Earnings Call Transcript - IX Q2 2026

Sachiko Nakane, Facilitator

Now that is time. I would like to begin the ORIX Corporation's second quarter financial results briefing for fiscal year ending in March 2026. Thank you for joining us. I'll be the facilitator. I'm from IR, Sustainability Promotion Department. My name is Nakane. We have 2 speakers today. We have a Director, Representative Executive Officer, President and COO, Hidetake Takahashi as well as our Operating Officer, Head of IR, Kazuki Yamamoto. First half will be presented by Takahashi. Second half by Yamamoto then we'll have a Q&A session. We are planning to have 60 minutes for this briefing session. Takahashi-san?

Hidetake Takahashi, COO

Thank you very much for taking your time out of your busy schedule to attend the ORIX Group's financial results briefing today. I'm Hidetake Takahashi, ORIX Group's COO. I'll explain the key initiatives as the business progresses toward achieving the long-term vision announced in May this year, which is making impacts through alternative investments and operation and business solutions as well as management indicators of 15% ROE and JPY 1 trillion in net profit for the fiscal year ending March 2035. Following this, Kazuki Yamamoto, who is in charge of Management Planning and IR, will explain the second quarter financial results for the fiscal year ending March 2026. If you could please refer to Page 3. There are 5 points that I'd like to convey today. First, I'd like to discuss the revision to our earnings forecast. Our first half, all 3 categories, finance, operation, and investment performed well and capital recycling is also progressing smoothly. As a result, we decided to raise the net profit forecast from the previous JPY 380 billion to JPY 440 billion. We also revised the full-year dividend forecast per share from JPY 132.13 based on a net profit of JPY 380 billion to JPY 153.67. Additionally, as we look forward to optimizing our portfolio and capital structure and considering the completion of the sale of Greenko announced yesterday, we have decided to increase the amount of our share buyback program from JPY 100 billion to JPY 150 billion, and Kazuki Yamamoto will explain the details shortly. The second point is the establishment of a PE fund together with the Qatar Investment Authority, which was announced yesterday. ORIX is strengthening our asset management function to help us achieve the long-term vision. As a milestone, we aim to achieve 11% ROE and JPY 100 trillion in AUM by the fiscal year ending in March 2028. Since the establishment of a PE Investment segment in 2012, we have executed over 30 investments in Japan, all utilizing our own balance sheet. We have reached an agreement with the Qatar Investment Authority to establish a fund aimed at investing in Japanese companies. For the first time, we will incorporate third-party funds into this business. Through this fund, which has a total scale of USD 2.5 billion, we will expand our investments, including those in a large-scale project. ORIX will contribute 60% and QIA, Qatar Investment Authority, 40%. The main investment target will be business section type deals, privatization of listed companies, and carve-outs with an expected investment size of JPY 30 billion or larger in EV projects. We intend to continue strengthening our asset management function, including our business segments. The third point is our future business expansion with Hilco Global. In September, we acquired a U.S. company, Hilco, a subsidiary. Hilco provides services globally such as evaluation and disposal of mobile assets like inventory and equipment, intangible assets like IP and trademarks, and ABL asset-backed lending. ORIX USA will position Hilco as a platform for the creation of an ABL investment fund, strengthening its origination capability, and expanding the private credit business. Similar to the domestic PE fund mentioned earlier, this is a strategic investment to aid the expansion of our asset management business. Furthermore, Hilco's asset evaluation services are a countercyclical business. In an uncertain economic environment, we believe we have acquired a fee-based business at a good time. Hilco's evaluation capability and asset disposal expertise will be utilized in assessing risk as we expand credit globally. The fourth point, the Osaka IR project, integrated resort. We aim to open the IR in Osaka City around the fall of 2030, and construction began in April of this year. In September, some changes were made to the existing plan. Primarily, these involve higher costs after taking inflation into account from currently JPY 1.27 trillion to approximately JPY 1.51 trillion. After carefully reviewing our business income and expenditure plan, we believe that the higher cost will not significantly impact the project profitability. The Osaka-Kansai Expo concluded successfully in October. We were able to confirm growing inbound demand in the Osaka, Kansai area with many foreign tourists visiting Osaka, which is also the birthplace of ORIX. In the Kansai area, we are engaged in the development and operation of our sales office which offers financial services, Kansai 3 airports, and the Umekita project. We also operate businesses such as hotels and inns, and we will maximize synergies by adding Osaka IR to these resources. Finally, my last point is portfolio optimization. As I discussed in May, the most important measures to achieve our ROE target are disciplined portfolio management, sophisticated risk management, and new business creation—those 3 points. We have begun utilizing a dashboard to visualize the status of our business portfolio in finer detail and are progressing with our portfolio optimization. We have sold all or partial shares in Greenko Energy, ORIX Credit, Ormat, Nissay Leasing, Canara Robeco, and other businesses. We will continue to review our portfolio based on our 4 criteria: growth potential, capital efficiency, impact on credit rating, and group synergies. We will continue to revisit our portfolio. Furthermore, in July, ORIX Bank paid a dividend of JPY 30 billion to the ORIX Group. We will also optimize the capital scale of other group companies, not just the bank. As of the end of September 2025, the AUM became JPY 88 trillion, bringing us one step closer to the medium-term target of JPY 100 trillion. We will also proceed with the transition to an asset-light portfolio. Out of the plan that we disclosed in the mid- to long-term corporate value enhancement is in ROE, in order to further improve the efficiency of capital use. All the measures that I mentioned that we carried out in the last 6 months are a good sign that we are making the right strides toward achieving a mid-term business plan. We will continue to work toward achieving this plan and to achieve the long-term vision through various tactics and measures. That's all from me. Next, Yamamoto will explain the most recent financial results.

