ORIX Corp (IX) 2023 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for second quarter consolidated financial results for the 6-month period ended September 30, 2022.

My name is Nakane from IR Sustainability Promotion. Today's attendees are member of the Board of Directors, Executive Officer, President and Chief Executive Officer; Mr. Inoue; and Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. We would like to ask the participants to keep your mobile phone and other communication devices either away from the telephone or on silent mode in order to prevent feedback.

So we will hear from Mr. Yano and then to Mr. Inoue, followed by Q&A. The duration of the meeting is approximately 1 hour.

At this time, I'd like to turn the call over to Mr. Yano.

Good afternoon. This is Hitomaro Yano, Head of Treasury and Accounting Headquarters of ORIX. Thank you for joining us in today's meeting despite your busy schedule. Allow me to give you a brief overview of our FY '23 March and second quarter results. I'll be making use of the PowerPoint slide in explaining our overview. .

So please turn to Page 2 of the handout. Net income fell 17% year-over-year to JPY 121.8 billion for the first half of FY '22 March end. This translates to an annualized ROE of 7.4%. Please look at the right-hand side chart that shows the quarterly trends of net income. Second quarter net income was JPY 59.9 billion, which was down by just 3% quarter-on-quarter despite major changes in the macroeconomic conditions. As I explained later, the main reason for our lower profits versus the first quarter was an increase in COVID-19-related payouts for policyholders isolating at home and insurance segments.

Please turn to the next page, segment profits. This shows you the breakdown. Now segment profits were JPY 170 billion. Please look at the right-hand side chart that shows trends in segment profits from the prior year. Investment gains are indicated in pale blue, while base profits are indicated in dark blue. Base profits in dark blue were down 18% year-over-year to JPY 144.8 billion. This was primarily due to sharp declines in profit at 3 segments, which performed very well last fiscal year, namely Insurance, ORIX USA and ORIX Europe, the Asset Management business. Meanwhile, the Aircraft and Ships segment a major surge in profits, driven by a recovery from COVID-19.

In addition, strong performance in the Environment and Energy, and Asia and Australia segments helped us maintain stable levels of profit even with a more challenging macro conditions. The light blue or pale blue investment gains were down 52% year-over-year to JPY 25.1 billion due to the absence of capital gains posted from multiple PE exit at ORIX USA during the same period last year. We will continue to monitor changes in the market climate carefully to determine the optimal exit timing for each investee and not make hasty exits simply to boost short-term investment gains.

Now please turn to Page 4 and 5 that shows the results by segment. The page shows a breakdown of profits and assets by segment to give you an overall picture of the current situation at all our segments. Due to the explanations for the segment performance can be found from Pages 17 and onwards. I'll briefly go over some of the highlights now.

Now first is the Corporate Financial Services and Maintenance Leasing segment. Although profits were lower, this was due to investment gains posted in first half of FY '22 March end as well as the related valuation gains. Excluding these one-off gains and profits from Yayoi sold last year, segment profits were healthy.

In the auto business, robustness of used car market continues into FY '23 March end. Furthermore, recovering rental cars, which have been impacted by COVID, allow the business to sustain strong profits. Rentec continues to pay well, supported by growth in demand for rental products.

Next is the real estate segments. Profits were down year-over-year due to multiple gains on the sales of logistics centers and other properties booked in the previous fiscal year, that gives profits were also lower year-over-year condominium sales were skewed to first half in FY '22 March end. However, segment profits are in line with the full year target.

Occupancy rates at hotels and inns were impacted by the seventh wave of COVID cases, but have recovered after benefiting from summer travel demand. We expect a further recovery from second half, aided by upbeat news such as the start to Japan's nationwide travel subsidy campaign. They entered the restriction on the number of inbound visitors and resumption of visa free travel and independent tourism.

Now next is the PE investment and Concessions segment. While some investees have impacted by changes in the macro climate, leading to mixed earnings performance at portfolio companies, the portfolio as a whole is healthy and recorded profit growth. In the Concession unit, passenger numbers on both domestic and international routes are on an uptrend and losses are shrinking. We expect to see an additional recovery in international passengers following the government's decision to scrap the cap on entrants into Japan.

