Earnings Call Transcript - IX Q2 2023

Operator, Operator

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for the second quarter consolidated financial results for the six-month period ended September 30, 2022. My name is from IR and Sustainability Promotion. Today's attendees include the Member of the Board of Directors, Representative Executive Officer, President and Chief Executive Officer, Mr. Inoue, and Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. We kindly ask participants to keep your mobile phones and other communication devices away from the telephone or on silent mode to avoid feedback. We will first hear from Mr. Yano, followed by Mr. Inoue, and then a Q&A session. The meeting is expected to last approximately one hour. At this time, I would like to turn the call over to Mr. Yano.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Good afternoon. This is Hitomaro Yano, Head of Treasury & Accounting Headquarters of ORIX. Thank you for joining us in today’s meeting despite your busy schedule. Allow me to give you a brief overview of our FY '23 March end second quarter results. I will be making use of the PowerPoint slide in explaining our overview. So please turn to Page 2 of the handout. Net income fell 17% year-over-year to ¥121.8 billion for the first half of FY '23 March end. This translates to an annualized ROE of 7.4%. Please look at the right-hand side chart that shows the quarterly trends of net income. Second quarter net income was ¥59.9 billion, which was down by just 3% quarter-on-quarter despite major changes in the macroeconomic conditions. As I explain later, the main reason for our lower profits versus the first quarter was an increase in COVID-19 related payouts for policyholders isolating at home in insurance segments. Please turn to the next page. Segment profits show you the vector. Now segment profits for ¥170 billion. Please look at the right-hand side chart that shows trends in segment profits from the prior year. Investment gains are indicated in pale blue, while base profits are indicated in blue. Base profits in dark blue were down 18% year-over-year to ¥144.8 billion. This was primarily due to sharp declines in profit at three segments which performed very well last fiscal year, namely insurance, ORIX USA, and ORIX Europe, the asset management business. Meanwhile, the Aircraft and Ships segment posted a major surge in profits driven by a recovery from COVID-19. In addition, strong performance in the environment and energy and Asia and Australia segments helped us maintain stable profits, even with more challenging macro conditions. The pale blue investment gains were down 52% year-over-year to ¥25.1 billion, due to the absence of capital gains posted from multiple PE exits at ORIX USA during the same period last year. We will continue to monitor changes in the market climate carefully to determine the optimal exit timing for each investee and not make hasty exits simply to boost short-term investment gains. Now please turn to Pages 4 and 5 that show the results by segment. The pages provide a breakdown of profits and assets by segment to give an overall picture of the current situation across all segments. Detailed explanations for segment performance can be found starting from Page 17. I'll briefly highlight some key points now. First is the Corporate Financial Services and Maintenance Leasing segment. Although profits were lower, this was due to investment gains reported in the first half of FY '22 margins, as well as related valuation gains. Excluding these one-off gains and profits from assets sold last year, segment profits were healthy. In the auto business, the strength of the used car market continues into FY '23 as of March. Additionally, the recovery in rental cars, which were affected by COVID, enables the business to maintain strong profits. Rent payments remain solid, supported by increased demand for rental products. Next is the real estate segment. Profits were down year-over-year due to multiple gains on the sales of logistics centers and other properties booked in the previous fiscal year. Gross profits were also lower year-over-year as condominium sales were skewed to the first half in FY '22 March end. However, segment profits are in line with a full year target. The occupancy rate at hotels and inns was impacted by the seventh wave of COVID cases, but have recovered after benefiting from summer travel demand. We expect further recovery from the second half aided by upbeat news, such as the start of Japan's nationwide travel subsidy campaign, the end of restrictions on the number of inbound visitors, and resumption of visa-free travel and independent tourism. Now, next is the PE Investment and Concession segment. While some industries have been impacted by changes in the macro climate, leading to mixed earnings performance at portfolio companies, the portfolio as a whole is healthy and recorded profit growth. In the concession unit, passenger numbers on both domestic and international routes are on an uptrend and losses are shrinking. We expect to see an additional recovery in international passengers following the government's decision to scrap the cap on entrance into Japan. Next is the Environment and Energy segment. Segment profits were up 11% year-on-year to ¥10 billion yen. In the Domestic Energy business, power generation from Mega solar projects increased, thanks to favorable weather, leading to higher revenue. Overseas power generation revenue was strong, aided by higher prices in the spot electricity market in some regions. Segment assets were up, but this was primarily due to changes in Forex, as I will explain later, growth in assets at all of our overseas segments can also primarily be explained by Forex effects. Next is the insurance segment, where profits were down sharply earlier due to higher COVID-19 related pandemic expenses caused by a surge in infections. Q2 coincided with the so-called Seventh Wave of COVID infections in Japan, leading to a much larger decline in profits versus Q1, which was impacted by the sixth wave. As of September 26, since payouts for in-home isolations are now limited to persons at high risk of developing complications, payout-related expenses are expected to hit bottom in the second quarter and decline from the third quarter. The number of policies in force continues to grow, and investment income is rising as a result of strong performance. Next is Banking and Credit. Banking profits were down year-over-year due to a one-time profit booked in the same period last year. Nevertheless, earnings from real estate investment loans remain solid. In Credit, segment profits are down 27% year-on-year due to aggressive ad spending to support the development of a new lending product ORIX Money. However, this is in line with our projections. Next is Aircraft and Ships, where segment profits were up ¥10.3 billion year-on-year to ¥10.6 billion. Ships posted major profit gains as the business accelerated sales of own ships in the first quarter to take advantage of high marine shipping prices. The favorable interest spread on the large tranche of ship collateralized lending, executed last year also contributed to earnings in aircraft leasing earnings on an uptrend as passenger markets, primarily in the U.S and Europe, are recovering to pre-COVID levels. Next is ORIX USA. Segment profits were ¥21.6 billion, a major decline compared to last fiscal year's record profit levels. Two major reasons were declining capital gains and lower base profits at Lument, which is involved in real estate lending. Markets have taken a decidedly cautious turn owing to inflation and rapid pace of interest rate hikes. And our business started to feel the impact on all the less capital gains and best profits both improved significantly from the first quarter to the second quarter. Please refer to Page 33 for detailed explanation. Overall, the risk of recession looms in the U.S. ORIX is diligently monitoring our portfolio, and although we have not seen any deterioration of asset quality at this time, we will remain vigilant. Next is ORIX Europe. The decline in equity markets caused AUM to fall, leading to lower profits. Fortunately, ORIX Europe has a diversified portfolio of asset managers in its roster, including our Boston partners, our investor, ESG, and growth and alternative investment-focused managers. Transtrend, a commodity trading advisor, has performed particularly well recently and that should contribute to profits through a performance fee booked at the end of December. Finally, the Asia and Australia segment. In addition to setting an affiliate in Singapore, countries in Southeast Asia are recovering from COVID closures and segment profits were up 21% year-on-year. The car leasing business in Australia and South Korea continued to be robust, which also contributed to the profit growth. This ends my comments on the first half of FY '23 March end results, and I'm pleased to have Mr. Inoue, ORIX CEO, to speak next.