Kazuki Yamamoto, Operating Officer, Head of IR

Please go to Page 5 of the presentation material. First, I would like to talk about the first half results and an update to our full-year forecast. Net income for the first half was JPY 271.1 billion, a record high for the first half year, and an increase of JPY 88.2 billion, up 48% compared to the same period last year. In the first half, we achieved a healthy initial full-year net income forecast, and ROE reached an annualized figure of 12.7%. This is a result of a contribution from gains on sales and valuation gains from large exit deals such as Greenko Energy. As explained by our President, our forecast reflects our efforts to enhance profitability through portfolio optimization, which is beginning to bear results. We raised our full-year profit forecast upward, as our COO, Takahashi explained, and the full-year profit forecast is JPY 440 billion, expanding the share buyback program to JPY 150 billion. Our full-year ROE is forecasted at 10.3%, an increase of 1.3 percentage points compared to the same period last year. The second point is the 3 categories: earning and capital recycling. In the first half, all 3 categories — finance, operation, and investment booked profit growth year-on-year, and ROE improved. Even excluding a gain on the sales of Greenko, the first half ROE was healthy at around 10%, exceeding the previous fiscal year's level of 8.8%. The third point is shareholder returns. In line with the upward revision of the net income forecast, should ORIX achieve a full fiscal year net income target of JPY 440 billion, the DPS forecast will increase from JPY 132.13 to JPY 153.67. The share buyback program also expanded from JPY 100 billion to JPY 150 billion. At the end of October, JPY 78 billion has already been repurchased, representing a 78% progress rate towards our previous JPY 100 billion. Page 6. Here, I'll explain the details of the revision of our earnings forecast and expansion of shareholder returns mentioned earlier. Based on the stellar performance in the first half and the current business environment, we have revised our forecast for second half earnings; specifically, we raised the pretax profit forecast from JPY 540 billion to JPY 640 billion and the net income forecast from JPY 380 billion to JPY 440 billion. This represents an increase of JPY 100 billion and JPY 60 billion, respectively. As a result, we forecast a full-year EPS of JPY 394. ROE will improve to 10.3%. Outlined earlier, we raised our full-year dividend forecast accordingly and expanded the share buyback program. Total shareholder return should reach JPY 320.7 billion. The total payout ratio is expected to rise from 65% to 73%. While improving ROE and maintaining a healthy D/E ratio, ORIX also aims to expand AUM. As our COO, Takahashi mentioned, total group AUM reached JPY 88 trillion at the end of the first half. In addition to growth in traditional asset AUM such as Robeco, which has performed very well, ORIX aims to expand its AUM in an asset-light fashion, not overly reliant on our balance sheet. Please go to Page 7. We also announced a joint PE fund with QIA. The page shows the first half results for the 3 categories, preceded by both previous year and current year segment profit, pretax profit, and net income shown at the bottom. Pretax profit for the first half was JPY 391.5 billion, an increase of JPY 134.5 billion compared to the same period last year. Like the net income, it reached a record high. We implemented capital recycling not only in the investment category, which achieved a large exit but also in finance and operation categories. All 3 categories achieved profit growth year-on-year. This page shows the first half results for the previous current year, 3 categories: investment on top to bottom. The dark blue represents finance. Our profit increased by 8% year-on-year to JPY 99.6 billion, a progress rate of 55% versus the full-year target. Gross investment income was strong in the Insurance segment. Asia, Australia saw a steady increase in financial income from leases and loans. In addition, as part of portfolio optimization, contributions from the sales of ORIX Asset Management and Loan Services Corporation, Nissay Lease shares also contributed to profit gain. Next, the light blue part represents operation. Profit increased by 9% year-on-year to JPY 114.9 billion, with a progress rate of 48% versus our forecast, which we raised by JPY 10 billion. Business driven by inbound tourism demand such as Kansai Airports and real estate operation at Inns and hotels continue to perform well. The strong used car market helped the auto business with Rentec capturing the demand for Windows 11 replacement PCs. Both businesses saw a growth increase in profits. The Environment and Energy Segment, the gain on the sales of Zeeklite, which operates the waste and final disposal side, also lost profit. The pink represents investment. Profit was up