Orix Corp Q2 FY2022 Earnings Call

Good evening, ladies and gentlemen. Thank you for joining this teleconference of ORIX Corporation for the second quarter consolidated financial results for the six-month period that ended on September 30, 2021. The attendees include members of the Board of Directors: President and CEO, Mr. Inoue; a Member of the Board and Emerging Executive Officer, Mr. [indiscernible]; and Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Before we begin, please ensure that your mobile phones and other communication devices are away from the telephone or turned off to prevent feedback. If there is significant feedback during the meeting, the organizer may need to pause the meeting briefly, and we appreciate your understanding. We will first hear from Mr. Yano and the staff, followed by Mr. Inoue in the second half, concluding with a Q&A session. The meeting is expected to last about one hour. With that, we will begin the meeting. I would like to invite Mr. Yano to speak now.

I’m Yano, Head of Finance and Accounting Headquarters. Thank you for joining us in the financial results briefing today despite your busy schedule. I will now explain our financial results for the second quarter of the fiscal year ending March 2022. Please open page two of the financial results briefing material. In the first half of FY 2022, net profit increased by 56.3% from the previous year to ¥146.7 billion, achieving 58.7% of our full-year profit forecast of ¥250 billion. ROE on an annualized basis was 9.5%, although we did not meet our target of 11%. We are getting closer to reaching double-digit figures and will continue to aim for performance improvement. The chart on the right shows that the quarterly net income for the second quarter was ¥81.5 billion, the highest level since the COVID-19 outbreak. We have recovered to levels seen in the second and third quarters of the fiscal year ended March 2020, before COVID-19 emerged. Please refer to the next page for the segment profit breakdown; segment income totaled ¥240.1 billion, which is a 53.1% increase compared to the same period last year. This section explains our results by separating base profit and investment gains. The dark navy color for base profit on the chart shows a 45.6% year-over-year increase to ¥173.5 billion, which constitutes 72% of total segment profits. In the domestic market, corporate financial services and maintenance leasing segments recorded significant increases. The three overseas segments, excluding transportation equipment, continued to perform well in the second quarter, contributing significantly to profit growth. The pale blue-colored gain on sales climbed 77.1% year-over-year to ¥66.6 billion. In the USA, we recorded gains from the sale of RoadSafe, a leading traffic infrastructure safety service business. In both the first and second quarters, there were gains due to the exit of several key indices. Additionally, in the real estate segment, we sold three logistics facilities in the first half of the fiscal year. Our business partner, Safety Company Ltd, focused on surveillance cameras, had an IPO that led to gains on shares sold as well as valuation gains, which significantly contributed to our results. Investment gains for the first half of FY March 2019 and March 2020 before COVID-19 was around ¥70 billion, indicating we have returned to pre-COVID levels of gain from sales. We plan to leverage favorable market conditions to continue realizing sales gains while improving profits. Please turn to pages four and five for a detailed process analysis by segment. The table allows the investment community to understand the segments better, and additional information can be found from page 21 onward for your reference. In this section, we’ll highlight some key points. ORIX USA and the banking and credit segments recorded lower earnings due to divestiture gains in the first quarter, while the other eight segments reported higher earnings compared to both the previous quarter and the previous fiscal year. Five segments—corporate financial services, maintenance leasing, real estate, ORIX USA, and ORIX Europe and Asia Australia—showed increasing profits, with growth measured in units of ¥10 billion, with increase rates ranging from 67% to 442%. In the corporate financial services and maintenance leasing segment, particularly in health units, we recorded variation gains and gains on sales related to the planned IPO this year. In the automotive unit, strong performance in the used car market and a focus on profitability in sales led to considerable profit increases. Lending units also saw doubled earnings due to heightened demand for rental products and rising prices in the used equipment market. In the investment operations unit within real estate, we generated gains from sales of logistics and other facilities, although hotels and inns continued to be adversely affected by COVID-19, resulting in limited profit contribution. However, as emergency declarations are lifting, operations are gradually increasing, hinting at potential for further results. In DAIKYO, profit was affected by not only sales of newly built condominiums but also the purchase and resale of pre-owned condominiums, alongside performance issues in condo and building management. ORIX USA's business benefited from gains in private equity investment sales, lending, and asset management services. Regarding ORIX Europe, balances continued to rise, reaching a record high of €328 billion by the end of the second quarter, particularly with sustainable equity funds. The Asia and Australia segment saw income increase, with some indices recovering from prior impairment losses. Leasing also increased in South Korea and China, while auto leasing saw strong performance in Australia, leading to significant profit growth. On page five, segment assets rose mainly in the environment and energy, and Asia and Australia segments. We successfully completed the M&A of Elawan, a Spanish renewable energy company, in July. In Asia and Australia, we are expanding lease assets mainly in South Korea and China, where the impact of COVID-19 has been less severe. As a result, segment asset ROA on an annualized basis improved to 2.6%, up by 0.9% year-over-year. Similar to our ROE, we aim to enhance ROA. In summary, we can say that the second quarter performance has returned to pre-COVID levels. Although some units are still experiencing earnings challenges due to COVID-19 impacts, other units are performing strongly. That's all from me. Next, we would like to invite our CEO Inoue.

