Earnings Call Transcript - IX Q4 2025

Sachiko Nakane, IR and Sustainability Department

Thank you for joining ORIX Corporation for Annual Results for the course of the fiscal year ended March 31, 2025, despite your very busy schedule. I'll be the master of ceremony. My name is Nakane from the IR and Sustainability Department. Thank you for this opportunity. The attendee at today's conference is a Member of the Board, Represent Executive Officer, President and CEO, Hidetake Takahashi, and also Kazuki Yamamoto, operator and responsible for Investor Relations. Inoue, Takahashi, and Yamamoto will present followed by a Q&A session. The briefing session is scheduled to last approximately one hour. I would like to hand over to Mr. Yamamoto.

Kazuki Yamamoto, Investor Relations Officer

I am Yamamoto from ORIX. So I would like to now report on the consolidated net income for ORIX for the fiscal year ending March 2025. So please refer to Page 3 to begin with. So consolidated net income for the fiscal year ending March 2025 was JPY 351.6 billion, which was announced at 3:30. Although it fell short by 9.8% compared to the forecast of JPY 390 billion, the net income was up 2% from the previous year's result of JPY 346.1 billion. ORIX once again achieved record high profit. The full year ROE was 8.8%. At the end of FY '25, the market had significantly changed with increased uncertainty due to the disruptions in the global supply chain and fluctuations in resource prices. As a result, we reviewed future prospects for our businesses. Considering these uncertainties, we recorded total impairments of JPY 53.1 billion on a pretax basis for some assets and investments. On the other hand, many segments, including PE and Concession, Aircraft and Ships, and Corporate Financial Services improved their performance, leading to another record high profit for the full year. On the next page, we will explain pretax profit and segment profit based on the 3 categories. Now Slide 4. If you could refer to the bottom row of the table below compared to the net income of JPY 351.6 billion mentioned earlier, pretax profit was JPY 480.5 billion, which is JPY 10.5 billion more than the same period last year. The profit from the 10 segments, excluding headquarters costs, came at JPY 544.7 billion. Now I will explain the breakdown using the 3 categories. First, profit from the finance category was JPY 176.3 billion. Last year, we booked a gain from the sales of ORIX Credit. So excluding that impact, profits were higher. The main factors behind the profit increase were strong investment income from ORIX Life Insurance and the U.S. private credit businesses. The profit from the operation category was JPY 200.2 billion. Profit declined year-over-year, mainly due to our conservative revision of plans more than the conservative plan of FY '22 for the coal and biomass coal-fired power plants, which resulted in an impairment of approximately JPY 20 billion. On the other hand, contributions from Kansai Airports, ROBECO, and Santoku shipping resulted in higher profits, excluding impairments. Regarding the investment category, segment profits were JPY 168.2 billion, a significant increase of JPY 56.2 billion compared to the same period last year. Two exits were realized in the domestic PE business, thanks to contributions from significant improvements in profits at investees, investment gains in the U.S. and Real Estate segment, and increased profits from equity method investees like Avolon. Next, we will explain segment profit in terms of base profit and investment gains. So please proceed to the next page. Out of total segment profits of JPY 544.7 billion, the so-called base profit was JPY 457.1 billion, a 5% increase from the previous year. Investment gains net of impairments were JPY 87.6 billion. Base profits exceeded JPY 100 billion in all four quarters for the first time in FY '25. The overall operations and investment portfolio contributed solidly to profits, supported by the recovery from the pandemic, inbound demand, and the steady recovery of domestic economic activities. Through value creation in our strong domestic PE investment ships, aircraft leasing, and European asset management businesses, and in businesses expected to grow further, we will continue to drive sustainable base profit growth for the ORIX Group. Additionally, investment gains through capital recycling are one of the pillars for realizing profits in a diversified operating and investment portfolio. In the fourth quarter, investment gains were a net loss of about JPY 2 billion due to impairments exceeding JPY 50 billion. However, we were able to record gross investment gains exceeding JPY 50 billion through PE investment exits in Japan and the U.S., making full year gross investment gains larger than the same period last year and second only to the fiscal year FY '22 when we booked the investment gains on the Yayoi sales. Finally, we will discuss the progress of capital recycling. Please refer to Slide 6. In the fiscal year ending March 2025, we recorded capital gains of JPY 140.7 billion for the full year. The cash inflow from sales for the full year was about JPY 645 billion, while new executions amounted to about JPY 600 billion in total. The assets sold were primarily those with strong performance, such as the two domestic PE investees listed here, where optimal buyers were selected for the firms from both domestic and international bidders. In Corporate Financial Services, the selection of business succession targets progressed in the micro business succession M&A project faster than the past several years, resulting in three exits. Additionally, there was a significant cash inflow from the sales of a large multipurpose facility in Tokyo, which had been a long-term holding while its value was being enhanced. These cash inflows were used for new investments focused on domestic real estate, domestic PE, and aircraft following the IRR focused selection process. Among these, we proactively invested in aircraft based on the assumption that the supply and demand for aircraft will remain tight in the future. For this fiscal year, we will continue to execute new investment while maintaining the right balance between recouping investment through capital recycling. We will remain flexible in making a decision if we think the deal will contribute to ORIX's future growth. So you can see the pipeline on the following page. Now, the vertical axis represents the investment amount and the horizontal axis represents the time required from investment execution to earnings contribution. So at ORIX, from the time of investment, we would swiftly try to generate profit from ships and aircraft. In addition to private equity investment from a long-term perspective, we would try to make investments that allow us to enjoy capital gain for many years to come. So we had roughly about more than JPY 2 trillion of investment, and that will remain unchanged. And this concludes my presentation. I would like to hand over to President Takahashi, who will present our forecast for the new year.

