ORIX - Q2 2023

Transcript

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for second quarter consolidated financial results for the six-month period ended September 30, 2022. My name is Nakane from IR Sustainability Promotion. Today's attendees are member of the Board of Directors, Representative Executive Officer, President and Chief Executive Officer, Mr. Inoue, and the 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. We will hear from Mr. Yano and then to Mr. Inoue, followed by Q&A. The duration of the meeting is approximately one hour. At this time, I'd like to turn the call over to Mr. Yano.

Hitomaro Yano (Executive Officer)

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 2023 March-end second quarter results. I'll be making use of the PowerPoint slide in explaining our overview. Please turn to page two of the handout. Net income fell 17% year-over-year to JPY 121.8 billion for the first half of FY 2023 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 explain later, the main reason for our lower profits versus the first quarter was an increase in COVID-19-related payouts for policyholders isolating at home in the insurance segments. Please turn to the next page. Segment profits. This shows the breakdown. Now, segment profits for 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 three segments which performed very well last fiscal year, namely Insurance, ORIX USA and ORIX Europe, the asset management business.

Meanwhile, the aircraft and ships segment posted a major surge in profits, driven by a recovery from COVID-19. In addition, strong performance in the environment and energy and Asia and Australia segments helped us maintain stable levels of profit even with the 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, the 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 four and five 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. Detailed explanations for the segment performance can be found from pages 17 and onwards. I'll briefly go over some of the highlights now. The 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 2022 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 2023 March-end. Furthermore, recovery in rental cars which had been impacted by COVID allowed the business to sustain strong profits. RENTEC continues to fare well, supported by growth in demand for rental products.

Next is the real estate segment. Profits were down year-over-year due to multiple gains on the sales of logistics centers and other properties booked in the previous fiscal year. DAIKYO profits were also lower year-over-year as condominium sales were skewed to first half in FY 2022 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, the end to the restriction on the number of inbound visitors and resumption of visa-free travel and independent tourism. Now next is the PE investment and concession segment.

While some investees have been impacted by changes in the macro climate, leading to mixed earnings performance at portfolio companies, the portfolio as a whole is healthy and recorded profit growth.

In the concession unit, passenger numbers on both domestic and international routes are on an uptrend and losses are shrinking. We expected to see an additional recovery in international passengers following the government's decision to scrap the cap on entry 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 also 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 the 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, payouts related expenses are expected to hit bottom in the second quarter and decline from the third quarter on. The number of policies in force 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 one-time 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 the development of a new lending product, ORIX Money. However, this is in line with our projections. Next is aircraft and ships, where segment profits were up 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 a ship collateralized lending executed last year also contributed to earnings. In aircraft leasing, earnings are 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 decline in capital gains and lower base profits at Lument, which is involved in real estate lending. Markets have taken a decidedly cautious turn owing to inflation and rapid pace of interest rate hikes. Our business started to feel the impact. Nonetheless, capital gains and base profits 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. Although we have not seen any deterioration of asset quality at this time, we will remain vigilant. Next is ORIX Europe. Decline in equity market caused AUM to fall, leading to lower profits.

Fortunately, ORIX Europe has diversified portfolio of asset managers in its roster, including Boston Partners, Value investing, ESG, Growth, and alternative investment-focused managers. Transtrend, a commodity trading advisor, has performed particularly well recently, and this should contribute to profits through a performance fee booked at the end of December. Finally, Asia and Australia segment. In addition 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 2023 March-end results, and I'm pleased to have Mr. Inoue, ORIX's CEO, to speak next. Thank you, Mr. Inoue.

Makoto Inoue (President and CEO)

Uh. This is Inoue from ORIX. Thank you for the introduction. I would very much like you to turn to page 6, 7, and 8, which I'm just about to explain. As explained, FY 2023 March end first half profits were down 17% year-over-year at net income of JPY 121.8. Well, I'm sorry to repeat myself, but there were three 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. 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 Lument agency lending transaction volume 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 overly optimistic goals. For this reason, we will set our FY 2023 March and full year net income target at 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 mainly in the auto, Rentec, and Asia and Australia business units. Most of ORIX's base profits are backed by stable cash flows from our diversified portfolio businesses. In the current economic conditions, I believe it is important to maintain a strong financial base and stable operating cash flows. Our pipeline for domestic PE deals is robust. 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 hire personnel, enhance 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 late last 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're continuing our dialogue with the markets to carefully determine the best timing for a 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. The health of the portfolio is maintained. Kansai Airports' earnings are consolidated into ORIX Group's accounts with a three-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 2023 March end. As I discussed, we see no reason to change our FY 2025 March end net income target. Now please turn to pages nine as well as 10.

