ORIX Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 2 speakers on the call.

Operator

It is now time to get started. Thank you for joining us for the Q1 consolidated financial results for the 3 month period ended December 30, 2023. This is the Oryx Corporation meeting. And today, we have the attendee, Hiyomaru Yano, Executive Officer responsible for accounting and IR. And if you like, kindly ask you to turn off the communication devices at your mobile phone or Keep it away from your telephone so that we can prevent feedback.

Operator

There's going to be presentation by Mr. Ayano for Baki and and the whole meeting should last approximately 1 hour. Mr. Yano, the floor is yours.

Speaker 1

Thank you for the introduction. I am Yano, Head of the Treasury and Accounting and Investor duration. Thank you very much for joining us today. Well, without further ado, I will give a brief overview of the Q1 FY 'twenty four March end results. Please see Page 2 of the deck that shows you the expected summary just as usual That covers today's main points.

Speaker 1

The first is net income and ROE. Rx posted a 2% year on year increase in net income to JPY 63,000,000,000 and annualized ROE of 7%. The segments that performed well were Corporate Financial Services and Maintenance Leasing, fueled by expansion of our auto related businesses, PE Investment, where industries continue to grow and Insurance, driven by higher investment income that is. As a result, the Q1 base profit hit JPY 82,200,000,000, supporting pre COVID level. The second is acceleration of reopening momentum.

Speaker 1

The rapid increase in inbound tourists visiting Japan has led to growth in earnings at concession, including Kansai International Airport and Facilities Operations, Hojesamins. In the Aircraft Leasing business, earnings continued to recover from the pandemic on the back of strong performance at airlines. 3rd is Capital Recycling. The yen weakened further during the Q1 as a result of rising U. S.

Speaker 1

Dollar and euro interest rates. This environment has allowed ORIX seek high returns on the sales of domestic assets, primarily in rail assets such as logistic centers. In addition, some industries are suffering from labor shortages, which has led to business opportunities for Rx, which can capitalize upon the expertise the company has built in efficiently managing physical assets. The 4th point is shareholders' return. In May 2023, we announced a JPY 50,000,000,000 share buyback program.

Speaker 1

As of the end of July, we have completed JPY 17,800,000,000 in buyback or 36% of the program. Please turn to the next page. As I previously discussed, The Q1 net income came in at JPY 63,000,000,000, up 2% year on year, and this translates to an annualized ROE of 7%. The right hand chart shows quarterly trends in net income and ROE for the last 2 years. The Q1 net profit was the 2nd highest in the 4 years since the start of COVID pandemic.

Speaker 1

Please note that from this fiscal year, we have retroactively adjusted our past and needs to reflect changes accounting standards for the Insurance segment. As a result of FY 2023 March, net income changed from JPY 1273,100,000,000 to JPY 290,300,000,000. The following pages, which focus on segment level information, also reflects some changes to the way we calculate segment profit. Specifically, we reviewed the method to distribute profits for business share between 2 different segments. As a result, although it may be small amounts, Segment profits in the Corporate Financial Services and Maintenance Leasing segment increased by those in the Energy and Environment segment decreased.

Speaker 1

Please note that these changes have also been reflected with the operating for the past fiscal years. Now please turn to the next page. This page shows the breakdown of segment profit. Segment profit rose 6% year on year to 91,500,000,000 yen. Please look at the right hand chart, We show segment profit by quarter.

Speaker 1

The light blue indicates base profits, the dark blue investment gains. Base profits were up 12% year on year to JPY 82,200,000,000. This figure was higher than the Q1 for FY key margin or FY 2019 margin. Profit growth was fueled primarily by progress in reopening and healthy earnings in Insurance. I'll explain the details in the following segment pages.

Speaker 1

Now meanwhile, investment gains were down 27% year over year to JPY 9,300,000,000 owing to a lack of large scale exit during the Q1 when RX only recorded small several smaller exits. Investment gains, as you can see on the right hand chart, tend to fluctuate substantially depending on the quarter. Please note, however, that is shown on the left hand chart. ORIX has consistently realized a certain level of investment gains for the past 5 years, averaging more than JPY 100,000,000,000 per annum. We plan to realize further investment gains during the remainder of the fiscal year and achieve a typical year of investment gains.

Speaker 1

Now please turn to Page 5. This page focuses on reopening related businesses. The left hand side chart shows segment profit trends for the 3 COVID impacted businesses, Aircraft and Shipping, Facility Operations and Concession. For the Q1, both Facility Operations and Concession posted their highest level of quarterly segment profit since the start of the pandemic. Aircraft and ships have sustained its earnings recovery trend, And the 3 businesses in total recorded segment profit of JPY 4,600,000,000, a dramatic improvement from the JPY 300,000,000 in losses a year ago.

