Earnings Call Transcript - IX Q1 2021

Operator, Operator

Good evening, ladies and gentlemen. Thank you very much for joining this telephone conference for ORIX Corporation for First Quarter Consolidated Financial Results for the Three-Month Period Ending June 30, 2020. The attendees at today's conference are Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. And as we begin the meeting, we would like to ask the participants to kindly turn off your mobile phone or other communication devices nearby or move them away from the phone. If during the meeting we find the howling or the noise feedback, we may have to disrupt the meeting and may ask participant to deal with this issue. We hope that you kindly understand. Mr. Yano will give you a presentation for first quarter financial results and we’ll move to a Q&A session. The whole conference will take about an hour. At this time, I would like to turn the call over to Mr. Yano. Please, go ahead.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

This is Yano speaking from the Treasury and Accounting department. Thank you very much for your participation on this call, despite your busy schedule. So without further ado, I'd like to get started with the business performance announcement of 2021 March and first quarter. So I hope you had received the PowerPoint slide in front of you. And I would like to make use of this deck. And please turn to the second page to begin with. So to begin this explanation session, I'd like to give you the procedure of this meeting. First of all, I'd like to explain the summary of business performances. Net income is JPY 50 billion, annualized ROE of 6.8%. ORIX is pretty well diversified in terms of its businesses. And as a result, although some businesses are affected negatively by COVID-19, we did manage to generate some profit. First half dividend is scheduled at JPY 35, and full year payout ratio of 50% remains unchanged. Second, the segment performance. For the first quarter, we increased the number of segments from six to ten. The remarkably growing overseas businesses, in fact, is growing its significance. So we have decided to split the overseas businesses into four segments and also domestic business that shares the same sales network, as well as reporting line, are expected to enjoy synergy and thereby we have decided to integrate into one segment. At the same time, we have made the environment and energy segment an independent segment. Our business model is often described as too complicated and not easy to understand, but we would like to enhance our disclosure continuously to facilitate a better understanding on the part of the investment community. And the third, I will be explaining about the financial soundness of our company. Back in July, S&P had announced the maintenance of the current rating, and we have managed to maintain an A rating and above with all the credit agencies. As of the end of June, liquidity on hand, excluding bank and life insurance, remained high at JPY 1.1 trillion, with a coupon of 0.03%, a very low coupon rate. We managed to issue a straight bond of JPY 70 billion in total, so funding environment remains favorable. Finally, I would like to talk about the investment pipeline. Despite the current environment, our investment pipeline remains rich, and examination can continue with a view to execute within this fiscal period. So let us move on to the next page. Now, first of all, I'd like to elaborate on the business performance summary. I'm sorry to be redundant, but the first quarter net income declined by 27.7% year-on-year at JPY 50 billion. Annualized ROE has become 6.8%. So let me move on to the next page. The next is breakdown of segment profit. Segment profit was JPY 75.4 billion. And I'd like to explain, just like before, by separating the profit into two: Base profit versus investment gain. The navy color indicates base profit. Year-on-year decline of 23% at JPY 60.5 billion and mostly affected by COVID-19, that is the decline. As for the pale blue color, is investment gain, as compared to the prior year of JPY 27.2 billion, the generation of investment gain was JPY 15 billion this quarter. This is a reaction to a large investment gain generated from PE investment in the United States in the last fiscal period. However, we managed to post a certain amount of investment gain this year. On this page, you can see the impact of COVID-19 in the first quarter on various segment profits. In May during the earning announcement, we identified real estate aircraft leasing and concession-related businesses that would suffer the biggest impact. In addition, automotive business and ORIX U.S. also had some impact, and the segment profit was down by JPY 24 billion. On the other hand, the environment and energy and retail-related businesses, such as life insurance, banking, and credit, were not greatly impacted by COVID-19 and the performance was solid. Please turn to the next page. Now, I would like to turn to the second point, which is change of segments and the segment performance. This is a comparison chart of the increased or improved disclosure of the segment, as was explained at the beginning. Last year, we started using six segments and 16 units for the presentation. We changed the segments, but the 16 units remain the same as before, more or less. This