Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for first quarter consolidated financial results for the three-month period ended June 30, 2019. The Attendee today is Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Mr. Yano will give you a presentation on the first quarter financial results for about 20 minutes, and we will move to a Q&A session. The whole conference will take about an hour. At this time, I'd like to turn the call over to Mr. Yano. Please go ahead.

So this is Yano from Treasury and Accounting Headquarters. Thank you very much for your participation in this teleconference despite your busy schedule. So let us get started without further ado on the first quarter results of fiscal period of 2020 March end. Although the explanation was to be 20 minutes as mentioned by the operator, we will be spending a little more than 20 minutes. Please refer to the second page of the deck that we have handed out to you, Overview Net Income and ROE. As you can see, fiscal year 2020 March end, the first quarter net income was down by 13% year-on-year at ¥69.2 billion. Annualized ROE was 9.6%, which was below the midterm management target of 11%. However, as seen on the chart on the right-hand side of the same page, ROE tends to fluctuate from quarter to quarter, affected by the timing of capital gain generation and other reasons. Please turn to the next page. The page shows the breakdown of pretax net profit. In order to facilitate a better understanding of the growth of ORIX, especially from a long-term perspective, we have applied a new way of showing the trend of our performance. The left-hand side chart shows the trend of pretax net profit for the past five years. The dark blue part of the bar chart shows the segment profit excluding gains on sales. By referring to this bar chart, you can see that the segment profit excluding the gains on sales has been growing steadily over the past five years. Moreover, for the first quarter, from the new investments we made in NXT Capital in the prior year as well as Avolon, we managed to generate profit, which contributed to the growth of our profit. Segment profit excluding gains on sales includes some impairment, and thereby, there may be some fluctuations anticipated over time. However, we think a fair level of strategy can be expected. Now on gain on sales, please look at the bar chart on the right. Gains on sales in the first quarter were lower year-on-year, both in Real Estate and in other investments. The gains on sale for the quarter were ¥27.8 billion, which was lower than ¥41.1 billion of the same quarter last year. For ORIX, gains on sale are not special profit but a profit generated from our usual business activities. We construct the business portfolio that allows us to generate gains on sales consistently while we continue to exert efforts to enhance the value of our assets at all times. However, a single shot of gains on sale could be quite sizable, and for this reason, as you can see from the trend, it may result in a certain level of fluctuation on a quarterly basis. We said that ¥27.8 billion was so-so. So this ¥27.8 billion for the first quarter was about 1/4 of the total amount for the year. Now please turn to the next page. Although details of segment profit will be explained later, just as a summary, let me share with you the trend for the profit by segment. Profits were up for Investment and Operation and Overseas Business while the trend was flat for Retail. And profits were down in Corporate Financial Services, Maintenance Leasing, and Real Estate. Segment assets increased by ¥276.7 billion compared to the end of the last fiscal period. Out of this ¥276.7 billion increase, ¥207.1 billion comes from an impact caused by a change in accounting standard for operating leases. Therefore, if we were to exclude this impact, our segment assets grew by ¥69.2 billion. Now the next page, and this page shows the health of our financial structure. The employed capital ratio was at 88% with no major change from the prior fiscal year-end. We intend to continue to pursue growth while controlling total risk and making new investments. However, we will continue to operate our businesses by remaining vigilant in the allocation of our capital in light of a rising trend in cautious outlook for the macroeconomic conditions. As for funding, we will not just diversify the method of funding, but we will try to diversify the market for funding as far as the geographical area of the funding itself. We will also further our effort not just in diversification but to proceed with the extension of the time period. With this, we'd like to conclude the business performance summary. Please move on to the next page. Now we would like to explain about the segment performances. As of the end of 2019 March, we have been disclosing our segment performance by a multiple number of units. So Corporate Financial Services, the segment profit was down by ¥3.8 billion year-on-year at ¥4.1 billion. As to the life insurance sales to corporates, we have changed our direction for the proposed products to the businesses, resulting in the decline of agency fee income. Installment loans, against the backdrop of a negative interest rate environment, acquisition