Orix Corp Q4 FY2022 Earnings Call

Good evening, ladies and gentlemen. Thank you for joining this teleconference of ORIX Corporation for annual results for the consolidated fiscal year ended March 31, 2022. The attendees of today's conference are members of the Board of Directors, Executive Officer, President and Chief Executive Officer, Mr. Inoue; and Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Before we begin, there is a request to all the participants. In order to prevent feedback, please either turn off your mobile phone nearby or move it away from the telephone. If we experience a severe feedback during the meeting, we may decide to discontinue the meeting for a short while in order to communicate with the person causing the feedback. So the first half will be Mr. Yano. Second half will be Inoue's presentation, followed by a Q&A session. We expect the meeting to last approximately 1 hour, and we would like to begin the meeting. Mr. Yano, the floor is yours.

Good afternoon. I am Hitomaro Yano, Head of ORIX' Treasury Accounting Headquarters. Thank you for joining us today despite your busy schedules. I would like to start by discussing our financial results for the fiscal year ending in March 2022. In that period, ORIX reported a net income of JPY 312.1 billion, marking a 62% increase compared to last year. We achieved our updated net income forecast of JPY 310 billion announced on December 17, and ended the year with a return on equity of 9.9%. Please look at the chart on the right side that illustrates the quarterly net income trend for the fourth quarter. ORIX achieved a net income of JPY 100.8 billion during this quarter, setting a new record. Moving on, this slide breaks down our segment profit, totaling JPY 551.2 billion. The graph on the lower left shows the trends in segment profit over the past five years, with base profits shown in blue and investment gains in light blue. Base profits increased by 32% year-over-year to JPY 363.3 billion, representing the highest amount recorded in the last five years. Eight of ORIX' ten segments showed higher segment profits, with the Overseas Business significantly driving earnings growth. Investment gains surged by 235% year-over-year to JPY 187.9 billion, also the highest recorded in the past five fiscal years. Along with gains from the sale of Yayoi in the fourth quarter, ORIX USA realized multiple private equity exits, and we continued our investment gains from real estate property sales. Please note that we have updated our definitions of base profit and investment gains in this financial closing, making retroactive adjustments to previous results to align with this change. Previously, base profits included finance revenues, operating leases, service income, and other income, with impairments deducted. However, we identified net impairments from investment gains. This adjustment reflects our view that both investment gains and impairments arise from fixing investees, and it is more appropriate to net impairments against investment gains. We recorded approximately JPY 70 billion in impairments in FY '22, primarily from write-downs in the private equity, Environment and Energy, and OCE segments. On Pages 4 and 5, you will find a detailed breakdown of segment profits and assets. I will now highlight a few key points. First is the Corporate Financial Services and Maintenance Leasing segment, which had a profit of JPY 251.4 billion, including a JPY 163 billion gain from the sale of Yayoi, our largest investment gain ever. We plan to continue recycling capital in this way. Along with Yayoi, corporate financing, auto, and Rentec businesses performed well, contributing to profit growth. However, segment assets decreased by JPY 159.3 billion due to the sale of Yayoi and a strategic reduction in lending and leasing assets. Next, in the Real Estate segment, profits increased by JPY 7.7 billion year-over-year to JPY 36.36 billion. The Investment and Operation unit has succeeded in developing logistics facilities and leasing them, leading to productive outcomes and subsequent sales. The occupancy rates of the facilities operating unit, although impacted by the ongoing pandemic, are showing a recovery trend. Segment assets rose by JPY 38 billion year-over-year due to new development projects and continued asset sales. In the PE and construction business, segment losses amounted to JPY 11.3 billion, a decline of JPY 15.1 billion year-over-year, resulting from write-downs and losses related to the sale of Kobayashi Kako's manufacturing facilities. All other