ORIX Corporation

It's time to start. Good evening, and thank you for joining us for this telephone conference of our ex-corporation for the third quarter consolidated financial results for the nine-month period ended December 31st, 2022. I'm from Aris Sustainability. My name is Nakane. I'll be the master of ceremony for today. Thank you for this opportunity. Today's conference is attended by Hitomaru Yano, Executive Officer, Responsible for Accounting, and Aya. And we would like to ask the participants to kindly either turn off your mobile phone or other communication devices, or move them away from the telephone in order to prevent feedback. Mr. Yano will give you a presentation, followed by a Q&A. And we accept this meeting to take about an hour. Mr. Yano, the floor is yours.

Good afternoon. This is a executive officer responsible for accounting and IR. Thank you for joining us in this financial results briefing today, despite your busy schedule. I will begin by explaining the results for the third quarter of fiscal year ending March 2023. Please refer to page two of the materials on hand. I will first review the executive summary. First, please note that net income for the first nine months of the fiscal year was 211.4 billion yen, although it was only several millions of yen, but we did manage to record year-over-year growth. The annualized ROE was 8.6%. Net income for the third quarter increased by 50% from the second quarter. This was Oryx's second highest quarterly net income since the pandemic started following the fourth quarter of the previous fiscal year in which we recorded an investment gain on the sale of Yayoi. Second, thanks to progress in reopening, businesses that have been strongly impacted by COVID-19 are continuing to recover towards higher profits. The insurance segment also experienced a significant decrease in COVID-19-related payout expenses compared to the first half of the year. Third, I would like to highlight on capital recycling. In the second half of the fiscal year, we've continued to both make new investment and realize exit mainly in our focused businesses of overseas renewable energy and domestic PE. Through this, we are increasing profitability by replacing assets, the fourth. The key point is shareholders' return. Last May, we approved a share buyback program of 50 billion yen and have already completed the acquisition and cancellation of 23.43 million shares, which is approximately 2% of our signing shares. We plan to pay dividends for the full year, as previously indicated. So please refer to page 3. For third quarter FY2023 March end OREC's recorded sharp increase of 50% versus second quarter sold at quarterly net income. The aforementioned recovery in the insurance segment played a part while strong performance trends in Oryx Europe led to booking of a performance fee. The partial sell of our stake in leading geothermal energy producer OMAD in the environment energy segment also contributed. Now please turn to page 4. The page shows breakdown of segment profit. Nine-month segment profit was at 290.7 billion yen. Please see the bar chart on the right. The breakdown of quarterly segment profit for the past two years is shown. Net income for the third quarter increased 15% year-on-year and 44% quarter-on-quarter to 120.7 billion yen. Please look at the left-hand side bar chart where you can see that investment gains for the fiscal year have returned to a usual level. I'll explain the details on individual segment pages later. Now please turn to page 5. This page describes the earnings improvement due to progress in reopening of the economy. The bar chart on the left shows the trend in segment profit for the three COVID-impacted businesses of aircraft and ships, facilities, operations, and concessions. In the fourth quarter of the previous fiscal year, we posted losses of 11.2 billion yen, but a steady recovery in profits Thereafter, resulted in a positive 5.6 billion yen in segment profits for the third quarter. In aircraft and ships, the passenger markets in North America and Europe remain strong, and aircraft leasing profits are in an uptrend. Hotel things and other facility operations have recently achieved an occupancy rate of about 80%, thanks in part to the government's nationwide travel support program, and ADR has mostly recovered to FY20 March levels. In the concession business, the number of progress on international routes has increased rapidly following the Japanese government's easing of border measures in October 2022. Kansai Airport's results are reflected in Oryx's group's earnings with a three-month lag, so we expect a full-fledged recovery in profits to take place in the next fiscal year. However, based on the current number of passengers, we believe that we are within striking range of returning to black. We expect further improvement in performance in all our COVID-impacted businesses as travelers from China return. Please refer to the following page for a summary of the trends in recovery indicators for each businesses. Now, the bar chart on the right shows the trend in segment profit for insurance. Payouts to policyholders with COVID increase and segment profit fell to 2.1 billion yen in the second quarter, particularly in the wake of the seventh wave peak of infections. However, the eligibility criteria for receiving benefits were changed from late September 2022. Only policyholders meeting certain conditions are now eligible for payouts for