sharply, 117% year-on-year to JPY 194.9 billion. The sales of Hotel Universal Port VITA in the first quarter and Greenko in the second quarter, as well as a gain from the sales of shares of NYSE-listed renewable energy company, Ormat, contributed to this increase. Additionally, the performance of domestic PE investments such as Toshiba was strong, leading to higher profit contributions. As a result, segment profit, pretax profit, and net income all increased by 42%, 52%, and 48%, respectively. Now on this page, I explain ROE, shareholders' equity for each of the 3 categories. You see on the right, at the end of the previous year, shareholders' equity was JPY 4.1 trillion, while annualized ROE was 8.8%. For the first half this year, these figures were JPY 4.4 trillion and JPY 12.7 trillion, respectively. Please look at the graph on the right. The dark blue ROE of finance improved from 8.3% at the end of the previous period to 8.5%. The allocated capital finance is JPY 1.8 trillion. Now, the light blue ROE in the operation category improved from 13.5% to 14% due to the sale of subsidiaries and other factors. Allocated capital here is JPY 1.3 trillion. Then the pink ROE in the investment category rose significantly from 7.4% to 16.6% due to sales of Greenko and hotels, with the allocated capital of JPY 1.6 trillion. The total allocated capital for 3 categories is JPY 4.7 trillion, which is slightly different from the shareholders' equity amount of JPY 4.4 trillion on a consolidated balance sheet. As explained last time, this is because the allocated capital is a management accounting figure. The next page shows ROA and assets for the 3 categories. With the start of portfolio optimization, total asset ROA improved by 1.03% from the end of the previous period to 3.15%. The ROA for the investment category improved significantly for the reason that I just outlined. ROA for both finance and operation categories also improved in the first half. This page shows the progress of capital recycling. In the first half, we recorded capital gains of JPY 157.1 billion. We had cash inflows from sales amounting to JPY 500 billion. Major asset sales included Greenko Energy, which resulted in cash in of JPY 178.9 billion, with capital gain of JPY 95 billion, and Hotel Universal Port VITA, cash in about JPY 34 billion, with capital gain of JPY 21.9 billion. We also sold ORIX Asset Management and Loan Services Group and Nissay Lease in the Corporate Finance Business segment as well, and Zeeklite in the Environment and Energy segment. In all 3 categories of finance, operation, and investment, we flexibly recycled capital to optimize our portfolio while balancing new investment. Cash outflows from new investments amounted to JPY 470 billion. The main new investments made in the first half were Hilco Global, JPY 776 million, and convertible bonds for the next-generation energy company, AM Green. Hilco Global is a leading asset appraisal company in the United States and a platform for asset-based lending. Additionally, we made a PE investment in specialty capsule toy retailer, LULUARQ, as well as new purchases of aircraft where prices are favorable and new investments in logistics. We also made additional investments in the Osaka Integrated Resort project as planned. We continue to have a promising investment pipeline for the future and will carefully select projects. For the fiscal year '26, we forecast realization and new investments of between JPY 600 billion to JPY 800 billion. By flexibly recycling capital in all 3 categories in a well-balanced manner, we will, as Mr. Takahashi explained, work to optimize our portfolio. Page 11 is about our financial strategy. This shows the important balance sheet items and the breakdown on the left and the key indicators from the perspective of financial soundness on the right. In the table on the left, you can see total assets increased by JPY 738 billion compared to the end of FY '25, with half of about JPY 600 billion amount, excluding FX effects due to U.S.-related factors. The remainder was primarily caused by asset growth in the Insurance segment, which saw strong sales of single premium whole life insurance, JPY 131.4 billion, and at ORIX Bank, which increased the execution of new real estate investment loans by JPY 109 billion. Next, short-term and long-term debt deposit increased by JPY 416.9 billion, mainly due to higher deposits at ORIX Bank and issuance of corporate bonds. We continue to diversify our funding methods and currencies and have realized competitive funding cost levels through this while maintaining a stable ratio of long-term debt. Insurance contract liabilities and policyholder reserves decreased by JPY 223.2 billion, mainly due to the lower liabilities from the higher discount rate for insurance contract liabilities. This was offset by the increase in single premium insurance policyholder accounts. Of the JPY 351.9 billion increase in