investees performed positively. In the Concession unit, domestic routes at Kansai Airport are improving, while international routes remain a challenge and continue to incur losses. We anticipate a recovery as Japan gradually eases immigration restrictions. In the Environment and Energy segment, profits decreased by JPY 24.6 billion compared to the previous year, with a profit of JPY 2.9 billion. The primary cause of the decline was due to the Soma and Hibikinada coal and biomass plants, which we have written down as part of our commitment to reduce greenhouse gas emissions. On a positive note, our Overseas Business has started to contribute to group earnings, with Greenko beginning in the second quarter and Elawan from the third quarter. We also realized a gain from the sale of our stake in the Vietnamese renewable energy company ESCO. In the insurance segment, profit decreased by JPY 1.6 billion year-over-year to JPY 54.6 billion, with earnings from the former Hartford Life part of the business fluctuating with market conditions. However, ORIX Life showed increased profits year-on-year, driven by diverse sales channels, including online methods. As mentioned on Page 36, first-half policies grew 2.4 times over the past seven years, and segment assets increased by 6% compared to the previous fiscal year due to new contracts. Moving on to Banking and Credit, segment profit fell by JPY 6.1 billion year-over-year to JPY 43.8 billion. Much like ORIX Life, ORIX Bank has successfully focused on non-face-to-face marketing and steady earnings from real estate investment loans. The credit unit saw a profit decline year-on-year due to the absence of earlier reversals of credit costs. In the Aircraft and Ships segment, profits dropped by JPY 7.2 billion year-over-year to losses of JPY 1.8 billion. Avolon wrote down the entire value of aircraft assets located in Russia, resulting in losses. However, the aircraft leasing market is recovering, and we anticipate further improvements ahead. The ship business has benefitted from favorable marine shipping rates, leading to robust profit growth through vessel sales and ship collateralized loans. While aircraft segment assets declined, ship assets increased due to new loan agreements, resulting in an overall 14% rise in segment assets. Next, ORIX USA posted a record segment profit of JPY 76.3 billion, up JPY 36 billion year-on-year, benefiting from substantial investment gains and growth across all three verticals. Lument, which focuses on real estate loans and asset management services, performed strongly. Segment assets rose mainly due to currency translation effects. In ORIX Europe, despite recognizing impairments in intangible assets, segment profits increased by JPY 10.1 billion to JPY 49.6 billion, achieving another record. Asset under management decreased slightly in the fourth quarter due to market changes, but net inflows remained positive. Finally, in Asia and Australia, segment profits rose by JPY 39.1 billion to JPY 52.3 billion, another record high. Each country and region has been impacted differently. With new COVID variants emerging, we continue to manage our asset exposure according to conditions in each area. New leasing business in South Korea and China contributed to profit growth, even as segment assets decreased significantly due to the influence of new leasing business and currency effects. This concludes my briefing on ORIX' financial results for the fiscal year ending March 2022. I would like to also address the impacts of interest rates and foreign exchange on ORIX as U.S. dollar interest rates rise and the yen depreciates. Regarding interest rates, our financing aligns with interest rate changes, and we may utilize derivatives for hedging purposes. Consequently, a 1% increase in U.S. dollar interest rates could negatively affect our annual pretax profit by about JPY 2 billion, while a similar change in euro rates would impact pretax profit by roughly JPY 2 billion to JPY 3 billion. The effect of higher yen interest rates is minimal; in fact, higher rates are generally beneficial. In terms of foreign exchange, we hedge foreign currency transactions, minimizing effects on profit and loss. However, profits in foreign currencies are converted to yen in our consolidated accounts, resulting in fluctuations based on exchange rates. Thus, yen depreciation can lead to higher profits from overseas when translated. That summarizes the situation regarding foreign exchange and interest rates. Now, I will hand over to Makoto Inoue, our CEO and President.