Makoto Inoue, CEO

Thank you, Mr. Yano. This is Inoue from ORIX. I appreciate the introduction. I would like you to refer to Pages 6, 7, and 8, where I will explain the FY '23 margins. In the first half, profits decreased by 17% year-over-year, with net income at ¥121.8. I apologize for the repetition, but there were three main factors contributing to the profit decline. First, we recorded ¥21.2 billion in COVID-related payouts within the insurance segment. Second, ORIX USA segment profits dropped by ¥25.5 billion year-over-year due to our decision to limit new business origination in private credit and the impact of rising interest rates, which led to a decrease in agency lending transaction volumes. Additionally, we did not pursue any rushed exits from private equity. Excluding ORIX USA and the insurance segment, base profits aligned with our forecasts. Most market participants anticipate that the U.S. Federal Reserve will continue to raise interest rates. In light of this, I believe we need to carefully analyze risk before undertaking any new lending or investments, at least until the financial markets stabilize. U.S interest rate impact conditions in other countries around the world. And under these circumstances, I don't feel it is the best course of action to operate with overly optimistic goals. So for this reason, we will set our FY '23 March end full year net income target at ¥250 billion. We of course intend to exceed this target, if at all possible. Although the macro climate remains challenged worldwide, led by the United States, base profits were robust, mainly in the auto, rental, and Asia and Australia business units. Most of our excess base profits are backed by stable cash flows from our diversified portfolio businesses. In the current economic conditions, I believe it is important to maintain a strong financial base and stable operating cash flows. Our pipeline for domestic PE deals is robust. And when we consider the recovery of COVID impacted businesses and other factors, I do not see any reason to change our medium-term outlook for net income of ¥440 billion and ROE of 11.7%, which we have shared last time. I will comment on shareholders return later. Although ORIX USA’s private credit and agency lending businesses are sluggish, we plan to accelerate the shift to an asset-light business model utilizing third-party capital over the medium to long term. We look at current challenging market conditions as an opportunity to hire personnel, enhance governance and rules, and develop effective marketing to build out our asset management business. Earnings in the insurance segment were squeezed by expenses for COVID-related payouts, which totaled to ¥21.2 billion in the first half. However, from late September, eligibility requirements have changed. Now only patients that meet a certain set of conditions will be eligible to receive an insurance payout for isolating at home. Although COVID cases remain high, with several tens of thousands of persons testing positive each day nationwide, we expect the impact of COVID-related payouts to lessen considerably from the second half. Although ORIX now hosts multiple investments where returns can be generated, we're continuing our dialogue with the markets to carefully determine the best timing for our sale. Currently, based on fair value fund accounting on our PE portfolio, 18 cases in all, we estimate total unrealized gains of around ¥150 billion. So the health of the portfolio is maintained. Kansai Airport earnings are consolidated into ORIX group's accounts with a 3-month lag. We expect the easing of border restrictions to help fuel a rebound in international passenger numbers, but the full-fledged recovery in profits should be from the next year and beyond as it will depend on the return of visitors from China. These are the primary reasons why profits may be lower year-over-year for the full year of FY '23 margin. But as I discussed, we see no reason to change our FY '25 margin net income target. Now please turn to Page 9 as well as 10. We believe that an important thing for ORIX to continue stable growth is capital recycling or the establishment of a model for value creation through investment, operation, growth, and evaluation. ORIX had never been hesitant in reshuffling its portfolio or rather the company records such activities to be part of its usual business operation, and therefore, I would like this policy to remain as an important management policy going forward. From FY '14 March end through FY '22 March end, although there have been some ups and downs, ORIX has grown its net income by 2.8x. We have accomplished this by both strengthening our financial base and accelerating capital recycling to use capital efficiently and effectively. The investment and lending committee evaluates each opportunity in terms of profitability efficiency, prospects for creating value, and exit strategy to determine an entry price. ORIX's value creation model helps grow base profits and improve the quality of earnings through group-wide cooperation, including the development of sales channels at investees and assisting with business model transformation depending on the industry's needs. In addition, the application of ORIX group's governance and compliance rules helps investees realize improvement in cover value. As indicated before, returning ORIX group to an ROE of 11% or higher is one of management's highest priorities. In order to achieve this we recognize that it is vital to quantitatively grasp the balance between earnings and capital costs for each segment that comprises our business portfolio. We are moving forward with efforts to visualize our portfolio as a whole through measurement of ROIC by segment, setting work, and identifying the ROIC spread differential between these segments. ORIX's portfolio is comprised of a wide range of financial operation and investment businesses that mix pre and post-leverage figures among their assets. And there are thus a range of whacks between segments relying solely on ROA as our only management indicator is not perceived as best practice. And we believe that measuring capital efficiency by contrasting ROIC with work for each segment will lead to the appropriate evaluation of profitability. So we are currently considering how to best address ROIC and WACC for each segment. After improving the accuracy of our calculations, spreading understanding among our various business lines, and embedding their use in management processes, I would like to disclose our ROIC work guidelines when they have matured to the point where we can