ORIX Corporation

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of Oryx Corporation for the first quarter consolidated financial results for the three-month period ended June 30th, 2022. The attendee at today's conference is Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. As we begin, we have a request to you in order to present the feedback. Please make sure that you either turn off your mobile phone and other devices or keep them away from the phone. If we experience severe feedback, we may disrupt the meeting with the consent of the organizer in order to get in touch with the attendee who is causing the feedback. Now, Mr. Yano will provide us with a presentation, and it will be followed by Q&A. We expect the whole duration of the meeting to last approximately one hour. We would like to start the meeting. Mr. Yano, the floor is yours.

Good afternoon. This is Hitomaru Yano. Thank you all very much for joining us today. So, without further ado, I would like to start the presentation on first quarter, FY23 March End Results. Now please turn to page 2 for the executive summary. So I'd like to, of course, go through each and every executive summary points. As for the first point, the net income declined 5% year over year to 61.9 billion yen, translating to annualized ROE of 7.5%. Profits rose in five segments out of 10, including aircraft and ships, where passenger demand is improving, Asia and Australia, which continues to perform well, and energy and environment, which executed several large transactions last year. Second, earnings were down year on year in some segments due to negative change in the market climate. At Oryx USA, PE investment gains declined and earnings in the real estate business were lower. At Oryx Europe, AUM shrank due to the decline in equity markets. Within Japan, Oryx Life saw an increase in COVID-related payouts owing to a renewed surge in infections. Third, I will discuss Oryx's asset portfolio under current market conditions and a view on future investments. Macro indicators moved dramatically during the first quarter, including global inflation interest rate hikes by the U.S. FRP and rapid yen depreciation. Against this uncertain economic backdrop, the non-performing loan ratio for all excess assets has remained at a low level, and credit losses and impairments have not increased. To the contrary, we see increasing opportunities for new investments in terms of both business area and price in this changing environment. receiving a larger number of inquiries. We will apply a careful approach to these decisions by evaluating each deal on an individual basis, but we hope to proactively seek out new investment opportunities by taking advantage of our strong balance sheet. The fourth point focuses on shareholder returns. As of the end of July, Oryx had carried out 17.3 billion yen of the 50 billion yen in shareholder buybacks announced in May, showing a steady execution of shareholders' return policy. Just to report to you. Now, the third page. I have no additional comment to be made, so let me go all the way to page four. This page shows breakdown of segment profits. Segment profits for 85.9 billion yen. Please look at the right-hand side bar chart. This shows a breakdown of segment profits by quarter for the last two years. Base profits are in dark blue, while investment gains are in light blue. Base profits were up 2% year-over-year and 11% Q-on-Q to 74.5 billion yen. Meanwhile, investment gains were down 60% year-over-year to 11.4 billion yen on lower investment gains at Oryx USA and others. As I commented earlier, we plan to realize investment gains going forward this I'll now briefly review performers by segments. As a matter of fact, please note that Oryx has changed our method for allocating some interest expenses and SGA costs from first quarter FY23 March. Segment SGA and A costs are higher as a result. We have retroactively adjusted segment profits for past fiscal years to reflect this change. Please note that FY22 March figures have changed for this reason. Page 5 and 6 are summary of segment profits and assets, but we will skip these today and discuss the specific segments using segment slides. Please turn to page 7. In the corporate financial service and maintenance leasing segment, segment profits were down 9% year-over-year to 15.7 billion yen. But flat, if profits from the Yayoi unit, which was sold in the previous fiscal year, are excluded. Corporate financial services put valuation losses on its equity stake in an investee, but fee income was up year-over-year. The auto business unit was able to maintain a high level of profits as the used car market remained strong and the rental car business continued its post-COVID recovery. Also, rented earnings remained healthy. Please turn to the next page. The page shows the real estate segment. Segment profit rose 13% year-over-year to 11.9 billion yen. In addition to investment gains booked on the sales of logistics facilities and other properties, occupancy rates improved at inns and hotels, leading to higher profits at investment and facilities operation. Profits at Daikyo were flat year by year. Although condo sales fell as compared to the prior year, investment gains were booked on the sale of rental condo properties. In an asset recycling business model, OREX purchases land and develops the properties on its own. The assets are then leased and sold depending on timing and consideration. Real estate segment asset size remains largely unchanged year over year. As the cycle of asset sales and new investment continues. Please turn to the next page. Next is the PE investment and concession segment. In the PE investment unit, profits increase due to steady performance of MSTs and the reduction of losses associated with Kobayashi Kako. Oryx also made its first new PE investment in roughly 18 months with an investment in Hexoworks, an electrical works company for housing complex. The concession unit remained in the red as frequency of flights and passenger numbers for international routes are still low, but the domestic routes in Japan recovered year over year. Please turn to the next page. So this is the environment and energy segment. In the domestic energy business, earnings grew thanks to higher power generation volumes, a megapolar solar project owing to sunny weather. In the overseas energy business, power generation volumes declined owing to seasonal factors, but soaring prices for electricity worldwide led to higher prices in some regions, which pushed up the earnings. Please turn to the next page. This is the insurance segment, as I mentioned earlier. Segment profits were down 28% year-over-year, owing to an increase in hospitalization payouts, including in-home isolation during the first quarter caused by the February peak in COVID cases. Policies in force, however, continued to rise, and insurance premium income was higher. Investment income was also healthy thanks to U.S. dollar interest rate hike. Please turn to the next page.

