ORIX Corporation

It is now time to get started. Thank you for joining us for the first quarter confidential results for the three-month period ended by June 30th, 2023. This is the OECD Corporation meeting. And today we have the attendee, Hitomaru Yano, who will be responsible for accounting and IRB. And we would like to kindly ask you to turn off telecommunication devices, such as your mobile phone, or keep it away from your telephone so that we can present feedback. There's going to be a presentation by Mr. Ayano for a few days, and the whole meeting should last approximately one hour. Mr. Ayano, the floor is yours. Thank you for the introduction. I am Ayano, head of the Treasury and Accounting and Investor Relations. Thank you very much for joining us today. Well, without further ado, I will give a brief overview of the first quarter 8 by 24 March end results. We see page 2 of the deck that shows you the executive summary just as usual that covers today's main points. The first is net income and ROE. OREC posted a 2% year-on-year increase in net income to 63 billion yen, an annualized ROE of 7%. The segments that performed well were corporate financial services and maintenance leasing, fueled by expansion of auto-related businesses, PE investment where industries continue to grow, and insurance, driven by higher investment income, that is. As a result, the first quarter base profits hit 82.2 billion, surpassing pre-COVID level. The second is acceleration of reopening momentum. The rapid increase in inbound tourists visiting Japan has led to growth in earnings at concession, including Kansai International Airport, and facilities operations hotels and inns. In the aircraft leasing business, earnings continue to recover from the pandemic on the back of strong performance at airlines. Third is capital recycling. The yen weakened further during the first quarter as a result of rising U.S. dollar and euro interest rates. This environment has allowed ORECs to seek high returns on the sales of domestic assets primarily in rail estates such as logistics centers. In addition, some industries are suffering from labor shortages, which has led to business opportunities for RX, which can capitalize upon the expertise the company has built in efficiently managing physical assets. The fourth point is shareholders' return. In May 2023, we announced a 50 billion yen share buyback program. As of the end of July, we have completed 17.8 billion yen in buyback, or 36% of the program. Please stand to the next stage. As I previously discussed, The first quarter net income came in at 63 billion yen, up 2% year-on-year, and this translates to an annualized ROE of 7%. The right-hand chart shows quarterly trends in net income and ROE for the last two years. The first quarter net profit was the second highest in the four years since the start of COVID pandemic. Please note that from this fiscal year, we have retroactively adjusted our past earnings to reflect changes to accounting standards for the insurance segment, As a result, FY23 March net income changed from ¥1,273.1 billion to ¥290.2 billion. The following pages, which focus on segment-level information, also reflect some changes to the way we calculate segment profits. Specifically, we reviewed the method to distribute profits for business shares between two different segments. As a result, although it may be small amounts, segment profits in the corporate financial services and maintenance leasing segments increase by those in the energy and environment segment decrease. Please note that these changes have also been reflected with the app review for the past 50 years. Now please send to the next page. This page shows the breakdown of segment profits. Segment profit rose 6% year-on-year to 91.5 billion yen. Please look at the right-hand chart, which shows segment profits by quarter. The light blue indicates base profits. The dark blue, investment gains. Base profits were up 12% year-on-year to 82.2 billion yen. This figure was higher than the first quarter for FY20 March end or FY19 March end. Profit growth was skewed primarily by progress in reopening and healthy earnings in insurance. I'll explain the details in the following segment pages. Now, meanwhile, investment gains were down 27% year-over-year to $9.3 billion, owing to a lack of large-scale exits during the first quarter when Oryx only recorded several smaller exits. Investment gains, as you can see on the right-hand chart, tend to fluctuate substantially depending on the quarter. Please note, however, that as shown on the left-hand chart, Oryx has consistently realized a certain level of investment gains for the past five years, averaging more than 100 billion yen per annum. We plan to realize further investment gains during the remainder of the fiscal year and achieve a typical year of investment gains. Now, please turn to page five. This page focuses on reopening related businesses. The left-hand side chart shows segment profit trends for the three COVID-impacted businesses, aircraft and shipping, facilities operations, and concessions. For the first quarter, both facilities operations and concessions posted their highest level of quarterly segment profits since the start of the pandemic. Aircraft and ships have sustained its earnings recovery trend, and the three businesses in total recorded segment profits of 4.6 billion yen a dramatic improvement from the 300 million yen in losses a year ago. Now, airport concessions centered on Kansai International Airport saw losses shrink dramatically following a strong rebound in international passenger numbers. Please note that owing to a lag in reporting Kansai Airport's earnings in direct growth, the first quarter figures reflect results for the January to March 2020 quarter. Kansai International Airport boasted 1.06 million international passengers in March, and that figure surpassed 1.35 million in June, reaching 63% of the June 2019 level. In facility operations, a