Earnings Call Transcript - IX Q1 2024

Operator, Operator

So it is now time to get started. Thank you for joining us for the First Quarter Consolidated Financial Results for the three-month period ended June 30, 2023. This is the ORIX Corporation meeting. Today, we have Hitomaro Yano, Executive Officer responsible for Accounting and IR. There will be a presentation by Mr. Yano, followed by a Q&A session, and the whole meeting should last approximately one hour. Mr. Yano, the floor is yours.

Hitomaro Yano, Executive Officer

Thank you for the introduction. I am Yano, Head of the Treasury and Accounting and Investor Relations. Thank you very much for joining us today. Well, without further ado, I will give a brief overview of the first quarter FY '24 March end results. Please see Page 2 of the deck that shows you the executive summary just as usual that covers today's main points. The first is net income and ROE. ORIX posted a 2% year-on-year increase in net income to JPY63 billion, and an annualized ROE of 7%. The segment that performed well was corporate financial services and maintenance leasing, fueled by expansion of our auto-related businesses, PE investment, where industries continue to grow in insurance, driven by higher investment income that is. As a result, the first quarter base profit hit JPY82.2 billion, surpassing pre-COVID level. The second is acceleration of reopening momentum. The rapid increase in inbound tourists visiting Japan has led to growth in earnings of concession including Kansai International Airport and facilities operations hotels and inns. In the aircraft leasing business, earnings continued to recover from the pandemic on the back of strong performance at airlines. Third is capital recycling, the yen we converted during the first quarter as a result of rising US dollar and euro interest rates. This environment has allowed ORIX to seek high returns on the sales of domestic assets primarily in real estate such as logistics centers. In addition, some industries are suffering from labor shortages, which has led to business opportunities for ORIX, which can capitalize upon the expertise the company has built efficiently managing physical assets. The fourth point is shareholders' return. In May 2023, we announced a JPY50 billion share buyback program. As of the end of July, we have completed JPY17.8 billion in buyback or 36% of the program. Please turn to the next page. As I previously discussed, the first quarter net income came in at JPY63 billion, up 2% year-on-year, and this translates to an annualized ROE of 7%. The right-hand chart shows quarterly trends in net income and ROE for the last two years. The first quarter net profit was the second highest in the four years since the start of the COVID pandemic. Please note that from this fiscal year, we have retroactively adjusted our past needs to reflect changes to the accounting standards for the insurance segment. As a result, FY '23 March net income changed from JPY1273.1 billion to JPY290.3 billion. The following pages, which focus on segment-level information, also reflect some changes to the way we calculate segment profit. Specifically, we reduced the method to distribute profit for business shares between two different segments. As a result, although it may be a small amount, segment profits in the corporate financial services and maintenance leasing segments increased while profits in the energy and environment segment decreased. Please note that these changes have also been affected retroactively for the past fiscal year. Now, please turn to the next page. This page shows the breakdown of segment profit. Segment profit rose 6% year-on-year to JPY91.5 billion. Please look at the right-hand chart, which shows segment profits by quarter. The light blue indicates base profits, and the dark blue indicates investment gains. Base profits were up 12% year-on-year to JPY82.2 billion. This figure was higher than the first quarter for FY '20 March end or FY '19 March end. Profit growth was skewed primarily by progress in opening and healthy earnings in insurance. I'll explain the details in the following segment page. Now meanwhile, investment gains were down 27% year-over-year to JPY9.3 billion, owing to a lack of large-scale exits during the first quarter when ORIX only recorded several smaller exits. Investment gains, as you can see on the right-hand chart, tend to fluctuate substantially depending on the quarter. Please note, however, that as shown on the left-hand chart, ORIX has consistently utilized a certain level of investment gains for the past five years, averaging more than JPY100 billion per annum. We plan to realize further investment gains during the remainder of the fiscal year and achieve a typical year of investing gains. Now, please turn to Page 5. This page focuses on reopening-related businesses. The left-hand side chart shows segment profit trends for the three COVID-impacted businesses, aircraft and shipping, facility operations, and concessions. For the first quarter, both the facility operations and concession posted their highest level of quarterly segment profits since the start of the pandemic. Aircraft and shipping are seeing this earnings recovery trend, and the three businesses in total recorded segment profit of JPY4.6 billion, a dramatic improvement from the JPY300 million in losses a year ago. Now, aircraft concession centers on Kansai International Airport, so loss has shrink dramatically following a strong rebound in international passenger numbers. Please note that owing to a lapse in reporting Kansai Airport's earnings in the ORIX Group, the first quarter figures reflect results for the January to March 2023 quarter. Kansai International Airport boasted 1.06 million international passengers in March, and that figure surpassed 1.35 million in