Orix Corp Q4 FY2023 Earnings Call

Good evening, ladies and gentlemen. Thank you for joining this telephone conference by ORIX Corporation for the Consolidated Financial Results for the Fiscal Year Ended March 31, 2023. My name is Nakane from IR sustainability, and I will be your Master of Ceremony today. We have two attendees with us: Makoto Inoue, who is a member of the Board of Directors, President, Executive Officer, and CEO; and Hitomaro Yano, Executive Officer responsible for Accounting and IR. Mr. Yano will present in the first half, followed by Mr. Inoue in the second half, and then we will have a Q&A session. We expect the meeting to last approximately one hour. Mr. Yano?

Good evening. This is Hitomaro Yano, Executive Officer responsible for Accounting and Treasury and Investor Relations at ORIX. Thank you so much for joining us today despite your busy schedule. Let me start by giving an overview of FY '23 March end results. Please turn to Page 2. Net income fell 12% year-over-year to ¥273.1 billion. For FY '23 March, it was disappointing to see earnings decline, but we substantially exceeded our forecast of ¥250 billion announced on November 7. ROE was at 8.3%. The right-hand chart shows the quarterly trend in net income. Fourth-quarter net income was ¥61.7 billion; investment gains and asset management fees from ORIX Europe fell compared to the third quarter. As we booked some impairments in the fourth quarter, growth was less evident than in the first quarter and the second quarter, but progress in reopening has helped a solid trend for the quarter. Please turn to the next page. This is a breakdown of segment profit. Segment profit totaled ¥381.3 billion, down 28% year-over-year. Please look at the left-hand chart, which shows trends in segment profits. The light blue bar indicates investment gains while the dark blue bar shows base profit. Base profits fell by 13% year-over-year to ¥297.8 billion, while performance among segments varied, but overall, we were able to secure stable base profits despite our big operating comment. I will go into further details later. The light blue investment gains were down 55% year-over-year to ¥83.5 billion, owing to the absence of last year's substantial gain on the sales of Yayoi. ORIX typically books investment gains of around ¥100 billion each year. Even in a tough environment, we were able to continue our effort of capital recycling and maintain a level of investment gains mostly on par with that of a normal year through the partial sales of our Ormat stake and logistics centers. Please turn to Pages 4 and 5. These are segment earnings. Here, we have broken down segment profits and assets by segment. This will give you a broad view of each segment, and the details can be found from Page 18 onwards in the presentation deck; I'll focus on an overview for now. First is the Corporate Financial Services and Maintenance Leasing segment. Segment profits reached ¥73.2 billion; excluding the sales of Yayoi booked last fiscal year, profits were up. The auto business unit reported profits that surpassed FY '22 March, which was a record high, bolstered by continued strong market for used cars and the recovery in rental car demand from pandemic lows. In the Corporate Financial Services unit, fee income was strong, and demand for rental equipment at Rentec is growing. For segment assets, while assets in the auto units were down due to a shortage of new vehicle supply, assets in Corporate Financial Services increased as the unit selectively added new deals. Overall, assets were almost flat year-over-year. Next is real estate. Segment profit rose ¥19.5 billion year-over-year to ¥51.5 billion. The development and rental unit posted profit growth fueled by sales of logistics facilities primarily to overseas investors. With respect to the facility operation business, hotels and inns saw both occupancy and average daily rates recover sharply, thanks to the recovery in inbound tourism and the national travel support campaign. The DAIKYO unit also posted higher profits year-over-year. Segment assets were up ¥24.9 billion despite property sales offsetting some new investments. The PE investment and Concession segment profits improved by ¥14.3 billion year-over-year to ¥2.6 billion. The private equity business in Japan was in the red last fiscal year, owing to Kobayashi Kako-related losses. However, measures related to the business and strong performance among current investees helped the business return to the black despite booking due diligence costs related to the recent DHC acquisition in the fourth quarter. In the concession business, passenger numbers are growing on both domestic and international flights, helping losses to shrink. According to data recently released by Kansai Airport, passengers on international routes exceeded 1 million for the first time in three years since February 2020 on a single-month basis in March 2023, while domestic routes also reached 2.35 million passengers, 99% of March 2019 levels, showing the strongest recovery to date since the start of the pandemic. Inbound tourism should begin to recover in earnest as Japan significantly reduced travel restrictions for Chinese tourists last month. Earnings from the concession units are reflected in group results with a three-month lag. Therefore, we expect considerable growth in profit for this business in FY '24 March. Segment assets were up ¥251.9 billion year-over-year as a result of the acquisition of DHC and HEXEL Works that