ORIX Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2024

There are 2 speakers on the call.

Operator

Since it is time, we now would like to get started despite your busy schedule. Thank you very much for attending the earnings call by ORIX Corporation. This is the Q2 of fiscal year ending March 2025 earnings call. I will be serving as a moderator. I am from IR Sustainability Promotion Department, Nakane.

Operator

So at today's earnings call, we have Director, Representative, Executive Officer, President and CEO, Yoh Inoue and Operating Officer in charge of IR, Kazuki Yamamoto. So before we begin, I have a request to you. To prevent echoing, if there are any communication devices such as mobile phone, please turn them off or put them away from the device that you're using to attend this earnings call. Today, we will be explaining about the progress of our performance and outline of our business. Mr.

Operator

Inoue will explain, and this will be followed by some additional remarks by Yamamoto san and also open up Q and A after that. We plan to hold this about an hour. So Inoue san, over to you. This is Inoue from ORIX. Thank you

Speaker 1

very much for your attendance. So let me explain by making use of the Slide number 2. For the 1st 6 months of FY 'twenty five margin, Oryx recorded pretax profit of JPY 257,000,000,000. Net income was JPY 182,900,000,000, up 42.8 percent year over year. A record high first half net income for ORIX.

Speaker 1

Now this represents 46.9% progress in our full year net income outlook of JPY 390,000,000,000, and we expect strong earnings to continue into the second half. So we will continue to work towards achieving our earnings target. First half ROE came in at 9.3%, and we will continue to recycle capital in order to meet our full year ROE target of 9.6%. Now please refer to Page 3. Here on this page, we have outlined progress for each of the 3 categories, finance, operation and investment.

Speaker 1

For all three categories, I believe we were able to post 1st half results that were in line with expectations. Segment profits for each category were Finance, JPY 92,800,000,000 operation, JPY 105,800,000,000 investment, JPY 89,200,000,000 for a total of JPY 287,800,000,000. This represents 47%, 44% and 48% of each category's full year target. Pretax profit, which are segment profit minus unallocated SG and A expenses from head office and administrative departments for first half were JPY 257,000,000,000. Please move to Page 4.

Speaker 1

In the finance category, the sale of 2 thirds of OX stake in OX credit to ntt.como resulted in the business becoming an equity method affiliated firm and reducing the amount of profit it contributes. Despite this, ongoing strong performance of Oryx Life Insurance contributed to earnings in this category. And therefore, we expect finance category profits to grow year over year on an actual basis after excluding last year's 57,200,000,000 yen on the sales of ORIX credit stake. Within Japan, we had expected yen interest rate to go up slowly. However, given the results of Japan's recent lower house elections in the national diet, we now anticipate a scenario characterized by political instability, worsening of Japan's fiscal situation and further yen weakness.

Speaker 1

Although I feel there is some room to hope for improvement in finance related spreads and asset management yields, we plan to carefully watch for trends in changes in the interest rate while maintaining our current policies to keep the status quo in the financial segment. In addition, in light of the results of U. S. Presidential elections, I think that geopolitical risks and certainty could worsen owing to extreme foreign policy. The U.

Speaker 1

S. Is likely to carry out rate cuts and economic stimulus measures, but these could lead to resurgence of inflation, higher interest rates and weaker yen. So as of now, it is difficult to get a read on condition for 2025 and beyond. In any case, we can say that now is the time to proactively grow the scale of our assets in the Oryx USA business. However, during this fiscal year, we will prioritize a conservative view on credit card and plan to begin this asset expansion in earnest from FY 2026 margin and beyond.

Speaker 1

That said, we are seeing some signs of a recovery in the private equity market and some areas of the real estate market, while the CLO market is clearly on a recovery track. Although we see some room for upside potential during this fiscal year, we have not reflected such expectations on our earnings projection for the segment. In any case, in light of the fact that we are doubtlessly in a period of political uncertainty, we have slimmed down the ORIX U. S. A.

Speaker 1

Balance sheet using both securitization and third party sales to JPY 10,800,000,000 as of end September 2024, a reduction of about $2,000,000,000 over the past 2 years. We remain cautious on the Greater China region. We have held off new investments in China, including Taiwan and Oryx, owing to the sluggishness in consumer spending and the severe real estate plan. The balance of our investments in Greater China are less than 3% of total group assets, so we view our risk associated with this region as limited. These revenues in other regions of Asia and Australia segment are healthy, and we have no particular concerns regarding these businesses.

Speaker 1

Please move on to Page 5. In the operation category, pretax profit rose 5.1 percent to JPY 105,800,000,000, achieving 44% of our full year target. We expect profit to rise for the full year as well. At the Kansai Airport, the number of foreign passengers has risen to 109% of pre COVID period. By spring 2025, the renovation of Terminal 1 building will allow us to expand our capacity for overseas route traffic to 40,000,000 passengers.

