ORIX Corporation (NYSE:IX) Q2 2024 Earnings Call Transcript

ORIX Corporation (NYSE:IX) Q2 2024 Earnings Call Transcript November 2, 2023

Nakane: Now it’s time to start the ORIX Corporation’s Financial Results Briefing for the Six-Month Period Ended September 30, 2023. Thank you very much for joining us today. I’d like to act as a moderator. I am Nakane from IR Sustainability Promotion Division. Today, we have Mr. Makoto Inoue, the President and CEO; as well as Mr. Hitomaro Yano, in charge of Accounting and Treasury and Investor Relations. There are some housekeeping announcements. In order to prevent any interference if you have any mobile phones or telecommunication devices nearby, please make sure to turn them off or move away from those devices. First, I will call upon Mr. Yano and then Mr. Inoue to make presentations and then take questions. We plan to spend about one hour. Now Mr. Yano.

Hitomaro Yano: Thank you for the introduction. This is Yano speaking in charge of Accounting and Treasury and Investor Relations. Thank you for taking time out of a very busy schedule to participate into this briefing. I’ll start by explaining about our fiscal 2024 March results. Please turn to Page 2. For first half of fiscal 2024 March, ORIX reported net income of JPY128.1 billion, up 4.7% year-on-year. This translated into annualized ROE of 7.0%. Please turn to the next page. This is the breakdown of segment profits. First half segment profits were up 11% year-on-year. It was JPY191 billion. This slide shows past trends of segment profits on a full year quarterly and half year basis from left to right. Base profit are dark blue and the investment gains are in light blue.

At the far right of the trends for the half year basis, base profits were up 16% year-on-year to JPY167.4 billion. This was primarily due to a recovery in the real estate and the concession business earnings, thanks to higher inbound tourism and the higher profits of the insurance segment as a result of higher investment income. Meanwhile, investment gains in light blue were down 14% year-on-year to JPY23.6 billion. These were primarily due to investment gains on sale of multiple real estate properties booked in the first half. Our CEO will discuss this later on. We plan to aggressively move forward with sales in the second half of this fiscal year. Please turn to Pages 4 and 5 next. This gives a breakdown of segment profits and segment assets.

This should give you a good overview of segment trends as a whole. Detailed information about each segment can be found from Page 16 and beyond. Please review them in your own time. And I will just give you a brief overview using Page 4 and 5. First is corporate financial services and maintenance leasing, Segment profits rose 9% to JPY40.3 billion. Corporate Financial Services, various fee businesses are performing well, and profits were up in the first half as M&A brokerage contributed to profits. In the Auto business, used car prices remained high and Rental car demand is strong continuously. And rental profits were lower year-on-year, owing to the costs associated with the launching of new technology center, but this unit has posted steady profits.

Moving on to real estate. Segment profit was up 42% to JPY26.9 billion. In the investment and operations, profits were up year-on-year, thanks to improving earnings in the facility operations business, hotels and inns on a recovery in inbound tourism demand and office and real condo sales were also booked. In the DAIKYO units, profits were up sharply year-on-year on strong condo sales. In real estate assets, real estate assets were up by JPY69.4 billion versus the end of last year as a careful selection of our new assets continued alongside proactive sales. Next is PE and concession. Segment profits were up 141% year-on-year to JPY9.7 billion. In the PE business – investment units, segment profits were up year-on-year as profit contributions from DHC and HEXEL Works were – which were acquired last year offset lower profits from other investments and impact of investees sales last year.

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Q&A Session

The concession unit returned to the black for the first time on a quarterly basis since the start of the pandemic on the recovery of international passenger numbers, and there’s a three-month delay in this profit reflection. And the segment assets were up JPY203.3 versus end of fiscal 2023 March, which – with the execution of Toshiba LP and mezzanine loan. Next is environment and energy. Segment profits were down 7% year-on-year to JPY8.1 billion. In the domestic energy business, segment profits were up slightly year-on-year, thanks to a large number of sunny days in the second quarter, which offset the impact of output curtailments in the Q1. In overseas energy, overall profits were down year-on-year due to higher hedging costs on foreign currency denominated assets caused by higher interest rates, profit contributions from Elawan were higher, and the Greenko profits were also up year-on-year.

Segment assets were up JPY59.6 billion year-to-date owing to ForEx changes. Next is the insurance segment. The segment profits were up 151% to JPY37 billion. Segment profits rose on the increase in investment income, thanks to the weaker yen and higher interest rate as well as lower COVID-related payouts. Segment assets were up JPY53.3 billion on ForEx changes. Next is banking and credit. Segment assets profits were up 8% to JPY16.5 billion. The banking business unit has been – has seen the financial revenues grow as a result of higher interest rate, lifting the long-term prime rate. They also benefited from the growth in fee revenues on an increase in trust assets. ORIX Bank continues to strengthen its profitability through growth in the trust and other businesses and not by unnecessary increasing assets.