for new deals, in fact, is becoming harsher. But as you can see from the right-hand side chart, we have been selective, and as a result, the loan yield has been trending at 2% plus. In the business succession support that we have started back in 2018, we have managed to conclude a deal by 2 so far, and there have been several inquiries that have been forwarded to us. So we would like to, of course, grow the business by making use of our nationwide network. As a matter of fact, for Yayoi, those members who are paying the charges, we have managed to increase the profit. Next page, please, maintenance lease segment. In this segment, the segment profit was ¥7.9 billion, down ¥1.8 billion year-on-year. In the presentation material, on Page 26, you can find the year-on-year comparison of each accounting item, but the main reason for the decline in profits was an increase in SG&A. However, in this segment, part of this segment's profit decline was due to the change in accounting standards, and excluding the impact, the ROA would have been around 3%, which is a higher level. Next page, please, Real Estate segment. The segment profit was affected by the large gains on sale of assets recorded last year and fell by ¥16 billion to ¥4.5 billion. On the right-hand side graph, you can see the unrealized gains on rental properties chronologically, and this is the information we disclose every year in the part of the yu ho report or securities report. You can see continuously higher unrealized gains of ORIX despite the shrinkage of promotion of the sale of assets in this Real Estate segment. Next, regarding DAIKYO, which was made a holding subsidiary in the last fiscal year. We are promoting the integrated management of all Real Estate businesses under the same umbrella of ORIX, and we are sharing know-how and resources for development, distribution, and construction management. Next page, please, Investment and Operation. Segment profit was up 4% to 14.2%. In the Environment and Energy segment, the profit is down because of power retailing going down due to weaker spot prices. However, the solar power generation was solid with 840 megawatts operating at the end of June. For the concession business, we had strong business with inbound tourists and merchandise sales. Investment and Operation profit is up ¥1.3 billion year-on-year to ¥7.8 billion. Next page, please, is the Retail segment. The profit is down 1% year-on-year to ¥21.6 billion. In the life insurance business, in view of the increasing insurance policies, we need to enhance the administration function of policies and premiums we receive from customers, and as part of that, we have expanded the call center located in Nagasaki and employed this year. Because of these expenses, there was some increase in SG&A. However, we believe that this is a significant investment for the future. And at the same time, last year, we recorded a sale of gain from sale of assets, which was another factor pushing down the year-on-year profit growth. And in the banking business, we have a high loan-to-deposit ratio of 90%, and spread is 2%, which is quite high, making our bank one of the highest profitable banks in Japan, which is still growing. Next page, please. This is the last segment, Overseas segment. The segment profit is up 20% year-on-year to ¥48.1 billion. Last year, we had profits from new investments such as NXT Capital and Avolon. We also had a gain from the sale of investees in Asia. Because of this, the profit increased in OCU or ORIX Corporation U.S.A. We suffered from a decline in asset sales proceeds, and segment profit went down year-on-year. However, the asset management business is still strong. In OCE, this is the former Robeco asset management company, because of fee pressure compared to last year, the profit declined. In terms of the business environment, there still is a trend of shifting investors from active to passive investments. But because of the favorable market condition in the last 6 months, AUM has slightly gone up to EUR 298.4 billion. We'd like to continue to secure high top line, and at the same time, we would like to drive cost reduction going forward. Lastly, I would like to summarize. For FY '20 March quarter 1, net income was ¥69.2 billion and annualized ROE was 9.6%. Gains on sales of assets decreased year-on-year. However, it was kept at a reasonably high level, and profits other than gains on sales grew as new investment continued. Lastly, I'd like to mention the KPIs defined as part of the medium-term strategic direction. In the financial results meeting held in May 2019, as Mr. Inoue, CEO, said, in late October, we are planning to hold the interim results meeting, and where we would like to give, announce an updated medium-term strategic direction, including shareholder returns. The current KPIs of profit growth of 4% to 8%, ROE of 11% or higher, credit rating of A can be the KPIs which can sometimes be mutually contradicting to each other. Also, despite the high pipeline for new investments, uncertainty still is there for the business outlook and the economic outlook, so we are internally discussing how exactly we should update the midterm direction. This concludes my explanation. Thank you for your kind attention.

