ORIX Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 2 speakers on the call.

Operator

It's time to start the meeting. Good evening, ladies and gentlemen. Thank you for joining this teleconference by Oryx Corporation for consolidated financial results for the fiscal year ended March 31, 2023. From our sustainability, my name is Nakane. I'm the master of the family today.

Operator

Thank you for this opportunity. We have 2 attendees today. Makoto Inoue, Member of the Board of Directors, President of Executive Officer and CEO And Hitomaru Yano, Executive Officer, responsible for Accounting and IR. Before we begin, we have a request for the participants. Mr.

Operator

Mr. Yano will take the first half and second half will be taken by Mr. Inoue followed by Q and A. We expect the duration of the meeting to be approximately 1 hour. Mr.

Operator

Ayano?

Speaker 1

Good evening. This is Ito Mariano, Executive Officer, responsible for Accounting and Treasury and Investor Relations at ORIX. You so much for joining us today despite your busy schedule. Let me start by getting an overview of FY 'twenty three March end result. Please turn to Page 2.

Speaker 1

Net income fell 12% year over year to 173,100,000,000 yen for FY 'twenty three March, it was disappointing to see earnings decline, but we substantially exceeded our forecast Of 250,000,000,000 yen announced on November 7, ROE was at 8.3%. The right hand chart shows quarterly trend in net income. 4th quarter net income was 1,700,000,000 yen investment gains and asset management fees from ORIX Europe fell as compared to the 3rd quarter. As we booked some impairment in the Q4, growth was less evident than in the Q1 and the second quarter, The progress in reopening has helped a solid trend for the quarter. Please turn to the next page.

Speaker 1

This is a breakdown of segment profits. Segment profit totaled JPY381.3 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 profits. Base profits fell by 13% year over year to 297,800,000,000 yen while performance among segments varied.

Speaker 1

But overall, we were able to secure stable base profits despite an opaque operating climate. I will go into further details later. The light blue investment gains were down 55% year over year to JPY 83,500,000,000 owing to the absence of last year's substantial gain on the sales of Yayoi. ORIX typically books investment gains of around 100,000,000,000 yen 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 of a normal year through the partial sales of our OMA stake and the business centers.

Speaker 1

Please turn to Page 45. 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.

Speaker 1

First is the Corporate Financial Services and Maintenance Leasing segment. Segment profits reached JPY 73,200,000,000. The sales of Yayoi booked last fiscal year, profits were up. The auto business unit reported profits that surpassed FY 'twenty three to 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.

Speaker 1

For segment assets, While the assets in the auto units are owing to a shortage of new legal supply, assets in 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 JPY 19,500,000,000 Year over year to JPY 51,500,000,000 the development and rental unit posted profit growth fueled by sales of logistics facilities, Primarily to overseas investors and with at the Spacy Operations business, Otezoning, both occupancy and average daily rates recovered sharply, thanks to recovery in inbound tourism and national travel support campaigns. The DAIKYO unit also posted higher profits year over year. Segment assets were up RMB24.9 billion despite property sales Offsetting some new investments, next is PE Investment and Concession.

Speaker 1

Segment profit improved by JPY 14,300,000,000 Year over year to 2,600,000,000 yen. The Private Equity business in Japan was in the red last fiscal year owing to Kobayashi Kako related losses, Certain end to measures related to the business and strong performance incurred, the investees helped the business return to the black despite booking due diligence costs Related to the recent DHC acquisition in the 4th 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 1,000,000 for the first time in 3 years Since February 2020, on a single month basis in March 2023, domestic routes also reached 2,350,000 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.

Speaker 1

Earnings from the concession units are in group results with a 3 month lag, so we expect considerable growth in profit for this business in FY 'twenty four March. Assets were up JPY251.9 billion year over year as a result of the acquisition of DHT and HexoWorks that offset the sale of NetJapan.

