ORIX Corporation (NYSE:IX) Q4 2024 Earnings Call Transcript

ORIX Corporation (NYSE:IX) Q4 2024 Earnings Call Transcript May 12, 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:

Hitomaro Yano: It’s time to begin the meeting. Thank you for joining us for this conference of ORIX Corporation’s for annual results for the consolidated fiscal year ended March 31, 2024. My name is Hitomaro Yano from Investor Relations and Sustainability Department. I will be the master of ceremony today. Thank you. The attendee at today’s conference is Mr. Inoue, member of the Board of Directors, Executive Officer, President and Chief Executive Officer and also Mr. Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we would like to request all the participants to make sure that any mobile phone or other communication device is nearby would be either turned off or be a bit far away from the phone in order to prevent beep back.

We will first of all hear from Mr. Yamamoto and then for the representation by and explanation by Mr. Inoue and then Q&A session. The whole program should take approximately one hour. Mr. Yamamoto, the floor is yours.

Kazuki Yamamoto: I’m Kazuki Yamamoto, Operating Officer in charge of Corporate Planning and IR department. I’d like to make use of the deck in front of you to provide you with FY 2024 March end full year earnings briefing. So please turn to Page 2. So the right-hand side of the Page 2 shows or its record high profit for the year FY 2024 March end with net income of ¥346.1 billion, and this is a year-on-year increase of ¥55.8 billion, up 19%. ROE rose to 9.2%. Now quarterly trends in net income is shown on the right. Q4 net income was ¥126.9 billion. This is ORIX’s highest quarterly net profit figure to date, even higher than the 2022 fiscal year March end when we sold Yayoi, the profit was posted by investment gains from the sales process taking over described an excess from the domestic PE investment.

Please turn to the 3 segment profit rose 22% year-over-year to ¥494.2 billion. As shown on the right-hand quarterly graph, FY 2024 March ended tail heavy in terms of exit as initially forecasted. In other words, we were able to maintain a consistent uptrend in base profits and investment gains over the fiscal year as a result. Next, please look at the full year graph on the left-hand side. Base profits were up 14% year-over-year to ¥367.6 billion, which also represents a new record high. Profit recovery in the facility operations and the concession business, thanks to higher inbound tourism as well as growth in investment income in the insurance segment were the main reasons behind growth in base profit. The likely investment gains were also up 54% year-over-year to ¥126.5 billion, while we have been maintaining an average of ¥100 billion over the past five years, thanks to ongoing capital recycling in our asset portfolio, including the real estate and domestic PE businesses and the portion of ORIX credit shares, we exceeded average this time with ¥126.5 billion of gain.

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Q&A Session

Note that from the fourth quarter, we have reclassified earnings from the investment in affiliates accounting to either equity method investments of goodwill, depending on the type of asset. As a result, we have retroactively restated both base profits and investment gains. Next, please turn to Page 4 and 5 for the breakdown of segment profits and segment assets. Detailed information can be found further back in the presentation from Page 20 onwards. Please take a look after. I’ll just give a brief overview of the highlights here. First, the Corporate Financial Services and Maintenance Leasing segment profits were up ¥6.2 billion to ¥81.2 billion. In Corporate Financial Services, profits were up as fee businesses were solid, and M&A brokerage businesses also contributed to profits.

In the auto unit, strong rental demand for rental cars and ongoing high prices in the used car market helped the business achieve its third consecutive year of record high profit. Segment assets were up by ¥38.3 billion to ¥1.5523 trillion, as asset increase in the Corporate Financial Services unit as it undertook a variety of financing deals while remaining careful in selecting new business. Assets also increased in the auto unit thanks to rental car fleet replacement. Next is the Real Estate segment. Segment profits were up ¥14.3 billion to ¥65.8 billion. The real estate investment in facilities operations saw profits rise as in on tourism demand led to strong earnings at the hotels and inns. In addition, we booked gains on the sale of a large property in Q3.

In fact the unit secured profits in line with the previous fiscal year, aided by robust sales of high-margin conducts. Segment assets were up. As — although still being selective, we state investment in facilities operations unit and continue to develop new logistics facilities while actively selling properties as part of capital recycling. Daikyo assets increased by ¥59.1 billion as compared to 2023 March end also by the acquisition of a very well situated site for large-scale development. We continue to operate this segment based on the business model of acquiring promising properties and then monetizing them after adding value. Next is the PE investment and Concession segment. Segment profits were up sharply by ¥40.5 billion to ¥43.4 billion.