shareholders' equity in the row below, JPY 223.2 billion is due to the lower insurance contract liabilities and policyholder accounts explained earlier. Other factors contributed to the increase in shareholders' equity are mainly net income. Debt-to-equity ratio remained steady at 1.5x. Looking at the graph on the right, we maintained the capital utilization rate at an appropriate level in the 90% range as a result of the capital recycling in the first half. This has helped us sustain A-level credit ratings at global agencies. While yen funding rates are gradually increasing, including those for bank group deposits, our overseas currency-based funding costs, mostly U.S. dollars, remain in a downtrend. We are working to reduce our cost of capital by keeping competitive A-level credit ratings and utilizing diversified funding sources. Pages 12 and 13 are segment summaries. Please refer to the slides from Pages 16 onwards for details. Links to supplementary financial materials and the integrated report are included in these slides for your reference. First, segment profits for the Corporate Financial Services and Maintenance Leasing segment increased by JPY 13.1 billion or 29% to JPY 58.6 billion. Corporate Financial Services posted significant growth, thanks to the sale of ORIX Asset Management and Loan Services Corporation and Nissay Lease in Q2. Growth in various fee revenues was also positive. The auto business continued to enjoy robust used car sales, achieving a record high profit for the first half. Rentec's profit grew on higher rentals from ICT equipment inventories fueled by demand for Windows 11 PC replacement. Although assets for Auto and Rentec increased due to new executions in car leasing and PC rentals, the sale of ORIX Asset Management and Loan Services Corporation reduced the total segment assets by JPY 29.2 billion versus the previous year, totaling JPY 1,855.3 billion. Second, the Real Estate segment's profit decreased by JPY 1.3 billion or 3% year-on-year to JPY 49.1 billion. The RE Investment and Facilities Operation units saw a significant increase in profits from hotel and inn operations in addition to the sale of Universal Port VITA. However, profits were down slightly year-on-year due to the previous year's gain from the sale of Hundred Circus. Meanwhile, the profits at Daikyo units increased on the sale of rental apartments, properties, and other factors. Real Estate segment assets remained flat compared to the end of the previous fiscal year. In addition, in response to the expanding investor demand, we increased the asset size of our first equipment — equity commitment type real estate value-add fund established in January this year from JPY 100 billion to JPY 120 billion. Please refer to Page 18 of the Real Estate presentation. The third is PE Investment and Concession. Segment profit increased by JPY 9.7 billion or 21% year-on-year to JPY 56.7 billion. The PE Investment unit enjoyed steady performance from the investees such as Toshiba and DHC, resulting in higher profits even after considering the previous year's gain. Regarding the domestic PE fund information with the Qatar Investment Authority mentioned by Takahashi, you'll find the details on Page 20. The Concession unit saw a significant increase in profits, as Kansai Airports continued to perform well. Please refer to Page 45 for related data, such as passenger numbers. The segment assets for PE Investment and Concession increased by JPY 31.9 billion versus the end of fiscal year '25, totaling JPY 1.548 trillion. The main reason was the new investment in LULUARQ and increased profit contribution from the investees, leading to an increase in equity method. Fourth, the Environment and Energy segment profit increased by JPY 117.3 billion year-on-year to JPY 119.7 billion. Profit was bolstered by the sale of Greenko Energy, which resulted in gains on sale and valuation gains as well as gains from the sale of shares of Ormat. Additionally, the domestic electricity retail business enjoyed both higher sales volume and unit price. Segment assets decreased by JPY 38.8 billion from the previous year-end to JPY 977.4 billion because of the progress in capital recycling. The fifth, the Insurance segment profit increased by JPY 10 billion or 24% to JPY 50.9 billion. Continuing the recent trend, asset income rose sharply on growth in investment assets in an effort to diversify portfolio management. In terms of business, both the single premium wholesale life insurance Moonshot and revamped income protection insurance Keep Up launched this June are selling well. Insurance segment assets increased by JPY 131.4 billion versus the end of FY '25 to JPY 3,140.6 billion. Sixth, the Banking and Credit segment profit decreased by JPY 600 million or 5% year-on-year to JPY 12.5 billion. Amid rising interest rates, while deposit procurement costs are increasing, the asset management yield is also improving. The main reason for the