Operator

In Environment and Energy Business, segment profits were up 32,600,000,000 yen to 35,700,000,000 yen. In addition to the partial sale of a stake in geothermal energy company, OMAD, higher prices in the electricity spot market At Erewhon, which became a fully consolidated subsidiary for Q4 and other firms led to growth in revenue from power sales. Domestic Energy, The solar power business also saw higher revenues. Segment assets grew substantially Owing to changes in ForEx and additional stake taken in LR1, up by JPY 70,000,000,000 versus end of FY 'twenty 2. In Insurance segment, profits were down JPY 15,300,000,000 to JPY 38,000,000,000.

Operator

Rising infection rates for COVID earlier in the fiscal year resulted in an increase 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 isolating at home, and payout related expenses have since peaked and declined as a result. Japanese government's classification of COVID as a Category 5 infectious disease from May 5 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-nineteen 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 US dollar and Japanese In Yuezian, our liabilities mark to market value also declined and therefore there's no problem.

Operator

In Banking and Credit segment, profits were down 3,900,000,000 yen to 37 point experience. In Banking, profits were down owing to the absence of a year earlier onetime profit. Earnings from investment real estate loans remained high and healthy. Credit business posted a decline in profits owing to aggressive advertising as a support to the launch of the new Oryx Money product. However, this is in line with projections and loan balances are still increasing in this business and guarantee business is healthy.

Operator

In Aircraft and Ships, segment profits were up JPY 20,900,000,000 year on year to JPY 18,600,000,000 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 Asian passenger market. Service revenues from arranging various securitization vehicles, among string investor demand was also positive. Aogon posted Q1 'twenty three earnings announced at the end of April, up 36% quarter by quarter. While the firm posted losses at the segment profit level owing to funding cost charged investment to Avalon.

Operator

Earnings are improving on a market recovery. Ship's unit profits were up sharply, aided by sales of owned vessels during the periods of strong marine shipping prices and higher contributions from financial revenues from ship financing deals. Segment assets were flat year on year, excluding changes in ForEx as sales of vessels was offset by an increase in aircraft acquisitions, primarily narrow body aircrafts, and we continue to grow their portfolio, and we will take a close watch on market conditions. Profits of Sharpen at ORIX U. S.

Operator

A. Down 26,600,000,000 yen to 49,000,000,000 yen compared to FY 'twenty two When the segment booked record profits owing to changes in the macroeconomic climate, there were fewer fee exits and origination fees of Lumen, a mortgage earn data was also down. We maintain disciplined risk management at ORIX USA and have taken conservative stance on new investments. Segment assets appear to have increased on yen basis, owing to primarily to changes in ForEx, but we are controlling the size of the asset base and dollar denominated assets down slightly. Next is ORIX Cube.

Operator

Segment profits were down by JPY 8,700,000,000 to JPY 40,700,000,000. Starting in the U. S, interest rates have risen globally, fueling fears of a recession, which led to a retreat in both equity and fixed income market. This caused AUM to shrink and profits to decline. Net inflows turned positive, however, in the 4th quarter and AUM has increased.

Operator

Last is Asia and Australia. Segment profits were down 16,800,000,000 yen year on year to JPY 34,300,000,000 profits were lower owing to the absence of investment gains booked last fiscal year and impairments of an affiliate booked in the 4th 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.

Operator

Please turn to Page 6. I briefly went over results in different segments, and this graph explains FY 'twenty two results versus the fiscal year. Our CEO, Mr. Inouye, will explain in detail that there were strong and weak performance among various segments During FY 'twenty three, some segments like Insurance, ORIX USA and ORIX U. Posted lower profits owing to COVID and rapid market changes.

Operator

Meanwhile, some businesses benefited from COVID related reopening and did well. Focus areas for risks such as Overseas Renewable Energy and MCPE also grew. Auto in the Maintenance Leasing segment and Facility Operations were also strong performers. We expect the Insurance segment to rebound in FY 'twenty four and segments that grew and recovered during this fiscal year should achieve further growth. For these reasons, we hope to secure profit growth in FY 'twenty four and 'twenty five.

Operator

That's all from me. And now I would like to hand over to Mr. Inouye, our CEO.