Next is the Environment and Energy segment. Segment profits were up 11% year-on-year to JPY 10.6 billion. In the domestic energy business, power generation from mega solar projects increased, thanks to favorable weather, leading to higher revenue. Overseas, power generation revenue was strong, aided by higher prices in the spot electricity market in some regions. Segment assets were up, but this was primarily due to changes in ForEx. As I will explain later, growth in assets at all of our overseas segments can also primarily be explained by ForEx effects.

Next is the Insurance segment, where profits were down sharply year-on-year owing to higher COVID-19-related payout expenses caused by a surge in infections. Q2 coincided with the so-called seventh wave of COVID infections in Japan, leading to a much larger decline in profits versus Q1, which was impacted by the sixth wave. As of September 26, since payouts for in-home isolations are now limited to persons at high risk of developing complications, payout-related expenses are expected to hit bottom in the second quarter and decline from the third quarter on, and the number of policies enforced continues to grow. And the investment income is rising as a result of strong performance.

Next is Banking and Credit. Banking profits were down year-on-year, owing to a onetime profit booked in the same period last year. Nevertheless, earnings from real estate investment loans remained solid. In Credit, segment profits were down 27% year-on-year, owing to aggressive ad spending to support development of a new lending product, ORIX Money. However, this is in line with our projections.

Next is Aircraft and Ships, where segment profits were up JPY 10.3 billion year-on-year to JPY 10.6 billion. Ships posted major profit gains as the business accelerated sales of owned ships in first quarter to take advantage of high marine shipping prices. The favorable interest spread on the large tranche of ship-collaterized lending executed last year also contributed to earnings. In Aircraft leasing, earnings on an uptrend as passenger markets, primarily in the U.S. and Europe are recovering to pre-COVID levels.

Next is ORIX USA. Segment profits were JPY 21.6 billion, a major decline compared to last fiscal year's record profit levels. Two major reasons were declining capital gains and lower base profits at Lument, which is involved in real estate lending. Markets have taken the slightly cautious turn owing to inflation and rapid pace of interest rate hikes, and our business started to feel the impact. And nonetheless, capital gains and base profit both improved significantly from first quarter to second quarter. Please refer to Page 33 for detailed explanation. Although the risk of recession looms in the U.S. ORIX is diligently monitoring our portfolio, and although we have not seen any deterioration of asset quality at this time, we will remain vigilant.

Next is ORIX Europe. Declining equity market caused AUM to fall, leading to our profits. Fortunately, ORIX Europe have diversified portfolio of asset managers in its roster, including Boston Partners, Value Invest, ESG growth and alternative investment focused managers. Transtrend, a commodity trading advisor has performed particularly were recently and that should contribute to profits through a performance fee booked at the end of December.

Finally, Asia and Australia segment. In relation to selling an affiliate in Singapore, countries in Southeast Asia are recovering from COVID closures and segment profits were up 21% year-on-year. The car leasing business in Australia and South Korea continue to be robust, which also contributed to profit growth.

This ends my comments on the first half of FY '23, March end results. And I'm pleased to have Mr. Inoue, ORIX CEO, to speak next. Thank you, Mr. Inoue?

So this is Inoue from ORIX. Thank you for the introduction. So I would very much like you to turn to Page 6, 7 and 8, which I'm just about to explain. As explained, FY '23 March end first half profits were down 17% year-over-year at net income of JPY 121.8 billion.

Well, I'm sorry to repeat myself, but there were 3 major reasons for the downturn in profits. First, we booked a total of JPY 21.2 billion for COVID-related payouts in the Insurance segment. That's the first. And the second, ORIX USA segment profits were down by JPY 25.5 billion year-over-year, as we limited origination of the new business in the private credit business in the rising interest rate environment and women's agency lending transaction volumes fell. In addition, we did not make any hasty PE exits.

Now excluding ORIX USA and the Insurance segment, base profits were in line with our forecast. Majority of market participants believe that the U.S. FRB will continue to raise interest rates. In light of this, I believe we need to carefully analyze risk before undertaking any new lending or investments, at least until the financial market stabilizes. U.S. interest rates impact conditions in other countries around the world. And under these circumstances, I don't feel it is the best course of action to operate with all the optimistic goals.