We believe that an important theme for ORIX to continue stable growth is capital recycling or the establishment of a model for value creation through investment, operation, growth, and evaluation. ORIX had never been hesitant in reshuffling its portfolio, or rather, the company regards such activities to be part of its usual business operation. Therefore, I would like this policy to remain as an important management policy going forward. From FY 2014 March end through FY 2022 March end, although there have been some ups and downs, ORIX has grown its net income by 2.8 times. We have accomplished this by both strengthening our financial base and accelerating capital recycling to use capital efficiency and effectively. The Investment and 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 cooperation, including development of sales channels at investees and assisting with business model transformation, depending on the investee's 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. There are thus a range of WACCs between segments. Relying solely on ROA as our only management indicator is not perceived as best practice. We believe that measuring capital efficiency by contrasting ROIC with WACC for each segment will lead to an appropriate evaluation of profitability.

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 formal KPI that effectively linked to our strategy. Let us move on to page 11. Many of the companies comprising ORIX Group's portfolio contribute to profit growth through synergies with each other. 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 Groep 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. In FY 2022 March end, AUM grew to a new record of EUR 339 billion. Since acquisition, it has been contributing approximately JPY 2 billion steadily.

The company has contributed steadily between JPY 25 billion-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 three airports in western Japan, was launched in 2016 as Japan's first full-fledged private airport concession operator. Although the business has unfortunately been loss-making since FY 2021 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%. We expect a quick return to the FY 2020 March end base profit levels quickly as we expect 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 & Banking. The bank is working to strengthen the earning power through loans for investment into condominiums and merchant banking, and collaborates with the corporate financial services business unit. ORIX Bank's portfolio remains healthy, and although it has nine 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 develop exit strategies for group companies that we invest in, as a strategic purpose. Through this, we continue to conduct capital recycling. Japan is likely to continue its policy of zero interest rates.

We must imagine the possibility that yen could slide to 160 yen by the end of the fiscal year or start of the next. There is also possibility of economic recession. On the flip side, foreign assets buyers are likely to continue to invest into Japanese assets with weak yen, 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-sized, we are now looking at larger sizes, and we have mobilized experts for this purpose. As for Toshiba being private, this is now 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. 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, and in addition to that, approximately $500 million additional investment is planned. Currently, our overseas renewable energy-related pipeline is 19 gigawatts, valued at about $19 billion, and we're moving forward with the execution on these projects while carefully monitoring business risk, profitability, and others. Within Japan, we have logistics center pipeline of 14 projects totaling JPY 200 billion.

We plan to complete these projects during the span of about three years from second half of FY 2023 March end through FY 2024 March end and 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 $1.2 billion. Although all the planes will be delivered in FY 2024 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 the Kansai International to increase steadily. In addition, we moved ahead with a 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's 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 2025 March end, we have pledged to pay dividend payout ratio of 33% or our FY 2022 March end dividend of JPY 85.6, whichever is higher. We will pay an interim dividend of JPY 42.8 billion per share for the first half of FY 2023 March end. 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.

In the second half, we expect to exit some real estate and PE investments, but I 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 the Forex. We have carried out share buybacks almost every year since FY 2017 March end and have already exceeded JPY 38.7 billion of the JPY 50 billion in buyback program for FY 2023 March end as at the end of October. Regarding ESG efforts, as a result of identifying material issues and setting key sustainability goals, enhanced qualitative disclosure and the TCFD-based analysis, ORIX ratings from ESG ratings agencies are improving. We are constituent of four of the five ESG indices in Japanese equities adopted by GPIF.

We are making steady progress in achieving the seven key ESG goals we announced in November 2021. That concludes my explanation. Thank you very much for your kind attention. Now, we would like to move on to the Q&A.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Yeah. Thank you. We are now ready for the Q&A session. If you wish to ask a question, please press the star key, then press one on your telephone keypad. After your name is announced, please ask your question. If you wish to cancel the question, please press the star key, then press two. If you wish to ask a question, you may ask up to one question. The first person from Nomura Securities, Sakamaki-san, please go ahead.

Speaker 9

Thank you. I am Sakamaki from Nomura Securities. I would very much like you to entertain one question of mine. I'm referring to page eight and the three segments. You show the outlook for the three segments for the full year. PE and the concession, you are foreseeing a negative consequences. Other segments other than the three segments, if there's anything that you can share with us as to the outlook for the full year, I would be very grateful.