Speaker 1

I'm Inouye from ORIX. I would like to start from Page 7 of the handout. So FY 'twenty three March net income was down 12.5% year over year to JPY273,100,000,000. EPS came in at JPY 232.35 billion. So for the fiscal year ending March 2023, we will pay a dividend of JPY85.6 per share, same as the prior year.

Speaker 1

So end of the year dividend, the second half dividend, in other words, will therefore be the same as the first half dividend at JPY 42.8 Taking into the account JPY 50,000,000,000 worth of share buyback, our total shareholders' return ratio will be 55.2%. Unfortunately, FY 'twenty three 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 Our FY 'twenty five March net income outlook of JPY 440,000,000,000. However, we will need to revise this figure downward in light of current market conditions.

Speaker 1

We now forecast FY 'twenty four March net income of 330,000,000,000 yen And revise downward our FY 'twenty five March net income target to 400,000,000,000 yen. Now, as a result of this downward revision, ROE will be 2% in 24 March end And the 10.4% for 25 March end. So for 24 March end, the shareholders return, We would maintain JPY 50,000,000,000 worth of shares buyback and the DTS of JPY 55.6 Per share or payout ratio of 33%, whichever higher. So I would like to further explain Referring to the 3 pages of 6, 7 and 8. And firstly, let me briefly discuss 23 March end results.

Speaker 1

So firstly, let me discuss the primary reason for FY 'twenty three March net income of 173,100,000,000 yen 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. A change in eligibility requirements in September 2022 led to a decline in COVID related payout expenses in the second half, But this factor brought 20,000,000,000 yen worth of increase in cost for the whole year. And secondly, profits at ORIX USA fell by $200,000,000 For the full fiscal year against our initial target due to an increase in credit cards, a slowdown in agency related transactions for Affordable housing and for other reasons, as I said, it was Below by US200 $1,000,000 In addition, management fees fell by €160,000,000 owing to lower AUM at Robeco Group, which also had a direct impact. Despite the profit contributions from the domestic real estate, auto, ships and environment and energy segment And a boost from the weaker yen, overall profits were down unfortunately year over year. On a brighter note, We foresee the Kansai Airport Concessions Business and Real Estate Operations, boosting earnings in FY 'twenty four March.

Speaker 1

Thanks to a strong recovery in inbound tourism following COVID reopening. 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 profits.

Speaker 1

Meanwhile, the outlook for financial markets, including U. S. Real estate It's becoming increasingly uncertain following turmoil in the financial system caused by KJ of Silicon Valley Bank and the Credit Suisse. Whether the authority will move to prioritize inflation control or stabilization of financial System uncertainty we may see and see to be seen. Many regional banks have unrealized losses on their commercial real estate portfolios, which could lead to credit downgrades, a rapid increase in interest rates and a collapse in the real estate market.

Speaker 1

So a vicious cycle may start, we think. So experience tells us that financial authorities will most likely search 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 'twenty four March and beyond, we will continue to execute our business with a focus on conservatism and defensiveness until conditions settle down. In FY 'twenty two March, ORIX USA reported record high segment profit of US15 $1,000,000 but this figure fell to US422 $1,000,000 in FY 'twenty three March.

Speaker 1

Inflation continues to rise despite higher Fed rate, which unfortunately drew attention to the negative effects of tighter men's 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 Our ultimate vision for this business is to build It's into a specialist asset like manager utilizing third party assets, and thus it may take several years before it can achieve major profit. For the near term, although it depends on the deal, we don't plan to grow the U. S.

Speaker 1

Business through M and 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 'twenty four March net income to RMB 330,000,000,000 and FY 'twenty five March net income forecast to RMB 400,000,000,000. It goes without saying that our internal targets, I think, would remain at JPY 440,000,000,000 And we would endeavor to exceed these goals. Please see a breakdown of FY 'twenty three March, FY 'twenty four March and FY 'twenty five March pretax profits by category. Now for FY 'twenty three March, overseas profits accounted For 43.2 percent of the total, but we expect this to go lower to 40.80% for FY 'twenty four March owing to inflation and interest rate hikes in the U.

