Earnings Call Transcript - IX Q4 2024

Operator, Operator

It’s time to begin the meeting. Thank you for joining us for this conference of ORIX Corporation’s for annual results for the consolidated fiscal year ended March 31, 2024. My name is Hitomaro Yano from the Investor Relations and Sustainability Department. I will be the master of ceremony today. Thank you. The attendees at today’s conference are Mr. Inoue, member of the Board of Directors, Executive Officer, President and Chief Executive Officer, and also Mr. Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we would like to request all the participants to make sure that any mobile phone or other communication devices are either turned off or kept a bit far away from the phone in order to prevent interference. We will first hear from Mr. Yamamoto, and then we will have a presentation by Mr. Inoue followed by a Q&A session. The whole program should take approximately one hour. Mr. Yamamoto, the floor is yours.

Kazuki Yamamoto, Operating Officer

I'm Kazuki Yamamoto, Operating Officer in charge of Corporate Planning and IR department. I'd like to utilize the deck in front of you to provide you with FY 2024 March end full year earnings briefing. So please turn to Page 2. The right-hand side of Page 2 shows our record high profit for the year FY 2024 March end, with net income of ¥346.1 billion. This is a year-on-year increase of ¥55.8 billion, up 19%. ROE rose to 9.2%. Now quarterly trends in net income are shown on the right. Q4 net income was ¥126.9 billion, which is ORIX's highest quarterly net profit figure to date, even higher than in the fiscal year 2022 March end when we reported profit by investment gains from sales associated with the domestic PE investment. Please turn to Page 3. Segment profit rose 22% year-over-year to ¥494.2 billion. As shown in the right-hand quarterly graph, FY 2024 March ended particularly strong as we initially forecasted. In other words, we maintained a consistent uptrend in base profits and investment gains over the fiscal year as a result. Next, please look at the full year graph on the left-hand side. Base profits were up 14% year-over-year to ¥367.6 billion, representing a new record high. Profit recovery in the facility operations and the concession business, due to higher inbound tourism as well as growth in investment income in the insurance segment were key reasons behind this growth in base profit. Likely investment gains were also up 54% year-over-year to ¥126.5 billion, exceeding the average of ¥100 billion we've maintained over the past five years, thanks to ongoing capital recycling in our asset portfolio, including real estate and domestic PE businesses. Note that from the fourth quarter, we have retroactively restated both base profits and investment gains as we reclassified earnings from investments in affiliates to either equity method investments or goodwill, depending on the type of asset. Next, please turn to Pages 4 and 5 for the breakdown of segment profits and segment assets. Detailed information can be found further back in the presentation from Page 20 onward, which I encourage you to refer to after this overview. First, the Corporate Financial Services and Maintenance Leasing segment profits were up ¥6.2 billion to ¥81.2 billion. In Corporate Financial Services, profits rose as fee businesses and M&A brokerage businesses contributed significantly to profits. In the auto unit, strong rental demand and high used car prices aided the business in achieving its third consecutive year of record-high profits. Segment assets increased by ¥38.3 billion to ¥1.5523 trillion, driven by asset growth in the Corporate Financial Services unit that undertook various financing deals while carefully selecting new business. Assets also grew in the auto unit due to rental car fleet replacements. Next is the Real Estate segment. Segment profits rose ¥14.3 billion to ¥65.8 billion. Here, investments in facility operations saw profit rise, driven by increased demand from inbound tourism that led to strong earnings at hotels and inns. Additionally, we booked gains on the sale of a large property in Q3. In fact, the unit secured profits in line with the previous fiscal year, aided by robust sales from high-margin conducts. Segment assets increased, though we remain selective and continue to invest in the facilities and develop new logistics properties. Daikyo assets also increased by ¥59.1 billion compared to March 2023, primarily due to acquiring prime locations for large-scale developments. We execute this segment based on a model of acquiring promising properties and monetizing them after enhancing their value. Next, the PE investment and Concession segment saw profits jump by ¥40.5 billion to ¥43.4 billion. Although ORIX booked costs associated with the financial stake in Toshiba, we observed significant contributions from two PE industries, including Primagest in the second half, and base profits from DHC acquired last year led to impressive growth. The Concession unit returned to profit on a full-year basis for the first time since the pandemic, aided by increased earnings from stronger inbound tourism. Segment assets rose by ¥167.4 billion year-on-year, compared to