ORIX Corporation

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of Oryx Corporation for Third Quarter Consolidated Financial Results for the 9-month period, ended December 31, 2019. The attendees at today's conference are Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Mr. Yano will give you a presentation on the third quarter financial results for about 15 minutes, and we will move to a Q&A session. The whole conference will take about an hour. At this time, I'd like to turn the call over to Mr. Yano. Please go ahead.

So good afternoon. Ladies and gentlemen, I am Yano from Treasure Yano County Headquarters. I'd like to thank you all for your participation to this telephone conference. Thank you very much. So without further ado, we'd like to get started with the third quarter consolidated financial results presentation of RX for the nine-month period ended December 31, 2019. Please refer to the second page. So as for the third quarter, the net income grew by 3.4% year-on-year at 244.3 billion yen. Annualized ROE was 11%. The progress year-to-date against the net profit target of 300 billion Japanese yen is now at 81%, progressing nicely. However, due to the market uncertainty, we are not planning to revise the full-year target of 300 billion yen as of now. Please move on to the next page. Let me now inform you the breakdown of segment profits. Please refer to the bar chart on the left. This shows the trend of segment profits for the past five years. Pale blue shows the gains on sales, while darker blue shows the profits other than gains on sales. So the profit other than gains on sales, in fact, has been growing steadily over the past five years. The two bar charts in the middle compares the year-to-date third quarter profits between the two years. Profits other than gains on sales grew steadily 7% YOY, at 238.5 billion yen. Contributions came mainly from NXT Capital as well as Avalon, the investment we made in the prior year. Now, over to profit from gains on sales in the third quarter on a year-to-date basis. It grew from 75.3 billion yen in the prior year to 114.5 billion yen, a sharp growth of 52%. In addition to the sales of RX Living and Hoolihan Loki, we posted gains on sales from private equity investment in investment and operations segment as well as overseas segment. While we are proceeding with a generation of profit from gains on sales, we are continuing to make new investment in a selective manner. And we have shown some of these examples on the table to the right. So some of which are like wind power generation business in the overseas segment, which we have made an investment after the interim announcement, as well as asset management business and real estate capital in the United States. So please refer to the next page. So segment profits and segment assets trend. Segment profit was up by 19% at 352.9 billion yen. As you can see on the bar chart to the left, corporate financial services and maintenance, these things, the profits were down. while all other four segments managed to increase their profits. As a result of Oryx making Daikyo a wholly-owned subsidiary in the third quarter, there was a reversal of deferred tax liability that reduced the corporate tax and others by about 27 billion yen, and thereby the contribution to the profit generation. This is why, although after-tax profit growth was limited to 3.4% in the quarter, both gains on sales as well as profits other than the gains on sales growth contributed to approximately 20% of growth for the segment profit. So as for the segment asset, the asset in fact grew by 861.5 billion yen, out of which impact from change in operating leasing accounting standards accounted for 200 billion yen, and the forex negative impact was 48 billion. If we exclude these negative impacts, the segment asset could have grew by 710 billion yen. So in the retail segment, in the Oryx Bank as well as Oryx Life, the assets grew. And in the overseas segment, the United States assets as well as the Aircross assets were the contributing factors to the growth of the assets. Please move on to the next page. So from this page onwards, I'd like to present on the segment performances. First of all, the corporate financial services. In the corporate financial services, the segment profit grew, unfortunately, declined by 6.6 billion yen at 13.2 billion yen. Agency fee income from life insurance businesses declined. But we are trying to diversify the offering of the products by ways of conducting our sales activities. At the same time, the accounting software, as well as service provision done by Yayoi, we managed to achieve an increase in membership for fee-based support services and sales of packaged products. Impact from the accounting standard change as of the third quarter, the impact was 1.4 billion yen in this specific segment. Now, please refer to the bar chart to the right. Under this negative interest rate environment, despite of the fact that there is a harsher competition, EU zone loans was maintained at above 2%. Now in the domestic, in the Japanese sales, we have been taking a cautious approach to the building of the assets at a lower spread. But also at the same time, we're trying to diversify the service income, such as accounting software that are offered for small businesses, as well as package versions, crowd versions, in order to maintain the top share, and if not, of course, grow the market share. So let us move on to the next page. So this is going to be the maintenance leasing segment. Maintenance leasing segment profit was down by 4.6 billion yen at 25.8 billion yen. Also, the leasing income grew steadily and the rent tech, thanks to the replacement boom in the IT-related businesses, would manage to grow the profit. And in order for us to broaden the client base, unfortunately, we spent more SG&A expenses, resulting in the decline in the profit. Just like the corporate financial services, there was a negative impact from the leasing accounting standard change by 1.9 billion yen. As for the assets, while OTO remained to be flat, Lentec grew as a result of building up IT-related assets. Our X group, of course, is carrying out diverse projects area of businesses. We're taking much consideration into some areas such as environment and in order to achieve a sustainable, to make a positive contribution to sustainability such as promotion of use of environmental friendly cars and providing vehicles that enjoys a better fuel efficiency as well as a better driving method. And as a result of this, from November of last year, we have introduced a hydrogen, a fused cell car using hydrogen.

