Earnings Call Transcript - IX Q1 2025

Nakane, Investor Relations

It's time to begin the meeting. Thank you for joining us for ORIX Corporation First Quarter Consolidated Financial Results for the three-month period ended June 30, 2024. I'm from the Investor Relations and the Sustainability Department. My name is Nakane. I've been seeing this program, and today's attendee is Kazuki Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we have a request to the participants. In order to present feedback, if you have a mobile phone or other telecommunication devices nearby, please make sure that it is turned off or away from the telephone. Yamamoto will provide an explanation and this will be followed by Q&A. The program will last approximately 1 hour. Mr. Yamamoto, please begin.

Kazuki Yamamoto, Operating Officer

Thank you for the introduction and for attending ORIX Group's earnings meeting today. I'm Yamamoto, the Operating Officer overseeing Corporate Planning and Investor Relations. Let's get started. Please refer to page two for the executive summary and some highlights. First, our Q1 net income increased 38% year-over-year to JPY86.7 billion, achieving an annualized ROE of 8.7%. This accounts for 22% of our full-year net income target of JPY390 billion, which is a solid start to the year considering the seasonality of ORIX's earnings. In the finance category, which we introduced in Q4 of last fiscal year, we continue to see steady earnings. Profits in the insurance segment rose during Q1. In operations, airport concessions are seeing growth, and in investments, we've reached 20% of our annual profit target with a significant year-over-year increase of 194% due to domestic PE exits. The second important point is the growth in inbound tourism. Profits from our three inbound-related businesses rose 78% to JPY6.9 billion year-over-year, benefiting from aircraft utilization and ongoing profit expansion in our airport concession business, including Kansai International Airport, hotels, and real estate operations. In aircraft leasing, high lease rates and prices are being driven by growing passenger markets and a tight supply and demand for aircraft. ORIX is well-positioned in both the aircraft leasing market and the resale of pre-owned aircraft. The third key point is capital recycling. Alongside a domestic PE exit, ORIX also benefitted from the sale of investment condos, resulting in JPY35 billion in capital gains for the quarter. We made several significant investment decisions that should drive future growth, which I'll detail later. We anticipate our full-year capital gains to surpass last year's figures as we carefully advance each deal in our ongoing capital recycling efforts. Now, moving to the next page, Q1 net profit of JPY86.7 billion is ORIX's strongest first quarter since FY ‘18, with a reported annualized ROE of 8.7%. The graph shows our quarterly net income and ROE trends over the past two years. ORIX's net income for Q1 has historically been around JPY60 billion, which reinforces our belief that we've had a strong start this fiscal year. In the following pages, you will notice changes in how we calculate segment profits and segment assets, with retroactive adjustments made for previous fiscal years. Please refer to our supplemental materials released today for details. Let's move to page four, which outlines our progress toward this fiscal year's forecast in three categories. The left chart shows actual segment profits for FY ‘24 by March's end against this year’s targets, while the right chart breaks down the data for Q1. Focusing on the finance category at the top, segment profits decreased slightly by 1% year-over-year to JPY47.2 billion. ORIX's credit, previously included in the finance category, is now categorized under investment this year. Taking that into account, the finance category performed well due to investment income in life insurance and other factors, achieving 24% of our previous forecast. Next is the operations category, represented by the light blue bar, which grew 14% year-over-year to JPY53.2 billion. Strong recovery in airport concessions, better earnings in European asset management, and growth in orders have contributed to this growth. The acquisition of Santoku Senpaku last fiscal year also provided a boost and resulted in this category achieving 22% of its three-year earnings target. Looking at the investment category shown by the pink bar, segment profits reached JPY36.8 billion, representing 20% of the three-year target but a remarkable 194% increase year-over-year. Successful PE industry exits and condo sales played a key role, with ORIX benefiting from favorable market conditions driven by the weak yen and low interest rates. Total segment profits increased 28% year-over-year to JPY137.3 billion. Moving to page five, this page updates three categories, ROA, and segment asset-size data trends from Q4 last year. We are committed to improving ROA in the finance category, supported by our shift toward an asset management model in the operations category and promoting capital recycling in investments. Now, on to page six, which presents a matrix of three categories and ten segments with definitions added as requested by investors. The three businesses highlighted in red have been moved from investments to operations since Q1. We've adjusted the segment profits retroactively on pages four to five to reflect these changes. Credit, categorized in finance last year, is now under investments as of this quarter. Pages seven and eight summarize segment information, showing year-over-year profit increases. Excluding the gain from ORIX credit's partial stake sale, segment profits also increased quarter-on-quarter. General trends can be found on pages seven and eight, while detailed segment information is available on page 13 and onwards. Starting with Corporate Financial Services