is an easy way of comparing the changes. On the next page, you can see our performance by segment, starting with our segment profits. Certainly, we have businesses impacted by COVID-19, as explained earlier; seven segments were down in profit. But three segments with relatively small impact increased in profit. Year-on-year change and the factors are summarized on this table. Page 13 and onwards will explain the details. We don't have enough time to go through all the details over page 13 and beyond, but I would like to use the chart on page seven to explain. Starting with three segments with the biggest impact of COVID-19. At the full year earnings announcement, we explained the impact of COVID-19 on these three businesses for the fiscal year. For real estate, profit reduction of JPY 25 billion to JPY 30 billion, for aircraft leases, JPY 20 billion to JPY 30 billion decrease and for concessions, we mentioned that the net income may be zero or even in the negative territory. Now looking at the current environment, facilities operation, which is in the real estate segment. Let us look at this business first. We operate more than 5,000 rooms in hotels and inns throughout Japan. In order to stop the spread of COVID-19, we closed most of these facilities until the end of May, which meant JPY 4 billion reduction in profit in the real estate segment. Since the certain measures were lifted from July, we started operating with a maximum of 50% operational level. After August, we'll be removing this upper limit of 50% operation and we will view the way these facilities are operated and how the expenses are spent. Therefore, the outlook for this fiscal year's performance is better than initially expected. Moving on to the concession business. We own 40% of Kansai Airports, which operates three airports including Kansai International Airport. Their performance is reflected in our numbers three months later which means for the first quarter results we are looking at the performance of the Kansai Airports from January to March of 2020. Due to the global travel ban, many international flights were reduced or canceled, leading to a reduced number of travelers. In the PE investment and concession segment, we saw a reduction in profit of JPY 5.8 billion. Overall, there are some recoveries in domestic airlines. Since there is a lot of uncertainty, we have not changed the pessimistic scenario that we explained last time. Moving on to the aircraft lease business. Again, demand for air transport is reducing mostly around international airlines and the proceeds for the aircraft reduced. Some impairments have to be recognized, and the transport segment suffered JPY 3.3 billion reduction in profit. Now Avolon, our affiliated company with a stake of about 30%, announced their second-quarter earnings on July 30. We are currently seeing impairment of some of their fleet, generating a loss of $162 million. However, their accounting standard is IFRS, whereas ours is U.S. GAAP. This is why the differences in recognition standard for impairment exist between the two companies and/or accounting standards. So according to U.S. GAAP, we did not recognize any impairment. As a result, in the first quarter, we've accounted for an equity gain in a positive manner from Avolon. So as of now, with the international flights, we need to be sluggish. However, we are beginning to see some sound recovery in China for domestic airlines. On the other hand, I think we need to be quite diligent and cautious regarding the future perspectives of these businesses. The performances of three major businesses are pretty mixed. However, if we consolidate the three businesses, the performance remains unchanged for the fiscal year. Environment and energy, life, banking, and credit are not greatly affected by COVID-19, and the business remains solid with profit increasing. We can continue to generate profit as we stand right now. They are not only affected greatly by COVID-19, but have managed to benefit from the changes in milestones due to the COVID-19 outbreak. Life increased the number of policyholders by leveraging their online and mail order capability. The same can be said for our banking businesses. They leveraged their non face-to-face online capabilities, growing their real estate investment loan asset. The Rentec unit is preparing for PC rental demand increased due to growing needs for telework or work from home. In the second quarter, the impact from COVID-19 outbreak may expand further, but we intend to utilize our strength of having a well-diversified business portfolio to generate profit led by businesses that will correspond nicely to the changing society. Let's move on to the next page. Now, as for segment assets, I would like to just focus on the major changes from last fiscal year-end. First, corporate financial services and maintenance leasing, the financial assets continued to decrease slowly at a 3% decline year-on-year at JPY 1.7439 trillion. Unlike commercial banks, we do not extend loans for working capital, but we extend loans for facilities and also capacities. Therefore, we haven't been receiving many requests for payment deferrals. Of course, if we do receive such a request, we deal with those requests in a very careful manner. As for the insurance segment, we increased the management of investment