Although ORIX booked costs associated with the purely financial stake in Toshiba, we saw 2 PE industries, including Primagest in second half. This has a start contribution to base profits from DHC acquired last year led to strong upswing in segment profit. The Concession unit returned to profit on a full year basis for the first time since the pandemic aided by a sharp rise in earnings following growth in international passengers, thanks to a strong inbound tourism. Segment assets were up by ¥167.4 billion, net versus end March end of 2023, although assets rose due to ¥200 billion stake in Toshiba. We had several exits from industries. Environment Energy segment profits were down 9% year-on-year to ¥29.9 billion. Domestic business secured profit in line with the year-earlier level despite some quarterly fluctuations owing to the impact of output cap of our solar power.

Overseas profits were down year-on-year, owing to elevated euro interest rates and the absence of a year earlier investment gains. However, electricity sales rose due to steady expansion in capacity at Elawan. Segment assets were up ¥73.4 billion versus end of March FY 2023 owing mainly to changes in Forex. Assets in real estate investment and concession and the environment and energy segments are each less than ¥1 trillion, and we remain aware of maintaining balance between different segments. Insurance segment assets were up 11% year-on-year to ¥70 billion. Profits were up mainly driven by lower corporate related payout expenses versus the prior year and higher investment income aided by Yen depreciation and high interest rates. Insurance premium income is also rising steadily with whole life insurance being marketed more aggressively.

Segment assets were up by ¥258.9 billion versus end FY 2023 March, reflecting the impact of FX and increase in investment securities. Banking credit profits were up ¥59.1 billion to ¥96.7 billion. In the credit business, ORIX sold 66% of share to NTT DOCOMO to create joint venture. This transaction resulted in investment gains and variation gains were ¥57 billion. In banking, interest income from real estate investment loans grew due to higher long-term interest rates with only marginal increases in deposit related expenses, profits were up year-on-year. Higher trust fees also contributed resulting from ORIX Bank’s focus on growing trust assets. Segment assets rose ¥34.2 billion, reflecting higher lending in the merchant banking business in ORIX Bank.

Based on the stake, ORIX Credit is now considered an affiliate rather than a consolidated subsidiary. Total assets for banking and credit and insurance segments are about ¥5 trillion. This represents 37% of our ORIX’s total assets. And we continue to manage this ratio with an awareness of the quality of insurance and banking related assets and overall balance within the firm. Next is Aircraft and Ships segment. Profit rose 44% year-on-year to ¥26.8 billion. In aircraft leasing, passenger demand in the U.S. and Europe reached record high levels. Recovery in airline earnings and the tight supply demand for aircraft led to an increase in both leasing income and gains on the sales of aircraft listed to higher profit year-on-year. In the Ships business, profits were in line with our target, but lower year-on-year, owing to proactive sales of owned vessels a year ago when prices were favorable.

At the end of February, we acquired Santoku Senpaku, which will begin to contribute to profits in fiscal year 2025 March on a 3-month lag. At Avolon, hedging costs rose owing to elevated U.S. dollar interest rates. Growth in lease revenues fueled by a rebound in passenger demand helped the firm achieve profitability on a full year basis for the first time since the pandemic. Segment assets were up ¥315.5 billion. versus the end of FY 2023, March, reaching slightly more than ¥1 trillion. This reflects aircraft purchases and aircraft leasing in addition to Santoku Senpaku, which owns 67 vessels as a consolidated subsidiary. ORIX USA segment profit was declined by 65% year-on-year to ¥17.3 billion. In Q4, OCU booked losses associated with the draw from an investee as well as preventative allowances impairments based on conservative view, risk from long-term inflation and EBIT interest rates.

The resulted segment loss was ¥10.5 billion for the first — fourth quarter alone. Segment assets were up by ¥74.3 billion, reflecting the substantial impact of a weaker yen, we remain price-sensitive and selective with new deals. And through the sales of assets in the real estate business, installment assets, excluding FX impact were down by ¥17.2 billion versus the end of the prior year. ORIX Europe segment profit were down 30% to ¥28.6 billion. In FY 2023, March and 2022 March, OCU booked ¥10 billion or more in performance fees, but this now declined substantially in FY 2024 March and higher currency hedging costs resulting from writing in interest rates led to lower profits year-on-year. In the mainstay asset management business assets, at €324 billion, a new record high at the end of FY 2024 March, buoyed by strong equity market and management fees.