decrease versus the first half FY '25 is the recording of losses from the sale of public and corporate bonds in Q2 to improve bond portfolio quality. Banking and Credit segment assets increased by JPY 109 billion versus the end of FY '25 to JPY 3,253.6 billion. Both investment in real estate loans and the merchant banking business saw an increase in new executions. As explained in Q1, ORIX Bank paid the parent group a dividend of JPY 30 billion in July to optimize the capital size. Seventh, the Aircraft and Ships segment profit decreased by JPY 10.1 billion or 31% year-on-year to JPY 22 billion. Aircraft leasing profit for the first half was roughly in line with the previous year. But with lease rates remaining high, the number of owned aircraft increased, and the business climate as a whole is positive. Avolon profit rose year-on-year, partly due to contributions from Castlelake, which was acquired in January this year. Profits in the ships unit were lower year-on-year due to the absence of higher charter fees from certain contracts last year, reflecting the impact of marine shipping prices. Segment assets increased by JPY 24.1 billion versus the end of FY '25 to JPY 1,256.1 billion, owing to aircraft purchases. Segment number 8 is ORIX USA. ORIX USA segment profit decreased by JPY 18.1 billion year-on-year, resulting in a loss of JPY 1.8 billion. Compared to the same period last year, the main reasons for the substantial profit decline were the absence of reversals of provisions recorded in last year, a decrease in capital gains, and the booking of credit cost and impairment in the first half this year. The credit losses and impairments stem from real estate financing originated during the period of monetary easing during the pandemic and legacy assets from before that. The extended period of elevated interest rate inflation and uncertain economic conditions in the U.S. negatively impacted these assets. More recently, based on our disciplined investment policy, we have conservatively chosen deals and thus have no exposure to the First Brands Group or Tricolor Holdings. Please see Pages 30, 31, and 32 in this presentation for more details. Excluding the Hilco Global segment, assets in U.S. dollars shrunk from JPY 12.2 billion at the end of March '23 to JPY 11.3 billion at the end of September 2025. This is a decline of 7.4% in the past 2.5 years. With the addition of Hilco as a subsidiary, we will review the ORIX USA business portfolio and continue to responsibly manage the portfolio while controlling asset size. Uncertainty persists in the operating environment for ORIX USA. We are conservatively reviewing our full fiscal year forecast for ORIX USA compared to the initial plan. Next is ORIX Europe. Segment profit increased by JPY 1.3 billion or 6% year-on-year to JPY 22.1 billion. Net fund inflows grew, thanks to favorable global capital markets, and AUM rose to a record high of EUR 425 billion. This resulted in higher profits even after adjusting for performance fees booked in the same period last year. ORIX Europe assets were flat year-on-year, excluding the currency impacts. Finally, Asia and Australia. Segment profit increased by JPY 600 million or 3% year-on-year to JPY 19.7 billion. In Greater China, profit contributions from investees decreased versus the same period last year. We maintained a constrained investment stance and reduced our exposure in both leases and investments. Meanwhile, financial income increased in countries such as Singapore, India, and Australia, resulting in higher profits. Segment assets increased by JPY 15.5 billion versus the end of fiscal year '25 to JPY 1,741.1 billion. The main reason was the FX impact, but the breakdown shows a decrease in assets in the Greater China region, while there was an increase in Australia and India. That concludes each segment's explanation. Next is Page 14. Finally, regarding shareholder returns and enhancing corporate value, we added JPY 50 billion to the JPY 100 billion share buyback program announced in May for the new total of JPY 150 billion. Regarding the dividends, the full-year DPS forecast was raised from the previous JPY 132.13 to JPY 153.67, a 39% increase over our full-year net income target. Compared to FY '25, a DPS, we expect an increase of JPY 33.66 per share or 28%. Since announcing the 3-year plan and long-term vision in May, CEO Inoue and COO Takahashi have been engaged in direct dialogue with institutional investors, both in Japan and overseas. We also plan to provide access to outside directors and are providing opportunities to have direct dialogues from outside directors and the investors. We continue to enhance corporate value by increasing opportunities for direct dialogue with the market regarding our most important management KPI, ROE improvement. EPS growth, which is also important, and capital cost are also key areas of discussion. This concludes my remarks. Thank you for your attention.

