ORIX Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 1 speakers on the call.

Operator

I am Kazuki Yamamoto, Operating Officer and Church of Corporate Planning and IR Department. I'd like to make use of the deck in front of you to provide you with FY 'twenty four March and full year earnings briefing. So please turn to Page 2.

Operator

So the right hand side of the right hand side of Page 2 shows OIBDAIX's record high profit for the year FY 'twenty four margin with net income of JPY 346,100,000,000. And this is a year on year increase of JPY 55,800,000,000, up 19% ROE, rose to 9.2%. Now quarterly trends in net income is shown on the right. Q4 net income was JPY 126,900,000,000. This is AbEx's highest quarterly net profit figure to date, even higher than the 2022 fiscal year March end when we saw the Yayoi.

Operator

Profit was bolstered by investment gains from the sales of purchase taking over credit and excess from the domestic PE investment. Page 10 to Page 3 segment profit rose 22% year over year to JPY494.2 billion. As shown on the right hand, quarterly graph, FY 'twenty four margin ended tail heavy in terms of exit as initially forecasted. In other words, we were able to maintain a consistent uptrend in base profits and investment gains over the fiscal year as a result. Next, please look at the full year graph on the left hand side.

Operator

Base profits were up 14% year over year to 67,600,000,000 yen which also represents a new record high. Profit recovery in the Facility Operations and Concession business, thanks to higher inbound tourism as well as growth in investment income in the Insurance segment, were the main reasons behind growth in base profit. The light blue investment gains were also up 54% year over year to 126,500,000,000 yen, while we have been maintaining an average of JPY 100,000,000,000 over the past 5 years, thanks to ongoing capital recycling in our asset portfolio, including the real estate and domestic PE businesses and a portion of OREX credit shares, we exceeded average this time with JPY126,500,000,000 of gain. Note that from the Q4, we have reclassified earnings from the investment in affiliates account into either equity method investments of goodwill depending on the type of asset. As a result, we have better actively restated both base profits and investment gains.

Operator

Next, please turn to Page 45 for the breakdown of segment profits and segment assets. Detailed information can be found further back in the presentation from Page 20 onwards. Please take a look after. I'll just give a brief overview of the highlights here. First, the Corporate Financial Services and Maintenance Seating segment profits were up JPY 6,200,000,000 to JPY 81,200,000,000.

Operator

In Corporate Financial Services, profits were up as fee businesses were solid and N and A brokerage businesses also contributed to profits. In the auto unit, strong leisure demand for rental cars and ongoing high prices in the used car market helped the business achieve its 3rd consecutive year of record high profit. Segment assets were up by JPY 38,300,000,000 to JPY 1552,300,000,000, 1,553,000,000,000 yen as assets increased in the Corporate Financial Services Unit, as it undertook a variety of financing deals while remaining careful in selecting new business. Assets also increased in the auto unit, thanks to rental car fleet replacement. Next is the Real Estate segment.

Operator

Segment profits were up JPY 14,300,000,000 to JPY 5,800,000,000. The Real Estate Investment and Facilities Operations Unit saw profit rise as inbound tourism demand led to strong earnings at hotels and inns. In addition, we booked gains on the sales of a large property in Q3. Daikyo unit secured profits in line with the previous fiscal year, aided by robust sales of high margin condos. Segment assets were up As although still being selective, we are seeing investment in facilities operations in need and continue to develop new logistic facilities while actively selling properties as part of capital recycling.

Operator

Daikyo assets increased by 59,100,000,000 yen as compared to 23 Marchand, bolstered by the acquisition of a very well situated site for large scale development. We continue to operate this segment based on a business model of acquiring promising Although our expected costs associated with the purely financial stake in Toshiba, we saw 2 PE Industries, including Primajev, in second half. This perhaps a stark contribution to base profits from DHCC acquired last year led to strong upswing in segment profit. The concession unit returned to profit on a full year basis for the first time since the pandemic, aided by a sharp rise in earnings following growth in international passengers, thanks to a strong inbound tourism. Stabilized assets were up by 167,400,000,000 yen net versus end March end of 'twenty three, although assets rose due to JPY 200,000,000,000 stake in Toshiba.

Operator

We had several exits from industries. Environment Energy segment profits were down 9% year on year to JPY 29,900,000,000. Domestic business secured profits in line with the year earlier level despite some quarterly fluctuations owing to the impact of output cap of silver power. Overseas, profits were down year on year, owing to elevated euro interest rates and absence of year earlier investment gains. However, electricity sales rose due to steady expansion in capacity at LO1.

Operator

Segment assets were up JPY 73,400,000,000 versus end of March FY 2023 or in a lead to changes in ForEx. Assisting Real Estate, PE Investment and Concession and Environmental Energy segments are each less than JPY 1,000,000,000,000 and we remain aware of maintaining balance between 3 segments. Insurance segment assets were up 11% year on year to JPY 70,000,000,000. Profits were up mainly driven by lower COVID related payout expenses versus the prior year and higher investment income added by yen depreciation and high interest rates. Insurance premium income is also rising steadily with whole life insurance being marketed more aggressively.