My name is Makoto Inoue, CEO of ORIX Group. Thank you, and please refer to Pages six and seven. I will later report on ESG-related matters. First, ORIX Group reported ¥146.7 billion in net income for the first half of FY '22 March, representing a 53.6% year-over-year increase and achieving 58.7% of our full-year net income target of ¥250 billion. While the situation remains unpredictable, the impact from the COVID shock is diminishing, and we see signs that economic activity may normalize in the second half. Therefore, we plan to accelerate our investment activities. We anticipate interest rates will begin to rise towards the end of 2021. The Central Bank, aside from certain exceptions, remains committed to this outlook. Although we have concerns regarding rising resource prices and real estate prices in China, we will continue to pursue valuable new investment opportunities while maintaining a cautious approach. We expect the three COVID-affected sectors—aircraft leasing, hotels and inns operations, and airport concessions—to recover steadily, even though they did not contribute to earnings in FY 21 or FY '22 March results. Our ROE has improved from 6.4% to 9.5%, indicating that returning to 10% is just a matter of time. S&P has upgraded ORIX's outlook from A- negative to A- stable. By the end of October, we made steady progress in share repurchases, completing ¥38.4 billion of our ¥50 billion buyback program announced in May. We will also pay an interim dividend of 39 per share, aligning with our promised full-year dividend of 78 per share. Regarding our shareholder return policy for FY '22 March and beyond, we will make decisions based on the second-half results and medium-term outlook. Regardless, we plan to provide adequate and sound shareholder returns. ORIX reported investment gains of ¥66.6 billion from asset sales in overseas private equity, the environment and energy segment, and domestic real estate capital gains, marking a sharp 77% year-over-year increase. In the real estate segment, ORIX sold three logistic centers due to strong e-commerce demand and healthy asset interest from overseas investors. We have a pipeline exceeding ¥100 billion centered around the Tokyo metropolitan area and will continue to successfully develop, operate, and sell logistics centers through asset recycling. Since last fiscal year, we have completed around ¥800 billion in new investments primarily in the environment and energy, asset management, and private equity sectors, despite a market that has favored sellers. We have focused on direct negotiations rather than a bidding process, allowing ORIX to invest at disciplined entry prices. We have completed acquisitions of the Spain-based global renewable energy operator Elawan Energy and Greenco, and we are now moving to the post-merger integration phase. Both investments are on track with initial plans for generating capacity and profit outlook, aiming to grow ORIX’s global renewable energy generating capacity to approximately eight gigawatts by 2026. Referring to Page 10, while direct comparisons are challenging, the market cap of public companies with a renewable energy capacity of 570 megawatts is estimated at ¥360 billion. The acquisition cost for project businesses with a capacity of 708 megawatts is around ¥200 billion. Thus, our environment and energy segment with a capacity of 848 megawatts is expected to hold an enterprise value exceeding ¥400 billion. Additionally, when including our capacity under construction and the pipeline from Elawan and Greenco, we believe this segment holds significant potential for creating substantial future value. Turning to Page 11, on September 28, Osaka Prefecture and City announced that the consortium of companies led by ORIX and MGM has been selected to operate the planned integrated resource development. In April 2022, we plan to apply to the central government for approval of our area development plan, with a total investment estimated at around ¥1.08 trillion and an anticipated facility opening around 2029. Since the site is located on reclaimed land, we will finalize construction plans following thorough ground surveys. ORIX has specific preconditions that need to be met as this process moves forward, but we continue to make steady progress. Now, refer to Page 12, where ORIX plans to announce its latest sustainability report within this month. I encourage you to refer to the report for details on our roadmap for promoting sustainability and identifying material issues and focus areas as part of our contribution to a sustainable society. During today's Board of Directors meeting, we approved ORIX Group's basic policy on sustainability and established a sustainability committee as a new executive body. Under the guidance of the Board of Directors, the committee will develop specific measures to achieve our key ESG-related goals and will work to realize these goals by setting medium to long-term targets for each business unit. The chart outlines ORIX’s ESG-related material issues and focus areas, including six key areas for reducing climate change risk, like setting GHG emissions reduction goals. For social risk mitigation, we have identified three focus areas, including enhancing our sustainable investing and lending policies and ensuring our risk management systems adequately address new and emerging social risks. In strengthening