ORIX Corporation (NYSE:IX) announced a record net income for the fiscal year ending March 31, 2024, marking a significant year-on-year increase. The company's net income rose to ¥346.1 billion, a 19% increase from the previous year.
ORIX also revealed an ambitious net income target of ¥390 billion for the fiscal year ending March 2025, alongside plans to expand its asset management business and address challenges such as high credit costs and elevated interest rates.
Key Takeaways
- ORIX Corporation reported a record high net income of ¥346.1 billion, a 19% year-on-year increase.
- The company's return on equity (ROE) increased to 9.2%, with base profits rising 14% to ¥367.6 billion.
- Investment gains were up 54% to ¥126.5 billion, surpassing the five-year average.
- Segment profits across various divisions showed significant growth, with notable increases in Corporate Financial Services and Maintenance Leasing, Real Estate, and PE Investment and Concession.
- Despite the overall positive performance, ORIX USA and ORIX Europe segment profits declined.
- ORIX announced a target net income of ¥390 billion for the fiscal year ending March 2025, with a projected ROE of 9.6% and a dividend policy of 39% of net income.
- The company plans to grow its asset management business, aiming to increase assets under management (AUM) to ¥100 trillion and achieve a pretax profit of ¥553.7 billion for FY 2025.
- Global uncertainties, including the upcoming U.S. Presidential election, are expected to impact the business environment.
Company Outlook
- ORIX targets a net income of ¥390 billion and an ROE of 9.6% for FY 2025.
- The company aims to increase its AUM to ¥100 trillion and achieve a pretax profit of ¥553.7 billion.
- A dividend policy of 39% of net income has been set, with a dividend per share of ¥98.6 for the fiscal year ending March 2024.
- ORIX plans to expand its asset management business and address high credit costs and elevated interest rates.
Bearish Highlights
- ORIX USA and ORIX Europe segments reported profit declines.
- The company anticipates that high interest rates and credit costs will continue to affect earnings.
- Global conflicts and divisions may expand, increasing uncertainty in the current fiscal year.
Bullish Highlights
- Record high net income and base profits were achieved in the fiscal year ending March 31, 2024.
- Investment gains significantly exceeded the average of the past five years.
- Profits in key segments such as Corporate Financial Services and Maintenance Leasing, and Real Estate saw substantial increases.
Misses
- No specific misses were mentioned in the provided context.
Q&A Highlights
- CEO Makoto Inoue discussed maintaining growth with ¥4 trillion in capital and a 39% payout ratio to provide returns to investors.
- The company is considering a more flexible hedging policy.
- ORIX plans to increase AUM through funds and attract new investors, despite challenges in explaining co-investment handling externally.
- Future growth prospects include doubling profits from Kansai Airport operations and capitalizing on aircraft acquisitions and fleet replacements.
- The investment pipeline exceeds ¥2 trillion, but selectivity will be key to increasing value and liquidity.
ORIX Corporation remains focused on its long-term strategic goals, including investing in domestic industries and expanding its asset management strategy. The company is also preparing for its 60th anniversary, aiming to promote unity and increase its global value.
With a clear focus on profitability, liquidity, and exit opportunities, ORIX is positioning itself to navigate the challenges of the global market while striving to meet its financial targets and investor expectations.
InvestingPro Insights
ORIX Corporation (NYSE:IX) has demonstrated resilience and strategic acumen in its financial performance, as evidenced by its record net income for the fiscal year ending March 2024. Delving into the financial metrics provided by InvestingPro, we can further analyze the company's recent success and future potential.
InvestingPro Data reveals that ORIX Corporation has a Market Cap of 24.9 billion USD, showcasing its significant presence in the financial sector. The company's P/E Ratio stands at 11.3, suggesting that its stock might be trading at a reasonable price relative to its earnings. Additionally, the PEG Ratio, which measures the stock's valuation while taking into account earnings growth, is quite low at 0.39 for the last twelve months as of Q4 2024. This indicates that investors might be getting a good value for the expected growth.
One of the InvestingPro Tips highlights ORIX as a prominent player in the Financial Services industry, which aligns with the company's strategic goals of expanding its asset management business. Another tip points out that ORIX has maintained dividend payments for 33 consecutive years, reinforcing its commitment to shareholder returns. This is particularly relevant given the company's dividend policy of 39% of net income, as mentioned in the article.
For readers interested in a deeper dive into ORIX Corporation's financial health and prospects, there are additional InvestingPro Tips available at https://www.investing.com/pro/IX. Utilizing the special coupon code PRONEWS24, readers can obtain an extra 10% off a yearly or biyearly Pro and Pro+ subscription, accessing a wealth of information to inform their investment decisions. Currently, InvestingPro lists a total of 8 additional tips for ORIX Corporation, providing a comprehensive view of the company's financial landscape.
Full transcript - Orix (NYSE:IX) Q4 2024:
Operator:
Hitomaro Yano: It’s time to begin the meeting. Thank you for joining us for this conference of ORIX Corporation’s for annual results for the consolidated fiscal year ended March 31, 2024. My name is Hitomaro Yano from Investor Relations and Sustainability Department. I will be the master of ceremony today. Thank you. The attendee at today’s conference is Mr. Inoue, member of the Board of Directors, Executive Officer, President and Chief Executive Officer and also Mr. Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we would like to request all the participants to make sure that any mobile phone or other communication device is nearby would be either turned off or be a bit far away from the phone in order to prevent beep back. We will first of all hear from Mr. Yamamoto and then for the representation by and explanation by Mr. Inoue and then Q&A session. The whole program should take approximately one hour. Mr. Yamamoto, the floor is yours.