June, reaching 63% of their June 2019 level. In facility operations, a robust increase in inbound tourists has helped to over-expand ABR while still maintaining high levels of customer services. And RevPAR in June at directly operated hotels was 119% of the June 2019 levels, while those facility inns were 114%. They helped the business achieve the first-quarter profit in the first quarter since the start of the pandemic. Aircraft leasing are expected to recover further as narrow-body lease rates already surpassing their pre-COVID levels and are continuing to rise. In order of the COVID-impacted businesses, we anticipate additional growth as Chinese tourists return to Japan. On the following page, you can see the latest trend in indices that illustrate recovery in each business, so please take a look at those as well. Please skip Page 6 and move on to Page 7. The auto user segment specifically tries to explain each segment's results. First is corporate financial services and maintenance leasing. Segment profit rose 20% year-on-year to JPY19.9 billion. In corporate financial services, fee-related businesses performed well, including insurance sales and real estate intermediary services. Segment profits rose sharply year-over-year as we booked the valuation loss of our stake in an industry a year earlier. Profit growth in the auto business as a result of profitability-focused sales activities, we have been carrying out over the last several years, and growth in the rental car business. In addition, prices for used cars remain high. Rental profits were down year-over-year, owing to higher depreciation expenses caused by upfront investments in rental ICT equipment, ahead of expected Windows-related upgrade demand. The business also booked costs associated with the operation of a new large fully automated warehouse, the third location in Japan. Excluding these, results were solid. So please turn to the next page. The page shows the real estate segment. Segment profits were down 17% year-on-year to JPY10 billion. In the real estate investment and facility operations unit, earnings improved in the facility operations business, hotels, and inns as outlined earlier. Meanwhile, profits were down year-over-year, owing to the absence of investment gains booked a year earlier from the sales of large logistics facilities and other properties. Now, DAIKYO secured a strong year-over-year increase in profits, bolstered by healthy sales of high-priced condos by procuring sites with excellent locations. Please turn to the next page. Next is PE investment and concessions. Segment profit rose 151% year-over-year to JPY5.7 billion. In the PE Investment business unit, financial performance improved on the completion of Kobayashi Kako-related costs, as well as contributions from indices that were purchased on FY '23 March, DHC and HEXEL Works. Please note that the first quarter results include just two months, February, and March 2023, of profits from DHC consolidated in the ORIX Group earnings. The concession unit posted smaller losses for the fourth consecutive quarter, aided by the recovery in international passengers, as I mentioned earlier. The unit is on track to return to profitability on a full-year basis for FY '24 March. Please turn to the next page. The page shows the environment and energy segment. Segment profits were down 14% year-over-year to JPY3 billion. In the domestic energy business, profits were down on lower income from power sales caused by output caps on solar power generation in some regions. In the overseas energy business, profits were down slightly year-over-year at Elawan, owing to poor weather in Spain and a higher euro interest rate. Despite this, Greenko earnings were up year-over-year. Now demand for renewable energy assets remains strong globally, and we are expanding our capacity with Elawan at the center. Profits are continuing to grow. Please turn to the next page. In the insurance segment, profits were up 68% year-on-year to JPY19.2 billion. The weaker yen and high-interest rate contributed to growth in investment income. In addition, Japan's May 2023 decision to legally reclassify COVID-19 led to further declines in COVID-19-related payout expenses. As I mentioned before, changes to accounting rules for the insurance segment have led to an increase in profit, particularly in the fourth quarter. Please turn to the next page. This is the banking and credit segment. Profits in banking were up year-on-year, helped by higher financial revenues from real estate investment loans on the back of higher long-term interest rates. In addition to fees rising on an increase in trust assets and one-time loss booked in FY '23 March, first quarter also contributed to higher profits. In the credit unit, we booked CECL reversal in the fourth quarter FY '23 March, which led to a decline in FY 2024 March first-quarter quarter-to-quarter, but earnings are mostly flat. Please to the next page. In the aircraft and ships segment, a 33% decline was posted in profit to JPY3.6 billion. The ship business posted lower profits on the absence of the sales gains from a year earlier when ORIX made the timely sales of its owned ship fleet. The income leasing profits were up year-on-year as recovery in passenger demand led to growth in the number of owned aircraft and higher lease income from rising lease rates. Avolon posted losses on par with previous first quarter, owing to higher dollar funding costs on that from when the investment was made. As with the Avolon profits on a current basis continue to grow fueled by growth in leasing income and the assets were higher owing to the increase in higher aircraft holdings in the equity business, changes in forex also contributed. Please turn to the next page. ORIX USA profits rose 61% to JPY9.7 billion. ORIX USA has implemented strict risk