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.

A financial graph with team of finance professionals analyzing data and trends.

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.

However, we focused about JPY5 billion in pretax profit contribution in the latter half of this fiscal 2024 March, and I expect to return up to around JPY10 billion in profits in fiscal 2025 March. In real estate operations, the average value rate and the lodging facilities have already surpassed pre-pandemic levels and increase in inbound tourism has to believe that additional improvements is – can be expected. And as for MICE-IR, we have signed an agreement with Osaka City and Prefecture late September. Although the investment amount is higher than we had usually planned on to inflation and rising construction costs. We judge that the project still allows MGM and ORIX partnership to secure desired level profitability. So we are financing details original contractors.

And we are preparing to begin construction in 2025 following resolution of land substance issues. The primary reason for 38.82% progress has been poor performance at ORIX USA – despite the weaker yen and the extent to which we can recover from that is going to be one of the challenges for the second half. In the U.S., high interest rate persists, which means that we accelerated sales of existing assets, approximately US$750 million worth. And we also limited new deals, but unfortunately, credit costs and allowance of double accounts increasing. So for fiscal 2024 March, we are strengthening credit risk monitoring and the prioritizing risk controls, and we anticipate that ORIX USA will underperform the initial profit target by about US$200 million.

And in other words, whether other segments can offset that is going to be the challenge for the fiscal 2024 March earnings outlook, Robeco Group. AUM declined during the first half, but it has hit bottom and at recovery track. And we expect roughly 10% year-on-year decline in fee income for fiscal 2024 March. However, new funds such as ESG-related funds and active ETFs are launching, and the outlook of the business remains bright. ORIX Europe, overall AUM is €301 billion, and the segment profit pretax income was €125 million for the six months. AUM for Robeco parent is €166 billion, and we will continue to improve earnings in this segment. In aircraft and ships, passenger numbers in the United States and Europe remain at the record high levels and airline demand for the leased aircraft is strong.

We thus expect to accelerate the number of purchases and aircraft sales in the second half. While it could take some time for earnings to recover owing to the higher euro and U.S. dollar hedging cost we expected acceleration in asset sales to allow for improvement in ROE, ROA and additional earnings contribution. In Page 11, in 2017, we purchased 10,988,577 shares in the renewable energy developer and operator Ormat Technologies for US$626 million. In November 2022, we sold 7.69% of this stake and booked $113 million or JPY15.9 billion gain on sale. We continue to hold 11.08% of the stock and the current share price is around $62 per share in comparison to the purchase price of $57. Although, the shares are down owing to the Israel/Hamas conflict and other factors, the shares remain at the acceptable level even after considering four hedging costs, but we plan to take a wait and see stance.

At the time of purchase, Oman’s adjusted EBITDA was US$344 million and the company’s guidance for the earning is between $480 million to $510 million for this fiscal year. Operating capacity have increased from 700 megawatt at the time of acquisition to 1.2 gigawatt, and by 2025, the capacity is slated to increase to between 1.9 gigawatt to 2.0 gigawatt. We view this as an exciting future investment portfolio. For the overseas renewable energy business, Elawan has a portfolio of 1.65 gigawatt in operating assets and generate earnings contributions of more than $90 million – €90 million annually on a total asset of €2.67 billion. The firm has roughly 8 gigawatt of capacity either under construction or in development, and we are moving ahead with plans to sell certain assets, chiefly those with stable cash flows.

Elawan, its earnings flow into ORIX Group is six-month lag, and some asset sale may be posted during the next fiscal year. However, we expect to be able to achieve ROA of 3% or higher for this business. Elawan’s asset in operation have more than doubled in two years since it joined ORIX Group. This and its rich pipeline make us believe the firm has a portfolio ripe for capital recycling in the future. We plan to develop Elawan into a core part of ORIX core portfolio. In 2021, ORIX acquired 20% of outstanding shares of Greenko and has now invested a cumulative of US$978 million. We own a total of 6.3 gigawatt in solar, wind and hydroelectric assets in operation and has three large scale pumped storage projects equivalent to 4.6 gigawatt under construction.