Kazuki Yamamoto: I'm Kazuki Yamamoto, Operating Officer in charge of Corporate Planning and IR department. I'd like to make use of the deck in front of you to provide you with FY 2024 March end full year earnings briefing. So please turn to Page 2. So the right-hand side of the Page 2 shows or its record high profit for the year FY 2024 March end with net income of ¥346.1 billion, and this is a year-on-year increase of ¥55.8 billion, up 19%. ROE rose to 9.2%. Now quarterly trends in net income is shown on the right. Q4 net income was ¥126.9 billion. This is ORIX's highest quarterly net profit figure to date, even higher than the 2022 fiscal year March end when we sold Yayoi, the profit was posted by investment gains from the sales process taking over described an excess from the domestic PE investment. Please turn to the 3 segment profit rose 22% year-over-year to ¥494.2 billion. As shown on the right-hand quarterly graph, FY 2024 March ended tail heavy in terms of exit as initially forecasted. In other words, we were able to maintain a consistent uptrend in base profits and investment gains over the fiscal year as a result. Next, please look at the full year graph on the left-hand side. Base profits were up 14% year-over-year to ¥367.6 billion, which also represents a new record high. Profit recovery in the facility operations and the concession business, thanks to higher inbound tourism as well as growth in investment income in the insurance segment were the main reasons behind growth in base profit. The likely investment gains were also up 54% year-over-year to ¥126.5 billion, while we have been maintaining an average of ¥100 billion over the past five years, thanks to ongoing capital recycling in our asset portfolio, including the real estate and domestic PE businesses and the portion of ORIX credit shares, we exceeded average this time with ¥126.5 billion of gain. Note that from the fourth quarter, we have reclassified earnings from the investment in affiliates accounting to either equity method investments of goodwill, depending on the type of asset. As a result, we have retroactively restated both base profits and investment gains. Next, please turn to Page 4 and 5 for the breakdown of segment profits and segment assets. Detailed information can be found further back in the presentation from Page 20 onwards. Please take a look after. I'll just give a brief overview of the highlights here. First, the Corporate Financial Services and Maintenance Leasing segment profits were up ¥6.2 billion to ¥81.2 billion. In Corporate Financial Services, profits were up as fee businesses were solid, and M&A brokerage businesses also contributed to profits. In the auto unit, strong rental demand for rental cars and ongoing high prices in the used car market helped the business achieve its third consecutive year of record high profit. Segment assets were up by ¥38.3 billion to ¥1.5523 trillion, as asset increase in the Corporate Financial Services unit as it undertook a variety of financing deals while remaining careful in selecting new business. Assets also increased in the auto unit thanks to rental car fleet replacement. Next is the Real Estate segment. Segment profits were up ¥14.3 billion to ¥65.8 billion. The real estate investment in facilities operations saw profits rise as in on tourism demand led to strong earnings at the hotels and inns. In addition, we booked gains on the sale of a large property in Q3. In fact the unit secured profits in line with the previous fiscal year, aided by robust sales of high-margin conducts. Segment assets were up. As -- although still being selective, we state investment in facilities operations unit and continue to develop new logistics facilities while actively selling properties as part of capital recycling. Daikyo assets increased by ¥59.1 billion as compared to 2023 March end also by the acquisition of a very well situated site for large-scale development. We continue to operate this segment based on the business model of acquiring promising properties and then monetizing them after adding value. Next is the PE investment and Concession segment. Segment profits were up sharply by ¥40.5 billion to ¥43.4 billion. Although ORIX booked costs associated with the purely financial stake in Toshiba (OTC:TOSYY), we saw 2 PE industries, including Primagest in second half. This has a start contribution to base profits from DHC acquired last year led to strong upswing in segment profit. The Concession unit returned to profit on a full year basis for the first time since the pandemic aided by a sharp rise in earnings following growth in international passengers, thanks to a strong inbound tourism. Segment assets were up by ¥167.4 billion, net versus end March end of 2023, although assets rose due to ¥200 billion stake in Toshiba. We had several exits from industries. Environment Energy segment profits were down 9% year-on-year to ¥29.9 billion. Domestic business secured profit in line with the year-earlier level despite some quarterly fluctuations owing to the impact of output cap of our solar power. Overseas profits were down year-on-year, owing to elevated euro interest rates and the absence of a year earlier investment gains. However, electricity sales rose due to steady expansion in capacity at Elawan. Segment assets were up ¥73.4 billion versus end of March FY 2023 owing mainly to changes in Forex. Assets in real estate investment and concession and the environment and energy segments are each less than ¥1 trillion, and we remain aware of maintaining balance between different segments. Insurance segment assets were up 11% year-on-year to ¥70 billion. Profits were up mainly driven by lower corporate related payout expenses versus the prior year and higher investment income aided by Yen depreciation and high interest rates. Insurance premium income is also rising steadily with whole life insurance being marketed more aggressively. Segment assets were up by ¥258.9 billion versus end FY 2023 March, reflecting the impact of FX and increase in investment securities. Banking credit profits were up ¥59.1 billion to ¥96.7 billion. In the credit business, ORIX sold 66% of share to NTT DOCOMO to create joint venture. This transaction resulted in investment gains and variation gains were ¥57 billion. In banking, interest income from real estate investment loans grew due to higher long-term interest rates with only marginal increases in deposit related expenses, profits were up year-on-year. Higher trust fees also contributed resulting from ORIX Bank's focus on growing trust assets. Segment assets rose ¥34.2 billion, reflecting