Earnings Call Transcript - IX Q2 2024

Nakane, Moderator

Now it's time to start the ORIX Corporation's Financial Results Briefing for the Six-Month Period Ended September 30, 2023. Thank you very much for joining us today. I'd like to act as a moderator. I am Nakane from IR Sustainability Promotion Division. Today, we have Mr. Makoto Inoue, the President and CEO; as well as Mr. Hitomaro Yano, in charge of Accounting and Treasury and Investor Relations. There are some housekeeping announcements. In order to prevent any interference if you have any mobile phones or telecommunication devices nearby, please make sure to turn them off or move away from those devices. First, I will call upon Mr. Yano and then Mr. Inoue to make presentations and then take questions. We plan to spend about one hour. Now Mr. Yano.

Hitomaro Yano, Accounting and Treasury, Investor Relations

Thank you for the introduction. This is Yano speaking in charge of Accounting and Treasury and Investor Relations. Thank you for taking time out of a very busy schedule to participate in this briefing. I'll start by explaining about our fiscal 2024 March results. Please turn to Page 2. For the first half of fiscal 2024 March, ORIX reported net income of JPY128.1 billion, up 4.7% year-on-year. This translated into annualized ROE of 7.0%. Please turn to the next page. This is the breakdown of segment profits. First half segment profits were up 11% year-on-year. It was JPY191 billion. This slide shows past trends of segment profits on a full year, quarterly, and half year basis from left to right. Base profits are dark blue and the investment gains are in light blue. At the far right of the trends for the half year basis, base profits were up 16% year-on-year to JPY167.4 billion. This was primarily due to a recovery in the real estate and the concession business earnings, thanks to higher inbound tourism and the higher profits of the insurance segment as a result of higher investment income. Meanwhile, investment gains in light blue were down 14% year-on-year to JPY23.6 billion. These were primarily due to investment gains on the sale of multiple real estate properties booked in the first half. Our CEO will discuss this later on. We plan to aggressively move forward with sales in the second half of this fiscal year. Please turn to Pages 4 and 5 next. This gives a breakdown of segment profits and segment assets. This should give you a good overview of segment trends as a whole. Detailed information about each segment can be found on Page 16 and beyond. Please review them in your own time. And I will just give you a brief overview using Page 4 and 5. First is corporate financial services and maintenance leasing. Segment profits rose 9% to JPY40.3 billion. Corporate Financial Services, various fee businesses are performing well, and profits were up in the first half as M&A brokerage contributed to profits. In the Auto business, used car prices remained high and rental car demand is strong continuously. Rental profits were lower year-on-year, owing to the costs associated with the launching of a new technology center, but this unit has posted steady profits. Moving on to real estate. Segment profit was up 42% to JPY26.9 billion. In the investment and operations, profits were up year-on-year, thanks to improving earnings in the facility operations business, hotels and inns on a recovery in inbound tourism demand and office and condo sales were also booked. In the DAIKYO units, profits were up sharply year-on-year on strong condo sales. In real estate assets, real estate assets were up by JPY69.4 billion versus the end of last year as a careful selection of our new assets continued alongside proactive sales. Next is PE and concession. Segment profits were up 141% year-on-year to JPY9.7 billion. In the PE business – investment units, segment profits were up year-on-year as profit contributions from DHC and HEXEL Works were acquired last year offset lower profits from other investments and the impact of investees sales last year. The concession unit returned to the black for the first time on a quarterly basis since the start of the pandemic on the recovery of international passenger numbers, and there's a three-month delay in this profit reflection. The segment assets were up JPY203.3 versus the end of fiscal 2023 March, which with the execution of Toshiba LP and mezzanine loan. Next is environment and energy. Segment profits were down 7% year-on-year to JPY8.1 billion. In the domestic energy business, segment profits were up slightly year-on-year, thanks to a large number of sunny days in the second quarter, which offset the impact of output curtailments in Q1. In overseas energy, overall profits were down year-on-year due to higher hedging costs on foreign currency denominated assets caused by higher interest rates, profit contributions from Elawan were higher, and the Greenko profits were also up year-on-year. Segment assets were up JPY59.6 billion year-to-date owing to Forex changes. Next is the insurance segment. The segment profits were up 151% to JPY37 billion. Segment profits rose on the increase in investment income, thanks to the weaker yen and higher interest rates as well as lower COVID-related payouts. Segment assets were up JPY53.3 billion on Forex changes. Next is banking and credit. Segment assets profits were up 8% to JPY16.5 billion. The banking business unit has seen the financial revenues grow as a result of higher interest rates, lifting the long-term prime rate. They also benefited from the growth in fee revenues on an increase in trust assets. ORIX Bank continues to strengthen its profitability through growth in the trust and other businesses and not by unnecessarily increasing assets. As a result, banking segment assets were flat versus a year ago. In credit business, both assets and segment profits were mostly flat year-on-year. Next is aircraft and ships. Segment profits were JPY10.4 billion, down 2% year-on-year. And the ship business unit profits were down year-on-year on the absence of year-earlier gains on timely sale of owned vessels during the period of high prices. This was in line with our initial targets. Four ships were sold during the first half. Aircraft leasing posted higher profits amidst the recovery in passenger demand; leasing revenues rose, thanks to higher lease rates and an increase in the number of owned aircraft. Avalon turned profitable on a quarterly basis after accounting for hedging costs, thanks to a rebound in passenger demand. Segment assets were up JPY164.3 billion on forex impacts and an increase in owned aircraft. Next is ORIX USA. Segment profits were down 24% to JPY16.3 billion. There were fewer exits in the PE business, owing to changes in the macroeconomic climate, which was the primary reason for lower profits in the segment. Segment assets were up JPY63.4 billion in OCU. Local currency denominated assets are lower, as ongoing enhanced risk management has led OCU to rein in new investments, but changes in Forex led to higher yen-denominated assets. Next is ORIX Europe. Segment assets were down 19% to JPY13.4 billion. Profits are lower owing to hedging costs on Forex denominated investments primarily at Robeco Group caused by higher euro interest rate. However, AUM has a recovery trend with the launch of active ETFs and fee income is stable. Segment assets were up JPY35.1 billion year-to-date, mainly due to Forex changes. Segment profits are down 49% year-on-year to JPY12.4 billion. This finally leads to Asia and Australia. Profits fell due to the absence of gain on the sale in the Southeast Asia affiliate compared to the same period of the previous year, and lower profit contributions from investees. Despite this, leasing and loan operations were healthy in Asian countries. Segment assets were up JPY174.8 billion year-to-date, owing to Forex changes and to favorable new lease executions in various countries. I would like to also make some comments on the impact of rising yen interest rates. Yesterday, the BOJ announced the new policy, and they have made upward revision to the long-term interest rate. For ORIX, especially for the financial businesses, the higher interest rate in the yen will be positive. ORIX Bank holds variable interest rate assets, especially those linked to the long-term prime rate of close to JPY1 trillion. A rise in the yield curve during the period of higher interest rates, therefore, will have a positive impact. In insurance, asset rotation in our investment portfolio leads to higher yields during times of rising interest rates. Also more than anything, the reduced present value of the insurance liabilities outweighs the decline in asset value, which will benefit embedded value. This also bolsters future earnings. In the domestic corporate financial services business, we have held off on aggressively pursuing additional financial leasing business because of low interest rates and excess liquidity. However, higher interest rates could be an opportunity for this business to grow. So that was about the rising yen interest rate. And with that, I would like to end my presentation and hand the microphone to Mr. Inoue, our CEO.