the end of March 2023, although they increased due to the ¥200 billion stake in Toshiba. Several exits from industries occurred as well. The Environment Energy segment saw profits decrease 9% year-on-year to ¥29.9 billion. Despite quarterly fluctuations, our domestic business maintained profitability in line with the previous year, although overseas profits dipped due to elevated euro interest rates and the absence of prior year's investment gains. However, electricity sales increased from steady capacity expansion at Elawan. Segment assets were up ¥73.4 billion compared to March FY 2023, primarily due to forex changes. Both the real estate investment and concession segments, along with the environment and energy segments, remain below ¥1 trillion in assets as we maintain a balance between our various business areas. Insurance segment assets grew 11% year-on-year to ¥70 billion, with profits driven by a decrease in corporate-related payout expenses compared to the prior year and growth in investment income aided by yen depreciation and high interest rates. Insurance premium income is also steadily rising, with whole life insurance being marketed more aggressively. Segment assets increased by ¥258.9 billion versus the end of FY 2023, reflecting the impact of forex changes and growth in investment securities. Banking credit profits increased by ¥59.1 billion to ¥96.7 billion. In the credit business, ORIX sold 66% of shares to NTT DOCOMO, resulting in investment gains of ¥57 billion. In banking, real estate investment loans experienced growth in interest income due to higher long-term interest rates, while only marginal increases in deposit-related costs helped profits grow year-on-year. Higher trust fees, stemming from ORIX Bank's efforts to boost trust assets, followed suit. Segment assets rose by ¥34.2 billion, reflecting higher lending at ORIX Bank in the merchant banking unit. Based on our ownership stake, ORIX Credit is now considered an affiliate rather than a consolidated subsidiary. Total assets for banking, credit, and insurance segments are about ¥5 trillion, accounting for 37% of ORIX’s total assets. We continue to manage this ratio carefully, being cognizant of the quality of banking and insurance-related assets and overall balance for the firm. Next is the Aircraft and Ships segment, where profits rose 44% year-on-year to ¥26.8 billion. In aircraft leasing, passenger demand in the U.S. and Europe hit record highs. Recovery in airline earnings and limited aircraft supply increased both leasing income and gains from aircraft sales, resulting in higher profits year-on-year. In the Ships business, profits aligned with our targets, but were lower year-on-year due to proactive sales of owned vessels a year earlier when prices were favorable. In February, we acquired Santoku Senpaku, which will begin contributing to profits in FY 2025 March on a 3-month lag. At Avolon, rising hedging costs stemmed from elevated U.S. dollar interest rates, while the rebound in passenger demand bolstered lease revenues, allowing for profitability at last on a yearly basis post-pandemic. Segment assets increased by ¥315.5 billion versus the end of FY 2023, exceeding slightly more than ¥1 trillion, reflecting aircraft purchases and leases in addition to Santoku Senpaku, which holds 67 vessels as a consolidated subsidiary. ORIX USA segment profit declined by 65% year-on-year to ¥17.3 billion due to booking losses from an investee and preventative allowances for impairments, reflecting a conservative outlook amid long-term inflation and high interest rates. The resultant segment loss was ¥10.5 billion for Q4 alone. Segment assets rose by ¥74.3 billion, primarily driven by forex impact, but installment assets, excluding FX effects, fell by ¥17.2 billion year-on-year. ORIX Europe segment profit witnessed a 30% decline to ¥28.6 billion. In FY 2023 March and 2022 March, OCU booked approximately ¥10 billion in performance fees, but this substantially declined in FY 2024 March, along with higher currency hedging costs from rising interest rates resulting in lower profits year-on-year. The core asset management business retained assets of €324 billion, a new record high at the end of FY 2024 March, supported by strong equity markets and management fees. Segment assets remained practically unchanged when excluding the effects of yen depreciation. Lastly, the Asia and Australia segment saw profits decrease by 2% year-on-year to ¥34.3 billion—profits remained stable year-on-year, bolstered by growth in leasing and lending assets across South Korea, Australia, India, and others from new executions, alongside gains from the sale of an investee during Q4. Segment assets increased by ¥192.4 billion, spurred by favorable new lease executions within ASEAN countries and India, as well as forex changes. We continue to remain cautious on investments in Greater China. The Aircraft and Ships and the U.S., Europe and Asia segments jointly account for 22% of segment profits and 34% of segment assets. We will persist in closely monitoring economic and financial trends in each country. This concludes my explanation about FY '24 March full year results. Next, we would like to hand over to our CEO, Mr. Inoue.

