Orient Corporation Q4 FY2025 earnings call

Previous Mid-Term Plan Summary

• All core targets (ordinary income, ROE, operating revenue to general expense ratio) missed final year goals significantly. Management recognizes shortcomings in execution speed and delivery, though progress was made on advancing partnerships with Mizuho Group, Aeon Financial Service, and Rakuten Group, as well as strengthening governance and improving funding stability via external rating upgrades.
• Business portfolio restructuring and evolution away from the traditional credit sales model remain incomplete, to be addressed in the new plan.

Core Corporate Challenges

1. Capital market engagement: Persistent PBR below 1x is the top priority for correction, with increased IR and investor engagement to incorporate stakeholder feedback.
2. Business structure reform: While risk/return profiling of business units is complete, bold reallocation of resources from declining/efficiency areas to growth areas has not yet been achieved. Building a stable, growth-aligned business portfolio is urgent amid rising interest rates.
3. Cultural reform: Internal silos, top-down passive culture, difficulty with deep problem-solving, and over-emphasis on evaluation have hurt execution speed. The plan's success depends on building an engaged, innovation-focused workplace.

New 5-Year Mid-Term Plan Strategic Framework

• Split into two phases: first 3 years to complete business structural reform and build competitive foundations, final 2 years to harvest results. Goal is to establish a unique Orico financial model, leveraging 70 years of expertise in small, long-term installment credit to consumers, plus access to large partner customer bases via network economic partnerships.
• 4 core business strategies:
  1. Complete business structural reform: Boldly shift 1,200 staff from contracting/efficiency areas (traditional individual installment, card, overseas business) to growth areas, with a net total headcount reduction of 900 (10% of current staff) over 5 years. Reallocate capital from traditional individual installment business to growth areas: digital installment, accounts receivable settlement guarantee, and auto leasing.
  2. Strengthen customer engagement via new experience value for consumers: Scale AI-powered digital installment payments (launched February 2025, targeting an 8 trillion yen market starting with consumer electronics), improve the "e-Orico" member portal, and drive multi-product engagement across the expanded Orico group network.
  3. Support credit provision and productivity improvement for SMEs: Grow accounts receivable settlement guarantee (already growing rapidly after launching an intermediated partnership with Mizuho Bank), and launch a business card platform for SMEs integrating cloud accounting and cash flow visibility, targeting the fast-growing 18.6% annual growth SME business card market via the Aeon economic network.
  4. Deepen penetration of the circular economy market: Grow personal auto leasing, leveraging Orico Auto Lease's industry-leading position to hit 265,000 units held and 19%+ market share by 2030 March, capitalizing on 10.7% annual market growth from the shift to usage-based consumption.

Management Foundation Strengthening

• Governance: Increase independent outside directors to 6 of 11 total directors, add 1 more female director (total 3), appoint outside directors as chairs of the nomination/remuneration and conflict of interest committees, and separate the chair role to a non-executive director to improve transparency.
• Executive remuneration: Split performance pay into short-term (tied to annual ordinary income) and medium-to-long-term (tied to ROE, total shareholder return, and employee engagement score) to align incentives with long-term value creation.
• ALM improvement: Strengthen asset-liability risk management, and pursue earnings from ALM positioning to optimize financial operations in a rising interest rate environment.
• Human capital and cultural transformation: Integrate organizational development, brand strategy, business process transformation, and DX. Senior management will engage directly with frontline staff, delegate decision-making authority, and automate redundant processes to free staff for creative, value-added work.

Capital Policy

• Core principle: Balance financial soundness, growth investment, and shareholder returns. Maintain an external A rating to support stable large-scale funding. Prioritize organic investment in growth areas. Maintain a dividend payout ratio target of 30% to 40%.

The full transcript does not provide segmented absolute financial performance or revenue contribution percentages for individual product segments. Aggregate 2025 March full-year results are: total operating revenue of 245.2 billion yen (up 16.2 billion yen year-over-year), driven by growth in priority payment and guarantee businesses plus contribution from three newly consolidated subsidiaries (Orico Auto Lease, Orico Business Lease, Orico Product Finance). Total operating expenses were 232.9 billion yen (up 19.9 billion yen year-over-year), driven by higher general expenses from the new consolidated subsidiaries and increased financing costs from rising market interest rates. Ordinary income was 12.3 billion yen (down 3.7 billion yen year-over-year), as interest rate increases were not fully offset by rate pass-through and growth volume. Net income was 13.9 billion yen (up 1.3 billion yen year-over-year) due to recognition of special gains.