Makoto Inoue, CEO

Yes, this is Inoue of ORIX. I would like to start with Page 6. The fiscal 2024 March first half pretax profit came in at JPY184.5 billion. Net income was JPY128.1 billion. Just to repeat, this was a slight increase of 4.73% year-on-year, and it represents a 38.82% progress towards our full year outlook of JPY330 billion. The interim dividend was JPY42.8 per share and we will continue to execute the share buyback for this fiscal year. Please turn to Page 7. For the first half, we had a net income of JPY128.1 billion, which is 38.82% towards the JPY330 billion outlook for the full year. The reason, first of all, is investment gains from asset sales exactly to be back-end loaded. In other words, it's going to be a second half heavy earnings plan. Secondly, the uncertain outlook in the U.S. interest rates, we are seeing higher credit costs, and we have decided to do no new private credit origination at ORIX USA. Thirdly, hedging costs increased due to higher U.S. dollar and euro interest rates. With the ongoing Russia-Ukraine conflict and intensifying fighting between Israel and Hamas, the global situation is becoming more challenging. In addition, rising energy costs, interest rate trends in major currencies, and price inflation globally makes it increasingly difficult for us to make accurate forecasts. Within Japan, higher prices, labor shortages, and the weakening yen have lowered feasibility. But the inflow of capital from outside of Japan continues to provide support. Our domestic businesses are healthy overall with profit up 16.1% year-on-year centered on real estate, PE and concession, and the insurance businesses. So we are performing ahead of plan. Please turn to Page 8. Having said that, in order to meet our full year target of net income of JPY330 billion and ROE of 9%, we will need to achieve growth in base profits and realize the sales of some assets in the second half of the fiscal year. In the first half, we booked investment gains of JPY23.6 billion, and we forecast that investment gains will be concentrated in the second half of the fiscal year. We expect a sharp recovery in the second half. Assets for sale are primarily logistics facilities, rental condominiums and other real estate-related assets, as well as our private equity assets and renewable energy facilities. Negotiations on conditions are currently underway with potential buyers, and we will release details as soon as they become available. To give you an overview of the first half results, domestic businesses were strong overall. Real estate, PE and concession, insurance, and lease financing business in Corporate Financial Services posted pretax profit of JPY138.2 billion, up 142% year-on-year. We expect to book investment gains during the second half, so we believe that we will have steady earnings if everything goes according to plan. Page 9 and 10. Airport concession and real estate operations have enjoyed a particularly strong recovery. During the pandemic, concessions recorded around JPY10 billion in losses because of ownership stakes. However, we focused on about JPY5 billion in pretax profit contribution in the latter half of this fiscal 2024 March, and I expect to return up to around JPY10 billion in profits in fiscal 2025 March. In real estate operations, the average value rate and the lodging facilities have already surpassed pre-pandemic levels, and an increase in inbound tourism has led to believe that additional improvements can be expected. As for MICE-IR, we have signed an agreement with Osaka City and Prefecture in late September. Although the investment amount is higher than we had usually planned due to inflation and rising construction costs, we judge that the project still allows MGM and ORIX partnership to secure the desired level of profitability. We are financing details with original contractors and preparing to begin construction in 2025 following the resolution of land substance issues. The primary reason for 38.82% progress has been poor performance at ORIX USA – despite the weaker yen and the extent to which we can recover from that will be one of the challenges for the second half. In the U.S., high interest rates persist, which means that we accelerated sales of existing assets, approximately US$750 million worth. We also limited new deals, but unfortunately, credit costs and allowance for bad debts are increasing. For fiscal 2024 March, we are strengthening credit risk monitoring and prioritizing risk controls, and we anticipate that ORIX USA will underperform the initial profit target by about US$200 million. In other words, whether other segments can offset that will be the challenge for the fiscal 2024 March earnings outlook. Robeco Group's AUM declined during the first half, but it has hit bottom and is on a recovery track. We expect roughly a 10% year-on-year decline