Speaker 1

This will position Kansai Airports to be completely ready to host visitors for the Expo 2025 Osaka Kansai Japan. In addition, an increase in inbound tourists has led to sharp improvements in both occupancy rate and profitability at OREX's Hotels and Inns. Outside of Kansai Airport, OREX's current businesses within the Kansai region include the Umye Kita Phase I and II projects where ORIX Group, Mitsubishi Estate and Hankyu Honshi Holdings have worked together as partners to jointly promote redevelopment of this key urban area. In September 2024, this group and 6 other companies together opened part of the Grand Green Osaka section of the project early, while the full scale open will be from 2025. In addition, the MICE IR project development will begin in earnest following the conclusion of Expo 2025.

Speaker 1

Total project costs are JPY 1,270,000,000,000. Even after accounting for future inflation, Oryx Group and MGM will plan to invest between JPY 300,000,000,000 to JPY 350,000,000,000 each, while 22 major Kansai firms will contribute around JPY 127,000,000,000 in total. This JPY 530,000,000,000 in financing from banks will complete the capital required for the project, and so we can expect to start operations in fall of 2030. In the Environment and Energy segment, we announced the acquisition of a hydro power in Spain by Elavon Energy, 175 Megawatt Equivalent Production that is and the signing of a power purchase agreement between Elavon and Google in the United States. In Japan, we continue to steadily move forward with the renewable energy business such as construction of energy storage station, while keeping a close eye on interest rate and construction costs.

Speaker 1

Our main focus continues to be contributing to a decarbonized society over the long term. Turning to the Asset Management business. Robeco Group, our core asset, saw AUM growth to a record high of EUR 358,000,000,000 including Robeco Asset Management Companies in ORIX Group now have assets totaling JPY 74,000,000,000,000 as of June 2024, and we continue to push forward in our efforts to realize scale of JPY 100,000,000,000,000 in assets at an early stage. Please move to Page 6. In the investments category, we achieved a 200% year over year increase to JPY 89,200,000,000 in pretax profit.

Speaker 1

This represents 48% of our full year target. Many SMEs

Operator

are facing success shortage, and they are obliged to close their businesses. So our policy is to respect the corporate culture of investees and along with related stakeholders, we are to develop the businesses. So Oryx, during the investment term, we developed the successors of the investee using the sales network of group within and outside of Japan and promote the sales of new products of investees, introduce partners who can co work, including overseas and enrich a branch network. So apart from capital provisioning, we are proud to be a partner being able to provide various benefits, not only PE Investment, but Corporate Financial Service segment. We are sincerely facing the issues of business successor issue of 40,000 clients.

Operator

Including M and A referrals, we are providing various services. Please go to Page 7. So sales of Sasae Holdings and also sales of 100 Circle, which is a property operation facility. It is contributing to our investment category. In the second half, we are revisiting the portfolio.

Operator

And for the assets on potential sale, we are now discussing with the potential buyers. So we will continue to do so to achieve the target. During this fiscal year, from sales, we will be collecting somewhere between KRW 520,000,000,000 to KRW 600,000,000,000. And also, capital in new investment will be about KRW 700,000,000,000. So capital recycling is working very well.

Operator

So we will avoid excessive impact on our financials. We will be managing appropriately ALM. ORIX has been targeting unlisted companies, and we have been carrying out marketing efforts focusing on business succession projects. But going forward, we will also proactively work on carve outs related to restructuring of Japanese companies and also delisting of the investees. As a part of this effort, we have announced investment into projector business of Panasonic Connect.

Operator

Going forward, we have to gain permits and also go through the procedures of spin off of business division. So investment will be executed within March 2026. So Panasonic Connect will own 20% of the entity. So together, we will operate the business. So in addition, we have invested in LINEs, which is a company which develops and sells educational software.

Operator

So apart from PE Investment segment, including inquiries to the group, we have a rich pipeline. We will be selective in carrying out investments. And also logistics related investment, we have many under development, but with higher construction cost, there are impacts on profitability. So we are paying attention to downside risks. Going on to Page 8, Aircraft and Ship segment.

Operator

There were defects of aircraft by Boeing, and there were also strikes. And the supply of new aircraft are tight. And there are risk factors and used aircraft prices going up and airlines load factors are rising and the credit is improving. So overall, airline industry is achieving healthy growth. Our of

Speaker 1

our

Operator

fleet. And

Speaker 1

Oryx has

Operator

of our fleet. And ORIX has 30% stake in Avalon and it announced the acquisition of Castle Lake Aviation, an asset management firm of 118 aircraft. And it announced to use its own debt of KRW 2,000,000,000 to acquire, including their debt. The Moody's have increased the credit rating outlook from BAA3 stable to positive. So we will maintain the financial soundness and expand the business.