introduce them as a former KPI that effectively links to our strategy. Let us move on to Page 11. Many of the companies comprising ORIX's portfolio contribute to profit growth through synergies with each other. And on this page, we have outlined several examples of investments with outstanding synergies including Daikyo, Robeco, Kansai Airports, and ORIX Bank. Since ORIX first took a capital stake in Daikyo in 2005, it has supplied a wealth of expertise through its complementary management business and construction supervision division to the real estate segment, which develops commercial complexes and logistics facilities among others, it has grown to the point where it contributes around ¥20 billion in best profits annually. Robeco Group was acquired by ORIX in 2013 as the main platform for the global development of our asset management business. In the intervening years, Robeco's sustainable investment expertise has become highly regarded as ESG became a strong trend and in FY '22 March end, AUM grew to a new record of €339. Since acquisition, it has been contributing approximately ¥2 billion steadily. The company has contributed steadily between ¥25 billion to ¥45 billion or best profits each fiscal year. Robeco Group's companies also have a differentiation diversification effect, as have our capital, Boston partners, and Transtrend each have different investment strategies. Conflict airports, which manages three airports in western Japan, was launched in 2016 as Japan's first fully fledged private airport concession operator. Over the business has unfortunately been loss-making since FY '21 March end owing to the COVID-related decline in inbound travelers. Kansai International Airport is expected to return to 30% of its pre-COVID traffic levels and Itami Airport to 70%. We expect a quick return to the FY '20 March end base profit levels as we expect that was like Expo as well. We can also expect MICE synergy and others among many. ORIX Bank entered the ORIX Group in 1998 with the acquisition of Yamaichi Trust Bank and the Bank is working to strengthen the earning power through loans for investment into condominiums and merchant banking and cooperates with the corporate financial services business unit. ORIX Bank's portfolio remains healthy and overall it has nine consecutive fiscal years of achieving record profits; improving the Bank's ROA will be a key future goal. At ORIX, in addition to pure investments predicated on an eventual exit, such as logistics facilities in the real estate business and PE investments, we also develop exit strategies for group companies that we invest in for a strategic purpose. And through this, we continue to conduct capital recycling. Japan is likely to continue its policy of zero interest rates. And we must imagine the possibility that yen could slide to ¥160 by the end of the fiscal year or start of next, there is also the possibility of economic recession. On the flip side, foreign asset buyers are likely to continue to invest into Japanese assets with the weakened yen and we plan to exit real estate and PE investments at the best time under these conditions. Please turn to Page 13. ¥400 billion of execution is expected in the second half of next fiscal year for Japan PE. In addition to the mid to small sized, we are now looking at larger sizes, and we have mobilized experts for this purpose. Regarding Toshiba, since it is private, it is currently not reflected in these figures. Once negotiations are completed and we determine that execution is feasible, the number will be incorporated. Our focus will be on developing our renewable energy business mainly overseas, which we see as a promising growth area, as evidenced by the recent Inflation Reduction Act in the United States. And we are still looking for acquisition opportunities overseas. Elawan/Greenko have a rich pipeline and in addition to that, approximately $500 million additional investment is planned. Currently, the overseas renewable energy related pipeline is 19 gigawatts valued at about U.S. $19 billion. And we are moving forward with execution on these projects, while carefully monitoring business risk, profitability, and others. Within Japan, we have a logistics center pipeline of 14 projects, totaling ¥200 billion. We plan to complete these projects during the span of about 3 years from the second half of FY '23 March end through FY '24 March end beyond, and then sell them. In Aircraft leasing, we plan to purchase 20 narrow-body aircraft in light of the recovery of passenger demand for a total of US$ 1.2 billion. Although all the planes will be delivered in FY '24 March end, we plan to sell most of them to Japanese investors. Please turn to Page 14. With the resumption of inbound travel, we expect traffic at Kansai International to increase steadily. In addition, we moved ahead with the renovation of Terminal One during the slow COVID period in preparation for the upcoming Osaka Expo. For Real Estate facility operations, the increase in tourists as a result of Japan's relaxation of international border restrictions should help fuel a full-fledged recovery in earnings from the second half. From this fiscal year through the end of March FY '25, we have committed to a dividend payout ratio of 33% or a margin dividend of ¥85.6 billion for FY '22, whichever is greater. We will distribute an internal dividend of ¥42.8 billion per share for the first half of FY '23. Although we find it challenging to meet this fiscal year's net income, we anticipate that the full-year dividend will be between ¥50 and ¥85.6 billion per share. In the second half, we expect to divest some real estate and private equity investments, but we might postpone some sales if we cannot achieve our desired pricing. We will continue to monitor market conditions and foreign exchange rates. We have implemented share buybacks nearly every year since the end of March FY '17, and we have already surpassed ¥38.7 billion of the ¥50 billion buyback program for FY '23. As of the end of October, we have made progress on our ESG efforts by identifying key issues and setting sustainability goals, improving our qualitative disclosures, and conducting TCFD-based analyses. Additionally, ORIX ratings from ESG rating agencies are on the rise. We are consistently considering this trend for the four or five ESG indices in Japanese equities adopted by GPIF. We are making steady progress in achieving the seven key ESG goals we announced in November '21. And that concludes my explanation. Thank you very much for your kind attention. Now we would like to move on to the Q&A.