in fee income for fiscal 2024 March. However, new funds such as ESG-related funds and active ETFs are launching, and the outlook of the business remains bright. For ORIX Europe, overall AUM is €301 billion, and the segment profit pretax income was €125 million for the six months. AUM for Robeco parent is €166 billion, and we will continue to improve earnings in this segment. In aircraft and ships, passenger numbers in the United States and Europe remain at record high levels, and airline demand for the leased aircraft is strong. We thus expect to accelerate the number of purchases and aircraft sales in the second half. While it could take some time for earnings to recover owing to the higher euro and U.S. dollar hedging costs, we anticipate an acceleration in asset sales to allow for improvement in ROE, ROA, and additional earnings contribution. In Page 11, in 2017, we purchased 10,988,577 shares in the renewable energy developer and operator, Ormat Technologies, for US$626 million. In November 2022, we sold 7.69% of this stake and booked $113 million or JPY15.9 billion gain on sale. We continue to hold 11.08% of the stock, and the current share price is around $62 per share in comparison to the purchase price of $57. Although the shares are down owing to the Israel/Hamas conflict and other factors, the shares remain at an acceptable level even after considering four hedging costs, but we plan to take a wait-and-see stance. At the time of purchase, Oman’s adjusted EBITDA was US$344 million, and the company’s guidance for the earnings is between $480 million to $510 million for this fiscal year. Operating capacity has increased from 700 megawatts at the time of acquisition to 1.2 gigawatts, and by 2025, the capacity is slated to increase to between 1.9 gigawatts to 2.0 gigawatts. We view this as an exciting future investment portfolio. For the overseas renewable energy business, Elawan has a portfolio of 1.65 gigawatts in operating assets and generates earnings contributions of more than €90 million annually on a total asset of €2.67 billion. The firm has roughly 8 gigawatts of capacity either under construction or in development, and we are moving ahead with plans to sell certain assets, chiefly those with stable cash flows. Elawan's earnings flow into ORIX Group is six-month lag, and some asset sales may be posted during the next fiscal year. However, we expect to achieve ROA of 3% or higher for this business. Elawan’s asset in operation has more than doubled in two years since it joined ORIX Group. This and its rich pipeline make us believe the firm has a portfolio ripe for capital recycling in the future. We plan to develop Elawan into a core part of ORIX's core portfolio. In 2021, ORIX acquired 20% of outstanding shares of Greenko and has now invested a cumulative of US$978 million. We own a total of 6.3 gigawatts in solar, wind, and hydroelectric assets in operation and have three large-scale pumped storage projects equivalent to 4.6 gigawatts under construction. We have a total of development pipeline of 12 gigawatts, including new pumped storage projects. In pumped storage project construction, steady progress is being made in concluding off-take contracts and Greenko plans to begin operating some of the projects from June 2024. We strongly believe that the investment value of Greenko has increased substantially. Page 12, at DHC, which we acquired last year, we have implemented a new management structure. We are improving governance and compliance, IT strategy, product strategy, and are rebuilding marketing efforts and executing the post-merger integration (PMI), such as reviewing the business in Greater China. Preparation to take Toshiba private is underway. Following the November 22 Extraordinary Shareholder Meeting, the company is set to be delisted on December 20. We executed LP equity investment and mezzanine loan of JPY100 billion each and expect earnings contribution from next year onwards. The timing of when gains on the sale of assets are booked will impact our ability to achieve the FY2024 March earnings outlook for JPY330 billion in net income. Depending on the progress made in the individual deals, there’s a possibility that we may have to revise our targets. Nonetheless, we will continue to do our utmost to meet our earnings forecast. Finally, ORIX Group has revised our corporate philosophy and I’d like to announce the new ORIX Group purpose and culture. Our purpose defines why ORIX Group exists in the world, and our culture is a set of shared values. In order to bring this purpose to life, I would like to support its widespread acceptance as a shared way of thinking among ORIX Group people globally. I hope that ORIX Group can unify around its purpose and culture as we seek to bring new values to all our stakeholders worldwide. Thank you very much for your attention.