Makoto Inoue, CEO

Good afternoon. This is ORIX CEO, Makoto Inoue. Let me begin from Page 6. For 2024 March end, ORIX achieved pretax profits of ¥470 billion, along with a 19% net income increase to ¥346.1 billion. This accomplishment represents 105% of our announced net income target. EPS was ¥299. In line with our policy of paying dividends per share of either 33% of net income or last year's EPS of ¥85.6, whichever is higher, we will pay a full-year dividend per share of ¥98.6 for the March end of 2024. We paid an interim dividend of ¥42.8 per share, making the year-end dividend ¥55.8 per share. ROE for FY 2024 March end was 9.2%. Now please turn to Pages 7 and 8. FY 2025 March end is the final year of the 3-year midterm outlook we introduced 3 years ago. Initially, we forecasted net income of ¥440 billion for the final year, subsequently revised downward to ¥400 billion last fiscal year, based on market conditions at the time. However, today we target a net income of ¥390 billion for FY 2025 March end. This translates to an ROE of 9.6%. Improving ROE remains a major challenge for ORIX. Unfortunately, I must ask for your patience for another year to achieve our goal of exceeding 10% ROE and reaching a net income target of ¥390 billion, which is only 4.7% year-over-year growth for FY March end 2025. Now please turn to Page 9, where I'll outline the reasons for our revised profit target from ¥400 billion down to ¥390 billion. First, we expect a longer recovery timeline for ORIX USA earnings due to persistent high credit costs and continued elevated interest rates as inflation remains high. The second reason is the MICE-IR project, which has begun earnestly, resulting in capital outflows that won't yield profits for some time alongside upfront cost outlays. Lastly, we face visibility challenges caused by political divisions from international conflicts, prolonged economic sluggishness in China, and Japan's diminishing global position due to historical yen depreciation and rising prices impacting the economy. Therefore, we decided on a conservative target of ¥390 billion for the coming fiscal year. However, this is merely a minimum target, and internally we aim to exceed ¥400 billion net profit. Now, please turn to Page 10, where I will discuss measures to reach the net profit goal of ¥390 billion later. I would like to announce a dividend policy for FY March 2025, intending to pay a dividend equivalent to 39% of net income or equal to the FY 2024 March dividend of ¥98.6, whichever is higher. As before, we set a share buyback program of ¥50 billion, leading to an EPS of ¥341 and an EPS of ¥133.2 for the full year. Including the share buyback, combined, ORIX's total shareholders return aims to reach 51.8%. Now please turn to Pages 11 and 12. Unfortunately, S&P recently announced its decision to downgrade ORIX from A minus to BBB plus. Though maintaining high levels of profitability, S&P found it challenging to uphold an A minus rating on ORIX due to our diversified portfolio, including operating assets and investments, and the pace of our capital recycling program. Moody's and Fitch continue with A equivalent ratings, while R&I and JCR maintain AA equivalent ratings and a stable outlook. We will continue our dialogue with the rating agencies to ensure they provide an objective and fair evaluation of our businesses. Please note that the S&P downgrade does not impact ORIX's capital and financial policies. Now, turning to Pages 12 and 13, ORIX Group holds assets worth ¥16 trillion, with shareholders' equity of ¥4 trillion. Due to accounting requirements, non-recourse loans in industries, third-party capital, and accounts are considered off-balance sheet but are still held on ORIX's balance sheet. With our diverse investment style, each M&A execution has expanded goodwill and intangibles. In FY 2025 March end, our ROE target sits at 9.6%. However, our intangible assets average around ¥1 trillion yearly; thus, we believe return on tangible equity (ROTE)—net income divided by shareholders' equity excluding goodwill and intangible assets—serves as an effective measurement for ORIX's business nature and actual profitability. Notably, ORIX's ROTE trends around 13%, and moving forward, we will disclose ROTE alongside ROE. Moreover, an important aspect of enhancing corporate value is EPS. EPS was ¥246 in FY 2023 March end, dropping to ¥199 in FY 2024 March, while we target ¥341 in FY 2025 March end. We aim to bolster EPS under our PV ratio, focusing on enhancing shareholder value. Now please refer to Pages 14 to 16, where we target FY 2025 March pretax profits of ¥553.7 billion, a 7.81% increase year-on-year. I'll delineate this by finance, operation, and investment categories. The finance category includes ORIX Life, ORIX Bank, recent installment loans, and the main businesses within the Corporate Financial Services segment, ORIX USA, and overseas leasing operations. We anticipate mild increases in yen interest rates within Japan, aiding improvements in financing income, asset management yields, and leasing spreads. In ORIX Bank, we aim to strategically bolster both ROA and ROE through expansions in merchant banking and private banking in addition to commercial banking. In our