Speaker 1

Now airport concession centers on Kansai International Airport saw losses shrink dramatically following a strong rebound in international passenger numbers. Please note that owing to a lag in reporting kansai Airport's earnings in Dorex Group, the first quarter figures reflect results for the January to March 2023 quarter. Hanbang International Airport boasted 1,060,000 international passengers in March, and that figure surpassed 1,350,000 in June, reaching 63% of the June 2019 level. In Facility Operations, a robust increase in inbound tourists has helped Oryx raise ADR while still maintaining high levels of customer services. And RevPAR in June at directly operated sales were 119% of the June 2019 level, By those, the traditional Japanese teams were 114%.

Speaker 1

We helped the business achieve the 1st quarter since the start of the pandemic. Aircraft leasing are expected to recover further as narrow body lease rates already surpassing their pre COVID levels and are continuing to rise. In all of the COVID impacted businesses, we anticipate additional growth as Chinese tourists return to Japan. On the following page, You can see the latest trend in indices that illustrate the recovery in each businesses. So please take a look at these as well.

Speaker 1

Please skip Page 6, I'll move on to Page 7. I'll use the segment specific slides to explain each segment's results. First is Corporate Financial Services and Maintenance Leasing. Segment profit rose 20% year on year to JPY 19,900,000,000. In Corporate Financial Services, fee related businesses performed well, including insurance sales and real estate intermediary services.

Speaker 1

Segment profit rose sharply year over year as we booked the valuation loss of our stake in an industry a year earlier. Profit growth in the auto business as a result of profitability focused sales activities we have been carrying out over the last several years and growth in the rental car business. In addition, prices for used cars remained high. Rental profit was down year over year owing to higher depreciation expenses caused by upfront investments in rental ICT equipment, ahead of expected windows related upgrade demand. The business also booked Costs associated with the operation of new large fully automated warehouse, the 3rd location in Japan.

Speaker 1

Excluding these, results were solid. So please turn to the next page. The page shows the Real Estate segment. Segment profits were down 17 percent year over year to JPY 10,000,000,000. In the Real Estate Investment and Facility Operations Unit, Earnings improved in the Strategic Operations business for those earnings as outlined earlier.

Speaker 1

Meanwhile, profits were down year over year owing to the absence of investment gains booked a year earlier from the sales of large logistics facilities and other properties. Now Daikyo secured a strong year over year increase in profits, bolstered by healthy sales of high size condominium by procuring sites with excellent locations. Please turn to the next page. Next is PE Investment and Concessions. Segment profit rose 151% year over year to JPY 5,700,000,000.

Speaker 1

In the PE Investment business unit, financial performance improved on the completion of Kobayashi Kako related costs as well as Contributions from industries that were purchased on FY 'twenty three March, VST and HexaWorks. Please note that the Q1 results include just 2 months February March 2023 of profits from DHC consolidated into OREX Group earnings. The concession unit posted smaller losses for the 4th consecutive quarter aided by the recovery in international passengers. As I mentioned earlier, the unit is on track to return to profitability on a full year basis for FY 24 March. We turn to the next page.

Speaker 1

The page shows the Environment and Energy segment. Segment profits were down 14% year over year to JPY 3,000,000,000. In the Domestic Energy business, Profits were down on lower income from power sales caused by output caps on solar power generation in some regions. In the Overseas Energy business, profits were down slightly year over year at Erawane owing to poor weather in Spain and higher euro interest rate. Despite this, green coal earnings were up year over year.

Speaker 1

Now demand for renewable energy assets remains strong globally, and we are expanding our capacity with Erwan and the center. Profits are continuing to grow.

Operator

Please turn to the next page. In the Insurance segment, profits were up 68% year on year to

Speaker 1

JPY 19,200,000,000.

Operator

The weaker yen and high interest rate contributed to growth in investment income. In addition, Japan's May 2023 decision to legally reclassify COVID-nineteen led to further declines in COVID-nineteen related payout expenses. As I mentioned before, changes to accounting rules for the Insurance segment has led to an increase in profits, particularly in the Q4. Please turn to the next page. This is the Banking and Credit segment.

Operator

Profits in Banking were up year on year, helped by higher financial revenues from real estate investment loans on the back of higher long term interest rates. In addition to the fees rose on an increase in trust assets and one time loss booked in FY 2023 March. 1st quarter also contributed to higher profits. In the credit unit, We booked CECL reserve reversal in the Q4 FY 2020 to 3 March, which led to a decline in FY 2024 March 1st quarter quarter to quarter, but earnings are mostly flat. Please turn to next page.

Operator

In Aircraft and Ship segment, 33% year on decline was posted in profit to JPY 3,600,000,000. The ship business posted lower profits on the absence of sales gains from a year earlier when ORIX made a timely sales of its owned ship fleet. The anchor fleet profits were up year on year as recovery in passenger demand led to growth in the number of owned aircraft and higher lease income from rising our lease rate. Other than the posted losses on par with previous Q1 owing to the higher dollar funding costs on debt from when the investment was made. As with OAS, our other loan profits on a parent basis continued to grow as fueled by growth in leasing income.