We have a total of development pipeline of 12 gigawatt, including new pumped storage projects. In pumped storage project construction, steady progress is being made in concluding off-take contracts and Greenko plans to begin operating some of the projects from June 2024. We strongly believe that the investment value of the Greenko has increased substantially. Page 12, at DHC, which we acquired last year, we have implemented a new management structure. We are improving governance and compliance, IT strategy, product strategy and are rebuilding marketing efforts and executing the post-merger integration or PMI, such as reviewing business in Greater China. Preparation to take Toshiba private are underway. Following the November 22 Extraordinary Shareholder Meeting, the company is set to be delisted on December 20.

We executed LP equity investment and mezzanine loan of JPY100 billion each and expect earnings contribution from next year and onwards. The timing of when gains on the sale of assets are booked will be an impact on whether or not we achieve the FY2024 March earnings outlook for JPY330 billion in net income, depending on the progress made in the individual deals, there’s a possibility that we may have to revise our targets. Nonetheless, we will continue to do our most to meet our earnings forecast. Finally, ORIX Group has revised our corporate philosophy and I’d like to announce the new ORIX Group purpose and culture. Our purpose defines our ORIX Group’s why ORIX Group exists in the world and our culture is a set of shared value. In order to bring this purpose to life, I would like to support its widespread acceptance as a shared way of thinking among ORIX Group people globally.

I hope that ORIX Group can unify around ORIX Group purpose and culture as we seek to bring new values to all our stakeholders worldwide. Thank you very much for your attention.

Operator: [Operator Instructions] Now we would like to open the floor for questions. [Operator Instructions] SMBC Nikko Securities, Muraki, please ask your question.

Masao Muraki: Yes. This is Muraki, SMBC Nikko Securities. I want to know more details about what happens when the interest rate goes up. If the short term interest is about 5 basis point, like it was in 2007, and the long-term interest rate is about 1.5%, let’s say under that scenario, what kind of business opportunities will ORIX see? In the integrated report, I saw that there was a story about when you joined Mr. Inoue and lease profit and funding. There used to be margin arbitrage, but right now it is not possible. But if the short-term interest rate is about 50 basis point, maybe arbitrage would be possible again in the corporate financial services business. So I want to know if that’s possible. So that’s the business aspect.

And also with regard to ORIX Bank and ORIX Life, considering the potential IPO as a CEO, what level of profit or gain on sales would you be satisfied with or can you expect that? If you look at [indiscernible] and PBR, for example, it is going high, and its PBR is about 2 times right now. So for ORIX Life and ORIX Bank, I understand that you will not be holding these entities forever, and once the financial policy normalizes, maybe it becomes unrealistic to sell off these assets. That’s my question.

Makoto Inoue: Thank you. First of all, impact of a higher interest rate? Well, of course, the bank, life and the lease, we can expect arbitrage as the spread widens. So this is a favorable situation for us. So centering around corporate financial services, lease operations, which used to slow down in the past can now accelerate. But with dozens of basis points, the spread would not widen that much. So interest rate will have to reach maybe 3% – 2%, 3%, 4%, before we can do an interesting spread business, arbitrage business. Life and Bank, well, the assets that we hold are different from lease. They are more liquid, which means that including potential sales of assets, maybe we can expect improvement in the earnings. Now Bank and Life, well, zero interest rate continued for a long time and the PBR in the financial service sector was 0.05 or something like that.

So we can expect improvement in the share prices due to higher interest rate. And once that happens, of course, we will start a dialogue with the market, [indiscernible] bank, yes, we do look at those things as well. And [indiscernible] PBR goes up that much? Why not ORIX Bank? That’s the question that we received. Now, a real estate condo investment and also trust business and merchant banking restart and various activities are starting, but we don’t want to suggest one single thing. The business model has to be multiple, not just one. Otherwise, overall PBR will not go up. So either way, to prove the earnings from the banking business, we need to increase the number of businesses that are multifaceted. And this is something that I’m talking with the bank team.