Operator

And going forward, we will continue to work with RX Aviation and build the portfolio focusing on narrow body, at least long term to leading airline carriers. We will continue to do the capital recycling. In March 2023, Santoku Senpaku joined the group, and we purchased 67 ships at a cheap price, including a new eco vessel using methanol fuel. We are proceeding with purchasing of 3 Panamax bulkers. So based on today's market, the portfolio of ships is more than JPY 100,000,000,000.

Operator

Going forward, we will drive with capital recycling and utilize ship management capability of Santoku and manage the vessels of a third party, and we would like to explore joining entering into Coastal Business as well. Moving on to Page 9. This is about shareholder returns and interim dividend. So at the earnings call of March 2024, we announced that dividend would be higher of either 39% of annual net profit or JPY 98,600,000, which was the dividend of last year. Therefore, the interim dividend will be 39% of JPY 182,900,000,000.

Operator

This is the first half net income, which means that it will be JPY 62.17 per stock. So compared to JPY 42.8 8, which was last year's interim dividend, it's the dividend hike by 45%, JPY 19.37. And if we can achieve the net income of JPY 390,000,000,000, then the annual dividend per share will be JPY 133. Please go to Page 10. While growing profit, we are mindful of ROE.

Operator

That's how we want to improve our corporate value. That's core policy of Alteryx. So for the buyback program of KRW 50,000,000,000, this is underway. And for the buyback of shares, until we improve ROE significantly, we are committed to continuing this program. So improving profit goes without saying, but we will continue to manage the company focusing on EPS.

Operator

For fiscal year ending March 2025, this will be the final year for 3 year plan of 2023, which was announced in 2023. So from the initial plan, KRW 390,000,000,000 is nothing that we can be proud of, but we are planning to do our utmost to achieve this level. And in addition, for the next 3 year plan, the discussion is already underway. So that stock price can continue to achieve more than 1x PBR in a stable manner. And also, we would like to go on to achieve ROE 11% 15%.

Operator

We will come up with measures. So when we announce the results for fiscal year March 2025, we would like to share that direction. That will be all from my end. Thank you very much for your kind attention.

Speaker 1

Inoue, thank you very much. So this is Yamanamoto speaking. And now I will share some of the details of our financials. Please refer to Page 11. In the first half, segment profits were JPY 287,800,000,000, which is up 29% year over year.

Speaker 1

This breaks down to JPY 221,500,000,000 in base profits, dark blue colored, and 66,400,000,000 yen in investment gains, light blue. And the lower right hand chart shows quarterly profit trends. Both base profits and investment gains all trended have trended well, with base profit growth to rising to JPY 117,700,000,000 for the 2nd quarter alone, with investment gains coming in at JPY 32,900,000,000, both being the highest quarterly figures in 3 fiscal years. Please turn to Page 1213 for outline of segment profits and segment assets. 7 of 10 segments reported higher segment profit year over year.

Speaker 1

Several segments enjoyed double digit profit growth, including real estate, PE and Concession, Aircraft and Ships and Corporate Financial Services and Maintenance Leasing. Of the 3 segments where profits fell year over year, Banking and Credit segment was, as outlined by CEO Inouye earlier, owing to the absence of profits from ORIX Credit. In Energy and Environment, profits were down due to the sluggishness in the overseas wholesale electricity market and one off losses from an investee booked in the Q1. However, Orex renewable energy capacity and operation has grown from just 1 gigawatt at the end of March of 2019 to 4.5 gigawatt at the end of September of this year, with an increase of 0.2 gigawatt in the last 12 months, While being mindful of short term market trends, supporting demand for clean energy caused by the dramatic increase in AI and DX remains to be very important. At the same time, it is also key to carefully watch trends in interest rates and construction costs.

Speaker 1

Segment assets were down slightly by JPY 114,500,000,000 versus end March to JPY 15,900,000,000 owing primarily to foreign exchange. This is largely in line with our initial expectations.

Operator

Next, about the financials on Page 14. As you can see on the left, as of end of September, including deposit, short and long term borrowing was JPY 8,500,000,000,000. This was flat from last fiscal year. Including borrowings from financial institutions, we continue to raise funds efficiently through corporate debt market. So as you can see in the middle, the funding cost.

Operator

The funding cost related to foreign currency began to come down from the 2nd quarter. FRB is set to continue to cut rates. Therefore, in line with market consensus, we expect that U. S. Dollar interest rate will decline.

Operator

That's our assumption. Yen based cost, the funding cost interest rate is on the rise slowly, but the favorable funding environment is likely to continue. So right now, the interest rate sensitivity remains the same as previous quarter, and yen interest rate hike are listed as slight negative. And this is because we have company used assets, which does not have interest rate sensitivity, and we also have some foreign assets, including emerging market currency that are linked to yen assets. So yen interest rate sensitivity remains to be positive.