quarantining at home. As a result, payout expenses have declined from the third quarter and profits have recovered. Please turn to page 7. Next, I will comment about capital recycling, which supports a sustainable growth. Capital recycling involves constant monitoring of capital efficiency, making exits in assets and businesses as needed while continually making new investments. This will increase earnings growth rate and that lead to improved ROE and in turn ROE. The box on the left shows exits and new investments in the overseas renewable energy business. As I mentioned earlier, in the third quarter, we saw 7.8% of 19.7% stake in Ormond shares. in the marketplace, resulting in a gain of about 15 billion yen. In addition to retaining 10% or more of OMA shares, we will continue to dispatch outside directors to support further growth of the business. Furthermore, we plan to acquire the remaining 20% of Erawan, where we acquired an 80% stake in July 2021, and make it a wholly owned subsidiary in the fourth quarter of 2023. In addition to So as we are, we will be able to make more, as a result, we will be able to make more flexible and swift decisions regarding business and financial strategies such as the new business development. Now, the box on the right shows a new investment in a domestic PE business. In 2014, we acquired a major metal recycling company called NetJapan, which we sold in a trade sale in the third quarter. We achieved a high return on the deal. of MOIC of three times and the 16.4% of IRR. In addition, as recently announced, we acquired a majority stake in DHC, a leading Japanese manufacturer of cosmetics and health foods. By promoting the smooth succession of DHC's businesses, further strengthening its compliance system, corporate governance, and implementing a new growth strategy, we aim to increase its corporate value while enhancing profitability and achieve an IRR of at least 20%. Page 8 and page 9 are a summary of segment information but today I will explain it by using the specific price for each segment. So please go all the way to page 12. The first segment is the corporate financial services and maintenance leasing segment. Segment profit decreased 9 percent year over year to 56.4 billion yen but excluding the sale of Yayoi in FY 2022 and investment and valuation gains on an investee recorded in the previous fiscal year segment profit increased in corporate financial services service revenues increased from the previous fiscal year due to strong performance in various businesses the auto unit posted a year over a year increase in segment profit versus the previous year when it achieved a record high this was thanks to the continued higher market high market price for used car and the recovery in car rentals for the pandemic from the financial slump. Rentex posted record high profits as well. Now please see page 14. The page shows real estate segment. The investment and operation unit saw an increase in profits due to improved earnings at hotels and inns thanks to progress in reopening, as I explained earlier. In Daikyo, profits declined versus the previous year as the number of condominiums units delivered in FY2022 skewed to the first half of the fiscal year. earnings in line with the full year forecast. In real estate, too, we operate a capital recycling type business model whereby we procure and develop land by ourselves, lease up property, and then sell it at the right time in the market. Please see page 16.

The investment unit posted a loss in the previous fiscal year due to losses at Kobachikako. but the investment portfolio has been solid for this fiscal year. Even excluding losses related to Kovash Kako, segment profits increased. In the concession unit, the number of passengers of international routes continued to increase in addition to those on domestic routes, and this shrunk the loss. Again, I expect earnings to grow at an accelerating pace, as earnings are already on recovery track, and inbound tourists from China begin to arrive in the earnest. Please see page 18. This is environment and energy segment. Profit increased 86% year-on-year to 34.1 billion yen. As I explained, in addition to the partial sale of stake in a third company, we also benefited from high electricity spot prices in some overseas regions, which led to higher electricity sales revenues. In the domestic market, sales increased in the solar power generation business due to the continued fine weather. We expect the global shift towards renewable energy to accelerate partly due to the prolonged war in Russia and Ukraine. We are already operating 3.4 gigawatt energy production facilities in Japan and abroad, and we plan to grow this to 10 gigawatt by the fiscal year ending March 2030. In addition to Elevon, we will have Greenco, a major Indian renewable energy company, where we hold a 20% stake to develop its pipeline. Please turn to page 20, insurance segment. As I mentioned, profit decreased compared to the previous year. due to an increase in COVID-19 related payout expenses for patients operating at home. Meanwhile, since last September of last year, eligibility for benefits has been limited to those with high risk of severe symptoms. So we expect the COVID-19 related expenses picked out in the first half of this year. The number of policies in force has continued to increase and the premium income has risen. In addition, asset management has steadily have seen steady results, and investment incomes