ORIX Corporation

It's time to start a meeting. Thank you for joining us for this telephone conference of our cooperation for the Third Quarter Consolidated Financial Results for the nine months ended December 31st, 2023. I'm the emcee. My name is Nakame from our sustainability department. Thank you for this opportunity. The attendee at this conference is Kazuki Yamamoto, operating officer responsible for investor relations. As we begin, we have a request for the participants. In order to avoid feedback, if you have a communication device such as mobile phone nearby, please make sure that it's turned off or it is away from the telephone. Yamamoto will provide the explanation for the session, and we will spend approximately one hour for this meeting. Mr. Yamamoto, please start.

Thank you for the introduction. Good afternoon and thank you for joining us for Oryx Group's earnings despite of your busy schedule today. Thank you very much indeed. My name is Kazuki Yamamoto, Head of Corporate Planning and Investment Relations at Oryx. I have taken over this role from my predecessor, Mr. Hitomaru Ayano. Let me start with a brief explanation of Q3 FY24 March results. Please stand to page two for the executive summary. So there are three points that I would like to explain. The first is the third quarter net income. Net income came in at 91.1 billion yen. Base profits rose in inbound tourism-related businesses, real estate, domestic PE investment, and insurance, allowing Oryx to post the second-highest levels of both base profits and segment profits in the four years since the start of the pandemic. Quarterly profits were the second-highest after the year, in which gains on the Yayoi exit were booked. The second is. Year-to-date net income for the nine months ending December 2023. Net income rose 3% year-by-year to 219.2 billion yen. As we discussed in the first half results briefing, we expected that most of the realization of capital gains would come in the latter half of FY20 for March end. We continue to make steady progress in realizing this investment gains in numbers of deals which are currently under negotiation. which should allow us to attain a full-year net income target of 330 billion yen, which will lift and change. So the third point is shareholders' return. In May of last year, Oryx approved a share buyback program of 50 billion yen. We have executed the full amount of the program and retired a total of 19.89 million shares. There are no changes to our dividend policy, which was announced back in May. Now, please turn to the next page. Net income for the nine months ended December 2023 rose 3% year-over-year to 219.2 billion yen with annualized ROE for the same period coming in at 8%. The right-hand chart shows trends in quarterly net income and ROE for the past four years. Oryx achieves its second highest ever quarterly net income since the start of the pandemic. in the third quarter of 91.9 billion yen, an increase of 40% Q and Q. The ROE in the chart in the annualized net income for each quarter, which improved to 9.7% in the third quarter. So we should be able to achieve the full year target so that we'll be able to achieve our target for the ROE for the year. Please turn to page four. Here, I will discuss the breakdown of segment profits. Segment profits for the nine months ended December 2023 rose 9% year-over-year to 319.2 billion yen. The chart on the bottom of the slide show historical trends in segment profits on a full-year, quarterly, and nine-month basis from left to right. The dark blue is base profits, while the light blue is investment gains. Please refer to the far right chart. of third quarter year-to-date nine-month performance. Base profits in dark blue rose 16% year-over-year to 268.8 billion yen. In addition to a recovery in businesses related to inbound tourism, expansion in investment income in the insurance segment and higher domestic PE investee earnings contributed to this strong number. The light blue investment gains for the nine-month period indicate an 18% year-over-year decline to 50.4 billion yen. But RX posted investment gains from real estate and PE exit in the third quarter of 26.9 billion yen, multiplying this figure by four equals more than 100 billion yen in investment gains. In fact, as shown in the chart, the amount consistently averaged more than 100 billion yen for the past five years. As I mentioned earlier, we are aggressively moving towards forward with exits during the second half. Now please stand to page five and page six. These pages outline profits and assets by segment. OREG's domestic businesses were strong and are on track to meet their full year targets. Overseas businesses saw profits fall owing to the impact of elevated interest rates and our stance of limiting risks considering economic uncertainty. That said, we think it is necessary to continue to carefully watch for the timing where interest rates and economic climate will bottom out. Now, as shown on page six, some