higher lending in the merchant banking business in ORIX Bank. Based on the stake, ORIX Credit is now considered an affiliate rather than a consolidated subsidiary. Total assets for banking and credit and insurance segments are about ¥5 trillion. This represents 37% of our ORIX’s total assets. And we continue to manage this ratio with an awareness of the quality of insurance and banking related assets and overall balance within the firm. Next is Aircraft and Ships segment. Profit rose 44% year-on-year to ¥26.8 billion. In aircraft leasing, passenger demand in the U.S. and Europe reached record high levels. Recovery in airline earnings and the tight supply demand for aircraft led to an increase in both leasing income and gains on the sales of aircraft listed to higher profit year-on-year. In the Ships business, profits were in line with our target, but lower year-on-year, owing to proactive sales of owned vessels a year ago when prices were favorable. At the end of February, we acquired Santoku Senpaku, which will begin to contribute to profits in fiscal year 2025 March on a 3-month lag. At Avolon, hedging costs rose owing to elevated U.S. dollar interest rates. Growth in lease revenues fueled by a rebound in passenger demand helped the firm achieve profitability on a full year basis for the first time since the pandemic. Segment assets were up ¥315.5 billion. versus the end of FY 2023, March, reaching slightly more than ¥1 trillion. This reflects aircraft purchases and aircraft leasing in addition to Santoku Senpaku, which owns 67 vessels as a consolidated subsidiary. ORIX USA segment profit was declined by 65% year-on-year to ¥17.3 billion. In Q4, OCU booked losses associated with the draw from an investee as well as preventative allowances impairments based on conservative view, risk from long-term inflation and EBIT interest rates. The resulted segment loss was ¥10.5 billion for the first -- fourth quarter alone. Segment assets were up by ¥74.3 billion, reflecting the substantial impact of a weaker yen, we remain price-sensitive and selective with new deals. And through the sales of assets in the real estate business, installment assets, excluding FX impact were down by ¥17.2 billion versus the end of the prior year. ORIX Europe segment profit were down 30% to ¥28.6 billion. In FY 2023, March and 2022 March, OCU booked ¥10 billion or more in performance fees, but this now declined substantially in FY 2024 March and higher currency hedging costs resulting from writing in interest rates led to lower profits year-on-year. In the mainstay asset management business assets, at €324 billion, a new record high at the end of FY 2024 March, buoyed by strong equity market and management fees. Segment assets were essentially flat after excluding the impact of yen depreciation. Finally, the Asia and Australia segment profit were down 2% year-on-year to ¥34.3 billion. Profits were flat versus a year ago, thanks to growth in lease and lending assets in South Korea, Australia, India and other countries from new executions, gains from the sale of an investee during Q4 also contributed. Segment assets were up ¥192.4 billion as a result of favorable new lease executions in ASEAN countries and India and the impact from FX changes. We maintain a cautious stance on investments in Greater China. The Aircraft and Ships and the U.S., Europe and Asia segments comprise a total of 22% of segment profits and 34% of segment assets. We will continue to carefully monitor economic and financial trends in each country. This concludes my explanation about FY '24 March full year results. Next, we would like to hand over to our CEO, Mr. Inoue. Please begin.
Makoto Inoue: Good afternoon. This is ORIX CEO, Makoto Inoue. Let me begin from Page 6. For 2024 March end, ORIX achieved pretax profits of¥ 470 billion and a 19% increase in net income to ¥346.1 billion. This represents an achievement 105% of our announced net income target. EPS was ¥299. Now in line with our policy of paying a dividend per share of either 33% of net income or last year's EPS of ¥85.6 whichever is higher, we will pay a full year dividend per share of ¥98.6 for March end of 2024. Now since we paid an interim dividend of ¥42.8 per share, the year-end dividend will be ¥55.8 per share. ROE for FY 2024 March end was 9.2%. Now please turn to Pages 7 and 8. FY 2025 March end is the final year of the 3-year midterm outlook that we introduced 3 years ago. We initially forecast net income of ¥440 billion for the final year, which we revised downward to ¥400 billion last fiscal year in light of market conditions at the time. But today, we now target FY 2025 March end net income of ¥390 billion. Now this translates to an ROE of 9.6%. Although improving our ROE is a major challenge for ORIX. Unfortunately, I will have to ask for your patience for another year for us to achieve our goal of ROE exceeding 10%, a target of ¥ 390 billion net income, so just 4.7% year-over-year growth for FY March end 2025. Now please turn to Page 9. There are three main reasons for our decision to lower the profit target from ¥400 billion to ¥390 billion. Thus, it may take some additional time before a full recovery in ORIX USA earnings because we foresee high credit costs to persist as well as elevated interest rates to continue as inflation remains doubly high. Second, the MICE-IR project has begun in earnest, resulting in capital outflows that may not produce profits for some time and upfront cost outlays. Now in addition, we see a lack of visibility caused by political divisions owing to expansion in international conflicts, Chinese economic sluggishness to extend, coupled with Japan's sinking position globally, owing to historic yen depreciation and the unleasable impact of high prices on the economy. For these reasons, we have decided to conservative target ¥390 billion for the coming fiscal year. However, this ¥390 billion is, of course, just a minimum target. And internally, we maintain our goal to exceed net profit of ¥400 billion. Now please turn to Page 10. I will outline the measures we plan to take to reach ¥390 billion in net profit later. So now I would like to announce a dividend policy for FY March 2025, which will be to pay a dividend equivalent to 39% of net income or equal to the FY 2024 March dividend of ¥98.6 whichever is higher. As in the previous fiscal year, we have set a share buyback program of ¥50 billion. This translates to EPS of ¥341 and EPS of ¥133.2 for the whole year. Combined with the ¥50 billion in shares buyback, ORIX's total shareholders' return is set to reach 51.8%. Now please turn to Page 