• New 5-year mid-term plan (ending 2030 March fiscal year) targets: ordinary income exceeding 50 billion yen, ROE of 12% or higher, operating revenue to general expense ratio in the low 50% range.
• 2028 March fiscal year (mid-point) targets: ordinary income exceeding 25 billion yen, ROE of 7.5% or higher, operating revenue to general expense ratio below 60%.
• Total operating revenue is targeted to grow at a 6.7% annual compound rate over the 5-year plan.
• Interest rate assumptions: 1% policy rate through the current fiscal year, one additional hike to 1.25% by 2028 March, then stable thereafter. If rates rise less than assumed, financial costs will be lower and earnings will come in above plan.
• Management confirms the plan is structured to achieve early recovery of PBR to above 1x, the company's top strategic priority.

• Persistently rising market interest rates increase financing costs, which may not be fully passed through to customer rates, pressuring net interest margins and profitability.
• Current Tier 1 capital ratio is just above 8%, and stress testing estimates it could decline by 0.5-1 percentage point under adverse conditions, creating risk to maintaining the required A external credit rating.
• Slow execution of business restructuring and cultural reform could delay delivery of growth and profitability targets, prolonging PBR below 1x.
• Traditional business areas have low profitability improvement momentum, and failed reallocation of resources to faster growing areas would miss growth targets.

Q: As a former bank CFO, what differences do you see in managing a non-bank like Orico compared to a bank, what are the pros and cons, and how does this tie to Orico's culture? / A: Orico's smaller size (around 9,000 employees vs 60,000 at Mizuho Group) makes initiating change much faster. Orico also has far less regulatory restrictions than banks, giving much higher business freedom, and it operates much closer to end-consumer points of sale, even allowing direct activities like used vehicle brokerage that banks cannot do. The main downside is a narrower business focus centered on lending, which has created an inward-looking organizational culture with low momentum for new innovation. For this reason, cultural reform is a core priority equal to hitting PBR 1x in the new mid-term plan.

Q: Is Orico's current capital level sufficient for planned growth investments, and is external capital raising needed? What is the background for the 30-40% dividend payout range, and when can we expect dividend increases? / A: Orico must maintain an A credit rating to access low-cost stable funding, so it targets an 8% minimum capital ratio under stress. While current capital is just above 8% and can be gradually increased via retained earnings without external capital raising, a small additional capital buffer would be ideal, and there is no current need for external equity raising. The 30-40% payout range is set as a clear commitment to shareholders, and while the 25 billion yen mid-term ordinary income target means dividend increases are unlikely before year 3 of the plan, management is focused on growing profitability as fast as possible to return capital to shareholders sooner.

Q: How should we understand the positioning of traditional individual installment business in the new plan? Is it being fully wound down? / A: It is not being wound down, it is being transformed. The new digital installment product Orico launched is just an evolution of the traditional individual installment model to a digital, pre-approved, on-demand format. Instead of maintaining the legacy offline, labor-intensive model, the entire broad installment business (including individual installment, credit card revolving) is being consolidated into a unified, efficient digital-first offering. Low-value retail credit is the initial target for digital conversion, and as digital installment credit limits increase, it will also expand into the auto space, though large-ticket premium vehicle financing will still rely on traditional sales processes.

Q: Why is the new mid-term plan 5 years instead of 3 years, and why set a 12% ROE target instead of 10% which would already clear PBR 1x? / A: While hitting 50 billion yen ordinary income in 3 years would be ideal for PBR recovery, it is not realistic given the pace of interest rate changes and natural headcount reduction (no forced layoffs are planned). The plan splits work into 3 years of foundation building, then 2 years of harvesting results to hit the target, and the entire plan is explicitly built around the goal of PBR recovery to 1x, which drove the 50 billion yen/12% ROE target. If interest rates do not rise as much as planned, the mid-point 25 billion yen target will be exceeded, as lower rates reduce financing costs and support higher earnings.