Next is the real estate segment. The segment profit grew by 1.3 billion yen year-on-year, and it was 56.1 billion yen. In the second quarter, we transferred Olyx Living shares, and we posted large gains on sales. For Daikyo... Delivery of condominiums happened earlier than the previous year, and the profit was increased by 7.7 billion yen. We are continuing with the sale of real estate assets, considering a strong market, and we are also continuously investing into new projects such as hotels and logistics facilities. One new logistics facility was completed in Aichi Prefecture last October. As we indicated during the interim presentation, In the next several years, we'll be investing into logistics hotels as well as ryokans in the amount of about 200 to 300 billion yen. And as we made a release on the 29th of January, we integrated eight hotel management companies for the 18 hotels that we have to form OLIX Hotel Management Company in order to get talents and educate them and consolidate and standardize operation so that we can really focus on service, specialty and governance so we can further increase the management business. Next is investment operations. Segment profit was up by 24.5 billion yen year-on-year and was 55.6 billion yen. and Konza AG profit uptake started, which we invested into last year in the third quarter, we sold one PE project. And the profit was up by 18.6 billion yen from 11.4 to 30 billion yen. And this was a major increase year-on-year. We also continued a new investment. For example, invested into Kobayashi Kako in January. This company is a generic company, taking care of all the way from API sourcing to manufacturing and sales, and also R&D. Oryx has invested into healthcare businesses, including these finance as well as animal health pharmaceuticals. We have functionalities that have high affinity with Kobayashi Kako. We will continue to expand the healthcare business through the enterprise value enhancement of Kobayashi. Next is energy and environment. Megasolar business is strong. Profit increased from 10.2 to 10.5 billion yen this year, this quarter. And for this fiscal year, we acquired all of the shares of the wind power company, which we co-invested overseas. Now it's a wholly owned subsidiary. And in Japan, we have secured solar capacity of 1 gigawatt for solar. and we are actively promoting geothermal as well as wind power business. Moving on to concession business, centering around airport management, the visitors from overseas is increasing, and in addition to that, we received some insurance payment due to a typhoon damage two years ago, and the profit was pushed up from 9.5 billion yen to 15 billion yen, which is an increase of 5.5 billion yen. In order to deal with an inbound tourist increase, we are doing a large-scale renovation at airports that we manage. In the Osaka International Airport, a new terminal will open in July this year, and we will also begin the renovation of the first terminal building of Kansai International Airport so that it will be completed by Osaka Expo in 2025. Next page, please. This is the retail segment. The segment profit... went up by 4.2 billion yen, and the profit level was 70.4 billion yen. For life insurance, we expanded our product portfolio, including foreign currency-dominated whole life insurance, and the number of policies enforced increased, and the premium income also increased. Profit was up by 2.9 billion yen. It went up from 39.5 billion to 42.4 billion. Moving on to banking. A loan for condominiums for investment is increasing, pushing up our finance revenues. And the gross margin ratio is at the 2% level, which is a high profitability level among the peers in Japan. And we are continuing to grow. Next page, please. This is last segment, overseas business. Segment profit went up by 36.3 billion yen and stood at 131.9 billion yen. With regard to U.S. OCUs, Next capital that we acquired helped grow the asset management business, and the profit went up by 11.3 billion yen from 38.5 to 49.8 billion yen year on year. In the third quarter, we acquired a mortgage loan servicing company called Hunt Real Estate Capital in the U.S. In addition to the license of Fannie Mae and FHA, we will add Freddie Mac licenses. meaning that we can expect further growth in the mortgage loan servicing area. In the former local group, asset management business is done by OCE, and as the market shifts from active to passive, the fee pressure has been very tough, and the profit actually went down by 3.6 billion yen from 28.3 billion to 24.7 billion. Out of this reduction, about half, 1.7 billion, is due to exchange rate between euro and yen. Next is the aircraft and ships. New investment from previous year Avalon, a profit uptake contributed to increase the profit by 5.1 billion yen from 27.7 to 32.8 billion yen. In Asia and Australia, the gain on shipments sale of shares that we have invested in the first quarter, as well as the absence of the negative contribution from IL and FS, which we had to account for in the previous year. The profit went up from 1.2 billion to 24.6 billion, which is an increase of 23.4 billion, major increase. Moving on to the next page, financial soundness. The funding status is very positive. and we have extra room for funding from borrowing from financial institutions as well as capital markets. We are trying to shift to long-term, and the long-term debt ratio is over 90%. In order to diversify our funding methods and manage the company sustainably, we issued green bonds, and the 10 billion yen that's issued will be allocated to our solar power business. Please turn to the graph on the right. This is employed capital ratio. As of December 2019, it stands at 85%. While continuing new investments, we will continue to replace the assets and build the internal reserve, and the number has gone down from the previous year, and we would like to continue to control this carefully. Lastly, the last page shows a summary. Third quarter for the fiscal year ending March 2020, Net income was at 244.3 billion yen with an annualized ROE of 11%. At the interim announcement, we mentioned that we are aiming for 300 billion yen net income for this full year, and we are on track to achieve that, and we will continue to pay attention to shareholders' return and aim for sustainable growth. Thank you very much for your kind attention.