Operator

Segment assets were up by JPY 258,900,000,000 versus end FY 'twenty three March, reflecting the impact of FX and increasing investment securities. Banking credit profits were up JPY 59,100,000,000 to JPY 96,700,000,000. In the credit business, Oryx sold 66% of share to NTT DOCOMO to create joint venture. This transaction resulted in investment gains and variation gains of around 57 1000000000 yen. In Banking, interest income from real estate investment loans grew due to higher long term interest rates with only marginal increases in deposit related expenses, profits were up year on year.

Operator

Higher trust fees also contributed, resulting from Oryx Bank's focus on growing trust assets. Segment assets rose JPY 34,300,000,000 reflecting higher lending in the merchant banking business in ORIX Bank. Based on the stake, ORIX Credit is now considered an affiliate rather than a consolidated subsidiary. Total assets for Banking and Credit and Insurance segments are about JPY 5,000,000,000,000. This represents 37% of Oryx's total assets.

Operator

And we continue to manage this ratio with an awareness of the quality of insurance and banking related assets and overall balance within the firm. Next is Aircraft on Ship segment. Profit rose 44% year on year to JPY 26,800,000,000. In aircraft leasing, passenger demand in the U. S.

Operator

And Europe reached record high levels. Recovery in airline earnings and the tight supply demand for aircraft led to an increase in both leasing income and gains of the sales of aircraft. This led to higher profits year on year. In the ships business, profits were in line with our target, but lower year on year, owing to proactive sales of owned vessels a year ago when prices were favorable. At the end of February, our acquired Santoku Senpaku, which will begin to contribute to profits in fiscal year 25 March on a 3 month lag.

Operator

At Avalon, hedging costs rose owing to elevated U. S. Dollar interest rates. Growth in lease revenues fueled by a rebound in passenger demand helped the firm achieve profitability on a full year basis for the first time since the pandemic. Segment assets were up JPY 315,500,000,000 versus the end of FY 'twenty three March, reaching slightly more than 1,000,000,000 yen This reflects aircraft purchases in aircraft leasing in addition to Santoku Senpaku, which owns 67 vessels as a consolidated subsidiary.

Operator

Oryxo USA segment profit was declined by 65% year on year to JPY 17,300,000,000. In Q4, we also booked losses associated with withdrawal from an investee as well as preventative and allowances impairments based on conservative view, risk from long term inflation and added interest rates. The resulted segment loss was JPY 10,500,000,000 for the Q4 alone. Segment assets were up by JPY 74,300,000,000 reflecting the substantial impact of weaker yen. We remain price sensitive and selective with our new deals.

Operator

And through the sales of assets in the the real estate business. Industrial Automated assets, excluding FX impact, were down by JPY 107,200,000,000 versus the end of the prior year. ORIX Europe segment profit were down 30 percent to JPY 28,600,000,000. In FY 2023 March 2022 March, OEC booked 10,000,000,000 yen or more in performance fees, but this amount declined substantially in FY2024 March and higher currency hedging costs resulting from rising loan currency rates led to lower profits year on year. In the MainStay Asset Management business, assets hit EUR 324,000,000,000 a new record high at the end of FY 'twenty four March, buoyed by strong equity market and management fees.

Operator

Segment assets were essentially flat after excluding the impact of year end depreciation. Finally, the Asia and Australia segment profit were down 10% year on year to JPY 34,300,000,000. Profits were flat versus year ago, thanks to growth in lease and lending assets in South Korea, Australia, India and other countries from new executions. Gains from the sale of an investee during Q4 also contributed. Segment assets were up JPY 192,400,000,000 as a result of favorable new lease executions in ASEAN countries and India and the impact from FX changes, we maintain a cautious stance on investments in Greater China.

Operator

The Aircraft and Ships and the U. S, Europe and Asia segments comprise a total of 22% of segment profits and 34% of segment assets. We will continue to carefully monitor economic and financial trends in each country. This concludes my explanation about the FY 'twenty four March full year results. Next, we would like to hand over to our CEO, Mr.

Operator

Inoue. Please begin. Good afternoon. This is Oryx CEO, Makoto Inoue. Let me begin from Page 6.

Operator

For 'twenty four margin, RX achieved pretax profits of JPY470,000,000,000 and a 19% increase in net income to 346.1 billion yen This represents an achievement 105% of our announced net income target. EPS was JPY299. Now in line with the policy of paying a dividend per share of either 33% of net income or last year's DPS of JPY 85.6, whichever is higher, we will pay a full year dividend per share of JPY 98.6 for March end of 2024. Now since we paid an interim dividend of JPY 42.8 per share, the year end dividend will be JPY 55.8 yen per share. ROE for FY 'twenty four margin was 9.2%.