Speaker 1

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 Under 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.

Operator

Please turn to Page 10. In FY March, ORIX continued our program of capital recycling. We realized around the 60,000,000,000 yen in gains on sales of slightly more than 200,000,000,000 yen in assets, including part of the stake in OMA Technologies, while acquiring 470,000,000,000 yen in new assets in the Private Equity, the HCB Real Estate Development and other businesses. While new asset purchases have also been dominant in FY 'twenty three March, we will continue to manage our program a balanced fashion in FY 'twenty four and onwards. IROI and RE will be used to assess the new investments and exits.

Operator

In addition, the impact on the balance sheet, PL and asset efficiency and risk adjusted to our capital ratio, also important metric for credit rating standpoint. We do calculate segment level, WACC and ROIC, but 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 Lava's 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.

Operator

Our investment pipeline for domestic and overseas projects now totals at about JPY 1,500,000,000. Our domestic pipeline includes the development of logistic centers and condominiums as well as private equity deals such as carve outs. Overall, 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 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.

Operator

For domestic private equity, our basic plan is to pursue projects, which can guarantee an IRR of 15% to 20% over 5 to 7 year holding period. For investment 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 Nice IR project bid spearheaded by MGM and ORIX. We now have 90 days to sign an agreement with Osaka Prefecture and Citi.

Operator

And while there are uncertainties and issues remaining such as detailed design of authorities as well as sole remediation Under its course action measures, we are proceeding based on the assumption that these issues can be resolved. As we move towards an 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 takeover 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.

Operator

While we cannot disclose certain details due to the fact that this is a TOP procedure, Corex plans to supply 100,000,000,000 yen to mesa means syndicated loans funded by Banking Group and also to invest 100,000,000,000 yen in equity as limited partner. We decided to participate in the GIP consortium based on positive evaluation of Toshiba's corporate values and the executability of the management improvement plan. Overall, this is positioned strictly as financial investment that will depend on GIPs, Management ability, we will strive towards the promotion of a new management structure and achieving improvement in corporate value through communication with JIT and will consider exit strategy following achievement of these. Please turn to Page 13 to 14. Regarding the progress in SG and A 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 waste volumes, we have Seeing improvements in both our ESG ratings and outstanding in the annual Nikkei SDG survey.

Operator

In December 2022, ORIX was newly added to the constituent to the SUTSI 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 are also creating an integrated report that features more detailed sustainability 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 non financial disclosures.

Operator

In addition, in order to promote achievement of our key ESG related goals in FY 'twenty four March, The Non Indirecting Committee is considering measures, which will include ESG Linked's 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 their shares are trading below PB of 1.0x and to promote discussion with shareholders. From past results, it's clear that ROE and fast book are clearly correlated From this perspective, improving our ROE will more than anything else lead to higher share price. Thus, as outlined before, We will make maximum efforts to lift ROE to 11% or above.

Operator

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

Speaker 1

Thank you. We are now ready for the Q and A session. So first of all, Mr. Watanabe from Daiwa Securities. I am Watanabe from Daiwa Securities.

Speaker 1

So I'm referring to Page 7, and that is to do with your shareholders' return. So 33% Plus, I think it's the payout ratio that you're indicating. May I take it that this is your target? And also at the Same time, with regard to the capital policy, upon this guidance which was provided from the PSE, is there any kind of changes? Well, so you have quickly identified, although we had kind of roughly indicated this number.

Speaker 1

As a result of the benefits that would be canceled that has been provided to the shareholders, we thought That some of the shareholders may decide the retail shareholders may decide to apart themselves from our shares. Although the amount that we were spending on this shareholders benefit will be allocated, the cost will be allocated to The payout of the dividend and if we can achieve 400,000,000,000 yen of a net income, I think it would require us to increase the dividend In a semiconductor manner, so we hope that we'll be able to pay out More than what we have indicated as a target. So we hope that it will be above 33%. I thought you can proceed it to be 33

Operator

SMBC Nikko Securities, Muraki san. Please ask your question. Thank you. 330,000,000,000 yen this year and 400,000,000,000 yen next year. This profit forecast give us some sense of ease.