and Maintenance Leasing, segment profits decreased by JPY600 million or 3% year-over-year to JPY19.8 billion. The decline primarily stemmed from the absence of one-time gains booked last fiscal year. Conversely, auto rentals hit record highs due to strong leased auto sales and the recovery in domestic travel. Rentec's profits rose from increased income in operating leases driven by IT equipment replacement demands. Real estate segment profits surged to JPY14 billion, a 36% year-over-year increase, due to the sales of investment condos, while operations in hotels and inns maintained favorable earnings. Note that the MICE IR business is now part of the real estate segment, leading to slightly higher costs year-over-year. The profits from the PE investment and concession segment skyrocketed by 455% year-over-year to JPY32 billion, a JPY26 billion increase. The sharp growth was due to the profitable sale of Sasaeah Holdings and higher contributions from existing industries like DHC. International passenger growth at Kansai International Airport and increased non-aerial revenues from new shopping venues also boosted this segment’s profits. Referring back to the Environment Energy segment, we reported losses of JPY500 million, a decline from JPY5.5 billion year-over-year. In Japan, costs rose due to facility rebuilds, while domestic power generation faced output caps at solar plants. Additionally, overseas renewable energy projects tend to show seasonal weakness in Q1. Insurance segment profits grew by 13% year-over-year to JPY21.9 billion, supported by earnings gains from diversifying our asset-managing portfolio in life insurance, and a rise in premiums contributed to this increase. The banking and credit segment saw a 23% year-over-year decline of JPY2 billion in profits to JPY6.4 billion, mainly from reduced profit contributions after the partial sale of ORIX credit. While segment assets dropped due to this sale, the lending balance rose through corporate loans in key sectors, like renewable energy. In the aircraft and ship segment, profits rose by JPY4.1 billion, a 54% increase to JPY11.8 billion, spurred by stronger global demand for passengers. Though aviation profits dipped from the lack of investment gains, the profit trajectory remains positive. In Ships, profits surged due to the acquisition of Santoku Senpaku. The ORIX USA segment profits fell 3% year-on-year to JPY11.8 billion amidst the challenging business climate. We continue to manage risks proactively for both new deals and existing investments, maintaining a manageable level of non-performing loans. Larger impairments recorded last fiscal year minimized credit costs in Q1. While private credit sees steady growth, the real estate and PE sectors are facing downturns that affected overall profits. The ORIX Europe segment demonstrated a significant profit increase of 56% year-over-year to JPY11.2 billion, attributed to timely growth in fee income and the expansion of assets under management. Conversely, the Asia and Australia segment noted a profit drop of JPY2 billion to JPY8.9 billion, largely due to the absence of prior year valuation gains. Nonetheless, ASEAN countries exhibit a healthy business climate, with growth in new lease executions for autos. Assets in this segment rose by JPY93.7 billion, but this largely stemmed from foreign exchange fluctuations. Caution persists in Greater China, with segment assets for that region decreasing when excluding FX effects. Now, please turn to page nine for key topics. We categorized Aircraft and Ships, real estate facilities operations, and airport concessions under inbound tourist-related businesses, which were impacted by the pandemic but are rebounding strongly due to increased inbound tourism and global travel demand. Q1 profits for these two business segments rose 78% year-on-year to JPY57.7 billion, driven by tight supply and demand for jets resulting in higher lease rates and aircraft prices. Visitor arrivals in Japan have surpassed 2019 levels from all countries except China, although arrivals from Mainland China are also improving. At Kansai International Airport, new shopping facilities benefiting from recent innovations are enhancing non-aerial revenues. Anticipation for the Osaka EXPO 2025 is expected to further lift inbound tourism. Note that Kansai's earnings results reflect a three-month lag, so current Q1 figures apply to the January to March period. Regarding capital recycling, ORIX recorded JPY35 billion in capital gains for Q1. The cash inflow of JPY135 billion will fund investments in areas such as domestic real estate and overseas renewable energy. Since our last earnings call in May, we've actively pursued numerous investments, which are listed in the blue box. By accelerating capital recycling according to our value creation strategy, we expect this fiscal year's capital gains to surpass last year's results. This next page breaks down our segment profits into base profit and investment gains as usual. Base profit saw a 6% rise year-over-year to JPY103.8 billion, while investment gains soared 261% to JPY33.5 billion. This strong Q1 performance in both categories reflects our ability to capitalize on favorable market conditions. ORIX plans to adapt to macroeconomic factors like interest rates and FX fluctuations, adhering to the financial strategy outlined by our CEO, Makoto Inoue, in our last earnings release. We aim for clearer disclosures to enhance investor comprehension of our operations amid rapid market changes. Q1 results met our expectations, and for Q2 onwards, we're focused on enhancing company-wide profitability through our established financial base while capitalizing on growth opportunities and operational investments. Our immediate goal is to reach our JPY390 billion net income target for FY '25, continuing our investments for future growth. Thank you for your attention.

