ORIX Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 2 speakers on the call.

Operator

Now it's time to start the RX Corporation's financial results briefing for the 6 month period ended September 30, 2023. Thank you very much for joining us today. I'd like to act as a moderator. I am Nakane from IR Sustainability Promotion Division. Today, we have Mr.

Operator

Makoto Inoue, the President and CEO as well as Mr. Hitomaru Yano in charge of Accounting and Treasury and Investor Relations. There are some housekeeping announcements. In order to prevent any interference, if you have any mobile phones or telecommunication devices 1st, I will call upon Mr. Yano and then Mr.

Operator

Inoue to make presentations and then take questions. We plan to spend about 1 hour. Now, Mr. Yano.

Speaker 1

Thank you for the introduction. This is Sayano speaking in charge of Accounting and Treasury and Investor Relations. Thank you for taking time. I will be very busy schedule to participate in today's briefing. I'll start by explaining about our fiscal 'twenty four March results.

Speaker 1

Please turn to Page 2. For first half Of fiscal 20 4 March, Oryx reported net income of JPY 128,100,000,000, up 4.7% year on year. This translated into annualized ROE of 7.0%. Please turn to the next page. This is a breakdown of segment profits.

Speaker 1

1st half segment profits were up 11% year on year. It was 100 and JPY 91,000,000,000. This slide shows past trends of segment profits on a full year, quarterly and half year basis from left to right. Base profits are dark blue and the investment gains are in light blue. At the far right of the trends for the half year basis, Base profits were up 16% year on year to JPY 167,400,000,000.

Speaker 1

This was primarily due to a recovery in the REIT Estate and the Concession business earnings, thanks to higher inbound tourism and the higher profits of the insurance segment as a result of higher investment income. Meanwhile, investment gains in light blue were down 14% year on year to JPY 23,600,000,000. These were primarily due to investment gains on sale of multiple real estate properties booked in the first half. Our CEO will discuss this later on. We plan to aggressively move forward with sales in the second half of this fiscal year.

Speaker 1

Please turn to Pages 45 next. This gives a breakdown of segment profit and segment assets. This should give you a good overview of segment trends as a whole. Detailed information about each segment can be found from Page 16 and beyond. Please review them in your own time.

Speaker 1

And I will just give you a brief overview using Page 45. First is Corporate Financial Services and Maintenance Leasing. Segment profits rose 9% to JPY 40,300,000,000. Corporate Financial Services, various fee businesses were performing well and profits were up in the first half as M and A brokerage contributed to the profit. In the auto business, used car prices remained high and rental car demand is strong continuously And Remedic profits were lower year on year owing to the cost associated with the launching of new technology center, but this unit has posted steady profits.

Speaker 1

Nodimoton Real Estate. Segment profit was up 42% to JPY 26,900,000,000. In the investment and operations, profits were up year on year, thanks to improving earnings in the facility operation business, hotels and inns On a recovery in inbound tourism demand and office in real condo sales were also booked. In the Daikou units, profits were up sharply year on year on strong condo sales. In real estate assets, In Yure Estate, assets were up by JPY 69,400,000,000 versus the end of last year as a careful Selection of our new assets continued alongside practice sales.

Speaker 1

Next is P&Concession. Segment profits were up 141% year on year to 9,700,000,000 yen In the PE Investment Units, And segment profits were up year on year as profit contributions from DHC and HEXO Works which were acquired last year offset lower profits from other investments and impact of investee sales last year. The concession unit returned to the black for the first time on a quarterly basis since the start of the pandemic on the recovery of international passenger numbers And there's a 3 month delay in this profit reflection. And the segment assets were up JPY 2,300,000,000 versus end of fiscal 2023 March, which with the execution of Doshiba LP and the net selling loan. Next is Environment and Energy.

Speaker 1

Segment profits were down 7% year on year to JPY 8,100,000,000. In the domestic Energy business, segment profits were up slightly on year, thanks to a large number of sunny days in the quarter, which offset the impact of output curtailments in the Q1. In Eobuzizz Energy, overall profits were down year on year due to higher hedging On foreign currency denominated assets caused by higher interest rates, profit contributions from L1 were higher and the Ginkgo profits were also up year on year. Segment assets were up JPY 59,600,000,000 year to date owing to ForEx changes.

Operator

Next is the Insurance segment. The segment profits were up 151 percent to JPY 37,000,000,000. Segment profits rose on an increase in investment income, thanks to the weaker yen and higher interest rate as well as lower COVID related payouts. Segment assets were up JPY53,300,000,000 on foreign exchanges. Next is Banking and Credit.

Operator

Segment assets profits were up 8% to JPY 16,500,000,000. The banking business unit has Seeing the financial revenues grow as a result of higher interest rate, lifting the long term prime rate. They also benefited from the Growth in fee revenues on an increase in trust assets. OX Bank continues to strengthen its profitability through growth in the trust and other businesses and not by unnecessary increasing assets. As a result, banking segment assets were flat versus a year ago.