So for this reason, we will set our FY '23 March and full year net income target of JPY 250 billion. We, of course, intend to exceed this target, if at all possible. Although the macro climate remains challenged worldwide, led by the United States, base profits for robust, mainly in the Auto, Rentech and Asia and Australia business units. Most of ORIX's base profits are backed by stable cash flows from a diversified portfolio of businesses.

In the current economic conditions, I believe it is important to maintain a strong financial base and stable operating cash flows. Our pipeline for domestic PE deals is robust. And when we consider the recovery of COVID impacted businesses and other factors, I do not see any reason to change our medium-term outlook for net income of JPY 440 billion and ROE of 11.7%, which we have shared last time.

I will comment on shareholders' return later. Although ORIX USA's private credit and agency lending businesses are sluggish, we plan to accelerate the shift to an asset-light business model, utilizing third-party capital over the medium to long term. We look at current challenging market conditions as an opportunity to higher personnel, enhanced governance and rules and develop effective marketing to build out our asset management business.

Earnings in the Insurance segment was squeezed by expenses for COVID-related payouts, which totaled to JPY 21.2 billion in the first half. However, from last -- late September, eligibility requirements have changed. Now only patients that meet a certain set of conditions will be eligible to receive an insurance payout for isolating at home. Although COVID cases remain high with several tens of thousands of persons tested positive each day nationwide. We expect the impact of COVID-related payouts to lessen considerably from the second half. Although ORIX now holds multiple investments where returns could be generated, we are continuing our dialogue with the markets to carefully determine the best timing for our sale.

Currently, based on fair value fund accounting on our PE portfolio, 18 cases in all, we estimate total unrealized gains of around JPY 150 billion. So the health of portfolio is maintained.

Kansai Airports earnings are consolidated into ORIX Group's accounts with a 3-month lag. We expect the easing of border restrictions to help fuel a rebound in international passenger numbers, but the full-fledged recovery in profits should be from the next year and beyond as it will depend on the return in visitors from China. These are the primary reasons why profits may be lower year-over-year for the full year of FY '23 March end. But as I discussed, we see no reason to change our FY '25 margin net income target.

Now please turn to Page 9 as well as 10. We believe that an important theme for ORIX to continue stable growth is capital recycling or the establishment of our model for value creation through investment, operation, growth and evaluation. ORIX had never been hesitant in reshaping its portfolio or rather the company regards such activities to be part of its usual business operation. And therefore, I would like this policy to remain as an important management policy going forward.

From FY '14 March end through FY '22 March end, although there have been some ups and downs, ORIX has grown its net income by 2.8x. We have accomplished this by both strengthening our financial base and accelerating capital recycling to use capital efficiency and effectively. The Investment & Lending Committee evaluates each opportunity in terms of profitability, efficiency, profits prospects for creating value and exit strategy to determine an entry price.

ORIX's value creation model helps grow base profits and improve the quality of earnings through group-wide corporation, including development of sales channels at investees and assisting with business model transformation depending on the investees needs. In addition, application of ORIX Group's governance and compliance rules helps investees realize improvement in corporate value.

As indicated from before, returning ORIX Group to an ROE of 11% or higher is one of the management's highest priority. In order to achieve this, we recognize that it is vital to quantitatively grasp the balance between earnings and capital costs for each segment that comprises our business portfolio. We are moving forward with efforts to visualize our portfolio as a whole through measurement of ROIC by segment, setting WACC and identifying the ROIC spread differential between these segments.

ORIX's portfolio is comprised of a wide range of financial operation and investment businesses that have a mix of pre and post leverage figures among our assets. And there are thus a range of WACC's between segments. Relying solely on ROA as our only management indicator is not perceived as best practice, and we believe that measuring capital efficiency by contrasting ROIC with WACC for each segment will lead to an appropriate evaluation of profitability.

So we are currently considering how to best address ROIC and WACC for each segment. After improving the accuracy of our calculations, spreading understanding among our various business lines and embedding their use in management processes. I would like to disclose our ROIC/WACC guidelines when they have matured to the point where we can introduce them as a former KPI that can effectively linked to our strategy.

Let us move on to Page 11. Many of the companies comprising ORIX Group portfolio contributed profit growth through synergies with each other. And on this page, we have outlined several examples of investments with outstanding synergies, including DAIKYO, Robeco, Kansai Airports and ORIX Bank.