Hidetake Takahashi, President and CEO

Good afternoon. I have been appointed to be the President and CEO from January of this year. My name is Takahashi, and allow me to present from Slide #8. We regret that we were unable to achieve the sales of Greenko announced in January and thus, we were unable to meet the full year forecast net income of JPY 390 billion for the fiscal year ending March 2025. However, we achieved a record net income of JPY 351.6 billion and a steady increase in base profit, despite recording significant impairment due to our conservative forecast. We would like to continue to grow the base profit steadily going forward, and I think we perceive this to be a great achievement this year. ORIX's full year dividend will be JPY 120.01 per share, following our dividend policy of a payout ratio of 39% of the previous year's dividend, whichever is higher. For FY '26, March end, we forecast a third consecutive year of record net income of JPY 380 billion. We will maintain our current dividend policy and assuming net income of JPY 380 billion, FY '26 March and DPS will be JPY 132. We will also increase the scale of share buybacks to JPY 100 billion, double the usual amount of JPY 50 billion. This is aimed at helping to steadily improve ROE, our most important management indicator, and this has been resolved at the time of the BOD today. As a result, the total shareholder return ratio, including dividend and share buyback, will be 65%. Next, I will discuss our view of the impact of recent macroeconomic developments on our businesses. We believe the direct impact of tariffs is limited, but we need to keep in mind the indirect net effects, such as possible recession and exchange rate fluctuations. Regarding the possibility of a recession, for example, some existing investments and loan targets in the U.S. and Japan are expected to face rising procurement costs, posing a risk of deteriorating performance. However, such clients account for a limited portion of our portfolio. Additionally, due to deterioration in the investment climate, there is a risk that new investments and exits may be delayed compared to our plans, and the realization of investment gains overseas may be postponed to the next fiscal year or later. On the other hand, domestic real estate and PE are maintaining solid momentum at present, and we expect to achieve a good amount of investment gains from these areas in the fiscal year ending March 2026. Given the uncertainties, including geopolitical risks, we believe a cautious approach is necessary for the time being. Meanwhile, during these uncertain times, it is important to conduct business activities with a focus on enhancing mid- to long-term corporate value and to have disciplined portfolio management. This means replacing assets with low capital efficiency to improve ROE. At any rate, ROE would have to be improved, and we would exert much effort in that regard. Despite this business climate, which remains uncertain, we believe our FY '26 March end net income target, which represents a new record high, is still achievable. Please move on to the next slide. Regarding this fiscal year's forecast, we will briefly explain it by breaking it down into three categories. We expect double-digit growth in profits in the operation and investment categories and continued stable growth in finance as well. As to finance, we are focusing on high premium first sector products, targeting corporations and affluent individuals for the insurance businesses. This should allow us to grow premium income at a pace significantly exceeding that of Japanese competition. This customer segment is an area where synergies with corporate financial services can be expected, and we anticipate profit growth through expanded premium income from FY '26 March. In operations, tourism-related areas such as airport concessions and aircraft leasing are likely to be the drivers of profit growth. The airport concessions business has completed a major renovation of Terminal 1 at Kansai International Airport in March, expanding international passenger intake capacity by 1.7 times and preparing for increased passenger traffic due to the Osaka Expo. In investments, we anticipate profit growth through continuous capital recycling in the real estate and PE segments by leveraging our extensive network and being capable of real estate development from sourcing properties and projects to exits. Please turn to the next page. Finally, regarding shareholder returns, the previous full year dividend of JPY 120.1 per share was a record high and a CAGR of 21% in dividends per share since the fiscal year ending March 2011. We will continue the dividend policy of having a payout ratio of 39% or the previous year's dividend, whichever is higher. Based on the forecast net income of JPY 380 billion, the dividend forecast for this fiscal year will be JPY 132 per share. We intend to continue implementing share buybacks. I already mentioned JPY 100 billion, but we will do this flexibly to achieve sustainable EPS growth and optimize capital at the same time. Moving on to long-term vision and the 3-year plan. Please skip to Page 13. In formulating the new 3-year plan, we started with the premise of the ORIX Group's purpose, which was established last year. Based on this, we drew up our goal and targets. Ten years from now, ORIX's vision for 2035 is to make an impact through alternative investments, operations, and business solutions. We will work to achieve an ROE of 15% and a net profit of JPY 1 trillion in the fiscal year ending March 2035. We also recognize that ROE improvement is ORIX’s top management priority for our new 3-year plan, which starts this fiscal year. We aim to achieve an ROE of 11% in the fiscal year ending March 2028, the final year of a 3-year plan. Please turn to the next page. To realize this long-term