Operator, Operator

So the first person from Nomura Securities, Sakamaki. Please go ahead.

Naruhiko Sakamaki, Analyst

Thank you. I’m Sakamaki from Nomura Securities. So I would very much like you to entertain one question of mine. So I’m referring to Page 8. And the three segments, you show the overall outlook for the three segments for the full year. For PE and concession, you are foreseeing negative consequences. But other segments, other than the three segments if there's anything that you can share with us, as to the outlook for the whole year, I would be very grateful.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Yano, in response to your question, if the current situation continues, particularly concerning COVID, we do not expect a significant recovery, with the exception of insurance 350. We do anticipate some recovery in insurance, but that is our primary expectation for a major recovery this year. Additionally, regarding ORIX Europe and Transtrend, which will be a future business as of the end of December, we can expect to receive performance fees at a certain level. For the second half of the year, we expect profit growth compared to the first half, particularly for the Concession business. However, there's a delay of about three months in incorporating the profit.

Naruhiko Sakamaki, Analyst

Thank you very much for that, which indicates that you do not expect significant investment gains.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

We are not expecting a specific amount, but we will avoid overstretching ourselves or rushing into selling our investments just for the sake of it. However, there may be a possibility of selling some of the investments if we believe the timing is appropriate. We need to go through certain procedures and are currently in discussions. It is possible that we could sell them before the end of March, or in some cases, we might postpone it until April. We have decided not to overstretch ourselves regarding the sale of those investments.