Since ORIX first took capital stake in DAIKYO in 2005, it has supplied a wealth of expertise through its condominium management business and the construction supervision division to the Real Estate segment, which develops commercial complexes and logistics facilities, among others, DAIKYO has grown to the point where it contributes around JPY 20 billion in base profits annually.

Robeco Group was acquired by ORIX in 2013 as a main platform for global development of our asset management business. In the intervening years, Robeco's sustainable investment expertise has become highly regarded as the ESG became a strong trend. And in FY '22 March end, AUM grew to a new record of EUR 339 billion. And since the acquisition, it has been contributing approximately JPY 2 billion steadily. The company has contributed steadily between JPY 25 billion to JPY 45 billion of base profits each fiscal year. Robeco Group's companies also have differentiation diversification effect, as Harbor Capital, Boston Partners and Transtrend each have different investment strategies.

Kansai Airports, which manages 3 airports in Western Japan, was launched in 2016 as Japan's first fully fledged private airport concession operator. Although the business has unfortunately been loss-making since FY '21 March end, owing to the COVID-related decline in inbound travelers, Kansai International Airport is expected to return to 30% of its pre-COVID traffic levels and the Itami Airport to 70%. And we expect a quick return to the FY '20 March end base profit levels quickly as we expect at Osaka Expo as well. We can also expect MICE synergy and others among many.

ORIX Bank entered ORIX Group in 1998 with the acquisition of Yamaichi Trust & Bank. And the bank is working to strengthen the earning power through loans for investment into condominiums and merchant banking and cooperates with the Corporate Financial Services business unit. And ORIX Bank's portfolio remains healthy. And although it has 9 consecutive fiscal years of achieving record profits, improving the bank's ROA will be a key for future.

At ORIX, in addition to pure investments predicated on an eventual exit such as logistics facilities in the real estate business and PE investments, we also developed exit strategies for group companies that we invest in as a strategic purpose. And through this, we continue to conduct capital recycling. Japan is likely to continue its policy of 0 interest rates. And we must imagine the possibility that yen could slide to JPY 160 by the end of the fiscal year or start of the next. There is also a possibility of economic recession. On the flip side, foreign asset buyers are likely to continue to invest into Japanese assets, which we can, and we plan to exit real estate and PE investments in the best time under these conditions.

Please turn to Page 13. JPY 400 billion of execution is expected in the second half and the next fiscal year for Japan PE. In addition to the mid- to small size, we are now looking at larger sizes, and we have mobilized experts for this purpose. And as for Toshiba being private, this is now included -- not included in these numbers. Once the negotiation is concluded and we deem that it is possible for us to execute, the number will be added.

And we plan to develop our renewable energy business, primarily overseas. We believe that this is a future growth area. As illustrated, for example, the Inflation Reduction Act recently passed in the United States, and we are still looking for acquisition opportunities overseas. Elawan and Greenko have a rich pipeline. In addition to that, approximately USD 500 million additional investment is planned. Currently, our overseas renewable energy-related pipeline is 19 gigawatt valued at about USD 19 billion. And we're moving forward with execution on these projects while carefully monitoring business risk, profitability and others.

Within Japan, we have a logistics center pipeline of 14 projects, totaling JPY 200 billion. We plan to complete these projects during the span of about 3 years from second half of FY '23 March end through FY '24 March end beyond, and then sell them. In Aircraft Leasing, we plan to purchase 20 narrow-body aircraft in light of the recovery of the passenger demand for a total of USD 1.2 billion. Although all the planes will be delivered in FY '24 March end, we plan to sell most of them to Japanese investors.

Please turn to Page 14. With the resumption of inbound travel, we expect traffic at Kansai International to increase steadily. In addition, we moved ahead with the renovation of Terminal 1 during the slow COVID period in preparation for the upcoming Osaka Expo. For real estate facility operations, the increase in tourists as a result of Japan relaxation of international border restrictions should help fuel a full-fledged recovery in earnings from the second half.