Operator, Operator

So, from SMBC Nikko, Muraki-san, over to you.

Masao Muraki, Analyst

Muraki, this is from SMBC Nikko. So, the market fluctuation, how does it affect your earnings, is what I want to ask you. On page 45, to the right-hand side, so there is a sensitivity to ForEx as compared to large end. So, it is, yen has depreciated or appreciated further. So, that is about the JPY16 billion of adversity I think that you're experiencing. So, if the United States is going to go into recession and the Fed and ECB is going to cut their interest rate, then what would be the impact to your earnings, whether it be to the positive or negative? Thank you.

Unidentified Company Representative, Company Representative

Thank you for the question. As you have said, as we stand now, after the sensitivity to ForEx, the current investment as well as loan extension, in fact, is on an upper basis, and we should be indicating a plus and minus of JPY2 billion. And therefore, what Muraki-san said is true. So, if there was to be any changes in the policy, especially for U.S. dollars as well as euro, interest rate cut should, we are proud to be positive for us. It would be a tailwind for our company. Whereas, for euro, the interest rate in actuality, the decline of the interest rate so far has been supportive to the recovery of our earnings. And with regard to aircraft-related businesses, it would work out to be positive as well. With regards to USD, it is the same. Source income the same can be said to be true. And also private equity and also real estate. As of now, we have been refraining from making new investment. We have been continuing our activities so far. But I think we will be able to be provided with some leading space. But of course, it is kind of difficult to indicate the impact in a quantified manner at this point in time. However, these monetary policy changes can be captured as a great opportunity for our earnings. So, we have to make sure that we'll be able to capture that as an opportunity, both in European market, as well as U.S. market. I don't know whether I have been able to answer your question in a straightforward manner because the market is still kind of going through changes. But that is all for myself. Thank you.

Masao Muraki, Analyst

Well, thank you for your answer. So, here in Japan, investment to private equity and also exit in real estate. With regard to that, it is not correlated to NSA 225. But in what kind of condition would you find it difficult to generate gains on sales, do you think?

Unidentified Company Representative, Company Representative

Well, that is something you have said or asked. Essentially, with regard to real estate businesses, there are certain, of course, funds that we would have to continue to manage. So, we would have to perhaps increase the amount of wage and fees. So, such as investment condos this year, we were able to enjoy sales that had exceeded or outpaced our initial expectations. And that is the depreciation of yen and also lower interest rate was supportive of these initiatives on our part. However, the adjustment up until now, about 2x as compared to the time when it was JPY 110 and JPY 120, in terms of the further space of growth, I think we still have some more space that we can enjoy growth because the expectations of investors would continue to remain unchanged. So, therefore, the pipeline deals that we can proceed with can be continued at a similar pace for now. But especially, the investment in PEs, especially FMEs, we would have to be affected by the higher interest rate. However, because of the positive turnaround of the economy, we can expect them to generate more profit. And that is true in the fees as well. They are beginning to show some signs of recovery in their earnings. So, therefore, we'll be able to not just receive any negative impact from the higher interest rate. I don't think the magnitude of impact could be that large. That is all.