Operator

In Credit Business, both assets and segment profits are mostly flat year on year. Next is Aircraft and Ships. Segment profits were JPY 10,400,000,000, down 2% year on year. In the Ship Business Unit, profits were down year on year. On absence of year earlier gains on timely sale of owned vessels during the period of high prices, This was in line with our initial targets.

Operator

4 ships were sold during the first half. Aircraft leasing posted higher profits. Amidst the recovery in passenger demand, leasing revenues rose, thanks to higher lease rates an increase in the number of owned aircraft. Apollo turned profitable on a quarterly basis after accounting for hedging costs, thanks to a rebound in passenger demand. Segment assets were up JPY 164,300,000,000 on ForEx FX and an increase in owned aircraft.

Operator

Next is ORIX USA. Segment profits were down 24 percent to JPY 16,300,000,000. There were fewer exits in the PE business owing to changes in macroeconomic climate, which was the primary reason for lower profits in the segment. Segment assets were up JPY 63,400,000,000 in OCU. Local currency denominated assets are lower as Ongoing enhanced risk management has led to OCU to reign in new investments, but charges Changes in the forex led to higher yen denominated assets.

Operator

Next is ORIX Europe. Segment assets were down 19% to JPY 13,400,000,000. Profits are lower owing to hedging costs on forex denominated investments, primarily at Wobeko Group, caused by higher euro interest rate. However, AUM on a recovery trend with the launch of active ETFs and fee income is stable. Segment assets were up JPY 35,100,000,000 year to date, mainly due to foreign exchanges.

Operator

Segment profits are down 49% year on year to JPY 12,400,000,000. This is finally the Asian and Australia. Profits fell due to the absence of gain on sale in the Southeast Asia paid 8 in the same period of the previous year and lower profit contribution from investees. Despite this, leasing and loan operations were healthy In Asian countries, segment assets were up JPY 174.8 billion year to date owing to foreign exchanges and due to favorable new lease executions in various countries. I'd like to also make some comments on the impact of rising yen interest rates.

Operator

Yesterday, BOJ announced the new policy and they have made upward revision to the long term interest rate. For ORIX, especially for the financial businesses, The higher interest rate in yen will be the positive. Oryx Bank holds Variable interest rate assets, especially those linked to the long term prime rate of close to JPY 1,000,000,000,000, A rise in the yield curve during the period of higher interest rates, therefore, will have a positive impact. In insurance, asset rotation in our investment portfolio reached higher yields during the times of rising interest rate. Also more than anything, the reduced present value of the insurance liabilities outweighs decline In asset value, which will benefit embedded value, this is also bolster future earnings.

Operator

In the domestic corporate financial services business, we have held off and aggressively pursuing additional financial finance leasing business because of low interest rates and excess liquidity. However, Higher interest rates could be an opportunity for this business to grow. So that was about the rising yen interest rate. And with that, I'd like end my presentation, hand the microphone to Mr. Inoue, our CEO.

Operator

All right.

Speaker 1

Yes. This is Inoue, Oryx, I would like to start with Page 6. And fiscal 24 March first half Pretax profit came in at JPY 184,500,000,000. Net income was JPY 128,100,000,000. Just to repeat, And this was a slight increase of 4.73% year on year and it represents a 38 0.82% progress towards our full year outlook of JPY 330,000,000,000.

Speaker 1

Internal dividend was JPY 42.8 yen per share. And continuing we will continue to execute the share buyback for this fiscal year. Please turn to Page 7. And for the First half, we had net income of JPY 128,100,000,000, which is 38.82 percent towards the JPY 330,000,000,000 outlook for the full year. And the reason, first of all, is investment gains from asset sales is likely to be back end loaded.

Speaker 1

In other words, it's going to be a second half heavy earnings plan. And secondly, the uncertain outlook in the U. S. Interest rates, We are seeing higher credit costs and we have decided to rein in new private credit origination at ORIX USA. And thirdly, hedging costs increased due to higher U.

Speaker 1

S. Dollar and euro interest rates. With the ongoing Russia Ukraine conflict and intensifying the fighting between Israel and Hamas, the global situation is becoming more challenging. In addition, rising energy costs, interest rate trends in major currencies and the price inflation globally makes it increasingly difficult for us to make accurate forecast. Within Japan, higher prices, labor shortages and weakening yen have lowered visibility, but an inflow of capital from outside of Japan has continued to provide support.

Speaker 1

Our domestic business healthy overall with basic profits up 16.1% year on year centered on real estate, PE and concession and insurance businesses. So we are performing ahead of plan. Please turn to Page 8. Having said all that, in order to meet our full year target of net income of RMB30 1,000,000,000 and ROE of 9%, We will need to achieve growth in base profits and realize the sales of some assets in the second half of fiscal year. In the first half, we booked investment gains of JPY 23,600,000,000 And we forecast that investment gains will be concentrated in the second half of the fiscal year.