Please turn to Page 15. From this fiscal year through FY '25 March end, we have pledged to pay a dividend payout ratio of 33% or our FY '22 margin dividend of JPY 85.6, which was higher. We will pay an internal dividend of JPY 42.8 billion per share for the first half of FY '23 March end. The dividend for this fiscal year although we believe it is difficult to achieve the net income of this fiscal year. It's likely that the full year dividend will be JPY 85.6 per share for this year. And in the second half, we expect to exit some real estate on PE investments, but may decide to hold off some of the sales if we are unable to get the desired pricing. We will continue to pay attention to market conditions and ForEx.

We have carried out share buybacks of almost every year since FY '17 March end and have already exceeded JPY 38.7 billion of the JPY 50 billion buyback program for FY '23, March end as at the end of October. Regarding ESG efforts, as a result of identifying material issues and setting key sustainability goals, enhanced quantitative disclosure and the TCFD-based analysis, ORIX ratings from ESG ratings agencies are improving. We are constant over 4 of the 5 ESG indices in Japanese equities adopted by GPIF. We are making steady progress in achieving the 7 key ESG goals we announced in November '21.

And that concludes my explanation. Thank you very much for your kind attention. Now we would like to move on to the Q&A.

We are now ready for the Q&A session. (Operator Instructions) So the first person from Nomura Securities, Sakamaki-san.

I am Sakamaki from Nomura Securities. So I would very much like you to entertain 1 question of mine. So I'm referring to Page 8 and the 3 segments. You show the overall outlook for the 3 segments for the full year. So PE and Concession, you are foreseeing negative consequences, but other segments -- other than the 3 segments, if there's anything that you can share with us as to the outlook for the full year, I will be very grateful.

Okay. Then this -- I'll let Yano answer to your question, if I may.

So basically, what we have set as an outlook if the current situation persists, especially with regard to COVID, we are not anticipating a major recovery from COVID, except for insurance, JPY 250 billion. And we do foresee some recovery for the insurance, but that's what we do expect in a major way. But other than that, well, so these are our expectations for the full year other than that.

As for ORIX Europe, Transtrend, which is a future business. As of December end, the performance fee is something that we can expect to receive at a certain level. So ORIX Europe, so the second half, we can expect for the growth of the profit as compared to the first half.

This is Inoue. As to the Concession business. So you see there is a delay by 3 months in terms of incorporation of the profit. So we cannot expect much of the contribution in the first half. And there will be some 2 or 3 exits perhaps. I'm sorry to say so, but the prices may not be that attractive, and we do not try to kind of haste into selling those at the price that is not attractive, there could perhaps be a possibility of some sales. But that will be JPY 250 billion -- that will be a top-up on JPY 250 billion. If there was to be any sales of these investees. So if you could...

Hello? Yes. Which means that the investment gains is what you are not anticipating very much.

We're not -- well, I'm not expecting a certain amount, but we will not kind of overstretch ourselves or haste into selling these investees just for the sake of it. But there has been a possibility of selling some of the investees if we think the time is right. But you see, we have to go through certain procedures. And we are currently in discussion, and there could be perhaps a possibility of selling them just before March end. Or in some cases, we may postpone it to like April. So we just decided to not kind of overstretch ourselves selling those investees. That's what it is.

Daiwa securities, Watanabe-san, please ask your question.

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

Well, for the overseas items, we are also looking for exits in some of the projects. But many investments are linked to ForEx -- sorry, share price. So we have to look at the share price and also the ForEx JPY 160 billion, JPY 150 billion. And depending on that, we are moving into some of the exit discussions, but it's not really decided yet. Around the third quarter, maybe we can talk about additional exits. But at this point in time, I have to say that it's still very fluid. I hope that you understand that.

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

Yes, that's correct. Because overseas deals, we need to go through a lot of process before selling. And also, if we don't do things very well, there is also antitrust law in China, for example. And we cannot foresee everything. So if it's done within this fiscal year, it will be added to this fiscal year's number. Otherwise, it will be added to the next fiscal year's number. So we can look forward to that.

So from Bank of America, Sasaki-san, please.

I am Sasaki from Bank of America. So I have 1 question to Mr. Inoue. So in the second half of this year, the outlook, I know that considering or taking into account various different risks, which I have fully understood 120%. I've understood what you have shared.

