Tokyo Century: Questions and Answers at Investor Meeting May 13, 2022 (Fiscal 2021)

Q&A at Investor Meeting May 13, 2022 (Fiscal 2021)

Tokyo Century Society

the year ended March 31, 2022>

Q

Looking at the results for fiscal year 2021, excluding one-time factors such as the aerospace business which recorded significant impairment and sales gains, I see continued organic growth. How do you rate the increase in base income?

A.

Overall, we believe core earnings remain strong, with the exception of the aviation business, which has been impacted by the prolonged spread of COVID-19 and the situation in Russia and Ukraine.

Let’s explain by segment. In the equipment rental segment, return on investment improved thanks to operations focused on asset efficiency and the promotion of strategic alliances. In particular, NTT TC Leasing Co., Ltd., a joint venture with Nippon Telegraph and Telephone Corporation (NTT), performed better than expected. While we recognize the overall severity of the business environment, with rental capital expenditure in Japan down approximately 20% from pre-COVID-19 levels, we believe our earning power has steadily declined. improved.

In the Mobility & Fleet Management segment, we have made considerable efforts to reform the structure of our car rental business centered on Nippon Rent-A-Car Service, Inc. (NRS). We have improved our business structure to generate sufficient profits even though our revenues are just under 90% of the pre-COVID-19 level in FY2019. Additionally, the corporate auto leasing business, led by Nippon Car Solutions Co., Ltd. (NCS), reached an all-time high thanks to the sale of used cars and the success of ongoing initiatives aimed at improving the quality of service.

In the specialty finance sector, while the gain on the sale of real estate was higher than in previous years, income from the transport and principal investment activities was also solid. Excluding Aviation Capital Group LLC (ACG) special factors, our initiatives are progressing as planned.

In the International Business segment, profitability increased steadily as CSI Leasing, Inc. (CSI), a US subsidiary, experienced double-digit growth, and our efforts for the structural business reforms we are working on in the Asian activities have borne fruit. .

Forecast of annual consolidated results>

Q

Regarding the ordinary revenue of the 2022 tax plan, what is the reason for the difference between the amount of 100 billion yen announced in the consolidated results forecast and the 130 billion yen announced in the new fourth medium-term management plan?

A.

We believe that ACG is the main factor behind this discrepancy as its aircraft leasing business has

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not yet fully recovered. In addition, we take into account market risks such as a rise in US dollar interest rates and an increase in the cost of funds due to a shift to long-term financing. We believe our non-ACG businesses are progressing as planned.

1. Business environment

Q

What impact will changes in the macro environment, such as the supply chain, rising interest rates and weak yen, have on Tokyo Century’s business?

A.

We are very attentive to the stagnation of the supply chain, mainly in semiconductors, in terms of handling goods such as PCs and cars in the leasing business. On the other hand, Tokyo Century’s business presents considerable revenue opportunities associated with product reuse. Therefore, we would like to consider this as a positive factor for the performance of our company.

With respect to rising interest rates, particularly in the US, the unhedged portion of foreign currency funding is expected to be affected. However, this impact has already been taken into account to some extent in the annual results forecast for the financial year 2022.

Q

What are the pipelines and lines of business that can re-accelerate earnings growth?

A.

Basically, we will pursue our seven pillars of business strategies (ACG-centric aviation, NRS-centric automotive, collaboration with NTT, real estate, environment and energy, collaboration with Advantage Partners Group and global activity centered on CSI) that we have set out. Among them, ACG and NRS were significantly affected by COVID-19. However, given the current situation where a V-shaped recovery of the NRS with a view to renewing its peak to date is not far in the future, we believe that the top priority is how to revive the ACG. At this time, we expect ACG to return to its pre-COVID-19 level of profitability around 2024-2025. Additionally, in terms of restoring its long-term earnings base, ACG is moving forward with new investments, such as announcing an order for 60 next-generation aircraft, for which demand is expected to be high, at the end of December last year. In addition, we look forward to the profit contribution of large-scale urban development projects in the real estate sector and the further acceleration of the collaboration with NTT; therefore, we will strive to follow a growth path in the future.

2. Car rental company

Q

Amid the COVID-19 pandemic, the number of owned vehicles has declined. However, will the current number of vehicles be sufficient if the number of foreign visitors increases soon due to the reopening of

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incoming tourists?

A.

Prior to the COVID-19 outbreak, NRS had a fleet of approximately 47,000 vehicles. During the pandemic, they were temporarily reduced to around 42,000; however, given the recovery in demand, we have already taken steps to increase the number of vehicles, and we believe we can meet customer needs as needed.

3. Aeronautical Affairs

Q

Of approximately $600 million of exposure to Russia, $380 million for the eight aircraft held will be recorded as an extraordinary loss in FY22 earnings. Please explain why you are not recording a loss on the provision for financing and loan guarantees of the remaining approximately $200 million.

A.

We would like to refrain from giving details of individual transactions, and we hope you understand that we have taken the appropriate accounting measures.

Q

Regarding aircraft insurance for Russian airlines, I guess war can be a cause for exoneration. Please let us know the status of negotiations with insurance companies regarding payment.

A.

We would like to refrain from commenting on the progress of the discussions with the insurance companies. Your understanding is appreciated.

Q

In light of the prolonged COVID-19 pandemic and impairment on aircraft leased from Russia, please advise us of the possibility of impairment on goodwill that Tokyo Century recorded upon acquisition. from ACG.

A.

We view the impairment of the aircraft to Russia as a transitory factor, so we do not assume that it will immediately be considered an impairment of goodwill. We cannot eliminate the risk of a deterioration in the business environment, such as a further extension of COVID-19. However, we have made our decision on the assumption that the pandemic will end and subside to some degree, and that progress will be made in line with the aviation market recovery scenario announced by the Transportation Association. international airline (IATA).

Q

What is ACG’s funding environment?

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A.

ACG plans to raise funds on an ongoing basis, primarily through the issuance of corporate bonds. Accordingly, interest expense is expected to increase as corporate bonds are redeemed and new bonds are issued. For reference, ACG does not expect to repay material amounts in fiscal 2022. Although ACG anticipates increased costs of the partially implemented floating rate funding, the impact has been included in Tokyo Century’s 2022 fiscal year results.

Q

ACG placed a new order for aircraft ahead of the situation in Russia and Ukraine. However, please tell us if you expect commercial pipelines to develop well in the future, even excluding aircraft leased from Russian airlines.

A.

Currently, ACG is making steady progress on the status of leases for aircraft ordered to be received from fiscal year 2022, primarily for US airlines, where demand is recovering rapidly. In addition, a total of 60 of Airbus’ next-generation aircraft, the A320neo and A220 series, announced at the end of December 2021, are fuel-efficient next-generation aircraft, so we expect aircraft replacement demand from the airlines.

Q

What is the balance of ACG’s aircraft lease premium recorded on Tokyo Century’s consolidated balance sheet?

A.

When ACG became a wholly owned subsidiary of Tokyo Century in December 2019, it had an outstanding balance of around 30 billion yen. However, following subsequent write-downs, this balance has now fallen to about half that amount.

4. Geopolitical risks in overseas operations

Q

Please let us know if there are any changes or impacts to other foreign businesses as a result of the situation in Russia and Ukraine.

A.

We do not foresee any direct impact on other overseas operations. However, going forward, Tokyo Century Group will continue to consider the impact of geopolitical risk and country risk on its business portfolio.

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