11. Unfortunately, the credit rating agency, S&P recently announced its decision to downgrade ORIX from A minus to BBB plus although we maintain high levels of profitability, S&P found it difficult to maintain an A minus rating on ORIX as a financial institution in light of a diversified portfolio, which includes operating assets and investments and given the speed of our capital recycling program. Moody's (NYSE:MCO) and Fitch maintain A equivalent, R&I and JCR maintain AA equivalent and they have a stable outlook as well. We will continue our dialogue with the rating agencies to ensure they give an objective and fair evaluation of our businesses. Please note that S&P downgrading has no impact on ORIX's capital and financial policies. Now please turn to Page 12 and 13. ORIX Group holds asset of ¥16 trillion with shareholders' equity of ¥4 trillion. Due to an accounting requirement, non-recourse loans at industries, third-party capital and accounts, which should be considered off balance sheet are held on ORIX's balance sheet. With ORIX's diverse investment style, each M&A execution has led to an increase in goodwill and intangibles. In light of this, in order to fairly represent the nature of the group businesses, I think a new approach would have to be examined. In FY 2025 March end our ROE target is 9.6%. However, each year our intangible assets average around ¥1 trillion. So considering this, we can believe return on tangible equity, ROTE, which is net income divided by shareholders' equity minus goodwill and intangible assets is an effective way to measure ORIX's nature of business and the actual profitability. Note that ORIX's ROTE trends at around 13%. Going forward, we will disclose ROTE alongside with ROE. In addition to ROE and ROTE an important factor for growing corporate value is EPS. EPS was ¥246 in FY 2023 March end to ¥199 in FY 2024 March, and we target ¥341 in FY 2025 March end. We will continue to endeavor to strengthen EPS under our PV ratio with the aim of improving shareholders' value. Now please refer to Page 14 to 16. We target FY 2025 March pretax profits of ¥553.7 billion, an increase of 7.81% year-over-year. I will now use the three category of finance, operation and investment to provide with you the breakdown. The finance category includes ORIX Life, ORIX Bank a recent installment loans and main businesses of the Corporate Financial Services segment, ORIX USA and leasing businesses at overseas subsidiaries. Within Japan, we can expect a mild increase in yen interest rates, which should help improve financing income, asset management yields and leasing spreads. At ORIX Bank, in addition to commercial banking, we aim to strategically improve both ROA and ROE through expansion in merchant banking and private banking. In Insurance, we anticipate growth in embedded value fueled by improvements in asset management yield. At ORIX USA, we assume high interest rates to continue, and therefore, expect that the credit cost burden to continue to rise. However, the multifamily agency and non-agency lending segment, which is ORIX USA's strength is faring comparatively well, and we expect it to contribute to earnings during this fiscal year. In the latter half of this fiscal year, we would hope that improved credit spreads from expectations of future rate cuts might help with earnings. However, before rate cuts actually occur, we feel that the impact of a possible increase in credit cost must also be considered. Thus we plan to continue to conservatively manage OCU portfolio going forward. In high-growth markets, like Australia, Indonesia and India, we plan to increase our financial portfolio. For finance category segments, we target at about ¥45 billion increase in pretax profits after the gain from the sale of ORIX Credit. Next, I would like to talk about the operation category. We anticipate roughly ¥18 billion year-on-year increase in pretax profit, including facility operations in Inns and Hotels in the Real Estate segment, condo development and the sales of Daikyo and auto-leasing business. In ships, while our business model was primarily focused on ship financing and sales, the acquisition of Santoku Senpaku will allow us to make a full-fledged entry into marine transport freight management ship charters and the coastal businesses. In addition, we plan to accelerate investment in eco-ships, making our ships business even more sustainable. In addition to ORIX Aviation and Avolon's aircraft leasing business, ORIX is well positioned to benefit from an increase in movement of people and goods in the aircraft and ship business, we are poised to offer solutions in the operations, finance and investment areas, and we plan to grow this as a core business for ORIX Group. At NXT Capital in the U.S. and Robeco in The Netherlands, we are searching for ways to expand the asset management business. Although it is a competitive market in order for ORIX Group to maintain its earnings expansion, we must consider how to best utilize third-party capital. This remains a vital area for ORIX to address. Investments are becoming increasingly large in scale, such as carve-outs and there are many opportunities facing us. We think that there is a limit to what ORIX can achieve when it is responsible for all of the acquisition capital. The shift towards an asset management model is an important medium-term scene for ORIX. ORIX's strengths include our expertise in managing variety of tangible assets and will for financing expertise. For this reason, we believe that we shall have no difficulty in expanding our role in asset manager. The current ¥60 trillion level AUM should be expanded to 100 trillion level as rapidly as possible. Our basic policy for investments is unchanged. That is not to limit ourselves to any particular industry, but to carefully consider profitability and liquidity and aim to secure opportunities deals, capitalizing upon the strengths of the ORIX Group network. ORIX is active in a variety of fields, such as private equity carve outs, succession deals and venture capital. Our basic principle behind portfolio management is always capital recycling. The Kansai Airport concession business, our joint venture with VINCI Group stands poised to benefit from earnings expansion powered by inbound tourism from the 2025 Osaka Expo. In FY 2024 March, in the investment category, we target pretax profit growth of around ¥57 billion, driven by profit growth at domestic investees and capital recycling in the overseas renewable energy business. Please turn to Page 17. In FY 2024 March, ORIX reached ¥150 billion in capital gains from Aircraft