But looking at the current conditions. In the next year, the current, of course, macro conditions may perhaps persist because of the policy of the central banks. So what is your idea for the next year onwards? You may remain to be conservative in the second half. But do you think that the business starts to recover? Or the robustness may perhaps be resumed from April of next year. In consideration of the balance sheet right now, what is in your mind as of now, Mr. Inoue?

So at the beginning of this month, 75 basis points, the bps interest rate was raised. And I think that there's going to be further 50 bps of interest rate rise in United States. Whether that would put -- kind of would calm down the inflationary environment pressure, I wonder. It is very much dependent on the moves by the U.S. Government.

So 4.5% or 5% in terms of the official discount rate, and that will be 5% to 6% in terms of the market rate and which means that it is several years back. So if the interest rate kind of hits the peak and if it becomes kind of a standard, then I think the financial market will start to kind of calm down, then I think the new lending may be kicked off and the private equity transaction may resume.

However, having said that, though, from January and February of next year, if the rate is going to be hiked by another 50 bps, I wonder this is going to mark the end of the interest rate hike. I wonder who knows. So this is why we would very much like to consider what could happen in the next year, our outlook in other words, of the performance.

But you see people would kind of panic at the time of interest rate hiking environment. And people tend to, of course, shift their investment from equity to debt. But if that kind of comes down and settles down, I think we will be able to kick off our new initiative in terms of new deals, new transaction. So which means that we could make a leap forward perhaps in the next year. Well, taking into account COVID-19 and Aircraft business, Concession, JPY 80 billion to JPY 90 billion worth of -- if we could go back to normal, in other words, then JPY 250 billion just topping up by JPY 90 billion. That will be a totally different kind of profit level. And we are working on it. Preparation is underway. So we think that we should be able to achieve minimum. I mean, I'm sorry to count the chicks before the eggs hatches. But this is what I have in mind as of now.

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

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

SMBC Nikko Securities, Muraki-san, please.

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

For our PE business, although I cannot really share the details, nonrecourse loan from banks. As far as this type of financing funding is concerned, nothing's really changed. And to be quite honest, last year or 2 years ago, when we had the issue of COVID, we had a nonrecourse loan and other debt was repaid by us, which means that there is a sense of strong trust for ORIX, which means that nonrecourse loan from banks. Well, we call it nonrecourse, but they think that because it's ORIX, they feel secured that we will pay the full amount anyway.

So the financing environment hasn't really changed in that sense. As far as overseas is concerned, especially for Environment and Energy, project finance -- financing is no problem. But the rate is higher now. And because of the high interest rate, we have to look at the productivity and decide which ones are doable or not. And we don't have many low spread projects. So for example, IRR may be 20 to 30 basis points worse than before because of the high interest rate. But other than that, we have not really seen any major impacts.

Now when it comes to the logistics facilities, JPY 200 billion is within our view. And we do have a slight concern about the increasing material prices it has started to settle down here. And of course, development NOI is maybe 4%, but maybe will be 3.9%. So 1 basis lower because of this. And also exit NOI is supposed to be above 3%. So it has not really changed. So as far as the market environment is concerned, nothing has changed in the last 6 months except interest rate. So we are paying close attention to that as we continue with our marketing activities. And I hope that answers your question.

A follow-up question, please. Earlier, you talked about Toshiba. And Aozora Bank was an example in the past. So maybe this is not an exception. But if you cannot get the management control, with the project. What is your approach or view? And has ORIX changed its approach in terms of that kind of project?

Well, for Toshiba, Lakeland Toshiba negotiation deadline is actually today. And I'm sure that you have read in the newspaper articles that they are struggling with getting finance from the banks. So there could be like a 1-month extension or maybe they go back to a joint board, we don't know.

But as far as Toshiba is concerned, it's a huge company. And this is a very small amount of money to control that company. So for Toshiba, we're looking at it as a pure investment. In other words, we will help remove the activist and then existing asset of Toshiba as well as the management of Toshiba would be able to clean up the organization of the company and make the best efforts for being listed once again in the future. And with that type of assurance, we can take a positive perspective.

So that's the condition. And we have not really discussed this within the investment committee and lending committee yet. And we have to make the right decision depending on how it will be done. So Toshiba is a huge company and Toshiba management, excellent people.