This is Inoue of ORIX. Some of my explanation may overlap with that of Mr. Yano, but please refer to Page 6 as well as 7 to begin with. In FY '22 margin, ORIX reported pretax profit of JPY 504.9 billion and net income of JPY 312.1 billion. This marks an increase of 162% versus '21 March and the figure of JPY 192.4 billion, and this translates to record high EPS of JPY 259 per share. We will pay our FY end year dividend of JPY 46.6 per share for a total of JPY 85.6 per share for the full year. Now more than 2 years have passed since the start of the COVID pandemic. While I cannot say it is completely over, I believe that the stable earnings generated by our diversified portfolio contributed to these figures. Investment gains from the sales of Yayoi contributed JPY 163.0 billion of the JPY 504.9 billion pretax profit. Meanwhile, on a challenging front, ORIX booked JPY 30.6 billion in write-downs related to the sales of assets associated with Kobayashi Kako. We reported JPY 8.2 billion in write-downs on 10 aircraft leases to Russian carriers held by Avolon, which is equivalent to 30% of the total write-down of JPY 27.2 billion. We also recorded JPY 19 billion in impairments of intangible assets related to a business model change at one of the asset management subsidiaries at ORIX Europe. Additionally, we have announced our intention to responsibly close or redevelop the Soma and Hibikinada coal power plants by 2030 as part of our sustainability goals, resulting in JPY 90.6 billion in write-downs associated with these assets. It is important to note that the Avolon-owned aircraft leased to Russian carriers were fully covered by insurance, and we have initiated the claims process with the insurance company. Excluding one-time profits, write-downs, and other investment gains, FY '22 margin base profit was JPY 363.3 billion. It may take a little longer for base profits to return to pre-COVID levels. In particular, the aircraft leasing, airport concession, and real estate operation businesses are currently below their pre-COVID levels, but we anticipate their contribution to substantial growth in base profits in the future. Unfortunately, just as the negative impacts of COVID were beginning to wane, the conflict in Russia and Ukraine has led to higher crude oil prices, rising U.S. interest rates, semiconductor shortages, increased material prices, and a rapid yen depreciation. The uncertainty is increasing, and while the direct impact on ORIX Group is limited, higher energy prices and economic sanctions against Russia are expected to persist. Therefore, we need to assess the potential impact on the global economy. The U.S. Federal Reserve has begun to raise interest rates, and several economic indicators indicate signs of a recession. For FY '23 March end and beyond, we will need to manage ORIX with greater attention to external climate changes than before. Given the growing uncertainty, rather than set short-term goals, I feel it is more valuable to outline our vision for the company in 3 years. With that in mind, our medium-term target is to achieve JPY 440 billion in net income for FY '25 March end, representing a 41% increase in net income over three years compared to FY '22 March end, which means double-digit growth every year. This target also implies returning to a ROE of 11% or higher. Although we will not provide short-term figures, we will maintain our policy of allocating 33% of net income each year to dividends, while splitting the remainder between new investments and internal results or share buybacks. We are committed to a dividend payout ratio of 33% of net income or maintaining last year's higher dividend. We will consider share buybacks based on net income levels and our investment pipeline. ORIX management believes that the shares are undervalued relative to the company's true enterprise value, and we plan to carry out JPY 50 billion worth of share buybacks during FY '23 March end. With yen depreciation accelerating, and excluding gains on the sale of Yayoi, the profit from our Overseas Business is currently over 50%, a trend we expect to continue. While the timing of acquisitions and sales of overseas assets requires careful consideration, including the availability of U.S. dollar financing, we intend to grow our overseas businesses. Please refer to Page 8. At today’s Board of Directors’ meeting, it was decided to terminate ORIX Group's shareholder benefit program following the distribution to shareholders of record as of March 31, 2024, holding 100 shares or more. ORIX introduced the gift catalog-style shareholder benefit program at the end of FY '23 with the aim of increasing ownership among retail shareholders. Our retail shareholders' number, which started at 92,000, has now grown to over 800,000, helping stabilize our shareholder base. When we first launched the program, our annual dividend was JPY 36 per share, which has risen to JPY 85.6 per share this fiscal year. ORIX has also opportunistically carried out share buybacks, and we believe our original objectives for the benefit program have been met. Based on this and our intent to return profits to shareholders, including those overseas, in a more equitable manner, we made the decision to terminate the program. ORIX will continue to enhance corporate value while being mindful of capital efficiency and appreciates shareholders' understanding in this matter. Now please turn to Pages 9 and 10. Although I’ve announced our FY '25 March end fiscal period net income target of JPY 440 billion, I will explain how we intend to achieve it. We expect the aircraft leasing, real estate operations, and airport concession businesses to recover to around JPY 80 billion of their pre-COVID levels. We are hopeful that inbound tourism will return to Japan, especially with the Osaka Expo in April 2025. For financial segments, we anticipate that financial markets outside of Japan will normalize, allowing higher interest rates to facilitate arbitrage activities. In the Real Estate segment, industrial demand for logistics facilities is strong, and we have a pipeline of over JPY 100 billion in assets expected to be completed and transferred within the next few years. We will continue to promote an asset recycling model focusing on development leasing and disposition of assets primarily in the Tokyo Metro area. In private equity investment, we will pursue large M&A deals despite past mistakes with Kobayashi Kako, alongside business succession support. We