Segment assets were essentially flat after excluding the impact of yen depreciation. Finally, the Asia and Australia segment profit were down 2% year-on-year to ¥34.3 billion. Profits were flat versus a year ago, thanks to growth in lease and lending assets in South Korea, Australia, India and other countries from new executions, gains from the sale of an investee during Q4 also contributed. Segment assets were up ¥192.4 billion as a result of favorable new lease executions in ASEAN countries and India and the impact from FX changes. We maintain a cautious stance on investments in Greater China. The Aircraft and Ships and the U.S., Europe and Asia segments comprise a total of 22% of segment profits and 34% of segment assets. We will continue to carefully monitor economic and financial trends in each country.

This concludes my explanation about FY ’24 March full year results. Next, we would like to hand over to our CEO, Mr. Inoue. Please begin.

Makoto Inoue: Good afternoon. This is ORIX CEO, Makoto Inoue. Let me begin from Page 6. For 2024 March end, ORIX achieved pretax profits of¥ 470 billion and a 19% increase in net income to ¥346.1 billion. This represents an achievement 105% of our announced net income target. EPS was ¥299. Now in line with our policy of paying a dividend per share of either 33% of net income or last year’s EPS of ¥85.6 whichever is higher, we will pay a full year dividend per share of ¥98.6 for March end of 2024. Now since we paid an interim dividend of ¥42.8 per share, the year-end dividend will be ¥55.8 per share. ROE for FY 2024 March end was 9.2%. Now please turn to Pages 7 and 8. FY 2025 March end is the final year of the 3-year midterm outlook that we introduced 3 years ago.

We initially forecast net income of ¥440 billion for the final year, which we revised downward to ¥400 billion last fiscal year in light of market conditions at the time. But today, we now target FY 2025 March end net income of ¥390 billion. Now this translates to an ROE of 9.6%. Although improving our ROE is a major challenge for ORIX. Unfortunately, I will have to ask for your patience for another year for us to achieve our goal of ROE exceeding 10%, a target of ¥ 390 billion net income, so just 4.7% year-over-year growth for FY March end 2025. Now please turn to Page 9. There are three main reasons for our decision to lower the profit target from ¥400 billion to ¥390 billion. Thus, it may take some additional time before a full recovery in ORIX USA earnings because we foresee high credit costs to persist as well as elevated interest rates to continue as inflation remains doubly high.

Second, the MICE-IR project has begun in earnest, resulting in capital outflows that may not produce profits for some time and upfront cost outlays. Now in addition, we see a lack of visibility caused by political divisions owing to expansion in international conflicts, Chinese economic sluggishness to extend, coupled with Japan’s sinking position globally, owing to historic yen depreciation and the unleasable impact of high prices on the economy. For these reasons, we have decided to conservative target ¥390 billion for the coming fiscal year. However, this ¥390 billion is, of course, just a minimum target. And internally, we maintain our goal to exceed net profit of ¥400 billion. Now please turn to Page 10. I will outline the measures we plan to take to reach ¥390 billion in net profit later.

So now I would like to announce a dividend policy for FY March 2025, which will be to pay a dividend equivalent to 39% of net income or equal to the FY 2024 March dividend of ¥98.6 whichever is higher. As in the previous fiscal year, we have set a share buyback program of ¥50 billion. This translates to EPS of ¥341 and EPS of ¥133.2 for the whole year. Combined with the ¥50 billion in shares buyback, ORIX’s total shareholders’ return is set to reach 51.8%. Now please turn to Page 11. Unfortunately, the credit rating agency, S&P recently announced its decision to downgrade ORIX from A minus to BBB plus although we maintain high levels of profitability, S&P found it difficult to maintain an A minus rating on ORIX as a financial institution in light of a diversified portfolio, which includes operating assets and investments and given the speed of our capital recycling program.