Sachiko Nakane, Facilitator

Now we would like to move on to the Q&A session. First, from SMBC Nikko Securities, Muraki Masao.

Masao Muraki, Analyst

Muraki from SMBC Nikko. I'd like to learn more about your joint investment with QIA. What prompted the establishment of this joint private equity venture? Previously, you managed everything independently and the asset was valued at JPY 1 trillion. Do you anticipate that domestically in private equity, you'll move away from your existing structure and see a reduction in your balance sheet? The 60% stake in this new private equity partnership with QIA will be reflected in net additions on the balance sheet, correct? Will this allow you to increase investments in larger projects? What impact do you expect this to have on your overall balance?

Hidetake Takahashi, COO

This is Takahashi speaking. Masao-san, let me take this one. We established a joint private equity partnership after nearly two years of negotiations with QIA. We have been in touch with various sovereign funds, and QIA showed particular interest in investing in Japan. We explored potential areas for collaboration and determined that domestic private equity investments would be a suitable focus. We spent considerable time discussing investment criteria and policies, ensuring we found the right fit and chemistry. That's how we reached the agreement to create the partnership. Regarding the management of our existing portfolio while focusing on the fund with QIA, that is not our plan. As we noted in the press release, our main strategy is to concentrate on enterprises with market capitalizations of JPY 30 billion or more, utilizing the joint fund with QIA. The JPY 2.5 billion to JPY 370 billion operates on an unleveraged basis, meaning we will finance it at 1x or 2x. The newspaper suggests that through borrowing, we could achieve a JPY 1 trillion investment capacity, but it's uncertain if we will reach that target. Investments below JPY 30 billion in market cap will continue to be managed within our balance sheet. We currently have JPY 2.5 billion available, with a commitment of 60%. We do not expect a significant increase in the asset balance but aim to maintain the current JPY 1 trillion balance going forward. So far, we have held a majority share in our target companies to keep them under consolidated accounting for profit benefits. However, for this fund, we will use fund accounting to reflect fair market value. The method for integrating profit into our business will differ from our previous approach of financing entirely on our own.

Masao Muraki, Analyst

I understand. Is this part of your ROE enhancement effort?

Hidetake Takahashi, COO

Yes, that too, plus goodwill and also the recognition of intangible asset will be different, too. There will also be an impact on the credit rating. That will be eased, too, I think. In the last 10 years, we've built up a track record in the private equity area. That's one thing. Reflecting the market trend and movements, we are seeing more and more good quality pipelines in front of us. Building that into our balance sheet, which would impact us in various areas. At this timing, we wanted to leverage our third-party funds to capture larger, better quality deals. This would benefit our long-term growth. That's our strategy.

Operator, Operator

Next from JPMorgan Securities, Sato-san.

Koki Sato, Analyst

This is Sato speaking from JPMorgan. About the ROE target and your commitment to that and also net assets, the balance between the two, I'd like to confirm one thing. Now the JPY 50 billion increase in buyback, I think there are different reasons. But the net profit increase, most of it will be used for shareholder return, I understand. At the same time, there is a big impact of the interest rate. Regarding this insurance with the change in the discount rate, about JPY 200 billion in the 6 months, I think that the profit has expanded. In comparison to the medium-term business plan, the JPY 20 billion or higher needs to be enhanced so that you can achieve the ROE target. Depending on the macro environment, noncash or cash in without that, there could be some higher risks. In that sense, in achieving the ROE to maintain the probability of achieving that, what kind of initiatives are you thinking of taking?

Sachiko Nakane, Facilitator

Thank you for your questions. Yamamoto will respond to your question.

Kazuki Yamamoto, Operating Officer, Head of IR

As you pointed out correctly, for this fiscal year, the higher interest rates and the discount, as well as the insurance accounts, the net asset increase was a little more than JPY 200 billion. To achieve the 11% ROE, of course, the numerator will not naturally increase. We have to take some measures or initiatives that will be necessary. U.S. accounting and Japanese accounting have some gaps. With the shareholders and ORIX, we are considering the various initiatives to be taken. In achieving the targets of the medium term in the final year, we will be implementing initiatives. As for the interest rate, I think we have come to an end of the cycle and this would stabilize. This increase is not going to continue from now on. In other words, if the interest rate comes down, the denominator will be less. That's something we will monitor closely and communicate to you. We understand the potential impact on achieving the ROE.

Sachiko Nakane, Facilitator

Next, Daiwa Securities, Watanabe-san.

Kazuki Watanabe, Analyst

This is Watanabe from Daiwa. Regarding this year's lending forecast and next year's profit forecast, you mentioned a reduction in provisions for the Bank and the U.S. business. Do you have any outlook for trends in the second half? For this fiscal year, it seems you will be generating significant profit. What is your outlook for next year? Will it be challenging, or will you maintain your current pace? What are your thoughts on next year?

Kazuki Yamamoto, Operating Officer, Head of IR

Regarding ORIX Bank and our debt and liability portfolios, we expect a reversal related to liability insurance. The various portfolios we manage for better liquidity, combined with the rising interest rates, will lead to increased losses. We plan to actively reorganize the portfolio and may record some losses from sales while maintaining our profit momentum. In ORIX USA, we typically assess all our assets in the fourth quarter, but we are adopting a more flexible risk management approach and have decided to acknowledge some losses in the second quarter as well. You can find additional information on ORIX USA's pretax profit on Page 32. Due to the plateau in dollar interest rates and the impact of inflation on equity and real estate issues, we are facing missed opportunities for capital gains. Before COVID, we encountered a credit loss on a legacy real estate asset. Moving forward, the performance of multifamily condominiums will be influenced by rising interest rates and increasing insurance premiums that affect rents. We recognize the need for close monitoring of property management and asset oversight. We understand the potential risks on the ORIX USA side and do not expect this situation to persist. We anticipate resolving our countermeasures by the end of the second half or early next year. Now, I'll have Takahashi provide further explanation.

