ORIX Corporation

our special time at 3 o'clock, so let us get started with this session. So thank you all very much for your participation to Business Performance Announcement Meeting for FY 2020 March and for Oryx. Thank you very much indeed. I'm going to be the emcee for this meeting from Corporate Planning Department. My name is Koora. I look forward to your cooperation in advance. As to the presentation material, you'll be able to refer to it on the screen, but also at the same time, you'll be able to download it whenever necessary. So please make sure that you can see the slides. As for the schedule for today, we'll start from the presentation from Mr. Yano, Head of Treasury and Accounting Headquarters, followed by Mr. Inoue, CEO and the Representative President, Director, President. And after the presentation of the two executives, we will be entertaining questions. We are scheduled to conclude the session at 16 hours. So because this meeting will be conducted online, there could perhaps be a possibility of you not being able to hear as well, but please do excuse us. As for the question, after the presentation by CEO, Mr. Inoue, on the screen, please send us or write out your question and send them on the template. questionnaire form. I'm sorry for this, but in the interest of time, we would like you to limit your question to just one question. Just one question. Now, if we don't have enough time to entertain all your questions, we will be sending back the response through the Secretariat later on. So, good afternoon. I am Yano of Treasury and Accounting Headquarters. Thank you very much for your attendance despite of the busy schedule to this business performance announcement meeting of our company. Let me share with you the actual results for FY2020 margin period. Please open page two of the handout slide. The page shows the net income and ROE for the whole year. So, harsh economic environment due to COVID-19 affected us in Q4. However, our net income was at 302.7 billion Japanese yen. This is lower than the prior year, but we did manage to achieve our target of 300 billion Japanese yen. ROE was kept at double digit at 10.3%. There was a reversal of deferred tax liability associated to conversion of Daikyo to 100% subsidiary in the third quarter. The reduction of corporate tax by 27 billion Japanese yen contributed positively to after-tax profits. As a result, although net income declined by 6.5% year-on-year, pre-tax segment profit grew by 4.1%. Now, please turn to the next page. The page shows the breakdown by business segment. Segment profit for the year was at 417.7 billion Japanese yen. Let me explain further by breaking down the profit into base profit versus investment gains. Until the third quarter, we were referring to the dark blue part of the bar chart as segment profits that exclude gains on sales. In order to facilitate for the ease of your understanding, we started to describe this as base profits from the fourth quarter. The base profit was down 5.5% year-on-year at 277.9 billion Japanese yen, defined in profit in corporate financial services and others, as well as a negative impact from COVID-19, of which the details will be shared later, affected us but a steady positive contributions were enjoyed from NXT Capital and Avalon investments we made in FY 2019. Now investment gains grew strongly by 30.3% from 107.3 billion yen to 139.8 billion yen. Gains on sales of PE investment both in Japan and overseas were posted while a rebalance of business portfolios such as RX Living Fulihan Loki, a department for ESG data collection, analysis, evaluation, and Robico SAM was done at the right timing. Now, please refer to the chart at the bottom of the slide. The bar chart shows the trend of segment profits for the first five years. Investment profits, pale blue part, may fluctuate due to changing environment. However, as a result of strategic capital allocation and timely exits, we have been successful in maintaining the level at around 130 billion yen on average, which we believe is a proven track record of OREC. As for the base profit, a dark blue part of the chart, it constitutes 70% of the segment profit for the fiscal year that is placed as steady growth over the past five years. Now, please stand to the next slide that shows segment highlights. It's page four, so segment highlights. As shown on the chart on the left, segment profits from investment and operation as well as overseas grew, while profits from all four other segments decreased. Now over to the table on the right. Details by segment will be explained later by using slides after page 16, so allow me to share with you just the highlights by making use of the slides. Now first, Corporate financial services segment, profit from the segment was down by 10.9 billion yen year-on-year at 14.6 billion yen. Negative impact came from reduction in agency fee income from life insurance brokerage business, but efforts to diversify product as well as the focus on online insurance is underway. But on the other hand, Yayoi, that provides accounting software services, The charge and support, in fact, increased the number of memberships and also the packaged products that increased sales. And the negative impact was 1.8 billion yen from the leasing account standard changes. Segment assets declined by 1% year-on-year at 948.3 billion Japanese yen due to a decline in the finance and leasing.