securities, and we managed to increase the assets thereby by 5% to JPY 1.664 trillion. Bank and credit segments utilized their non face-to-face capabilities in capturing real estate investment loan demand. As a result, the assets increased by 1% to JPY 2.6295 trillion. Finally, ORIX U.S.A. Their earnings were impacted by FX of minus JPY 13.7 billion. But as far as the decrease in installment loans, this reduced the asset by 4% to JPY 1.3168 trillion. Let us move on to the third point, which is about financial soundness. As I mentioned right at the beginning of the session, the rating maintained at A and above with liquidity on hand, excluding bank and life, remaining high at 1.1 trillion. Although at the final year-end performance announcement in May, we indicated the possibility of a decline in operating cash and collection rate to as low as 70%, the requests for payment deferral and payment delays have remained at a very low level company-wide, allowing us to enjoy a high collection rate of about 95% even including aircraft leasing businesses. Therefore, as I said, the collection rate has been maintained at as high as 95%. Let us move on to the next page. Based on our strong financial health, the financing status for our company is very favorable. We have sufficient additional capacity for funding both from banks and the capital market. The funding is our long-term debt ratio, which continues to stay above 90%. As you can see to the right, employed capital ratio is 87% at the end of June 2020. No major investments were made in the first quarter. The impact of CECL, which is the new accounting standard, has already been reflected in our capital. Whether we make a new investment or provide shareholder returns, we have sufficient on-hand liquidity as well as shareholders' equity. Moving on to the next page, the fourth point is about the investment pipeline. In the past, we have executed many new investments and captured high returns through timely exits. On the back of a strong track record, we now have a very rich pipeline at approximately JPY 2 trillion and we are examining these investment opportunities. By field and by size, these are some examples; valuable businesses in Japan and overseas about JPY 300 billion; roll-up of existing asset management companies approximately JPY 200 billion; private equity investment deals in Japan, U.S., and Asia JPY 250 billion; domestic real estate development project, JPY 250 billion; Osaka MICE-IR, JPY 650 billion; and other new potential investments, JPY 350 billion, in total JPY 2 trillion. As you may know, Osaka MICE-IR has been indicated at the highest amount of JPY 650 billion as of last November. We are still using the same number here, but the actual amount may differ from this number noted on this slide. Please be mindful of that. Global monetary easing has brought excess liquidity, which means that asset prices, including stock prices, did not drop as much as anticipated. Despite this environment, we have strength in exclusive dealing and are carefully examining various opportunities that meet our investment criteria. In some cases, the discussions may have been discontinued due to COVID-19, but the prices may have come down recently. In the first quarter, for example, there was a PE investment into Dojin Iyaku-Kako. This was a new investment that was made. We have sufficient levels of on-hand liquidity for additional new investments. We will look at a rich pipeline and identify deals that would satisfy our investment criteria to try to close some of them before the end of this fiscal year. Moving on to the last page. Net income for the first quarter of the fiscal year ending March 2021 was JPY 50 billion. Annualized ROE was 6.8%. In May during the earnings announcement, we presented two different scenarios. If COVID-19's impact continues for one year, net income may drop to JPY 80 billion to JPY 120 billion. Or if it recovers and normalizes by the end of the third quarter, net income may stay around JPY 180 billion to JPY 200 billion. The state of emergency was lifted on the 25th of May, but the future is still very uncertain. However, we are now operating under the assumption that COVID-19 is here to stay at least for the time being. It really depends on the environment going forward, but at this point in time, we do not believe that we would reach the worst scenario of the two. On the 22nd of May, during the full-year earnings announcement, we communicated that the payout ratio for the fiscal year was 50%. As Mr. Inoue, our CEO, explained to you, to maintain the JPY 76 of our full year dividend, we will continue to make efforts to achieve JPY 180 billion to JPY 200 billion in net income for this fiscal year. Starting from this first quarter, we increased the number of segments from six to ten to improve the disclosure. We are hoping to provide more useful information to the investors regarding the most recent turning point of our business outside Japan. We will continue to maintain an A rating or higher. We have a high level of on-hand liquidity and sufficient cash and capital to support our rich pipeline, so we will continue to execute projects with a high return and take care of stakeholders, including shareholders and ratings, while continuing to use capital in the most appropriate manner. That's all from me. Thank you.