offset the sale of Net Japan. In the Environment and Energy business, segment profits were up ¥32.6 billion to ¥35.7 billion. This was due to the partial sale of our stake in geothermal energy company, Ormat, along with higher prices in the electricity spot market at Elawan, which became a fully consolidated subsidiary in Q4. Other firms also led to growth in revenue from power sales. In domestic energy, the solar business also saw higher revenues. Segment assets grew substantially owing to changes in Forex and additional stake taken in Elawan, up by ¥70 billion versus the end of FY '22. In Insurance, segment profits were down ¥15.3 billion to ¥38 billion. Rising infection rates recovered earlier in the fiscal year resulted in an increase in COVID-related payouts, causing a significant drag on earnings. However, changes implemented since last September mean that only patients at high risk of serious complications are eligible for policy payouts for patients being at home. Payout related expenses peaked and declined as a result. The Japanese government's classification of COVID as a category for infectious diseases has meant that policyholders are no longer able to make claims from hospitalization insurance policies for in-home isolation, regardless of the risk. For this reason, we expect COVID-related payouts to decline dramatically going forward. Although segment assets were down due to a lower variation of mark-to-market assets affected by higher interest rates, mark-to-market value also declined; therefore, there's no problem. Banking and Credit segment profits were down ¥3.9 billion to ¥37.6 billion. In banking, profits decreased due to the absence of a prior year's one-time profit. Earnings from investment real estate loans remain high and healthy. The credit business posted a decline in profit due to aggressive advertising to support the launch of the new ORIX Money product. However, this is in line with the projections. Loan balances increased in this business, and the guarantee business remains healthy. In aircraft and ships, segment profits increased by ¥20.9 billion year-on-year to ¥18.6 billion. Aircraft and ships reported strong profit growth year-on-year. Lease revenues rose in the aircraft leasing business, primarily in North America and Europe, but also supported by the delayed recovery in the agent passenger market. Service revenues from arranging various securitization vehicles among investor demand was also positive. Avolon posted Q1 '23 earnings announced at the end of April, up 36% quarter-on-quarter, although a segment posted losses at the segment profit level owing to funding costs charged for investments in Avolon; earnings are improving on a market recovery. The ships unit profits were up sharply, aided by sales of owned vessels during the period of strong marine shipping prices and higher contributions from financial revenues from ship financing deals. Segment assets were flat year-on-year, excluding changes in Forex, as sales of vessels were offset by an increase in aircraft acquisitions, primarily narrow-body aircraft; we continue to grow that portfolio and will monitor market conditions closely. Profits rose sharply at ORIX USA, down ¥26.6 billion to ¥49 billion compared to FY '22, when the segment booked a record profit due to changes in the macroeconomic climate; there were few exits, and origination fees from Lument and mortgage origination also decreased. We maintained disciplined risk management at ORIX USA and have taken a conservative stance on new investments. Segment assets appear to have increased on a yen basis owing primarily to changes in Forex, but we are controlling the size of the asset base, and dollar-denominated assets are down slightly. Next is ORIX Europe. Segment profits were down by ¥8.7 billion to ¥40.7 billion. Starting in the U.S., interest rates have risen globally, fueling a recession, which led to a retreat in both equity and fixed-income markets. This caused AUM to shrink and profit to decline. Net inflows turned positive, however, in the fourth quarter, and AUM has increased. Lastly, in Asia and Australia, segment profits were down ¥16.8 billion year-over-year to ¥34.3 billion. Profits were lower due to the absence of investment gains booked last fiscal year and impairments of an affiliate booked in the fourth quarter. As reopening progresses in Asian countries, new business executions are rising steadily in Australia, South Korea, Southeast Asia, and India. Segment assets grew sharply owing to changes in Forex and new executions. And this is going to be my last slide. Please turn to Page 6. I briefly went over results in different segments. This graph explains FY '22 results versus this fiscal year. Our CEO, Mr. Inoue, will explain in detail. But there were strong and weak performances among various segments during FY '23. Some segments like insurance, ORIX USA, and ORIX Europe posted lower profits due to COVID and rapid market changes. Meanwhile, some businesses benefited from COVID-related reopening and did well. Focus areas for ORIX such as overseas renewable energy and domestic private equity also grew. The Maintenance Leasing segment and facility operations also performed strongly. We expect the insurance segment to rebound in FY '24, and the segments that grew and recovered during this fiscal year should achieve further growth. For these reasons, we hope to secure profit growth in FY '24 and '25. That's all from me. And now I would like to hand over to Mr. Inoue, our CEO.