Operator

And for the ForEx, with JPY 1 cheaper, impact before tax profit is JPY 1,500,000,000. ForEx means to be volatile. So including hedge, we need to flexibly and efficiently control the risks. Of course, the sensitivity analysis of ALM. This does not include the future interest rate outlook, businesses and financial operation.

Operator

Therefore, our base case is for U. S. Dollar and euro interest rate to come down and a slight increase in yen interest rate. So according to the changes, we will flexibly change our policies. And for interest rate outlook and financial business direction, this was explained by Mr.

Operator

Inoue earlier. And the result of presidential election in the U. S. And lower house election in Japan and domestic policy, regardless of this trend, we expect that both interest rate and FX will continue to be opaque. And so we need to carefully monitor.

Operator

And as you can see on the left on Page 15, DE ratio is 1.6x. This is a conservative leverage. And in the center, based on the assumption of A grade of global agencies credit rating agencies, employed capital ratio is stable at 93%. We will continue capital recycling and conduct optimal capital allocation of the portfolio. Through close communication with the credit rating agencies, we will pay attention to the financial soundness.

Operator

That will be all. We would like to open the floor for questions now. So if you have any questions, please enter 1. And when your name is called, please pose your question. And if you are to cancel the question

Speaker 1

So we have from Bank of America, we have Fijino san. Thank you very much for this opportunity. So I will ask one question. So the JPY 390,000,000,000 profit for the full year, I know that you have achieved about the progress of 50%. So therefore, there was much progress as compared to the Q1.

Speaker 1

Now in terms of the achievement, so how comfortable are you, especially in light of the pipeline of the sales that you are scheduling? This is in a way answering to your question. Normally, as you know, our company I'm sure you have been following our company for some time now. So we tend to be a tail heavy in achieving our fiscal year earnings, And that was really the case in the last year. We are not that as heavy as we were in the last year.

Speaker 1

But in terms of gain on sales, we are scheduled to generate more in the second half. And it is trending well, I would have to say. So JPY 390,000,000,000 of achievement, I don't know how confident we are in achieving the goal. I think that we will be able to achieve 100% of this goal. And in terms of the pipeline, there are some non public deals that in other non auction deals on a 1 on 1 basis.

Speaker 1

So this is why I will not be able to disclose much, but it is on schedule. So I'm sorry to follow-up, but especially the electricity power station referring to Page 22. I can see that there may be some major asset that you are planning to dispose. So Spain's electricity price that had fallen in fall. And I think there was some discrepancy in terms of the timing of the posting of these numbers in the past.

Speaker 1

But with regard to the disposition of this electricity facility, the power facilities, do you think that you are gaining more appetite or what? So the case in Spain, in Europe that is, so the government's intent or the control over the electricity power unfortunately was out of our expectations. So this is why we did generate some losses, but then it is now recovering. And we did acquire hydro power station. And we have so 150 gigawatts will start generating profit from next year.

Speaker 1

So as a core income, this will be reflected to our financials. And as for the disposition, if we can sell some of our assets, of course, we would have to refer to the balance of what we can gain on the sales of some of these assets. And of course, there will be counterparty if we were to sell these assets, and we would have to get the permission of the government as well in many of their cases. So we will not be able to share when we will be able to dispose these assets, but we should be able to conclude the sales, and we'll be able to post some gains. I'm sorry.

Speaker 1

Please allow me to limit my explanation to that. Thank you. Nishinikoshi. SMBC

Operator

Nikko. Muraki san, please. Yes. I am Muraki from SMBC Nikko Securities on Page 4. So after the presidential election, how you recognize the environment?

Operator

You mentioned a little bit. But in your businesses and also in your investment, what will be the impact, if you could elaborate? To be more specific, in the U. S, you are considering M and A of Renewal Energy. So will this be impacted?

Operator

And yen is cheap. So M and A, exchanging yen to foreign currency, you will refrain from making such an investment. So with the politics, your business and your investment policy will be the case. With external directors, we had a discussion today as well. So Trump's ideas and his policy, it's difficult to read.

Operator

It will be a deal by deal. So it's JPY 150 to the dollar right now, JPY 154 to the dollar. So I don't think Trump will admit this. To China, he's taking a strong line, and he will do that to Japan as well. So he wants to make yen stronger.

Operator

So the pressure will be quite strong from President Trump. So if so, yen depreciation shifting to yen appreciation, that's the hunch that I have. But when it comes to U. S, it's all confined within the U. S.

Operator

Market. That's the business that we do. So we will not experience this Nippon Steel's case. And with JPY 154, can we acquire should we acquire? And if we can gain profit even at exchange rate of 154, then we may give a go ahead.