robust increase in inbound tourists has helped Oryx raise ADR while still maintaining high levels of customer services. And Red Par in June at directly operated hotels were 119% of the June 2019 level, while those at traditional Japanese teams were 114%. These helped the business achieve the first quarter since the start of the pandemic. Aircraft leasing are expected to recover further as narrow-bodied lease trades are already surpassing their pre-COVID levels and are continuing to rise. In all of the COVID-impacted businesses, we anticipate additional growth as Chinese tourists return to Japan. On the following page, you can see the latest trends in indices that illustrate a recovery in each business. so please take a look at these as well. Please skip page six and move on to page seven. I'll use the segment specified to explain each segment's results. First is corporate financial services and maintenance leasing. Segment profit rose 20% year-on-year to 19.9 billion yen. In corporate financial services, fee-related businesses perform well, including insurance sales and real estate intermediary services. Segment profits rose sharply year-over-year as we booked the valuation loss of our stake in an industry a year earlier. Profit rose in the auto business as a result of profitability-focused sales activities we have been carrying out over the last several years and growth in the rental car business. In addition, prices for used cars remained high. Rental profits were down year-over-year owing to higher depreciation expenses caused by upfront investments in rental ICT equipment. ahead of expected Windows-related upgrade demand. The business also puts costs associated with the operation of new large fully automated warehouse, the third location in Japan. Excluding these, results were all solid. So please turn to the next page. The page shows the real estate segment. Segment profits were down 17% year-over-year to 10 billion yen. In the real estate investment and facility operations units, Earnings improved in the facility operations business as outlined earlier. Meanwhile, profits were down year-over-year owing to the absence of investment gains looked a year earlier from the sales of large logistics facilities and other properties. Now, Daikyu secured a strong year-over-year increase in profits bolstered by healthy sales of high-price condominiums by procuring sites with excellent locations. Please stand to the next page. Next is PE investment and concession. Segment profit rose 151% year-over-year to 5.7 billion yen. In the PE investment business unit, financial performance improved on the completion of Kobayashi Kako-related costs, as well as contributions from industries that were purchased on FY23 March, DHT, and Hexaworks. Please note that the first quarter results include just two months February and March 2023, are profits from DHC consolidated into OREC's good earnings. The concession unit posted smaller losses for the fourth consecutive quarter, aided by the recovery in international passengers, as I mentioned earlier. The unit is on track to return to profitability on a full-year basis for FY20 for March. Please turn to the next page. The page shows the environment and energy segment profits were down 14% a year by a year to 3 billion yen, In the domestic energy business, profits were down on lower income from power sales caused by output caps on solar power generation in some regions. In the overseas energy business, profits were down slightly year-over-year at ERA1, owing to poor weather in Spain and higher euro interest rates. Despite this, green coal earnings were up year-over-year. Now, demand for renewable energy assets remains strong globally. and we are expanding our capacity with Edalan at the center. Profits are continuing to grow. Please turn to the next page. In the insurance segment, profits were up 68% year-on-year to 19.2 billion yen. The weak yen and high interest rate contributed to growth in investment income. In addition, Japan's May 2023 decision to legally reclassify COVID-19 led to further declines in COVID-19-related payout expenses. As I mentioned before, changes to accounting rules for the insurance segment have led to an increase in profits, particularly in the fourth quarter. Please turn to the next page. This is the banking and credit segment. Profits in banking were up year-on-year, helped by higher financial revenues from real estate investment loans on the back of higher long-term interest rates In addition to fees rose on an increase in trust assets, and the one-time loss booked in FY23 March first quarter also contributed to higher profits. In the credit unit, we booked a CECL reserve reversal in the fourth quarter, FY23 March, which led to a decline in FY20-24 March first quarter. quarter to quarter, but earnings were mostly flat. Reaching the next page. In aircraft and ship segment, 33% yen decline was posted in profits to 3.6 billion yen. The ship business posted low profits on the absence of sales gains from a year earlier, when Oryx made a timely sale of its own ship fleet. The anchor fleet's profits were up year-on-year, as recovery in passenger demand led to growth in the number of owned aircraft and higher lease income from rising lease rates. Avalon posted losses on par with previous first quarter, going to the higher dollar funding costs on debt from when the investment was made. As with OAS, Avalon profits on a current basis continue to grow, fueled by growth in Leasing income and assets were higher, including increasing higher aircraft holdings in the aircraft business. Changes in forex also contributed. This is the next page. OXCSA profit rose 61% to 9.7 billion yen. OXCSA has implemented strict risk management controls for both new and existing deals in light of the U.S. business climate. And this has allowed the segment to control losses including credit losses. On the three businesses' verticals, credit business posted higher profits helped