Speaker 1

So we will expect sharp recovery in the second half. Assets up for sale are primarily logistics facilities, Rental condominiums and other real estate related assets as well as private equity assets and renewable energy facilities And negotiations on conditions are currently underway with potential buyers. And we will release details as soon as they become available. To give you an overview of the first half result, Domestic businesses were strong overall. Real Estate, PE and Concession, Insurance and Lease financing business in Corporate Finance Law Services posted pretax profit of JPY 138,200,000,000, up 142% year on year.

Speaker 1

We expect to book investment gains during the second half. So We believe that we will have steady earnings if everything goes according to plan. Page 910. Airport concession and real estate operations have enjoyed particularly strong recovery. And During the pandemic, concession recorded around JPY 10,000,000,000 in losses because of the ownership stakes.

Speaker 1

However, We focused about the JPY 5,000,000,000 pretax profit contribution in the latter half of this of fiscal 2024 March. And I expect to return up to around JPY 10,000,000,000 in profits in fiscal 2025 March. In Real Estate Operations, the average daily rate and the lodging facilities have already surpassed pre pandemic levels And increasing inbound tourism leads us to believe that additional improvements is can be expected. And as for my SIR, we have signed an agreement with Osaka City and Prefecture late September. Although the investment amount is higher than we had initially planned owing to inflation and rising construction costs, We judged that the project still allows MGM and ORIX partnership to secure desired level of profitability.

Speaker 1

So we are finalizing the details of regional contractors. And we are preparing to begin construction in 20 35 following dissolution of our land results issues. The primary reason for our 38.82% progress has been poor performance at ORIX USA despite the weaker yen and the extent to which we can recover from that is going to be one of the challenges for the second half. In the U. S, high interest rate persists, which means that we accelerated sales of existing assets approximately USD 715,000,000 worth.

Speaker 1

And we also limited new deals, but unfortunately, credit costs and allowance of doubtful accounts are increasing. So for fiscal 2024 March, we are strengthening credit risks, monitoring and prioritizing risk controls, and we anticipate That Dorex USA will underperform the initial profit target by about US200 $1,000,000 And in other words, whether other segments can offset that is going to be the challenge for the Fiscal 24 March earnings outlook. Rubeko Group AUM declined during first half, but it has hit bottom and it's on a recovery track. And we expect roughly 10% year on year decline in fee income for fiscal 2024 March. However, New funds such as ESG related funds and active EDFs are launching and the outlook of the business remains bright.

Speaker 1

OX Europe Overall AUM is €301,000,000,000 and the segment profit pretax income was €125,000,000 for the 1st 6 months. AUM for Rubeko parent is €176,000,000,000 and we will continue to improve earnings in this segment.

Operator

In aircraft and ships, passenger numbers in the United States and Europe remain at the record high levels and airline demand for the leased aircraft is strong. We thus expect to accelerate the number of purchases and aircraft sales in the second half. While it could take some time for earnings to recover owing to the higher euro and U. S. Dollar hedging cost, We expect a deceleration in asset sales to allow for improvement in ROE, ROA and additional earnings contribution.

Operator

In Page 11, in 2017, we purchased 10,988,570 shares in the renewable energy developer and operator, OMA Technologies, for US626 million dollars In November 2022, we sold 7.69% of this stake and booked $113,000,000 or 15,900,000,000 yen gain on sale. We continue to hold 11.08 percent of the stock and the current share price is around $62 per share in comparison to the purchase price of $57 Although the shares are down owing to the Israel announced conflict and other factors, the shares remain at acceptable level even after considering lower hedging costs, but we plan to take a wait and see stance. At the time of purchase, OMA's adjusted EBITDA was US344 $1,000,000 And the company's guidance for the earning is between US480 million dollars to US510 $1,000,000 for this fiscal year. Operating capacity have increased from 700 megawatt at the Saino acquisition to 1.2 gigawatt. And by 2025, the capacity is slated to increase to between 1.9 gigawatt to 2.0 gigawatt.

Operator

We view this as an exciting future investment portfolio. For the overseas renewable energy business, Eleman has a portfolio of 1.65 Gigawatt in operating assets and generate earnings contributions of more than €19,000,000 annually on a total asset of €2,670,000,000 The firm has roughly 8 gigawatt of capacity either under construction or in development, And we are moving ahead with plans to sell certain assets, chiefly those with stable cash flows. Elavon, Its earnings flow into ORIX Group is 6 month lag and some asset sale may be posted during the next full year. However, we expect to be able to achieve a ROA of 3% or higher for this business. L1's asset in operation have more than doubled in 2 years since it joined ORIX Group.