I'm Inoue from ORIX. I would like to start from Page 7 of the handout. For the fiscal year ending March 2023, net income decreased by 12.5% year-over-year to ¥273.1 billion, with EPS at ¥232.35. We will maintain a dividend of ¥85.6 per share for this fiscal year, the same as last year. The final dividend will also be ¥42.8, matching the first half. Including a ¥50 billion share buyback, ORIX's total shareholders' return ratio will stand at 55.2%. Unfortunately, the return on equity for March FY '23 was 8.3%, falling short of our 10% target, but we remain committed to achieving this goal. Last May, we forecasted a net income of ¥440 billion for March FY '25, but we will have to revise this estimate lower due to current market conditions. We now project a net income of ¥330 billion for FY '24 and have adjusted our FY '25 target to ¥400 billion. Consequently, the return on equity will be 2% by the end of March '24 and 10.4% by the end of March '25. For the end of March '24, we will maintain a share buyback of ¥50 billion and a dividend payout of ¥55.6 per share, or 33%, whichever is greater. Let me further explain by referring to Pages 6, 7, and 8. First, the key reason for the ¥273.1 billion net income in FY '23 was the significant negative impact of COVID-related payout expenses in the life insurance segment, especially for home-isolated patients. A change in eligibility requirements in September 2022 led to a decrease in these payouts during the second half, but the overall costs increased by ¥20 billion for the entire year. Additionally, profits from ORIX USA dropped by $200 million for the full fiscal year due to a rise in credit card use and a slowdown in transactions related to affordable housing. Also, management fees decreased by €116 million due to reduced assets under management at RobecoGroep, directly affecting profits. Despite contributions from the domestic real estate, auto, ships, and Environment and Energy segments, total profits were down compared to last year. On a positive note, we expect that the Kansai Airport concession and real estate operations will enhance earnings in FY '24, buoyed by a recovery in inbound tourism post-COVID. The Aircraft segment is also recovering, although rising interest rates in the Eurozone and the U.S. have increased hedging costs, delaying its profit contribution. The outlook for financial markets, especially U.S. real estate, is becoming more uncertain in the wake of turmoil caused by the Silicon Valley Bank and Credit Suisse incidents. How authorities will balance inflation control and financial system stabilization remains to be seen. Many regional banks are facing unrealized losses in their commercial real estate portfolios, which could result in credit downgrades and further market volatility. This situation could lead to a detrimental cycle. History suggests financial authorities will likely seek stabilization measures. Hence, given ORIX USA's position, we believe it's essential to prepare for potential increases in credit provisions and funding costs. Going into FY '24 and beyond, we will continue to prioritize a conservative and defensive business approach until conditions improve. In FY '22, ORIX USA achieved a record segment profit of $715 million, which fell to $422 million in FY '23. Inflation persists despite elevated federal rates, underscoring the adverse effects of tighter monetary policy. Thus, we do not expect strong growth in this business for the foreseeable future. With this in mind, we have begun enhancing our management functions and securitizing ORIX USA's assets. Our vision is to develop this business into a specialist asset-light manager leveraging third-party assets, though it may take several years to realize substantial profits. In the near term, contingent on specific deals, we don't plan to expand the U.S. business through mergers and acquisitions unless they directly enhance our asset management operations. We have lowered our FY '24 net income forecast to ¥330 billion and the FY '25 forecast to ¥400 billion, while our internal targets remain set at ¥440 billion, and we aim to exceed these goals. A detailed breakdown of pretax profits by category for FY '23, FY '24, and FY '25 is available. In FY '23, overseas profits constituted 43.2% of the total; we anticipate this to decline to 40.8% for FY '24 due to inflation, interest rate hikes in the U.S., and rising energy costs in Europe. However, we expect the renewable energy sector to contribute more significantly to overseas profits starting in 2025, and with a likely recovery in the U.S. economy over the next few years, we will pursue activities to expand our