aim for continued success with new investments across the U.S., Europe, Asia, and Japan. Please turn to Page 13. Among our existing businesses, we will allocate capital towards real estate development, new M&A deals including private equity investments, and Greenko and Elawan in our overseas Environment and Energy business. Elawan possesses a robust pipeline of assets in Europe and the U.S., with numerous projects proceeding on schedule and expected to contribute substantially to base profits and investment gains from FY '24 March end. Elawan operates in over 10 countries and plans to expand its operating capacity to 9 gigawatts. Greenko is one of India’s largest renewable energy companies, focusing on solar, wind, and hydroelectric power. The integrated renewable energy storage project is a promising growth driver, and in March, Greenko formed a strategic partnership with ArcelorMittal to integrate renewable energy into its steel manufacturing processes. The capacity, including pipeline assets, is 18 gigawatts. Please refer to Page 14. Robeco, the core asset management firm in ORIX Europe Holdings, has been a leader in sustainable investment since launching its first investment product in 1995. The firm recorded high asset management levels in FY '22, and we see potential for growth given the increasing demand for ESG-related investment products. Although we do not anticipate high growth rates from domestic asset management businesses, we will expand in areas with growth potential, such as management of mega solar projects, aircraft fleet management, and REITs. Please turn to Page 15. Two years have passed since the onset of the COVID-19 pandemic, and three businesses: real estate operations, aircraft leasing, and airport concessions were significantly impacted, leading to a JPY 90 billion decline in segment profits compared to pre-COVID levels. However, we believe earnings in these businesses have bottomed out, entering a recovery phase in the first half of FY '22. By FY '25, we expect segment profits to recover to roughly 80% of pre-COVID levels, translating to an increase of about JPY 80 billion. We anticipate Japan will reopen for inbound tourism by the April 2025 Expo, aiding recovery in the hotel operation and airport concession sectors. Fortunately, our exposure in aircraft leasing to the Russia-Ukraine crisis has been relatively small, allowing us to maintain a strong position compared to other leasing companies. Please turn to Page 16. While we view Japan as a source of exclusive profits, there are limited businesses expected to achieve double-digit growth. In light of this, we anticipate business succession support, real estate development, and private equity fields to be new earnings sources, leading us to invest in resources and capital in these areas. ORIX Life has experienced growth in new contracts double the industry average, making it a promising growth area. ORIX Bank aims to enhance its ROA to 1% or more by catering to ESG-related investment needs and expanding beyond commercial banking. Please turn to Page 17. ORIX has expanded globally since moving into Hong Kong in 1971, operating now in 28 countries. Initially, our operations focused on financing through leasing subsidiaries in Asia. From the 2000s, we have expanded our overseas focus on investment and asset management. In FY '22, overseas business contributed 47% of segment profits. Excluding Yayoi and accounting for depreciation, overseas operations contribute more than half of ORIX earnings. In the near term, our focus will be on global operations. Our human resources are vital for expanding overseas. To attract specialized personnel in each business line, it is crucial our overseas operations are managed by those knowledgeable about local laws and practices. Localization is our strategy, securing resources for each functional area and entrusting local management. From an asset under management perspective, we comply with U.S. SEC regulations and need local management familiar with various international laws. Therefore, we find reliance on Japanese expatriate management insufficient. While some subsidiaries are led by Japanese expatriates, local management handles business development, analysis, and operations. This policy will continue. Despite yen depreciation challenging new overseas investments, we will focus on expanding our overseas business, including ORIX USA, ORIX Europe, Elawan, and Greenko. Our group expansion relies on a global governance structure led by our global general counsel team. We aim to attract personnel with extensive experience and knowledge in their industries. For a company to be accepted into ORIX Group via M&A, they must align with our philosophy and policies; otherwise, the acquisition cannot be realized. Pages 18 through 23 provide details on the management teams of our overseas subsidiaries to illustrate the localization of our management. Please turn to Pages 24 and 25. To grow as a global entity, ORIX and our overseas subsidiaries must foster a sense of unity across the group. We have started a project to redefine ORIX's mission, vision, values, and purpose. While Japan remains a growth source, our focus for the next 5 to 10 years will shift overseas. To support this, we need to attract human resources domestically and internationally, improve training, development, spread our organizational DNA, enhance communication and governance, and increase the quality of global information sharing. In our November 2011 sustainability report, we identified seven key goals to analyze ESG-related issues. Of these, we have already created the first, transitioning to a majority external Board of Directors. We are also progressing toward reducing greenhouse gas emissions by 50% by FY '50, including the responsibly managed closure and development of our coal and biomass power plants. Additionally, establishing robust governance to manage our global corporate group is a priority, and we aim for steady progress in this area. As I mentioned at the beginning, our preparation period for achieving our FY '25 net income target of JPY 440 billion and ROE of 11% or higher is vital. To realize these goals, we will drive growth by improving profitability in each business segment, with a focus on increasing base profits in our overseas operations. This net income target of JPY 440 billion represents annual growth of double digits. ORIX will continue to return capital to our shareholders. Thank you for your attention.