have been increasing. Segment assets decreased. This is marked the market and the rise in both Japanese and US dollar interest rates, resulting in a lower valuation. However, the market value of debt has also declined since the duration of policy reserves or exchange liabilities is longer than that of assets. The rise of interest rates, particularly in yen, has been a positive for embedded value. So, in other words, interest rates rise and carry revenues faster than increasing insurance expenses and profits increase, based on page 22. Banking and credit banking unit. Revenue from real estate loans for investment continue to be firm, despite the absence of a one-time profit booked for the previous year. In the credit business, we actively invest in advertising to develop a new OLYX money product, which resulted in decline in profits. However, performance is in line with the expectations, and loan balance is increasing. Please turn to page 24. Aircraft and ship segment. Profit increased 14.2 billion yen year-on-year to 17 billion yen. As mentioned, the aircraft leasing business has benefits from rebound from passenger markets, particularly in North America and Europe. In addition to leasing revenue, service revenue from aircraft asset management is a strength and it grew. Avalon earnings are also on the upward trend, reducing its losses. Please note that the financing costs from investing in Avalon are included in the profit report. The ship unit boosted earnings, partly reflecting the sale on ships in response to February market prices. as well as financial income from SHIB financing deals. Please turn to page 26, Oryx USA. Affiliate profit fell sharply from the previous year when it achieved a record high to 33 billion yen. The decline was primarily due to fewer PE exits caused by changes in the macroclimate and the origination fees in the real estate lending from Lumet. And the capital gains improved in the second and third quarter compared to the first quarter of this phase 27. We're currently in the process of adjusting the risk controls, OCU, in light of the uncertain economic outlook in the U.S. We have strengthened our governance framework in order to achieve additional growth in our asset management business, utilizing investor capital, such as establishing asset management, investment, and website committee, in addition to the investment committee. The asset quality of RXUSA is sound, It appears that the yen-denominated assets have increased due to the FX effect, but the yen to keep the asset size to a certain level, and the dollar-denominated asset has actually declined, based on the page 29. This is our exube. Segment profit fell 36% year-on-year to 35.9 billion yen as a result of decline in the yen, which hit a record high in the previous fiscal year due to impact of a weaker financial market. Meanwhile, In the third quarter, Transtrend, a CDA asset management firm, recorded performance fees, which resulted in a significant increase in profits in the second quarter. And the asset management business, we have diversified, and each company has a distinct management style. In addition to Transtrend, Boston Partners, which is strong value investment, is also performing well. Please turn to page 32. Asia and Australia segment. Profit decreased 3% compared to the previous year to $34.1 billion amid ongoing reopening in Asian countries. We expected new deals in India and Indonesia in addition to Australia and South Korea. And the decline in profit is due to absence of gain on sale of the previous year. This completes the segment. Please turn to page 10. With regard to shareholder return, our basic policy is to distribute one-third of net income to dividends, one-third to investments, and the remainder to retained earnings and share buybacks. Dividend for the country's core year is 85.6 yen, or dividend payout ratio of 33%, whichever is higher. However, the dividend payout ratio will be 40%, assuming the net income forecast announced November last year of 250 billion can be achieved. including the share buyback of 50 billion. The total payout ratio is a 60 percent for the fiscal year. Now I would like to talk about the credit ratings. Last week S&P reduced the outlook from stable to negative to reflect our execution of investment in DHC. Although the downgrade itself is an undesired change from our perspective we undertake thorough risk management of a portfolio and plan to proceed with a capital recycling strategy while both maintaining and strengthening the financials. By providing appropriate information disclosure to rating agencies, we hope to improve mutual understanding. Meanwhile, please note that the rating action will not affect the basic policy of our shareholder returns. Lastly, we understand that the economic environment continues to be uncertain worldwide, and strengthening the risk management system is important. Nonetheless, we do see some bright news on the horizon, such as the progress of reopening around the world in Japan. In the domestic PE and other fields, we are seeing numerous inquiries for potential investments, including large projects. While maintaining a cautious and selective stance, we intend to actively seek investment opportunities towards achieving the mid-term goal of which we announced last May, which is net income of $440 billion and the 11.7% ROE in the fiscal year ending March 2025. Thank you very much for your kind attention. Now the floor is open for questions.