Operator

So in yen dollar terms, it will be quite significant with JPY 154. But yen, dollar and euro, we are controlling everything separately. So we procure in dollar and we pay in dollar. So of course, on the financial statements, there will be exchange, a translation, but let's say IRR would be 20% or so, if we can go after that or those that has growth potential like infrastructure and private credit companies and also AM terms. These are the potential areas that we are continuing to look for.

Operator

So some are under due diligence phase. Did that answer your question? Yes, I've understood very well. Thank you very much.

Speaker 1

Thank you for the question. The next question is from JPMorgan. Sato san, over to you. This is Sato from JPMorgan. So ORIX USA, the 2nd quarter business conditions, if you could be so kind enough to share with us.

Speaker 1

So 32, 33 on those pages, you have shown the performance of ORIX USA, but it looks as if they have faced a pretty tough second quarter, especially real estate and also private equity because credit loss and also origination of real estate had remained to be sluggish and that's a qualitative kind of description of the businesses. What have exactly happened in the Q2, which has led to such a result? And also, if you could be so kind enough to describe the impact as well. So it's a multifamily when we talk about the real estate property at Lunette. So finance origination and all the ADG's disposition, the sales impact is the main businesses.

Speaker 1

But as a result of the interest rate hike, the borrowers unfortunately, the nonperforming loan had increased. So bad debt had increased. So we have taken over these assets and renovate them and to keep them and wait until the market recovery. So that's what we are working on. And this is why, unfortunately, it is putting a pressure on the profitability.

Speaker 1

So if the of course, the interest rate starts to come down, I'm sure we'll be able to enjoy the normalization of the businesses. But it may take a little while until we can enjoy such a normalization. But I think the worst time is almost over. So we hope to enjoy something that is more positive and about reposition, renovation and also the management operation and also the disposition, the timing is to be thoughtful. So with regard to multifamily assets, I think for the next 6 months to 12 months, the current situation is likely to persist.

Speaker 1

Private equity, they are small in size and already at fair value. The book value has risen, but there has been some correction. So we are trying to kind of adjust ourselves to the fair value by way of carrying out an impairment. So in other words, we're working on the correctional adjustment. And this correction phase should be over and done with by end of this calendar year.

Speaker 1

And thereafter, we would like to watch over the development of the interest rate in United States as well as the economic stimulus, which may be introduced by President Trump, so that we'll be able to resume our activities in the investment, so that we can be ready anytime. So that is where we are in the United States. If I could follow-up or if I could ask you to follow-up, especially with regard to real estate. So the Q2, if you were to cut out the 3 months, I suppose 5,000,000 yen I think it is only limited to 5,000,000 dollars but just has been explained by Mr. Yue just now.

Speaker 1

So if you were to think about the market risk, so you would like to, of course, maintain the current situation, the status quo? And do you think that you'll be do you think that the current level of profit generation is likely to continue from the next in the next quarter onwards For the second half, in other words, October through to March, we do not foresee much of the upside coming from United States. We are remaining to be defensive in United States. So therefore so about USD 250,000,000 or so of a profit is what we are foreseeing to be generating, but it will not reach the USD 300,000,000 or that is not our expectation. So this by achieving this JPY 390,000,000,000 of a profit for the entire group, we do not expect a large contribution coming from the U.

Speaker 1

S. That's what it is. Understood. Thank you so much.

Operator

Thank you. Next, Daiwa Securities, Watanabe san, please. Yes. This is Watanabe from Daiwa Securities. On Page 10, this is about improvement of corporate value.

Operator

Through investors meeting, the feedback has been shared at Board meeting. So if you could share some of the major points. And if you could give us some updates on the current trend of achieving midterm management plan. So in the U. S, I did IR roadshow, and executive officers have made some explanations, and we shared that to the Board members.

Operator

And finance, investment and operation, we are disclosing these 3 categories, and now investors have a better idea of disclosing in such a way. So with these 3 categories, we would like to evolve how we go about disclosing the information. So that was some comments made by external directors. So ORIX is very difficult to understand, but we want to make it easier to understand. So as an effort in doing that, we will continue to disclose from these 3 category perspectives.

Operator

Then we may foster the understanding of the market and external board members also agreed. So that was discussed at today's meeting as well. Okay. Thank you. So for the next midterm management plan, what kind of KPIs will be introduced?

Operator

Any additional comments? So at today's Board meeting, so when it comes to qualitative, well, in the past, we created numbers and how we go about achieving those numbers. So from external directors or outside directors, they did not like it. We should start from strategy, talents and deals and projects. So however, the projects, we have them in front of it.

Operator

How should we treat them and process them and incorporate that into our strategy? So we should make it upside down. That was the advice given. So in the coming 5 or 10 years, in what kind of direction are we proceeding? So that was the discussion made at today's meeting, but that was more at a qualitative discussion.