Operator

And assets were higher owing to the increase in higher aircraft holdings in the aircraft business. Changes in ForEx also contributed. Please turn to next page. Oryx USA profit rose 61 percent to JPY 9,700,000,000. Oryx GSA has implemented strict risk management control for both new and existing deals in light of the U.

Operator

S. Business climate. And this has allowed the segment to control losses, including credit losses. On the 3 businesses verticals, Credit Business posted higher profits helped by stable financial revenues and gains on the sale of small deals. In the Real Estate business, Lument, first quarter origination volumes were up quarter on quarter and surpassed the year earlier level.

Operator

And earnings boost was seen from higher interest rates, leading to higher profits. Meanwhile, DFIM had lower fewer deals this quarter, which led to lower profits year on year. In Private Equity, there were limited capital gains in the Q1, leading to flat profits year on year. Please note that the assets rose owing to changes in ForEx and excluding that, it's down slightly. Page 28 features a breakdown of our business line.

Operator

So please refer to this page as well. Please turn to the next page. Business, Rx Europe. Segment profits were down 55% year on year to JPY 4,200,000,000. AUM growth was sluggish in FY 2023 March owing to the impact of high interest rates and Russia Ukraine conflict.

Operator

However, AUM has recovered slightly with the launch of active ETF products and other measures. Nonetheless, higher euro interest rate resulted in higher funding costs, which led to year on year decline in profit. Please turn to the next page. This is Asia and Australia. Operating profit was down 37% year on year to JPY 8,000,000,000.

Operator

On the absence of gain on the sale of a Southeast Asian affiliate a year earlier, Assets rose by JPY 120,300,000,000, of which JPY 82,000,000,000 was due to changes in ForEx. So excluding ForEx impact, the net asset has increased. Please turn to the next page. Now I would like to give an overview of 1st quarter results and progress using the categories we disclosed at the Q4 earnings announcement. For Domestic segments, both Financial and Non Financial categories posted higher earnings year on year.

Operator

The financial category, in particular, shows stable growth, showing stable good start. Overseas segments. Results were below year earlier levels due to higher funding costs caused by higher euro interest rates and also ongoing uncertainty in the U. S. Economic outlook.

Operator

And we are taking strict risk management stance in the U. S. And we have maintained healthy asset quality and low nonperforming ratio. Please note that the overseas category, Energy category, some seasonal factors have come into play, which typically leads to lower profits in the Q1. That completes my explanation about the Q1 results.

Operator

And now I would like to talk about the business climate as well as the remainder of this fiscal year. Please turn to the next page, Page 18. I will start with a discussion on the macroeconomic climate and our current status. As for interest rate, as outlined in past quarters, ORIX looks to keep its profit sensitivity to interest rate changes low through asset liability matching. Although a 1% increase in euro interest rates is JPY 1,000,000,000 to JPY 2,000,000,000 to JPY 3,000,000,000 negative impact on annual pretax profits.

Operator

We have worked to increase the fixed rate loans in order to reduce the sensitivity further. Yen weakness and low interest rate in Japan have encouraged overseas investors to increase investment in Japan. This environment should allow ORIX to improve our returns even further through exits in domestic assets, including real estate properties like our logistics facilities. Regarding the inflation, while this does impact a wide variety of our businesses, we have been able to pass along higher costs through maintenance leasing rates. Rental fees like your condominium prices, hotel and in RevPAR and power prices for overseas renewable energies among others.

Operator

Finally, labor shortage is a critical issue for Automobile and Aircraft Maintenance Operations and for management of our solar power generation facilities. Outsourcing of management of these assets is likely to increase, and this should allow ORIX to capitalize on the expertise in capably managing these assets to expand business opportunities. Our asset management portfolio is outlined on Page 30 of the presentation material. Please refer to that as well. Moving on to the last page.

Operator

The key theme for this fiscal year continues to be capital recycling. As explained earlier, we have noticed stronger momentum for investment among overseas investors for domestic real estate and PE assets. Demand is particularly robust in real estate. ORIX consistently generates certain level of high investment gains each fiscal year and plans to continue exits going forward in this fiscal year as well. In domestic KTE Investment, we have improved the value of a number of investees following a period of active management and have multiple companies close to exit.

Operator

And the Environment and Energy segment, LO1, which ORIX acquired in 2021, has been steadily developing new assets and expanding its operating capacity. And the company plans to sell some of these assets during the fiscal year. And like other segments, continue capital recycling. In OMEX U. S.

Operator

A, we maintain a cautious stance in new investments, but most of our existing PE investees have enjoyed growing earnings. So we continue to look for opportunities to exit at the right time. And for the fiscal year. We will continue to see uncertain macroeconomic climate, but we see some positive aspects as well, such as progress in reopening and yen weakness. And we will continue to work towards achieving a full year target of JPY 330,000,000,000 net income we announced in May and also then reached JPY 400,000,000,000 in net income, an ROE of 10.4% for fiscal 2024 March.