We will now take the first question from Muraki-san at SMBC Nikko Securities.

This is Muraki from SMBC Nikko Securities. So you have shared with us your target of JPY 440 billion of net profit. So thank you very much for explaining how you're going to get there. If you could be so kind enough to explain to us your investment plan going forward. So according to the plan, it is about JPY 350 billion in the next year, JPY 350 billion, and therefore if it was JPY 440 billion in March end '25, I think JPY 1.1 trillion worth of, I think, the total investment, I suppose, in order to generate 33% of payout. So in the next 3 years, in terms of the new investment, out of this JPY 700 billion to JPY 800 billion, how much of this fund will be appropriated to the investment is my question. And also, the area, too? So you have, in fact, shared with us your idea in trying to identify the area that replaces Yayoi. So if you could be so kind enough to share your investment plan for the next 2 years.

According to Page 9, you might try to assess it using various scales, but this is simply an overview. Referring back to Page 7, on a segment asset basis, JPY 12 trillion is expected to rise to JPY 14 trillion. These figures are not exact, so I estimate there will be an increase of JPY 2 trillion to JPY 3 trillion. The majority of this will come from the bank and life insurance sectors, which have their own funding sources, meaning ORIX' corporate loan isn't necessary. However, Greenko Holdings contributes 20%, and together with Elawan, they have a pipeline exceeding JPY 2 trillion. Therefore, we will not be making equity investments for now. We might also consider selling some assets, but we anticipate needing over JPY 1 trillion in funding. Renewable energy and private equity would be our target areas, with opportunistic investments planned. The pipeline includes several hundreds of billions of yen, but many projects are still under due diligence, so I can't disclose details. For ORIX' corporate loan generating funds, we estimate around JPY 1 trillion. We won't seek alternative funding sources but will look to recycle capital, focusing on renewable energy and potential acquisitions in the U.S. Meanwhile, regard private equity, possible carve-out deals might be in Japan, but these are just ideas. Regarding our borrowing, if we consider JPY 1 trillion to JPY 2 trillion in corporate loans, it may be challenging to secure credit extensions over the next three years. This means the price-to-book ratio under 1 needs to rise above 1x to achieve the necessary flexibility. In the first one or two years, we aim to restore our share price to achieve a PBR above 1x, allowing for further investments. With this in mind, we seek your understanding for a grace period of about three years, which aligns with the slide we've shared. I hope this clarifies your question.

Yes.

Regarding your last point, it ultimately depends on the deals and their availability. We might aim for an equity ratio of around 24%. We will not completely deny equity funding, as I wouldn’t rule out that possibility. However, when talking about the equity ratio, this is a final goal, and it could be as low as 20% or whatever it may be. We plan to be flexible in maintaining this equity ratio. At the same time, we do not intend to hold off on making new investments solely due to financing constraints. This captures our perspective.

Daiwa Securities, Watanabe-san, please ask your question.

Yes. This is Watanabe with Daiwa Securities. On Page 6, you are talking about shareholder return. JPY 50 billion buyback was set and this is until March, which is a little bit long. Are you going to add more? And 11.7% ROE, this means that JPY 3.6 trillion. So excess cash is maybe about JPY 700 billion or JPY 800 billion in terms of accumulation of profits. If this is correct, maybe JPY 200 billion or JPY 300 billion could be allocated to the buyback according to my potential scenario. So what is your policy or approach for share buybacks?

I was expecting this question. 11.7% ROE, you want to go back to this higher than 11%. Basically, equity ratio, well, it will be 24% according to this scenario. When I explained in the past, I said that we should not exceed 25%. So shareholder return has to be done more opportunistically if the situation is to exceed 25%. That is the thinking behind this. For FY '22 March end, JPY 85.6 dividend. And also for '22 March, buyback, this is about 48% return or payout ratio. So it is possible that we may be short by about JPY 50 billion if you do the calculation, but we want to be flexible. JPY 50 billion within 1 year may look wrong. You may question what I'm doing. But if we do the buyback for JPY 50 billion, for example, we want to monitor the situation on the market and we want to respond in a flexible manner. So with regard to the buyback, I think I've mentioned this before, we did have a lot of discussions at BOD. There are many new projects that we can invest into, and we don't want to be unable to finance the new investments just because we have to pay more for the buyback. We don't want to hesitate in investing into new potential deals. So this is the capital policy that we want to maintain. So we want to keep that in mind. And capital policy and shareholder returns are considered based on that. Sorry, JPY 3.7 trillion equity may be achieved if we go forward with this. And we believe that this is maybe too much, JPY 3.7 trillion. And if we do the asset turnover, recycling and the segment asset, it does not inflate too much, and we can maintain it at about JPY 12 trillion or JPY 13 trillion and achieve that rate of equity that I mentioned. In that case, it would be necessary to increase the buyback or the new investments so that we can get more profit than a share buyback. Can we find such a deal? If not, we have to consider share buybacks. So that is the structure that I'm trying to run the management by, do you understand?