international operations. In FY March, ORIX continued its capital recycling strategy. We realized gains of around ¥60 billion from sales of over ¥200 billion in assets while acquiring ¥470 billion in assets in private equity, DHC Real Estate Development, and other sectors. As new asset purchases dominated in FY '23, we will manage our program more balanced in FY '24 and beyond. We will use ROI and ROA to evaluate new investments and exits, considering the impact on the balance sheet, income statement, asset efficiency, and risk-adjusted capital ratios, important for our credit rating. Although we calculate segment-level WACC and ROIC, these figures are primarily for internal managerial accounting. Therefore, we have opted not to disclose ROIC for each segment currently, but we will manage each business unit with awareness of both debt and equity capital costs. Our investment pipeline for domestic and international projects is currently around ¥1.5 trillion. In the domestic market, we are developing logistics centers, condominiums, and engaging in private equity deals. While we must carefully assess interest rate conditions, we plan to advance selected projects. For domestic logistics and condo developments, we expect a developed net operating income yield of over 4%, focusing on urban areas like Tokyo and Osaka. Our foreign private equity investment strategy targets projects with guaranteed internal rates of return between 15% and 20% over a 5 to 7-year holding period. Given rising interest rates and construction costs in renewable energy, we will only undertake projects with sufficient arbitrage and clear exit strategies. On April 14, the Minister of Land Transportation and Infrastructure approved the Osaka MICE-IR project bid led by MGM and ORIX. We have 90 days to finalize agreements with Osaka Prefecture and the city. While we face several uncertainties regarding design and remediation measures, we believe these issues will have resolutions. Adjustments for construction costs and the Osaka Expo may be necessary for the project's opening in 2029 or later, and we recognize the importance of monitoring these factors closely. There are ongoing lawsuits aimed at halting the project, but we aspire to foster sustainable growth in Osaka's economy and tourism. Regarding Toshiba, a takeover bid has been finalized between JIP and Toshiba, with antitrust filings to commence in each country, and we expect TOB procedures to start in late July. We cannot disclose certain specifics of this TOB process, but ORIX intends to provide ¥100 billion in mezzanine syndicated loans through the banking group and invest ¥100 billion in equity as a limited partner. We decided to join the JIP consortium based on our favorable assessment of Toshiba’s corporate value and their management improvement plan’s feasibility. This investment is purely financial and hinges on JIP’s management abilities. We will work to support a new management structure and enhance corporate value with JIP, while considering exit strategies post fulfillment of these objectives. Regarding our ESG-related initiatives, we have broadened our TCFD scenario analysis and are making progress on disclosures related to Scope 3 greenhouse gas emissions, water usage, and waste volumes. Our ESG ratings and rankings in the Nikkei SDG survey have improved. In December 2022, ORIX was added to the FTSE Blossom Index and is now included in all ESG indices used by GPIF for local stock allocations. We are conducting surveys and risk analyses on human rights protection, and also preparing an integrated report with more comprehensive information on our sustainability initiatives. Moving forward, we will enhance employee understanding of our sustainability initiatives and raise awareness of human rights across our supply chain, improve our sustainability policy, and elevate our non-financial reporting. Additionally, to further support our key ESG objectives for FY '24, the nominating committee is contemplating including ESG-linked performance metrics in the bonuses of interim directors and certain executives, with details to be publicly announced once finalized. Finally, on March 31, 2023, the Tokyo Stock Exchange instructed listed companies to create action plans when shares trade below a P/B of 1.0x and to hold discussions with shareholders. Historical data shows a correlation between ROE and share prices from this viewpoint. Therefore, enhancing ROE will increase our share price. As mentioned previously, we are committed to raising ROE to 11% or higher and will also improve how we communicate with investors. That concludes my remarks. Thank you for your attention.