As for life insurance, of course, the higher interest rate will directly impact that business. So embedded value and other improvements could be expected. So depending on the situation, in the future, life insurance liquidation – excuse me, life insurance sell off may be possible, but we don’t have enough materials to decide that right now. Now, in terms of negative impact, private equity, of course, and also real estate development projects would experience higher interest rate and also higher construction cost. High interest rate will push up general costs. So for development and exit NOI, we have to carefully look at the arbitrage and build the new projects very carefully. We are not doing any low spread businesses. More than 3% arbitrage is possible for the projects that we find.

So several tens of basis points of interest rate high could not impact us that much. I hope that answers your question.

Masao Muraki: Yes, thank you. I read your story very interestingly on the integrate report about how to leverage or take advantage of failures. Thank you.

Operator: Next is Sato from JPMorgan Securities.

Koki Sato: Thank you. This is Sato speaking. First question about the U.S. business. On Page 31 of your presentation material, you are disclosing the numbers and compared with the past, new investments are being controlled, you mentioned. And this time the real estate system business segment is down. But if you look at the total picture, it’s flat, I think. So what you say, the controlling risk is what you are doing. And when you continue with that, the base profit of each business and the segment assets, what will be the trend of those? What should we expect? So, if you can give us some more details on that and also the higher interest rate in the United States. Could you comment on that as well? In the past, Avalon charge the interest payment would increase and also the USA segment, that would be positive, so it would be offset.

And also on another page, the higher interest rate in the United States does not have much impact. So as of now, when you look at the current portfolio, the higher interest rate in the United States, how would that impact on your profit and loss? If there are any update. Thank you.

Makoto Inoue: So USA operation, first of all, most of the main business in the United States are private credit, so financial business. So PE, the amount is limited or small. So for real estate, it’s multifamily finance and agency or sell to agency and credit, double B or single B equivalent companies, we were providing loans to those companies. So single B, double B minus loans, there are some remaining and right now they’re using the tangible asset or rather they are using the intangible assets. So the cash flow based is the collateral used for most of the loans in the United States. When the interest rate rises, the cash flow on the customer side turns negative. So there are several higher credit cost and bad debt increasing and we have already worked them out and we increased the provision.

So we have done the mark-to-market and then selling them off. So that’s what we have in the United States. So after that, naturally, even when the interest rate goes up basically or say that up to 5% or so and if stabilizes, then around 5% funding cost will be the assumption, so that increasing the balance of the loan. And then in the future when the interest rate comes down, then we can do the arbitrage and also 25 basis points is possible here and probably we are reaching the peak. So we are trying to wait and see and start to make new investments and then we should be able to make that quick recovery. As for the interest rate in the United States, as I said, a 25 basis point or 50 basis point. If it’s within 25 basis points it would be better, especially ORIX USA, most of the assets are floaters, so fixed interest rate, we don’t have an asset at the fixed interest rate, so the impact will not be a big one on us.

Also Avalon and others, Avalon expectation and investment, they are all in U.S. dollars. So Avalon’s earnings is improving, including our hedge cost, we think that it would take some time before the recovery. So we have to really reconsider the hedge cost. But as of now, the Avalon and others for the U.S. denominated investments, the interest cost, how to change that and we are thinking that we should reconsider. But that’s being reconsidered. So we have not yet made a final decision. In the future this is something that we need to work on. Did I answer your question?

Koki Sato: Yes. Thank you. Just a follow-up, ORIX USA the floater assets and higher interest impact has been positive. So this time in the first half the segment profit or base profit results, higher interest rate that positive impact is included. Is that the correct understanding?