Now, let me move on to maintenance leasing segment. Profit was 33.7 billion yen minus 5.1 billion yen year-on-year. Auto lease profit was solid, and Rentex saw an increase in profit due to Windows PC repurchase demand. However, with the intent to enhance service quality, service costs and SG&A expenses rose, and IT assets needed to be depreciated, resulting in a profit decline. As with the corporate financial services, there was a negative impact from the accounting standard change of 2.6 billion yen. For segment assets, there was a slight dip in auto driven by key to competition, but Rentik increased its IT-related assets and all in all, a 2% increase year-to-date standing at 889.6 billion yen. Real estate segment profits was year-on-year minus 12.4 billion yen, ending at 76.9 billion yen. Logistic and commercial facilities, rental condo mediums were sold, and Oryx Living was sold as well, and profits from such neighbor sales were sustained. However, gains from sales dropped year-on-year. Asset-managed business is strong. Daikyo also saw a 1.6 billion yen profit increase due to last-minute demand before the consumption tax hike. Segment assets was 749.7 billion yen. New investments continued, but we proactively sold facility assets. New lease accounting standards pushed up assets by 90.4 billion yen, so year-to-date actual assets decreased by 60.9 billion yen. Next is investment and operations segments. Profit was 55.7 billion yen, a year-on-year increase by 17.5 billion yen. Investment in an operations segment enjoying two major gains on sales and private equity investment resulting in a 4.5 billion yen profit. Concession business, namely airports, saw profit of 6.2 billion yen. This was due to an increase in duty-free sales from increased inbound visitors and insurance income for typhoon damages from two years ago. Details will be explained later, but although this business is affected by COVID-19, impact on our financials will be from the year ending March 2021. Segment assets grew year-to-date by 16%, standing at 847.1 billion yen, This was due to new PE investments in Japan and wholly subsidizing our overseas investment in wind power business. Profits for the retail segment dropped 3.8 billion yen year-on-year to 80.4 billion yen. Life insurance contracts and premium increased due to enriching our product lineup with foreign currency whole life policies. However, COVID-19 has heightened market volatility and and suppressed interest rates, causing a loss for former Hartford Life Insurance's variable annuity. Real estate investment loans for banking and local financial institutions loan guarantees increase respectively, securing profit. As for segment assets, due to operating assets increasing for life insurance and banking, a 17% year-to-date increase amounting to 4.1839 trillion yen. Lastly, our overseas business segment. Profit increased year-on-year by 31 billion yen to 156.4 billion yen. Profits from new investments from the previous year contributed greatly. We also rebalanced our portfolio such as Hulian Valky, UAEF, RubicoSams ESG data collection analytics evaluation arm and benefit from capital gains. Segment assets increased year-to-date by 5% to 3.2874 trillion yen. Acquirement U.S. real estate loan and servicing firm Hunt Real Estate Capital contributed to this increase. Let me now move on to page 5. On this page, we are showing the impact of COVID-19 on our Q4 pre-tax profits. I will cover four major areas of business. First is the impact of the stock and bonds market fluctuating. The market value of securities held dropped and resulted in a negative impact of 3 billion yen. Former Hartford Life Insurance viability reserves for variable annuities shifted as well, a negative impact of 7 billion yen. OCE, formerly Robeco, AUM decreased, thus fee decline, a negative impact of 3 billion yen. Energy prices plummeted, and 3 billion yen was acknowledged as loan loss provisions for U.S. energy operators. In April, the market has recovered, and as of today, The factors explained earlier are impacting positively upon 2021 March Q1 results. The second area is facility operation included in our real estate segment. Here in Japan, we operate 5,000 rooms at hotel and inn facilities. Inbound traffic, mainly from Asia, has decreased dramatically, Domestic travel and business trips were put on hold, and occupancy rates dropped. Also, in an effort to stop the spread of the virus, we shut down aquariums and some other facilities, and the overall impact is a negative 2 billion yen. The third area is our concession business. Kansai Airport, where we have a 40% share, operates a total of three airports, including the Kansai International Airport. Because of the global restrictions imposed on travel, many international flights were either cut back or canceled. As a result, March arrival and departures for the three airports was minus 32% year-on-year, and passengers declined by 69%. Despite this decline in sales, we are conscious of sustaining employment and contributing to the local community, but we are seeing a major setback in profits. Having said that, there is a three-month lag in account settlements for Kansai Airport. Therefore, the concession business impact is not reflected yet in our 2020 January to March Q4 results. This also goes for the fourth area, aircraft leasing business. There is no impact for Q4 results. When we combine these four areas, the impact of the COVID-19 outbreak is approximately 15 to 20 billion yen before tax. I have now explained the results for the year 2020 March, and I will now hand over to our CEO, Inoue.