Kazuki Watanabe, Analyst

Yes, this is Watanabe, Daiwa Securities. Panasonic Connect projector business, you have obtained this equity investment and profit contribution size. What kind of synergy do you expect? Can you please outline this, please?

Unidentified Company Representative, Company Representative

Thank you for your question. As you have mentioned, from Panasonic Connect, 80% of the projector business is transferred to us. And regarding this project, we have mentioned several times in the past, we are positioning this as a carve-out investment from a large company. The PE expertise can be leveraged, and some aspects will be new to us as well. As you can see in the report, the transfer price, enterprise value, JPY118.5 billion is mentioned. But this actually includes loans. So, our actual investment is different from this number. And we are not disclosing this number yet because it will take some more time before the deal can be closed. I hope you understand the situation. As for profitability, because this is a carve-out project, due to that nature, this means that compared to the conventional investment project, it may take time for this to be profitable, to increase in profitability. Because the size of the business and the number of employees and other aspects of this project are larger than traditional. So, it may take time before this can contribute to profitability. But expected ROI in the end will not differ materially from the traditional deals. We believe that there is a good future potential for the return, and we will continue to focus on this. And together with the sellers, we will continue to proceed with the process up until the close of this deal. Thank you.

Kazuki Watanabe, Analyst

What about synergy? What do you expect? What about synergy with Toshiba or synergy in terms of MICE IR? Do you have any comments?

Unidentified Company Representative, Company Representative

Thank you for your question. When we do PE investments, synergy with existing business is not necessarily included in a valuation. Therefore, we believe that this is going to be a potential upside. Specific events, specific planning will be impacted by future trends. So we should not rely on just one factor that would lead us to the wrong decision. Therefore, together with the seller, we are basically assuming this is going to be a standalone business. And rather than synergy, we can have areas of cooperation. So, we have PE know-how from the past, which means that we have experience of hands-on investments in the past. ORIX has its own unique financial perspective, which can be reflected in this project, and that should contribute to future growth. I know that this doesn't directly answer your question, but this is how we assess and evaluate our investments.

Naruhiko Sakamaki, Analyst

This is Sakamaki from Mizuho Securities. Thank you for the opportunity. So, first, regarding your U.S. businesses, the risk as well as opportunity, if the rate cut is going to start in the United States, you may be able to start enjoying a growth potential. Is there any kind of timeline that you have in your mind, because we don't know how much of the cuts will be conducted, and also whether there will be a recession in the U.S. or not? And also, in terms of the frequency of the rate cuts, at what timing, if you have any ideas of the timeline, and what kind of impacts can be thought about as a result of such timeline?

Unidentified Company Representative, Company Representative

If I could refer you to page 28, you can see the breakdown of the businesses. As of now, it may be a bit limited in terms of impressions, but let me respond to your question. We are starting to see signs of recovery in the credit market in the United States. This means that our investment and extension businesses can benefit from the expanding spread. Additionally, with NXT Capital and Signal Peak, we can utilize the funds provided by our investors, which may encourage them to invest further. If there were to be an interest rate cut in the United States, it could potentially aid in market recovery and contribute to earnings recovery, possibly in the second half of next year. Regarding real estate businesses, we cannot predict the extent of the decline in long-term interest rates, as it largely depends on policy rates and their impact on deal development. We need to observe how policy trends, especially with the upcoming presidential election in the United States. Looking back at previous years, we will need to monitor developments in mortgage investment levels over the next one to two years. On another note, private equity, particularly in the U.S. middle market and service sectors, may experience earnings recovery and M&A activity, but this might take some time. Therefore, we should remain cautious for now. The effect on earnings across industries is one aspect, but we also need to ensure that terms and conditions for private equity investments become clearer, as there is still uncertainty. We believe that recovery in credit-related businesses may happen sooner, while the recovery in the mortgage and private equity sectors might take longer to materialize. That's all.