And ORIX, I'm over maybe, as an humanities people. We don't know to what extent we can help them. But if we get some bid rights, for example, there would be a problem with the antitrust law in China. And the permission, we'll have to wait for another 1 or 2 years. So we have to look at all of these different factors and the balance of these factors and to what extent we can implement governance. And once the structure is satisfactory from our perspective, we may be entering. That's the position.

And the next is from Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.

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

You see it may vary from one industry to the other. In the case of overseas, because of dollar appreciation and yen's depreciation, the investment we are not becoming aggressive in terms of making a new investment. But in the case of alternative asset management, if there was to be some interesting deal, we do have some kind of appetite.

The multiple hasn't really lowered. So we have to wait a little more even if the interest rate goes up, the liquidity of the money is remaining to be abundant. And therefore, in the overseas location, the purchasing or the acquisition of the assets is not underway. But the boutique, for example, the Robeco, the acquisition in a very small way, but it is about USD 10 million or USD 20 million or so.

So a major kind of investment is only considered in renewable energy arena. And because, of course, the electricity cost is rising still. So this is why renewable energy is the area whereby many other investors are paying a lot of attention to. So therefore, rather than M&A or acquisition, we may consider perhaps making an investment in a greenfield manner.

As for the domestic market, so far as inclusive of PE investment, I don't think the situation has changed very much, but the overseas investors are turning quite aggressive because you see at the 30% discount or sell, they can acquire the Japanese asset. So therefore, the foreign investors for sure, are turning very aggressive. So especially the real estate properties. I think we will be able to sell, if at all possible, especially the logistic perhaps facilities, we will be able to sell them at acquired to attractive pricing.

Yes, I do understand. Yes. That was very clear. May I just add 1 more question, if I may. And you see with the current conditions, there is still an expect -- I'm not expecting you to carry through the shares repurchase. But at the beginning of the year, you in fact shared with us your idea. Well, you see, our attitude remains to be unchanged. So far as the shares repurchase, the buyback is concerned. And we should be concluding the current program that is up and running by end of December. And of course, there are some pipeline deals. So we would like to strike the right balance between the 2, the investment and also the buyback.

I know there are many investors who are focusing very much on the buyback, which we do understand why -- the reasons why they do put an emphasis on that. But the Japanese investors, I think they have kind of quite down in terms of their expectations for the shares repurchase or the buyback. So therefore, I think we would like to continue to have a close communication with the market. And if it was to be like JPY 50 billion worth of shares buyback, it doesn't affect us in a kind of major way. So I think we would like to continue to consider the possibility. Thank you very much for that.

Next, JPMorgan Securities, Otsuka-san.

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

Yes, we can hear you.

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

Well, this is basically JPY 20 billion of the insurance payouts, and we were thinking around the end of September that maybe another JPY 20 billion for the second half. But now we know it's about JPY 20 billion and maybe several billions of yen in the second half only. And yes, JPY 20 billion lower than before. This is big. Without this, we would have achieved JPY 150 billion in the first half. So the insurance payouts for COVID-related items this was bigger than expected. That's 1 factor.

Another factor is the U.S. rate hike was very rapid, and our USA business is in the debt business. And the new debt, if you try to do that, the spread is too wide and we will not be able to exit later. So to be quite honest, we stopped the U.S.A. activities. And that was another negative factor of about JPY 20 billion.

Without those factors, we would have been able to achieve the level that we mentioned in the beginning of the fiscal year. So those are the 2 factors. For private equity, we are still active. It really depends on the market. We don't have anything fixed yet, but maybe we will be able to post something in the second half. We don't know. To be quite honest, we don't want to be rushed to make this decision. So life insurance and the U.S.A. operations, stopping the U.S.A. operations. Those were the 2 major factors behind this gap.

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

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

And the next is Sato-san, Mr. Sato from Mizuho Securities.

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

So U.S. dollar availability is what we have started to consider. So dollar procurement is not that difficult, but the cost, of course, is higher. And the more recently, procurement from bank, whether the current terms and conditions are to be maintained, I have a big question mark. So therefore, procurement, the funding from a bank is not something that we should be dependent a medium-term note as well as, I think, a straight bond, the corporate bond is something that we may have to consider even at a slightly higher cost, we may have to secure other routes for funding other than resorting to bank funding.