segments posted growth in assets due to forest impacts, new EPE investment, insurance, reflecting higher securities investment, and greater investment in aircrafts and leases in Asia and Australia. A detailed overview of trends in each segment will be shared later. Now, what has contributed to the base profit were airport concessions and the facilities operations. Please turn to page 7. The chart shows segment profit trends for OREX's three COVID-impacted businesses, concession facilities operations, and aircraft ships. The left shows full-year segment profits, while the right shows quarterly trends. Total segment profits for the three businesses for the nine-month period were 26.6 billion yen, up by 17.7 billion yen year over year. Even though there is still one quarter left in the fiscal year, these businesses have recovered by about 50 billion yen from the worst period of losses marked during the pandemic. Although there are some seasonal fluctuations, steady growth should allow us to achieve additional expansion on the way to recovery to the 70 billion yen in annual segment profits. Now, inbound traffic from all countries and regions excluding China continues in an upward trend. Airport concessions returned to the black ink in the second quarter, and profits continue to expand in the third quarter. In December last year, Kansai International Airport opened its new international terminal departures area, which it had been working on during COVID closures. This leads to large-scale renovation of the airport's schedule, for completion in spring 2025. The airport is taking measures such as increasing smart lane baggage inspection facilities in an effort to combat labor shortages and ongoing expansion in and out of tourism should lead to further growth in Oryx Group's earnings. Now, by the way, Kansai Airport's earnings are included in Oryx Group's consolidated earnings with a three-man flag. The third quarter figures represent July, September 2023 numbers. Now please turn to page 8. In aircraft leasing, leases are continuing to rise as passenger demand in the U.S. and Europe is at record high levels. Airline earnings recovery and tight supply demand for aircrafts. Although dollar-based interest rates are pushing capital costs higher, there is strong demand in the secondary market for aircraft purchases. Under three types of fee income, these revenue gains on the sales of aircraft management fees are all rising. In the facilities operations segment, we have endeavored to raise red par by delivering superior services to our customers and maintaining high post-COVID occupancy rates. As a result, in December 2023, Red Park stood at 138% of the 2019 level for directly operated hotels and at 128% for inns. As shown in the slide, segment profits for the nine months ending December 2023 in the facilities operation business were 7.7 billion yen, already higher than the 5.6 billion yen for the full year of 2020 March end. We believe further profit growth remains possible as we see room for additional hikes in Webpar and should benefit from the second block of our new luxury Karaku brand, which opened at the end of 2023. Now, please turn to page 9. Next, I will share the progress we made with the result for the third quarter versus the full-year target using the four categories we started to employ last fiscal year. Within Japan, segment profits in both the financial and non-financial category businesses were up year-over-year, making strong progress versus our full-year targets. In particular, domestic non-financial businesses were helped both by inbound-related demand and the real estate segment, where strong demand for properties from overseas investors fueled by yen's weaknesses led to property sales. For this reason, it could overshoot our full-year target for the categories. Now, the overseas segments saw profits decline owing to an absence of investment gains booked on the sales of a partial stake in OMAD in the environment and energy segment in the previous fiscal year, and higher euro interest rates. While we have some distance from meeting our full-year target, we will focus on building up earnings while continuing to control risks. Moreover, assets in these regions remain healthy. Please note that Oryx USA has very little exposure either direct or indirect to commercial real estate. International market in the aircraft and ships remains strong, and we aim to continue to grow our earnings through capital recycling. As for the baseball club, the posting fee from pitcher Yoshinobu Yamamoto's transfer was booked as pre-tax earnings in the other non-10 segment area. Please refer to page 10. Oryx bears a net income of 219.2 billion yen for the nine months ended December 2023, representing progress of 66% towards our target of 330 billion yen. In order to achieve this target, Oryx will need to book net income 110.8 billion yen on pre-tax profits of 165 billion yen in the fourth quarter. In addition to growth in base profits, we are moving