Thank you. We're now ready for the Q&A session. So, first of all, Mr. Watanabe from Daiwa Securities.

I am Watanabe from Daiwa Securities. I'm referring to Page 7, and that is to do with your shareholders' return. So the 33% plus, I think, is the payout ratio that you're indicating. May I take it that this is your target? Also, at the same time, regarding the capital policy upon this guidance provided from the TSE, is there any kind of changes?

So you have quickly identified although we had roughly indicated this number. As a result of the benefits that would be canceled that have been provided to the shareholders, we thought that some retail shareholders may decide to part ways with our shares. Although the amount we spent on this shareholders benefit will be allocated, the cost will be allocated to the payout of the dividend. If we can achieve ¥400 billion of net income, I think it would require us to increase the dividend significantly. So we hope we will be able to pay out more than what we have indicated as a target. Therefore, we hope that it will be above 33%. I thought you could perceive it to be 33% plus.

SMBC Nikko Securities, Muraki-san.

JPY330 billion this year and ¥400 billion next year; this profit forecast gives us some sense of ease. But inflation and banking prices, how does it impact the banking business for ORIX, both in Japan and the United States? On Page 8, you're saying that the PE will be mostly focused in the domestic market, and some asset management acquisition may happen overseas. I think that is a policy that you're indicating. On Page 10, there are many keywords, cost increase, procurement environment worsening, and also credit tightening. There are so many different keywords here. My question really is, in the existing business, what are the concerns about exposures for specific businesses, what kind of scenarios do you need to get ready for? And carve-out, as well as the investment into NPL or equity or credit, could these be opportunities for risk? And how do you see those opportunities?

First, as for Japan, we now have a new governor of BOJ, but the policy will remain the same; that is my expectation. The interest rate for Japan may increase slightly, but we believe that this is going to be manageable. As far as Japan is concerned, we will not be changing our policy very much. In other words, we'll be investing in new projects actively. Also, overseas investors are still planning to invest newly in Japan as well. Therefore, we want to promote capital recycling actively. So I have no significant concerns for the Japanese market. As for the U.S., that would be the biggest concern. Last year, the situation became tighter in terms of new investment from October and November. In other words, we have been very careful in selecting new projects. Going from over ¥700 million in FY '22, we had secured a profit of over ¥400 million, which was fine. However, if we want to increase it to $700 million or $800 million, then it would be too risky, especially for U.S. private credit. As the interest rate increases, the risk in implementing loans is high. Therefore, we have slowed down the entire process. For FY '24, the contribution to profit is only about $400 million maximum. Land for doubtful debt will have to be increased or considered to be increased as well. If bank loans are stopped or slow down, nonbanks like us can continue to lend money, but target companies will face financial challenges, which means we cannot speak to those targets. Thus, we must continue to be cautious. The contribution of profit from the U.S. is going to be quite small; that is how we have planned the numbers. However, if banks stop lending and regional banks stop lending, we expect banks to sell assets, and asset sales will increase. What could happen is, as we saw in the case of aircraft and ships, banks started selling aircraft and ships portfolios about two years ago, and we purchased them on a discount basis. We have increased our exposure in aircraft and ships. For example, the average coupon is LIBOR plus 350, and the loan-to-value is 50%, for example. So these purchases of loans are quite safe. We now have many opportunities like that. We expect ORIX USA to go through a similar process. Heavy asset financing against those market opportunities will offer us to purchase assets depending on the content, we may consider purchasing. Of course, we must keep loan-to-value low and pricing aligned with our expectations. Now we have opportunities to be selective; hence we anticipate such opportunities.

You just mentioned that funding costs will have to be taken into account. Finally, how much profit or revenue can we generate from each deal?

While it's not entirely reliable but as of recently, I think 600 or 700 deals will definitely appear. Thus, we believe that this is another type of opportunity available to us. In terms of scenarios for this year centered around Japan, we will be building good assets and promoting sales based out of Japan. As for the U.S.A., the asset management business is currently the focus. However, in the U.S. market, some asset managers are already struggling, meaning this will push prices down. Hence, at lower prices, we should be able to purchase. Therefore, private credit deals will appear, as I have previously mentioned. So based on this assumption for the second half of this fiscal year as well as the next fiscal year, we will continue to deploy our business. I hope that answers your question.

So from Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.

And the first question that I'd like to ask is regarding the business in the United States. I want you to answer in more specific terms. I know that you are remaining cautious on commercial properties in real estate assets, but could you share how much exposure you may have directly? Also, I would like to ask you, as you look into the details by segments, it looks as if the environment and energy business may not be particularly good due to seasonal reasons, winter, in other words. Additionally, regarding Robeco in Europe, is the acquisition cost rising due to interest rate hikes? That was my assumption or imagination. And so it also applies in the United States. There are many negative factors to examine. Therefore, if you were to dedicate more effort in the next year, what do you think about developing this business?