This is Inoue speaking. So I'll start my presentation, start from slide number six. I'm sorry to repeat what has been already being presented, but just as been announced yesterday, for 2020 March end, pre-tax net income at the 412.6 billion yen, in fact, was an increase by 4.3%. However, our net income was down by 6.5% year on year at 302.7 billion yen. That was the results. ROE was at 10.3%, which is lower than 11%. However, just as announced last time, we remain to be unchanged in setting our target of achieving ROE or above 11%, and we will continue to exert our effort in that regard. Now, due to market fluctuation, multiple numbers of credit rating agencies have changed their outlook to negative for ROX. but the credit rating of single A, in fact, is maintained. 2020 March end dividend payment has been scheduled for the full year per share of 76 years to be paid. First half, 35 yen. Second half, 41 yen. So thereby, the payout ratio will be 32% for the year. And just as we have announced in the last year, with a maximum of 100 billion yen a shares repurchase program was executed. So let me report the details on the shares repurchase program. 2019, November 1st through to May the 8th of 2020 was the exercising period. 34 million shares had been repurchased at the price of 55.8 billion yen in total. The average share price was 1,638 yen. shares outstanding of RX, in fact, compared to the Treasury's debt is 5.8%. So therefore, 11 million shares in excess of 5% will be cancelled or has been cancelled. Unfortunately, from February this year, there was an outbreak of COVID-19 pandemic that resulted in the sharp decline of the share price. So therefore, the shares we purchased may not have provided enough benefit to the shareholders. This is our understanding. So our initial target for the shares repurchased to the maximum extent of 100 billion yen was not being used fully this time. As to the extension of the exercising period for the program or the renewed program for the repurchase is not planned. because we need to place the highest priority to securing liquidity at this point in time. So we want to continue to watch over the development of COVID-19 pandemic and also the recovery of the macroeconomic conditions before we arrive at the decision to go ahead or whether or not to continue with this execution. So as of October of last year, we had made a mention of our midterm direction, but the As of now, we do not know how long this COVID-19 pandemic is going to continue and how much time is required before the macroeconomic conditions will be recovered. So all the major countries, including Japan, they are all trying to find their own way to prevent pandemic. So therefore, there is no alignment and no harmony between and among different countries of the world. So under such circumstances, as for RX, we have decided to refrain from disclosing any short-term direction as well as a mid-term direction because we find the disclosure to be associated with much difficulty. As has been said, 2021 March end, the major challenge for us would be securing liquidity. So COVID-19, the battle with COVID-19, It's very much so dependent on the timing. It would give a major impact to Ulrich's business performance. However, from a financial standpoint, our long-term debt ratio remains to be high, and we have an ample amount of liquidity as well. So the finance, as well as the operating cash flow of Ulrich Group, the impact that is given from COVID-19 will remain to be limited. So please refer to page 8. So 2021 March end, the cash on hand verification, although we have carried out the verification within the limited scope, however, it has been concluded. So the magnitude of the impact that is given to various different businesses has been verified from sector to sector, but we are going to maintain, other than, of course, the operation of the facilities. And assuming worst case, and 500 billion yen worth of new investment and loan extension is to be executed, we can still be securing 600 billion yen of cash. So we remain to be unchanged in upholding a basic policy of prioritizing the liquidity for the time being, but for this year, while funding stress will be considered in a conservative manner, By controlling the new investment and loan extension, we should be able to secure enough liquidity. However, in order for us to raise the level of accuracy for the midterm perspective, as soon as we start to see the end of the battle against COVID-19, of course, putting our effort in bringing our business back to its usual speed is going to be the first and foremost importance. However, we think that it would take a certain amount of time. Now, real estate segment, facility operation, inclusive of hotels and inns, unfortunately, they're all closed. So, therefore, the revenue generation from this total segment asset, $118 billion, is not to be expected for the time being. Because of the incurrence of HR costs as well as the depreciation costs, before we start to see the recovery in the inbound tourist demand, profit contribution will remain to be negative. And as for rentable properties, request for rent reduction has been received, and we are responding on a case-by-case manner. As for consensual business, centered around Kansai Airport, for four years, until March of 2020, vis-à-vis the total investment of 20 billion yen, we were able to receive a dividend income of 19.1 billion yen. However, we are assuming that this dividend income will be zero for the coming new year and that there will be no contribution being made to the overall profit generation. But over the four years, the accumulated amount of equity method income is 50.4 billion yen, including 3.1 billion yen of interest income from 12 billion Japanese yen of shareholders' loans. So concession remaining period is as long as 39 years. If you were to take that into account, even if we were to bear losses for a single year, we would be able to recover back the business just as easily. So as for aircraft leasing business, for 2020 March end, the segment asset was 555.3 billion yen, with segment profit being 44.6 billion yen. Many airlines have forwarded the request for deferral for the leasing fee, so we're responding to the request on a case-by-case basis. So we can start to see the full recovery in terms of the distribution of goods and people. I think the airline industry remains to be sluggish, but Oryx has long-standing experiences as well as knowledge and many and varied experiences and knowledge starting from 1990 as a result of experiencing Gulf War, SARS, 9-11, GFC. So based on my own experience, I am imagining that it may take more than a year. Well, according to a newspaper article, it says it may be perhaps extended until 2024, but I think that it would take more than a year before we can come out from the COVID-19 pandemic crisis. However, more than 50% Our investments, in fact, are intangible assets, so we foresee the downside risk to be limited. Asset management segment, Oryx Europe, or former Robico, in 2019, December, AUEM was 287 billion euros, but by end of March of 2020, unfortunately, it was downsized to 233 billion euros. But from April, we started to see some recovery in the amount of AUM. So, of course, we feel the need to watch closely over the development in Europe. As to the COVID-19 impact to other segments, it is in no way zero. So in the finance department, we have been receiving a request for these fee deferral, these repayment deferral. So some negative impact must be taken into account. So there are many uncertainties right now. And for this reason, we will refrain from disclosing any details regarding Midterm Plan for now. Once we start to see how things will settle with COVID-19 pandemic, we would like to take an opportunity to explain in a little more detail.