vision, we have 3 focus areas. I would like to explain the growth strategy. We have pathways, growth, and impact. These are the 3 focus investment areas. We want to evolve our strength in our two business models — alternative investments and operations and business solutions — to achieve a sustainable growth cycle. Business solutions are there to solve or address our customers' problems. With regard to pathways, the focus is on technological evolution, aiming to achieve new areas of impact in the future economy. Growth focuses on global population growth and demographic changes, supporting sustainable growth in a changing world. Impact addresses global warming and limited resources. We aim to make a positive impact on these issues. While we already have businesses in these key areas, we intend to further strengthen cross-segment collaboration, combining the strength of each segment expanded over the past decades to develop business at scale in each area. While these two business models are the ones that we have traditionally possessed, the asset value creation model will evolve into an asset management business, incorporating third-party capital in each business, transforming into an asset-light business structure. This is our plan. In a model for solving clients' issues, we provide solutions to global clients' challenges, such as M&A brokerage focused on business succession opportunities within the Japanese market, which has actually grown to a considerable scale. We aim to strengthen our revenue base with asset-light fee-based models. Please turn to the next page. I would like to explain the 3 key measures for achieving our long-term vision. The first is disciplined portfolio management. Second, sophisticated risk management; and third, new business creation. These are the essence of management for the ORIX Group, in my own opinion as well. We want to execute all 3 without fail, and the details can be found on the bottom of the slide. We also believe that disciplined portfolio management is particularly important for improving ROE. As before, we will realize business value through capital recycling moving forward, but we will also visualize the growth potential, capital efficiency, and impact on credit ratings of each business and asset at a much finer granularity. This will enable us to optimize and reconfigure the portfolio and improve ROE, which is the most important theme for the management of the group. In relation to enhancing our existing businesses, we aim for sustainable growth of the bottom line through new businesses centered on the strategic focus areas, which were outlined earlier. We will invest management resources to maximize growth in the numerator part of the ROE formula. Please move on to the next page. I would like to explain the ROE targets and initiatives for ROE improvement in our new 3-year plan in the three categories of finance, operations, and investments. In Finance, we aim for double-digit ROE growth through accumulation of alternative investments and syndication, including the addition of third-party funds, selection, and concentration within Asia, and the expansion of non-financial revenue through the model of solving clients' issues. In operations, we aim to improve ROE through horizontal rollout of asset management businesses in real estate, renewable energy, aircraft, and ships, and enhancing services and inbound businesses. We want to improve it to 15%. In the investment category, ROE may fluctuate depending on exits, but we aim to improve ROE to 11% on a multiyear average basis by accelerating capital recycling and forming PE funds. Recently, we announced the sale of ORIX Asset Management and Loan Services Corporation. We intend to continue optimizing the business portfolio across the three categories without setting aside any area as a sacred cow. Our strength has been able to approach sectors and regions from three different angles: finance, operations, and investments and our ability to undertake hands-on investment and operations utilizing expertise in finance, which is a founding business. Over the mid- to long term, our portfolio will shift more towards operations and investments. But it is important to maintain abilities in all three, not just categories but methodologies. Please turn to the next page. Finally, I'd like to explain the policy regarding capital allocation and shareholder returns in our new 3-year plan. While continuing to maintain an A credit rating, we will persist with the policy of distributing 39% of net profit as dividends. For March '26 fiscal year, we have a JPY 100 billion share buyback. Looking at capital recycling, we will be flexibly conducting share buybacks to optimize capital and also grow EPS sustainably. We believe that my mission is to enhance long-term enterprise value and stock value. Since EPS growth and improvement of ROE have a correlation with rising stock prices, I want to reiterate that we will thoroughly focus on capital allocation and portfolio management that emphasizes the growth potential and capital efficiency and the impact on credit ratings of each business while optimizing capital to achieve sustainable EPS growth and ROE improvement. This concludes the brief overview of our long-term vision and the new 3-year plan. Please turn to Page 18. I would like to recap the key objectives once again. We aim for an ROE of 15% and a net profit of JPY 1 trillion for the fiscal year ending March 2035 as a management KPI. There is an interim milestone of ROE 11% for the fiscal year ending March 2028. This is the most important goal for the new 3-year plan. Regarding the JPY 100 trillion AUM target in asset management, we aim to achieve this within these three years, and we plan to further expand AUM. That was a quick view on our long-term vision and our new 3-year plan. Thank you very much for your kind attention.