management controls for both new and existing deals in light of the US business climate. This has allowed the segment to control losses, including credit losses. On the three business verticals, credit business posted higher profits helped by stable financial revenues and gains on the sale of small deals. In the real estate business, Lument first quarter origination volumes were up quarter-on-quarter, and surpassed the year earlier level and earnings boost was seen from higher interest rates leading to higher profits. Meanwhile, the FY had lower fewer deals this quarter, which led to lower profits year-on-year. In private equity, there were limited capital gains in the first quarter leading to flat profits year-on-year. Please note that the assets rose owing to changes in forex and excluding that, it's down slightly. Page 23 features a breakdown of that business line, so please refer to this page as well. Please turn to the next page. This is ORIX Europe. Segment profits were down 55% year-on-year to JPY4.2 billion. AUM growth was sluggish in FY '23 March, owing to the impact of high-interest rates and the Russia-Ukraine conflicts. However, AUM has recovered slightly with the launch of an active ETF product and other measures. Nonetheless, higher euro interest rates resulted in higher funding costs, which led to a year-on-year decline in profit. Please turn to the next page. This is Asia and Australia. Segment profit was down 37% year-on-year to JPY8 billion, on the absence of a gain on the sale of a Southeast Asian affiliate a year earlier. Assets rose by JPY120.3 billion, of which JPY82 billion was due to changes in forex. So excluding the forex impact, the net asset has increased. Please to the next page. Now I would like to give an overview of first quarter results and progress using the categories we disclosed at the Q4 earnings announcement. For domestic segments, both financial and non-financial categories posted higher earnings year-on-year. The financial category, in particular, shows stable growth, showing a stable good start. Overseas segments, results were below year-earlier levels due to higher funding costs caused by higher interest rates and also ongoing uncertainty in the US economic outlook. We are taking a strict risk management stance in the US, and we have maintained healthy asset quality and a low non-performing ratio. Please note that the overseas category, energy category, and some seasonal factors have come into play, which typically leads to lower profits in the first quarter. This completes my explanation about the Q1 results. Now I would like to talk about the business climate as well as the remainder of this fiscal year. Please turn to the next page, Page 18. I will start with a discussion on the macroeconomic climate and our current status. As for interest rates, as outlined in the past quarters, ORIX works to keep its profit entity to interest rate changes low through asset-liability matching. Although a 1% increase in euro interest rates is expected to have a negative impact of JPY2 billion to JPY3 billion on annual pretax profit, we have worked to increase the fixed-rate loans even after reducing this exposure further. Yen weakness and lower interest rates in Japan have encouraged overseas investors to increase investment in Japan. This environment should allow ORIX to improve our returns even further through exits in domestic assets, including real estate properties like logistics facilities. Regarding inflation, while this does impact a variety of ORIX businesses, we have been able to pass along higher costs through maintenance leasing rates, rental fees like condominium prices, hotel and inn RevPAR, and product prices for overseas renewable energies, among others. Finally, labor shortages are a critical issue for automobile and aircraft maintenance operations and for the management of solar power generation facilities. Outsourcing the management of these assets is likely to increase, and this should allow ORIX to capitalize on the expertise in capably managing these assets to expand business opportunities. Our asset management portfolio is outlined on Page 30 of the presentation material. Please refer to that as well. Moving on to the last page. The key theme for the fiscal year continues to be capital recycling. As explained earlier, we have noticed a stronger momentum for investment among our overseas investors for domestic real estate NPE assets. Demand is particularly robust in real estate. ORIX consistently generates a certain level of investment gains each fiscal year and plans to continue exits going forward in this fiscal year as well. In domestic PE investment, we have improved the value of a number of investees following a period of active management and have multiple companies close to exit. In the environment and energy segment, Elawan, which ORIX acquired in '21, has been steadily developing new assets and expanding its operating capacity, and the company plans to sell some of these assets during the fiscal year. And like other segments, continued capital recycling. In ORIX USA, we maintain a cautious stance in new investments, but most of our existing PE investees have enjoyed their growing earnings. So we continue to look for opportunities to exit at the right time. For this fiscal year, we will continue to see uncertainty in the climate, but we see some positive aspects as well, such as progress in reopening and in labor markets. We will continue to work towards achieving a full-year target of JPY330 billion in net income, which we announced in May and also then reach JPY400 billion in net income and an ROE of 10.4% for fiscal 2024 March. While caution is still necessary, we plan to continue to grow proactively while looking for more investment opportunities. Thank you for your kind attention. That's all from me.