As a result, banking segment assets were flat versus a year ago. In credit business, both assets and segment profits were mostly flat year-on-year. Next is aircraft and ships. Segment profits were JPY10.4 billion, down 2% year-on-year. And the ship business unit profits were down year-on-year on absence of year-earlier gains on timely sale of owned vessels during the period of high prices. This was in line with our initial targets. Four ships were sold during the first half. Aircraft leasing posted higher profits amidst at the recovery in passenger demand, leasing revenues rose, thanks to higher lease rates and increase in the number of owned aircraft. Avalon turned profitable on a quarterly basis after accounting for hedging costs, thanks to a rebound in passenger demand.

Segment assets were up JPY164.3 billion on forex impacts and an increase in owned aircraft. Next is ORIX USA. Segment profits were down 24% to JPY16.3 billion. There were fewer exits in the PE business, owing to changes in the macroeconomic climate, which was the primary reason for lower profits in the segment. Segment assets were up JPY63.4 billion in OCU. Local currency denominated assets are lower, as ongoing enhanced risk management has led to OCU to rein in new investments, but charges, changes in the ForEx led to higher yen-denominated assets. Next is ORIX Europe. Segment assets were down 19% to JPY13.4 billion. Profits are lower owing to hedging costs on ForEx denominated investments primarily at Robeco Group caused by higher euro interest rate.

However, AUM on a recovery trend with the launch of active ETFs and fee income is stable. Segment assets were up JPY35.1 billion year-to-date, mainly due to ForEx changes. Segment profits are down 49% year-on-year to JPY12.4 billion. This is finally the Asia and Australia. Profits fell due to the absence of gain on sale in the Southeast Asia affiliate in the same period of the previous year and lower profit contributions from investees, despite this leasing and loan operations were healthy in Asian countries. Segment assets were up JPY174.8 billion year-to-date, owing to ForEx changes and due to favorable new lease executions in various countries. I would like to also make some comments on the impact of rising yen interest rates. Yesterday, BOJ announced the new policy, and they have made upward revision to the long-term interest rate.

For ORIX, especially for the financial businesses, the higher interest rate in the yen will be the positive. ORIX Bank holds variable interest rate assets, especially those linked to the long-term prime rate of close to JPY1 trillion, a rise in the yield curve during the period of higher interest rates, therefore, will have a positive impact. In insurance, asset rotation in our investment portfolio leads to higher yields during the times of rising interest rate. Also more than anything, the reduced present value of the insurance liabilities outweighs decline in asset value, which will benefit embedded value. This is also a bolster future earnings. In the domestic corporate financial services business, we have held off and aggressively pursuing additional financial – finance leasing business because of low interest rates and excess liquidity.

However, higher interest rates could be an opportunity for this business to grow. So that was about the rising yen interest rate. And with that, I would like to end my presentation and hand microphone to Mr. Inoue, our CEO.

Makoto Inoue: Yes, this is Inoue of ORIX. I would like to start with Page 6. The fiscal 2024 March first half pretax profit came in at JPY184.5 billion. Net income was JPY128.1 billion. Just to repeat, and this was a slight increase of 4.73% year-on-year, and it represents a 38.82% progress towards our full year outlook of JPY330 billion. Interim dividend was JPY42.8 per share and continuing – we will continue to execute the share buyback for this fiscal year. Please turn to Page 7. For the first half, we had a net income of JPY128.1 billion, which is 38.82% towards the JPY330 billion outlook for the full year. And the reason, first of all, is investment gains from asset sales exactly to be back-end loaded. In other words, it’s going to be a second half heavy earnings plan.

And secondly, the uncertain outlook in the U.S. interest rates, we are seeing higher credit costs, and we have decided to do any new private credit origination at ORIX USA. And thirdly, hedging costs increased due to higher U.S. dollar and euro interest rates. With the ongoing Russia-Ukraine conflict and intensifying fighting between Israel and Hamas, the global situation is becoming more challenging. In addition, rising energy costs, interest rate trends in major currencies, and the price inflation globally makes it increasingly difficult for us to make accurate forecast. Within Japan, higher prices, labor shortages and the weakening yen have lowered feasibility. But an inflow of capital from outside of Japan have continued to provide support.

Our domestic business are healthy overall with this profit, up 16.1% year-on-year centered on real estate, PE and concession and the insurance businesses. So we are performing ahead of plan. Please turn Page 8. Having said that, in order to meet our full year target of net income of JPY330 billion and ROE of 9%, we will need to achieve growth in base profits and realize the sales of some assets in the second half of fiscal year. In the first half, we booked investment gains of JPY23.6 billion, and we forecast that investment gains will be concentrated in the second half of the fiscal year. So we will expect a sharp recovery in the second half. Assets are for sale are primarily logistics facilities, rental condominiums and other real estate related assets as well as our private equity assets and renewable energy facilities.

And negotiations on conditions are currently underway with potential buyers. And we will release details as soon as they become available. To give you an overview of the first half results, domestic businesses were strong overall. Real estate, PE and concession, insurance and lease financing business in Corporate Financial Services posted pretax profit of JPY138.2 billion, up 142% year-on-year. We expect to book investment gains during the second half. So we believe that we will have a steady earnings if everything goes according to plan. Page 9 and 10. Airport concession and real estate operations have enjoyed a particularly strong recovery. And during the pandemic, concession recorded around JPY10 billion in losses because of the ownership stakes.