Operator

While caution is still necessary, We plan to continue to grow proactively while looking for more investment opportunities. Thank you for your kind attention. That's all from me.

Speaker 1

Thanks for your attention and interest. We're now ready for the Q and A session. So we have from Daiwa Securities, Watanabe san, asking the question to begin with. So I am Watanabe from Daiwa Securities. I'm referring to Page 41, and that is to do with Capital usage ratio going up to 39%.

Speaker 1

It was, I think, the end result of acquiring VHC. What is your total level? So I know that you have been explaining about capital recycling today, which was pretty positive. But JPY 100,000,000,000 or 5 years investment gain was to be achieved. But based on this capital usage ratio, Do you think that there may be some other relation?

Speaker 1

Thank you very much for asking the question. So as to the capital leases, yes, we were impacted by DHT acquisition, as we have been sharing with you from some time ago. So whether this is correct or not, but we are constantly referring to this level. And Whether it goes up to the level of 90% or not is the yardstick that we would apply. In other words, we would not like to end up having excess amount of capital for the sake of the investors, the shareholders and also remain to be agile in carrying out the M and A if it proves to be right from the timing perspective.

Speaker 1

So we have just gone over that level currently, so which means that we may perhaps consider exiting from some of the investment and with 90% at our with abuse. And so we are making us those thoughts, as we have explained, that real estate, in fact, is the demand remains to be strong. At the time when we put together the plan, if we were to sell a certain property, we had kind of estimated or simulated the amount of investment gains on the sales of the properties. But we are now beginning to feel That is assumption currently, the price may be higher than initial assumption or expectation. So the PE investment here in Japan as well as Domestic Real Estate Investment and also Overseas Renewable Energy Investment, and there could be some other businesses as well.

Speaker 1

So we would continue to, of course, manage all these businesses. And although I said JPY 100,000,000,000 of an average investment gain, it could be generated just like any other usual years. And we may perhaps succeed that as well. So as an issuer or developer, we would like to continue to recycle the capital so that we would like to continuously generate profit on a recurring basis. And this is what we want to display and prove to the investment community.

Speaker 1

I hope this answers your question. Thank you very much. So from that perspective, investment gain this year from JPY 100,000,000,000, do you think that there could be an overshoot from JPY 100,000,000,000 that is expected. Well, as for the investment gains, it's not something that is controllable to hit bottom 100,000,000,000 yen. So therefore, there could be a possibility of overshooting such guideline.

Operator

SMBC Nikko Securities, Muraki san. Please ask Your question. Yes, this is Muraki. I have one question. JPY 330,000,000,000 profit planned for the full year.

Operator

Is this still your best estimate at this point in time? On Page 17, you are showing the progress. Well, if we calculate the progress from this, most of them are below 25%. And investment gain plan progress is just about 10%. And I think you're saying that you can catch up.

Speaker 1

But against the base profit.

Operator

On Page 18, there is a downward arrow. How much of a concern is this? So financing cost, interest rate and also inflation impact. And although it doesn't really say, there is a limit to the output of solar power generation. And against the base plan, is this going to be a material impact?

Operator

Can you please elaborate? Thank you for your question. I clearly understand your questions coming from. Between our base profit, looking at the past, towards the second half, base profit tends to increase. And I have mentioned the reopening situation and the concession clearly is showing recovery.

Operator

The base profit may not shoot up, but Every quarter, we expect gradual growth in base profit. That is my current scenario. And then you can add investment gains on top of that. In the Q1, the progress rate, as you mentioned, is quite low, but there is no need to see this in a pessimistic light. So things will be built 1 by 1, step by step in order to achieve full year objective.

Operator

That's the scenario. With regard to macroeconomy, euro interest rate. Well, most of the other interest rates are mostly neutral, so there is not much concern. And euro was the biggest concern, but JPY 2,000,000,000 to JPY 3,000,000,000 was mentioned earlier. Now in this fiscal year, Compared to the previous fiscal year, we have started to increase hedge volume slowly.

Operator

And as of today, the sensitivity is much lower than what's indicated on this slide. So going forward, the annual sensitivity is below JPY 1,000,000,000 level, which means that your interest rate increase should not have a material negative impact on us. Well, we don't believe that we should hedge against everything, but we believe that the current level is probably appropriate. With regard to inflation, I believe that was the next part of the question. Material cost increase and labor shortage can result from inflation.

Operator

So material cost, of course, and construction cost has gone up. But the real estate price increase and further lowering of expected yield and increasing price is much larger than the increase in the cost. So I believe that inflation is actually positive for us. These are some of the smaller impacts, But in hotels and inns, occupancy cannot really be increased very much because it's harder to find people to work there. But still, within the limited number of headcount, we can increase the services and we can increase ADR.

Operator

And in the end, we are having a positive situation. So we are coming back to the pre COVID level. In other words, we're taking advantage of the inflation in order to increase the service prices that we offer. So in that sense, we want to be able to ride this wave and we're actually able to increase the top line and we are also seeing an increase in the bottom line as a result of that. I think that should be it.