Makoto Inoue (President and CEO)

Let Yano answer to your question, if I may.

Hitomaro Yano (Executive Officer)

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, 350. We do foresee some recovery for the insurance, but that's what we do expect in a major way. Other than that, well, these are our expectations for the full year. Other than that, as for ORIX Europe, Transtrend, which is a futures business.

As of December end, the performance fee is something that we can expect to receive at a certain level, so ORIX Europe. The second half, we can expect for the growth of the profit as compared to the first half. This is in a way. As to the concession business, you see, there's a delay by three months in terms of incorporation of the profit. We cannot expect much of the contribution in the first half, and there will be some two or three exits perhaps. I'm sorry to say so, but the prices may not be that attractive, and we do not try to kind of hasten into selling those at a price that is not attractive. There could perhaps be a possibility of some sales, but if that would be 250.

That would be a top-up on JPY 250 billion if there was to be any sales of these investees. Hello? Yes. Oh, thank you very much for that. Which means that the investment gains is what you are not anticipating very much. Well, I'm not expecting a certain amount, but we will not kind of overstretch ourselves or hasten into selling these investees just for the sake of it. There could perhaps be a possibility of selling some of the investees if we think the time is right. You see, we have to go through certain procedures, and we are currently in discussion, and there could perhaps be a possibility of selling them just before March end, or in some cases, we may postpone it to like April. We just decided to not kind of overstretch ourselves in selling those investees. That's what it is.

Speaker 9

Okay, thank you very much.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

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

Speaker 5

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. For overseas exit, what is your current approach, current stance?

Makoto Inoue (President and CEO)

Well, for the overseas items, we are also looking for exits in some of the projects. Many investments are linked to share price. We have to look at the share price and also the Forex 160-150, 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. At this point in time, I have to say that it's still very fluid. I hope that you understand that.

Speaker 5

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

Makoto Inoue (President and CEO)

Yes, that's correct. Because overseas deals, we need to go through a lot of a process before selling. Also, if we don't do things very well, there is also antitrust law in China, for example, and we cannot foresee everything. If it 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.

Speaker 5

I understand that. Thank you.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Thank you for the question. From Bank of America, Sasaki-san, please.

Speaker 3

Hello. I am Sasaki from Bank of America. I have one question to Mr. Inoue. In the second half of this year, the outlook, I know that, considering or taking into account various different risk, which I have, fully understood 120%, I've understood what you have shared. Looking at the current conditions in the next year, of course, macro conditions may perhaps persist because of the policy of the central banks. 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? At the beginning of this month, 75 basis points interest rate was raised, and I think that there's going to be further 50 basis points of interest rate rise in United States. Whether that would calm down the inflationary environment pressure, I wonder. It is very much dependent on the moves up by the U.S. government. 4.5 or 5% in terms of the official discount rate, and that would be 5%-6% in terms of the market rate, and which means that it is several years back. If the interest rate kind of hits the peak, and if it becomes kind of a standard, then I think the financial market will starts to kind of calm down.

Makoto Inoue (President and CEO)

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 basis points, I wonder this is going to mark the end of the interest rate hike. I wonder. Who knows? This is why, you know, 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.

If that kind of calms down and settles down, I think we will be able to kick off our new initiative in terms of new deals, new transaction. Which means that we could make a leap forward perhaps in the next year.

Speaker 3

Well, you know, taking into account the COVID-19 and aircraft business concession, JPY 80 billion-JPY 90 billion worth of. You know, if we could go back to normal, in other words, then, you know, JPY 250 billion, just topping it up by JPY 90 billion, that would be a totally different kind of profit level. We are working on it, and preparation is underway. We think that we should be able to achieve the minimum. I mean, I'm sorry to count the chicks before the egg hatches, but this is what I have in mind as of now. Well, if that is the case, yeah, what is in your mind? ROE, 11% or higher is the priority that the management places, you have said.

Makoto Inoue (President and CEO)

In 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. We may. I think 11% or higher ROE can be achieved still, from my perspective. We do have an abundance of asset and also unrealized gain as well. If we can realize these unrealized gains, I think we can still be achieving 11%. Whether we can achieve this in the next fiscal year, I think it remains to be uncertain still.

Speaker 3

Okay. Thank you very much for that.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Thank you. SMBC Nikko Securities, Muraki-san, please. Thank you.