Operator

This and its rich pipeline Nikos believe the firm has a portfolio ripe for capital recycling in the future. We plan to develop LO1 into a core part of ORIX core portfolio. In 2021, ORIX acquired 20% of outstanding shares of Grinko and has now invested a cumulative of USD 978,000,000 We own a total of 6.3 gigawatt in solar, wind and hydroelectric assets in operations. En has 3 large scale pumped storage projects equivalent to 4.6 gigawatts under construction. We have a total of development pipeline of 12 gigawatt, including new pumped storage projects.

Operator

In pumped storage project construction, steady progress is being made in concluding offtake contracts. And Grinko plans to begin operating some of the projects from June 2024. We strongly believe that the investment value of the Grinko has increased substantially. Page 12. At DHC, which we acquired last year, We have implemented a new management structure.

Operator

We are improving governance and compliance, IT strategy, product strategy and are rebuilding marketing efforts and executing the both merger integration with PMI, such as reviewing business in Greater China. Preparation To take Toshiba private are underway. Following the November 22 extraordinary shareholder meeting, The company is set to be delisted on December 20. We executed LP Equity Investment and mezzanine loan of JPY 100,000,000,000 each and expect earnings contribution from next year and onwards. The timing of when gains on the sale of assets are booked will be an impact on whether or not we achieved The FY 'twenty four March earnings outlook for JPY 330,000,000,000 in net income.

Operator

Depending on the progress made in the individual deals, There's a possibility that we may have to revise our target. Nonetheless, we will continue to do our most to meet our earnings forecast. Finally, ORIX Group has revised our corporate philosophy and are like to announce the new ORIX Group purpose and culture. The English translation of the purpose and culture is finding a path and making impact. So this is our purpose.

Operator

Our purpose defines our ORIX Group's why ORIX Group exists in the world And our culture is a set of shared value. In order to bring this purpose to life, I would like to support this widespread acceptance As a shared way of thinking among ORIX Group people globally, I hope that the ORIX Group can unify around the ORIX Group purpose and culture as we seek to bring new values to all our stakeholders worldwide. Thank you very much for your attention.

Speaker 1

Yes, this is Muraki, SMBC Nikko Securities. I have some questions about what will happen when the interest rate goes up. First of all, sensitivity to yen interest rate. Mr. Yan has already My apologies.

Speaker 1

I could not hear what you were saying. Could you please start from the beginning? Yes, this is Muraki. This is Nico Securitas. I want to know more details about what happens when the interest rate goes up.

Speaker 1

If the short term interest is about 5 basis points like it was in 2007 and the long term interest rate is about 1.5%, let's say. Under that scenario, what kind of business opportunities will ORIX see? In the integrated report, I saw that there was a story about when you joined Mr. Inoue and this profit And funding, there used to be margin arbitrage, but right now, it is not possible. But if the short term interest rate is about 50 basis points, maybe arbitrage would be possible again in the Corporate Financial Services business.

Speaker 1

I want to know if that's possible. So that's the business aspect. And also with regard to ORIX Bank and ORIX Life, Considering the potential IPO, as a CEO, what level of profit Our gain on sales will be satisfied with or can you expect that? If you look at Blackton Bank's PBR and PBR, for example, It is going high and its PBR is about 2x right now. So for ORIX Life and ORIX Bank, I understand that you will not be holding these entities forever.

Speaker 1

And once the financial policy normalizes, maybe it becomes unrealistic to sell off

Operator

1st of all,

Speaker 1

Impact of higher interest rate. Well, of course, the bank life and the lease, We can expect to arbitrage as the spread widens. So this is a favorable situation for us. So Centrico Grande Corporate Financial Services lease operations, which used to slow down in the past can now accelerate. But with dozens of basis points, the spread would not widen that much.

Speaker 1

So interest rate will have to reach maybe 3% 2%, 3%, 4% Before we can do an interesting spread business, arbitrage business, Life and Bank, Well, the assets that we hold are different from lease. They are more liquid, which means that including potential sales of assets, maybe we can expect improvement in the earnings. Now Back and life, well, zero interest rate continued for a long time and the PDR in the financial 36 was 0.05 or something like that. So we can expect improvement in the share prices due to high interest rate. And once that happens, of course, we will start a dialogue with the market.

Speaker 1

Rakuten Bank, yes, we do look at those things as well. And Rakuten Bank PB goes up that much, why not ORIX Bank? That's the question that we received. Now Real Estate Condo Investment and also Trust Business and Merchant Banking restart and various activities are starting. But we don't want to suggest one single thing.

Speaker 1

The business model has to be multiple, not just one. Otherwise, Overall PBR will not go up. So either way, that approves the Earnings from the banking business, we need to increase the number of businesses that are multifaceted. And this is something that I'm talking with the bank team. As for life insurance, of course, the higher interest rate will directly impact that business.