Moody’s and Fitch maintain A equivalent, R&I and JCR maintain AA equivalent and they have a stable outlook as well. We will continue our dialogue with the rating agencies to ensure they give an objective and fair evaluation of our businesses. Please note that S&P downgrading has no impact on ORIX’s capital and financial policies. Now please turn to Page 12 and 13. ORIX Group holds asset of ¥16 trillion with shareholders’ equity of ¥4 trillion. Due to an accounting requirement, non-recourse loans at industries, third-party capital and accounts, which should be considered off balance sheet are held on ORIX’s balance sheet. With ORIX’s diverse investment style, each M&A execution has led to an increase in goodwill and intangibles. In light of this, in order to fairly represent the nature of the group businesses, I think a new approach would have to be examined.

In FY 2025 March end our ROE target is 9.6%. However, each year our intangible assets average around ¥1 trillion. So considering this, we can believe return on tangible equity, ROTE, which is net income divided by shareholders’ equity minus goodwill and intangible assets is an effective way to measure ORIX’s nature of business and the actual profitability. Note that ORIX’s ROTE trends at around 13%. Going forward, we will disclose ROTE alongside with ROE. In addition to ROE and ROTE an important factor for growing corporate value is EPS. EPS was ¥246 in FY 2023 March end to ¥199 in FY 2024 March, and we target ¥341 in FY 2025 March end. We will continue to endeavor to strengthen EPS under our PV ratio with the aim of improving shareholders’ value.

Now please refer to Page 14 to 16. We target FY 2025 March pretax profits of ¥553.7 billion, an increase of 7.81% year-over-year. I will now use the three category of finance, operation and investment to provide with you the breakdown. The finance category includes ORIX Life, ORIX Bank a recent installment loans and main businesses of the Corporate Financial Services segment, ORIX USA and leasing businesses at overseas subsidiaries. Within Japan, we can expect a mild increase in yen interest rates, which should help improve financing income, asset management yields and leasing spreads. At ORIX Bank, in addition to commercial banking, we aim to strategically improve both ROA and ROE through expansion in merchant banking and private banking.

In Insurance, we anticipate growth in embedded value fueled by improvements in asset management yield. At ORIX USA, we assume high interest rates to continue, and therefore, expect that the credit cost burden to continue to rise. However, the multifamily agency and non-agency lending segment, which is ORIX USA’s strength is faring comparatively well, and we expect it to contribute to earnings during this fiscal year. In the latter half of this fiscal year, we would hope that improved credit spreads from expectations of future rate cuts might help with earnings. However, before rate cuts actually occur, we feel that the impact of a possible increase in credit cost must also be considered. Thus we plan to continue to conservatively manage OCU portfolio going forward.

In high-growth markets, like Australia, Indonesia and India, we plan to increase our financial portfolio. For finance category segments, we target at about ¥45 billion increase in pretax profits after the gain from the sale of ORIX Credit. Next, I would like to talk about the operation category. We anticipate roughly ¥18 billion year-on-year increase in pretax profit, including facility operations in Inns and Hotels in the Real Estate segment, condo development and the sales of Daikyo and auto-leasing business. In ships, while our business model was primarily focused on ship financing and sales, the acquisition of Santoku Senpaku will allow us to make a full-fledged entry into marine transport freight management ship charters and the coastal businesses.

In addition, we plan to accelerate investment in eco-ships, making our ships business even more sustainable. In addition to ORIX Aviation and Avolon’s aircraft leasing business, ORIX is well positioned to benefit from an increase in movement of people and goods in the aircraft and ship business, we are poised to offer solutions in the operations, finance and investment areas, and we plan to grow this as a core business for ORIX Group. At NXT Capital in the U.S. and Robeco in The Netherlands, we are searching for ways to expand the asset management business. Although it is a competitive market in order for ORIX Group to maintain its earnings expansion, we must consider how to best utilize third-party capital. This remains a vital area for ORIX to address.

Investments are becoming increasingly large in scale, such as carve-outs and there are many opportunities facing us. We think that there is a limit to what ORIX can achieve when it is responsible for all of the acquisition capital. The shift towards an asset management model is an important medium-term scene for ORIX. ORIX’s strengths include our expertise in managing variety of tangible assets and will for financing expertise. For this reason, we believe that we shall have no difficulty in expanding our role in asset manager. The current ¥60 trillion level AUM should be expanded to 100 trillion level as rapidly as possible. Our basic policy for investments is unchanged. That is not to limit ourselves to any particular industry, but to carefully consider profitability and liquidity and aim to secure opportunities deals, capitalizing upon the strengths of the ORIX Group network.