You have asked me a lot of questions. If you could refer to Page 35, ORIX USA credit, real estate, PE segment profit assets breakdown. Real estate assets are mostly affordable housing. We do have commercial real estate, but the loan-to-value is quite low. Therefore, we are mostly participating in the syndication. In terms of the value, ¥3,350 million is saved in real estate; however, out of that, more than $2 billion is housing related. Hence, we are not impacted very much. As to the remaining ¥1 billion, NXT’s syndication, we are participating via NXT syndication. Regarding the appropriations for loan losses, we have not reserved any amounts yet, but we remain cautious. As for credit, they are all private credit; there are maybe two to three deals that may aggravate, which may, of course, raise the cost of credit, which is why we are adding reserves. For private equity, the amount is relatively small. However, for these, we will continue to operate the business. The operation has not deteriorated yet, but as the cost of borrowing is rising, we need to manage this closely. Regarding Robeco, it goes without saying that as of now, AUM is indeed on the decline. We are, however, making a positive profit from Transtrend and have brought in some partners, Robeco and Harbor Capital. We have these major subsidiaries. Transtrend is focused on commodities; thus, they have been posting record highs, and we should be able to do the same this year as well. Whereas, Boston Partners have not performed very well in the past regarding value focus, but value investments are currently gaining traction. Therefore, we expect to perform better. Gravis Capital is struggling, but we intend to change the active ETF. AUM is trending upwards. From the latter half of this year, we hope to generate positive results. Regarding mutual funds, Robeco is also committing to active funds, and a private credit fund is also being formulated. Thus, we do not expect significant underperformance. Overall, we believe it is on an upward trend. And what was the other question? Is that regarding energy and environment?

If I may add, this is Yano. Regarding the environment and energy business, just as you pointed out, there are seasonal factors, especially in India, that may significantly affect our businesses. However, in the domestic market, the solar power business faced some snow that negatively affected it, leading us to conduct construction work without overstretching ourselves. As a result, we decided to impair some amounts; although it is not significant, it is prudent. We expect recovery in the environment and energy segment in a very short time.

As for Elawan, electricity prices are rising; therefore, earnings are on the trend of improvement.

Yes, for sure. This is Yano again. I think Tsujino-san, you are inquiring about the quarterly trend, and there were changes noted as negative factors. However, generally, Elawan has maintained a positive trend. What was the other question? I believe I have answered all the questions.

UBS Securities, Okada-san.

This is Okada from UBS Securities. I'm looking at Page 11, March '25 consolidated results forecast. The profit plan was actually revised downward. However, the domestic non-financial and overseas segments, the profit plan was increased. If possible, could you please discuss the forecast of that plan and the background behind the increase in profit, which segments are strong, and so forth?

For the FY '25 March numbers, you will see one number actually, but simply speaking, I could say that overseas, environment and energy and aircraft and ships are expected to grow. Excellent ships, this is mostly aircraft, including Avolon. Going forward, we anticipate some movements around narrow-body and also the new models of aircraft will be introduced. There will be cycles. Moreover, Japanese investors are receiving a lot of inquiries; therefore, we believe we can expect strong growth. This is our plan. As for OCU and OCE, in FY '24, that assumption is hardly any growth. But this is for the U.S. Once recovery happens, it will occur quickly. Therefore, around FY '25, we expect new investments to occur, especially in the United States. As for '25 March, private equity assets that we own will be sold in '24 and '25 gradually, which is also the background for this number. I hope this answers your question.

Just one follow-up question. The overseas energy segment forecast was revised upwards. What is the background of this? Is it energy prices, or is it because of the asset building on your side?

As far as Elawan is concerned, at the beginning of the fiscal year, we basically decided to own 100%. By doing so, we removed partners, which gives us a higher degree of freedom. The solar power and wind farms developed by Elawan can be turned into funds, and we can incorporate third-party money, allowing us to increase this. Many projects are in place. Pension funds and ESG investments are keen to increase, hence we can promote investments actively. However, interest rates are rising, and construction costs are also up. So we have to carefully analyze and find deals where we can achieve arbitrage and capital gain. If that is the case, we will actively pursue those deals. Regarding Greenko, there is hydropower, hydrogen, as well as ammonia; these will be developed around Greenko, and this is all brownfield. We believe these projects can start contributing to profit from FY '25; that is the assumption underlying this number.