Operator, Operator

Now we would like to open the floor for questions. SMBC Nikko Securities, Muraki, please ask your question.

Masao Muraki, Analyst, SMBC Nikko Securities

Yes. This is Muraki from SMBC Nikko Securities. I want to know more details about what happens when the interest rate goes up. If short-term interest rates are about 5 basis points, like it was in 2007, and the long-term interest rate is about 1.5%, under that scenario, what kind of business opportunities will ORIX see? In the integrated report, I saw that there was a story about when you joined Mr. Inoue and lease profit and funding. There used to be margin arbitrage, but right now it is not possible. If the short-term interest rate is about 50 basis points, maybe arbitrage would be possible again in the corporate financial services business. I would like to know if that’s feasible. This pertains to the business side of things. Additionally, regarding ORIX Bank and ORIX Life, in terms of a potential IPO, what level of profit or gain on sales would be acceptable or what can you expect? For instance, PBR is currently rising and is about two times right now. I understand that you won’t hold onto ORIX Life and ORIX Bank indefinitely, and once financial policy stabilizes, selling these assets may not be realistic. That’s my question.

Makoto Inoue, CEO

Thank you. First of all, the impact of a higher interest rate? Of course, the bank, life, and lease will allow us to expect arbitrage as the spread widens. So this is a favorable situation for us. Centering around corporate financial services, lease operations, which used to slow down in the past, can now accelerate. However, with dozens of basis points, the spread would not widen that much. The interest rate will have to reach maybe 2%, 3%, or 4% before we can engage in an interesting spread business or arbitrage business. Life and Bank, the assets that we hold are different from lease. They are more liquid, which means that including potential sales of assets, we can expect improvement in the earnings. Now, Bank and Life, zero interest rates have continued for a long time, and the PBR in the financial service sector was 0.05 or something like that. So we can expect improvement in share prices due to higher interest rates. Once that happens, we will start a dialogue with the market. If the PBR goes up that much, why not ORIX Bank? That's the question that we received. The real estate condo investment and also trust business and merchant banking restart various activities are starting, but we don't want to suggest one single thing. The business model has to be multiple, not just one. Otherwise, overall PBR will not go up. So either way, to prove the earnings from the banking business, we need to increase the number of businesses that are multifaceted. This is something that I'm discussing with the bank team. As for life insurance, of course, the higher interest rate will directly impact that business. Embedded value and other improvements could be expected. Depending on the situation, in the future, life insurance liquidation – excuse me, life insurance sell-off may be possible, but we don't have enough materials to decide that right now. In terms of negative impact, private equity, of course, and real estate development projects would experience higher interest rates and also higher construction costs. High interest rates will push up general costs. For development and exit NOI, we have to look at the arbitrage carefully and build the new projects very carefully. We are not doing any low spread businesses. More than 3% arbitrage is possible for the projects that we find. A few tens of basis points of interest rate increase could not impact us that much. I hope that answers your question.