Operator

So we need to also reflect the qualitative discussion into quantitative discussion and then come up with numbers in 3 years' time or 5 years' time. So those will be the steps. So when it comes to target setting, it will be somewhere between January March. And then come May, I believe it was May, when we make annual financial results, how we will be discussing and announcing what will be considered. So we still do not have numbers yet.

Operator

So if you could give us a little more time. Thank you very much. Thank you. Thank you for

Speaker 1

the question. The next person is Sasaki san from Nomura Securities. Over to you. This is Sasaki from Nomura Securities. Thank you very much for the opportunity.

Speaker 1

So as to the outlook for the next year and beyond, I would like to hear idea, Mr. Inoue, for this fiscal year to the guidance. I know that the progress has been pretty smooth and roughly about the 10% of ROE is likely to be achieved. And this 10% of ROE, if you were to raise it to the level of 11% or 15% with the current uncertainty that surrounds you and also making use of the capital, may not that be easy, I suppose. So Mr.

Speaker 1

Inoue, what is the image that you have in your mind? If you were to continue the way you are, do you think that you can achieve 15%? Or is there any kind of other ways that you may have to explore in order to achieve this 11% or even beyond? So what is your kind of strategy that you have in your mind? That is a very difficult question.

Speaker 1

But if we remain to be where we are as we are, I think it will prove to be very difficult for us to achieve 11% or, of course, let alone 15%. Even if we were to repurchase our shares by JPY 550,000,000,000 or even more, I don't think it would be possible for us to achieve such a level of ROE. So if we were to buy back our shares to the extent of JPY 1,000,000,000,000, we may be able to achieve that high an ROE, but that doesn't sound realistic. So while we proceed with like M and A, like acquire a company that enjoys high profitability or to sell some of the businesses that kind of experiences low kind of ROE or to gear up perhaps. But in any case, I think we would have to raise the ROE and there are various different means and methods that we can utilize.

Speaker 1

But currently, if we remain to be as we are and who we are, then I don't think it is difficult to achieve 11% and beyond. So this is why we may have to continue to replace and or recycle our capital and assets. That has to be continued. So if we remain to be where we are, is 11% maybe achievable, but going beyond 11% like 13% or 15% is not possible. So if you could follow-up by sharing one piece of information.

Speaker 1

So are you thinking about something that is different from the past and that could be like M and A or to divest low ROE company, you have given us some clue. But if you were to think about the business management from next year onwards, out of those three options that you have mentioned, which one in fact you would put the priority on? Which one do you think that you would like to focus on? Well, we would like to, of course, expand our Asset Management business. But even if you were to expand the Asset Management business, it may be limited to like if it was to be AUM of JPY 1,000,000,000, JPY 2,000,000,000,000, JPY 2,000,000,000,000, JPY 2,000,000,000,000, that the return would be very limited.

Speaker 1

Now we have 75 or so 1,000,000,000,000 yen, but we need to extend it to 100,000,000,000,000 yen and even beyond. And this is something that we need to achieve in 1 or 2 years' time. And as a matter of fact, to the 3rd party investors having been entrusted with their capital, in other words, expanding the AUM as an asset manager. In other words, we really want to be acquire an asset manager. But at the moment, the price is not right.

Speaker 1

So this is why if we are carrying out the negotiation right now, I see if we are success if we succeed in acquiring it, we may be able to expand our AUM. And also one other business is aircraft. Currently, we have 200 in our fleet, but 150, of course, aircraft making use of our investors' money. So we want to, of course, raise it to like 200 and even beyond. So this is not going to be a short term solution.

Speaker 1

But if we were to pursue this way, the principal investment can be contained by making use of the 3rd party's capital money, I think that would be the first step. And as we have said, maybe to sell off some of the low ROA company and to acquire a high ROA company on the other hand, the businesses on the other hand. So that will be my effort in the next my prime mission in the next 1 to 2 years. Okay, understood. Thank you very much.

Speaker 1

Thank you. Thank you very much. Next, Mizuho Securities, Sakamaki san please.

Operator

Yes. I'm Sakamaki from Mizuho Securities. I have one question. So the asset the credit status of your assets, I would like to confirm. So data book on Page 27 or 28, using this, if you could respond, that will be helpful.

Operator

So the concerns that I have are the allowance for the credit loss from end of June. We can see the trend. But as you explained in the U. S, the credit, you are very prudent in provisioning and perhaps there are some concerns. So why did your concern come down since then?

Operator

So this is Yamamoto speaking, if I may. So I think you're looking at the supplementary materials for the credit loss provisioning on Page 28. So this is the number or this is the page that you're looking at. Yes, correct. So here, as Eisam mentioned, in the U.

Operator

S, so midcap market, the credit situation, of course, we cannot be optimistic. So where we are investing in some of the loans, we are provisioning. We are being conservative, and we reassessed. So that is the reason. So the credit loss of course, it is not increasing significantly and also nonperforming loan or a loan under management, we have been controlling, and we have been picking up signs to deal with this.