Hidetake Takahashi, COO

Regarding the next year's forecast, let me give some brief thoughts. Usually, income gains, for example, from real estate or private equities exit, those gains from sales, we have been recording pretty much on every fiscal year; it's recurring gain. Gains from sales like divestments such as Greenko are one-off profits. The proceeds we received are the reasons we were able to do an additional share buyback. Another reason is we averaged out the EPS, and we intend to continue to increase EPS in a linear fashion. If there is surplus capital, we will use it for that. Going forward, we will aim to realize sustainable profit growth. The sales from gains, especially on a scale like this, which is almost like a one-off, would be volatile. Sometimes we do, sometimes we don't. When we have surplus, we will leverage buybacks to continue to increase our EPS linearly. I'm unsure if I'm answering your questions, but it's not that we aim to generate a certain amount of profit every single year. That's quite different from our actual business practices.

Sachiko Nakane, Facilitator

Next, Mizuho Securities, Sakamaki-san.

Naruhiko Sakamaki, Analyst

Sakamaki speaking from Mizuho. I'd like to ask some questions on the forecast for the second half. On Page 10, capital recycling forecast. For this fiscal year, JPY 200 billion or higher for capital gain. Compared with the past range, there could be some upside. For the second half, the segment profit is only JPY 200 billion. How should we understand this balance between the two? If you can explain it?

Unknown Executive, Unknown

Yes. Thank you. On Page 10, this JPY 200 billion. If I may talk about this further, as you know, usually, our capital gain is about JPY 100 billion. That's the normalized level. So the Greenko part, JPY 995 billion is added. So it's JPY 200 billion. That is on track. The real estate market is very solid, and private equity portfolio performance, as we mentioned, is good. We will invest and realize in a very flexible manner. In the second half, if you deduct that, the pretax income or revenue level — I think that's what you are referring to. We did not specify the first half and second half, but some of them were already realized in the first half, so there could be some differences. Capital gains can be considered as the income or profit in other areas. I hope that answers your question.

Sachiko Nakane, Facilitator

From Nomura Securities, Sasaki-san.

Futoshi Sasaki, Analyst

This is Sasaki from Nomura Securities. I have a question about your performance. This year's second half pretax profit forecast, the level is quite a bit declining versus the first half. So it looks like a JPY 250 billion pretax profit. This aligns with your base profit, but you also are going to record some capital gain as well, right? I was wondering if perhaps you have some significant impairment loss or some kind of negative factor that you're forecasting for the first half. Is my understanding correct? Regarding next year's business plan, I'm sure you're in the midst of discussion right now. If you can share as much as you can about next year's plan, please.

Sachiko Nakane, Facilitator

The first question will be answered by Yamamoto.

Kazuki Yamamoto, Operating Officer, Head of IR

Regarding the first point, you're correct—the base profit first half I mentioned was quite brisk. Within our base profit, we have the profit from the company we invested in. That is contributing; for example, Toshiba is performing quite well, and we have recorded gains from the divestment of Toshiba materials in their performance. For the second half, we have set that to the regular cruising speed—not buoyant. For the second half, we are expecting certain base profit plus some capital gain. It is not that we expect some one-off significant loss.

Hidetake Takahashi, COO

Let me add to that. This is a bit of a detail, but as Yamamoto mentioned, Toshiba's performance is quite good now. The divestment of Toshiba material is recorded in Toshiba's performance, and KIOXIA's share price is quite well. Base profit—our size base profit and our gain from sales and also the income from equity method affiliates are all recorded under base profit. Various onetime gains happened in the first half, and those are not necessarily recurring income we can continue to expect in the second half. That's the reason. You asked me about the second—next year plans. Actually, we will start this discussion from next—beginning of next year. What we’re sharing right now with the market is ROE of 11% by the fiscal year ending in March, but of course, we're creating bottom-up plans up to 3 years into the future. What we will discuss going forward is what went well, what didn't go well for the past year, and make a rolling update to what we established last March and this year's March to our medium-term plan. We do not expect any downward change to our initial plan; I’m sure next year will be quite positive, but segment leaders of each division will discuss the details going forward.

Futoshi Sasaki, Analyst

May I add one more thing, please?

Hidetake Takahashi, COO

Yes.

Futoshi Sasaki, Analyst

You mentioned that next year's profit can be volatile. I got the nuance in your wording. This year, 10% ROE, you need to grow the profit at a certain level. Otherwise, I don't think ROE can go up to the 10% levels. Is that okay to say that it can be volatile?