Operator

Now please turn to Pages 7 and 8. FY 2025 margin is the final year of the 3 year mid term outlook that we introduced 2 years ago. We initially forecast fixed net income of JPY 440,000,000,000 for the final year, which we revised downward to JPY 400,000,000,000 last fiscal year in light of market conditions at the time. But today, we now target FY 2025 March end net income of 390,000,000,000 yen Now this translates to an ROE of 9.6%, although improving ROE is a major challenge for RX. Unfortunately, I will have to ask for your patience for another year for us to achieve our goal of ROE exceeding 10%.

Operator

Our target of yen 390,000,000,000 net income suggests 4.7% year over year growth for FY March 2025. Now please turn to Page 9. There are three main reasons for our decision to lower the profit target from JPY 400,000,000,000 to JPY 390,000,000,000. First, it may take some additional time before a full recovery in OLIX U. S.

Operator

A. Earnings because we foresee high credit costs to persist as well as elevated interest rates to continue as inflation remains doubly high. 2nd, the Maesir project has began in earnest, Now in addition, we see a lack of visibility caused by political divisions owing to expansion in international conflicts, Chinese economic sluggishness to extend, coupled with Japan's sinking position globally owing to historic yen depreciation and the unreadable impact of high prices on the economy. For these reasons, we have decided conservative target 390,000,000,000 yen for the coming fiscal year. However, this 390,000,000,000 yen is, of course, just a minimum target.

Operator

And internally, we maintain our goal to exceed net profits of 400,000,000,000 yen Now please turn to Page 10. I will outline the measures we plan to take to reach JPY 390,000,000,000 in net profits later. So now I would like to announce our dividend policy for FY March 25, which will be to pay a dividend equivalent to 39 percent of net income or equal to the FY 2024 March dividend of JPY 98.6, whichever is higher. As in the previous fiscal year, we have set a share buyback program of 50,000,000,000 yen This translates to EPS of 3.41 yen and EPS of JPY 133.2 for the full year. Combined with the JPY 50,000,000,000 in shares buyback, Oryx total shareholders' return is set to reach 51.8%.

Operator

Now please turn to Page 11. Unfortunately, the credit rating agency, S&P, recently announced its decision to downgrade ORIX from A- to BBB plus Although we maintain high levels of profitability, S and P found it difficult to maintain an A- rating on ORIX as a financial institution in light of a diversified portfolio, which includes operating assets and investments and given the speed of our capital recycling program. Nordea and Fitch maintained A Equivalent. RNI and JCR maintained AA equivalent, and they have a stable outlook as well. We will continue our dialogue with the rating agencies to ensure they give an objective and fair bit evaluation of our businesses.

Operator

Please note that S and P downgrading has no impact on Rx's capital and financial policies. Now please turn to Page 1213. OX Group holds asset of 16 1,000,000,000,000 yen with shareholders' equity of JPY 4,000,000,000,000. Due to an accounting requirement, non recourse loans at Investi's 3rd party capital and accounts which should be considered off balance sheet are held on ORIX's balance sheet. With Oryx's diverse investment style, each M and A execution has led to an increase in goodwill and intangibles.

Operator

In light of this, in order to fairly represent the nature of the group businesses, I think a new approach would have to be examined. In FY 2025 March end, our ROE target is 9.6%. However, each year, our intangible assets average around 1,000,000,000,000 yen. So considering this, we can believe return on tangible equity, ROTE, which is net income divided by shareholders' equity minus goodwill and intangible asset, is an effective way to measure ORIX's nature of business and the actual profitability. Note that ORIX's RoTE trends at around 13%.

Operator

Going forward, we will disclose RoTE alongside with ROE. In addition to ROE and RoTE, an important factor for growing corporate value is EPS. EPS were JPY246 in FY 'twenty three March and JPY 299 in FY 'twenty four March and we target JPY 341 in FY 2025 March end. We will continue to endeavor to strengthen EPS on the PV ratio with the aim of improving shareholders' value. Now please refer to Page 14 to 16.

Operator

We target FY 'twenty five March, pretax profits of JPY553.7 billion, an increase of 70 point 8 1 percent year over year. I will now use the 3 category of finance, operation and investment to provide with you the breakdown. The finance category includes ORIX Life, ORIX Bank, the leasing, installment loans and lending businesses of the Corporate Financial Services segment, Oryx USA and leasing businesses at overseas subsidiaries. Within Japan, we can expect a mild increase in yen interest rates, which should help improve financing income, asset management yields and leasing spreads. At ORIX Bank, in addition to Commercial Banking, we aim to strategically improve both ROA and ROE through expansion in Merchant Banking and Private Banking.

Operator

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

Operator

In high growth markets like Australia, Indonesia and India, we plan to increase our financial portfolio. For finance category segments, we target at about JPY 45,000,000,000 increase in pretax profits after the gain from the sale of ORIX Credit. Next, I would like to talk about the operation category. We anticipate a roughly JPY 18,000,000,000 yen increase in pretax profits including facility operations in inns and hotels in the Real Estate segment, condo development and the sales of DAIKYO and Auto Leasing Business. In ships, while our business model was primarily focused on ship financing and sales, the acquisition of Santok Senpak will allow us to make a full fledged entry into marine transport freight management, ship charters and their coastal businesses.