Operator

But rather, in terms of our business direction, the market or the environment has not come back so that we can be proactive in getting these credit. Okay. Understood. So the provisioning for credit loss from end of June is coming down. So were there drawdowns?

Operator

And where was it? Well, the general provisioning, total asset in the U. S. Is coming down. And how we are reducing this?

Operator

We are using CLO or selling fund of loan assets and also ORIX USA credit. The profitability is improving, and

Speaker 1

this

Operator

is because we're lighter in the balance sheet. So that is why general provisioning has been drawn down. Okay, understood. Thank you very much.

Speaker 1

Thank you for the question. The next person is Niwa san from Credit Security Citi Securities. This is Niwa speaking from Citi Securities. So I hope you can hear my voice. As to the investment pipeline, I have some questions.

Speaker 1

And that is Page 45 of your deck. And if I if you could be so kind enough to allow me to understand how to interpret this. So I don't think there has been any kind of major changes by looking at this. I suppose you are kind of building in terms of the disclosure policy. You're just incorporating those that you can be absolutely sure of.

Speaker 1

But do you think that we could be a little more optimistic? If you could give us some more color to what has been reflected onto this page. So in specific terms, we will not be able to share anything at this point in time. Just to give you an example, Abalone, for example. So 70%, in fact, is owned by Bohai right now, but we may be able to acquire the 70% from Bohai, so far as Abalone's stake is concerned or to acquire asset manager in the United States or here in Japan.

Speaker 1

Private Equity can be built up more here in Japan. So these are some of the conversation that is underway. So in total, although we have been sharing that we may be spending as much as JPY 700,000,000,000, but if we were to build all those up, we may be spending about JPY 1,000,000,000,000 or even more. So this is why we will not be spending that much, which means that we will remain to be quite selective. And so that will be that will be contributed to the enhancement of ROE.

Speaker 1

So that is continued. It is still underway. But if it becomes more kind of short deal, then we may be able to disclose it. But I'm terribly sorry for this, but because of the non confidentiality or nondisclosure agreement, we will not be able to share anything anymore. But it is not just staying at the pipeline.

Speaker 1

But while we would acquire some of the assets, but that will be recycling. So therefore, JPY 700,000,000,000 of acquisition and maybe JPY 1,000,000,000,000 or close to that much of divestment. So if you could allow me to limit my explanation to that. So expansion of new business domain. So digging down deeper in the existing business kind of domain, that I understand because you have a good level of expertise.

Speaker 1

But how about the new domain, the business domain? So when we talk about new business domain, so we mean by you mean by non the domain that belongs to that is non existing? Well, we do not describe it to be non domain because we go by transaction by transaction. It just so happens that this one of the transaction may fall into like new domain, such as the medical area. Some discussion is underway.

Speaker 1

I don't know whether you can describe it to be new domain because we do not segregate new to old or existing. So the private equity, M and A, there are several kind of deals that are under discussion right now. Thank you very much for the idea. Thank you. Thank you.

Operator

We are still accepting questions. So please raise your hand. From Morgan Stanley, MUFG Securities, Takemura san, please. Yes, this is Takemura speaking. Thank you very much for this opportunity.

Operator

I have one question. So going forward, the capital gain, your ideas towards generating capital gains is my question. In the first half, there was a progress in profit and dividend is 39%. So that's your DPS this time around. So like last term, if a capital gain is skewed, then perhaps dividend will fluctuate.

Operator

So which means that going forward, capital gains, you will be leveling between first half and second half. Is that your idea? Or against this first half profit, it's 39%. So will you be applying that throughout the year? Well, this time, in the first half, yes, a profit against that 39%.

Operator

So with 33% in the previous term, the interim dividend, it was the same. But when we raised to 39% and then same dividend as last year interim dividend, I think everyone will be mad. So for the first time, we used the number of first half and multiplied by 39%, and it's the first time that we have carried this out. So 39% of first half or second half, yes, that's what we need to continue going forward. Then what concerns me is, okay, first half is already okay, but what's going to happen if we don't achieve the second half?

Operator

So that is why in order to avoid that discussion, we are committed in achieving this JPY 390,000,000,000. So 39% against the first half. This idea will continue down the road. Okay. Thank you very much.

Speaker 1

Thank you for the question. We are still it's okay for you to be asking the second question even if you have asked the question already. You can be asking another question. So Tsujino san from Bank of America, over to you. Thank you.

Speaker 1

So leasing aircraft leasing, I have a question. So the price of aircraft is rising. So air cap, earnings call, for example. So in other words, I think there is about 20 some percentages in terms of the gains on sales. So at Abellon, I know that there is a discrepancy in terms of the posting timing by 1 month or so, but there has been some gains on sales.