governance founded on transparency, compliance, and integrity, we have outlined five material issues and focus areas, including enhancing the independence of our Board of Directors to ensure appropriate oversight of management and business execution. Please turn to Page 13 for further details on our key ESG-related goals. By the June 2023 shareholders meeting, over half of our board will be composed of independent directors, with female directors making up over 30% of the board by the end of the fiscal year ending March 2030. Additionally, we aim for female employees to account for over 30% of management roles by the same date. Our target is to reduce ORIX Group GHG emissions by 50% compared to the fiscal year ending March 2020 by the end of fiscal year March 2030 and achieve net-zero emissions by the end of the fiscal year ending March 2050. We also aim to reduce our investment and credit balance in GHG-emitting industries by 50% compared to March 2020 levels by the end of March 2030, targeting a complete divestment from these industries by the end of fiscal year March 2040. Moving to Page 14, we will exclude the sustainable investment lending policy established in September 2019 based on which the investment and lending committee, along with segment management, approved and disapproved investments. Our foundational policy is to consider the environmental and social ramifications of each transaction thoroughly. Human rights risks also play a crucial role in investment and lending decisions in regions deemed high risk concerning human rights. We prohibit transactions with companies presenting human rights risks, particularly in sectors where there are concerns about forced labor, child labor, human trafficking, or other practices that violate human rights as defined by the U.K. Modern Slavery Act. The Board of Directors primarily focuses on evaluating mid-to-long-term management strategies, capital policies, and determining policies and directions to secure sustainable growth while also directing sustainability efforts. Please turn to Page 15, where we will establish a new Sustainability Committee as an executive body to manage ESG-related issues and goals. After clarifying strategies, KPIs, and timelines for various efforts, the committee will report to the Board for approval. The CEO of ORIX Group will chair the Sustainability Committee, supported by the sustainability committee Secretariat. Members will include heads of segments and businesses with direct ESG responsibilities. The committee will operate flexibly, involving other relevant parties as needed and may engage third-party experts. The Sustainability Committee's rules include discussing specific policies and goals, balancing short-term profit growth with long-term sustainability, discussing TCFD-required measures for climate change risk mitigation, sharing sustainability information from both domestic and international sources, and determining reporting to the Board of Directors. Referring to Pages 16 and 17, ORIX Group's greenhouse gas emissions were 1.266 million tons for the fiscal year ending March 2022. Of this, coal and biomass coal-fired power plants in the environmental energy segment accounted for 941,000 tons, while certain waste processing facilities contributed 93,000 tons. The real estate segment was responsible for 85,000 tons, and other businesses contributed 147,000 tons. By March 2030, ORIX aims to reduce emissions by 50% from March 2020 levels and achieve net-zero emissions by March 2050. We have specific measures in place to reach these goals. ORIX operates highly efficient coal, biomass coal-fired power generation plants in two locations, with output capable of generating considerable profit. There are various strategies to reduce CO2 emissions from these plants, including increasing biomass fuel use, exploring alternatives for coal fuel, and considering refurbishing to full biomass use or applying carbon capture technologies. If we determine that achieving a 60% reduction in emissions group-wide by 2020 is unfeasible, we may need to either scale down these plants or decommission them, with estimates indicating decommissioning costs of approximately ¥17 billion. We plan to finalize decisions while carefully considering future CO2 reduction efforts and contributions from our renewable energy business. In the U.S., ORIX's environmental resources business generates 93,000 tons of CO2 emissions annually through a facility that processes waste, ensuring adherence to strict environmental standards while facilitating a high recycling rate. Although we recognize the emissions generated from these operations in our total, the facility supports proper waste disposal. We will closely monitor developments regarding international emissions reporting rules and discussions on carbon pricing by the Japanese government, and if necessary, consider installing carbon capture technology. Lastly, I want to highlight that ORIX Group has already contributed to reducing over 3 million tons of CO2 emissions through its renewable energy business, including solar power generation. ORIX Group is also focused on climate change solutions and transitioning away from fossil fuels through our renewable energy initiatives, including Greenco, Elawan, and geothermal power plant development. That concludes my remarks, and I look forward to addressing your questions. Thank you.