Masao Muraki, Analyst, SMBC Nikko Securities

Yes, thank you. I read your story very interestingly on the integrated report about how to leverage or take advantage of failures. Thank you.

Operator, Operator

Next is Sato from JPMorgan Securities.

Koki Sato, Analyst, JPMorgan Securities

Thank you. This is Sato speaking. First question about the U.S. business. On Page 31 of your presentation material, you are disclosing the numbers and compared with the past, new investments are being controlled, you mentioned. This time the real estate system business segment is down, but if you look at the total picture, it's flat. So what you say is controlling risk is what you are doing. When you continue with that, the base profit of each business and the segment assets, what will be the trend of those? What should we expect? If you can give us some more details on that and also the higher interest rate in the United States. Could you comment on that as well? In the past, Avalon charge the interest payment would increase and also the USA segment; that would be positive, so it would be offset. And also on another page, the higher interest rate in the United States does not have much impact. So as of now, when you look at the current portfolio, how would the higher interest rate in the United States impact your profit and loss? If there are any updates? Thank you.

Makoto Inoue, CEO

USA operation. First of all, most of the main business in the United States are private credit and the financial business. So PE, the amount is limited or small. Our real estate focus is multifamily finance and agency or sell to agency and credit; double B or single B equivalent companies. We provide loans to those companies. For single B, double B minus loans, there are some remaining, and right now they're using tangible assets or rather they are using intangible assets. The cash flow based is the collateral used for most of the loans in the United States. When the interest rate rises, the cash flow on the customer side turns negative. So there are several higher credit costs and bad debt increases, and we have already worked them out and we increased the provision. We have done the mark-to-market and then selling them off. So that’s what we have in the United States. Even when the interest rate goes up to 5% or so and if it stabilizes, then around a 5% funding cost will be the assumption for increasing the balance of the loan. In the future, when the interest rate comes down, then we can do arbitrage, and probably we are reaching the peak. We are trying to wait and see and start to make new investments, and then we should be able to make that quick recovery. As for the interest rate in the United States, as I said, a 25 basis point or 50 basis point change would be better, especially ORIX USA. Most of the assets are floaters, so fixed interest rates—we don’t have any assets at fixed interest rates—so the impact will not be a big one on us. Also Avalon and others, Avalon expectation and investment are all in U.S. dollars. Avalon’s earnings are improving, including our hedge cost; we think that it would take some time before recovery. So we have to really reconsider the hedge cost. But as of now, the Avalon and others for the U.S. denominated investments, the interest cost, how to change that, we are thinking that we should reconsider. But that’s being reconsidered. So we have not yet made a final decision. In the future, this is something that we need to work on. Did I answer your question?

Koki Sato, Analyst, JPMorgan Securities

Yes. Thank you. Just a follow-up, ORIX USA the floater assets and higher interest impact has been positive. So this time in the first half, the segment profit or base profit results, the higher interest rate that positive impact is included. Is that the correct understanding?

Hitomaro Yano, Accounting and Treasury, Investor Relations

Yes, that’s correct. The liability side is exactly what you said, but the asset side with the higher interest rate, the customer side has a negative cash flow or deteriorating cash flow financing and has the bad loan and that I think is the negative factor for ORIX USA.

Koki Sato, Analyst, JPMorgan Securities

I see.

Hitomaro Yano, Accounting and Treasury, Investor Relations

So the interest rate sensitivity is difficult to say, but the environment, of course, is a mixture of positive and negative. Thank you very much.

Operator, Operator

Thank you. Next is Daiwa Securities, Watanabe-san. Please ask your question.

Kazuki Watanabe, Analyst, Daiwa Securities

Yes, this is Watanabe from Daiwa Securities. I have one question about the profit plan JPY330 billion, how strong is this commitment for this fiscal year? On Page 8, you are showing capital gain outlook JPY100 billion; the lower bound is shown for the second half and the JPY400 billion for next fiscal year. Maybe you attempted to prioritize that. The utilization of capital has actually increased to 94%. I think there is of course upside and downside. But how strong is the commitment for the profit plan for this fiscal year? That’s my question.