Operator

In addition, we plan to accelerate investment in Eco Ship, making our ships business even more sustainable. In addition to ORIX Aviation and Avolon's Aircraft Leasing Business, ORIX is well positioned to benefit from an increasing movement of people and goods. In the aircraft and ships business, we are poised to offer solutions in the operations, finance and investment areas, and we plan to grow this as a core business for ORIX Group. At NXT Capital in the U. S.

Operator

And Robeco in the Netherlands, we are searching for ways to expand the asset management business. Although it is a competitive market, in order for ORIX Group to maintain its earnings expansion, we must consider how to best utilize 3rd party capital. This remains a vital area for ORIX to address. Investments are becoming increasingly large in scale, such as carve outs and there are many opportunities facing us. We think that there is a limit to what ORIX can achieve when it is responsible for all of the acquisition capital.

Operator

The shift towards an asset manager model is an important medium term theme for ORIX. ORIX strengths include expertise in managing variety of tangible assets and welfare financing expertise. For this reason, we believe that we shall have no difficulty in expanding our role in asset manager. The current JPY 60,000,000,000,000 level AUM should be expanded to 100,000,000,000,000 yen level as rapidly as possible. Our basic policy for investment is unchanged.

Operator

That is not to limit ourselves to any particular industry, but to carefully consider profitability and equality in aim to secure opportunities deals, capitalizing upon the strength of the ORIX Group network. ORIX is active in a variety of fields such as private equity carve outs, business succession deals and venture capital. Our basic principle behind portfolio management is always capital recycling. The Kansai Airports Concession business, our joint venture with VINCI Group stands poised to benefit from earnings expansion powered by inbound tourism from the 2025 Osaka Expo. In FY24 March, In the investment category, we target pretax profit growth of around JPY 57,000,000,000 driven by profit growth at domestic PE Investies and capital recycling in the Overseas Renewable Energy business.

Operator

Please turn to Page 17. In FY 24 March, Oryx reaped JPY 150,000,000,000 in capital gains from aircraft and ships, real estate and PE. This reaches JPY 520,000,000,000 altogether with originally invested capital. New investments totaled JPY 620,000,000,000. In FY 2025 March, we plan to continue our capital recycling program.

Operator

The pipeline, both within Japan and overseas, for new investments is ample, And we plan to stick to our business strategy, which cautiously weighs profitability, liquidity and exit opportunities when making investment decisions. In this fiscal year, we expect the global conflicts to further expand. Worldwide divisions based on nationality, politics and economics accelerating. The results of the November U. S.

Operator

Presidential election run the risk of increasing global uncertainty, And we must think about the possible impact in various areas. Within Japan, yen depreciation and high prices remain unsolved. Both of these have the effect of lowering Japanese economic value and position in the world. We must carefully consider the direction that the group will take. That said, we have no plans to change our basic strategy.

Operator

In other words, we plan to 1st of all invest in domestic industries. 2nd, execute investment aimed at solving problems and accelerate globalization of our X Group and expand our asset management strategy. We plan to maintain this direction for this and next fiscal year. In FY 2025 March, we marked the 60th anniversary for the founding of our ORIX Group. We have seen some ups and downs, but I feel that we have been able to maintain a growth trajectory overall.

Operator

The full and gracious support of our shareholders and stakeholders has been key to our ability to return to growth trajectory in just 2 years following the pandemic and the announcement of record high profits this fiscal year. Please turn to Page 18. For ORIX Group's 6th anniversary, we aim to further promote sense of unity and increase in corporate value as a global company by accelerating the adoption of the Oryx Group purpose and culture, which was announced in the FY 'twenty three March results briefing. That concludes my remarks. Thank you very much for your kind attention.

Operator

We'd like to move on to Q and A session now. So Mr. Sato from JPMorgan to begin with. Thank you. Sato san from JPMorgan.

Operator

Please start asking your question. Hello? Can you hear me now? Yes, we can. I'm very sorry for this.

Operator

I am Sato from JPMorgan. Hello. I have 2 questions by asking 1 question by 1. So first of all, on Page 15, you had explained for the fiscal period the or the prerequisite in coming up with a target for this year. Now in the area of finance, you are thinking about increasing your profit by 40%, and that seems to be quite significant considering your business nature and the model.

Operator

So would you mind explaining the backdrop to this? And also, at the same time, this the headquarter and managerial expense of JPY 25,000,000,000 seems to be pretty high as well. So would you mind concerning these numbers and also the backdrop to this? So may I explain provide my explanation to your question then? Yes.

Operator

Okay. In REIT, first of all, with regard to this headquarter and administrative expenses, so JPY 45,000,000,000 of interest payment and SG and A is JPY 30,000,000,000 or so. So those are the major items that is included in the headquarter and administrative expenses. And I think the amount has been trending on and around this amount up to now. So it doesn't seem to be a big increase on our part.