I see.

If there are no other deals and we only have JPY 50 billion, everyone will be disappointed. In that case, we would need to reevaluate our options.

UFJ Morgan Stanley, Tsujino-san, please ask your question.

So thank you very much for sharing with us your medium-term direction. So I suppose you would say please refrain from asking the question for this fiscal period. But that was the same, even at the time of pre-COVID period. So this time, for the full year, after the dividend, you have kindly come out with your expectations for the full year dividend. So it is easier for us to figure out what is your expectation for the full year. So the reason why you have not come up with a forecast for the profit generation for this year is because the dividend is flat. So I suppose you can write down JPY 310 billion of profit. But if your achievement is lower than that of JPY 310 billion, you didn't want to bring about disappointment, and that is why you did not put down the number in such a way. But is it because you didn't want to show a flat trend expectations going forward? Or because you have this strong kind of intent, you're wanting to grow the profit? So what was the reason behind not putting down the short-term profit expectations?

No, please continue. You don't have to stop.

No, the reason why you have stopped this shareholders' benefit program, is it because that you felt that it was not kind of equitable in offering those just to the Japanese retail investors, the shareholders, and this is why you have decided to stop it? And on a total region basis, 48% is to be achieved. So therefore, if you have any kind of leeway, you would express that or you would kind of make use of this leeway not in a form of a benefit program but by shareholders return.

Now let me explain about the shareholders' benefit program. When we made the first announcement, our general affairs department was in complete chaos if we were to make this announcement because I'm sure there will be a lot of, of course, phone calls criticizing this stoppage. But thinking about the overseas investors, although they may not have raised their voices, it was pretty unfair. So this is why we were trying to figure out what will be the best timing in stopping this program offering. But all these gifts that were offered in the form of a catalog, in fact, are all investees throughout the country of Japan. The other providers or the suppliers of these gifts that appear on the catalog, and they were happy to take part in this catalog, which, of course, created some businesses for them as well. And as a result of carrying those products, there are some companies who have made some capital investment in order to provide these gifts to make an appearance on this catalog. But so this is why a short notice of about 6 months in terminating this program would give some kind of burden or some problems being caused to some of these business partners as well. So this is why the cost that incurred from this program is about JPY 3 billion to JPY 4 billion or so. Therefore, this benefits program that were offered to retail shareholders, will, of course, be used somewhere else for the sake of returning the profit to all the shareholders, which, of course, is something that we need to think about in the future. When we previously announced our midterm business plan, there were similar concerns regarding the JPY 440 billion profit target, which some may view as conservative. However, the main challenge for us lies in new investments, including those involving Elawan, which will lead to both goodwill and an increase in tangible and intangible assets. If these fixed and intangible assets rise, it will also increase depreciation charges. Consequently, we do not expect earnings from these deals in the first couple of years. This is why we aim to match the previous year’s results during this period. Achieving a 10% or 20% increase will be challenging. Hence, we established a three-year plan with the JPY 440 billion profit target. Nevertheless, the payout ratio will remain the same or even increase, and we ask for shareholder understanding to avoid negative feedback. While there are uncertainties, including the effects of COVID-19 on our external environment, we are committed to maintaining our profit levels, which influenced our planning.

Yes, that is helpful.

BofA Securities, Sasaki-san, please ask your question.

This is Sasaki, Bank of America. I have just one question. JPY 440 billion target, what is the pathway to achieve this? Is it already on the balance sheet? Are the deals already clearly known? And with what's available right now, what's clear right now, how much of this JPY 440 billion can you achieve? Considering in the next 2 to 3 years, the Fed may increase the rate, and we have to think about the market situation with inflation, material costs may go up and the profitability of renewable energy may go down. The capital market may even suffer greatly. So renewable energy and PE investments, I believe that these are strong drivers. But at this point in time, how do you assess the risk in these areas? What is your view?