and Ships, Real Estate and PE. This reaches ¥520 billion altogether with originally invested capital. New investments totaled ¥620 billion. In FY 2025 March, we plan to continue our capital recycling program. The pipeline, both within Japan and overseas for new investments is ample, and we plan to stick to our business strategy which cautiously weighs profitability, liquidity and exit opportunities when making investment decisions. In this fiscal year, we expect the global conflicts to further expand. Worldwide divisions based on nationality, politics and economics accelerating. The results of the November U.S. Presidential election run the risk of increasing global uncertainty, and we must think about the possible impact in various areas. Within Japan, yen depreciation and high prices remain unsolved. Both of these have the effect of lowering Japanese economic value and position in the world, and we must carefully consider the direction that the Group will take. That said, we have no plans to change our basic strategy. In other words, we plan to, first of all, invest in domestic industries; second, execute investment aimed at the solving problems and accelerate globalization of ORIX Group and expand our asset management strategy. We plan to maintain this direction for this and next fiscal year. In FY 2025 March, we marked the 60th anniversary for the founding of our ORIX Group. We have seen some ups and downs, but I feel that we have been able to maintain a growth trajectory overall. The full and gracious support of our shareholders and stakeholders has been key to our ability to return to a growth trajectory in just two years for pandemic and the announcement of record high profits this fiscal year. Please turn to Page 18. For ORIX Group's 60th anniversary, we aim to further promote sense of unity and increase incorporate value as a global company by accelerating the adoption of the ORIX Group purpose and culture, which was announced in the FY 2023 March results briefing. That concludes my remarks. Thank you very much for your kind attention.
A - Hitomaro Yano: We would like to move on to Q&A session now. [Operator Instructions] So Mr. Sato from JPMorgan to begin with. Thank you. Sato San from JPMorgan, please start asking your question.
Koki Sato: Hello, can you hear me now?
Hitomaro Yano: Yes, we can.
Koki Sato: I am so sorry for this. I am Sato from JPMorgan, hello. I have two questions by asking one question by one. So first of all, on Page 15, you had explained for this fiscal period, the -- or the prerequisite in coming up with a target for this year. Now in the area of finance, you are thinking about increasing your profit by 40%, and that seems to be quite significant considering your business nature, the model. So would you may explaining the backdrop to this? And also, at the same time, the headquarter and managerial expense of ¥75 billion seems to be pretty high as well. So do you mind concerning these numbers and also the backdrop to this?
Makoto Inoue: So may I explain -- provide my explanation to your question then.
Koki Sato: Yes.
Makoto Inoue: Okay. In the first of all, with regard to this headquarter and administrative expenses. So ¥45 billion of interest payment and SG&A is ¥30 billion also. So those are the major items that is included in the headquarter and administrative expenses. And I think the amount has been trending on and around this amount up to now. So it doesn't seem to be a big increase on our part. And as for the growth area I think I would like to hand over to Yamamoto-san to answer to the question.
Kazuki Yamamoto: So with regard to the finance segment or the finance businesses, financial businesses, insurance as well as in U.S., we have been conservatively selecting our businesses, the deals, and we can start to experience some recovery. And so because we have incorporated some negatives in the prior year, and this is why we can expect a significant recovery this year. This means that in the United States.
Koki Sato: So according to your qualitative explanation, you sounded very cautious in this briefing session. But you do expect normalization of the businesses, and that is reflected to the numbers. Is that right?
Makoto Inoue: Well, this is the number that you had ¥148.2 billion on other profits. And that includes the sales of a credit company, and that is ¥51 billion or so. So it is a capital gain. So we shouldn't have really amalgamated the numbers. But -- so this is why although the percentage is not that significant. However, from the flow of the business of financials, ¥198 billion should be achieved, and the majority is consisted of insurance as well as bank and also considering other parts of the financial businesses, we have set these numbers. As for U.S. though, credit cost, but we did, in fact, kind of appropriate for the credit cost increase as of 2024 March end. So we think that we have come to almost to the peak level. However, although the numbers may not grow that much. However, the credit cost, I think, has is just about to peak out. So this is why we have come up with this number because we do not foresee the credit cost to further increase.
Koki Sato: Okay. And the second question, in fact, is still on Page 15, and that is to do with the PE investment. And you, in fact, expect the growth in a significant manner and the capital gain that appears on Page 12, that is. And what I want to be asking with regard to the capital gain in the last year, there was before the impairment loss was a valuation loss, ¥150 billion, I think that was. But this year, it is about ¥150 billion to ¥200 billion of an expectation this year, and it was about ¥100 billion on average for the past some years. So which means that the capital gain is going to be significantly higher. So over the two years, because of the environment that's around the business, the capital gain can be generated in a much bigger way in numbers or this as compared to this ¥100 billion of an average, it's just that there has been a shift on the level of the capital gain that you can generate in a single year. Would this be a new standard, may I take it? So this is something that I would like you to confirm.
Makoto Inoue: So ¥100 billion was on average per year, and that is our user expectation. This year, it was higher because of the sales of the credit business. And although we separate into sub segments, but this ¥150 billion, in fact, includes the sales of the credit company. And if you were to subtract that, it is roughly about ¥100 billion of gain. And that is roughly about our expectations or it is in line with our expectation.