Operator

And as for the growth area, I think I'd like to hand over to Yamamoto san to answer to the question. So with regard to the finance segment or the finance businesses financial businesses, insurance as well as in U. S, we have been being conservatively selecting our businesses, the deals, and we can start to experience some recovery. And so of course, we have incorporated some negatives in the prior year, and this is why we can expect a significant recovery this year, which means that in United States, so according to your qualitative explanation, you sounded very cautious in this briefing session, but you do expect normalization of the businesses and that is reflected to the numbers. Is that right?

Operator

Well, this the number that you had JPY 148,200,000,000 on other profits. And that includes the sales of a credit company and that is JPY 51,000,000,000 or so. So it is a capital gain. So we shouldn't have really unalcomated the numbers. But so this is why although the up percentage is not that significant, however, from the flow of the business of financials, JPY 198,000,000,000 should be achieved, and the majority is consisted of insurance as well as bank.

Operator

And also, considering other parts of the financial businesses, we have set these numbers. As for U. S. Though, credit cost, what we did in fact kind of appropriate it for the credit cost increase as of 24 March. So we think that we have come to almost to the peak level.

Operator

However, although the numbers may not grow that much, however, the credit cost, I think, has is just about to peak out. So this is why we have come up with this number because we do not foresee the credit cost to further increase. Okay. Thank you very much for that. And the second question, in fact, is still on Page 15, and that is to do with the PE investment.

Operator

And you, in fact, expect the growth in a significant manner and the capital gain that appears on Page 12, that is. And what I want to be asking, with regard to the capital gain, in the last year, there was before the impairment loss, that was the evaluation loss, JPY 150,000,000,000 that I think that was. But this year, it is about JPY 150,000,000,000 to JPY 200,000,000,000 of an expectation this year. And it was about JPY 100,000,000,000 for the past some years, so which means that the capital gain is going to be significantly higher. So over the 2 years, because of the environment that surrounds the business, the capital gain can be generated in a much bigger way or in numbers or this as compared to this JPY 100,000,000,000 of an average.

Operator

It's just that there has been a shift on the level of the capital gain that you can generate in a single year. Would this be a new standard? May I take it? So this is something that I would like you to confirm. So JPY 100,000,000,000 was an average per year, and that is our usual expectation.

Operator

This year, it was higher because of this sales of the credit business. And although we separate into sub segments, but this JPY 150,000,000,000, in fact, includes the sales of the credit company. And if you were to subtract that, it is roughly about JPY 100,000,000,000 of our gain. And that is roughly about our expectation or it is in line with our expectation. I'm terribly sorry that I may be asking this in a different way, Pat.

Operator

But capital gain, I think, is still expected to JPY 150,000,000,000 to JPY 200,000,000,000. That is your expectation going forward. Is that right? And for the next fiscal period and onwards, is this sustainable, the level JPY 150,000,000, JPY 200,000,000, JPY 200,000,000,000, JPY 200,000,000,000? It is possible, it is sustainable, but it is very much dependent on the deals that are available.

Operator

And we are exploring different opportunities such as PE and also real estate investment. So we have a certain buffer in place. So still, our usual expectation will be still be around 100,000,000,000 yen. So in a from a flow perspective, normally, when we do acquire any kind of investment, we would the equity method and all that would be under consolidation. And this is why we do expect these kind of numbers that you see on this page.

Operator

Okay. Okay. That is all for myself. Thank you. Thank you very much.

Operator

Daiwa Securities Watanabe san. Please ask your question. Yes, this is Ranabe, Daiwa Securities. I have two questions. First question is about profit target.

Operator

This is the last year of the midterm. And for FY 'twenty six March end and beyond, how much profit growth do you plan for? And ROTE and EPS, I understand you want to focus on this as KPIs. But going forward, do you think your KPIs will change? Well, for FY 2025 March end, this is a situation.

Operator

And do we produce another 3 year plan, midterm plan beyond FY 'twenty six March end? I'm sure that there are expectations for that. But when we produce a midterm plan, it will make our situation more difficult. So we are thinking about that. And including the directors of the Board, we will be discussing what to do about the 3 year plan, whether to announce that or not.

Operator

And if we announce it, what do we do? To be quite honest, going forward, we will have a very heated internal discussions. Level of growth, more than 10% of growth. This is something that we must achieve. And based on that understanding, of course, the numbers need to exceed 10%.

Operator

But it goes without saying that it depends on the market. But anyway, we are looking at that and we need some more time before we can announce something externally. So please be patient. What is the second question? RoTE and also EPS, are you going to focus on different KPIs going forward?

Operator

ROA, ROE and well, RTE is maybe another perspective that we should have. Some other companies are looking at return on tangible assets as well, But there are companies that don't use this KPI. Trading companies invest a lot in tangible assets, so they usually use ROE. But our investments, well, there's a lot of goodwill sometimes of intangible assets and we invest into those companies quite often. Of course, we will show ROE, but RoTA is something maybe we have to calculate as well.

Operator

And on top of that, we have EPS as well. We are not trying to increase the number of KPIs. ROA and ROE are the main KPIs. But in order to understand the true status of the company, RTE is something that we want to look at. So this is our policy and we also want to use it as an external announcement approach, but this is not with a KPI.