Naruhiko Sakamaki, Analyst

Okay. Thank you very much.

Operator, Operator

Daiwa Securities, Watanabe. Please ask your question.

Kazuki Watanabe, Analyst

Yes, this is Watanabe speaking from Daiwa Securities. I have a question about exits. Well, in the beginning of the fiscal year, you said you would exit from this asset because of the weak yen. And earlier, you said you want to maintain what the domestic, but for overseas exits, what is your current approach, current stance?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

For the overseas items, we are exploring exits in some other projects. However, many of these investments are connected to Forex. Therefore, we need to consider the share price and the Forex rates of 160 and 150. Based on that, we are entering discussions about potential exits, but nothing is finalized yet. We may have more to discuss around the third quarter regarding additional exits. At this moment, I must emphasize that the situation is still very fluid, and I hope you understand that.

Kazuki Watanabe, Analyst

So in the beginning of the fiscal year, you were expecting some, you're not expecting those anymore. But if the exit is successful, that will be added on top of the ¥250 billion, is that correct?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Yes, that's correct. Due to overseas deals, we must go through a considerable process before making sales. Additionally, if we don't execute everything properly, there are antitrust laws in places like China that could pose challenges we can't predict. If the deals are completed within this fiscal year, they will count towards this year's numbers; otherwise, they will be included in next year's figures. So we can anticipate that.

Kazuki Watanabe, Analyst

I understand that. Thank you.

Operator, Operator

So from Bank of America, Sasaki, please.

Futoshi Sasaki, Analyst

Hello, I am Sasaki from Bank of America. I have a question for Mr. Inoue. In the second half of this year, I understand that you are considering various risks. However, looking at the current conditions, it's possible that macro conditions may continue into next year due to central bank policies. What are your thoughts for next year? While you may remain conservative in the second half, do you believe that business will start to recover or show signs of resilience from April of next year, considering the current state of the balance sheet? What do you feel is currently lacking?

Makoto Inoue, CEO

So at the beginning of this month, 75 basis points, the bps, interest rate was raised. And I think that there's going to be further 50 bps of interest rate rise in United States. Whether that would calm down the inflationary environment pressure, I wonder, it is very much dependent on the moves up by the U.S government. So 4.5% or 5% in terms of the official discount rate, and that will be 5% to 6% in terms of the market rate, and which means that it is several years back. So if the interest rate kind of hits the peak, and if it becomes kind of a standard, then I think the financial market will start to calm down, then I think the new lending may be kicked off, and the private equity transaction may resume. However, having said that, from January and February of next year, if the rate is going to be hiked by another 50 bps, I wonder this is going to mark the end of the interest rate hike, I wonder, who knows. So this is why we would very much like to consider what could happen in the next year outlook, in other words over the performance. But you see people would kind of panic at the time of interest rate hiking environment, and people tend to, of course, shift their investment from equity to debt. But if that kind of comes down and settles down, I think we will be able to kick off our new initiative in terms of new deals and new transactions. So which means that we could make a leap forward perhaps in the next year? Considering the impact of COVID-19, our Aircraft business could generate between ¥80 billion to ¥90 billion. If we return to normal, it could reach ¥250 billion, exceeding our expectations by ¥90 billion, resulting in a significantly different profit level. We are actively preparing for this, and we believe we should be able to meet the minimum expectations. While I understand it's premature to count on this, it's how I currently envision the situation.

Futoshi Sasaki, Analyst

Well, if that is the case, what is in your mind, ROE 11% or higher is priority that the management places you have said. But thinking about the next year, if the market does not proceed in the way that you would wish, is there going to be any kind of dynamic kind of decision?

Makoto Inoue, CEO

Well, I think we may have to correct our kind of policy, we may, but I think 11% or higher ROE can be achieved still from my perspective, and we do have an abundance of assets and also unrealized gains as well. So if we can realize these unrealized gains, I think we can still be achieving 11%. But whether we can achieve this in the next fiscal year, I think it remains uncertain still.

Futoshi Sasaki, Analyst

Okay. Thank you very much for that.

Operator, Operator

Thank you. SMBC Nikko Securities, Muraki please.