Hitomaro Yano: Yes, that’s correct. Well, liability side is exactly what you said, but the asset side with the higher interest rate, the customer side have a negative cash flow or deteriorating cash flow and financing and have the bad loan and that I think is the negative factor for ORIX USA.

Koki Sato: I see.

Hitomaro Yano: So the interest rate sensitivity is difficult to say, but the environment, of course, it is a mixture of positive and negative. And thank you very much.

Operator: Thank you. Next is Daiwa Securities, Watanabe san. Please ask your question.

Kazuki Watanabe: Yes. This is Watanabe, Daiwa Securities. I have one question profit plan JPY330 billion, how strong is this commitment for this fiscal year? On Page 8 you are showing capital gain outlook JPY100 billion, lower bound is shown for the second half and the JPY400 billion for next fiscal year. Maybe you attempted to prioritize that. And utilization of capital has actually increased to 94%. And I think there is of course upside and downside. But how strong is the commitment for the profit plan for this fiscal year? That’s my question.

Hitomaro Yano: That is actually a very difficult question. JPY330 billion, JPY100 billion, well, 20 – well, about JPY80 billion considering what we have done in the first half, this is basically according to plan and we’re hoping to do this in the second half. In January, February, during the end of the pandemic we started to move forward with sales activities. But of course, there are buyers and their own situations and sometimes they’re late in responding to the situation. So negotiations starting from February to March would probably be concluded in the second half of the year that is why the schedule is expected to be tail heavy or second half heavy. But if this is actually possible, we believe that we can achieve this number.

But it really depends on the customers. In order to achieve JPY400 billion, maybe we want to delay some of them. Maybe that is a sentiment. But the sales teams have their own objectives for this fiscal year that if they cannot achieve this there’s going to be strong pressure. So, on the ground I don’t think any team is considering prioritizing the next year’s profit target. Now, as I mentioned before, renewable energy related matters starting from next fiscal year, operations will start in some of these initiatives. So once they’re operational and the cash flow is stable, it means that we can exit immediately and including Greenko. Well, Ormat was a little bit unexpected because of the Israel situation and the sovereign risk is now materialized or maybe a little bit more difficult.

But other than that, everything is basically going according to plan.

Kazuki Watanabe: And the next question is to what extent we will have event risk.

Hitomaro Yano: So that is basically one of the risks that we have to look at in terms of achieving the target and excluding that all efforts are being made so that we can achieve the target smoothly.

Kazuki Watanabe: Well, in terms of employed capital ratio, I think it’s going up. And also, there is a possibility of buying the used car business. Do you have any idea or plan about exit?

Makoto Inoue: Well, we don’t increase the bank lending dramatically. As I said before, capital recycling is at the center for our new investments. So we are basically recycling the assets from the older ones, the new ones. And for the old ones, it’s basically capital recycling. We want to increase the earnings. And for the new projects, we use that funding and the employed capital ratio should not be very high. That is the very basic policy of our business.

Kazuki Watanabe: That’s very clear. Thank you very much.

Operator: Thank you. Tsujino Natsumu from Mitsubishi UFJ Morgan Stanley Securities.

Natsumu Tsujino: Yes, thank you very much. The banking and credit in the presentation, the trust asset, JPY1 trillion. And for the real estate loan, you have sold some of them, and this led to this amount. Until now, we did not pay much attention to that. So liquidation rate, how would that start to impact your earnings? And the new investments in new real estate market, I think that it’s very competitive. So whether you are successfully doing dates and also with the intensified competition, I think that the competition has been always intense. So what is going to be – how would you improve your position in terms of the gain on sales of the exit [ph]?

Makoto Inoue: Well, 0.7% ROA of 0.7% or 0.8%, or their mission is to get to the 1%. So what they do is to make the earnings and that want their total assets would increase. And the JPY3 trillion is the total asset in their assumption and they have set up the earnings target. As a parent company, at JPY3 trillion and if it’s 0.7%, it’s not good enough because ORIX Group ROA will be pushed down. So that is not acceptable. So our real estate, the loan is not the only thing we have. So especially about the banking, the real estate loan for the investment purposes, we have slowed down. In the merchant banking, especially for the renewable energy project finance and also project finance like syndication becoming a leader and getting the fee revenue and to sell the assets.