by stable financial revenues and gains on the sale of small deals. In the real estate business, remit first quarter origination volumes were up quarter on quarter and surpassed the year earlier level, and earnings boost was seen from higher interest rates, leading to higher profits. BFIN had fewer deals this quarter, which led to lower profits year-on-year. In private equity, there were limited capital gains in the first quarter, leading to flat profits year-on-year. Please note that the assets were going to changes in Forex, and excluding that, it's down slightly. Page 28 features a breakdown business line, so please refer to this page as well. Please turn to the next page. This is Oryx Europe. Segment profits were down 55% year-on-year to 4.2 billion yen. AEM growth was sluggish in FY23 March owing to the impact of high interest rates and Russia-Ukraine conflict. However, AEM has recovered slightly with the launch of active ETF products and other measures. Nonetheless, higher euro interest rates resulted in higher funding costs, which led to a near decline in profit. Please turn to the next page. This is Asia and Australia. Figment profit was down 37% a year to 8 billion yen. On the absence of gains, On the sale of a Southeast Asian affiliate a year earlier, assets rose by 120.3 billion yen, of which 82 billion was due to changes in forex. So excluding forex impact, the net asset has increased. This is in the next page. Now I would like to give an overview of first quarter results and progress using the categories we disclosed at the Q4 earnings announcement. For domestic segments, both financial and non-financial categories posted higher earnings year-on-year. The financial category in particular shows stable growth, showing a stable good start. Overseas segments, results were below year-earlier levels due to higher funding costs caused by high euro industries and also ongoing uncertainty in the U.S. economic outlook. And we are taking a strict risk management stance in the U.S., and we have maintained healthy asset quality and low non-performing ratio. Please note that the overseas category, energy category, some seasonal factors have come into play, which typically lead to low profits in the first quarter. This completes my explanation about the Q1 results. And now I would like to talk about the business climate as well as the remainder of this fiscal year. Please turn to the next page, page 18. I will start with a discussion on the macroeconomic climate and our current status. As for interest rates, as outlined in past quarters, OREX works to keep its profit sensitivity to interest rate changes low through asset library matching. Although a 1% increase in euro interest rates is 2 to 3 billion yen, negative impact. On annual pre-tax losses, we have worked to increase the fixed rate loans in order to reduce the sensitivity further. Then weakness and low interest rates in Japan have encouraged overseas investors to increase investment in Japan. This environment should allow OREGs to improve our returns even further through exits in domestic assets, including real estate properties like logistic facilities. Regarding inflation, while this does impact the variety of our businesses, we have been able to pass along higher costs through maintenance leasing rates, rental fees, like your condominium prices, hotel and in RIVPAR, and car prices, overseas renewable energies, among others. Finally, labor shortage is a critical issue for automobile and aircraft maintenance operations, and for management of solar power generation facilities. Outsourcing of management of these assets is likely to increase, and this should allow Oryx to capitalize on the expertise in capably managing these assets to expand business opportunities. Our asset management portfolio is outlined on page 30 of the presentation material. Please refer to that as well. Moving on to the last page. The key theme for this fiscal year continues to be capital recycling. As explained earlier, we have noticed this stronger momentum for investment among overseas investors for domestic real estate and PE assets. Demand is particularly robust in real estate. Oryx consistently generates a certain level of investment gains each fiscal year and plans to continue exits going forward in this fiscal year as well. In domestic W-E investment, we have improved the value of a number of investees following a period of active management and have multiple companies close to exit. And the environmental energy segment, L-1, which O-X acquired in 21, has been steadily developing new assets and expanding its operating capacity. And the company plans to sell some of these assets during this fiscal year And like other segments, continuing capital recycling. In Oryx USA, we maintain a cautious stance in new investments. But most of our existing PE investees have enjoyed their growing earnings. So we continue to look for opportunities to exit at the right time. And for this fiscal year, we will continue to see uncertain macroeconomic climate. But we see some positive aspects as well. such as progressing in opening and in weakness. And we will continue to work towards achieving a four-year target of 330 billion yen in net income, we announced in May, and also then reach 400 billion yen in net income, an hourly of 10.4% for fiscal 2024, March. While caution is still necessary, we plan to continue to grow proactively looking for more investment opportunities. Thank you for your kind attention. That's all from me. Thank you for your attention and interest. We're now ready for the Q&A session. If you wish to ask a question, please press the star key, then press 1 on your telephone keypad. After the announcement of your name, please ask your question. If you wish to cancel the question, please press the star key, then press 2. If you wish to ask a question, please, you may ask up to one question. We have from Daiwa Securities, Watanabe-san, asking the question to begin with. So