Operator, Operator

Mr. Yano, thank you for your explanation and presentation. We will now move to the Q&A session. I ask that you limit your questions to one each. Let's begin with Daiwa Securities, Mr. Watanabe. Please go ahead with your question.

Kazuki Watanabe, Analyst, Daiwa Securities

My name is Watanabe from Daiwa Securities. I have to limit my questions to just one. Let me ask you about base profit. JPY 60.5 billion of profit seems to be pretty high. In your presentation, you mentioned that there is a very small possibility of turning into a negative scenario. Do you think that you are higher or lower at this point in time? For the second quarter and onwards, if there was to be any overshoot or undershoot, what would be the negative or positive factors affecting the base profit?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Thank you for your question. What would happen from the worst scenario? If I were to answer your question, I would like to give the disclaimer that it is very much dependent on how things unfold from here on out. The worst scenario is, of course, assuming all the worst could happen. But we have been responding to the COVID-19 outbreak as much as possible. So we're pretty confident that we can avoid this worst scenario from happening as a result of our response so far. Regarding whether we will achieve this upside result of JPY 180 billion to JPY 200 billion, I think that was your question in a nutshell. We are going to be furthering our efforts in achieving a better result, of course. But in the businesses that we operate, we have hotel operations, accommodation operations, as well as airport operations. These will be affected by whatever happens from here on out. So we cannot claim certainty for the future. How we can compensate for any possible losses from these businesses with other lines of business? Of course, we would be happy if we can enjoy better developments concerning COVID-19 and all other situations. I hope that I managed to answer your question. However, regarding base profit, I think you asked me about the specifics there.

Kazuki Watanabe, Analyst, Daiwa Securities

Regarding the base profit from the second quarter onwards, is there a possibility of undershoot or overshoot compared to the first quarter base profit result?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

As a matter of fact, by unit it differs significantly. As I told you, corporate financial services and maintenance leasing have adapted to the COVID-19 outbreak and there could perhaps be an overshoot, whereas concession businesses have been delayed by three months. The first quarter managed to capture results only from January to March of this calendar year. The airport started to suffer from mid-February to be precise. Concession businesses are expected to experience the negative impact from COVID-19 from here on out as opposed to the first quarter results. If I were to name some negatives, Hartford Life Insurance, for example, experienced loss generation in the first quarter, but we managed to recover. I cannot draw a clear outright conclusion. If we are to see performance, there are both negatives and positives in the second quarter as I forecast.

Kazuki Watanabe, Analyst, Daiwa Securities

Thank you very much indeed for your answer.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Thank you very much.

Muraki-san, Analyst, SMBC Nikko Securities

Yes. This is Muraki from SMBC. Regarding aircraft lease, I want to ask a question about pages 27 and 28. From the second quarter and onwards, what is the outlook for the aircraft lease? In the first quarter, except for Avalon, there is no profit. Profit is down by JPY 75 million or so. This can be explained by the reduction in the proceeds only. In terms of IFRS versus GAAP, you mentioned there were differences, including year-end situations. What is the possibility of incurring impairment? Additionally, what is the outlook for aircraft lease as a whole?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Aircraft lease, let me explain this. At this point in time, we cannot really be complacent. In other words, we cannot definitively say that the outlook is positive. However, I must say it depends on market development. For Avalon, there is a delay in reflecting the numbers. Impairment was not posted. Avalon bought back some bonds to generate profit, which is why the profit looks a little higher, while OAS saw limited profit from sales. Chapter 11 impairment was partially included as well, which meant a lower level of profit.

Muraki-san, Analyst, SMBC Nikko Securities

Going forward, how long will payment deferral requests linger? That’s one of my questions. Also, during this kind of situation, what would happen to the price of the aircraft themselves? Do we need to recognize impairment?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

All these factors will influence the situation, and at this point, I can't say anything positive about the aircraft lease business. We must pay close attention to profitability and impairment.

Muraki-san, Analyst, SMBC Nikko Securities

According to U.S. GAAP impairment, what triggers the inclusion of payment in the consolidated segment? What should we look for?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Avalon states it's impairment according to IFRS, but not according to U.S. GAAP. Under U.S. GAAP, if the price is low in the context of IFRS, impairment does happen. In contrast, U.S. GAAP considers signs of impairment. They evaluate future cash flow, how lease payments will come in, and the assumption of cash flow will include the residual value several years down the line. Though appraisal prices are not dramatically dropping, if fair value is slightly negative, it indicates impairment under IFRS. Yet, this impairment can be recovered in the future. U.S. GAAP's approach is different; if a big drop suggests permanent impairment, it cannot be recovered. Avalon provided impairment test data based on IFRS, we conducted our own evaluation, consulted with the accounting auditor, and ultimately decided not to recognize impairment according to U.S. GAAP. Thus, we have not recognized payment this time around.

Muraki-san, Analyst, SMBC Nikko Securities

I understand. Thank you very much.