Operator, Operator

Thank you for your attention and interest. We are now ready to begin the Q&A session. Our first question comes from Watanabe at Daiwa Securities.

Kazuki Watanabe, Analyst

I am Watanabe from Daiwa Securities. I'm referring to Page 41, and that is to do with the capital usage ratio going up to 39%. It was, I think, the end result of acquiring DHC. What is your total level? So I know that you have been explaining about capital recycling today, which was pretty positive. But JPY100 billion of five years investment gain was to be achieved. But based on this capital usage ratio, do you think that there may be some acceleration?

Hitomaro Yano, Executive Officer

Thank you very much for asking the question. So as to the capital usage ratio, yes, we were impacted by the DHC acquisition as we have been sharing with you for some time ago. Whether this is correct or not, but we are constantly referring to this level. And whether it goes up to the level of 90% or not is a yardstick that we would apply. In other words, we would not like to end up having excess amounts of capital for the sake of the investors, the shareholders, and also remain agile in carrying out the M&A, if it proves to be right from the timing perspective. So we have just gone over that level currently, which means that we may perhaps consider exiting from some of the investments with 90% being the benchmark. And so we are making a slow start, as we have explained. But the real estate, in fact, the demand remains to be strong. At the time when we put together the plan, if we were to sell a certain property, we had estimated or simulated the amount of investment gains on the sales of the properties, but we are now beginning to feel that this assumption currently, the price may be higher than our initial assumption or expectation. So the PE investments here in Japan as well as domestic real estate investment, and also overseas renewable energy investments, and there could be some other businesses as well. We would continue to, of course, manage all these businesses. Although I said JPY100 billion of an average investment gain could be generated just like any other usual years, we may have to exceed that as well. So as an issuer or a developer, we would like to continue to recycle the capital so that we would like to continuously generate profit on a recurring basis, and this is what we want to display and prove to the investment community. I hope this answers your question.

Kazuki Watanabe, Analyst

Thank you very much. So from that perspective, the investment gain this year from JPY100 billion, do you think that there could be an overshoot from JPY100 billion, that is expected?

Hitomaro Yano, Executive Officer

Well, as for the investment gains, it's not something that is controllable to hit at JPY100 billion. Therefore, there could be a possibility of an overshoot such a guideline.

Kazuki Watanabe, Analyst

Okay. Thank you very much.

Hitomaro Yano, Executive Officer

Thank you.

Operator, Operator

SMBC Nikko Securities, Muraki. Please, ask your question.

Masao Muraki, Analyst

Yes, this is Muraki. I have one question. JPY330 billion profit plan for the full year. Is this still your best estimate at this point in time? On Page 17, you are showing the progress. Well, if we calculate the progress from this, most of them are below 25%. And investment gain plan progress is just about 10%. And I think you're saying that you can catch up. But I think the base profit on Page 18, there is a downward arrow. How much of a concern is this, so financing costs, interest rates, and also inflation impact? And over it doesn't really say there is a limit to the output of solar power generation. Against the base plan, is this going to be a material impact? Can you please elaborate?

Hitomaro Yano, Executive Officer

Thank you for your question. I clearly understand where your question is coming from. With regard to base profit, looking at the past to the second half, base profit tends to increase. I have mentioned the reopening situation, and the concession is clearly showing a recovery. The base profit may not shoot up, but every quarter, we expect gradual growth in base profit. That is my current scenario. And then you can add investment gains on top of that. In the first quarter, the progress rate, as you mentioned, is quite low, but there is no need to see this inadequate decline. Things will be built one by one, step by step in order to achieve the full-year objective. That's the scenario. With regard to the macroeconomy, the euro interest rate. Well, most of the other interest rates are mostly neutral. So there is not much concern and euro was the biggest concern, but JPY2 billion to JPY3 billion was mentioned earlier. Now in this fiscal year, compared to the previous fiscal year, we have started to increase the hedge volume slowly. As of today, the sensitivity is much lower than what's indicated on this slide. Going forward, the annual sensitivity is below JPY1 billion level, which means that a euro interest rate increase should not have a material negative impact on us. Well, we don't believe that we should hedge against everything, but we believe that the current level is probably appropriate. With regard to inflation, I believe that was the next part of the question. Material costs increase and labor shortages can result from inflation. So material costs, of course, and the construction cost has gone up. But the real estate price increase and further lowering of expected yield and increase in price is much larger than the increase in other costs. So I believe that inflation is actually positive for us. These are some of the smaller impacts, but in hotels and inns, occupancy cannot really be increased very much because it's harder to find people to work there. But still, within the limited number of headcounts, we can increase the services and we can increase ADR, and in the end, we are having a positive situation. So we are coming back to the pre-COVID level. In other words, we're taking advantage of the inflation in order to increase the service prices that we offer. So in that sense, we want to be able to ride this wave, and we're actually able to increase the top-line. We are also seeing an increase in the bottom line as a result of that. I think that should be it. Am I right? Or was there anything else?