Speaker 10

Six months ago at the earnings call, I would like to know what's changed. Please update me on that. Current investments that in 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 bank finance for acquisition is not really abundant. 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 six months?

Makoto Inoue (President and CEO)

For our PE business, although I cannot really share the details, non-recourse loan from banks, as far as this type of financing, funding is concerned, nothing's really changed.

To be quite honest, last year or two years ago, when we had the issue of Kobayashi Kako, we had a non-recourse loan, and all the debt was repaid by us. Which means that there is a sense of a strong trust for ORIX, which means that non-recourse loan from banks, well, we call it non-recourse, but they think that because it's ORIX, they feel secured that we will pay the full amount anyway. The financing environment has not 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. Because of the high interest rate, we have to look at the productivity and decide which ones are doable and not. We don't have many low spread projects.

For example, IRR may be 20-30 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. We do have a slight concern about the increasing material prices. It has started to settle down, I hear. Of course, development NOI is maybe 4%, but maybe will be 3.9%, so one basis point lower because of this. Also, exit NOI is supposed to be above 3%, so it has not really changed. As far as the market environment is concerned, nothing's changed in the last six months except interest rate.

We are paying close attention to that as we continue with our marketing activities, and I hope that answers your question.

Speaker 10

Yes. Thank you. Follow-up question, please. Earlier, you talked about Toshiba. Aozora Bank was an example in the past, so maybe this is not an exception. If you cannot get the management control with a project, what is your approach or view, and has ORIX changed its approach in terms of that kind of project?

Makoto Inoue (President and CEO)

Well, for Toshiba, JIP and Toshiba negotiation deadline is actually today. I'm sure that you have read in the newspaper articles that they're struggling with getting finance from the banks. There could be like one-month extension or maybe they go back to the drawing board. We don't know.

As far as Toshiba is concerned, it's a huge company. This is a very small amount of money to control that company. 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, the company, and make the best efforts for being listed once again in the future. With that type of assurance, we can take a positive perspective. That's the condition. 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. Toshiba is a huge company, and Toshiba management are excellent people. ORIX are more of a maybe arts and humanities people. We don't know to what extent we can help them.

If we get some bid rights, for example, there would be a problem with the antitrust law in China, and the permission will have to wait for another one or two years. We have to look at all of these different factors and the balance of these factors and to what extent we can implement governance. Once the structure is satisfactory from our perspective, we may be entering. That's the position.

Speaker 10

Thank you. That's very clear.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Thank you for the question. The next is from Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.

Speaker 7

Thank you for the opportunity. Earlier, you shared with us that there are a number of deals that are under negotiation. Of course, yen is weakening or weakened to a lot of extent. 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. For the new deals, the price has become much lower. As a result, what do you think the attitude about the investors? Are they becoming more kind of proactive in acquiring the Japanese assets, or what do you think?

Makoto Inoue (President and CEO)

You see, it may vary from one industry to the other. In the case of overseas, because of dollar appreciation and the yen's depreciation, the investment, we are not becoming aggressive in terms of making a new investment. 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. We have to wait a little more. Even if the interest rate goes up, the liquidity of the money is remaining to be abundant. Therefore, in the overseas location, the purchasing or the acquisition of the asset is not underway. The boutique, for example, the Robeco, the acquisition in a very small way, but it is about $10 million or $20 million or so. A major kind of investment is only considered in renewable energy area. Because, of course, the electricity cost is rising still. This is why renewable energy is the area whereby many other investors are paying a lot of attention to.

Therefore, us, rather than M&A or acquisition, we may consider, perhaps making an investment in a greenfield manner. As for the domestic market, as far as, inclusive of PE investment, I don't think the situation has changed very much. The overseas investors are turning quite aggressive. Because you see, at a 30% discount or so, you know, they can acquire the Japanese asset. Therefore, the foreign investors for sure are turning very aggressive. Especially the real estate properties, I think we will be able to sell if at all possible, especially the logistics, perhaps facilities. We will be able to sell them at a quite unattractive pricing.

Speaker 7

Yes, I do understand.

Makoto Inoue (President and CEO)

Yes. Thank you very much. That was very clear. Thank you.

Speaker 7

May I just add one more question, if I may?

With the current conditions, I'm not expecting you to carry through the share repurchase. At the beginning of the year, you in fact shared with us your idea.

Makoto Inoue (President and CEO)

Well, you see, our attitude remains to be unchanged so far as the share repurchase, the buyback, is concerned. We should be concluding the current program that is up and running by end of December. Of course, there are some pipeline deals. We would like to strike the right balance between the two, the investment and also the buyback. I know there are many investors who are focusing very much on the buyback, which we do understand, you know, why the reasons why they do put an emphasis on that.