Insurance segment, we expect growth in embedded value driven by enhancements in asset management yield. Regarding ORIX USA, we assume high interest rates will endure, expecting a continued rise in credit cost burdens. However, the strength of the multifamily agency and non-agency lending segment—ORIX USA's strong suit—should contribute positively to earnings this fiscal year. We hope to witness improvements in credit spreads during the latter half of this year from anticipated future rate cuts. However, until actual rate cuts are implemented, we must remain wary of the potential credit cost increases. We plan to cautiously manage the OCU portfolio going forward. In high-growth markets like Australia, Indonesia, and India, we plan to bolster our financial portfolio. For finance category segments, we target a pretax profits increase of around ¥45 billion, following the gain from the sale of ORIX Credit. I will now explain the operational category, expecting a year-on-year pretax profit increase of approximately ¥18 billion, covering facility operations in Inns and Hotels in the Real Estate segment, condo developments, and the sales of Daikyo within the auto-leasing business. In ships, while our primary focus was on ship financing and sales, the Santoku Senpaku acquisition allows us to transition fully into marine transport, freight management, ship charters, and coastal operations. Furthermore, we plan to ramp up investment in eco-ships, rendering our ships business even more sustainable. In addition to ORIX Aviation and Avolon's aircraft leasing business, we are positioned to benefit from increased movement of people and products across the aircraft and ship industries. Through Investments, we plan to identify solutions in operations, financing, and investment, striving to grow this into a core business for the ORIX Group. At NXT Capital in the U.S. and Robeco in the Netherlands, we seek methods to expand our asset management operations. The competitive landscape requires us to explore how to optimally leverage third-party capital, a critical area for ORIX to address. Investments are scaling up, particularly in carve-outs, surfacing numerous opportunities ahead. We believe there are limits to ORIX's achievements when solely relying on our capital for acquisitions. The transition toward an asset management model remains a vital medium-term vision for ORIX. Our strengths lie in our expertise managing various tangible assets and financing capabilities. We aim to swiftly grow our current ¥60 trillion level of AUM to ¥100 trillion. Our investment policy remains unchanged: we will not confine ourselves to a specific industry but will diligently evaluate profitability and liquidity to secure advantageous deals that utilize the strengths of the ORIX Group network. We engage in diverse fields such as private equity carve-outs, succession deals, and venture capital. Our foundational principle in portfolio management remains centered on capital recycling. The Kansai Airport concession business, our joint venture with VINCI Group, stands ready to gain from earnings expansions fueled by inbound tourism, especially with the 2025 Osaka Expo on the horizon. In FY 2024 March, ORIX achieved ¥150 billion in capital gains from aircraft and ships, real estate, and PE ventures. Overall, this represented ¥520 billion with our originally invested capital. New investments totaled ¥620 billion. For FY 2025 March, we plan to persist in our capital recycling program. The pipeline for new investments, both domestically and internationally, is robust, and we intend to adhere to our cautious business strategy, which carefully weighs profitability, liquidity, and exit opportunities when making investment choices. This fiscal year, we expect global conflicts to escalate, fueled by increasing nationalism and economic divisions. The results of the November U.S. Presidential elections present risks of intensifying global uncertainty, which we must contemplate in various areas. In Japan, yen depreciation and rising prices remain unresolved, which undermines the economic value and position on the global stage, necessitating careful evaluation of the Group's future trajectory. Nevertheless, we have no intention to alter our core strategy: first, investing in domestic industries; second, executing investments aimed at problem-solving; and finally, accelerating the globalization of ORIX Group while expanding our asset management strategy. We plan to sustain this direction during this and the next fiscal year. FY 2025 marks the 60th anniversary of ORIX Group's founding. Despite experiencing ups and downs, we have succeeded in maintaining an overall growth trajectory. Our shareholders' and stakeholders’ unwavering support has been integral to our ability to return to a growth pathway within just two years post-pandemic, ultimately announcing record high profits this fiscal year. Please turn to Page 18. For ORIX Group's 60th anniversary, we aspire to foster a sense of unity and amplify our corporate value as a global entity by accelerating the adoption of the ORIX Group purpose and culture, as announced during the FY 2023 March results briefing. That concludes my remarks. Thank you very much for your kind attention.