Koki Sato, Analyst

Thank you. Yes, just one question about the non-performing assets or asset quality. What is the concentration and the future risks? What is your view on the future risks? In the appendix, page 27, I can see the non-performing. And for the individual loans, the non-performing is increasing. The ratio increases 2.8%. Compared to pre-COVID, I believe that this ratio is probably the highest that you have had for a while. So, where do you see the non-performing assets in each asset type? And how would you account for these losses? Is there a risk that this will hit your PL in the future?

Unidentified Company Representative, Company Representative

Thank you for your question. The total non-performing loans (NPL) amount to just over JPY60 billion, which is higher than the traditional range of JPY30 billion to JPY40 billion. This increase is due to various factors, particularly in our U.S. real estate business. We need to include specific items in our classification, leading to a higher disclosed amount of NPL than previously reported. I'm referring to real estate-related financing deals, and we expect some of them to be recovered based on our disclosure assumptions, so we don't have major concerns regarding those items. We recognize the unknown value here, especially in real estate as part of our mortgage portfolio, and we will continue to monitor this closely to manage potential future losses. Currently, we haven't heavily accounted for this, but as I mentioned earlier, the trends in interest rates and the overall business environment in real estate suggest that recovery may take time. This indicates that we need to enforce management on unbalanced or securitized assets. We've already begun reviewing our insurance in a more detailed manner. In terms of the assets recognized by us, the quality is now managed at a higher level than it has been in the past, which improves transparency. I hope this clarifies the situation. Thank you.

Kiyoaki Suzuki, Analyst

This is Suzuki from Nomura Securities. Thank you for the opportunity. Allow me to refer to slide number 10. So, there's one question to ask about this slide. So, referring to the bullet point, for the full year earnings, so capital gain is to be targeted which is to surpass that of '24 March end. So, I think you have changed the wording here. Can I take it that the likelihood has increased? This is something that I want to you to confirm. And it is not just dependent on the gain on sales, but also the new investment? Because of the market fluctuation, the volatility, how does it affect you in making or executing those decisions? Because the valuation may perhaps decline, that may allow you to make further investment. And also, yen has started to appreciate. So, some of the hesitancy that you used to have may go away. So, would you mind giving us some flavor to your idea because of the changes in the market?

Unidentified Company Representative, Company Representative

So, while we were targeting, we can expect, we have said, and that is at the time of the earnings result, we have made such expression that we targeted with what we have said last time. But this time, we have said that, we can expect or we expect. And that is based on the first quarter result. But there is not much of a change except for the fact that we have now concluded the first quarter. So, the market continues to be volatile. But as to the deals that we foresee executing, of course, we will continue to watch over the development by carrying through the negotiation. As to the likelihood, it is only one quarter of the purpose that we were able to meet in the first quarter. But as to the new investment, as you have asked the question, the valuation may have gone down. But the yen appreciation, especially in the first one or two years, if you were to compare it to our actual investment. So, as a result of yen depreciation as well as low interest rate, we have been focusing very much on investment here in the domestic market. So, with the current rate against the U.S. dollar, the yen at JPY144, would that be perceived as attractive enough, it's yet to be determined. But as to the negotiations that we have been carrying out, it is true that we will be able to enjoy a little more tailwind, thanks to this depreciation of yen. But we may turn a little stronger in allowing the growth to take place, not just onshore, but also abroad as well. Thank you all very much for joining us in this briefing, despite the very busy schedule. So that was the trend for the first quarter, and thank you very much for many questions. So, we would like to, of course, capture whatever the changes that will take place in the market to be a great opportunity that will make a positive contribution to the earnings. So, we will continue to watch over the development of the deals that are existing as well as in the pipeline, and thank you very much for your time again.

Operator, Operator

So, we would like to conclude the 2025 March-end first quarter results earnings briefing. Thank you all very much for taking part in this session.