Thank you. We are now ready for the Q&A session. The first question comes from SMBC Nikko Securities, Mr. Muraki, please.

Thank you very much. On Page two, you will find the full year forecast and the progress that has been made so far. Mr. Inoue mentioned that your outlook for the second half is quite positive. However, why hasn't there been an upward revision? Is it due to the revision being minimal, or is it related to the potential divestment affecting your year-over-year expectations? What should we anticipate moving forward?

I understand that the Investment Committee has released various reports about our company, but regarding year-over-year performance, no decisions have been made about a potential divestment, despite much discussion on the topic. There are several restrictions in place that prevent me from sharing more information at this time. However, there is a possibility that we could see an upward revision in our full-year results. At this moment, we are uncertain about the extent of this potential revision. We might have more clarity when we release our third-quarter results, where we can assess our three-year forecast against our achievements. Decisions will likely be made around that time, particularly concerning our aircraft-related businesses. In Europe, the market is currently going through integration and consolidation, and future actions remain undecided. As for the hotels and inns, with the COVID-19 pandemic nearly behind us, we are noticing an uptick in bookings. However, the extent of improvements in performance is still unclear. Therefore, at this point, we do not have a definitive idea about the magnitude of any upward revisions for the second quarter. We anticipate being able to provide more details around the time of our third-quarter performance announcement. I hope this addresses your question.

Thank you very much. That was very clear.

One thing to note is related to this year's performance forecast. You have shared your approach regarding the shareholders policy, indicating that a decision will be made at the end of this fiscal year. You mentioned the policy for shareholder returns from this period onward. Achieving ¥250 billion would enable us to provide a ¥78 full year dividend. However, if we exceed ¥250 billion, providing just ¥78 yen may not satisfy investors. This is why, based on the third quarter results, we might need to reevaluate our dividend payout plan. We are looking at the potential to reach ¥300 billion or ¥100 billion, and we need to determine how quickly we can achieve that. We must also consider the shareholder return policy for the next fiscal year and beyond. This applies not only to dividends but also to share repurchase programs. By the end of December, during the announcement of the third quarter results or the full year performance, we will finalize the timing of our announcements.

Thank you very much, that was clear. Thank you.

Daiwa Securities, Watanabe, please ask your question.