So because there is an abundance of pipeline. In order for us to execute the pipeline, there should not be any difficulty that we may face from the funding perspective from the accounting and finance department perspective. So portfolio at the moment, there are no kind of major problems that we face. But because of the rate hiking, although quality may perhaps starts to deteriorate that we may have to start addressing.

So therefore, while we may have to reinforce our risk management kind of structure or system. So -- but we, as you know, we remain to be agile at all time. That is ORIX. So therefore, we would try to identify and discover attractive deals. And I'm sure there are a lot out there still. So we're not already concerned about the possibility and the opportunity.

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

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

Niwa-san from Citigroup Securities.

Yes. This is Niwa from Citigroup Securities. For Domestic Environment & Energy, JPY 20 billion or just under, that's the target for the FY '25 March end, maybe this is very challenging right now. Do you have any plan B? And both organic and inorganically, how are you going to deal with this situation?

To be honest, I think the domestic is already finished. And selling some of the solar projects that we have, maybe a couple of them. And also FIT is still high, if that's the case. Sometimes we get it or sell it, but basically, wind farm is over. That is my understanding.

Looking at the trade firms, they are trying to do this with a low spread and they're very active in this. So if we want to do Environment and Energy, we have to focus on Europe and the United States. And Greenko is India, but we can use Greenko and Elawan and also developer of renewable energy in the United States. We need to capture those players. Otherwise, it would be difficult for us to do Environment and Energy business. For domestic market, the new power companies businesses are shrinking. So I don't think there is any point in pursuing this actively.

So JPY 400 billion is the balance sheet that is planned, but maybe you will have to make some adjustments.

That is correct. We want to shift our money into what's profitable. So if it is not profitable, we will take the money away and put it something else. So we want to be very flexible in doing this. So environment energy market in Japan, especially the new utilities, looking at the current situation, I think there's a huge question mark in this business right now.

I see that's very clear. And congratulations on the baseball championship, winning the championship.

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

So this is -- unfortunately, we have to bring this session to a close. So from UBS Securities, Okada-san. This is going to be the final question that we are going to be entertaining.

So with regard to U.S., I have 2 questions. So first of all, so the interest rate hike, what has been the impact to your businesses? I want to better understand. And you have been stopping new businesses, business execution. But in the second quarter, I think you may perhaps be paying more of an interest kind of expenses as opposed to interest rate income. That has been enjoyed. So if you could give us a little more color to this.

And the second question with regard to Lument. So the improvement with the government agency is underway, I heard. But with regard to the second half outlook. So the base profit deceleration is something that you cannot avoid or can we regard the second quarter to be the bottom. And so far as you can share with us, what is your outlook?

First of all, let me start from the Lument. So you see about JPY 10 billion of profit has been generated over the years, but I'm sure it is going to be lower. I wouldn't say 50% of a decline. But talking about the housing market, it is B2C businesses. And if we were to securitize it and selling to Fannie Mae as well as Freddie Mac, which means that during that time, the spread will become tightened -- will become tighter.

And of course, there are several months before we can divest or dispose. And we work on the floaters basically. But the spread, of course, would widen. So therefore, with regard to the disposition, our spread will be impacted quite naturally. So therefore, JPY 10 billion or so profit that was generated in the past, whether it would be hoped or it will be lower by 50%, but it will be lower in any case.

And as to the interest rate impact, and we work on the floater and therefore, with regard to our existing portfolio, we are not affected by the interest rate hike. But because of the industry hike, the borrowers' quality, unfortunately, may deteriorate. There is such risk. So this is why I think we have to do a better job of risk management. And if there was to be any kind of deterioration of the quality, there may be cases whereby we may perhaps sell some of the asset even at a loss. That may perhaps be generated. But the fixed rate deals are almost none. We work on the floaters, basically. So we do -- we are not basically affected by the hike of the interest rate.

However, because the spread is going to be widened, and if we were to sell our asset to the third party, we may have to sell at some certain discount. Otherwise, we may not be able to make a smooth exit. So therefore, in the first half of the next year, between January to March, we may have to watch kind of carefully as to how things would transcend and kind of proceed.

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

Yano will answer to the question.

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

It's time to close the Q&A session since it's time to close this call. Mr. Inoue?

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

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