I have two questions. So on Page 3, the summary for business performance, the slide, so the gains on sales of ¥27.8 billion were a so-so level, I think, were expressed by Mr. Yano. But the tax rate, in fact, is going to be stable this year. So I don't think you will be able to achieve what you have been able to in the prior year. So it is not a so-so level, but the gain on sales can be expected from here down the road? So this is what I want to confirm with you at the end of the first quarter. Also, the second question, the Overseas Business, especially dollar-denominated assets as well as liabilities. The Overseas Businesses, the installment loans, in fact, had increased this time around, I believe. According to the slide, Page 31, to the right-hand side, so the foreign currency procurement has been indicated through the pie chart, and I think there seems to be an increase in the total amount. So would you mind helping us to better understand this?

Thank you for your question. Regarding the gains on sales, as you mentioned, without the deferred tax assets, we wouldn't be able to grow due to the significant gains on sales. This explains our current awareness of the situation. Additionally, concerning the Real Estate disposition and ORIX Living, which pertains to elderly care homes, we are considering selling those assets. I believe we can expect to generate a certain level of gains on sales this year. We aim to increase these gains, although I'm not sure I can guarantee they will be substantial. However, we definitely anticipate generating more than we did in the first quarter. As for the dollar-denominated assets and liabilities, our U.S. businesses are experiencing considerable growth, contributing to this expansion. In Asia, we've extended a significant amount of loans, resulting in an increase in the outstanding loan amounts. These represent foreign currency-denominated costs, which have continued to rise. However, I believe this situation will stabilize moving forward.

The interest rate on a dollar-denominated basis, if it is to be hiked or if it is to shift upwards, what kind of implication would that be for ORIX?

I have to be honest. There are about 2,000 units in terms of the mismatch. So you see, we are, of course, keeping the mismatch to the minimum as much as possible. So that has been the explanation. There are about ¥200 billion worth of mismatch. Therefore, if the interest rate starts to fall in the United States, this would be positive for us. This is our interpretation.

As for that final point, in terms of the mismatch, this is not a duration mismatch. But do you mean by mismatch between the floating interest rate versus fixed? Is that what you mean?

Yes, exactly. And of course, if you were to go into the details of the duration, of course, it is pretty much mixed. But on a P&L basis, I think that's how I just wanted to express. And yes, that is a correct understanding between floating versus fixed. You see, in the United States, there seems to be a direction to lower the interest rate.

And if that is going to be the case, up until now, the floating rate, I think you have been building up the loan portfolio to that end. But from here down the road, are you going to stick to the skew towards disclosing? Or would you be perhaps shifting or making a change or rebalancing your portfolio towards fixed, like corporate bonds, for example? So is there any kind of changes to your policy due to an interest rate lowering environment?

We are not making bets on the trend of interest rates; our approach is heavily influenced by how well various projects align with municipal or corporate bonds. Just because interest rates might decrease, it doesn't mean we will significantly alter our portfolio. In terms of municipal bonds, we do hold some long-term ones, which is affecting the long-term end positively. However, we do not plan to change our management policy from an interest rate standpoint.

I am Watanabe. I have two questions. The first question is about asset sale proceeds, which overlaps with the previous question. For the first quarter, it was low. At the beginning of the fiscal year, you had certain assumptions on the pipeline. Have there been any changes to your assumption? From the second quarter, I assume you have major asset sales planned. Were you intentionally reducing the amount of asset sales in the first quarter? Regarding the medium-term strategic direction update in Q2, are you indicating that you are changing the KPI itself or revising the targets for different KPIs? Which is it? Additionally, on Page 5, there were some equity ratios, and the end of June figure is disclosed. What is the intention behind disclosing this figure?

Regarding the profit from asset sales, we currently find it challenging to provide any comments on our plans because there are various possibilities. While there are certain expectations for real assets, we are also considering projects in other areas. However, we cannot comment on whether these will materialize at this point. In terms of regular items, we have some in real estate as well as thoughts on private equity exits, and we plan to execute these one at a time. I can only provide limited comments at this stage. As for your question about the second quarter, due to the nature of the inquiry, we can only respond in Q2. We are discussing future directions internally, and while we anticipated this question in Q1, I regret to inform you that you will have to wait three more months for more specific information and discussions on our plans for shareholder returns. I appreciate your patience. There were additional questions you raised related to this.