Operator

Am I right or was there anything else? Solar power generation. Oh, yes. Tap on output. Yes, that is true, but we do not expect a major impact from that.

Operator

We're actually is selling energy as well and the market is volatile. The cost may go up were down. There may be a competition against other companies, and we may not be able to increase the price that we sell the electricity at. So we have to look at this carefully. But in terms of full of our generation, the profit contribution is very stable.

Operator

I see. So maybe the arrow on Page 18, I think there are more upwards arrows than downward arrows. Yes. That's how I prepared this material. That was the meaning of the slide.

Operator

Thank

Speaker 1

you. Thank you very much for the question. From SBI Securities, we have I am Mosuka from SBI Securities. I hope you can hear my voice okay. Yes.

Operator

Thank you.

Speaker 1

So I'm referring to the data book numbers. What has been explained by Yano san just now, I want your clarification or confirmation. Just as usual, you have the procurement cost and also The asset yield, return on asset and also the foreign currency. And if you were to calculate the spread, so I think it is 5% for the Q1 that has just ended, and it was 6% in the last Q1 in the last year, that is. And so therefore, that is kind of downsizing the spread as a result of the foreign currency impact.

Speaker 1

So in Page 18, the reason why the euro procurement, the funding cost, in fact, is resulting in such numbers? Or because you are treating of those phenomena. So therefore, the spread may not have downsized from here down the road. It may perhaps trend flat. So if you could be so kind enough to explain that.

Speaker 1

Yes. Your, I think, assumption is exactly the same as mine. And to begin with, so talking about the asset side, and that is financial asset only. And on the liability side, other than the financial liability, there are some equity investment as well. That is included.

Speaker 1

But talking about the financial asset, so the asset and liability matters. And this is why, just as I explained earlier, euro rather OCE OCE business and some part of LRN that is the investment that we have been making, the procurement cost, I mean by funding costs, in fact, has been pushed up. But as for euro, So because of the interest rate fluctuation, we think well, we have the position not to be susceptible to the changes of the interest rate. So we're working on the ALM so that we will not be largely impacted by the changes. So I hope this answers your question.

Speaker 1

Yes, thank you. Yes, thank you very much.

Operator

That was very good to understand. Mitsubishi UFJ, Morgan Stanley and Mr. You mentioned about the impact of reopening fixed assets and also real estate. I think this is operation or management only. So Daikyo contribution and also investment gains, I subtracted that from the information that I received.

Operator

And what kind of improvements do you think you will see in each of these items? In terms of concession, JPY 450,000,000 in red And then JPY 8.9 in red and then just under JPY 2,000,000,000 in red in these three quarters. And there was an improvement from January through March, but the improvement was not that impressive.

Speaker 1

So going forward, what do

Operator

you think will happen? April through June, was there any special high cost? Was a special item and maybe the actual improvement was much better than this. If that is the case, please talk about that. And also, if you look at the real estate operations only, there are activities and it was JPY 1,200,000,000 from October to December.

Operator

And then it went to deficit and then JPY 1,400,000,000 in April June. So in the past, if you just looked at the operations,

Speaker 1

it was about JPY 3,000,000,000

Operator

So what do you think you need to do in order to go back to that level? Do you expect that level of recovery before the end of the fiscal year? That's my question. Thank you. In terms of concession, It is a related affiliated company.

Operator

I don't know to what extent I can comment. But January through March for them, every year sees cost for repair, which means that fixed cost tends to be posted in high amount in January through March, and that's basically April through June this year, which means that there is a big recovery. So the April through June and our July through September should see more growth. That's what we expect. And for concession, we have seen a good recovery.

Operator

So we do have high expectations. Having said that, hotels and inns, well, we have a very good feel for this segment. As of today, I would say the situation is actually better than pre COVID. Hotels and inns operations have seasonality. Usually, better in spring and autumn and worse in winter.

Operator

Even before the pandemic, we were actually running deficits in winter season. So if you exclude the seasonality, if you take that out, you can see that we have seen steady recovery quarter by quarter. And again, we have high expectations for this segment as well. Hotel and ins and concessions on their own, how much increase in profit can we see? That might be another question.

Operator

But for these 2, we expect big growth. Mr. Muraki asked a similar question earlier. I think base profit, what will happen to base profit going forward? Well, since we have these expectations in these areas, we believe that certain amount of growth is definitely possible and for aircraft as well.

Operator

So we have Zou and this is also cycling and we can sell aircrafts which will push up the profit. So for these 3 particular segments, we expect further growth in profit. In terms of recovery from the pandemic, In terms of Corporate Financial Services, rental car is showing a very good recovery as well. And that's another piece of contribution that we see. That's all for me.