Operator

I understand. Thank you. Second question is about shareholder return payout ratio 39%. It was 33%. And also, on top of that, there was some addition due to the abolishment of the shareholder benefit.

Operator

But what is the background? What is the reason for this increase? It's simple. We want to see our investors happy. Prior market average payout ratio is 37%, I think.

Operator

And 37%, 38% are not really impactful. So why not 39%? Well, I know that people asked us for 40%, but it was not possible. So 39% is the number that we would like to show and get your understanding on. We don't know what is going to happen in the future, but we want to maintain growth.

Operator

And we also have a capital about €4,000,000,000 So low payout ratio would not be something that would be disappointing. And also for the retail investors, for from fiscal year 2024 and March end, we stopped providing shareholders benefits. So we wanted to provide some additional return. This is how the decision was made. We thought maybe this could be lower in the beginning, but we want to have this endorsed by the investors and that is why we decided on this number.

Operator

I hope this answers your question. Yes, that was very clear. Thank you very much. Thank you. Thank you for the question.

Operator

The next person is Sasaki san from Nomura Securities. Over to you. I am Sasaki from Nomura Securities. Hello. I have two questions.

Operator

The first question is with regard to the hedging costs. In the presentation, I think you had explained about the hedging costs. And when you came out with the plan for this year, how did you reflect the hedging cost? In what way? And when you do make an investment overseas, you'll basically do hedge against it.

Operator

Has there been any changes to the policy, the hedging policy? And if you're going to proceed with globalization, do you always have to hedge whenever you make an overseas investment, I wonder. So the hedging policy remains to be unchanged despite the fact that you'll be proceeding with the product globalization. So to begin with, you see ORIX was an yen based company. We started out that way.

Operator

And therefore, we have been proceeding with investment overseas on a yen denominated basis. But now we had extended globally, so therefore, dollar denominated outstanding balance of investment is JPY 2,800,000,000,000. And in total of JPY 3,500,000,000,000 worth of investment overseas that is denominated either on U. S. Dollars or euro.

Operator

So therefore, is there any kind of benefit in hitting against those currencies on a yen basis? We had questioned ourselves. So this JPY 160 to a dollar, in fact, kind of poses a question whether we should continue to maintain our capital in a very conservative way by hedging even against such the level of currency. But of course, on adjusted ForEx basis, we would be making an adjustment on the final, of course, accounts. But other than conservatively hedging for everything and anything, we may want to become a little more flexible, considering day by deal whether hedging is necessary or not would be questioned.

Operator

And so therefore, going forward, this ForEx adjusted amount, even if there was to be any fluctuation, it would be adjusted on the balance sheet basis. It will not affect the P and L. So this is why we may be a little more flexible, which means that the hedging costs going forward would not be based on a very conservative hedging policy, but I think we would turn a little more flexible and that is at the basis of this earnings forecast or the plan, which means that in 25 March, so JPY 390,000,000,000 of a net profit expectations. So this operation, in fact, there will be changes in your operation as well as this impact that you have just announced. Of course, if there was to be any kind of excess in terms of the planned target, then that would be the change that would be reflected, if you could take it that way.

Operator

Now you had explained to us that there are a number of risks that you foresee. But for example, Mr. Inoue, in your idea, this what would allow you to exceed your expectations in terms of the profit generation or the business opportunities or any kind of risks that may perhaps become smaller or whatever. So 24 March end, if you were to refer to the numbers, it was very much domestic focused. In other words, the overseas location, we had faced difficulty, if we may conclude.

Operator

So as for United States, if interest rate starts to, of course, get lower, the arbitrage would work and therefore the spread would, of course, spread or rather the other way around. So which means that we may be able to increase our profit generation. But according to the announcement of the Fed, it doesn't look as if they are going to be lowering the interest rate immediately. But if, of course, Mr. Trump becomes the President, sure, the interest rate may perhaps become lower, and they may perhaps cut the corporate tax rate as well.

Operator

So if U. S. Will be led by Trump, then of course, things would be very different. But that would be after the next fiscal period, though. So as for U.

Operator

S, it looks as if we will be hitting the bottom soon. However, how much of an improvement can we make is very much dependent on how things would kind of proceed. So inclusive of the security, in Europe, the volatility may perhaps increase on over in Europe. So U. S.

Operator

A, if Trump becomes President, of course, things would become better. But if Trump is going to become the President, Europe may suffer more and China may continue to struggle. So this is why if domestic can maintain the current level of the businesses, then United States will be an additional contributor and Europe may not be and Robico AUM can be expanded. But as for Robico, of course, the inflation in fact has not kind of come down. So therefore, 2025 number is still very difficult to or it has not it does not have much of a visibility that is.

Operator

So this is why we have carried out the downwind revision for JPY 440,000,000,000 to JPY 400,000,000,000 to JPY 390,000,000,000. That is these are at the backdrop. So if my forecast is not too conservative, then I think we would be able to exceed our current target of 390,000,000,000 yen to so 390,000,000,000 yen in fact is a minimum target that you are you feel the obligation to achieve. I don't want to really kind of drive myself into the SMBC SMBC Nikko Securities, Muraki san. Please ask your question.