Yes. There was an equities employment capital ratio disclosed on Page 5.

Yes, risks are important factors for us. While you asked a lot about the debt-to-equity ratio, we're not just focusing on that. We're considering various aspects due to the changing nature of the business, and we need to tightly control the risks during this transition stage. That's why we're emphasizing this number. It's not just for the end of the year or for interim periods; we believe it's important to show these figures consistently. For the first quarter, the balance sheet reflects a significant decline in dividends, and due to changing interest rates, equity hasn't increased much, which is why it remained flat.

This time, so the profit excluding capital gains, in fact, is up, was your explanation. However, maintenance leasing...

I think, sorry, we are finding it difficult to hear you.

How about this?

Yes, that is better. Thank you.

Profit excluding capital gains is indeed increasing when viewed over a longer trend. However, I believe maintenance fees and corporate financial services are declining. Additionally, the Environment and Energy sector seems to be experiencing a downward trend as well. Capital gains could potentially offset these shortcomings. What are your expectations regarding this? Referring to the material, you’ve not only addressed service income but also indicated your expectations for capital gains. Is it reasonable to expect similar outcomes for next year? Considering the new group will be introduced next year, could there be negative implications requiring more capital gains to be built up? This trend seems likely to continue. You mentioned an update this time, yet there's a noted decline in dividends, which is a concern for investors currently. Should I assume you will factor this into your ROE calculations as well?

My answer to the second part of your question is yes. Starting with the first question, Corporate Financial Services has experienced a profit decline, as has Maintenance Leasing and Environment and Energy. However, when looking at our full-year business performance by dividing it into 16 separate units, you can gain a clearer view of the overall situation. It's essential to recognize that this is a business portfolio, meaning some areas will perform well while others may struggle. We strive to capitalize on our successes and enjoy the positive outcomes. There may also be seasonal variations in the performance of certain businesses. Regarding Corporate Financial Services, we cannot provide a specific timeline for recovery. We will, however, remain proactive in working to enhance profits where feasible. Excluding gains from sales has been beneficial, allowing for consistent growth in our segments, though there may be fluctuations periodically. We aim to maintain good control over our overall business. You may wonder about the general trend and the potential impact on dividend payouts. At this point, I cannot share a definitive intent, but we plan to address your inquiry more thoroughly in the second quarter. I apologize if my response has not fully addressed your question.

I apologize for bringing up so many negative factors, but I know you have managed to reduce SG&A in the Overseas Businesses. In Asia, particularly Hong Kong, the asset disposition might total around ¥7 billion. Given the expense reductions, is this a sustainable situation? Could you clarify this for me?

So as to the SG&A in the overseas, there are some positives that are enjoyed in some of the markets, whereas some negatives in some of the markets. But overall, we are trying to revisit the expense incurrence. But ORIX Europe, for example, Robeco's AUM, the personnel cost, HR costs, dependent on the profit generation, that would, of course, fluctuate, and affect the overall business performance as well and SG&A, more specifically. So the asset management side of our business and other, of course, administration cost, we would like to change many of the fixed costs to that of varying costs. But overall, overseas, Asia business is recovering, and in Asia, we have been able to generate quite a sizable amount of gains on sales. So I think it is trending okay in general.

This is Sakamaki from Nomura Securities. I have two questions. The first is about overview 2, excluding segment profit. For Avolon and NXT, what was the exact contribution from those 2 entities in overseas, Avolon and NXT? The total is shown to be ¥5.2 billion. And what is the breakdown? Excluding the segment profit and capital gain, how much was the contribution from them? Second is the corporate finance. The agent premium for life insurance business has gone down. Is this trend going to continue going forward, agency is down?