Operator, Operator

Let us move on to the next question from JPMorgan. We have Mr. Otsuka asking the question.

Wataru Otsuka, Analyst, JPMorgan

This is Otsuka from JPMorgan. Thank you for the opportunity. This is going to be a very simple question. As we proceed to the second quarter, I suppose much to the extent, we will be left with the second half for the year. Things will be clearer for the whole year's performance. Would you be making your forecast announcement for the full year? Just as Yano-san explained, it is very much dependent on how COVID-19 outbreak unfolds, but what do you think?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

From that perspective, whether we make the full year forecast or not is difficult to answer precisely. Once we reach the second quarter, things would indeed be clearer. I expect the third-quarter performance forecast will also clarify. Thus, we believe it's better to make a certain announcement on how we foresee the whole year unfolding. I kind of wonder if you would also be asking about shareholder returns. At the time of the second-quarter and full-year result announcements, we will provide further information regarding shareholder returns as well. Therefore, with respect to the second quarter and as of today, whether we will for sure make announcements for the full-year forecast is not yet concluded, but we would like to watch over developments vigilantly.

Wataru Otsuka, Analyst, JPMorgan

Thank you very much for answering my question, including shareholder return. Alright then, unless a significant second or third wave of COVID-19 occurs that prevents you from forecasting the full year, you will indicate how your business performance unfolds from here on out.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

I don't want you to push me into making a commitment. Of course, it will depend on how things unfold. I'm sorry to repeat myself, but that's what I think as of now. Thank you.

Operator, Operator

Mitsubishi UFJ, Morgan Stanley Securities, Tsujino-san, please ask your question.

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

Thank you. I have a question about the situation in the United States. The disclosure has changed; I don't really see it clearly, but segment profit is close to zero. The level is about the same as January through March, marketable securities are the same, and service revenues are coming down. There are different factors; it is difficult to see what's happening. Can you please explain what is happening? What is the loss due to marketable securities and what other factors?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Yes, I'm sorry, I didn't provide you with enough explanation about what's happening in the United States. Please turn to Page 29. For FY 2019 first quarter, you can see high profit. The Houlihan Lokey Bank divestiture had a big impact, just under JPY 10 billion or so in the last quarter. This was not reflected in the first quarter. Then there is impairment and provision in the Rentec segment. I previously explained it in the fourth quarter; it pertains to the energy-related portfolio, which we call a legacy asset internally. We used to have approximately JPY 20 billion traditionally, but we had to increase the allowance for this in the fourth quarter and the first quarter because the situation is getting harder for us. Many funds had to be marked-to-market, which means impairment had to be recognized. We must apply specific evaluation rules and discussions with the accounting auditors were crucial, as we could not simply apply our rules. This resulted in a significant negative impact on calculations in the first quarter closing. Looking back, I would say this is arguably the bottom, and we expect to see some recovery next quarter. Various factors are involved in earnings results from the United States; however, from the second quarter, I believe we will begin to see some recovery. I have expectations that recovery will occur in this area. Does that answer your question?

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

Service revenues are declining, but is that your stance that we don't have to worry about that?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

With regard to the service revenue, companies that were consolidated will be moved from the list of consolidation, and I think this is why you see a big gap. The service revenue decline is just noise.

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

I understand. So it's not really a profit contribution?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

That's correct. There was a capital gain posted last year.

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

So, expense reduction is also because of the removal of that converted subsidiary?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Yes, among other reasons, that's the reason. Similar to Europe, if performance is poor, performance-based bonuses will decrease as well. That could be another factor behind all these numbers.

Natsumu Tsujino, Analyst, Mitsubishi UFJ Morgan Stanley Securities

Thank you. I understand.

Operator, Operator

Thank you very much for the question. The next participant is from Merrill Lynch, Japan Sasaki-san, please.

Futoshi Sasaki, Analyst, Merrill Lynch, Japan

Thank you for the opportunity. This is Sasaki from Merrill Lynch, Japan. I want you to tell me about the JPY 2 trillion investment pipeline. You had given us some idea of this pipeline. But there is a lot of uncertainty this fiscal period. No one knows how things will develop from here on out. Do you think that you'll be able to execute some of these deals within the fiscal period? What is the probability like, the likelihood? If you could elaborate on this investment pipeline?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

At the time of fiscal year-end announcement, Mr. Inoue, CEO, mentioned that we are going to halt all investments because we had no idea how the COVID-19 outbreak is going to unfold and we needed to prioritize liquidity above anything else. In other words, we remained just with the major investment and continued executing small bits and pieces of deals. However, with the current environment and conditions, it doesn’t mean prices will decline sharply. Therefore, we have started reconsidering some sizable deals to execute. As such, we have begun to consult whether we can restart the examination of execution for some sizable deals. Overall, we have been decreasing the number of investments, especially sizable deals. This situation entirely depends on the terms and conditions of these investments. But we certainly wish to continue making a certain amount of investment.