Hitomaro Yano, Accounting and Treasury, Investor Relations

That is actually a very difficult question. JPY330 billion, JPY100 billion, well, about JPY80 billion considering what we have done in the first half. This is basically according to plan, and we’re hoping to do this in the second half. In January and February, during the end of the pandemic, we started to move forward with sales activities. But of course, there are buyers and their own situations. Sometimes they’re late in responding to the situation. So negotiations starting from February to March would probably be concluded in the second half of the year. This is why the schedule is expected to be tail heavy or second half heavy. But if this is actually possible, we believe that we can achieve this number. It really depends on the customers. In order to achieve JPY400 billion, maybe we want to delay some of them. Maybe that is a sentiment. The sales teams have their own objectives for this fiscal year. If they cannot achieve this, there’s going to be strong pressure. So on the ground, I don’t think any team is considering prioritizing next year’s profit target. Now, as I mentioned before, renewable energy-related matters are starting from next fiscal year; operations will start in some of these initiatives. Once they’re operational and the cash flow is stable, it means that we can exit immediately, including Greenko. Well, Ormat was a little unexpected because of the Israel situation, and the sovereign risk has materialized or maybe a little bit more difficult. Other than that, everything is basically going according to plan.

Kazuki Watanabe, Analyst, Daiwa Securities

And the next question is to what extent we will have event risk.

Hitomaro Yano, Accounting and Treasury, Investor Relations

So that is basically one of the risks that we have to look at in terms of achieving the target, and excluding that, all efforts are being made so that we can achieve the target smoothly.

Kazuki Watanabe, Analyst, Daiwa Securities

Well, in terms of employed capital ratio, I think it's going up. And also, there is a possibility of buying the used car business. Do you have any idea or plan about exit?

Makoto Inoue, CEO

Well, we don't increase the bank lending dramatically. As I said before, capital recycling is at the center for our new investments. So we are basically recycling the assets from the older ones to the new ones. For the old ones, it's basically capital recycling. We want to increase earnings. For the new projects, we use that funding, and the employed capital ratio should not be very high. That is the very basic policy of our business.

Kazuki Watanabe, Analyst, Daiwa Securities

That's very clear. Thank you very much.

Operator, Operator

Thank you. Tsujino Natsumu from Mitsubishi UFJ Morgan Stanley Securities.

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

Yes, thank you very much. The banking and credit in the presentation, the trust asset, JPY1 trillion. For the real estate loan, you have sold some of them, and this led to this amount. Until now, we did not pay much attention to that. So liquidation rate, how would that start to impact your earnings? The new investments in the new real estate market, I think that it's very competitive. So whether you are successfully doing dates and also with the intensified competition, I think that the competition has been always intense. So what is going to be – how would you improve your position in terms of the gain on sales of the exit?

Makoto Inoue, CEO

Well, 0.7% ROA of 0.7% or 0.8%, or their mission is to get to the 1%. So what they do is to make the earnings and that want their total assets would increase. The JPY3 trillion is the total asset in their assumption, and they have set up the earnings target. As a parent company, at JPY3 trillion and if it’s 0.7%, it's not good enough because ORIX Group ROA will be pushed down. So that is not acceptable. Our real estate loan is not the only thing we have. We have slowed down especially in banking for real estate loans for investment purposes. In merchant banking, especially for the renewable energy project finance and also project finance like syndication becoming a leader and getting the fee revenue and selling the assets. This is the policy that they have. The extent to which they are successful in doing so will determine how we can manage the metrics or determine the future of ORIX Bank. I hope that answers your question.

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

Yes, I understand the philosophy. So from now on, this – the JPY1 trillion, the breakdown and the impact on the profit and loss, if you can provide that information in the future, that would be very helpful. Thank you.

Operator, Operator

Thank you. SBI Securities Otsuka-san, please ask your question.

Unidentified Analyst, Analyst, SBI Securities

Yes. This is Otsuka. I hope you can hear me?

Makoto Inoue, CEO

Yes, we can hear you.

Unidentified Analyst, Analyst, SBI Securities

I want to go back to what you said, maybe I have missed something, so I just want to confirm something. USA, when you explained about ORIX USA, JPY200 million underachievement, I think that's what you said?

Makoto Inoue, CEO

Is this about the profit being underachieved by $200 million?

Unidentified Analyst, Analyst, SBI Securities

Yes.

Makoto Inoue, CEO

Post-tax profit target, ORIX USA, in 2010, had JPY750 million pretax profit. That pushed up the target profit internally, and the JPY500 million, just under JPY500 million pretax profit was a target for this fiscal year. Against this target, they will be underachieving by about JPY200 million.

Unidentified Analyst, Analyst, SBI Securities

I see. So according to your document, well, on Page 10, for example, you are showing ORIX USA profit being JPY55 billion. This is pretax target. So there is a possibility that you will not be achieving this, and that is why you are trying to offset this by profit from other segments, is that correct?