Regarding NXT and Avolon, please look at Page 12. For Overseas Business, the numbers are shown. For NXT, it is ¥2.3 billion, and Avolon is ¥3.2 billion. This was the exact contribution profit from them, that is included in the non-capital gain. So the total is ¥5.5 billion. That's the contribution profit from NXT and Avolon. Regarding the Corporate Financial Services business, as I mentioned earlier, the benefit of ORIX is that we can look at the timing and quickly come up with a product that is needed by the market. A few years ago, we started selling solar panels, which contributed a lot to the profit. Last year, we sold life insurance, which was quite significant. But now this is being put on hold. So how long will it continue, and will we come out with new products to cover up for the loss? I can't comment on the exact timeline yet. However, for life insurance as well, sooner or later, we can figure out what is needed and what is not needed in the market. Then, we can be aggressive once again. We can't just leave it as it is, so we have to come up with new products as well. There are other products as well, like brokerage business in real estate, which is growing as well. Of course, we have to make a recovery in this business. We are aware of that. If I could say once again, depending on the timing, we have the capability to find exactly what is needed by the market. That is something we would like to do this time again.

So this is Sasaki from Merrill Lynch. On Page 13, the third box, I have two questions. So at the time of full year business performance explanation, Mr. Inoue has said about the repurchase of your shares. I thought that he was going to share with us your policy. So in the midterm business plan, I think you're going to be incorporating this idea at the time of interim result announcement. So is it that you're going to be revisiting the midterm business plan, and you're now going to be sharing this at the time of the full year business performance information session?

Let me respond to that part of the question again. At that time, Mr. Inoue indicated he would share details about the share repurchase when full year business performance information was provided. In conclusion, we will present the total shareholder return policy, including the repurchase program, during the second quarter results announcement. We are actively discussing updates to the policy. While we are not implementing changes immediately, the discussions are ongoing.

The second question. So whenever you come up with the business plan, inclusive of the midterm management plan, you may start from year-end and then you would share the new plan in the new year. But in revisiting the plan, I think you're spending more time than usual, it seems. Does that mean that there's going to be a major decision to be made? Why are you taking more time than usual in putting together the plan this time?

Well, as to the revision of the plan, of course, we are constantly discussing over the topic of the business plan, management plan, and so we're just sharing with you where we are at. This is something business as usual for us. So it's just that we wanted to be quite transparent as to where we are at to the investors this time around. To be honest with you, for the first quarter, we thought it was not a good idea for us not to share any of our idea as to the shareholders policy. But just so you know, we are going to be making an announcement at the time of the second quarter end. So does that make any sense?

Could you provide more information regarding expenses and investments? In the presentation material on Page 23, SG&A information shows an increase of about 6% compared to last year. What is the reason behind this increase? By segment, you mentioned specific reasons for future investments, but given the slow growth in profit, how much do you expect to reduce SG&A for the rest of this fiscal year? That's my first question. My second question is about the execution of investments. In the first quarter, how much was spent and on what types of investees? Additionally, how much progress have you made regarding the full year pipeline?

Thank you for your question. The overall figures for SG&A are quite intricate and can sometimes be misleading. For instance, if NXT Capital's investment increases, SG&A will also rise. Similarly, with Cornes AG's growth, SG&A will go up as well. There are various factors to consider, making it difficult to provide a broad comment. In ORIX Europe, the bonus payments are decreasing, which is another factor. Therefore, I cannot make a general statement on this matter. However, we are closely monitoring SG&A, particularly in Japan. We want to keep a close eye on sales and maintenance-related business there moving forward. Concerning SG&A expenses, I prefer not to delve into the specifics at this moment, but we have seen some adjustments in lease accounting standards. There were two key changes: one being the modification of the operating lease accounting standard. As a lessee, we borrow properties and buildings, and sometimes land to set up solar panels for power generation. For long-term leased land, we have incorporated this into our balance sheet, resulting in over ¥200 billion in on-balance-sheet investments. Additionally, we previously referred to initial direct costs associated with lease acquisition, which could be deferred during the lease term. This is no longer the case. While the impact is not substantial, in Japan, it accounts for over ¥1 billion, representing an increase in SG&A. This had a negative effect on domestic financial services and maintenance leases. Those are some of the details. Nonetheless, we intend to closely monitor SG&A expenses moving forward. I hope I addressed your questions.

How about the investment execution?