This is the banking and credit segment. QuickSpanx profits were lower year-on-year owing to the absence of a one-time profit recorded in the previous period, but earnings from real estate property loans remained strong. In the credit unit, we are aggressively investing in advertising for a new Oryx money product. This and the absence of the year-earlier credit loss reversals led to lower profits, but the assets are steadily increasing. Please turn to the next page. Aircrafts and ship segment returned to the black with a 5.4 billion in segment profit, up 10.4 billion yen year-on-year. Ships contributed to profit growth with ship sales as market prices remained firm. And in aircraft leasing, as mentioned earlier, earnings are in an uptrend thanks to a recovery in passenger demand. OAS continues to buy and sell aircraft. Earnings at Avalon recovered significantly on both Q&Q and EONIA basis. And the losses shrank. Earnings at Oryx USA were down 76% year-on-year to 6 billion yen. Overall macro factors such as rising inflation, higher interest rates, and concern over a possible recession in the U.S. certainly had an impact. Segment earnings this quarter were lower than anticipated. Please turn to page 15 for a breakdown of the current situation. Oryx USA has three major lines of business. and on this page we outlined how trends in each business differed versus the previous year in terms of capital gains and base profits. The single largest factor behind the sharp decline in profits is lower capital gains in PE business. In first quarter, FY22, ending March, Oryx USA posted investment gains on the sale of WorldSafe, a relatively large transaction. The absence of this and several other capital gains booked that quarter led to a $9.9 billion decrease in capital gains in PE versus the previous fiscal year. The decline in earnings in the real estate business was another factor. The U.S. market saw a temporary disruption in government mortgage loan agencies' loan purchases, caused primarily by higher interest rates and greater interest rate volatility. Oryx USA's real estate loan earnings fell 3%. As a result, we are currently tightening our standards for new deals. In light of rising inflation and economic uncertainties, we plan to maintain a flexible stance to best position ourselves for any direction of the market. Please note that the bulk of the increase in assets was due to forex effects. Please listen to the next page. This is Oryx Europe. AUM hit a record last fiscal year, but were down this year owing to changes in the macroclimate, including higher interest rates and the Russia-Ukraine conflict. Segment profit fell 31% year-on-year to $9.3 billion. However, Oryx maintains a diversified portfolio in specialized areas in asset management businesses. TCCDA TransTrend and Value Equity Manager, Boston Partners, both performed well. Please turn to the next page. This is the last segment, Asia and Australia. Segment profit rose 48% year-on-year to $12.6 billion in the Asia and Australia segment. Aided by the COVID recovery, assets from across the region contributed to the strong result. Car leasing in Australia and South Korea remains upbeat, which added to profit growth. The increase in assets is mainly attributable to changes in forex. This ends my segment-specific comments. Next, I would like to address some additional topics which may be of interest to you. Please turn to the next page. There are two pages. The first page outlines the pace of COVID recovery. The left-hand graph shows segment profits at the three COVID-impacted businesses. And Please look at the year-on-year comparison graph in the middle. For the first quarter, compared to the pre-COVID period contribution, our profit is lower, but you can see steady recovery in the earnings over the last couple of years. And please note that while not included in the chart, an increase in hospitalization payouts of COVID, including for those in home isolation related to the latest surge cases, was a 4 billion yen negative impact on profits. And although infections are spiking again in Japan, we expect an ongoing recovery in our COVID-impacted businesses. Please turn to the next page. This slide outlines how various macro changes may or may not impact Oryx. Oryx controls for market risk such as interest rates and forex risk through ALM. For forex and interest rates, I've explained at previous earning calls and the direct impact is limited. And you can see the sensitivities for both outlined in this page. we will need to continue to carefully watch for any sudden market changes, such as rapid fluctuations in the U.S. interest rates and their impact on our business. Regarding credit risk, we regularly monitor all large borrowers both within Japan and overseas and have seen no sign of increase in either non-performing loans or provisions for doubtful receivables and probable loan losses. and none of our businesses have seen significant trouble in any business line, and therefore the impairments have not increased. We will continue to carefully monitor risk and any possible new investments. Finally, I would like to speak about inflation. We are strengthening profitability management for individual development projects in areas where accelerating inflation is expected to increase costs. Meanwhile, for example, we can expect larger investment gains owing to higher prices for physical assets such as used cars and ships. Higher electricity prices also have some positive aspects as they lead to larger power generating profits. We hope to carefully control costs so that in the extent possible, we can turn this into a positive factor for OREC's profits. So that's all about the slides. And again, I would like to emphasize that for the fiscal year ending March FY23, it's likely to be a year where economic uncertainties will continue on a global scale. We will continue to lay the groundwork for achieving both profit growth and immediate term net income target of 440 billion yen. As I outlined in the start of my remarks, we are receiving a large number of inquiries into new investment projects. Although the business climate still warrants some careful approach, we will continue to aim to proactively take advantage of investment opportunities. And that is the end of my comments. Thank you for your kind attention.