Futoshi Sasaki, Analyst, Merrill Lynch, Japan

On page 11, the table that you have shown us didn’t quite ring a bell, but like asset management companies, for example, are you considering putting capital into these kinds of businesses?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Of course, with the environment and energy sector, it's easy to understand. Regarding asset management businesses, we have been telling you for quite some time we mean by a broader definition of asset management businesses. In the United States, for example, we are considering state service-related businesses. So it is not limited to a general understanding of asset management businesses. It is highly dependent on the terms and conditions moving forward. However, if the price is right and normalization occurs, we wish to consider the possibility of acquisition or expansion of asset management businesses. I must admit we have some offers as well. We want to explore private equity domestically; we are keen on seeking non-auction deals. It doesn’t mean the price is right or no price impact; at least I think some inflated portions have been eliminated, and we are beginning to see signs of normalization of pricing. If the price is right, we want to proceed with execution.

Futoshi Sasaki, Analyst, Merrill Lynch, Japan

If you could explain about hotels as well, what is the possibility of investment into hotels?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

At the moment, rather than hotels, or real-time inns, the deals that are underway should proceed akin to before. We will not aggressively seek new investments into hotels or real-time inns; this may mislead the description.

Operator, Operator

Thank you very much for that. From Alma Capital, we have Mr. Krew.

Unidentified Analyst, Analyst, Alma Capital

I was just wondering about the maintenance leasing segment. You were quite clear it seems that the auto leasing business would come under pressure. I was wondering how much we can read into that as being COVID-19 related, and how much is just the tough environment you've been experiencing over the last couple of years? Also, in that segment Rentec specialist equipment leasing, I was not expecting it to be as heavily impacted as perhaps it has been in Q1. Could you just comment on that as well? Thank you.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Thank you very much. Apologies, I'm speaking in Japanese. Regarding automotive lease, the biggest impact comes from rental car and car sharing. In automotive business, we have leases for corporations and lease for individuals, which is smaller in size, while rental cars and car sharing services face the most significant impact. That's the biggest driver behind this number. Of course, we've been struggling with a tough environment over the last couple of years, but this time around that impact is not that great. The price of second-hand cars has come down, which complicates the interpretation. You could say it’s due to COVID-19 or not; unfortunately, new cars are not selling very well, and automotive OEMs are struggling. Fortunately, this makes second-hand vehicle prices rise, suggesting that this business is recovering more recently. Thus, we anticipate a slightly positive situation. Moving on to Rentec, noise or issues may have been caused in this segment. The challenge is how quickly we can deliver equipment to end customers, as disruptions—COVID-19 included—altered work styles. Thus, the performance declined in Q1; however, we rebuild what we're doing, and we do expect a big recovery in Q2 and beyond. So I don't think this should be a significant concern for you.

Operator, Operator

Let's move on to the next question from Mizuho Securities. We have Sato-san asking the question.

Koki Sato, Analyst, Mizuho Securities

This is Sato from Mizuho Securities. Referring to page 5, the first quarter impact from COVID-19 outbreak has been explained. Regarding the full-year announcement back in May, I think you indicated some progress from the time of the announcement. Relating to automotive, domestic, and services, some loan losses or impairment—if there are any changes you have observed in the mix of these businesses, I'd be grateful. Comparing to the initial anticipation, were there any significant changes?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

I conclude that it was almost in line with our initial expectations. As for the United States and automotive sectors, I realize we didn't clarify those businesses much during the full-year announcement. I apologize for that.

Koki Sato, Analyst, Mizuho Securities

With regard to domestic businesses, such as financial assets—are they okay?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

At the time of the full-year announcement, we were slightly concerned about financial assets. We anticipated perhaps some payment dues and requests for deferral. Quite a number of them. As compared to our initial expectations, we did not receive many requests, and the credit loss was not as significant as anticipated. This is my impression so far. Regarding impairment, as I’ve explained concerning aircraft, we need to remain cautious as we watch the developments moving forward. If you could perhaps follow-up concerning United States businesses.