Operator, Operator

We would like to move on to the Q&A session now. So Mr. Sato from JPMorgan will begin. Thank you, Sato-san from JPMorgan, please start asking your question.

Koki Sato, Analyst

Hello, can you hear me now?

Operator, Operator

Yes, we can.

Koki Sato, Analyst

I am sorry for this. I am Sato from JPMorgan, hello. I have two questions, and I will ask one at a time. Firstly, on Page 15, you explained the prerequisites for coming up with a target for this year. In the area of finance, you are considering a profit increase of 40%. That seems quite significant given your business model. Could you explain the backdrop to this? Simultaneously, I found the headquarter and managerial expense of ¥75 billion to be relatively high. Could you please elaborate on these numbers and the reasoning behind them?

Makoto Inoue, CEO

Let me explain my perspective on your question. Firstly, regarding the headquarters and administrative expenses. This consists of ¥45 billion related to interest payments and ¥30 billion to SG&A. These are the major items rolled into our headquarters and administrative expenses and have been trending around this level for some time now; it doesn’t reflect a significant increase on our part. As for the growth area, I'd like to hand this over to Yamamoto-san for further elaboration.

Kazuki Yamamoto, Operating Officer

In terms of the finance segment—financial businesses and insurance, as well as in the U.S.—we have been selectively choosing our business deals, and we are beginning to see some recovery. We had accounted for some negatives last year, and that’s why we anticipate a substantial recovery this year, particularly in the United States.

Koki Sato, Analyst

Your qualitative explanation presented some caution during this briefing session. However, you do expect normalization within the businesses, and that is reflected in the numbers, correct?