Yes, this is Watanabe with Daiwa Securities. Additional question about shareholder return policy, if the profit level is higher than expected, not just dividend but also share buyback maybe increased, is that a correct understanding? And what about the shareholder return policy from next year and beyond? Are you going to set the actual dividend amount or payout ratio or depending on excess capital, you will create a new formula for shareholder return. What are you considering at this point?

Basically in the last one and a half years because of COVID-19. We made an announcement of about the payout ratio but if the profitability level improves in terms of absolute amount, of course, it will go up, but in terms of payout ratio, we want to go back to normal. And as I explained before, dividend should be based on 1/3 of profit. And in addition, even if the profitability goes up, if the dividend is lower than the previous fiscal year, it would not be probably acceptable. So we have to set the minimum level and also the cap fee payout ratio we announced the payout ratio. And once we go back to the normal level, how much should be the payout ratio that we will be maintaining for the long-term? So we would like to announce such a plan in the future. In addition to that, we will consider a share buyback on top of that. That's the basic policy.

I see for this fiscal year. Is there going to be an increase of share buybacks?

Well, 39 billion and 50 billion is a target so in December or January, we will probably reach the 50 billion mark. So January, February is not really a good timing, we may announce additional share buyback at that time, or maybe we will announce another one for the next fiscal year instead, we have not decided yet.

The next is Mitsubishi UFJ Morgan Stanley Securities, Tsujino, please.

Regarding capital gains, I am aware that in the first half, you experienced several capital gains. Additionally, private equity businesses have been performing well overseas, particularly in the United States. Real estate has also shown strong performance, and there might be a divestment of the IOE. This suggests that you could have generated significant profits this year. However, if there is a considerable overshoot this year, it may lead to a negative base effect next year. Year-over-year, this will likely be a considerable factor, but the current pace may be too rapid. Do you believe there could be a slowdown, or do you think you can maintain this pace? What should we expect moving forward?

Well, thank you very much for the difficult question. So I think I would say that this is going to be a cruising speed. And we hope to kind of chalk out a very smooth, upward kind of curve. But of course, capital gains could of course experience ups and downs. And so ¥300 billion, and in thinking about the 2030, we may perhaps move up the schedule a bit, or there could be a delay somewhat, but that is very much dependent on the market conditions, after all. So we will have to continue to refer to the market condition. So I don't think it is possible for us to draw out a smooth upward line going forward. So this is why, but hopefully, we don't want to of course, create such a bumpy kind of very volatile line going forward. So this is why the divestment of private equity, of course, is still progressing. So we hope to draw out a slightly smoother line, than perhaps anticipated. So this is why it goes without saying, inclusive of the shareholders return as such as payout ratio, we hope to achieve a smoother kind of line in order to convince the investment community. So I hope this answers your question.

Yes, definitely. While your profits may fluctuate, shareholder returns will remain stable. Regarding the concession segment, this time the segment profit was 1.5 billion, and we are closely examining the profit and loss for this segment, which had expenses of ¥14 billion. It seems that there was a reversal in this regard. I acknowledge that the cost of goods may have increased, but when you look at the numbers, especially in the investment sector, I'm unsure how much of this increase has been artificially inflated.

Yano is going to be answering your question.

If you could look at the appendix A material, the negative ¥8 billion in segment expenses is what you are asking about. Unfortunately, due to a non-disclosure agreement, there are limitations on what we can share. All I can indicate is that there was a certain amount of gain, and we have various investments. In some instances, we may need to withhold specific details. We also do not practice fund accounting. Regarding the investment-related businesses, those will reflect on the balance sheet, meaning that any profits generated by these entities will contribute to our profit and loss statement, and fluctuations will impact our consolidated earnings. Please keep in mind there will be some variability over time. I hope this clarifies your inquiry.

So, yes, understand, but this fluctuation there are some positives on one hand, but there could be some negatives on the other hand. So, I have to imagine that.

If you view it negatively, that might be true, but if each of those indices generates profit, it will certainly enhance the enterprise value in the future. So, please don’t just concentrate on the negatives; also consider the positive aspects of the metrics. Thank you.

BofA Securities of Sasaki.