For the fiscal year ending in March 2022, we anticipate a base profit of approximately JPY 363 billion. If everything goes as planned with real estate management and aircraft, we could see a recovery of around JPY 80 billion to JPY 90 billion, bringing us to about JPY 450 billion. Initially, we were estimating the overseas business at JPY 115 to the dollar, but now it's around JPY 130, making this target more achievable. It might even be that our initial estimates were too conservative. So, with a base profit of JPY 360 billion, and if all three segments show recovery, pretax profit could reach about JPY 450 billion. If we can add another JPY 100 billion, we'd reach JPY 550 billion, making JPY 440 billion attainable. It's not an overly ambitious target, though the current situation is unclear. When the yen is weak, we generally sell overseas assets, and when it's strong, we focus on investments. We finance in local currency and utilize local currency for hedging, which simplifies things, but profits don't have any hedging. A weak yen can lead to high valuations on books for new investments, which we want to avoid. Right now, we need to be cautious with overseas investments. Our strategy is to allocate more investments within Japan when the yen is weak as we can acquire Japanese assets at lower costs. As the yen strengthens, we can then pursue overseas assets. This is our fundamental investment plan. Regarding the exchange rate, I believe it's a contest between Mr. Makoto and hedge funds, and he might lose, potentially pushing the rate up to JPY 140. We'll see how that unfolds. When it comes to overseas investments, careful consideration of hedging is necessary, and it will be challenging for us to navigate. If we sell assets now, we could realize a 30% capital gain since our previous investments were at JPY 100 and are now at JPY 130 per dollar. Profit-taking is an important aspect to consider. Additionally, Elawan is primarily focused on project financing to limit equity increases. We're looking into selling renewable energy projects and using the proceeds to finance further investments. For now, we need to strategize on investing without having to move money out of Japan, which is where we currently stand. I hope that clarifies your question.

Fair enough. So you have already all these projects in sight to achieve JPY 440 billion. Housing loan may crash in the United States or the market may have, and that would not worry you?

Well, if it's Black Monday or global financial crisis, of course, we will be in trouble. But if it's a small decline in the market, I'm sure that we can respond to the situation, adapt to the situation. Your situation is basically stand-alone and that they're trying to do the asset recycling as well. So I don't think we have to worry about market crash so much. We have considered to some extent, but it's not a big concern for us. That's my stance.

Let us move on to the next question. And Mr. Niwa, please?

I am from Citi Securities. My name is Niwa. I hope you can hear my voice okay.

Yes, we can.

Referring to Page 9, I have some questions regarding the mid- to long-term outlook. Assuming the official interest rate in the United States is set between 3% to 4%, would this be beneficial for you? At that point, it seems the finance business may not be your primary focus, with operations likely becoming your main source of profit. Could it be that private private equity investment will be your key pillar? Additionally, you are targeting JPY 400 billion in the mid- to long-term, but based on this diagram, it appears you might exceed JPY 600 billion by 2030. What are your thoughts on this?

As a result of the interest rate increase, we decided to shift our focus towards private equity investment and asset management because arbitrage opportunities have diminished. The lease fee was around 15%, and the cost was about 10%, allowing for a possible arbitrage of about 5%. However, as interest rates have decreased, our profits have also decreased. In the United States, there is still some spread available, but in Japan, it’s only about 20 to 50 basis points at most. In the U.S., even in the middle market, the spread could be between 5% to 6%, while 2.3% is quite challenging. Moreover, using tangible assets as collateral is difficult, leaving us with only intangible assets as security, which limits our ability to achieve higher margins or spreads. Therefore, we decided to focus on private equity and asset management. We believe there will also be opportunities for financial engineering to generate some margin. Moving forward, we plan to enhance our financial businesses, which have not been very profitable in the past, by strengthening our assets and organizational structure to maximize our potential during this period. Thanks to the increase in interest rates, financial arbitrage may become feasible again, which is why we aim to return to this market. What was the next question?

So as compared to last year, I think, why is the profit level higher by 1.5x? Did you gain more confidence? What was behind the thinking in your mind?

Due to COVID, there was a delay in our plans. We are currently in the process of recovering and hope to return to almost normal, but that has not yet happened. In terms of property operations and real estate, as well as concessions, we expect to recover around JPY 80 billion to JPY 90 billion. If we can achieve this within this fiscal period, new investments will become viable. Additionally, while it's hard to label it a recession, the interest rate hike has created conditions where private equity and the sellers' market could allow for new investment opportunities. If this trend accelerates, which we anticipate this year, we believe we can refine our focus accordingly. By March 2025, including current and future investments, ORIX's presence will be significantly stronger. Simply mentioning ORIX attracts many interesting deals, and we are more confident than before in leveraging our brand. This confidence is reflected in my updated forecast, which differs from last year.

Yes, I think I was successful in reading between the lines.

UBS Securities, Okada-san, please ask your question now.