Operator

But inflation and banking prices, How does it impact the banking business for ORIX, both in Japan and United States? On Page 8, You're saying that the PE will be mostly focused in the domestic market and some asset management acquisition may happen overseas. I think that is a policy that you're indicating. And on Page 10, there are many key words, cost increase, Procurement environment worsening and also credit is tightening and off balance. There are so many different keywords here.

Operator

And my question really is, In the existing business,

Speaker 1

what

Operator

are the concerns about exposures for specific businesses? What kind of scenarios do you need to get ready for? And carve out as well as investment into NPL or equity or credit could be maybe provided for risk opportunities. And how do you see those opportunities? As far as Japan is concerned, we now have a new governor of our BOJ, but the policy will remain the same.

Operator

That is my expectations. So, 0 interest rate for Japan may increase slightly, but we believe that this is going to be manageable. So as far as Japan is concerned, we will not be changing a policy very much. In other words, we'll be investing into new projects actively and also overseas investors are still planning to invest newly in Japan as well. So, We want to actively promote to capital recycling.

Operator

So I have not a big concern for the Japanese market. Oil of USA would be the biggest concern. Last year, From October November, the situation became more tight in terms of a new investment. In other words, we have been very careful in selecting new projects. So more than 700,000,000 yen in FY 'twenty two.

Operator

And in the end, we could secure profit of over 400,000,000 yen. So it was fine. But if we want to increase it to $700,000,000 or $800,000,000 then it will be too risky, especially for USA. Private credit. In other words, lending is the mainstay.

Operator

So as interest rate goes up, There's a high risk in implementing loans. So we have basically slowed down the whole process. So for FY 'twenty four, contribution to profit is only about $400,000,000 maximum. And of course, our doubtful debt will have to be increased or has to be considered to be increased. And bank loans, If this is stopped or slowed down, well, non bank FICO can continue to lend money, but the target companies will face Financial challenges, in which case we cannot really lend to those targets.

Operator

So we have to continue to be cautious. The contribution of profit from the USA It's going to be quite small. That's how we plan the numbers. But if the banks stop lending and the regional banks stop lending And the banks start to sell assets and asset sales has increased. What would happen is, as we saw in the case of aircraft and ships, banks We started selling the portfolio in aircrafts and ships from about 2 years ago, and we are purchasing at a discount basis.

Operator

And for aircraft and ships, we have increased our exposure. For example, average coupon is LIBOR plus 350, On the value of the asset is 50%, for example. So these Purchase of loans are very safe and we have many opportunities such as that. And we expect ORIX USA to go through a similar process. Heavy asset financing and against those markets providing offers to us to sell.

Operator

So depending on by consent, we may consider to purchase. And loan to value, of course, has to be kept low. And pricing has to be aligned with what we want. And we now have an opportunity to be selective. So we expect such opportunities.

Operator

Your store, the funding cost will have to be also taken into account. And finally, how much profit or revenue can we generate from each deal? Well, it's not really liable, but so far recently, but the 600 or 700 sofa deals will definitely appear. So we believe that this is another type of opportunity that would be available to us. In terms of scenarios, For this year, centered around Japan, we will be building good assets and overall promote sales entering Japan.

Operator

As far as the USA is concerned, asset management business is currently the focus, but the U. S. Market actually some asset managers are struggling already, which means that it will push the prices down. And at lower prices, we should be able to purchase So private credit deals will appear as I have mentioned earlier. So based on this kind of assumption For the second half of this fiscal year as well as next fiscal year, we will continue to deploy our business.

Operator

I hope that answers your question. Yes, that's very clear. Thank you very much for your answer. Thank you.

Speaker 1

Thank you for the question. So from Mitsubishi UFJ Morgan Stanley, Tsujino san, please. Thank you very much for the opportunity. And the first question that I'd like to ask With regard to the business in United States, I want you to answer in a more specific terms. I know that you are remaining pretty cautious on the commercial properties in real estate asset, but The exposure that you may have directly, so how much of what?