Operator

This is Muraki, SMBC Nikko Securities. Page 12 sorry, Page 11, you are showing the financial leverage. And on Page 11 and 12, you are showing your ROE. In order to increase ROE, what can be done? That is my question.

Operator

I don't think it's too difficult to achieve 10%, but in rating leverage and if you increase to 10% or higher, maybe it's challenging to maintain that high level. So if the leverage is not increased, then as a method, for example, as you explained, shifting to asset management, introducing third party money and earning fees, I think that would be the model that you would want to shift to. But in order to increase ROE for this fiscal year, what are the initiatives for asset management? What are the specific initiatives in Japan and outside? Including the USA, we plan to launch funds.

Operator

And if the capital already is trying to increase the funds AUM and for domestic market, especially including Middle East, we are finding new investors who want to put money with ORIX. And of course, we have to deal with the situations 1 by 1, which means that, for example, with private equity, how much AUM will we have, we don't know yet. But anyway, we want to increase the AUM and increase the asset management fees. The challenge is compared to principal investment. We will be using a third party's money and profitability will be much lower in terms of fee.

Operator

So we have to do both, in other words. And as was mentioned before, if we want to maintain level higher than 10%, then we need a lot of funding from the 3rd party and we have to think about various initiatives. Total asset may increase, the total number may increase, but ROE may get worse. So in order to avoid that situation, we have to think about our policy how to best utilize capital and third party's investment and continue on expansion path. This is a major theme.

Operator

And this is the direction we're removing into this direction, but it will take some more time before we see the impact or the result of this. Thank you. Maybe it's not so much about earning fees, but you also mentioned that the project size is also increasing. You think about DHC, for example, as a deal, I think there's an advantage in going alone, investing 100% by yourself. But for large scale deals, do you think we will see more and more joint investments?

Operator

Yes, that is correct, including Middle East third party investments coming into ORIX. This means co investment funds type of approach. For example, we get for 51% and we will invite 49% investment. That will be the approach. But basically, according to accounting requirement, this 49% will be 100% on balance on our balance sheet.

Operator

So how to explain that externally is another issue. But anyway, U. S. GAAP requires us when we get investment from different sources and ORIX invest 30% or 40% or even a majority, everything has to be on our balance sheet. So ROA, ROE do not improve at least on the surface level.

Operator

So how do we explain that properly externally? And that is why we're talking about RoTE showing that in parallel, so that you can see how efficiently ORIX as a whole is being managed. So our next challenge is how to explain that externally. Understood. Thank you very much.

Operator

Thank you for the question. The next person is SBI Securities, Otsuka san, please. I am Otsuka from SBI Securities. I hope you can hear my voice okay. Yes, we can.

Operator

Thank you. So on Page 15, I was referring to Page 15. And I want to be asking questions about the PE investment. So 188 JPY 304,000,000,000 in fact is so that is JPY 420,000,000,000 of an increase, 42,000,000,000 yen of an increase. So Page 40 impact shows a breakdown by 3 categories and is a matrix with the segments.

Operator

And according to Mr. Inouye's explanation, and I think you have been explaining over time, but on Page 14. So the in the operation, which area is going to increase or grow in operations? So first of all, Kansai Airport kicks in the last year about JPY 10,000,000,000. Our I think it was the applicable on equity and that should double.

Operator

And also aircraft business, So we're proceeding with the acquisition of the aircraft in a significant way. And in addition, we would be disarming those aircrafts to Japanese investors. And also the replacement of the fleet of the ships will take place as well. So JPY 40,000,000,000 worth of profit can be generated with this being set. And the green curve, edamang, the assets, how can we capitalize on those assets, in other words, proceeding with the capital recycling that is?

Operator

And taking all that into account, I think posting of such an amount of profit is quite possible, we thought. I mean, sorry to go into much of the details, Mr. Inoue. But on Page 14, Kansai Airport, in fact, is an facilities operation, right? So I thought that it is under investment or is it under the real estate facility operations of operation?

Operator

Is that right? So investment, in fact, is if it is under equity method, it will be under investment. But the airport operation after all is under operation, although as an asset, it is held as an equity method. So I'm sorry that it is confusing. So as an operation, it is 100% operation for ORIX, real estate facility operation that is and of course, airport is included.

Operator

In the case of Kansai International Airport, we own 40%. However, there are about 10 people that are seconded from our company, and they are very much involved on a day to day operations. So as to the operation of Kansai Airport, there's an overlap between operation and investment. I hope this would explain. So this 188 and 8.5 and 230.4 in fact includes Kansai Airport.

Operator

Yes, it does, the operation I mean, yes. It's almost time to close and therefore the next question will be the last. Citigroup Securities, Niwa san. Please ask your question. Thank you.

Operator

This is Niwa from Citi. I hope you can hear my voice. Yes, we can hear you. Thank you. I would like to talk about the exit and also pipeline evaluation.