Makoto Inoue, CEO

Well, JPY55 billion, this is in Yen. We are actually charging a lot of different costs for this segment. That is why we have this number. Yes. So JPY55 billion is a pretty tough target. And how we can support it will be key to achieving the JPY330 billion target overall.

Unidentified Analyst, Analyst, SBI Securities

I see. Thank you very much.

Operator, Operator

Next, Sasaki-san from Nomura Securities.

Unidentified Analyst, Analyst, Nomura Securities

Sasaki of Nomura Securities. Can you hear me?

Makoto Inoue, CEO

Yes.

Unidentified Analyst, Analyst, Nomura Securities

On Page 8, I have a question. First of all, this type of disclosure, I have been covering you for a long time. This is the first time that I see this. So why did you decide to disclose this now? Could you explain the reason? And also capital gain forecast was mentioned and when and which number was used to come up with this calculation? Could you talk about the assumptions and also, if possible, the commitment of JPY330 billion and also JPY400 billion for the next year? I would like to hear your view on your commitment to achieve that.

Makoto Inoue, CEO

But as for Page 8, for a long time, the disclosure of ORIX has been criticized by investors. There was some dissatisfaction, so we wanted to improve that. Different ways of disclosures are being done. This is part of our efforts to improve. In order for you to understand what would be the best disclosure and how should we disclose the numbers? We are always thinking about it. This time we decided to provide this capital recycling table so that you can better understand. We are always trying to make improvements. As a result of that, we are disclosing this page. Also, the JPY330 billion commitment as I said earlier, the capital gain in the past, the annual capital gain has been from JPY80 billion to JPY100 billion and those numbers are based on the book value of our assets with the gain on sale. That means that the capital gain in addition to the book value, and based on that assumption we always make a calculation. So JPY100 billion or JPY80 billion capital gain. This is the net profit on sale or gain on sale. About the JPY400 billion, similarly, there are multiple projects ongoing and some of them are in development. In the second half of this year and early next year, they will gradually start to operate. We will consider selling them, and which project can be sold and what would be the level of the capital. Those are the validation verification we go through. As a result, we think that we can achieve JPY100 billion. Toward that target, we would like to proceed with capital recycling or setting of those six. I hope that answers your question.

Unidentified Analyst, Analyst, Nomura Securities

So if that is the case, Page 8, going back to those numbers, you are negotiating with counterparties based on those numbers, say that the JPY20 billion to JPY40 billion, and JPY60 billion and so forth mentioned. If it's possible, when you sell which assets, what kind of numbers do you come up with? If you can – so for example, you have so many private assets. Overall balance sheet unrealized gain is very difficult for us to calculate. This time you are disclosing Page 8, if you can show us the denominator of those numbers, what would be the size of it if possible.

Makoto Inoue, CEO

First of all, those numbers right now from the front line, those are the expected capital gains when they negotiate. It’s not just something that we calculate. As for the denominators, Yano-san, depending on the case of real estate, it’s 1.5 to 2 times; if it’s old, and for the PE, 1.5 to 2 times at the time of sales. The book value is 1.5 times the capital gain. I think in many cases, it's at that level. That gives a kind of image that will be coming down. For real estate, the development NOI is the cost, and the exit NOI for the development NOI is 5.2%, for old ones it's 6% or so, and the new ones are 5%. The NOI is 3% or a little more. Based on those assumptions, I think that you'll be able to match with those numbers. For the PE investments, as you know, at the time of Yayoi for JPY80 billion, it was JPY260 billion, so it increased dramatically. The size of the denominator is difficult to say. When you say it, the buyers might say that they are not going to buy at a high price, so it's difficult for us to say about the PE investment. But renewable energy and others, especially the real estate, particularly renewable overseas, the development NOI is about 8% or 9%, and the exit NOI is 3% to 4%. Those are the numbers for our exit strategy. For real estate, as I said, 5% is the entrance and the 3% is the exit. If you consider like that, I think that you'll be able to have a good grasp of those numbers.

Unidentified Analyst, Analyst, Nomura Securities

Yes, so renewable energy, it's like doubling. It is likely to be sold, and in your segment disclosure, certain assets with a certain size are included. So that means that you already have a certain level of unrealized gain?

Makoto Inoue, CEO

Yes, that's correct. The issue is that when we disclose it, there will be an insider issue, so I would like you to understand that.

Unidentified Analyst, Analyst, Nomura Securities

I see. Thank you. It's now clear. Thank you.

Operator, Operator

Thank you. We're nearing the end. So this is going to be the last two questions. UBS, Okada-san, and then Niwa-san. So we'll start with Okada-san.