Speaker 1

But on the part of Avalon, 59 aircrafts will now scheduled to be divested disposed. So at Oryx Aviation or at Avalon, so what kind of margin are you enjoying for the aircrafts that you have sold? Any kind of expectations that you have? Or can we expect more profits to be generated? So, Avalon, the reason why we are selling more is because the low spread aircraft, we should be selling them faster.

Speaker 1

That is our policy right now. So ROE, ROA of Avalon is not that good as Oryx Aviation. We're not expecting Avalon to reach the standard of Oryx Aviation, but we have been giving out the guidance. So for 50 or so aircrafts, whether we'll be able to enjoy a large amount of capital gain, we are not sure. But I don't think there'll be a case whereby we'll be generating capital loss.

Speaker 1

So among the airline kind of leasing, it is one of the best. So Oryx Aviation is. So this is why we have been giving out a strict guidance to Avalon that is to measure up to the expected standard. But if they are going to be purchasing any new aircraft, for example, ORIX Aviation, so that would be holding period of 1 to 2 years. And so therefore, to enjoy a capital gain of about 10% to 20% is expected.

Speaker 1

I hope this answers your question. Thank you very much.

Operator

Thank you. Next from Nomura Securities, Safaki san please. So 70% equity of Aperon, I think that's interesting if you're interested in buying that. But taking the risk of Greater China, what do you have in mind? And once you acquire, the shareholder agreement or some kind of agreement needs to be exchanged.

Operator

And I think I do recall that you are hedging by introducing the clause. So is such kind of deal possible? Well, for Bohai, 70%, they want to sell their stake to 3rd party, but 30% of ORIX, there are some restrictions. So that is why we don't there's no one who are taking who are interested because of the veto rate and so forth. And Qiguo or this company is considering.

Operator

And next year, there will be a completion of sales. And after that, Bohai will sincerely start to think about Avalon, and there is a pressure from Beijing. So at some point in time, they will be selling, and the buyer will only be ORIX, and there has to be a discussion. So it's about 5,000,000,000 for 70%, which means that ORIX alone will not be able to purchase the whole thing. But if Oryx is willing to hold 100%, some investors are willing to join us.

Operator

So maybe we can take 51% in total and the remaining 49% owned by other investors. And after the purchase, by improving the performance, we hope to bring the company to IPO. So that's the scenario that we are thinking of. So there's an intention of Bohai. But so far Bohai, if they were to sell, they are thinking of us as a potential buyer.

Operator

So if we don't become too greedy, then they might come to us. But if we become too greedy, they might try to go elsewhere. And if we purchase from Bohai, then there's no longer China related risk. And thereafter, basically, we will not take any China or Chinese related risk. We will be free from that.

Operator

So Avalon, the airline of Greater China, they do have some exposure, so which means that if this continues, there's no problem. No. We will do the valuation of all airlines if we are to go through this process. And if there are any lease contracts

Speaker 1

with a

Operator

delayed payment, then of course, there will be some discounts. And whether it be 1x or 0.9x of PBR, we will calculate and decide on the purchasing price. So we will be taking a risk of airlines, but basically, the focus is narrow body. And if there is a default, then aviation or reposition capability, they have a lot. So with reposition, we can apply that to other airlines.

Operator

So there should not be a concern in this regard. Okay. Thank you very much. That was helpful.

Speaker 1

Thank you for the question. So it is almost time for us to finish off this session. So we'd like to conclude this Q and A for now. So I'd like to ask Mr. Inouye to share his closing remarks.

Speaker 1

So for the first half, well, I think we have trended quite well. But the market remains to be uncertain. So I will not be able to say out loud that we are okay for the full year by 100%. But at the moment, we have confidence in achieving JPY 390,000,000,000 for the full year. So please continue to watch over the development in a warmly, that is.

Speaker 1

So with this, I'd like to conclude the 2nd quarter results briefing for ORIX. Thank you very much for your participation today.

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Key Takeaways

  • Record-high net income of JPY 182.9 B in 1H, up 42.8% YoY, representing 46.9% of full‐year target and 9.3% ROE versus 9.6% goal.
  • Interim dividend raised 45% to JPY 62.17/share with a 39% payout ratio and a JPY 50 B share buyback underway to support EPS.
  • Operations rebound with Kansai Airport traffic at 109% of pre‐COVID levels, F1 renovation for Expo 2025, and a JPY 1.27 T MICE IR project co‐investment with MGM.
  • Finance segment faces political and FX uncertainty, sold two‐thirds of its credit arm stake and has postponed US credit card expansion until FY 2026 amid rate and yen risks.
  • Investment segment plans JPY 520–600 B in asset sales and JPY 700 B in new deals focused on SME succession and carve‐outs, while monitoring logistics construction cost risks.
AI Generated. May Contain Errors.
Earnings Conference Call
ORIX Q2 2025
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