Masao Muraki, Analyst

Thank you. Six months ago at the earnings call, I would like to know what's changed, please outbid me on that? Current investments that in profits and also negotiation for sales as well as new pipeline, what kind of changes have you seen since then? PE and fund industry, we know that dry powder is preserved. But back finance for acquisition is not really abundant. And your business does not really directly compete against major PE funds. But in terms of investment and exit, what kind of environment change do we see in the last 6 months.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

For our private equity business, while I can't provide specific details, there has been no change regarding nonrecourse loans from banks. To be frank, a year or two ago, when we faced certain challenges, we utilized a nonrecourse loan, and we fully repaid all the debt, which demonstrates a strong trust in ORIX. As a result, even though we refer to it as a nonrecourse loan, the banks have confidence in ORIX and believe we will honor our commitments fully. So the financing environment hasn't really changed in that sense. As far as overseas is concerned, especially for environmental energy, project financing is no problem, but the rate is higher now. And because of the high-interest rate, we have to look at the productivity and decide which ones are doable or not. And we don't have many low spread project. So for example, IRR may be 20 to 30 basis points worse than before because of the high interest rate, but other than that, we have not really seen any major impacts. Now when it comes to the logistic facilities, ¥200 billion is within our view, and we do have a slight concern about the increasing material prices. It has started to settle down here and of course development in OI is maybe 4%. But maybe it will be 3.9, so on basis lower. Because of this and also exit in OI is supposed to be above 3%. So it has not really changed. So as far as the market environment is concerned, nothing's changed in the last 6 months except for interest rates. So we are paying close attention to that as we continue with our marketing activities. And I hope that answers your question.

Masao Muraki, Analyst

Thank you. I have a follow-up question. Earlier, you mentioned Toshiba, and our Bank was mentioned as an example in the past. While this may not be an exception, what is your perspective on projects where you cannot obtain management control? Has ORIX adjusted its approach to such projects?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

The Toshiba negotiation deadline is today. You may have seen in the news that they are having difficulties securing financing from banks. There might be a one-month extension, or they could start over; it's uncertain. Toshiba is a large company, and the amount of money needed to control it is relatively small. We view this as a straightforward investment. Essentially, we aim to assist in removing activist influence and allow the existing management to reorganize Toshiba effectively, with the goal of re-listing it in the future. Given the reassurance, we can maintain a positive outlook. However, this has not yet been discussed within the Investment Committee or the lending committee. We must make the right decision based on how the process unfolds. Toshiba is a substantial company, and its management is highly capable. As ORIX, we may not fully understand the extent of assistance we can offer. But if we get some bid rights, for example, there would be a problem with the antitrust law in China, and the permission, we will have to wait for another one or 2 years. So we have to look at all these different factors and the balance of these factors and to what extent we can implement the governance. And once a structure is satisfactory from our perspective, we may be entering. That's the position.

Masao Muraki, Analyst

Thank you. That's very clear.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Thank you for the question.

Operator, Operator

And the next is from Ms. please.

Unidentified Analyst, Analyst

Thank you for the opportunity. Earlier, you shared with us that there are a number of deals that are under negotiation. And of course, yen is weakening or weakened to that extent. So in the case of Japanese equity, for example, on a $1 basis that, of course, market capitalization has lowered and everyone's face has become pale. And for the new deals, the price has become much lower. So as a result, what do you think the attitude about the investors? Do they become even more kind of proactive in acquiring the Japanese assets? Or what do you think?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

You see, it may vary from one industry to the other. In the case of overseas, because of dollar appreciation and yen's depreciation, the investment, we're not becoming aggressive in terms of making a new investment. But in the case of alternative asset management, if there was to be some interesting deal, we do have some appetite, but the multiple hasn't really lowered. So we have to wait a little more, even if the interest rate goes up.

Unidentified Analyst, Analyst

The liquidity of the money is remaining abundant. And therefore, in the overseas location, the purchasing or the acquisition of the assets is not underway. But boutique for example, the Rebecca the acquisition in a very small way. But it is about US$10 million or US$20 million or so. So, a major kind of investment is only considered in the renewable energy arena and because of course, the electricity cost is rising still.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

So, therefore, rather than M&A or acquisition, we may consider perhaps making an investment in a greenfield manner in the domestic market. So, far as inclusive of PPE investment, I don't think the situation has changed very much, but the overseas investors are turning quite aggressive, because you see other 30% discount, so, they can acquire the Japanese asset. So, therefore, the foreign investors for sure are turning very aggressive. So, especially the real estate properties, I think we will be able to sell if at all possible, especially the logistic perhaps facilities, we will be able to sell them at quite attractive pricing. Yes, I do understand.

Unidentified Analyst, Analyst

Yes, thank you very much. That was very clear. Thank you. May I just add one more question, if I may. And you see with the current conditions, there is still unexpected, I'm not expecting you to carry through the shares repurchase. But at the beginning of the year, you in fact shared with us your idea, well, you see, our attitude remains to be unchanged. So, far as those shares repurchase, the buyback is concerned and we should be concluding the current program that is up and running by end of December and of course, there are some pipeline deals. So, we would like to strike the right balance between the two the investment and also the buyback. I understand that many investors are focused on the buyback, and we recognize the reasons behind this emphasis. However, I believe Japanese investors have adjusted their expectations regarding the share repurchase. Therefore, we wish to maintain open communication with the market. If we were to proceed with a ¥50 billion buyback, it wouldn't significantly impact us. We will continue to explore this possibility. Thank you. Thank you.