So that is the policy that they have. So to what extent they are successful in doing so? The total assets keep growing is not acceptable. So we want to control the total assets, and we want to reduce it from JPY3 trillion to JPY2.5 trillion and increased the ROA. So that is what we tell them or as a direction or instruction. So if they cannot do it, we cannot increase the ROA. And like Rakuten, the selling or listing will not become visible. So when we consider listing in the future, at least ROA of 1% is necessary, and we have to take initiatives for that. We can use the trust business so that the total asset can be reduced and increased the fee business. So that’s what they are trying to do as a target. So whether they can achieve them or not – be the – or determine the future of ORIX Bank.

I hope that answers your question.

Natsumu Tsujino: Yes, I understand the philosophy. So from now on, this – the JPY1 trillion, the breakdown and the impact on the profit and loss, if you can provide that information in the future, that would be very helpful. Thank you.

Operator: Thank you. SBI Securities Otsuka-san [indiscernible], please ask your question.

Unidentified Analyst: Yes. This is Otsuka. I hope you can hear me?

Makoto Inoue: Yes, we can hear you.

Unidentified Analyst: I want to go back to what you said, maybe I have missed something, so I just want to confirm something. USA, when you explained about ORIX USA, JPY200 million under achievement, I think that’s what you said?

Makoto Inoue: Is this about the profit being underachieved by $200 million?

Unidentified Analyst: Yes.

Makoto Inoue: Post-tax profit target, ORIX USA, in 2010, had JPY750 million pretax profit. And that pushed up the target profit internally and the JPY500 million, just under JPY500 million pretax profit was a target for this fiscal year. And against the target of just below JPY500 million, they will be underachieving by about JPY200 million. That’s what I meant.

Unidentified Analyst: I see. So according to your document, well, on Page 10, for example, you are showing ORIX USA profit being JPY55 billion. This is pretax target. So there is a possibility that you will not be achieving this and that is why you are trying to offset this by profit from other segments, is that correct?

Makoto Inoue: Well, JPY55 billion, this is in Yen.

Unidentified Analyst: So in terms of U.S. dollars, that would be about 350 million, would that be correct?

Makoto Inoue: Well. We are actually charging a lot of different costs for this segment. That is why we have this number. Yes. So JPY55 billion is actually a quite tough target. And how can we can somehow supplement support that will be the key of achieving the JPY330 billion target overall.

Unidentified Analyst: I see. Thank you very much.

Operator: Next, Sasaki-san [ph] from Nomura Securities.

Unidentified Analyst: Sasaki of Nomura Securities. Can you hear me?

Makoto Inoue: Yes.

Unidentified Analyst: On Page 8, I have a question. First of all, this type of disclosure, I have been covering you for a long time. This is the first time that I see this. So why did you decide to disclose this time? Could you explain the reason? And also capital gain forecast were mentioned and when and which number were used to come up with this calculation? Could you talk about the assumptions and also, if possible, the commitment of JPY330 billion and also JPY400 billion for the next year? I would like to hear your view on your commitment to achieve that?

Makoto Inoue: But as for the Page 8, for a long time, the disclosure of ORIX were criticized from investors. There were some dissatisfaction, so we wanted to improve that. So different way of disclosures are being done. So this is part of this our efforts. So in order for you to understand what would be the best disclosure and how should we disclose the numbers? We are always thinking about it. And this time we decided to provide this capital recycling table so that you can understand this better. So we are always trying to make improvements. And as a result of that, we are disclosing this page. Also, JPY330 billion commitment as I said earlier, the capital gain in the past, the annual capital gain was from JPY80 billion to JPY100 billion and those numbers, so JPY80 billion to JPY100 billion.