Speaker 1

So embedded value and other improvements could be expected. So depending on the situation, in the future, life insurance liquidation Excuse me, life insurance sell off may be possible, but we don't have enough materials decided right now. Now in terms of negative impact, Private Equity, of course, and also Real Estate Development projects. Would I experience high interest rate and also high construction cost? High interest rate will push up general cost.

Speaker 1

So for development and exit NOI, we have to carefully look at the arbitrage and built the new projects very carefully. We are not doing any low spread businesses. More than 3% arbitrage is possible for the projects that we find. So several tens of Basis points of high interest rate hike could not impact us that much. I hope that answered your question.

Speaker 1

Yes. Thank you. I read your story very interestingly on the integrated report about how to leverage or take advantage of the failures. Thank you.

Operator

Next is Sato san from JPMorgan Securities. This is Sato speaking. First question about the U. S. Business.

Operator

On Page 31 of your presentation material, You are disclosing the numbers and compared with the past, new investments are being controlled, you mentioned. And this time, the Real Estate System Business Segment is down, but as if you look at the total picture, it's flat, I think. So what you say the controlling risk is what you are doing? And when you continue with that, The base profit of each business and other segment assets, what would be the trend of those? What should we expect?

Operator

So if you can give us some more details on that. And also, The higher interest rate in the United States, could you comment on that as well? In the past, our borrowing The charge, the interest payment would increase and also the USA segment, That would be positive, so it would be offset. And also on another page, The higher interest rate in the United States does not have much impact. So as of now, when you look at the current portfolio, the higher interest rate in the United States, how would that impact on your profit and loss?

Operator

If there are any update? So USA operation, first of all, Most of the main business in the United States are private credit, so financial business. So PE, the amount is limited or small. So for real estate, it's multifamily Finance and Agency sell through Agency and Credit BB For single B equivalent companies, we are providing we were providing loans to those company. So B BB- loans, there are some remaining.

Operator

And right now, they're using the tangible asset or rather they're using the intangible assets. So the cash flow base is the collateral used for the most of the loans in United States. When the interest rate rises, The cash flow on the customer side turns negative. So there are several higher credit cost and the bad debt increasing. And for the we have already worked them out and we increased the provision.

Operator

So we have done the mark to market and then selling them off. So that's what we have in the United States. So after that, Naturally, even when the interest rate goes up, basically, say that's up to 5% or so And if stabilizes, then around 5% funding cost, EBITDA assumption, So that increasing the balance of the loan and then in the future when the interest rate comes down, Then we can do the arbitrage. And also 25 basis points is possible here And probably, we are reaching the peak. So we are trying to wait and see and start to make new investments.

Operator

And then We should be able to make the quick recovery. As for the interest rate in the United States, as I said, 25 basis point or 50 basis point. If it's within 25 basis point, it will be better. Especially ORIX USA, Most of the assets are floaters. So fixed interest rate, we don't have asset at the fixed interest rate.

Operator

So The impact will not have a will not be a big one on us. Also, Avolon and others, Avolon expectation and investment, they are all in U. S. Dollars. So Aperon's the earnings is improving and our including our hedge cost, We think that it would take some time before the recovery.

Operator

So we have to really reconsider the hedge cost. But as of now, the Abalone and others, for the U. S. Denominated investment, The interest rate interest cost, how to change that and we are thinking that we should reconsider, But that's been reconsidered. So we have not yet made a final decision.

Operator

In the future, this is something that we need to work on. Did I answer your question? Yes. Thank you. Just a follow-up.

Operator

ORIX USA, the floater assets and higher interest impact has been positive. So this time, in the first half, the segment profit For a base profit results, higher interest rate, the positive impact is included. Is that the correct understanding? Yes, that's correct. Well, liability side is exactly what you said, but the asset Side with the higher interest rate, the customer side have a negative cash flow or deteriorating cash flow and financing and have the loan.

Operator

And that I think is the negative factor for ORIX USA. I see. So the interest rate sensitivity is difficult to say, but the environment, Of course, it is a mixture of positive and negative. And thank you very much.

Speaker 1

Thank you. Next is Daiwa Securities. Watanabe san. Please ask a question. Yes.

Speaker 1

This is Watanabe, Daiwa Securities. I have one question. COVID plan, 330,000,000,000 yen, how strong is this commitment for the fiscal year? On Page 8, you are showing capital gain outlook, JPY900,000,000,000 lower bound is shown for the second half And 400,000,000 yen for next fiscal year, maybe you attempted to prioritize that. And Digitalization of capital has actually increased to 94%.

Speaker 1

And I think there is, of course, upside and downside, but how strong is the commitment for the profit plan for this fiscal year? That's my question. That is actually a very difficult question. 330,000,000,000 yen. 100,000,000,000 yen, well, 20 well, about 80,000,000,000 yen Considering we have done in the first half, this is basically according to plan, and we're hoping to do this in the second half.