Operator, Operator

Next, JP Morgan Securities, Otsuka San. Please ask your question.

Wataru Otsuka, Analyst

Yes, this is Otsuka, JPMorgan Securities. Can you hear me okay?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Yes, we can hear.

Wataru Otsuka, Analyst

Although this is not an official number, but in the beginning of the fiscal year, you mentioned for this fiscal year, the profit level would be basically flat. Maybe US¥300 to US¥310 billion at bottom. So flat from the fiscal previous fiscal year. And today, you're talking about ¥250 billion, so it's although lower than what you mentioned. I just wanted to double check, is this because of the negative impact coming from the insurance business, and also the private equity sales exit, you're not really hurrying with that?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

This accounts for approximately ¥20 billion in insurance payouts. We anticipated an additional ¥20 billion for the second half around late September, but it now appears to be around ¥20 billion, plus potentially several billion more in the second half. This is significant as, without this situation, we could have reached ¥150 billion in the first half. These insurance payouts are related to COVID and were larger than we expected. Additionally, the rapid U.S. rate hikes have affected our U.S. business, which is focused on debt. The current spread makes it unfeasible for us to proceed, leading us to halt our U.S. activities, which negatively impacted us by roughly ¥20 billion. Without these issues, we could have maintained the target profit level we set at the beginning of the fiscal year. These are the two main factors. Regarding private equity, we remain engaged, but our activity depends on market conditions. We haven't finalized any deals yet, but there may be opportunities in the second half. We prefer not to rush this decision.

Wataru Otsuka, Analyst

So ¥440 billion target 2.5 years down the line, you are still keeping this because you expect this to recover and normalize?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Yes, for life insurance, ¥20 billion payout is not expecting the second half. And once the rate is settled in the USA business, of course, it's a huge market that business is not shrinking. So spread widening, and if we can find good interest rate transactions, that's what we expect. So as long as we see some situation coming down with regard to the interest rate, we should be able to normalize the business.

Wataru Otsuka, Analyst

Thank you. Understood.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Thank you for the question.

Operator, Operator

And the next is Sato - Ms. Sato from Mizuho Securities.

Koki Sato, Analyst

This is Sato from Mizuho Securities. Thank you for the opportunity. So, I think you may have shared what I want to hear from you in the answers. So ¥440 billion of an achievement, the feasibility is what I want to know from you. And especially, if the environment starts to kind of settle down and come down and also if we remove this COVID-19 pandemic and FX impact, the risk hedge take into account, do you think that there could perhaps be an undershoot of the performances? So, taking all that into account as compared to 6 months ago, is there anything in addition that you need to undertake in terms of the activities, have you already started to consider any kind of new activities that you may have to undertake?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

So U.S. dollar availability is what we have started to consider. So, the other procurement is not that difficult, but the cost, of course, is higher. And more recently, procurement from bank, whether the current terms and conditions are to be maintained, I have a big question mark. So, therefore, procurement, the funding from a bank is not something that we should be dependent on medium-term note as well as I think a straight bond, the corporate bond is something that we may have to consider even at a slightly higher cost, we may have to secure other routes for founding other than resorting to bank funding. So because there is an abundance of pipeline, that for us to execute the pipeline, there should not be any difficulty that we may face from the funding perspective from the Accounting and Finance department perspective. So, portfolio at the moment, there are no kind of major problems that we face, but because of the rate hiking, borrowers' quality may perhaps start to deteriorate, that we may have to start addressing. So therefore, while we may have to reinforce a risk management kind of structure or system, we as you know, we remain to be agile at all time that is ORIX. So therefore, we will try to identify and discover attractive deals, and I'm sure they’re out there still. So we're not overly concerned about the possibility and opportunity.

Koki Sato, Analyst

Okay. Thank you very much for that. As a matter of fact, MBS for example, issuance in the United States for example, over the past several months, I think the terms and conditions have changed very much. But as to the operation of Lument, anything that you want to comment on?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Well, with regard to Lument, from the beginning of this year, because the rate is going to hike, I did in fact give out the guidance of slowing down. But they did not, and to Freddie Mac and the agent, the securitization in fact is becoming sluggish although the market is beginning to recover. So I think at the end of the day, we should not overly concern ourselves, but the amount value has expanded. So this is slightly a slight concern on my part, but still things are almost going back to normal. And so would it be for Lument as well. But the spread-wise it is not no longer that attractive as of now. So I think we need to diversify our activities a little more.

Koki Sato, Analyst

Okay, thank you very much. That was very clear. Thank you.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Thank you.

Operator, Operator

Niwa from Citigroup Securities, please.