Operator

Yes. It's almost an end. Occupancy wise, I understand it's a pre COVID level, But maybe because of inflation, profit will not recover to JPY 3,000,000,000 to JPY 4,000,000,000 on a quarterly level yet. Is that true or not? In terms of occupancy, because of labor shortage, occupancy itself is actually quite difficult to raise.

Operator

But in hotels and inns, we have increased unit price. And as a result, what we call RevPAR, as you can see on Page 6 of the handout, compared to 2019, we have seen some increase. So we can expect some positive results here. Thank you.

Speaker 1

I understand. Thank you, Chijino san. Now over to Sasaki san from Nomura Securities. I am Sasaki from Nomura Securities. Can you hear my voice okay?

Speaker 1

Yes, we can hear you well. Thank you for the opportunity. I have two questions. The first, according to I don't think Yohanno san have mentioned this. With regard to the new investment, So after the Q1, the data labs, there might be some, of course, positives and negatives.

Speaker 1

And also, you have mentioned about labor shortages. In the case of hotels, the luxury hotels construction, in fact, is proceeding in Japan and condominium price has been rising too. So in terms of the timing, So with regard to the first the new investment, Has there been any kind of strategy changes after the Q1? Do you have any idea? Thank you very much.

Speaker 1

That's the first question. And the second question For BICO, the Asset Management side of your business, I suppose if you were to exclude the ForEx impact, AUM, I think, is turning to the net I think has decreased. And the outflow of fund, I think, is continuing from last year. And do you know anything about the notification of the cancellation? How do you foresee the development at 8 Asset Management Companies?

Speaker 1

So first of all, let me start with the new investment. This time, well, it was just it was the Q1 and this is why. Now that we would I would I had, of course, paid the attention for the Q1 performance and also The Q2, how we foresee the Q2. So this is why I have not made a lot of mention about the new investment. But the PE investment, we do have some actual kind of outcome.

Speaker 1

We do have the actual case of new investment. And real estate related, so it is capital recycling after all. So we have new development. And as for hotels and inns, so there were initial plans on our part, such as Suginoi in Oita. We had rebuilt hotel, and that was quite sizable even during the period of COVID-nineteen pandemic.

Speaker 1

So we have been working on the development of hotels. And how long, the real estate boom may continue, but the construction cost is rising, so we need to turn cautious. We cannot, of course, continue to enjoy the heyday. That should not be the case. But we have, of course, been developing ourselves, and we'll be able to increase the value that way.

Speaker 1

So it means that we can always develop and hold as opposed to develop and exit. So we would like to continue that way. And going forward, on a much longer perspective, So at the time of the closing of the Q2 results, I suppose we'll be able to share some examples of PE Investment. And as the second part of your question, so BICO and Other Asset Management AUM, please, I think, Please refer to the numbers that appear on the material that we have provided to you. We call it as data book And we call it as supplementary information for the 3 months ended June 1st year 2023 that we disclosed.

Speaker 1

So we have a pension, the bulletin report as well as presentation material and also this supplementary information. And the 2020 3 shows the level of AUM. Unfortunately, in the second quarter, The net new money or the input of money was JPY 2,900,000,000 of a decline. But if you were to refer to the outstanding balance, 23

Operator

March end,

Speaker 1

KRW 296.1 and JPY 305,100,000,000 thereafter. So in 2023, April to June, which means that we had increased the AUM at the end of the period. And the net new money, So it was on decline, as you can see from the chart on Page 21. And we have been covering it somewhat by the appreciation of the prices of the financial products. But we would Try to, of course, do whatever we can to increase the net new money going forward.

Speaker 1

So I hope this answers your question. Robico, So the asset class that you are struggling the most, is it alternative asset or equity or bonds? I'm not sure, to be honest. Robico, they are good at managing traditional financial products. So I think they would like to perhaps increase the alternative asset.

Speaker 1

So in other words, you are struggling with the traditional asset rather than anything new or newer. Robigo and we had Harvard Capital and Boston Partners, Those are the asset managers that we own. And the U. S. Harbor is struggling, so We are converting the way in which the management is done to act for the company going forward.

Speaker 1

Thank you very much. I would like to perhaps ask you further questions at later stage. So over to the next best, Asma.

Operator

JPMorgan, Todoroki, please. Yes. Can you hear me okay? Yes, we can hear you. Thank you.

Operator

I would like to ask you to give me some more explanation about the aircraft and ships. So in line with concession and real estate, our kind of recovery, do you expect? I want to understand that based on the trend. But also, the ships were already included in the different quarters in the past. Avalon can be excluded, but pure aircraft profit is difficult for us to see.

Operator

So for example, on Page 13, this is the segment profit and the quarterly trend. Can you maybe give us more information about this so that we can see the breakdown of the aircraft trend, for example. And excluding Avolon, just over JPY 2,000,000,000 decline in profit is seen. And if you exclude the sales of marine vessels, what is the situation? Can you please explain this in a little bit more detail?

Operator

Thank you. Well, Our ships did not have a big impact. That was our assumption. That is why we put them together with the aircraft. But for Q1 of FY23 March, our 8 ships were sold and we gained a lot from that sale.