Speaker 1

In January or February, During the end of the pandemic, we started to move forward with sales activities, but of course, There are bias in their own situations and sometimes they're late in responding to the situation. So negotiations starting from February to March would probably be concluded in the second half of the year. This is why the schedule is expected to be tail heavy or second half heavy. But if this is actually possible, we believe that we can achieve this number, but it depends on the customers. In order to achieve JPY 400,000,000,000, maybe we want to delay some of them, Maybe that is a sentiment, but the sales teams have their own objectives.

Speaker 1

So this is clear that if they cannot achieve this, there's going to be some pressure. So on the ground, I don't think any team is considering prioritizing the next year's profit target. Now As I mentioned before, renewable energy related matters, starting from next fiscal year, our operations will start in some of these initiatives. So once they're operational and the cash flow is stable, it means that we can exit immediately and including GreenCo. Well, Walmart was a little bit unexpected because of the Israel situation and the sovereign risk is now materialized maybe a little bit more difficult.

Speaker 1

But other than that, everything is basically going up on its plan. And the next question is to what extent we will event risk. So that is basically one of the risks that we have to look at in terms of achieving the target. And excluding that, all efforts are being made so that we can achieve the target smoothly. Well, in terms of employed capital ratio, I think it's going up and also there is a possibility of buying the used car business.

Speaker 1

Do you have any idea what's the plan about exit? Well, they don't increase the bank lending dramatically. As I said The full capital recycling is at the center for our new investments. So we are basically cycling the assets from the older ones to new ones. And for the old ones, it's basically capital recycling.

Speaker 1

We want to increase the earnings. And for the new projects, We use that funding and employee capital ratio should not be very high. That is the very basic policy of our business. That's very clear. Thank you very much.

Operator

Thank you. Shushino san from Mitsubishi FJ Morgan Stanley Securities. Yes. Thank you very much. The banking and credit in the presentation, the trust asset, JPY1 1,000,000,000,000,000 And for the real estate loan, you have sold some of them and this led to this amount.

Operator

Until now, We did not pay much attention to that. So liquidation rate, How would that start to impact your earnings? And The new investments and new real estate market, I think that it's very competitive. So whether you are successfully doing this and also With the intensified competition, I think that the competition has been always intense. So what is Going to be how would you improve your position in terms of the gain on sales or the exit?

Operator

Well, 0.7% ROA over 0.7% or 0.8% or Their mission is to get to the 1%. So what they do is to make the earnings and that means that their total assets would increase. And the JPY 3 trillion is the total asset in their assumption. And they have set up the earnings target. As a parent company, At KRW3 1,000,000,000,000 and IFRS 0.7, it's not good enough because ORIX Group ROA will be pushed down.

Operator

So that is not acceptable. So real estate loan is not the only thing we have. So especially about the banking, the real estate loan for the investment purposes, we have slowed it down. And the merchant banking, especially for the renewable energy project finance and also project finance like Syndication becoming a leader and getting the fee revenue and to sell the assets. So that is the policy that they have.

Operator

So to what extent they are successful in doing so, So total assets keep growing is not acceptable. So we want to control the total assets and We want to reduce it from 3,000,000,000 yen to 2,500,000,000 yen and increase the ROA. So that is what we tell them or as a direction or instruction. So if they cannot do it, we cannot increase the ROA. And like Rakuten selling or listing will now become visible.

Operator

So when we consider listing in the future, At least ROA of 1% is necessary and we have to take initiatives for that. We can use the trust business, so that the total asset can be reduced and increase the fee business. So that's what they are trying to do as a target. So whether they can achieve them or not, it will determine the future of ORIX Bank. I hope that answers your question.

Operator

Yes, I understand the philosophy. So from now on, this the 1,000,000,000,000 yen breakdown and the Impact on the profit and loss, if you can provide that information in the future, that would be very helpful. Thank you.

Speaker 1

Thank you. SBI Securities, Otsuka san. Please ask your question. Yes, this is Otsuka. I hope you can hear me.

Speaker 1

Yes, we can hear you. I want to go back to what you said, Mr. Inoue. Maybe I have missed something, so I just U. S.

Speaker 1

A, when you explained about ORIX U. S. A, 200,000,000 yen Underachievement, I think that's what you said. Is this about the profit being underachieved by $200,000,000 Yes. Post tax profit target, ORIX USA in 2010 had JPY 750,000,000 pretaxprofit.

Speaker 1

And that pushed up the target profit internally. And the 500,000,000 just under 500,000,000 Pretax profit was target for this fiscal year. And against that target of just below 500,000,000 yen, they will be underachieving by about 200,000,000 yen. That's what I meant. I see.