Masao Muraki, Analyst

Solar power generation.

Hitomaro Yano, Executive Officer

Yes. Up on output, yes, that is true, but we do not expect a major impact from that. We're actually selling energy as well and the market is volatile. The cost may go up or down, or there may be a competition against other companies, and we may not be able to increase the price that we sell the electricity at. So we have to look at this carefully. But in terms of solar power generation, the profit contribution is very stable. I see. So maybe the arrow on Page 18, I think there are more upward arrows than downward arrows, yes. That's how I prepared this material. That was the meaning of this slide.

Masao Muraki, Analyst

Thank you. Thank you very much for the question.

Operator, Operator

From Otsuka Securities, we have a question.

Unidentified Analyst, Analyst

I am Otsuka from Securities. I hope you can hear me well.

Hitomaro Yano, Executive Officer

Yes.

Unidentified Analyst, Analyst

Thank you. So I'm referring to the data book numbers, what has been explained by Yano, just now, so your clarification or confirmation. Just as usual, you have the procurement cost and also the asset yield return on assets and also the foreign currency, and if you were to calculate the spread. So I think it is 5% for the first quarter that just ended, and it was 6% in the last first quarter, last year that is. Therefore, that is kind of downsizing the spread as a result of the foreign currency impact. So on Page 18, the reason why the euro procurement, the funding cost, in fact, is resulting in such numbers or because you are treating those phenomena, so therefore, the spread may not have downsized from here down the road, it may perhaps trend flat. So if you could be so kind to explain that. Thank you.

Hitomaro Yano, Executive Officer

Yes, your assumption aligns with mine. First, discussing the asset side, which consists solely of financial assets, and on the liability side, aside from financial liabilities, there are also some equity investments included. When we consider financial assets, the assets and liabilities correspond with each other. This is why, as I mentioned earlier, in our OCE business and in part of Elawan, the investments we've made and the funding costs have increased. However, regarding the euro, due to interest rate fluctuations, we believe we are in a position to remain unaffected by these changes. We are working on asset-liability management to ensure we are not significantly impacted by these variations. I hope this answers your question.

Unidentified Analyst, Analyst

Yes, thank you very much.

Operator, Operator

Mitsubishi UFJ Morgan Stanley. Tsujino, please proceed.

Natsumu Tsujino, Analyst

You mentioned the impact of reopening eastern access and also real estate. I think this is the operation or management only, so daily contribution and also investment gains, I subtract exact from the information that I received. And what kind of improvements do you think you will see in each of these items? In terms of concessions, JPY450 million in red. And then JPY8.9 billion in red, and then just under JPY2 billion in red in these three quarters, and there was an improvement from January through March, but the improvement was not that impressive. So going forward, what do you think will happen? April through June, was there any special high cost? Was it a special item, and maybe the actual improvement was much better than this? If that is the case, please talk about that? And also, if you look at the real estate operations only, there are activities and it was JPY1.2 billion from October to December. And then it went to deficit, and then JPY1.4 billion in April, June. So in the past, if you just looked at the operation, it was about JPY3 billion. So what do you think you need to do in order to go back to that level? Do you expect that level of recovery before the end of the fiscal year? That's my question.

Hitomaro Yano, Executive Officer

Thank you. In terms of concession, it is a related affiliated company. I don't know to what extent I can comment. But January through March for them, every year sees cost for repair, which means that fixed cost tends to be posted in a high amount in January through March, and that's basically April through June this year, which means that there is a big recovery. The April through June and our July through September should see more growth. That's what we expect. And for concessions, we have seen a good recovery, so we do have high expectations. Having said that, hotels and inns, well, we have a very good feel for this segment. As of today, I would say the situation is actually better than pre-COVID. Hotels and Inns operations have seasonality, usually better in spring and autumn and worse in winter. If we look for the pandemic, we were actually running deficits in winter season. So if you exclude the seasonality, if you take that out, you can see that we have seen steady recovery quarter by quarter. Once again, we have high expectations for this segment as well.