Operator

Roughly speaking, in the Q1 last year, JPY 4,000,000,000 profit in ships. And in this fiscal year in this quarter, JPY 2,000,000,000. So that's the scale, that's the sense. And if we exclude that, the remainder is aircraft. And aircraft is growing year on year.

Operator

Lease fees are increasing overall. And also because of JOL, we can sell aircraft as well. So we expect to see growth going forward. For ships, we made a clear decision to sell and our assumption was very clear. So when the situations are bad, we buy.

Operator

And when the situations are good, we always sell. So there could be some ups and downs. But we also have Jokko, which is an methodology for ships. We also have our ship loans as well, Marine Vessel Loans, which provides us with a spread based on the value of the vessel. And we can do this because we can operate the vessels and we can provide loans.

Operator

And if anything happens, we can always repossess the vessels. And that is why we want to keep our steady method with ships at least for the time being. So aircraft is covering steady in a nice way. And for this fiscal year, our profit for ships is lower than the prior year. But still, as you can see that already in the plan, that decline in ships can be more than compensated by the aircraft.

Operator

That's all from me. Thank you. I just want to double check the numbers. Last year shipped 4,000,000,000 in the Q1 and the JPY 2,000,000,000 this fiscal year. This is a very rough number, okay?

Operator

If that's the rough number, if we exclude those numbers, Non Avalon aircraft is only increasing several 100 of 1,000,000 of yen, so it's only a flight increase? Yes, that's correct. And the data book P and L shows, well, this is no longer segment operating profit. You are using a different expression. But the Equity method contribution prior to the contribution, the number is lower than the prior year.

Operator

And on Y o Y, excluding Avalon, there is an increase in the equity method. So aircraft recovery is contributing to the Q1 basically in the equity method. This is Avalon equity method, a profit increase is Avolon. Let me double check. I'm not saying anything wrong, am I?

Operator

Avolon profit, Avalon does its own earnings announcement. And 1 month later, we can capture the profit to our financials. So that is why we see increase in the equity method. But We're also charging interest rate for that investment and the U. S.

Operator

Interest rate is going up. That's negative. So our loan recovery looks week, if you just look at this segment profit, that is the current status. Aircraft on ships, sometimes we have a joint venture with funds to own aircraft and vessels. And sometimes, we have equity method applied to the profits and losses, but that's quite rare.

Operator

So this equity method, profit or loss, is mostly Avolon related. Debt costs, this is profit before the charging of debt costs. That's very clear. Thank you very much.

Speaker 1

Thank you for the question. From Okada san from UBS Securities. Please. I am Okada from UBS Securities. As for myself, I'd like to ask a question about the Page 28.

Speaker 1

I'm referring to your U. S. Businesses. So the 3 businesses of United States' 50. So can you now explain a little more into detail?

Speaker 1

As compared to 3 months ago, each of these segments, what has changed. And if we were to refer to the base profit, the credit has returned. However, real estate, private equity on a year over year basis. Unfortunately, you have experienced a decline. So as compared to 3 months ago, I think your view to U.

Speaker 1

S. Economy may have improved. But based on those backdrop, In other words, the economic environment or conditions, how do you foresee the businesses trending going forward? So as for the U. S.

Speaker 1

Businesses, well, we would, of Of course, hope that to increase the top line for sure. But the credit so far, We have not been increasing the bad loans or bad debt. And of course, for the time being, because I will not be able to Say anything in a kind of an admin manner for the future, but we think that the current trend can be continued. But as for the base profit for the real estate, it is kind of difficult to segregate the 2. Boston Financial, for the low income bracket people, we securitized the estate asset.

Speaker 1

But it varies from quarter to quarter. This quarter, there was none. And this is why the base profit, unfortunately, will have we experienced a decline. As for PE Investment, unfortunately, so exit is not that smooth at this point in time. And this is why Private Equity was long declined in terms of the base profit.

Speaker 1

So the investee of the PE, We are charging the interest rate and the cost impact as they rise in. So this is this has resulted in the negative consequences. So that, in fact, are the major factors to the negative base rate base profit, sorry. And we have been, of course, Giving us the direction to OX USA not to overstretch and because you see the current conditions that does not allow them to be that successful with the businesses that we have and running. So by making use of the leverages And if the PE investment may start to recover, we may be able to enjoy a better performance going forward.

Speaker 1

I hope this answers your question. Thank you. Just one follow-up question. So the PE exit in the United States, I suppose there have been 1 or 2 perhaps PE exits. So that situation, in fact, is remains to be unchanged going forward.

Speaker 1

So did I say 1 or 2? I may have said 1 or 2 or 3, But are you asking me the question whether we have said so for the Q1 results 3 months ago? At that timing or throughout the year, there could be a possibility of some exits. And there are some equity investments that we have made to keep the association or the partnership going. But we may be able to perhaps exit out of some 1 or 2 perhaps investment, I may have expressed that in such a way.