Koki Sato, Analyst, Mizuho Securities

Thank you for the explanation. But how about Asia in terms of credit loss? If you can provide additional details regarding the Asian region?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

As compared to the domestic market in Asia, the payment deferral requests in fact were more than that in Japan. We have received requests for deferred payments. However, even if we were in a position to be appropriate in certain loan loss provisions, I don't think it will be sizable. ¥2 billion of provision was accounted in the first quarter. If you refer to the appendix, we provide further details regarding this. It varies from one country to another. Even if we talk about Asia as a whole, there are differences from country to country. In Korea, for example, or China, Taiwan, we didn't have much concern. In India, however, the variations depend heavily on the impact resulting from COVID-19 outbreak.

Koki Sato, Analyst, Mizuho Securities

Thank you very much for that.

Operator, Operator

Thank you very much. Citigroup Securities Niwa-san. Please go ahead.

Koichi Niwa, Analyst, Citigroup Securities

Thank you. This is Niwa from Citi speaking. I want to ask some questions about first-quarter investment execution. I may have missed your explanation, but what is the amount of investment executed in the first quarter? ¥500 billion per year, that's the plan. How far did you progress, and what was the content? As far as M&A is concerned, I think there was a comment in the first quarter—it's difficult because you cannot visit outside Japan. Has your initiative changed due to COVID-19?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

We don’t want to make a lot of investments in the first quarter. It’s less than ¥100 billion this quarter. As I mentioned, there is a pharmaceutical company we invested in; however, nothing major, because everything was put on hold due to the strong message by CEO. Mr. Inoue mentioned in the full-year announcement that we don't want to engage in or execute investment projects where we cannot do physical due diligence. We started a project in renewable energy recently, conducted diligence once, and had local staff nearby. Even though borders are closed, we can restart due diligence in some countries. This means that outside Japan, we can still do physical due diligence and continue pushing these projects forward, but not for every project, and we will do what we can.

Koichi Niwa, Analyst, Citigroup Securities

One additional question, if I may. You spoke about a ¥2 trillion investment pipeline. Compared to three months ago, is this an increase or decrease, or is it flat? It may be flat net, but perhaps increased or decreased on a gross basis. Can you explain?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

I would say it is flat. We usually maintain a list of potential investments and then make selections to decide which ones to proceed with or not. Among this list of deals, some new ones were recently brought to us, while some were rejected from the beginning. However, we still maintain our pipeline. Comparing it to three months ago, was there a big change? The answer is no. Overall, we have not really seen major movement in the last three months. But we have always maintained a structure around this pipeline.

Koichi Niwa, Analyst, Citigroup Securities

Thank you very much for your answer.

Operator, Operator

Thank you for the question. We are almost at the end of the schedule. This is going to be the final question that we will be entertaining. From Nomura Securities, we have Sakamaki-san asking the question.

Naruhiko Sakamaki, Analyst, Nomura Securities

This is Sakamaki from Nomura Securities. This will be a quick question. Regarding shareholder returns, you haven't adopted the worst scenario for business performances. You've strongly indicated the dividend payout. Were there any changes you made in the shareholder return policy?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Although I didn’t touch upon shares repurchase, it doesn’t mean we've given up the whole idea of shares buyback. We have just suspended the program. We decided to pause execution of share repurchase until we foresee the development of COVID-19. This does not imply giving up completely. We will also start reconsidering the execution of the program when the time is right. Whether we go ahead or not depends largely on the situation. As of now, no conclusions have been made regarding the restart of this program, yet we are progressing the program as planned.

Naruhiko Sakamaki, Analyst, Nomura Securities

Thank you very much for that.

Operator, Operator

Thank you for the question. We have come to the end of the scheduled time. I'd like to invite Mr. Yano to make final remarks.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting

Thank you all very much for your participation in this conference, despite the manifold duties of your work. I'm sure that you may have further questions, please do put them forward to us on an individual basis, and we would like to continue to provide further information as we enter into the second quarter. Thank you very much indeed.

Operator, Operator

We'd like to conclude the ORIX business performance announcement for the first quarter of 2021 March-end. Thank you very much for your participation, and you may now disconnect. Thank you.