I am Watanabe from Daiwa Securities. I'm referring to page 41, and that is to do with capital usage ratio going up to 39%. It was, I think, the end result of acquiring DHC. What is your total level? So I know that you have been explaining about capital recycling today, which was pretty positive. but 100 billion yen of five years investment gain was to be achieved. But based on this capital usage ratio, do you think that there may be some acceleration? Thank you very much for asking the question. So as to the capital usage, yes, we were impacted by DHC acquisition, as we have been sharing with you from some time ago. So whether this is correct or not, but we are constantly referring to the level. And whether it goes up to the level of 90% or not is a yardstick that we would apply. In other words, we would not like to end up having excessive amounts of capital for the sake of the investors, the shareholders, and also remain to be agile in carrying out the M&A if it proves to be right from the timing perspective. So we have just gone over that level currently, which means that we may perhaps consider exiting from some of the investments with 90% with abuse. And so we are making a slow start, as we have explained, that real estate, in fact, the demand remains to be strong. At the time when we put together the plans, if we were to sell a certain property, we had kind of estimated or simulated the amount of investment gains on the sales of the property. But we are now beginning to feel that this assumption, currently the price may be higher than initial assumption or expectation. So the PE investment here in Japan, as well as domestic real estate investment, and also overseas renewable energy investment, And there could be some other businesses as well. So we would continue to, of course, manage all these businesses. And although I said 100 billion yen of an average investment gain, it could be generated just like any other user years. And we may perhaps succeed at that as well. So as an issuer or developer, we would like to continue to recycle the capital so that we would like to continuously generate profits on a recurring basis. And this is what we want to display and prove to the investment community. I hope this answers your question. Thank you very much. So from that perspective, the investment gain this year from 100 billion yen, do you think that there could be an overshoot from 100 billion yen that is expected? Well, as for the investment gain, it's not something that is controllable to hit dot on 100 billion yen. So therefore, There could be a possibility of overshooting such a guideline. Okay, thank you very much. Thank you. SMBC Microsecurity, Miraki-san, please ask your question. Yes, this is Miraki. I have one question. We have inserted the yen-yen profit plan for the four years. Is this still your best estimate at this point in time? On page 17, you are showing the progress. Well, if we calculate the progress from this, most of them are below 25%. And investment gain plan progress is just about 10%. And I think you're saying that you can catch up. But against the base profit, on page 18, there is a downward arrow. How much of a concern is this? So financing cost, interest rate, and also inflation impact. And although it doesn't really say, there is a limit to the output of solar power generation. And against the base plan, it is going to be a material impact.

Can you please elaborate? Thank you for your question.

I clearly understand where your question is coming from. Looking at the base profit, looking at the past, to the second half, base profit tends to increase. And I have mentioned the reopening situation and the concession clearly is showing recovery. The base profit may not shoot up, but Every quarter, we expect gradual growth in base profit. That is my current scenario. And then you can add investment gains on top of that. In the first quarter, the progress rate, as you mentioned, is quite low, but there is no need to see this in a pessimistic light. So things will be built one by one, step by step, in order to achieve the four-year objective. That's the scenario. Moving back to macroeconomy, euro interest rate. Well, most of the other interest rates are mostly neutral, so there is not much concern. And euro was the biggest concern. But 2 to 3 billion yen was mentioned earlier. Now, in this fiscal year, compared to the previous fiscal year, we have started to increase the hedge volume slowly. And as of today, the sensitivity is much lower than what's indicated on this slide. So going forward, the annual sensitivity is at the low one billion level, which means that your interest rate increase should not have a material negative impact on us. Well, we don't believe that we should hedge against everything, but we believe that the current level is probably appropriate. Listen now to inflation. Inflation. I believe that was the next part of the question. Material costs increase and labor shortage can result from inflation. So material cost, of course, and the construction cost has gone up. But the real estate price increase and further lowering of the expected yield and increasing prices much larger than the increase in the cost. So I believe that inflation is actually positive for us. These are some of the smaller impacts, but in hotels and inns, occupancy cannot really be increased very much because it's harder to find people. to work there. But still, within the limited number of headcounts, we can increase the services and we can increase ADR. And in the end, we are having a positive situation. So we are coming back to the pre-COVID level. In other words, we take advantage of the inflation in order to increase the service prices that we offer. So in that sense, we want to be able to ride this wave and be actually able to increase the top line. And we are also seeing an increase in the bottom line as a result of that. I think that should be it. Am I right, or was there anything else?