Koki Sato: I'm very sorry that I may be asking this in a different way, perhaps -- but the capital gain, I think you still expect it to ¥150 billion to ¥200 billion. That is your expectation going forward. Is that right? And for the next fiscal period and onwards, is this sustainable, the level ¥150 billion, ¥200 billion?
Makoto Inoue: It is possible. It is sustainable, but it is very much dependent on the deals that are available, and we are exploring different opportunities, such as PE and also real estate investment. So we have a certain buffer in place. So still, our user expectation will be still be around ¥100 billion. So in a -- from a flow perspective, normally, when we do acquire any kind of investment, we would -- the equity method and all that would be under consolidation. And this is why we do expect these kind of numbers that you see on this page.
Koki Sato: Okay, that is all for myself. Thank you.
Hitomaro Yano: Daiwa Securities, Watanabe, please ask your question.
Kazuki Watanabe: Yes, this is Watanabe, Daiwa Securities. I have two questions. First question is about profit target. This is the last year of the midterm and for FY 2026 March end and beyond. How much profit growth do you plan for? And ROTE and EPS, I understand you want to focus on these as KPIs. But going forward, do you think your KPIs will change?
Makoto Inoue: Well, for FY 2025 March end, this is a situation. And do we produce another three year plan midterm plan beyond FY 2026 March end. I'm sure that there are expectations for that. But when we produce a midterm plan, it will make the situation more difficult. So we are thinking about that. And including the Directors of the Board, we will be discussing what to do about the three year plan, whether to announce that or not. And if we announce it, what do we do. To be quite honest, going forward, we will have a very heated internal discussions. Level of growth, more than 10% of growth. This is something that we must achieve. And based on that understanding, of course, the numbers need to exceed 10%. But it goes without saying that it depends on the market. But anyway, we are looking at that, and we need some more time before we can announce something externally. So please be patient. What is the second question?
Koki Sato: ROTE and also EPS. Are you going to focus on different KPIs going forward?
Makoto Inoue: ROA, ROE and well, LTE is maybe another perspective that we should have. Some other companies are looking at return on tangible assets as well. But there are companies that don't use this KPI. Trading companies invest a lot in tangible assets, so they usually use ROE. But our investments, well, there's a lot of goodwill sometimes of intangible assets, and we invest into those companies quite often. Of course, we will show ROE, but ROTA is something maybe we have to calculate as well. And on the profit, we have EPS as well. We are not trying to increase the number of KPIs, ROA and ROE are the main KPIs. But in order to understand the true status of the company, ROTE is something that we want to look at. So this is our policy, and we also want to use it as an external announcement approach, but this is not really a KPI.
Koki Sato: I understand. Thank you. Second question is about shareholder return. Payout ratio of 39%. It was 33%. And also on top of that, there was some addition due to the abolishment of the shareholder benefit. But what is the background? What is the reason for this increase?
Makoto Inoue: It's simple. We want to see our investors happy.
Koki Sato: Prime market average payout ratio is at 37%, I think. And the 37%, 38% are not really impactful. So why not 39%.
Makoto Inoue: Well, I know that people asked us for 40%, but it was not possible. So 39% is the number that we would like to show and get your understanding on. We don't know what is going to happen in the future, but we want to maintain growth, and we also have capital about ¥4 trillion. So low payout ratio would not be something that would make the market happy, would be disappointing. And also for the retail investors from fiscal year 2024 and March end, we stopped providing shareholders benefit. So we wanted to provide some additional return. This is how the decision was made. We thought maybe this could be lower in the beginning, but we want to have this endorsed by the investors, and that is why we decided on this number. I hope this answers your question.
Koki Sato: Yes, that was very clear. Thank you very much.
Hitomaro Yano: The next person is Sasaki-san from Nomura Securities. Over to you.
Futoshi Sasaki: I am Sasaki from Nomura Securities. Hello. I have 2 questions. The first question is with regard to the hedging costs. In the presentation, I think you had explained about the hedging cost. And when you came out with the plan for this year, how did you reflect the hedging cost in what way? And when you do make an investment overseas, you'll basically do hedge against it. Has there been any changes to the policy, the hedging policy? And if you're going to proceed with globalization, do you always have to hedge whenever you make an overseas investment, I wonder, so would the hedging policy remains to be unchanged despite the fact that you'll be proceeding with the project globalization.
Makoto Inoue: So to begin with, you see ORIX was a yen-based company. We started out that way. And therefore, we have been proceeding with the investment overseas on a yen-denominated basis, but now we had extended globally. So therefore, dollar-denominated outstanding balance of investment is ¥2.8 trillion. And in total of ¥3.5 trillion worth of investment overseas that is denominated either on U.S. dollars as well as or euro. So therefore, is there any kind of benefit in hedging against those currencies on a yen basis. We had questioned ourselves. So this ¥160 to $1, in fact, kind of poses a question whether we should continue to maintain our capital in a very conservative way by hedging, even against such the level of currency. But of course, on an adjusted Forex basis, we would be making an adjustment on the final, of course, accounts. But other than conservatively hedging for everything and anything, we may want to become a little more flexible, considering deal-by deal, whether hedging is necessary or not would be questioned. And so therefore, going forward, so this Forex-adjusted amount, even if there was to be any fluctuation, it will be adjusted on the balance sheet basis. It will not affect the P&L. So this is why we may become a little more flexible, which means that the hedging costs going forward would not be based on a very conservative hedging policy. But I think we would turn a little more flexible, and that is at the basis of this earnings forecast of the plan, which means that in 2025 March, so ¥390 billion of our net profit expectations.
Futoshi Sasaki: So this operation, in fact, there will be changes in your operation as well as this impact that you have just announced?