From JPMorgan, we have Sato-san asking the questions.

I am from JPMorgan Securities. My name is Sato. I'd like to ask a question referring to Page 47 of the deck, which deals with capital usage. The ratio of long-term employed capital was 91%. Has it brought about any changes or will there be any changes in the future? I know that you are remaining cautious on risk taking, but risk capital may increase. However, shareholders' equity and capital from the accounting perspective, as the interest rate hikes create an embedded value, even if it were kind of added.

From an accounting perspective, it could turn negative. Also, at the same time, it might bring about some negative repercussions. Thus, we may use some of the retained earnings; this could affect a situation where the employed capital ratio may go beyond 91%. If that starts impacting capital management, we will have to slow down some of the new investments' execution. To be very frank with you, we do not foresee any major risk that is outside of our assumptions. However, as we have been saying, our equity ratio of 22% to 23% may reach 25%. We need to think about what we regard as appropriate equity ratios. Currently, we have no issues with bank borrowing. However, what concerns me is euro-denominated or U.S. dollar-denominated funding, whether it will proceed smoothly as it has in the past. We have to take that into consideration. We need to execute capital recycling efforts, and there's no way we can build up our assets as we have done so. Currently, about ¥11 trillion, and considering the total of ¥14 trillion or so, and the PVR is about 1.5x, we may have to consider third-party allotment. Unless we reach that extent within the ¥12 trillion of assets, we will enhance profitability and maintain the debt ratio. This is our basic policy. Depending on the project, it may bring about further aggravation, but I don't foresee it happening. I hope this answers your question.

Listening to you just now, at the end of the day, I know that you will try to strike that balance by referring to different numbers. However, in thinking about the capital regarding risk management, I think comes first. On the other hand, you might increase your retained earnings, which may put pressure on the payout. That may be a last resort strategy.

That is true, but everything is interrelated. Thus, I cannot provide a straightforward answer. However, we need to refer to ROE because if we can elevate it to the level of 11%, we may have to exit that asset to bring it up to 11%. By increasing the retained earnings, ROE would lower. For this reason, we have to strike the right balance. If any new deals and good projects arise, there could be cases where share repurchase may occur. Nevertheless, we are attempting to achieve what we intended. This is our plan regarding retained earnings.

Citigroup Securities, Mr. Niwa, please.

Yes, this is Niwa. Can you hear me?

Yes, we can hear you.

This is not about the earnings but more about the long term. In March 2030, your target profit level of ¥600 billion is the ultimate target, and I believe ¥400 billion is just a milestone. That was my understanding. Although there are some environmental factors at play, you might struggle to achieve ¥400 billion, which is just a milestone. Is ¥600 billion still your long-term target? I understand that overseas may be a growth factor, but are you going to revise this downward, maintain the original target, or is it too early to say?

To be honest, I don't think this is the right time to talk about that right now. 2030 is seven years away; I'll be gone by then. In other words, the next generation of leaders will have to make that commitment. I don't want to leave behind a wrong legacy. Thus, I won't say the wrong thing. Right now, we are opportunistic in participating in various segments. We are not necessarily successful at the board. Generally speaking, we aim to maintain growth. Compared to 10 years ago, we have grown a lot, and we want to maintain this trend going forward. Currently, environment and energy, overseas market, and asset management are our focuses. We want to grow them. However, several years down the line, we may prioritize different segments or areas as they may emerge, and we want to capture opportunities in a timely manner. Our aim for ¥400 billion is just a milestone for us, and if possible, we want to achieve ¥600 billion. We're not a trading company; hence, it's tough to declare we can easily achieve ¥1 trillion, but ¥600 billion is definitely within our sight. We have not revised that downward.

It is almost time for us to conclude this session. It looks as if there are no more questions; we would like to conclude today's conference. I would like to invite Mr. Inoue to provide us with the closing remarks.

Because of COVID, this is the fourth time we have conducted this briefing session via this teleconference format. In the future, we would very much like to hold a session in person. I’m sure we’ll be receiving much tougher questions if we were to meet you in person, but still, we look forward to seeing you then.

With this, we would like to conclude today's briefing session. Thank you for your participation. You may now disconnect. Thank you so much.