Natsumu Tsujino, Analyst

Hotels and Inns and concessions on their own, how much increase in profit can we see? That might be another question. But for these two, we expect a big growth. Mr. Muraki asked a similar question earlier, I think base profit, what will happen to base profit going forward?

Hitomaro Yano, Executive Officer

Well, since we have these expectations in these areas, we believe that a certain amount of growth is definitely possible, and for aircraft as well. This is also cyclic, and we can sell aircraft which will push up the profit. So for these three particular segments, we expect further growth in profit. In terms of recovery from the pandemic, in terms of corporate financial services, rental car is showing a very good recovery as well. That's one other piece of contributions that we see.

Natsumu Tsujino, Analyst

That's all from me. Occupancy-wise, I understand that it's a pre-COVID level. But maybe because of inflation, profit will not recover to JPY3 billion to JPY4 billion on a quarterly level yet. Is that true or not?

Hitomaro Yano, Executive Officer

In terms of occupancy, because of labor shortages, occupancy itself is actually quite difficult to raise. But in hotels and Inns, we have increased unit price. As a result, what we call RevPAR, as you can see on Page 6 of the handout. Compared to 2019, we have seen some increase, so we can expect some positive results here. Thank you.

Natsumu Tsujino, Analyst

I understand.

Operator, Operator

Thank you, Tsujino. Now, over to Sasaki from Nomura Securities.

Futoshi Sasaki, Analyst

I am Sasaki from Nomura Securities. Can you hear my voice okay?

Hitomaro Yano, Executive Officer

Yes, we can hear you well.

Futoshi Sasaki, Analyst

Thank you for the opportunity to ask questions. I have two. First, I believe Yano did not address this. Regarding the new investment, after the first quarter, there might be both positives and negatives. You've also mentioned labor shortages. In the hotel sector, the luxury hotel construction is progressing in Japan, and condominium prices are rising as well. So, concerning timing, has there been any change in strategy regarding the new investment after the first quarter? What are your thoughts on this? Thank you for your response. For my second question, regarding Robeco and the asset management side of your business, if we exclude the forex impact, it seems that assets under management have decreased, and the outflow of funds appears to be ongoing from last year. Do you have any information about cancellation notifications? How do you foresee the developments in the asset management companies?

Hitomaro Yano, Executive Officer

Let me begin with the new investment. In the first quarter, we focused on this, and I've been attentive to our performance. As for the second quarter, I haven't mentioned the new investment yet. However, we do have tangible results from our private equity investments and some new developments in real estate, which involve capital recycling. We are working on new hotel developments, including the significant renovation of Suginoi in Oita, which was a notable project even during the COVID-19 pandemic. While the real estate market may experience a boom, we are aware that construction costs are rising, so we must proceed with caution. We can't expect continuous growth like before. Nonetheless, we are committed to enhancing our value through development rather than just developing to sell. Looking ahead, by the close of the second quarter, we should have examples to share regarding our private equity investments. As for your second question about Robeco and asset management AUM, please refer to the data book we provided, which contains supplementary information for the three months ending June 30, 2023. Our bulletin report, presentation material, and supplementary information indicate our current AUM levels. Unfortunately, in the second quarter, we experienced a decline of JPY2.9 billion in net new money. The outstanding balance at the end of March was JPY296.1 million, and it increased to JPY305.1 billion afterward. From April to June 2023, our AUM rose by the end of that period, despite the decline in net new money, as shown in the chart on Page 21. We are somewhat offsetting this decline with increases in the prices of our financial products. We will do our best to boost net new money going forward. I hope this clarifies your questions.

Futoshi Sasaki, Analyst

Robeco, the asset class that you are struggling the most, is it alternative asset or equity or a bond? I'm not sure, to be honest.

Hitomaro Yano, Executive Officer

Robeco, they are good at managing traditional financial products. I think they would like to perhaps increase the alternative assets. In other words, you are struggling with the traditional assets rather than anything newer. Robeco, and we had covered Capital and Boston Partners. Those are the asset managers that we own. The US harbor is struggling, so we are converting the win which the management has done to access for the company going forward.

Futoshi Sasaki, Analyst

Thank you very much. I would like to perhaps ask you the further questions at a later stage. So over to the next person.

Operator, Operator

JPMorgan, Sato Koki. Yes.

Koki Sato, Analyst

Yes. Can you hear me okay?

Hitomaro Yano, Executive Officer

Yes, continue.