This is Sasaki, Bank of America. There are two questions. Long-term performance and how do you view this, that’s the question.

Q2 earnings results show no changes to the midterm management plan announced previously. We expect possible updates in Q3 and by the end of the year. The impact of COVID-19 is diminishing, and the outlook is becoming clearer. Previously, we discussed figures around 400 and 500, while the conversation around COVID-19 was more focused on the 300 range. Now that the COVID-19 situation is improving, we can adjust our perspective.

What is your long-term outlook and the global renewable energy this is my concern. European and American major players, they provided guidance and warnings, saying that the equipment cost is going up, environment is changing. And I feel like the tide is changing. There's a sea change. So in addition to the long-term performance outlook, how does it look to you?

I usually show you the 300 billion and 400 billion chart. And this is on Page 47, this time as reference material. COVID-19, impact is actually lessening. And we can go back to 300 billion much faster than expected. And based on that 300 and 400 billion mid-term objective is shown here. But maybe we have to reconsider the timeline. Because aircrafts and concession and hotels, if all of them go back to normal, we're talking about approximately an additional return of 80 billion to 100 billion. So if the target is 300 billion, 400 billion and there's capital gains, as you can see on page 47. Well, we have to maybe reconsider this chart and present it to you otherwise it will become just a graphic representation. That is why it is not in the main part of the slide deck. Yellow one and Greenco and the other projects.

What would be the profit contribution and when will it begin, for example, Avolon?

For next fiscal year, we expect a big increase, but we don't know exactly how much by how much. So that is why we could not really provide a specific explanation this time. But the 300 billion market targets should be cleared quite easily, and maybe even 400 billion as well. But going forward, including MICE-IR, we will be doing more greenfield projects. Yellow one has a little pipeline, but many of them, most of them are actually greenfield which means that it will take them two to three years before they start contributing to the profit. And we need more time before we can show you a nice steady constant growth plan. In other words, we cannot really share the detailed numbers at this point in time. Please give us some more time. And please understand that the explanation is a little bit vague because of that reason what was the other question?

Well, I don't really need that detailed number. But how do you feel, Mr. Inoue? 400 billion and 500 billion was the target before COVID-19? Do you think you can go higher than that? Is that the sense I'm getting from you? But is that correct interpretation?

Well, I'm always as positive as you know. So I always feel positive. And I want to go back and recover as quickly as possible. And in the beginning, we thought it would take maybe one or two years longer. But now it seems that we can go back to the previous level more quickly. So it's a half hope and half confidence. That will be the correct interpretation, I think.

Understood. Renewable energy you see players profit outlook becoming more challenging. We're seeing more warnings coming from those players. But over the mid to long-term performance for ORIX, do we have to be concerned about that? You mentioned that there are many greenfield projects? And how do you see this?

With renewable energy, we have a lot in our pipeline, and there are three approaches we can take. The first is to hold those projects to benefit from the full year’s profit. The second involves selling established projects to a pension fund at a cap of 3%. Many investors purchase these projects, and our target is around 8% net operating income. Therefore, we aim to either sell the projects for gains, hold onto them, or fund and manage them ourselves. These are the three different strategies we are considering, and we need to determine which is the best option. If we decide to create our own fund, we need to consider its size because anything less than 1 billion isn't really substantial. We are discussing this within the U.K., wanting to retain some of the best projects while selling those with medium net operating income. If a project has low income but is still good, it might be suitable for inclusion in the funds. This approach reflects a profit adjustment, aiming for a more consistent and steady growth trend. Does that address your question?

Understood. And last but not least, in your presentation today, you talked about ESG and spent a lot of time as the CEO to explain about ESG that's my impression.

Contributing to society does not necessarily equal contribution to the shareholders. That's my impression.

So in your mind, ORIX initiative toward ESG, how should it be reflected in the share price? Can you please simply talk about this.