And this is based on the book value of our assets and with the gain on sale. So that means that the capital gain in addition to the book value. And based on that assumption we always make a calculation. So JPY100 billion or JPY80 billion capital gain. So this is the net profit on sale or gain on sale. So about the JPY400 billion. Similarly, there are multiple projects going on and some of them are in development. And so in the second half this year and early next year gradually they will start to start up. And then we will consider to sell them and which project can be sold and what would be the level of the capital. Those are the validation verification we go through. And then as a result we think that we can achieve JPY100 [ph] billion. And toward that target, we would like to proceed with the capital recycling or setting of those six.

I hope that answers your question.

Unidentified Analyst: So if that is the case, Page 8, going back to those numbers, so you are negotiating with counterparties and based on those numbers, say that the JPY20 billion to JPY40 billion and JPY60 billion and so forth mentioned and if it’s possible, when you sell which assets, what kind of numbers that you come up with. If you can – so for example, you have so many private assets. So overall balance sheet unrealized gain is very difficult for us to calculate. So this time you are disclosing Page 8. So if you can show us the denominator of those numbers, what would be the size of it if possible?

Makoto Inoue: First of all, those numbers right now from the front line, those are the numbers that they’re using as expected capital gain when they negotiate. So it’s not just something that we calculate. So as for the denominators, Yano-san, [ph] depending in the case of real estate, it’s 1.5 times to 2 times, if it’s old and as for the PE 1.5 times to 2 times at the time of sales. So the book value, 1.5 times of the capital gain. I think in many cases, it’s at that level. So that’s the kind of image that will be coming down. So about the real estate, development NOI, that is the cost and exit NOI, the development NOI is 5.2%, for old one it’s 6% or so and the new ones are 5%. And the NOI is 3% or a little more. So based on those assumptions, I think that you’ll be able to match with those numbers.

As for the PE investments, as you know, at the time of Yayoi for JPY80 billion, it was JPY260 billion, so it increased dramatically. So how much the denominator is, it’s difficult to say. And when you say it, the buyers might say that they are not going to buy at high price, so it’s difficult for us to say about the PE investment. But renewable energy and others and the real estate, especially the renewable overseas, development NOI is about 8% or 9%, exit NOI is 3% to 4%. So those are the numbers for our exit strategy. For real estate, as I said, 5% is the entrance and the 3% is the exit. So if you consider like that, I think that you’ll be able to have a good grasp of those numbers.

Unidentified Analyst: Yes. So renewable energy, so it’s like doubling. And it is likely to be sold, and in your segment disclosure, certain assets with a certain size are included. So that means that you already have a certain level of unrealized gain?

Makoto Inoue: Yes, that’s correct. The issue is that when we disclose it there will be an insider issue. So I would like you to understand that.

Unidentified Analyst: I see. Thank you. It’s now clear. Thank you.

Operator: Thank you. We’re nearing to close. So this is going to be last two questions. UBS, Okada-san and then Niwa-san. So we’ll start with Okada-san.

Taiki Okada: Yes, this is Okada from UBS Securities. I was looking at Page 10. And the full year profit plan JPY105 billion for overseas, how likely is this going to be achieved? So overseas environment energy and Asia and Australia, hedge costs will continue to stay high in the second half as well. That’s my expectation. So capital gain and also asset size increase in the second half, do you think that will enable the achievement of the targets? And also for Asia and Australia, compared to the last fiscal year, the profit level is maybe lower in the first and second quarters of this year. And do you think this is going to recover during the second half of this fiscal year? So I want to understand the likelihood of achieving the profit plan for overseas business.