Koichi Niwa, Analyst

Yes, this is Niwa from Citigroup Securities. For domestic environmental energy, ¥20 billion are just under, that's the target for the FY '25 March end. Maybe this is very challenging right now. Do you have any plan B, and both organic and inorganically, how are you going to deal with this situation?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

I believe that the domestic market has pretty much concluded. We might have a few solar projects in the works, but generally, the feed-in tariff remains favorable under certain conditions. However, my understanding is that the wind farm sector has plateaued. Trade firms are attempting to operate with minimal margins and are quite active in this arena. If we want to pursue environmental energy, we need to concentrate on Europe and the United States. While Greenko operates in India, we can utilize partnerships with Greenko and Elawan, as well as collaborate with renewable energy developers in the U.S. It's essential for us to engage these entities; otherwise, succeeding in the environmental energy sector will be challenging. For the domestic market, the new power companies businesses are shrinking. So I don't think there is any point in pursuing this actively. So ¥400 billion is the balance sheet that is planned, but maybe you will have to make some adjustments. That is correct. We want to shift our money into what's profitable. So if it is not profitable, we will take the money away and put it something else. So we want to be very flexible in doing this. So the environmental energy market in Japan, especially the new utilities, looking at the current situation, I think there's a huge question mark in this business right now.

Koichi Niwa, Analyst

I see. That's very clear. Thank you and congratulations on winning the baseball championship.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Yes, the cost will be pushed up, but I'm sure that we can deal with that. Thank you.

Operator, Operator

Thank you for the question. So this is, unfortunately, we have to bring this session to a close. So from UBS Securities, Okada, this is going to be the final question that we're going to be entertaining.

Taiki Okada, Analyst

So with regard to the U.S., I have two questions. So first of all, so the interest rate hike, what has been the impact to your businesses? I want to better understand. And that you have been starting new businesses, business execution, but in the second quarter, I think you may perhaps be paying more of an interest kind of expenses as opposed to interest rate income that has been enjoyed. So if you could give us a little more color to this. And the second question with regard to Lument. So the improvement with the government agency is underway, I heard. But with regard to the second half outlook, so the base profit deceleration is something that you cannot avoid? Or can we call the second quarter to be the bottom? And so far as you can share with us, what is your outlook?

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

First of all, let me start with Lument. Over the years, approximately ¥10 billion in profit has been generated. However, I anticipate a decline, although not a drastic one, considering the housing market. This is a B2C business. If we were to securitize that and sell to Fannie Mae and Freddie Mac, it would result in tighter spreads during that time. Additionally, there are several months before we can divest, and while we focus on the floaters, the spread will naturally widen. Consequently, regarding disposition, our spreads will be affected. Therefore, while the ¥10 billion profit generated in the past may not be reduced by half, it will definitely decrease. As for the impact of interest rates, we are focusing on floaters, and our existing portfolio is not affected by the rate hike. However, the industry's interest rate increase could unfortunately worsen the quality of borrowers, presenting a risk. So this is why I think we have to do a better job of risk management. And if there was to be any kind of deterioration of the quality, there may be cases whereby we may perhaps sell some of the assets, even at a loss that may perhaps be generated. But the fixed-rate deals are almost none. We work on the floaters, basically. So we're not basically affected by the hike of the interest rate, however, because the spread is going to be widened. And if we were to sell our asset to the third party, we may have to sell at some certain discount, otherwise, we may not be able to make a smooth exit. So therefore, in the first half of the next year, between January to March, we may have to watch kind of carefully as to how things would transcend kind of proceed.

Taiki Okada, Analyst

Okay. Thank you. I just want to add one. So, by quarter-by-quarter, the base profit in fact has been improving with what kind of product the improvement was bought about?

Makoto Inoue, CEO

Yano will answer to the question.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

So credit, you said credit, you mean by credit USA? Okay. I think it is more of a volume attributable to the volume. Volume, in fact, has been declining. And especially on the other hand, on a deal-by-deal basis, there has not been any major deterioration. So therefore, it has not been rising as a result. I hope this answers your question.

Taiki Okada, Analyst

Yes, thank you. That was clear.

Hitomaro Yano, Executive Officer, Head of Treasury & Accounting Headquarters

Thank you.

Operator, Operator

It's time to close the Q&A session. Since it's time to close this call.

Makoto Inoue, CEO

¥250 billion, this is a number that we are embarrassed to disclose but looking at the market situation. I hope that you can understand and accept this, but ¥250 billion is the bottom that we expect, which means that there is an upside. We really appreciate your patience in supporting ORIX going forward. Thank you very much.

Operator, Operator

That concludes the second quarter earnings call for FY '23 March end. Thank you very much for being a part of this meeting until the very end.