Koki Sato, Analyst

Thank you. I would like to request further clarification regarding the aircraft and ships. In relation to the recovery in concessions and real estate, could you provide insight into the trends? Additionally, while ships have been accounted for in previous quarters, excluding Avolon makes it challenging to gauge pure aircraft profit. For instance, on Page 13, you present the segment profit and quarterly trend. Could you provide more detailed information to help us understand the aircraft trend breakdown? Without Avolon, there's a decline in profit of just over JPY2 billion. What is the situation if we also exclude marine vessel sales? Please elaborate on this.

Hitomaro Yano, Executive Officer

Well, ships did not have a big impact. That was our assumption. That is why we put them together with the aircraft. But for the first quarter of '23 March, eight ships were sold, and we gained a lot from those sales, roughly speaking, in the first quarter last year, JPY4 billion profit in ships. In this fiscal year, in this quarter, JPY2 billion. That's the scale as of June. If we exclude that, the remainder is aircraft. The aircraft is growing year-on-year. Lease fees are increasing overall. Also because of jobs, we can sell aircraft as well. We expect to see growth going forward. For ships, we made a clear decision to sell. The assumption was very clear. When the situation is bad, we buy, and when the situations are good, we always sell. So there could be some ups and downs. But we also have methodology for ships. We also have shipped loans as well. Marine vessel loans, which provide us with a spread based on the value of the vessel. We can do this because we can operate the vessels and provide loans. If anything happens, we can always repossess the vessel. That is why we want to keep our steady method with ships at least for the time being. Aircraft are recovering steadily in a nice way. For this fiscal year, our profit from ships is lower than the prior year. But still, as you can see that already in the plan, that decline in ship can be more than compensated by the aircraft.

Koki Sato, Analyst

I just want to double-check the numbers. Last year, shipped JPY4 billion in the first quarter and the JPY2 billion this fiscal year. This is a very rough number. Okay? If that the rough number, if we exclude those numbers, non-Avolon aircraft is only increasing several hundreds of millions of yen. So it's only a slight increase?

Hitomaro Yano, Executive Officer

Yes, that's correct.

Koki Sato, Analyst

The data book P&L indicates that this is no longer classified as segment operating profit, but rather a different measure. The equity method contribution before accounting for the contribution is lower than last year. Year-over-year, excluding Avolon, there is an increase in the equity method segment. Aircraft recovery is benefiting the first quarter mainly through the equity method, with a profit increase related to Avolon. Let me confirm that I'm conveying this correctly.

Hitomaro Yano, Executive Officer

Avolon profit, Avolon does its own earnings announcement. One month later, we can capture the profit to our financials. That is why we see an increase in the equity method. But we're also charging interest rate for that investment, and the US interest rate is going up, that's negative. Avolon recovery looks weak if you just look at the segment profit, that is the current status. Aircraft and ship sometimes, we have a joint venture with funds to own aircraft and vessels. Sometimes, we have equity method applied to the profit and losses, but that's quite rare. This equity method profit or loss is mostly Avolon related. Debt cost, this is profit before the charging of the debt cost.

Koki Sato, Analyst

That’s very clear. Thank you very much.

Hitomaro Yano, Executive Officer

Thank you.

Operator, Operator

Question from Okada, from UBS Securities. Please.

Taiki Okada, Analyst

I'm Okada from UBS Securities. As for myself, I'd like to ask a question about Page 28. I'm referring to your US businesses. So the three businesses of the United States need explaining a little more into detail. As compared to three months ago, in each of these segments, what has changed? If we were to refer to the base of profit, the credit has returned. However, real estate private equity on a year-over-year basis, unfortunately, you have experienced a decline. So as compared to three months ago, I think your view of the US economy may have improved. But based on those backdrops, in other words, the economic environment or conditions, how do you foresee the businesses trending going forward?

Hitomaro Yano, Executive Officer

So as for the US businesses, well, we would, of course, hope to increase the top-line for sure. But the credit so far, we have not been increasing the bad loans or bad debt. And of course, for the time being, because I will not be able to say anything in a manner for the future. But we think that the current trend can be continued. For the base profit for the real estate, it is difficult to segregate the two. The Boston Financial for the low-income bracket people, we securitize the real estate asset. But it varies from quarter to quarter. This quarter, there was none, and this is why the base profit, unfortunately, we experienced a decline. As for PE investment, unfortunately, so exit is not that smooth at this point. This is why private PE was on decline in terms of the base profit. The investee of the PE, we are charging the interest rate, and the cost impact has been rising. This has resulted in the negative consequences. These are the major factors to the negative base profit. And we have been, of course, giving other directions to ORIX USA, not to overstretch and because you see the current conditions do not allow them to be that successful with the businesses that we have been running. By making use of the leverages, and if the PE investment may start to recover, we may be able to enjoy better performance going forward. I hope this answers your question.