steadily forward with several deeds which are in the negotiation phases with buyers. and aim to achieve our full year earnings targets. Regarding shareholder returns, our DPS plans remain unchanged at either 85.6 yen per share or a payout ratio of 33%, whichever is higher. This translates to DPS of 94 yen if we achieve our FI24 margin net income target of 330 billion yen. As mentioned earlier, we completed our entire share buyback program of 50 billion yen, of which some has already been canceled. Regarding our FI25 margin net income target of 400 billion yen, the global macroeconomic climate has changed significantly since our initial outlook. So we will discuss the path towards achieving this target and specific measures as part of our FI25 margin business planning processes. Regarding our view on monetary policy and its impact, we think there is a... I would like to take this opportunity to share. We think there is a possibility that negative interest rates could end in Japan around spring, which will push up the interest rate upward. Higher yen interest rates should positively impact OREX group earnings, particularly at OREX Bank and in the insurance segment. However, we expect only a gradual pace to interest rate hikes, and therefore, please know we have no plans to change our current portfolio strategy or sub-policies. We expect cuts in U.S. dollar interest rates to start around summer. Lower U.S. dollar interest rates should provide support to expansion in earnings. particularly Oryx USA's rare estate and PE businesses. Lower euro interest rate would help reduce hedging costs for Oryx Europe and positive for recycling activities for renewable energy projects at Erevan. So dollar and yen's interest rate decline would be supportive to the strategy of Oryx in many of the times. Thank you.

I would like to continue with the status of each segment. First, corporate financial services and maintenance leasing. Please turn to page 12. For the nine months ended December 23, the segment profit was up 2% year-on-year at 59.2 billion yen. Profits were higher in corporate financial services thanks to solid earnings in fee-related businesses and profit contribution from M&A-intimidated services. In auto, rental car demand remained strong, and prices for used autos continued to trend at high levels. In addition, policy of prioritizing more profitable business during sales activities has yielded results, pushing the auto business to its third year in a row of record profits. by end of Q3, and the segment is poised to post record profits for the full year again. Assets are flat overall, with assets in corporate financial services slightly lower, and rental car fleet in their auto division being renewed. Please turn to page 14. This is the real estate segment. Segment profits were up 110% year-on-year to 51.4 billion yen for the first nine months. Investment facilities segment realized a large investment gain in Q3, resulting in the substantial increase in profits year-on-year. Daikyo profits have grown year-on-year for three consecutive quarters, contributing to the segment's sharp increase in profits. We are proactively setting up properties in the asset recycling business, like logistics centers, and also initiating new development projects in carefully selected areas. And Daikyo continues to acquire sites in favorable areas. And all in all, the segment assets increased by 70.6 billion yen versus the end of the prior year. We will continue this business model to invest in high potential projects and turning them possible. Please turn to page 16 for P investment and concession. Segment profits rose 235% year-on-year to 23 billion yen. The PE investment achieved strong profit gains on the back of exits during Q3 and also thanks to profit contributions from DHC, which we invested in in the prior fiscal year and the profit from concession is increasing, as with real estate. Our first aim is rapid return to pre-COVID profit levels, and our approach is working, which is investment during the pandemic period. Segment assets were up $195.4 billion versus the prior year end, spoiling LP investment, and mentally financing to Toshiba. Please turn to page 18. Segment profit was down by 38% year-on-year to 19.8 billion yen. Excluding the impact of last year's gain on sale of a partial OMAT stake, profits were up year-on-year. The bottom left graph shows the segment profits. In the domestic business, Profits for the nine months were steady year-on-year, although output caps for solar power generation in some regions impacted earnings in the first quarter. A high number of sunny days from Q2 offset this negative impact, and the profits from overseas energy business were lower year-on-year, owing to the absence of earlier gains and the higher hedging costs of overseas investments as a result of elevated euro interest rates. Meanwhile, allowance power sales volume increased thanks to higher generating capacity. Last year, a major renewable energy company decided