Makoto Inoue, CEO

The ¥148.2 billion in other profits includes sales of a credit company, totaling about ¥51 billion, representing a capital gain. Hence, while the percentage indeed seems modest, the business flow from financials projects ¥198 billion should be achieved: chiefly from insurance, banks, and collectively considering other financial sectors. Regarding the U.S., we did make provisions for anticipated credit cost increases by the end of March 2024. Thus, we believe we are nearing the peak level there. While the numbers may not see drastic growth, the credit costs have reached a plateau.

Koki Sato, Analyst

For my second question, still on Page 15 concerning PE investment, you predict significant growth in capital gains, referenced on Page 12. Last year, there was a valuation loss of ¥150 billion due to impairment losses. This year, you project between ¥150 billion to ¥200 billion in expectations, compared to just ¥100 billion on average per year over the past years. Can we expect capital gains to substantially surpass the usual average of ¥100 billion, establishing a new standard?

Makoto Inoue, CEO

While we previously averaged ¥100 billion in capital gains annually, this year was higher due to the sales of the credit business. Although we segment these figures, that ¥150 billion includes those sales. Excluding this, we project gains roughly around ¥100 billion, aligning with our previous expectations.

Koki Sato, Analyst

I'm very sorry to ask this differently, but you predict capital gains between ¥150 billion to ¥200 billion moving forward, correct? Is this sustainable for the next fiscal period and beyond?

Makoto Inoue, CEO

That is indeed possible; it could be sustainable, but it largely hinges on the quality of available deals. We are currently exploring various opportunities, including in PE and real estate investments. Therefore, we have a certain buffer in place, though on average, our user expectations remain around that ¥100 billion mark.

Koki Sato, Analyst

Thank you. That will be all for me.

Operator, Operator

Daiwa Securities, Watanabe, please ask your question.

Kazuki Watanabe, Analyst

Yes, this is Watanabe from Daiwa Securities. I have two questions. My first question is about profit targets. This being the last year of your midterm plan, what profit growth do you plan for FY 2026 March end and beyond? I understand you want to focus on ROTE and EPS as KPIs. However, will your KPIs change moving forward?

Makoto Inoue, CEO

For FY 2025 March end, the current situation stands as follows. While considerations are ongoing regarding the next three-year midterm plan beyond FY 2026 March end, we acknowledge your expectations. However, deciding upon this plan will be a complex matter. Internally, among the Board of Directors, we are deliberating the future steps. To be candid, we aim for growth exceeding 10%, and this must align with the market conditions.

Koki Sato, Analyst

Regarding ROTE and EPS, will there be a change in focus on different KPIs moving forward?

Makoto Inoue, CEO

ROA, ROE, and also considering ROTE may be another angle worth exploring. While many companies emphasize the return on tangible assets, others may not. Given our frequent investments in data-rich and intangible asset companies, we will maintain ROE, but ROTE might be necessary for consideration as well. Our intention is not to clutter our KPI menu, but exploring ROA, ROE, ROTE, and EPS will guide our understanding of the company's true status as well.

Koki Sato, Analyst

I understand. Thank you. For my second question, can you discuss the heightened payout ratio of 39%? It was previously at 33%, and the change comes alongside the abolishment of the shareholder benefit. What motivated this increase?

Makoto Inoue, CEO

The reason is straightforward: we want our investors to be content.

Koki Sato, Analyst

The prime market's average payout ratio hovers around 37%. Why not elevate to 39%?

Makoto Inoue, CEO

While we've fielded requests for a 40% payout ratio, that wasn't feasible. Thus, we established 39%—a number that conveys our intent and seeks your understanding. Predicting future market conditions isn't straightforward, yet we strive for consistent growth with a capital foundation of around ¥4 trillion. A low payout ratio would not be beneficial and could disappoint investors. Moreover, we've ceased the shareholder benefits starting from FY 2024 March end, aiming to provide some additional returns to our shareholders.

Koki Sato, Analyst

Thank you very much for that clarity.

Operator, Operator

Next, we have Sasaki-san from Nomura Securities. Please go ahead with your questions.