Yes, this is Okada with UBS. I want to ask about net income. Excluding Yayoi, profit increase is about JPY 80 billion to JPY 90 billion. And what about by segment, what is the plan? Can you please talk about the major factors behind this? In addition, in the third quarter presentation, you talked about product equity investment pipeline of about JPY 400 billion. And there are some large deals that would contribute to profit from day 1. That's what you said. And in the new year plan, how is that reflected? Can we expect an upside on the profit?

I would like to address the second question first, and then Yano-san will respond to your initial question. Regarding your second question, our projections for this fiscal year and next are quite conservative. We have not included large capital gains in our assumptions. Our focus is on increasing base profit and achieving growth in the three segments I previously mentioned. We aim for the combined profit from each segment to reach JPY 312 billion or more. As for the JPY 440 billion, some private equity capital gains are anticipated by the end of March '23 and '24, which are reflected in that figure. That outlines our plan. Now, can you please address the first question?

Yes, this is Yano speaking, I would like to explain. I will start from some detail. So Yayoi profit was included in the profit of '22 March end, but Soma, Hibikinada impairment also occurred, and we also had the impairment related to Avolon. So there is an offset, which means that in the end, it's about JPY 80 billion. And also, there was a tax aspect. Kobayashi Kako impairment was included for this fiscal year. But this is not something that we can recover from the tax scheme. For Yayoi, the exit impact was not very big. In other words, the tax rate was quite high. So the tax rate for the fiscal term was high. So '23 March end, we have to really increase the profit. Otherwise, the bottom line will not be the same. That would be a concern, but that's not really what's happening. So where do we make the recovery? First of all, these segments impacted by COVID-19 pandemic, we are not expecting a rapid recovery, but we are expecting recovery to some extent. So they will turn from negative to positive contributions. And then in terms of PE investments, we no longer have Kobayashi Kako. And also excluding Kobayashi Kako, in this fiscal year, we already increased in profit. And also, we will be considering exits, which could push up the profit. With the Environment and Energy, again, we expect steady growth overseas. And also with regard to other segments, we will be continuously making efforts to grow. So through these efforts, these numbers are achievable. Simply speaking, those are the positive factors that we believe are quite likely. Does that answer your question?

Yes. Thank you very much for your kind explanation.

Thank you very much for the questions. So this is going to be the last question. From Mizuho Securities, Sato-san, please.

I'm Sato from Mizuho Securities. I hope you can hear my voice okay.

Yes, we can.

I apologize for asking such a detailed question. On Page 17 of your presentation, the footnote mentions JPY 30 billion that has not been allocated to each segment. Could you explain the reasoning behind this? Are there any new business initiatives you anticipate improving over the next three years? Is that related to the image you have presented? Additionally, will you be able to reach JPY 600 billion through your current business lines, or do you plan to add to this amount? What is your thinking regarding this footnote?

First of all, as we've mentioned previously, this represents the direction of our midterm business plan. There are some inconsistencies in the detailed numbers. On this page, if you total the profits presented in each area, there are discrepancies of around JPY 30 billion. These figures are estimations of what we aim to achieve, and there are new businesses being introduced that cannot be assigned to specific units or segments. Therefore, the JPY 30 billion discrepancy is due to this type of arrangement.

I would like to follow up. This is Inoue. Due to the yen's depreciation, we are experiencing some unrealized gains in our overseas assets, representing potential profit. We might consider taking profits from some of these assets. Currently, we are in discussions with our overseas team. If the yen reaches JPY 130 against the dollar and market conditions are favorable, we may start liquidating some assets to realize investment gains. However, the decision will depend on market conditions. The JPY 30 billion figure I mentioned reflects an excess amount attributed to our ongoing work.

That concludes the Q&A session. Mr. Inoue, can you please provide us with your closing remarks.

Yes. Thank you. So this is the 3-year plan, and we will, of course, make up most efforts in the first and the second year. I hope that you understand our approach: 41% increase in profit at double-digit growth. We would like to achieve this on an annualized basis as much as possible. And if we have excess cash, we may do share buybacks and new investments IIR is better, then we will allocate the funding to that. So please allow us some flexibility in that aspect. Thank you very much for joining us today.

Thank you. And that concludes the meeting with ORIX. Thank you very much for your kind participation for today. Thank you. Thank you, and goodbye.

Statements in English on this transcript were spoken by an interpreter present on the live call. We would like to achieve this on an annualized basis as much as possible. If we have excess cash, we may do share buybacks, and if new investments are better, we will allocate the funding to that. So please allow us some flexibility in that aspect. Thank you very much for joining us today. Thank you. And that concludes the meeting with ORIX. Thank you very much for your kind participation today. Thank you and goodbye.