Operator, Operator

But please understand that we will prioritize those who are attending the meeting in person. So to the person at the farthest right on the first row in the venue.

Kazuki Watanabe, Analyst, Daiwa Securities

I'd like to ask a question with regard to capital policy. The buyback is now being doubled to JPY 100 billion. On Page 17 in the orange box, maybe JPY 150 billion or more is expected to be repurchased. So if you could kindly share the idea of the shareholders' return as well as the shares repurchased program.

Unidentified Company Representative, Company Representative

We have been targeting achieving double-digit ROE and have positioned it to be the first and foremost important management target, which means that we need to address both the denominator and the numerator in order to improve our ROE. As for the denominator, we would have to continue to carry out the shares repurchase program to achieve capital efficiency. Also, capital recycling and the timing of the investment must be addressed in a flexible manner. There might be attractive opportunities for us to invest, but investment and divestment may cause discrepancies that hinder achieving a good enough balance. We will not be able to perhaps achieve great balance if divestment amounts exceed possible investments. In any case, we would like to continue to focus on ROE regarding management indicator.

Kazuki Watanabe, Analyst, Daiwa Securities

You mentioned focusing on EPS, which means that you are incorporating double-digit growth. Is there any kind of changes in the idea behind that?

Unidentified Analyst, Analyst

No, no changes. But we would turn more proactive in terms of shares repurchase program because 70% of the profit is base profit, while the others consist of capital gain. The capital gain in a linear manner to grow will be difficult. We would like to continue to grow EPS steadily in a linear manner.

Operator, Operator

Second row in the front.

Masao Muraki, Analyst, SMBC Nikko Securities

My name is Muraki. I have a question about your capital allocation. Page 48 on the right side, I can see a diagram. To improve ROE, investments must be shifted from light red to the darker red in the center, which is what you're trying to do. Regarding investments and capital allocation, which part do you intend to shrink? That's my question. Also, in terms of the share buyback for this fiscal year and the next fiscal year, Page 17 shows about JPY 300 billion — more than JPY 300 billion. Is this the number for upside? Or is this based on the standard scenario in terms of investment?