Speaker 1

Would you mind sharing in more specific terms as to what you own currently? And one other thing that I would like to ask you, so this time by segment, if you were to look into the details, It looks as if environment and energy may not be particularly good For a seasonal reason, winter in other words and also Robeco and in Europe that is, So interest rate cost is rising. So at the time of acquisition, So the cost of acquisition may have been affected because of the interest rate hike. That was my assumption or imagination. And so it is in the United States as well, I imagine.

Speaker 1

So there are quite a number of negative factors that I need to dig down into. So therefore, Environment and Energy and also European Business. So, if you are to dedicate more efforts in the next year, what do you think about the business to develop this year's telephonic. So you have asked me a lot of questions. So if you could refer to Page 35, ORIX USA Credit Real Estate and PE and segment profit assets breakdown.

Speaker 1

And So the real estate asset is mostly affordable housing. And the Bania NXT, We do have commercial real estate, but the loan to value is pretty low. So mostly, we're participating in the syndication. So therefore, In terms of the value, RMB 330,000,000 is safe in the real estate, but out of which, So, more than US2 $1,000,000,000 is housing related. So we are not impacted very much.

Speaker 1

As to the rest of 1,000,000,000 yen, NXT's syndication, it is we are participating via NXT's syndication. And so as to the appropriation of the loan losses, the reserves, We are not appropriating any reserves yet. So but we are remaining to be cautious. Now with regard to credit, They are all private credit. So, therefore, they are like 2 to 3 deals that may perhaps aggravate And that may, of course, raise the credit cost, and this is why we are adding the reserves amount.

Speaker 1

But as to the private equity, it is a small amount in any case. But for these, we would continue to up and run the business And operation has not deteriorated yet. And but as to the company, The cost of borrowing, of course, is rising. So we need to, of course, manage this well. And as to Robeco, It goes without saying that as of now AUM in fact is on the decline.

Speaker 1

But However, we are making positive profit from TransTrent and also Boston Partners, Robeco and Harbour Capital. So we have these major subsidiaries. Transplant is focused on commodities. So they have been recording they have been posting record high and we should be able to do the same this year as well. Whereas Boston Partners, Up until now, they were very much value focused.

Speaker 1

And the value focus was not particularly good in the past, But the value investment, in fact, is gaining profit. So therefore, I think we can perform better. And Gravis Capital is struggling, but we are in fact going to be changing the active ETF. The AUM, in fact, is on the rising trend, expanding trend. So from the latter half of this year, we Hoping that we'll be able to generate positive results.

Speaker 1

And also from the mutual fund, Robeco, that is, we are now trying to convert to active fund And the private credit fund is also to be formulated or formed. And so therefore, there should not be very much of an undershoot. So, all in all, I think it is on the upward trend. And what was the other question? And that is to do with the energy and environment.

Speaker 1

So if I may perhaps add to this is Yanno. And with regard to Environment and Energy, just as you have pointed out, There is something that I need to make a note about. There is some seasonal factor, especially in India, that may affect our businesses in a significant manner. But seeing the domestic market, the solar power business, there was some snow that has affected our business in a negative way. And we had to carry out some construction work, but we decided not to overstretch ourselves.

Speaker 1

And this is why we have decided to impair Some amount, although it is not significant, but rather than repairing it. So therefore, in a very period, it looks as if our environment and energy, in fact, has aggravated in terms of their performances, but that is not the case. So the Q1, we do expect the recovery to take place in the segment. And as the Lavan, as a matter of fact, Electricity, of course, price is rising. So therefore, the earnings, in fact, is on the trend of improvement.

Speaker 1

Yes, for sure. This is Yano again. And Erwan, I think to Shinu san, I think you're asking about the quarterly trend, The changes that is for the negative, but Elauan in fact had was boosted and then it may have come down, But Elavon overall is enjoying a positive trend. And what was the other question? I think that answered to all the questions.

Speaker 1

Yes, that is all. Thank you. Thank you very much for answering to my question.