To be quite honest. If you look at other manufacturers and trading companies and compare them against ORIX, 1.26 million tons of CO2 emissions is not such a big emission. And out of that 900,000 tons comes from something we started 10 years ago, probably my fault, but in Fukushima and Osaka prefecture, we have the fuel mix, a combustion, and ¥17 billion costs will be incurred if we're going to deal with it. And scope three includes automobiles, ships and aircraft, we need to really understand the needs of our customers. So we can use low-emission engines or may convert to electric vehicles. But anyway, we will not be receiving a big negative damage. If you look overseas, our auto lease for coal companies and also at least for plants, this balance is approximately 23.5 billion and the risk is just five years. So we can make necessary adjustments and reduce the emission without causing a big damage to the business. So we promote ESG initiatives and we do not consider that we are causing any damage to our investors through these efforts.

So from JPMorgan, Otsuka, please.

Thank you. This is also Otsuka from JP Morgan. So please refer to page three. So, in the first half, you managed to generate ¥173.5 billion. But what is your takeaway as a management? And I'm sure there are a number of factors that are contributed to this profit generation inclusive of Forex, and also supported by the market conditions for sure. As compared to your initial expectation is ¥173.5 billion, what is your assessment, and if you were to double this 173.5 billion, in fact, it is larger in terms of the profit sizes compared to pre-COVID period. So this is the one and only question of mine.

So compared to the pre-COVID period, this number reflects a stable performance. Honestly, we achieved this without a significant amount of effort. The corporate financial services, banking and credit, and life insurance sectors were not negatively impacted by COVID-19, which is why they generated increased profits in both Asia and Australia. During the pandemic, they had to adhere to moratoriums and avoid aggressive operations as directed by the government. This was achieved with relatively little effort. For instance, the profits from secondhand car sales contributed to this. The leasing of secondhand cars has been quite profitable, which is why the automotive business saw an increase in profits. Additionally, secondhand car sales also performed well. Overall, the automotive segment has had a positive outcome as a result of the pandemic. Thank you.

Sato-san, Mizuho Securities.

Yes, this is Sato from Mizuho Securities. Page 52 about the capital utilization rate, 91% is the recent number and can we please talk about this. Depending on the investment and turnover, it may go up and down. And I think your target was around 80 some. Accounting-wise, some things are not counted as laid in profit, which is not, which is part of this. So, if you add those things, can we expect the available capital level to be quite high? So 91% from the management perspective, what does this number say to you?

Yes, this is Yano, responding to your question. The increase in this number is mainly due to Greenco and Elawan. We’re not aiming for 80% as a target right now, since we prefer not to have excess capital. We feel comfortable with about 90%. However, we must remain flexible in case circumstances change. It’s important to note that this figure is also an internal assessment and not a definitive number. There is daily portfolio turnover, so we do not anticipate a decline in this figure. We believe that sustaining the current level is acceptable for us. I hope this answers your question.

Just one thing. In that case, rather than thinking that you have excess capital, you will be actively making investments. So it's a balance between the investment cadence and also the turnover. And is this the right level?

Well, it's not that we have to replace or turn them over? Well, we don't decide everything based on just shareholders capital, we look at the risk and return or what we have and make the final decision. So this is not the only criteria for decision-making. Please understand that there are many other factors involved. So you want to enhance the capital and asset efficiencies and increase the absolute profitability and profitability per share. And based on those assumptions, we will be changing the items in our portfolio.

From UBS Securities, Okada.

Okada is my name from UBS Securities. For myself, I'd like to ask a question about Osaka, MICE-IR, on page 11. Referring to the KPI number, the number of traffic and also the expectation for the revenue as compared to what was announced by Osaka Prefecture as well as City, I think it is exceeding the numbers that was announced by the prefecture and the city. So, what is at the backdrop in revising up with the numbers that you have shown on this page and also providing that there is going to be a disclosure. So, the return on investment to this project, is there any kind of expectation that you have as of now.