For the first quarter, there weren't any significant investment items to report. We're continually assessing various opportunities, including reshuffling of securities, which causes fluctuations in investment amounts. However, there's nothing substantial to communicate to investors at this time. We do have several medium-sized investments in the pipeline, including private equity investments in Japan and international markets. The focus for this fiscal year is on how much we will include, but we can't provide specific details yet. We'll issue a press release once they are finalized. As we did last year, we aim to actively pursue investments, but we are cautious about pricing given the current market conditions. We won't invest where prices are still high, and we intend to maintain discipline while pursuing aggressive investment strategies. Regarding your last point about uncertainties in the economic outlook, last year, business investments surpassed ¥1 trillion. Are you planning to maintain that level, or are you considering a reduction compared to last year? Well, the pricing of those assets are still very high. Therefore, whatever is available on the market are the ones which are very difficult for us to buy, although there are a lot of offerings to us. Our stance is to keep a cautious stance.

Otsuka from JPMorgan here. I apologize for repeating questions that have already been asked, but I want to avoid any confusion. On Page 3, in the summary, regarding the second segment profit excluding gains on sales for the first quarter compared to the previous year, it seems you managed to grow by only ¥300 million. However, in the second and third quarters, it appears to start building up, which suggests that, as shown on this page, you will experience steady growth. That’s my first question, and I would appreciate your response.

Yes. That is our expectation. But how far can we grow this amount of profit by the end of the year, we are yet to know. But for sure, we would like to increase. It is only about ¥300 million as mentioned by yourself, so it is not enough to outspokenly say that it was quite high.

There was investment from NXT Capital, and I understand there was some impairment related to domestic sales or maintenance. Compared to the previous year, there has been a decline. The new investment contrasted with existing businesses, which were somewhat masked by the new investments. Regarding the midterm direction, you've provided an update. As it pertains to the KPIs shown, I am not inquiring whether there will be changes but rather the reasoning for discussing them, considering it has been a year since the midterm management plan was launched. This includes the annual growth in profit or ROE. Have there been any significant changes in the business environment that would prompt adjustments to these KPIs? I am curious why you are bringing up the reevaluation of the midterm management plan at this time.

At this time, I can only share that we are in the process of revisiting our midterm management plan, which could lead to modifications of this KPI. There are possibilities for changes or no changes at all. During the announcement of our fiscal year-end results, we recognized conflicts between achieving different sets of KPIs and the extent of our investment activities. We will continue our investment efforts to foster business growth, but specifics regarding the scale and timing are still uncertain. Currently, we aim to communicate our thoughts and direction as we progress into the second quarter.

As you mentioned, when we developed this midterm management plan, I realized that there were changes in the environment. The conflict between different KPIs was already evident.

Of course. We want to keep the health conditions of our businesses while, of course, growing our businesses. And of course, we knew that there were certain conflicts between different KPIs, for sure, at the time when we did put together this plan. But of course, knowing that, we want to continue to revisit the whole thing.

I'm Sato from Mizuho Securities. I have two questions. The first one is about maintenance lease. This time, SG&A has increased. After Q2, will this trend continue, or will it return to normal? Regarding the gain from the sale of used cars, you mentioned there was a year-on-year increase despite a challenging environment. Are you currently at the lowest point? My second question is about the global theme. Will you maintain your target for increased net income? How significant is this goal?

For maintenance leases, there has been a change in the accounting standards. Additionally, the maintenance business has faced various burdens from service fees. Due to these factors, SG&A is on an upward trend. We aim to take actions to address this, but please note that SG&A is expected to rise year-on-year this fiscal year. As for the sale of used cars, we are indeed approaching a bottom. It's quite difficult to predict the future trend since it can be influenced by numerous factors. Overall, we’re not in an environment where cars are selling rapidly, so I can’t specify when we’ll see a recovery in the sale of used cars. For RVs, we are taking a cautious approach, allowing us to adjust the gain from asset sales accordingly. That addresses your first question. Regarding your second question, answering it would mean predicting the future, which is always a challenge. However, I can say that we have several different assets with unrealized profits, making it relatively easy for us to generate profits in a single year. The real question for this fiscal year is what direction we will take, which is crucial for our decision-making. Did I answer your questions? Some final remarks from Mr. Yano. This is Yano again. Thank you very much for your participation despite your busy schedule. I have been answering your questions so far, and that's where we are at. We will continue to exert effort so that we can present a good result in the second quarter.

Thank you. That concludes today's conference. Thank you for your participation and you may now disconnect.