to withdraw from an offshore wind project. However, we still see strong demand for renewable energy worldwide. This business is positioned as a growth driver, and we will utilize our experience both overseas and in Japan to originate new opportunities. Moving on to insurance segment on page 20. Segment profits were up 101% to 53.4 billion yen. COVID-related insurance payouts from last year fell, and higher investment income helped the segment post sharply higher profits. Premium income, mostly from whole life insurance, was also healthy. Segment assets rose. by 155.3 billion yen, owing to an increase in investment securities and the impact of FX. Please turn to page 22. Banking and credit segment. Segment profits were up 8%, 26.9 billion yen. In banking, profits were up a year. Earnings from real estate investment loan grew on the back of higher long-term interest rates. while the increase in deposit interest was kept at a certain level. In addition, Oryx Bank continues to grow its trust assets and the higher earnings from trust banking also contributed. Earnings in the credit unit were flat year-on-year. Segment assets were up 51.8 billion yen, reflecting the increase in lending interest. as the bank focuses in merchant banking. As part of this business, Oryx Bank originates loans for corporate clients in priority areas such as renewable energy and logistics centers and then securitizes the assets into debt products and using the trust banking license and sell these products to investors. Please turn to page 24, aircraft and ships. Segment profit fell 5% year-on-year to 16.1 billion yen. In the ship segment, profits were down year on year as the business aggressively sold ships holdings last year, taking advantage of the favorable pricing. But this is lining with projections. And the ship's prices remain high. And in this segment, we sold four vessels this fiscal year. Aircraft leasing, as I mentioned earlier, is enjoying healthy progress. At Avalon, high US dollar interest rates has been a drag, and the business was loss-making on a cumulative basis in the nine months. However, the operating environment is improving, and it has been profitable for the two consecutive quarters in Q2 and Q3, even after the hedging costs. Segment assets were up 123.2 billion yen versus the prior year end, reflecting the impact in FX and aircraft purchases. Next is OXUSA on page 26. Segment profits were down 16% year-on-year to 27.8 billion yen. And the primary reason for this was fewer capital gains booked in the PE business. Meanwhile, the credit business saw earnings rise. We have strengthened risk management from an early stage and become very selective with new deals and been running in credit costs despite elevated interest rates, while still enjoying higher financial earnings. Breakdown of profits by this line can be found on page 27 of your handout for your reference later. Segment assets were down by 10.8 billion yen versus prior year end. Even after considering the impact of weaker yen, because we have been selective, While we cannot be overly optimistic owing to the lack of visibility concerning US markets, we continue to operate the business with an awareness that it might bottom out quite soon. Please turn to page 28. This is Oryx Europe. Segment profits fell 42% year-on-year to 20.8 billion yen. In the prior year and the year before, OCE booked performance fees of... higher than 10 billion, but because of the market situation, this shrank. And the increase in hedging costs stemming from higher interest rates led to lower profits. OCE has developed and launched some active ETFs. This is clear. And OCE is promoting efforts to cross-sell financial products across different group companies. Please turn to page 30. Lastly, I would like to talk about the Asia and Australia segment. Segment profits were down 40% year-on-year, 20.7 billion yen. Although leasing and loans were growing in South Korea, Australia, and Asia, profits were lower year-on-year on the absence of the gain on sale of East Asian affiliates. Segment assets were up 163.4 billion yen versus prior year end, reflecting the impact of FX and new lease executions. Segment assets and overview of Asia is shown on page 31 for your reference. And as the footnote says, Oryx's exposure to Taiwan through leasing and investments is as little as 70 billion yen, accounting for just 4.4% of assets in this segment. And in fiscal year 24, March end, overall interest rates have remained higher for and longer than anticipated in Europe and America. And earnings growth overseas has suffered. Meanwhile, benefits from a weaker yen and strong inbound travel demand has helped. Domestic business profit trend above plan. We will concentrate on achieving our net income target of 330 billion yen for fiscal year 24 March end, and then lay the foundation to reaching the fiscal year 25 March end net profit target of 400 billion yen. That concludes my explanation about Q3. Thank you for your kind attention.