Makoto Inoue: Well, for aircraft and ships we believe that it is possible to achieve because we are selling off aircraft and also on ORIX owned aircraft offered to investors who want to use them as tax holders. So we believe that for aircraft and ships, it’s possible to achieve the target. And for vessels, we will be selling about four vessels that’s in the plan, and that’s achievable according to current market situation. Environment and Energy, especially Elawan, Avolon asset sales is in the center in the focus. For Avolon, the profit contribution has a three-month delay. So can we do this before the end of December, that’s the question? If not, then 27 may not be able to be achieved and that will be pushed out to the next fiscal year.

So this is still in the flex. For Asia and Australia, again we will have two or three to be sold. That’s in the plan and the internal process is ongoing. One of them we’re trying to sell is an asset in China, and we need approval from the authority. So as long as the approval is granted, there is no three-months delay for this. So we can sell before the end of March next year. For Asia and Australia, last year, we sold one lease company. And because of the absence of that, the number looks smaller this time around. But with regard to lease business then, we are seeing steady recovery. But in terms of gain on sales, we will have maybe one or two these company’s sales but we do not expect a big capital gain coming from this. So that is why we are presenting this number.

I hope that answers your question.

Operator: Okada-san, Did you ask a question? Next Niwa-san from Citigroup Global Markets.

Koichi Niwa: Thank you. My name is Niwa. Hope you can hear me.

Makoto Inoue: Yes.

Koichi Niwa: Thank you. On the follow-up question about the aircraft and ships, I’d like to ask another question. There are three questions. The next year, what would be the segment profit expected? And the second is the collection of the insurance, what will be the time frame, if you can comment on that? And the third, inorganic possibilities. I think that the aircraft industry is very active. As for the funding, it’s not very easy and it’s not going to get easier. So inorganic possibilities, I think it’s quite – it’s a good time for considering that. So if you can comment on that.

Makoto Inoue: As for the next fiscal year target, we are checking, as for the insurance, Avolon $300 million, we are asking for that payment. And AerCap and others, Russian insurance company, a partial collection or recovery has been completed. So domestic aircrafts in Russia, if they go outside of the country, they will be foreclosed. So they don’t want to have that. And so the payment was done for part of it. So for Avolon, $300 million out of the $300 million, the $70 million is going to be paid by the Russian company, so we are currently negotiating. But Roy’s insurance company negotiation, it has become a litigation. So about that, I will take probably one or two years. So if the collection $70 million from Russia is possible, then it’s not going to take that much time.

For the next year target for aircraft and ships, although we have not yet announced this, but JPY350 million to JPY40 billion. So most of the JPY40 billion or two-thirds is the aircraft and one-third is ships. As for ships, most of them are already sold. So the ships, the – unless there is a lowering of the marine transport, we won’t be able to make an order. So this is not very clear. But as for the aircraft, it’s very active. But as for the acquisition, acquiring at low price is very difficult. But the aircrafts, we have inflation hedging. So when the interest rate goes up, the leasing goes up. So no negative spread is likely to emerge. So post pandemic, the lease factor is 0.5% to 0.6%. Right now it’s 0.8% to 0.9%. So this is because of the rising interest rate.

So leasing of the aircraft based upon the inflation in interest rate, it changes so aircraft? How can I say this? There is not much negative impact from the cost. I hope you answered your question.

Koichi Niwa: Yes. Thank you. Thank you very much.

Operator: Thank you. It’s time to close the Q&A session. Lastly, we have closing remarks from Inoue-san.

Makoto Inoue: Yes. The numbers will be tail heavy second half heavy, which may be causing some concerns among you. But from October to December in the third quarter, to what extent do we see progress in terms of capital gains and that will probably enable us to give you more detailed or more accurate numbers when we do the earnings announcement in December. Interest rate hike in the U.S. is impacting our allowance for doubtful debt, it is increasing. We want to make some improvements, although it’s difficult to do so. But other than that, things are going very smoothly. So we expect and appreciate your kind support going forward. Thank you. And that concludes the second quarter earnings announcement. Thank you very much for staying with us until this – until the end of the meeting. Thank you, and goodbye.