Taiki Okada, Analyst, UBS Securities

Yes, this is Okada from UBS Securities. I was looking at Page 10. The full-year profit plan JPY105 billion for overseas, how likely is this going to be achieved? So overseas environment energy and Asia and Australia, hedge costs will continue to stay high in the second half as well. That's my expectation. So capital gain and also asset size increase in the second half, do you think that will enable the achievement of the targets? Also for Asia and Australia, compared to the last fiscal year, the profit level is maybe lower in the first and second quarters of this year. Do you think this is going to recover during the second half of this fiscal year?

Makoto Inoue, CEO

For aircraft and ships, we believe that it is possible to achieve because we are selling off aircraft and also ORIX-owned aircraft offered to investors who want to use them as tax holders. So we believe that for aircraft and ships, it's possible to achieve the target. For vessels, we will be selling about four vessels in the plan, and that's achievable according to the current market situation. Environment and energy, especially Elawan, Avolon asset sales are in the center of focus. For Avolon, the profit contribution has a three-month delay. Can we do this before the end of December, that's the question? If not, then may not be able to achieve the target and that will be pushed out to the next fiscal year, so this is still in influx. For Asia and Australia, again we will have two or three assets to be sold. That's in the plan, and the internal process is ongoing. One of them we're trying to sell is an asset in China, and we need approval from the authority. As long as the approval is granted, there is no three-month delay for this. We can sell before the end of March next year. For Asia and Australia, last year, we sold one lease company. Because of the absence of that, the number looks smaller this time around. But regarding lease business then, we are seeing steady recovery. But in terms of gain on sales, we will have maybe one or two more of these companies' sales, but we do not expect a big capital gain coming from this. This is why we are presenting this number. I hope that answers your question.

Operator, Operator

Okada-san, did you ask a question? Next, Niwa-san from Citigroup Global Markets.

Koichi Niwa, Analyst, Citigroup Global Markets

Thank you. My name is Niwa. Hope you can hear me.

Makoto Inoue, CEO

Yes.

Koichi Niwa, Analyst, Citigroup Global Markets

Thank you. On follow-up questions about the aircraft and ships, I would like to ask another question. There are three questions. The next year, what would be the segment profit expected? The second is the collection of the insurance, what will be the time frame, if you can comment on that? The third is inorganic possibilities. I think that the aircraft industry is very active. As for the funding, it's not very easy and it's not going to get easier. So inorganic possibilities, I think it's quite – it's a good time for considering that. So if you can comment on that.

Makoto Inoue, CEO

As for the next fiscal year target, we are checking. As for the insurance, Avolon $300 million, we are asking for that payment. AerCap and others, a partial collection or recovery has been completed. Domestic aircraft in Russia, if they go outside of the country, they will be foreclosed. They don't want to have that, and the payment was done for part of it. $300 million out of the $300 million, the $70 million is going to be paid by the Russian company, so we are currently negotiating. Roy's insurance company negotiation has become litigation. So about that, it will probably take one or two years. If the collection $70 million from Russia is possible, then it won't take that much time. For the next year target for aircraft and ships, although we have not yet announced this, but JPY350 million to JPY40 billion. Most of the JPY40 billion or two-thirds are from aircraft and one-third from ships. As for ships, most of them are already sold. Unless there is a lowering of the marine transport, we won't be able to make an order. This is not very clear. As for aircraft, it's very active. The acquisition at a low price is very difficult. But the aircrafts, we have inflation hedging. When the interest rate goes up, the leasing also goes up. No negative spread is likely to emerge. Post-pandemic, the lease factor is 0.5% to 0.6%. Right now, it’s 0.8% to 0.9%. This is because of the rising interest rate. So the leasing of the aircraft based upon the inflation in interest rate changes without much negative impact. I hope I answered your question.

Koichi Niwa, Analyst, Citigroup Global Markets

Yes, thank you. Thank you very much.

Operator, Operator

Thank you. It's time to close the Q&A session. Lastly, we have closing remarks from Inoue-san.

Makoto Inoue, CEO

Yes. The numbers will be tail heavy second half heavy, which may be causing some concerns among you. But from October to December in the third quarter, to what extent do we see progress in terms of capital gains, that will probably enable us to give you more detailed or more accurate numbers when we do the earnings announcement in December. Interest rate hikes in the U.S. are impacting our allowance for doubtful debt; it is increasing. We want to make some improvements, although it's difficult to do so. Other than that, things are going very smoothly. We expect and appreciate your kind support going forward. Thank you. And that concludes the second quarter earnings announcement. Thank you very much for staying with us until the end of the meeting. Thank you, and goodbye.