ORIX CORP Q2 FY2027 earnings call

• Record First-Half Net Income: Net income reached ¥856.2 billion (approx. 85.6 billion yen), nearly triple the previous year, driven by gains on the sale of Oryx Bank shares and significant valuation/sale gains from Kyokusha (Kioxia) shares.
• Key Initiatives Progress: Completed portfolio optimization by transferring Oryx Bank shares to Diamond Next Bank and exiting multiple PE investees. Launched RX Fleet in APAC and formed a PE fund with the Qatar Investment Authority for Japan Information Industry.
• Airfin Acquisition: Completed the acquisition of Airfin, an aircraft parts aftermarket company, to expand the aircraft value chain, diversify earnings via parts sales, and promote circular economy practices.
• Asset Management Expansion: Shifted battery storage plants to an asset management model using external capital (23.7% equity stake). NXT Capital closed its largest-ever funds in the US, and Oryx USA strengthened distribution and product development capabilities.
• Capital Recycling: Recorded ¥266.1 billion in capital gains and ¥930 billion in cash inflows from investment recovery. New investments totaled approximately ¥340 billion, with a robust pipeline expecting over ¥800 billion for the full year.

Total segment profits increased by ¥749.6 billion year-over-year to ¥1,147.4 billion. The APAC Infrastructure segment reported a profit of ¥82.1 billion, a decrease of ¥118.9 billion year-over-year, primarily due to the absence of prior-year gains from Greenco and Hotel Universal Port Vita sales, though transportation equipment subunits grew. The Europe and Americas segment saw profits rise by ¥71.5 billion year-over-year to ¥91.8 billion, driven by asset management fee growth from Robeco and sale/valuation gains on PE investees in Oryx USA. The Insurance segment profits increased by ¥6.2 billion year-over-year to ¥57.1 billion, supported by new corporate and high-net-worth whole life insurance policies.

• Full-Year Net Income Forecast: Maintained unchanged at 530 billion yen, noting that this includes approximately 80 billion yen related to Kioxia equity profits.
• Third Quarter Expectations: Forecasts a loss of approximately 190 billion yen from Kioxia sale and valuation gains based on September-end share prices.
• Adjusted Profit Trajectory: Adjusted profits are progressing steadily, with first-half adjusted profits at 317.5 billion yen. Management aims for a run-rate of roughly 100 billion yen per quarter for adjusted profits in the second half, though final numbers depend on one-time items and market conditions.
• ROE Target: Reaffirmed a target Return on Equity (ROE) of 11% for the fiscal year ending March 2028, contingent on share price stabilization and further divestment of Kioxia holdings.

• Kioxia Share Price Volatility: Net income is highly sensitive to fluctuations in Kioxia’s share price; a ¥1,000 change impacts after-tax gains by approximately 12.8 billion yen. Recent declines pose a risk to Q3 results.
• Greater China Investments: Impairments were recorded due to mark-to-market rules and market value discrepancies. Strategic reviews are ongoing for both public and private investments, with potential for further losses or restructuring costs.
• Cybersecurity Incidents: Unauthorized access and data breaches occurred at Oryx Life distributors and PE investees (DHC, White Essence). While no material financial impact was recognized yet, enhanced security standards and vendor management are being implemented.
• Macroeconomic Factors: Exposure to rising interest rates, inflation, and US political developments affects procurement costs and real estate/PE valuations. US mortgage business remains sensitive to rate hikes.
• Hilco Portfolio Challenges: Oryx Capital Partners in the US faces challenges with remaining portfolio companies, requiring active management and potential capital solutions over the next 24 months.

Q: How do you view the sustainability of the 11% ROE target given the volatility of Kioxia share prices and the proposed shift away from using it as a primary index?

A: Management acknowledged that Kioxia's volatility makes standard ROE calculations misleading. They introduced 'adjusted ROE' to reflect core earning power more accurately. While the 11% nominal target remains, they plan to finalize which financial indices to use for long-term targets after observing share price trends through December, aiming to provide clarity at the Q3 earnings call.

Q: What is the strategic outlook for the challenging US portfolio companies under Oryx Capital Partners, specifically Hilco and Network Connex?

A: Hilco has shown signs of turnaround with some asset divestments breaking even or generating profit, but fundamental issues remain. Management expects to see refreshed trends within 24 months through capital solutions and liquidation. Network Connex provided exceptional profit upon exit, but other remaining assets are not expected to yield similar results, necessitating continued active portfolio rotation.

Q: Can you elaborate on the recent cybersecurity incidents involving unauthorized access at Oryx Life and PE investees, and what countermeasures are being taken?

A: Breaches occurred at Oryx Life distributors and PE investees DHC and White Essence. No material financial impact has been recognized yet, but the company is implementing stricter minimum security standards across the group. Measures include early detection, damage minimization, rapid recovery, and enhanced vendor management to prevent future erosion of data integrity.

Q: How does the acquisition of Airfin integrate into the broader aircraft strategy, and what are the mid-term prospects for aircraft and ship leasing?

A: Airfin allows entry into the aircraft aftermarket, diversifying earnings through parts sales and supporting the circular economy. The aircraft and ship businesses performed well due to tight supply-demand dynamics and favorable pricing. Management is bullish on the mid-term outlook, planning to order new vessels and expand fleet management services rather than just selling assets, leveraging funds to enhance capital efficiency.

Q: What is the status of investments in AI-related data centers, and why hasn't ORIX moved aggressively into this sector compared to competitors?

A: ORIX has limited direct exposure to AI/data center equities but is exploring indirect opportunities through logistics land conversion to data centers and GPU lending via Rentech. The primary bottleneck is securing sufficient power capacity and suitable locations in Japan. Policy support could unlock opportunities, but currently, ORIX lags behind peers in this specific asset class, focusing instead on core competencies like logistics and renewable energy.