Operator

JPY 1,200,000,000,000 this time around. And last time last year, around this time, you said it was going to be JPY 1,500,000,000,000 And I think investment was quite successful last year maybe. But with regard to the pipeline, is it okay to expect something like JPY 2,000,000,000,000 or is it completely unrealistic? If you could explain, please. Well, pipeline, well, we have more than 2 trillion yen if we include all the good and bad things.

Operator

And if we are selective, this is a number that we're talking about. And then out of that, after buying, can you increase the value and can we do capital recycling and liquidate? And also, how can we capitalize the ORIX network? We have to look at all of this and then it would be basically about 50%. There are many inquiries, but it's becoming more and more competitive as well.

Operator

And we don't want to buy at high price. So we have to be very carefully looking at these different deals. One good example of this is Santoku Senpaku. In the beginning, From the seller's perspective, we are basically out of the question, but they changed their minds and they wanted to do with us. So we cannot say exactly how much, but we could purchase them at very competitive rates.

Operator

So there's inquiries, there's pipeline, can we really buy at good purchase price? And then can we really increase the value after the investment? So we have to be very discerning in all of these perspectives, which means that we cannot really process a large volume. But there's a lot in our pipeline and we have sufficient projects that we can do. But of course, we have to be selective in terms of what deals we can do because it's a competitive landscape and this stance has not really changed from before.

Operator

I hope that answers your question. Yes, thank you for the details. Now I would like to ask you about Lifestyle and also Bank low profitability businesses. And in the presentation, this time around, you talked about small upside of Japanese economy. That was my understanding, which means that for these businesses, in terms of flexibility expansion, maybe there's no more room.

Operator

Is that the correct understanding? Or once the monetary policy changes, should you continue to hold these businesses as core businesses because the profitability will change? The monetary situation is changing. So I would like to understand your position, your stance about bank and insurance. Yes, for life insurance and bank, it's true that the profitability is low.

Operator

In order to increase the profitability, we are pressuring these teams. If interest rate goes up, embedded value of life insurance company will increase. And then we will have maybe sufficient price to sell. If that is the case, we will not hesitate to sell. And this has been my policy over the last several years.

Operator

It has not changed. And same story with the bank. We are asking the bank to increase the profitability. Compared to other businesses, ROA seems to be good. But if we want to sell bank, we can only sell at PBR of 0.some times.

Operator

We're not that desperate. So we only sell if the price is right. So same thinking as credit. If we have the buyer and the offer is attractive for us, then we will sell at that attractive price. So the policy is still unchanged.

Operator

Thank you. In order to increase ROE, I think what to do with this business is a big theme for ORIX. But still, you want to maximize the value that is more important for us. Is that correct? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, bank and life insurance, 0.5, 0.6 at this level, I don't think there's an advantage for us to sell.

Operator

That is our assessment. It has to be sold at the right price. You might be dissatisfied, but RA is 9% with ORIX, and we are approaching exceeding 10%. So we want to pursue ways to maximize the value that is the current direction of ORIX. I hope you understand.

Operator

Thank you very much for your detailed explanation. That was very informative. Thank you for the questions. And with this, we'd like to conclude the Q and A session. And I'd like to ask Mr.

Operator

Inhale to provide us with the closing remarks. Well, this year, 2024 March end, the numbers were pretty good, as we have announced. But it is not to our full satisfaction, JPY 390,000,000,000, JPY 400,000,000,000 and also ROE of 10%, 11% must be achieved. And it will require a strenuous effort in order to achieve those goals. So we would continue to seek for your support.

Operator

And of course, during this time, of course, we would enhance the payout ratio so that we'll be able to align ourselves with your expectations. And this is how we are going to be managing this business forward. So please continue to support us. So with this, I'd like to conclude our FY 'twenty four March end briefing session. Thank you very much for your participation and please disconnect.

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Key Takeaways

  • Record FY24 profit: Net income rose 19% to JPY 346.1 billion with Q4 net profit of JPY 126.9 billion—both all-time highs—while base profit climbed 14% and investment gains jumped 54% on ongoing capital recycling.
  • FY25 targets revised: Net income guidance lowered to JPY 390 billion (4.7% growth) due to slower U.S. recovery, elevated rates and geopolitical risks, yet ROE is targeted at 9.6% with a longer-term goal above 10%.
  • Enhanced shareholder returns: Full-year dividend set at JPY 98.6 (39% payout ratio) and a JPY 50 billion share buyback program, aiming for a 51.8% total return to shareholders.
  • Shift to asset manager model: Plans to report ROTE (~13%) alongside ROE, target EPS of JPY 341 for FY25, and expand AUM from JPY 60 trillion to JPY 100 trillion by leveraging third-party capital and its global network.
  • Credit rating update: S&P downgraded ORIX from A- to BBB+ over portfolio diversification and capital recycling pace, while other agencies maintained A- or AA-equivalent ratings and ORIX says its financial policies remain unchanged.
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Earnings Conference Call
ORIX Q4 2024
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