Regarding MICE-IR, the figures released by the Osaka Prefecture are preliminary estimates. When we consider inbound services from previous years, currently, we expect the traffic to be primarily driven by local Japanese visitors, which forms the foundation of our planning. We anticipate that simulating the next 10 to 20 years will be challenging, and the operational longevity of the facility will influence outcomes. We're estimating that the integrated resort will reach a 20% expectation. This leads us to the initial investment figure of ¥1.08 trillion, which includes ¥580 billion for construction costs, with the remainder allocated to operational expenses. We believe achieving an internal rate of return of 10% or higher is feasible. While MGM has provided an estimate nearly double ours, our expectations are more conservative since we have limited our traffic projections to Japanese residents and have not factored in beyond certain levels. This is the basis for our figures.

Citi Group Securities, Niwa.

About ESG business opportunities. This is a follow up to the fact on question. Other than power generation when it comes to supply chain as a whole, aircrafts, automobiles, and ships were identified as a big impact areas. What are the initiatives that are already underway and what are your near future plans for these areas, accelerating the purchase, you think. And what is ORIX advantage as opposed to the competitors within the domestic market?

Depending on the segment, what we do is different. With an aircraft, whether this is fortunate or not, stage four engine, younger aircraft, that's what we have. And with Avolon again we have new models. CO2 emission is not really critical for us. Within the aviation industry by 2030, CO2 has to be reduced and maybe zero emissions by 2050, what is the alternative fuel, the whole industry is already moving in the direction. So we will continue to provide aircraft according to those changes to the aircraft and to the companies. Within scope three, of course, we have to monitor the CO2 and not just scope one, scope two, but also scope three has to be taken into consideration as we continue to manage our ESG initiatives. So employers and the supply chain, we have to monitor the CO2 emitted by them. So how to do this is, we just see same thing with automotive and also ships. We have to convert into eco-ships as early as possible, which means that we may have to accelerate the replacement of these assets. I suppose the automotive we are focused on hybrid vehicles right now. But there are still a lot of our internal combustion engines. And very few customers who actually use EVs, how to convert to electric vehicles, is there going to be the biggest challenge for our automotive segment. In the next few years, we need to see progress in terms of CO2 reduction contribution, we have to change the models. And asset-based lease and finance team will face this challenge. This is going to be the biggest challenge, I think. So we have a target for 30 and 50. We are basically binding ourselves to these targets as we continue to manage the company. I hope that answers your question.

Thank you. A follow-up question, compared to the existing players, competitors, what would be ORIX’s strength?

ORIX strength is fast decision-making and selling off assets, which produce a lot of CO2, even if we have pushing payments. We are much more agile than other players. I hope that you will see us that way.

So it is time for us to close this session. So this next person is going to be the final question. Sakamaki from Nomura Securities.

I have one question. I know that, sorry for being persistent. But with regard to shareholder return as well as investment, you may not be able to give us a clear answer as compared to the prior briefing sessions of what has been the changes in your mindset, because your business performance expectation, in fact, the prospect is becoming kind of brighter. So do you think that you are turning a little more aggressive in terms of making further investment? I understand. So is there any kind of the changes in mindset of the CEO?

There have been no changes in my mindset. When discussing business performance, one-third should be allocated for payouts and the remainder for investment, and that remains unchanged. The ¥250 billion we announced at the beginning of the fiscal period will be negatively impacted by COVID-19. The pandemic was widespread until summer, but suddenly, it appears that we are seeing unexpected signs of improvement; however, I can't be sure if the government's numbers are accurate. Still, the situation remains unpredictable. If there were a significant increase in profits, we want to avoid being overly optimistic. Therefore, I ask that you wait until the next quarter before expecting any further updates from our company.

Thank you very much. So with this, I would like to conclude the Q&A session. So Mr. Inoue, would you like to give us the closing remarks.

Thank you for your questions. The inquiries were focused on ESG, and due to COVID-19, the market remains quite volatile. We are currently uncertain about the extent to which we can meet our targets. While we believe that reaching 250 billion is feasible, we still do not know how much we can exceed that figure. We are committed to considering shareholder returns, so I ask for your patience as we prepare to make further announcements. This is my request.

So that concludes today's financial briefing session of ORIX. Thank you for your participation. And you may now disconnect. Thank you.