a focus on conservatism and defensiveness until conditions settled down. In FY ’22 March, ORIX USA reported record high segment profit of $715 million, but this figure fell to $422 million in FY ’23 March. Inflation continues to rise despite higher fed rate, which unfortunately drew attention to the negative effect of tighter monetary policy. We have thus judged that it would not be in ORIX’s best interest to anticipate strong growth in this business for some time.

Against such a backdrop, we have moved to both strengthen management functions and securitize ORIX USA’s assets. Our ultimate vision for this business is to build it into a specialist asset-light manager utilizing third-party assets. And thus, it may take several years before you can achieve major profit. For the near term, although it depends on the deal, we don’t plan to grow the U.S. business through M&A unless it is an investment that will contribute to the asset management business. It is for these reasons that we have decided to both lower our FY ’24 March net income to ¥330 billion and FY ’25 March net income forecast to ¥400 billion. It goes without saying that our internal targets, I think, would remain at ¥440 billion, and we would enable to exceed these goals.

Please see a breakdown of FY ’23 March, FY ’24 March and FY ’25 March pretax profits by category. Now for FY ’23, March, overseas profits accounted for 43.2% of the total, but we expect this to go lower to 40.80% for FY ’24 March, owing to inflation and interest rate hikes in the U.S. as well as rising energy costs in Europe. This said, with the renewable energy business expected to contribute more dramatically to overseas profits from 2025 and the likely recovery in the U.S. economy within several years, we will continue to carry out activities with a vision to expand our overseas businesses going forward. Please turn to Page 10. In FY March, ORIX continue to have a program of capital recycling. We realized around ¥60 billion in gains on sales of slightly more than ¥200 billion in assets, including part of the stake in Ormat Technologies, while acquiring ¥470 billion in assets in the private equity, DHC Real Estate Development and our businesses.

While new asset purchases have also been dominant in FY ’23 March, we will continue to manage a program in a balanced fashion in FY ’24 and onwards. ROI, ROA — ROI and ROE will be used to assess the new investments and exits. In addition, the impact on the balance sheet, PL and asset efficiency and risk-adjusted capital ratio, also important metric for credit rating standpoint. We do calculate segment level WACC and ROIC factor. This is only employed as a method of supporting internal managerial accounting. This said, we believe that ROIC is not an appropriate fit for actually calculating the future potential of investment projects for all the diverse business segments. For this reason, we have decided not to disclose ROIC value for each segment at this time, but we’ll continue to manage each business unit in a way that considers the capital cost of both debt and equity.

Please turn to Page 11. Our investment pipeline for domestic and overseas projects now totals at about ¥1.5 trillion. Our domestic pipeline includes the development of logistic centers and condominiums as well as private equity deals such as carve-outs. Although we need to carefully monitor conditions such as changes in interest rates, we plan to move ahead with carefully selected projects. For domestic logistics center and the condo development projects, we expect to realize a developed NOI yield of 4% or higher range centered on urban locations, such as Tokyo and Osaka. For domestic private equity, our basic plan is overseas projects, which can guarantee an IRR of 15% to 20% over a 5- to 7-year holding period. For investments in renewable energy overseas, with both interest rates and construction costs rising, we will only carry out projects where we can ensure sufficient arbitrage and we’ll realize certain exit strategy.

Please turn to the next page. On April 14, the Minister of Land Transportation & Infrastructure approved the Osaka MICE-IR project bid, spearheaded by MGM and ORIX. We now have 90 days to sign an agreement with Osaka Protect and City. And while there are uncertainties and issues remaining such as the design of authorities as well as full remediation and [recitation] measures, we are proceeding based on the assumption that these issues can be resolved. As the new tools and opening in 2029 or later, adjustments may have to be made for construction costs and the Osaka Expo, but we are aware of the importance of carefully monitoring construction costs and schedules. At any rate, we have heard that several lawsuits to stop work on this have been filed, but we hope to contribute to sustainable growth in the economy and tourism of Osaka and Kansai region.

Regarding Toshiba, a take-over bid contract has been signed between JIP and Toshiba. Antitrust filings will be made in each country, and we expect the TOB procedures to begin in late July. While we cannot disclose certain details due to the fact that this is a TOB procedure, ORIX plans to supply ¥100 billion to mezzanine syndicated loans funded by banking group and also to invest ¥100 billion in equity as a limited partner. We decided to participate in the JIP consortium based on positive evaluation of Toshiba’s corporate value and executability of the management improvement plan. Overall, this is positioned strictly as financial investment that will depend on JIP. Management ability, we will strive towards the promotion of a new management structure and achieving improvement in corporate value through communication with JIP and will consider exit strategy following achievement of these.

Please turn to Page 13 to 14. Regarding the progress in ESG-related measures, after expanding our TCFD scenario analysis and moving forward with measurements and disclosure in key areas such as Scope 3 GHG emissions, water usage and water volume — waste volumes. We have seen improvements in both our ESG ratings and outstanding in the annual Nikkei SDG survey. In December ’22, ORIX was newly added to the constituent to the FTSE Blossom Index. And now it is included in all of the ESG indices utilized by the GPIF for domestic stock allocation. We are preparing a survey and the risk analysis regarding human rights protection, and we’re also creating an integrated report that features more detailed flexibility information. Going forward, in addition to continuing activities that will further develop an understanding of ORIX’s sustainability promotion direction among all employees, we will also be raising awareness of human rights across our supply chain, improving our sustainability policy, enhancing our nonfinancial disclosures.

In addition, in order to promote achievement of our key ESG-related goals in FY ’24 March, the nominating committee is considering measures, which will include ESG-linked performance metrics in bonuses for interim directors and some executive officers. We will announce these metrics externally as soon as the final decision is made. Finally on Page 15. On March 31, 2023, the Tokyo Stock Exchange has recently directed listed companies to make action plans if the shares are trading below P/B of 1.0x and to a discussion with shareholders. From past results, it’s clear that ROE and past decade clearly correlated from this perspective, improving ROE will more than anything else leads to higher share price. Thus outlined before, we will make maximum efforts to lift ROE to 11% or above.

And we will also work to improve disclosure methods to investors. That’s all from me. Thank you for your attention.

Operator: Thank you. We’re now ready for Q&A session. [Operator Instructions] So, first of all, Mr. Watanabe from Daiwa Securities.

Operator: SMBC Nikko Securities, Muraki-san.

Q&A Session

Operator: So from Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.

Operator: [Operator Instructions] UBS Securities, Okada-san.

Operator: From JPMorgan, we have Sato-san asking the question.

Operator: Citigroup Securities, Mr. Niwa, please.

Operator: It is almost time for us to conclude this session. It looks as if there are no more questions, we would like to conclude today’s conference. And I would like to invite Mr. Inoue to provide us with the closing remarks.

Makoto Inoue: Because of COVID, and I think it’s been 4x since we have been carrying out this briefing session in this way, teleconference. In other words, we would very much like to perhaps hold a session in in-person manner. And I’m sure we’ll be receiving much tougher questions if we were to meet you in person, but still we look forward to seeing you then.

Operator: So with this, we would like to conclude today’s briefing session. Thank you for your participation. And you may now disconnect. Thank you so much. Thank you.