Taiki Okada, Analyst

Thank you. Just one follow-up question. So the PE exits in the United States, I suppose there have been one or two perhaps PE exits. So that situation, in fact, remains to be unchanged going forward as well.

Hitomaro Yano, Executive Officer

Did I say one or two? I may have said one or two or three, but are you asking me the question whether we have said so for the first quarter results three months ago, the timing or throughout the year, there could be a possibility of some exits. There are some equity investments that we have made to keep the association or the partnership going. We may be able to perhaps exit out of some, one or two perhaps, investment. I may have expressed that in such a way. We would like to, of course, stick to such a plan. We have not, of course, not realized that, but I think we do foresee an opportunity to exit out of those investments.

Taiki Okada, Analyst

Thank you very much.

Operator, Operator

Citigroup, Niwa, please.

Koichi Niwa, Analyst

Yes, this is Niwa, Citigroup. Can you hear me?

Hitomaro Yano, Executive Officer

Yes, we can hear you.

Koichi Niwa, Analyst

Thank you. Question about banking, two questions. One is the impact of ICC for this fiscal year and next fiscal year. How do you think this will impact your company performance? What is your analysis? Was it a surprise or not? And secondly, strategically, green and nonrecourse loans are done, but what is the current status? And what is the current status of the spread? Thank you.

Hitomaro Yano, Executive Officer

ORIX Bank is a bank. Higher interest rates would generally have a positive impact on the banking business. They do a lot of loans for small condominiums for investment purposes, but many of them are linked to the long-term prime rate. You may be surprised, but it's true. If the five-year interest goes up, then ORIX Bank's profit actually goes up, that is the structure. So interest rate increase, especially yield curve steepening is actually quite beneficial for ORIX Bank. BOJ's interest rate policy change, it is very difficult to judge how much of a change they've actually made. But mid to long-term zone interest rates will continue to creep up, which is good for us. I don't know to what extent we can expect more. But yes, we do have expectations. That's my explanation about the banking business, mostly loans for investment purposes. Other than that, we are just making all our efforts, we are getting people together, and Environment Energy Head, Nishikori, now moved to the banking business. He’s using his own network to grow the business, and the business is growing by several hundreds of billions of yen. But if not for the accumulated gain, we will take advantage of the trust function and the sale of the assets and turn this into another capital recycling business. So in terms of impact for the group, maybe it doesn't look like much, but at the banking business level, there's definitely steady growth. So please continue to watch them for a while. That's the kind of status.

Koichi Niwa, Analyst

Thank you very much for your very detailed explanation. That was very clear.

Operator, Operator

So it is almost time to finish up this session. The next question is going to be the final question from Sakamaki of Mizuho Securities. Before we ask Yano to close the session.

Naruhiko Sakamaki, Analyst

So I am Sakamaki from Mizuho Securities. Thank you. I would like to ask questions about Asia as well as Australia. In the last year, you shared with us the idea of increasing the asset, but I don't think you have been generating much of the profit. So the contribution to the profit as revenue as a result of the asset funding balance of assets that you have been building up over time. How long does it take?

Hitomaro Yano, Executive Officer

In Asia and Australia, our primary businesses are traditional leasing and investing. We have been selling some equity method holdings, though the profits generated have been inconsistent. We've reduced our leasing assets during the COVID pandemic, but we are starting to see gradual profits from these businesses. Investment returns fluctuate and are currently not optimal. While we have made significant investments in Greater China in the past, we have been less proactive with new investments lately. Our focus is now more on exiting overseas investments. We see opportunities to divest in Asia and Australia, including Greater China, which we believe could positively impact our revenue and profits. I realize this may not directly address your question, but this is our outlook.

Naruhiko Sakamaki, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you, Yano. Closing remarks, please.

Hitomaro Yano, Executive Officer

Well, thank you again for joining today. I have already explained quite a lot, so there's not much more for me left to say. But considering the current environment, you can see how we started the first quarter, JPY330 billion for this fiscal year, we definitely want to achieve this. On the other hand, we want to continue to invest so that we can continue to grow into the next fiscal year as well. We appreciate your kind support. Please watch us. I'm sure that you have many more questions, and the IR team will be happy to respond to any questions you may have. Thank you very much again for your kind participation.

Operator, Operator

Thank you, and that concludes the first quarter earnings announcement. Thank you very much for your kind participation.