Unidentified Company Representative, Company Representative

To improve ROE, there are several approaches. One is revisiting capital allocation and releasing low capital efficiency. Another aspect is maintaining an A rating while conducting share buybacks flexibly. We want to look at all factors at a high level of granularity, both for asset investment and divestment. We want to visualize them accurately. Based on quantitative data, we want to execute capital recycling. This is part of ROE improvement. Our most important management measure is rigorous portfolio management.

Kazuki Yamamoto, Investor Relations Officer

You have a question about Page 48. I would like to explain the numbers regarding 11% over three years. Upside for the investment category is not directly reflected. Based on the current portfolio, the horizontal axis represents the percentage of capital allocated. Investment will be repeated and accumulated. ROE will be pushed up through this process. This has already been factored in, and we want to achieve 11%. For the first year of this plan, share buyback has changed from JPY 50 billion to JPY 100 billion because of this background. As we move forward with capital recycling, there will be no sacred cow; no stone will be left unturned in our efforts to achieve 11%. This is what we are trying to demonstrate with the bubble chart on Page 48.

Masao Muraki, Analyst, SMBC Nikko Securities

How do you incentivize these measures? Because traditionally, director remuneration sees net income as a key KPI, and ROE was not taken into account.

Unidentified Company Representative, Company Representative

There are two factors. Since I assumed this position in January and as the Head of Segment and Head of Administrative Department, I have repeatedly delivered the message to focus on ROE and am trying to change people’s mindsets. Secondly, reflecting this into the executive remuneration is important. We didn’t have enough time this round. Starting from January, with the AGM, we could have introduced a new remuneration system.

Koki Sato, Analyst, JPMorgan

Regarding the profit plan for this year, how did you apply your conservative estimate? For the year that ended, gross capital gain and net capital gain can be observed, but the impairment of JPY 50-plus billion also occurred. This time, the segment profit increase is roughly about JPY 55 billion. Are you expecting growth despite the impairment? Also, is there any conservatism reflected?

Unidentified Company Representative, Company Representative

There is some conservatism, but we are also aggressive. We think that this profit is achievable, and this is why we made the announcement. For example, unfortunately, the Greenko sales were not executed. The market has been volatile. We think this is achievable; this is why we made such an announcement today.

Naruhiko Sakamaki, Analyst, Mizuho Securities

In terms of your midterm plan, I don't think you have disclosed profit levels. What level of profit do you think would be acceptable?

Unidentified Company Representative, Company Representative

We have not announced any numbers today, so I would refrain from discussing specific figures, but we focus on improving ROE and maximizing management resources.

Wataru Otsuka, Analyst, SBI Securities

On Page 16, you have shown the ROE plan. This is the first time you have taken such an approach. Who is going to be accountable for this, and how does it work?

Hidetake Takahashi, President and CEO

As of now, for these 3 categories, the management accountable is Inoue, CEO, and myself, COO, Takahashi. We think the best scenario is to carry out these category activities under the heads of each segment. As we have disclosed, we do have capital allocation from a managerial accounting perspective.

Natsumu Tsujino, Analyst, BOA

In the fourth quarter, you had equity-based investment of about JPY 10 billion in Asia and also in Europe. Regarding impairment, why was it significant at this time?

Unidentified Company Representative, Company Representative

Impairment must be done according to accounting rules. Specific reasons vary; we want to optimize capital which will improve ROA and the quality of capital. While gross profit contribution is welcomed, if capital efficiency is low, ROE may be weak.

Futoshi Sasaki, Analyst, Nomura Securities

In new investments, JPY 500 billion to JPY 700 billion is the idea. If you're going to be asset portfolio and sell assets, would that match against this size?

Hidetake Takahashi, President and CEO

Regarding the second part of your question, we have been able to post positive results in past cycles. We have just made a press release regarding an acquisition. We intend to make the most out of our strength.

Kazuki Yamamoto, Investor Relations Officer

In the three years, the execution will be done during this period. We will scrutinize businesses in the pipeline. We aim for around JPY 500 billion to JPY 700 billion just as you’ve asked.

Hidetake Takahashi, President and CEO

Thank you very much for joining us today. I’m sure that there are still some questions left, but we have introduced our strategy and measures today. By implementing them on a quarterly basis, we would look forward to providing you with the progress, so that you can monitor the progress. We appreciate your continued support.

Operator, Operator

That concludes the earnings call for the fiscal year ending March 2025. Thank you very much for staying until the end of this program. Thank you, and goodbye.