Operator

So according

Speaker 1

to your document, well, on Page 10, for example, you're showing ORIX USA profit being JPY 55,000,000,000, this is pretax target. So there is a possibility that you will not be achieving this and that is why you are trying to offset this by profit from other segments. Is that correct? Well, JPY 55,000,000,000 this is in yen. So in terms of US dollars, that would be about JPY 350,000,000.

Speaker 1

Will that be correct? Well, we are actually charging a lot of different costs for this segment. That is why we have this number. Yes. So JPY 55,000,000,000 is actually a quite tough target.

Speaker 1

And how can we can Somehow, supplements for that will be the key of achieving the 330,000,000,000 target overall. I see. Thank you very much.

Operator

Next, Sasaki san from Nomura Securities. Sasaki of Nomura Securities, can you hear me? Yes. On Page 8, I have a question. First of all, this type of disclosure, I have been covering you for a long time.

Operator

This is the first time that I see this. So why did you decide to disclose this time? Could you explain the reason? And also, capital gain forecast were mentioned. And When and which number were used to come up with this calculation?

Operator

Could you talk about the assumptions? And also, if possible, The commitment of JPY 330,000,000,000 and also JPY 400,000,000,000 for the next year, I would like to hear your view on your commitment to achieve that. As for the Page 8, For a long time, the disclosure of ORIX were criticized from investors. There were some dissatisfaction, so we wanted to improve that. So different way of disclosures are being done.

Operator

So this is part of this, my our efforts. So in order for you to understand What would be the best disclosure and how should we disclose the numbers? We are always thinking about it. And this time, we decided to Provide this capital recycling table so that you can understand this better. So we are always trying to make improvements.

Operator

And as a result of that, we are disclosing this page. Most of our 330,000,000,000 yen commitment, as I said earlier, The capital gain were in the past. The annual capital gain was from JPY 80,000,000,000 to JPY 100,000,000,000 And those numbers, so JPY 80,000,000,000 to JPY 100,000,000,000. This is based on the book value of our assets. And with the gain on sale, So that means that the capital gain in addition to the book value and based on that assumption, we always make a calculation.

Operator

So JPY 100,000,000,000 or JPY 80,000,000,000 capital gain. So this is the net profit on sale or gain on sale. So about the 400,000,000,000 yen, similarly, there are multiple projects going on and some of them are in development. And so in the second half this year and early next year, gradually, they will start to start up. And then we will consider to sell them and which project can be sold and what will be the level of the capital.

Operator

Those are the validation, verification we go through. And then as a result, we think that we can achieve JPY 400,000,000,000. And toward that target, we would like to proceed with the capital recycling or selling of those assets. I hope That answers your question. So if that is the case, Page 8, going back to those numbers.

Operator

So you are negotiating with the counterparties. And based on those numbers, say that the JPY 20,000,000,000 to JPY 40,000,000,000, JPY 60,000,000,000 and so forth mentioned. And If possible, when you sell which assets, what kind of numbers that you come up with? If you can So for example, you have so many private assets. So overall balance sheet unrealized again is very difficult for us to calculate.

Operator

So this time, you are disclosing Page 8. So if you can show us the denominator of those numbers, what would be the size of it, if possible? First of all, those numbers right now from the front line, Those are the numbers that they're using as expected capital gain when they negotiate. So it's not just something that we calculated. So as for the denominators, Yano san, depending In the case of real estate, it's 1.5 times to 2 times if it's old.

Operator

And as for the PE, 1.5 times to 2 times at the time of sales. So the book value, 1.5 times of the capital gain. I think in many cases, it's that level. So that's the kind of image that will be coming down. So about the real estate, development NOI that is the cost And exit NOI, the development NOI is 5.2%.

Operator

For old one, it's 6% or so And the new ones are 5% and the NOI is 3% or a little more. So based on those assumptions, I think that you'll be able to match with those numbers. As for the PE investments, As you know, at the time of the IOE, for JPY 80,000,000,000, it was JPY 260,000,000,000. So it increased dramatically. So how much the denominator is, it's difficult to say.

Operator

And when we say it, The buyers might say that they are not going to buy at high price. So it's difficult for us to say about PE Investment. But renewable energy and others and the real estate, especially The Renewable Overseas Development NOI is about 8% or 9%. Exit NOI is 3% to 4%. So those are the numbers for our exit strategy.

Operator

For real estate, as I said, 5 is the entrance and 3 is the exit. So if you consider like that, I think that you'll be able to have a good grasp of those numbers. Yes. So renewable energy, so it's like doubling And if it is likely to be sold and in your segment disclosure, Certain the assets with a certain size are included. So that means that you already have a certain level of unrealized the gain.

Operator

Yes, that's correct. The issue is that when we disclose it, there will be an insider issue. So would I like not to understand that? I see. Thank you.

Operator

It's now clear. Thank you. Thank you. We're nearing

Speaker 1

the close. So this is going to be the last two questions. Yes, this is Okada from UBS Securities. I was looking at Page 10. And full year profit plan, JPY 105,000,000,000 for overseas, how likely is this going to be achieved?