Operator

Thank you. Yes, this is Okada from UBS Securities. I'm looking at Page 11. 25 March consolidated results forecast. Profit plan was actually revised downward, But the domestic non financial and overseas others, actually the profit plan is Chris.

Operator

So if possible, can you please talk about the forecast of the plan and background of why you have increased the profit, which segment is strong, so on and so forth? Thank you. If I try to find March numbers, well, you will see one number actually. But simply speaking, I'd say that overseas, energy and aircraft and ships are expected to grow. And ex 7 ships, this is mostly aircraft, including Avalon.

Operator

And going forward, we know that there's going to be some movements around Narrow body and also SAS new fuel, because of this impact, New model of aircrafts will be introduced. So there's going to be cycling. And also, JOKO for Japanese investors are receiving a lot of inquiries. Therefore, we believe that we can expect strong growth. That's our plan.

Operator

For OCU and OCE, In FY 'twenty four, the assumption is hardly any growth, but this is the U. S. So once the recovery happens, it would happen very quickly. So around FY 'twenty five, we expect new investments happening, especially in the United States. And as for 25 March, private equity assets that we own We'll be sold in 2024 and 2025 gradually, and that is also the background for this number.

Operator

Just one follow-up question. Overseas Energy segment, Forecast was revised upwards. What is the background of this? Is it energy prices? Or is it because of the asset building on your side.

Operator

As far as Elawon is concerned, in the beginning of fiscal year, We basically decided to own 100%. And by doing so, we removed Partners, in other words, we now have a higher degree of freedom. And the solar power and wind farm developed by Elawang Can be turned into funds and we can incorporate 3rd party money and we can increase this. And there are many projects in place. And also, pension fund ESG investments, Many investors are keen to increase that, which means that we can be more actively promoting investments.

Operator

However, interest rate is going up. Construction cost is also up. So we have to look at this very carefully and find Deals where we can get arbitrage and capital gain and if that is the case, we will be actively doing those deals. As for GreenCo, So hydrogen as well as ammonia. And these will be developed around green coal and this is all brownfields.

Operator

So we believe that they can start contributing to profit starting from FY 'twenty five. That is the assumption behind this number. That's very clear. Thank you.

Speaker 1

Thank you for the question. From JPMorgan, we have Sato san asking the question, The next. Thank you very much. I am from JPMorgan Securities. My name is Sato.

Speaker 1

And I'd like to ask a question By referring to Page 47 of the deck, and that is to do with the capital usage. And I think I have been asking the question Sometime before as well. And so 91% was the ratio of the long term, but Employee capital ratio, has it been bringing about any kind of impact or would there be any changes in the future? And so the risk taking, I know that you're remaining to be cautious, but the risk capital may increase. But on the other hand, The shareholders' equity, on the other hand, and I'm sure you're referring to the capital From the accounting perspective, if the interest rate hikes embedded value, even if it was to be kind of added, I think from an accounting perspective, it could turn to negative.

Speaker 1

And also at the same time, It may bring about some negative repercussion. So therefore, I think you may perhaps Use up some of the retained earnings and therefore that may perhaps affect you and therefore The equity employed capital ratio may go beyond 91%. So would that give any kind of impact in terms of the capital Management, so if it starts to kind of impact the capital management, it means that we may have to slow down some of the new investment Execution of new investment. And to be very frank with you, so as to the funding side, We do not foresee any major risk. That is not in our assumption.

Speaker 1

But sometime in the future, As we have been saying, our equity ratio of 20 2%, 23%, and it may reach to 25%. And the security ratio, what is regarded to be appropriate is what we need to think about. And also bank borrowing, at the moment, we have no issue. But what concerns me is the euro denominated or U. S.