Futoshi Sasaki, Analyst

I am Sasaki from Nomura Securities. Hello. I have two questions. My first question concerns hedging costs. In the presentation, you detailed those costs. When drawing up your plan, how did you account for hedging costs? When making overseas investments, do you hedge? Will the hedging policy undergo any changes as you pursue globalization?

Makoto Inoue, CEO

To begin, as ORIX started as a yen-based company, our overseas investments were conducted on a yen-denominated basis. Presently, the dollar-denominated outstanding balance of investments is ¥2.8 trillion, with an overall overseas investment value of ¥3.5 trillion across both dollar and euro denominations. This raises the question: is hedging advantageous given a ¥160 exchange rate? We've questioned our need to hedge assets conservatively under those circumstances. While we will continue to adjust forex-related amounts on our balance sheet, our approach may become more flexible moving forward. This will affect the anticipated hedging costs in the forecast for FY 2025, targeting net profits of ¥390 billion.

Futoshi Sasaki, Analyst

Should we anticipate changes in your operations based on what you've shared?

Makoto Inoue, CEO

Certainly. If there are excesses beyond the planned targets, those will be reflected in the operational changes.

Futoshi Sasaki, Analyst

You've reiterated risks you foresee. What elements allow you to exceed your profit expectations or business opportunities, or which risks may diminish?

Makoto Inoue, CEO

Indeed, looking at the past 24 months, our focus was essentially domestic. We've encountered challenges overseas. Should interest rates in the U.S. decline, arbitrage opportunities facilitate potential profit increases. The timing for Fed interest rate reductions doesn't appear imminent, yet considering a potential return of Trump as President may shift that dynamic positively. Conversely, if Trump returns, Europe may face additional struggles. Should domestic operations maintain their current levels, the U.S. can act as an additional profit contributor. Geopolitical volatility remains a risk, complicating projections.

Futoshi Sasaki, Analyst

Is targeting ¥390 billion essentially treating it as a minimum target?

Makoto Inoue, CEO

I hesitate to box myself in with a definitive statement, but that's the basic approach considering all risks involved.

Operator, Operator

Next, we have SMBC Nikko Securities, Muraki-san. Please proceed with your query.

Masao Muraki, Analyst

On Page 11, you indicate financial leverage. On Pages 11 and 12, you present ROE figures. In what ways can ROE be increased? Reaching 10% isn't overly difficult, but if leverage remains static, it seems a model adjustment is necessary to grow profit. You stated a shift toward asset management to boost third-party capital is the trend you want to pursue. What initiatives do you have in asset management to increase ROE this fiscal year?

Makoto Inoue, CEO

In the U.S., we plan to launch new funds while growing the fund's AUM. We are working to identify new investors, particularly in regions like the Middle East, who wish to invest with ORIX. Our objective remains to increase AUM and asset management fees over time, although compared to direct principal investments, the fee profitability potential of joint capital investments is lower. Thus, a dual strategy needs to be adopted.

Masao Muraki, Analyst

Given some deals may yield larger sizes, do you foresee an increase in joint investments?

Makoto Inoue, CEO

Yes, that's correct! Including the Middle East, we anticipate third-party investments in ORIX. For instance, in a co-investment fund model, we might control 51% while inviting 49% investments. From an accounting perspective, even at this minority stake, it still entirely consolidates onto our balance sheet—impacting ROA/ROE perceptions. Therefore, we need to clarify this position externally while continuing to pursue ROTE to reflect the efficient management of ORIX overall.

Masao Muraki, Analyst

Understood, thank you very much.

Operator, Operator

Next, we have Otsuka-san from SBI Securities. Please go ahead.

Wataru Otsuka, Analyst

I’m Otsuka from SBI Securities. I hope you can hear my voice.

Operator, Operator

Yes, we can, thank you.

Wataru Otsuka, Analyst

On Page 15, I want to ask about PE investment. The figures indicated suggest a ¥420 billion uplift. The breakdown you provided hints at growth in operations, but could you clarify which areas are likely to see significant operational growth?