Speaker 1

So overseas, Environment, Energy and Asia and Australia, hedge costs We'll continue to stay high in the second half as well. That's my expectation. So capital gain and also asset size increase in the second half, you think that will enable the achievement of the targets? And also for Asia and Australia, compared to the last fiscal year, The profit level is maybe lower in the 1st and second quarters of this year. And do you think this is going to recover during the second half of this fiscal year?

Speaker 1

So I want to understand the likelihood of you achieving the profit plan for overseas business. Well, for aircraft and ships, we believe that it is possible to achieve because we are selling off aircrafts. And also, ORIX owned aircrafts offered to investors who want to use them as tax So we believe that for aircraft on ships, it's possible to achieve the target. And for vessels, we will be selling about 4 vessels. That's in the plan and that's achievable according to the current market situation.

Speaker 1

Environmental Energy, especially Elrond's asset Sales is in the center, in the focus. For Era 1, the proof contribution is has a 3 month delay. So

Operator

can we

Speaker 1

do this before the end of December? That's the question. If not, then 27 may not be able to be achieved and will be pushed out to the next fiscal year. So this is still in the flux. For Asia and Australia, again, We will have 203 to be sold.

Speaker 1

That's in the plan, and the internal process is ongoing. 1 of them return to sell is an asset in China, and we need approval from the authority. So as long as the approval is granted, there is no 3 months delay for this. So we can sell before the end of March next year. For Asia and Australia, last year, we sold 1 lease company.

Speaker 1

And because of the absence of that, the number looks smaller this time around. But with regard to these business plans, we are seeing a steady recovery. But in terms of gain on sales, We will have maybe 1 or 2 of these companies sales, but we do not expect a big capital gain coming from this. So that is why we are presenting this number. I hope that answers your question.

Operator

Next, Niwa Zan from Citigroup Global Markets. Thank you. My name is Niwa. Hope you can hear me. Yes.

Operator

Thank you. The follow-up question About the aircraft and ships, I'd like to ask another question. There are 3 questions. The next year, what would be the segment profit expected? And the second is the collection of the insurance, what would be the time frame, if you can comment on that?

Operator

And the 3rd, inorganic possibilities. I think that The aircraft industry is very active. As for the funding, it's not very easy and it's not going to get easier. So inorganic possibilities, I think it's quite well, it's a good time for concerning that. So if you can comment on that.

Operator

As for the next fiscal year target, we are checking. As for the insurance, up along US300 million U. S. Dollars, we are asking for that payment. And AerCap and others, Russian Insurance Company partial collection or recovery has been completed.

Operator

So domestic aircrafts in Russia, if they go outside of the country, they will be foreclosed. So they don't want to have that. And so the payment was done for part of it. So for Avolon, 300,000,000 out of the 300,000,000 yen, the 70 1,000,000 yen is going to be paid by the Russian company. So we are currently negotiating.

Operator

But Roy's insurance company negotiation has become a litigation. So about that, I will take probably 1 or 2 years. So if the collection of 70,000,000 yen from Russia is possible, then it's not going to take that much time. As for the next year, our target for aircraft and ships, although we have not yet announced this, about JPY 350,000,000 to JPY 40,000,000,000. So most of the JPY 40,000,000,000 or 2 thirds is the aircraft and onethree is ships.

Operator

As for ships, most of them are already sold. So the Ships, the unless there is a lowering of the marine transport, We won't be able to make an order, so this is not very clear. But as for the aircraft, it's very active. But as for the acquisition, acquiring at low Price is very difficult, but the aircraft, we have inflation hedging. So when the interest rate goes up, the leasing goes up.

Operator

So no negative spread is likely to emerge. So Post pandemic, the lease factor is 0.5 to 0.6. Right now, it's 0.8 to 0.9. So this is because of the rising interest rate. So leasing of the aircraft, based upon the inflation and interest rate, it changes.

Operator

So aircraft, how can I say this? There is not much negative impacts from the cost. I hope it answers your question. Yes. Thank you.

Operator

Thank you very much. Thank

Speaker 1

you. It's time to close the Q and A session. Lastly, we have closing remarks from Inoue san. Yes, the numbers will be tail heavy, second half heavy, which may be causing some concerns among you. But From October to December in the Q3, to what extent?

Speaker 1

Do we see progress in terms of capital gain? And That will probably enable us to give you more detailed or more accurate numbers So when we do the earnings announcement in December, interest rate hike in the U. S. Is impacting our allowance for doubtful debt. It is increasing.

Speaker 1

We want to make some improvements, Although it's difficult to do so, but other than that, things are going very smoothly. So we And that concludes the Q2 earnings announcement. Thank you very much for staying with us until the end of the meeting. Thank you and goodbye.

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Earnings Conference Call
ORIX Q2 2024
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