Makoto Inoue: Of course, if there was to be any kind of excess in terms of the planned target, then that would be the change that will be reflected, if you could take you that way.
Futoshi Sasaki: Now you had explained to us that there are a number of risks that you foresee. But for example, Mr. Inoue, in your idea, this -- what would allow you to exceed your expectations in terms of the profit generation or the business opportunities or any kind of risks that may perhaps become smaller or whatever?
Makoto Inoue: So 24 months, and if you were to refer to the numbers, it was very much domestic focused. In other words, the overseas location, we had faced difficulty if we may conclude. So as for the United States, if interest rates start to, of course, get lower, the arbitrage would work, and therefore, the spread would of course, spread or the other way around. So which means that we may be able to increase our profit generation. But according to the announcement of the Fed, it doesn't look as if they're going to be lowering the interest rate immediately. But of course, Mr. Trump becomes the President, sure the interest rate may perhaps become lower, and they may perhaps cut the corporate tax rate as well. So if U.S. will be directed by Trump, then, of course, things would be very different. But that will be after the next fiscal period though. So as for U.S., it looks as if we will be hitting the bottom soon. However, how much of an improvement can we make is very much dependent on how things would kind of proceed. So inclusive of the security in Europe, the volatility may perhaps increase on -- over in Europe. So USA, if Trump becomes President, of course, things would become better. But if Trump is going to become the President, Europe may suffer more. And China may continue to struggle. So this is what if domestic can maintain their current level of the businesses, then the United States will be an additional contributor. And Europe may not be and Robeco AUM can be expanded. But as for Robeco, of course, the inflation, in fact, has not kind of come down. So therefore, 2025 number is still very difficult to or it does not have much of a visibility that is. So this is why we have carried out the downward revision from ¥440 billion to ¥400 billion to ¥390 billion. That is -- these are at the backdrop. So if my forecast is not too conservative, then I think we would be able to exceed our current target of €390 billion.
Futoshi Sasaki: So ¥390 billion impact is a minimum target that you are -- you feel the obligation to achieve?
Makoto Inoue: I don't want to really kind of draw myself into the corner, but that's my basic idea incorporating all the risks.
Hitomaro Yano: SMBC Nikko Securities, Muraki-san. Please ask your question.
Masao Muraki: This is Muraki SMBC Nikko Securities. Page 11, you are showing the financial leverage. And on Page 11 and 12, you're showing your ROE. In order to increase ROE, what can be done? That is my question. I don't think it's too difficult to achieve 10%, but in rating leverage and then if you increase to 10% or higher, maybe to challenge you to maintain that high level. So if the leverage is not increased, then as a method, for example, as you explained, shifting to asset management, introducing third-party money and earning fees, I think that would be the model that you would want to shift to. But in order to increase ROE for this fiscal year, what are the initiatives for asset management? What are the specific initiatives in Japan and outside.
Makoto Inoue: Including the USA we plan to launch funds. And if the capital already is trying to increase the fund's AUM and for domestic market, especially including Middle East, we are finding new investors who want to put money with ORIX. And of course, we have to deal with the situations one by one, which means that, for example, with private equity, how much AUM we will have, we don't know yet. But anyway, we want to increase the AUM and increase the asset management fees. The challenge as compared to principal investment, we will be using third parties' money and the profitability will be much lower in terms of fee. So we have to do both in other words. And as was mentioned before, if we want to maintain a level higher than 10%, then we need a lot of funding from the third party, and we have to think about the various initiatives. Total asset may increase. The total number may increase, but ROE may get worse. So in order to avoid that situation, we have to think about our policy how to best utilize capital and the third-parties' investment and continue on expansion path. This is a major theme. And this is the direction we're already moving into this direction, but it will take some more time before we see the impact or the result of this. Thank you.
Masao Muraki: Maybe it's not so much about earning fees, but you also mentioned that the project size is also increasing. If you think about GFC, for example, as a deal I think there's an advantage in going it alone, investing 100% by yourself. But for large-scale deals, do you think we will see more and more joint investments?
Makoto Inoue: Yes, that is correct, including Middle East, third-party investments coming into ORIX. This means co-investment fund type of approach. For example, we get for 51%, and we will invite 49% investment. That will be the approach. But basically -- according to accounting recommend this 49% will be 100% on our balance sheet. So how to explain that externally is another issue. But anyway, U.S. GAAP requires us when we get investment from different sources and ORIX invests 30% or 40% or even a majority, everything has to be on our balance sheet. So ROA/ROE do not improve at least on the surface level. So how do we explain that properly externally? And that is why we're talking about ROTE showing that in parallel so that you can see how efficiently ORIX, as a whole, is being managed. So our next challenge is how to explain that externally.
Masao Muraki: Understood. Thank you very much.
Hitomaro Yano: Thank you for the question. The next person is SBI Securities, Otsuka-san please.
Wataru Otsuka: I’m Otsuka from SBI Securities. I hope you can hear my voice.
Hitomaro Yano: Yes, we can, thank you.
Wataru Otsuka: So on Page 15, I was referring to Page 15. And I want to be asking questions about the PE investment. So 188 and 304 in fact, is -- so that is 420 of an increase, ¥42 billion of an increase. So Page 40, in fact, shows a breakdown by three categories and is a matrix with the segments. And according to Mr. Inoue's explanation, and I think you have been explaining over time. But on Page 14. So the -- in the operation, which area is going to increase for its grow in operations?