Makoto Inoue, CEO

Kansai Airport's contribution, which kicks in this year, could add around ¥10 billion, and we expect this to double. Additionally, within the aircraft business, we are poised to conduct significant acquisition activities while selling aircraft to Japanese entities, thus facilitating ship fleet replacements. Consequently, we believe it’s feasible to achieve that ¥40 billion profit mark based on these developments.

Wataru Otsuka, Analyst

To clarify, Kansai Airport falls under facility operations, correct? Does that relate to investment department operations?

Makoto Inoue, CEO

Yes, it is classified as an operational project, yet its asset holding fall under the equity method. I apologize for any confusion. The airport's operational aspect categorizes it under operational assets while maintaining an equity hold. I hope that clarifies your inquiry.

Operator, Operator

Thank you very much. We are nearly out of time, so the next question will be the last. Citigroup Securities, Niwa-san, please ask your question.

Koichi Niwa, Analyst

Thank you. This is Niwa from Citi. I hope you can hear my voice.

Operator, Operator

Yes, we can hear you.

Koichi Niwa, Analyst

I would like to discuss the exit and pipeline evaluation. You indicated ¥1.2 trillion in this latest report; the last report was about ¥1.5 trillion. You mentioned investment was successful last year. Regarding the pipeline, is it reasonable to anticipate something like ¥2 trillion, or is that unrealistic?

Makoto Inoue, CEO

In terms of our pipeline, we have identified more than ¥2 trillion, including both strong and weak investments. However, when we sift through it selectively, we encounter another number. When we execute acquisitions, we need to assess if we can enhance value, recycle capital, and liquidate properly. Although we see plenty of inquiries, competition is intensifying, and we will maintain discipline on purchase prices. As exemplified by the Santoku Senpaku deal, which initially seemed implausible, we ultimately secured it, bearing favorable pricing in mind. The pipeline is substantial, containing multiple entries, yet we need to be discerning as the competition grows while our fundamental approach remains unchanged.

Koichi Niwa, Analyst

On the topic of lifestyle and bank low profitability businesses, you suggested a slight upside to the Japanese economy, so is the interpretation correct that facility expansion may hit a ceiling? Conversely, should the monetary policy change, do you regard holding these as core business segments, assuming profitability might shift?

Makoto Inoue, CEO

Indeed, the profitability of life insurance and banking segments remain low. We're holding these teams accountable for enhancing profitability. If interest rates rise, the embedded value of our life insurance entities will increase, offering favorable prices for potential sales. We won't hesitate to sell if the prices meet our expectations. For the banking sector, we could only consider a sale at roughly the PBR of 0.7 times. We're not in a situation where desperation exists, so we want to ensure if we sell, it’s at the right value. To reiterate, monitoring what we do with our bank and life insurance branches remains paramount for ORIX's strategy.

Koichi Niwa, Analyst

Thank you for the thorough details. Maximizing overall value seems of paramount importance to ORIX, correct?

Makoto Inoue, CEO

Exactly; at this stage, considering a PBR of 0.5 or 0.6 in these entities, it's not profitable for us to sell unless compelling offers arise. Our current aim includes exceeding 9% ROE for ORIX, edging towards our target above 10%. Maximizing value is indeed our current focus and direction. I trust my message is clear.

Operator, Operator

Thank you for the questions. We will now conclude the Q&A session, and I would like to ask Mr. Inoue to provide us with the closing remarks.

Makoto Inoue, CEO

For FY 2024 March end, we have seen impressive results as announced; however, we still see room for improvement regarding our expectations of ¥390 billion, ¥400 billion, and ROE exceeding 10%-11% that we must meet. It will require diligent effort to achieve these objectives. We will continue to seek your support. Alongside this, we are enhancing our payout ratios to align better with your expectations, directed toward managing this business effectively moving forward. Thank you for your continued support.

Operator, Operator

With that, I would like to conclude our FY 2024 March end briefing session. Thank you very much for your participation. Please disconnect.