Speaker 1

All the denominated funding, whether it would proceed in the smooth way as it has done so in the past or not. So we have to take that into consideration. And as I have been saying, I think we have to proceed with this capital recycling effort and there's no way that we can continue to build up our asset as we have done so. So it is currently about 11,000,000,000,000 yen and I think it is about the quarter of 14,000,000,000,000 yen or so And PBR would be 1.5 times and which means that we may have to consider 3rd party allotment. So

Operator

even unless we reach

Speaker 1

to that extent within the 12,000,000,000,000 yen of an asset, I think we would have to just enhance the profitability and the borrowing ratio the debt ratio should be maintained. So that is our basic policy. Dependent on the project though the deal though, it may perhaps bring about Kind of further aggravation, but I don't think it will be the case. So I hope this answers to the question. So listening to you just now, At the end of the day, I know that you would try to strike the balance by referring to different Numbers, but if you were to think about the capital in light of the risk, What you need to do on the capital side, the risk control, I think, comes first, I suppose.

Speaker 1

And on the other hand, You may perhaps increase the retained earnings, which may perhaps put a pressure on the payouts. In other words, So that may perhaps be the kind of the last resort kind of strategy. That is true. But everything is kind of interrelated. So I will not be able to give you a straightforward answer.

Speaker 1

But I that we would have to refresh the ROE after all because if we can raise that to the level of 11%, we would have to exert our effort to bring it up to 11%. And but by, of course, increasing the retained earnings, the ROE would Be lower, so this is why we have to strike the right balance. And if there was to be any kind of new deals and new projects that is attractive, There may perhaps be a case whereby the shares repurchase may be carried out, but we are still trying to achieve what we had intended to. And so therefore, we this is our idea to the return earnings level. And also, as to the borrowing, they may have The repeat of the global financial crisis, who knows?

Speaker 1

So therefore, I think we need to keep a right balance between Offensive as well as defensive attitude, I suppose, I don't know whether this answers your question. But as of now, I think you have given us the best possible, I think, answer. Thank you.

Operator

Citigroup Securities, Mr. Niyuna, please. Yes, this is Niyuna. Can you hear me? Yes, we can hear you.

Operator

This is not about the earnings factor, more about the long term. 2030 March, JPY 600,000,000,000 level of profit, That is the ultimate target. And I think 25 March is just a milestone. JPY 400,000,000,000 was just mildly milestone. That was my understanding.

Operator

And there are some environmental factors too, but you're struggling maybe To achieve 400,000,000,000 yen which is just a milestone, so 600,000,000,000 yen or higher, Is this still your target over the long term? And I understand that overseas may be a growth factor, but Is it really true? And 25 March, which is supposed to be a midpoint or milestone, I understand what has happened until then, but What about beyond 25 March? Are you going to revise downward or maintain the original target? Or is it too early to say?

Operator

To be honest, I don't think this is the right time to talk about that right now. 2,030 Is 7 years more to go? I'll be dead by then. In other words, The next generation of leaders will have to make the commitment. I don't want to leave my wrong legacy assets.

Operator

So I don't want to say the wrong thing, but right now, we are opportunistic in participating in all the different types of segments, and we are not necessarily successful across the board. But generally speaking, we are maintaining growth. And compared to 10 years ago, we have grown a lot, and we want to maintain this trend going forward. And right now, Environmental Energy and Overseas Market as well as Asset Management are in a focus. We want to grow them.

Operator

But several years down the line, maybe we will focus on a different segment or different area because they will emerge and we want to capture this opportunity in a timely manner. We want to be able to do that. We want to have the capability for that and also funding to be able to do that. So 400,000,000,000 yen is just a milestone for us. And if possible, we want to achieve 600,000,000,000 yen.

Operator

We're not really a trading company, so it's really difficult to say that we can achieve 1,000,000,000 yen easily, but JPY 600,000,000,000 is definitely within our sight. We have not really revised that downward. Very clear. Thank you very much.

Speaker 1

Thank you for the question. It is almost time for us to conclude this session. It looks as if there are no more questions. So we would like to conclude today's conference. And I would like to invite Mr.

Speaker 1

Inoue to provide us with the closing remarks. Because of COVID, and I think it's been 4 times since we have been carrying out this briefing session in this So Wei teleconference, in other words, we would very much like to perhaps hold a session in an 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. So with this, we'd like to conclude today's briefing session. Thank you for your participation.

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Earnings Conference Call
ORIX Q4 2023
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