Makoto Inoue: So first of all, Kansai Airport kicks in the last year, about ¥10 billion. I think it was a pick up on our equity, and that should double. And also Aircraft business, so we're proceeding with the acquisition of the aircraft in a significant way. And in addition, we would be this -- selling those aircraft to Japanese industries and also the replacement of the fleet of the ships will take place as well. So ¥40 billion worth of profit can be generated with these being set. And the Greenko, Elawan the assets how can we capitalize on those assets? In other words, proceeding with the capital recycling that is. And taking all that into account, I think posting of such an amount of profit is quite possible we thought.
Wataru Otsuka: I'm sorry to go into much of the details Mr. Inoue. But on Page 14, Kansai Airport in fact, is an facilities operation, right? So I thought that it is under investment? Or is it under the real estate facility operations of operations? Is that right?
Makoto Inoue: So investment, in fact, if it is under equity method, it will be under investment. But the airport operation after all, is under operation, although as an asset, it is held as an equity method. So I'm sorry that it is confusing. So as an operation, it is 100% operation for ORIX, real estate facility operation that is and of course, airport is included. In the case of Kansai International Airport, we own 40%. However, there are about 10 people that are seconded from a company, and they are very much involved on a day-to-day operations. So as to the operation of Kansai Airport, there's an overlap between operation and investment. I hope this would explain. So this 188 and 8.5 and [Indiscernible]. In fact, includes Kansai Airport. Yes, it does, the operation, I mean. Yes.
Hitomaro Yano: Thank you very much. It's almost time to close. And therefore, the next question will be the last, Citigroup Securities, Niwa-san. Please ask your question.
Koichi Niwa: Thank you. This is Niwa from Citi. I hope you can hear my voice.
Hitomaro Yano: Yes, we can hear you.
Koichi Niwa: Thank you. I would like to talk about the exit and also pipeline evaluation, ¥1.2 trillion this time around. And last time last year, around this time, you said it was going to be ¥1.5 trillion. And I think investment was quite successful last year maybe. But with regard to the pipeline, is it okay to expect something like ¥2 trillion? Or is it completely unrealistic? If you could explain, please.
Makoto Inoue: Well, pipeline. Well, we have more than ¥2 trillion if we include all the good and bad things. And if we are selective, this is a number that we're talking about. And then out of that, after buying can you increase the value? And can we do the capital recycling and liquidate. And also, how can we capitalize the ORIX network. We have to look at all of this and then it would be basically about 50%. There are many inquiries, but it's becoming more and more competitive as well. And we don't buy at high price. So we have to be very carefully looking at these different deals. One good example of this is Santoku Senpaku. In the beginning from the sellers' perspective -- we're basically out of the question, but they changed their minds and they wanted to do with us. So we cannot say exactly how much, but we could purchase them at a very competitive rate. So there's inquiries as pipeline, can we really buy at a good purchase price? And then can we really increase the value after the investment. So we have to be very discerning in all of these perspectives, which means that we cannot really process a large volume. But there's a lot in our pipeline, and we have sufficient projects that we can do. But of course, we have to be selective in terms of what deals we can do because it's a competitive landscape and this stance has not really changed from before. I hope that answers your question.
Koichi Niwa: Yes, thank you for the details. Now I would like to ask you about lifestyle and also bank low profitability businesses. And in the presentation, this time around, you talked about small upside of Japanese economy. That was my understanding, which means that for these businesses in terms of facility expansion, maybe there's no more room. Is that the correct understanding? Or once the monetary policy changes, should you continue to hold these businesses as core businesses because the profitability will change. The monetary situation is changing. So I would like to understand your position, you stance about bank and insurance.
Makoto Inoue: Yes, for life insurance and bank, it's true that the profitability is low. In order to increase the profitability, we are pressuring these teams. If the interest rate goes up, our embedded value of life insurance company will increase. And then we will have maybe sufficient price to sell. If that is the case, we will not hesitate to sell. And this has been my policy over the last several years, it has not changed. And the same story with the bank, we are asking the bank to increase the profitability. Compared to other businesses, ROA seems to be good. But if we want to sell the bank, we can only sell at PBR of 0.7 times. We're not that desperate. So we only sell if the price is right. So same thinking as credit. If we have the buyer and the offer is attractive for us, then we will sell at that attractive price. So the policy is still unchanged.
Koichi Niwa: Thank you. In order to increase ROE I think what to do with this business is a big thing for ORIX. But still, you want to maximize the value that is more important for us. Is that correct?
Makoto Inoue: Well, bank and life insurance, 0.5, 0.6 at this level, I don't think there's an advantage for us to sell. That is our assessment it has to be sold at the right price. You may be dissatisfied but ROE is 9% with ORIX and we are approaching exceeding 10%. So we want to pursue ways to maximize the value. That is the current direction of ORIX. I hope you understand.
Koichi Niwa: Thank you very much for your detailed expression. That was very informative.
Hitomaro Yano: Thank you for the questions. And with this, we'd like to conclude the Q&A session. And I'd like to ask Mr. Inoue to provide us with the closing remarks.
Makoto Inoue: Well, this year, 2024 March end, the numbers were pretty good. As we have announced, but it is not to our full satisfaction, ¥390 billion, ¥400 billion and also ROE of 10%, 11% must be achieved. And it will require a strenuous effort in order to achieve those goals. So we will continue to seek for your support. And of course, during this time, of course, we would enhance the payout ratio so that we'll be able to align ourselves with your expectations. And this is how we are going to be managing this business forward. So please continue to support us.
Hitomaro Yano: So with this, I'd like to conclude our FY 2024 March end briefing session. Thank you very much for your participation. And please disconnect.
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