Unknown Executive, Unknown

You have a point. We need to continuously grow. Otherwise, we will never get to 11% ROE. We're not there yet. Of course, we need profit growth to get there. With the current portfolio, knowing what can be sold at what price is something that—we have a higher probability with some already in negotiation. Others are just pie in the sky. We need to make the right decision at the right timing, considering appropriate capital recycling to maximize our gains from sales. As I mentioned, this fiscal year, proceeds from Greenko are, I would say, a bit extraordinary. What we’ve discussed going forward internally is compared to this year, how much base profit can we increase. Ultimately, we would like to achieve the ROE target by 2025 that we have. That’s our grand plan.

Sachiko Nakane, Facilitator

Next from BofA Securities, Tsujino-san.

Natsumu Tsujino, Analyst

Some detailed questions about Environment and Energy. If you look at the quarterly number, JPY 117 billion segment profit. The Greenko sales gain on sales is JPY 95 billion. So the gain on securities, Ormat sales gain on sales is included, I think. We don't know how much that is. That means it is said that for JPY 15 billion, but the equity method, this is JPY 83 billion. So Ormat gains on sales and also if you deduct the JPY 95 billion, you are in red in terms of segment profit. So in the Environment and Energy segment, excluding the gains from sales of those 2, what is happening? Was there any kind of impairment? If so, what was it? What about the impairment risk of others in coming months and years?

Hidetake Takahashi, COO

Sorry, this is Takahashi responding. If I may talk about the details, the renewable energy in Japan, especially the mega-solar that is already operating, we are getting stable profit. In the Energy Business, in the previous year, there were impairment losses that led to lower depreciation and amortization while maintaining sales volume included, and this part was profitable. In Environment and Energy, the bigger part is Elawan, concerning that, it is breakeven or just slightly in red. Lower interest rates and our developing projects have started to recover. Also, on the Environment side, ORIX's Environment is a circular economy company, generating stable profit. ORIX or resources recycling, which is engaged in the interim processing, are going through the rebuilding or replacement phase. We expect some red deficit. In actual performance, they are indeed in red. However, we are not seeing signs of any major impairment loss. I do not recognize that.

Natsumu Tsujino, Analyst

Okay. So a way of thinking, if you calculate this, you are in red, as I said. So is that correct understanding?

Hidetake Takahashi, COO

Yes. We do not recognize this as a major deficit. It's really close to the breakeven level. It's a small deficit.

Sachiko Nakane, Facilitator

Now we are reaching the closing time. So we would like to take one last question from Morgan Stanley, MUFG Securities, Takemura-san.

Atsuro Takemura, Analyst

I'm Takemura from Morgan Stanley, MUFG. I have a question about some numbers. You have made a revision to the lending forecast. Page 7, bottom right, in financial, it's remaining 180.0 so no change. Were there any changes regarding the business profit, and there was an increase of JPY 10 billion? What's the reason for this investment and GreenKo of JPY 95 billion addition plus JPY 80 billion? I would like to know why you are postponing some of it, the reason for that, please share. Regarding ORIX USA, I understand that you have revised the performance forecast. How does that impact this overall segment?

Kazuki Yamamoto, Operating Officer, Head of IR

What you explained toward the end is very much a reason for that for finance and life insurance included. We did quite well in asset management. We have management income in the bank; we also recorded a loss of our debt liabilities. To improve portfolio quality and in the credit-related business, we have conservatively recorded some new losses too. Those are what's impacting this finance business. For business, many of the operating units are quite brisk. However, in ORIX USA, real estate origination, the fee environment with competitors became quite difficult. That’s impacting our profit. Regarding investment, you are correct about the JPY 95 billion addition from Greenko's divestment. It doesn't mean we put some of the sales plans for the sales to a later date. We had specific uncertainty in the fair value part about the future gains from the sales that ORIX USA is doing in the PE business. As Takahashi-san pointed out, regarding ORIX USA, we have a more conservative outlook because of this uncertainty.

Sachiko Nakane, Facilitator

Thank you very much. We would like to conclude the Q&A session. Now we'd like to have our last remarks from Takahashi.

Hidetake Takahashi, COO

As I said at the outset, there are a mixture in terms of business performance between the segments. The businesses are diversified. Also in May, we announced the strategy. We are executing that steadily in the first half. Relatively speaking, I think we kept good results. But we would like to stay focused, and we took note of what you pointed out, and we will continue to take initiatives. We consider those target numbers are not easy numbers, and also in the medium-term plan and the long-term vision, the numbers that we are committed to, we would like to make sure to try to achieve those targets. I hope you would continue to support us. Thank you very much.

Sachiko Nakane, Facilitator

With that, we'd like to conclude today's conference regarding the second quarter results. Thank you very much for your participation.