Speaker 1

And we would like to, of course, To speak to such a plan, we have not, of course, not realized that, but I think we do foresee an opportunity to exit out of those investments. Thank

Operator

Yes, this is Nima. Citigroup can hear you. Yes, we can hear you. Thank you. Question about Banking.

Operator

Two questions. One is impact of YCC for this fiscal year and next fiscal year. How do you think this will impact your company 4 months. What is your analysis? Was it surprise or not?

Operator

And Secondly, strategically, green and nonrecourse loans done. But what is the current status and what is the current status of the spread? Thank you. Ruix Bank is a bank, so higher interest rate would generally have a positive impact on the banking business. They do have a lot of loans for small condominiums for investment purposes, but many of them linked to the long term prime rate.

Operator

You may be surprised, but that is true. So if the 5 year interest rate goes up, then ORIX Bank's profit actually goes up. That is the structure. So interest rate increase, especially yield curve steepening is actually quite beneficial for Oryx Bank. BOJ's interest rate policy change, it is very difficult to judge how much of a change they have actually made.

Operator

But mid to long term zone, our interest rate will continued to creep up, which is good for us. I don't know to what extent we can expect more, but yes, we do have expectations. That's my explanation about banking business, mostly loans for investment purposes. Other than that, we are just making all our efforts. We are getting people together.

Operator

And Environment Energy Head Nishigori san now moved to banking business. And he's using his own network to grow the business and the business is growing by several 100 of 1,000,000,000 of yen. But it's not just accumulation gain. We will take advantage of the trust function and the sale of the assets and turn this into another recycling capital recycling business.

Speaker 1

So in terms of impact for

Operator

the group, maybe it doesn't look like much, but at the banking business level, there's definite steady growth. So please continue to watch them for a while. Of 2020. Thank you very much for your very detailed information. That was very clear.

Speaker 1

So it is almost time to So the next question is going to be the final question From Sakamaki san of Mizuho Securities before we ask Yano san to close the session. So I am Sakamaki from Mizuho Securities. Thank you. And I would like to ask questions about Asia as well as Oceania. So in the last year, You shared with us the idea of increasing the asset.

Speaker 1

And but I don't think you have been generating much of the profit. So the contribution to the profit as revenue As a result of the assets outstanding balance of assets that you have been building up over time, how long does it take? So with regard to Asia as well as Australia, The traditional leasing business and also investment business are the 2 major businesses. And the traditional, that is Equity Method Holding, and we have been selling those assets as well. So the profit that we have been generating, in fact, are patchy.

Speaker 1

But we have decreased The asset of the leasing during the period of COVID pandemic, so the contribution from that leasing businesses, Although gradual, but we are beginning to generate some profit. So investment, in fact, does fluctuate over time. So it looks as it doesn't look it is suboptimal. But in the Great China, we have been making quite a bit of investment in the past. But as for the new investment, we have not been that proactive.

Speaker 1

Well, we would like to rather work on the exit of the investment that we have made in the overseas location. I don't know how much. But in Asia as well as in Australia, inclusive of Greater China, that is, we would foresee the opportunity to exit out of those investments so that we can make a positive contribution to the revenue as well as profit that could be generated. So I hope this is I think that this may not answer to your question in a direct manner. This is how we foresee.

Speaker 1

Okay. Thank you very much.

Operator

Thank you, Nana. And closing remarks, please. Well, thank you again for joining today. I have already explained quite a lot. So there's not much more for me, do less to say.

Operator

But Considering the current environment, you can see how we started the Q1, JPY 300,000,000,000 for the fiscal year. We definitely want to achievements. And also, on the other hand, we want to continue to invest so that we can continue to grow into the next fiscal year as well. And we appreciate your kind support. Please watch us.

Operator

I'm sure that you have many more questions, and our IR team will be happy on to any questions you may have. Thank you very much again for your kind participation. Thank you. And that concludes the Q1 earnings announcements. Thank you very much for your kind participation.

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Key Takeaways

  • Q1 net income rose 2% year-on-year to ¥63 billion with an annualized ROE of 7%, while base profit reached ¥82.2 billion, returning to pre-COVID levels.
  • Reopening momentum drove strong earnings in concessions (e.g., Kansai Airport), facility operations (RevPAR at 119% of June 2019), and continued aircraft leasing recovery.
  • Capital recycling accelerated as a weaker yen and higher US/EUR rates yielded high returns on domestic asset sales, and a ¥50 billion share buyback is now 36% complete.
  • While base profits grew 12% year-on-year, investment gains fell 27% to ¥9.3 billion; ORIX averages over ¥100 billion p.a. in exits and plans further realizations.
  • ORIX reaffirmed full-year targets of ¥330 billion net income and 10.4% ROE, balancing cautious US investment with proactive growth amid macro uncertainty.
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Earnings Conference Call
ORIX Q1 2024
00:00 / 00:00