The Japanese investors, I think they have kind of quieted down in terms of their expectations for the shares repurchase or the buyback. Therefore, I would think we would like to continue to have a close communication with the market. If it was to be like JPY 50 billion worth of shares buyback, it doesn't affect us in a kind of major way. I think we would like to continue to consider the possibility.

Speaker 7

Thank you very much for that. Thank you.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Next, JPMorgan Securities, Otsuka-san, please ask your question.

Speaker 6

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

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Yes, we can hear you.

Speaker 6

Although this is not official number, but in the beginning of fiscal year, you mentioned for this fiscal year, the profit level would be basically flat. Maybe JPY 300-310 billion at bottom. Flat from the previous fiscal year. 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.

Makoto Inoue (President and CEO)

Well, this is basically JPY 20 billion of the insurance payouts. We were thinking around the end of September that there may be another JPY 20 billion for the second half, but now we know it's about JPY 20 billion and maybe several billion JPY in the second half only.

JPY 20 billion lower than before. This is big. Without this, we would have achieved JPY 150 billion in the first half. The insurance payouts for COVID-related item, this was bigger than expected. That's one factor. Another factor is the U.S. rate hike was very rapid, and our U.S. business is in the debt business. The new debt, if you try to do that, the spread is too wide, and we would not be able to exit later. To be quite honest, we stopped the U.S. activities. 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. Those are the two 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. Life insurance and the USA operations, stopping the USA operations, those were the two major factors behind this gap. JPY 440 billion target two and a half 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. Once the rate is settled in the USA business, of course, it's a huge market. That business is not shrinking.

Spread widening and if we can find good interest rate transactions, that's what we expect. As long as we see some situation coming down with regard to the interest rate, we should be able to normalize the business.

Speaker 6

Thank you. Understood.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Thank you for the question. The next is Sato-san, Mr. Sato from Mizuho Securities.

Speaker 8

This is Sato from Mizuho Securities. Thank you for the opportunity. I think you may have shared what I want to hear from you in the answers. 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 calm down. Also if we can remove this COVID-19 pandemic and effect impact, the risk hedge take into account, do you think that there could perhaps be an undershoot of the performances? Taking all that into account, as compared to six 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?

Makoto Inoue (President and CEO)

U.S. dollar availability is what we have started to consider. Dollar procurement is not that difficult, but the cost of course is higher. More recently, procurement from bank, whether the current terms and conditions are to be maintained, I have a big question mark. 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.

Because there is an abundance of pipeline, you know, that for us to execute the pipeline, you know, there should not be any difficulty that we may face from the funding perspective, from the accounting and finance department perspective. Portfolio at the moment, there are no kind of major problems that we face. Because of the rate hiking, borrowers' quality may perhaps starts to deteriorate, that we may have to start addressing. Therefore, we may have to reinforce a risk management kind of structure or system. We, as you know, we remain to be agile at all time. That is ORIX. Therefore, we would try to identify and discover attractive deals, and I'm sure there are a lot out there still.

We're not overly concerned about the possibility and opportunity. Okay, thank you very much for that. 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. 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. To Freddie Mac and the agent, the securitization in fact is becoming sluggish, although the market is re-beginning to recover. I think at the end of the day, we should not overly concern about this.

The amount, the value has expanded, so this is a slight concern on my part. Still, things are almost going back to normal, and so would it be for Lument as well. The spread, it. You know, the spread wise, it is not no longer that attractive as of now. I think we need to diversify our activities a little more.

Speaker 8

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

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Thank you. Niwa-san from Citigroup Securities, please.

Speaker 4

Yes, this is Niwa from Citigroup Securities. For domestic environment and energy, JPY 20 billion or just under, that's the target for the FY 2025 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?

Makoto Inoue (President and CEO)

To be honest, I think the domestic is already finished. Selling some of the solar projects that we have, maybe a couple of them, and also if it is still high. If that's the case, sometimes we get it or sell it. Basically, wind farm is over. That is my understanding. Looking at the trading firms, they are trying to do this with a lower spread, and they're very active in this. If we want to do environment and energy, we have to focus on Europe and the United States. Greenko in 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.

Speaker 4

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

Makoto Inoue (President and CEO)

That is correct. We want to shift our money into what's profitable. If it is not profitable, we will take the money away and put it into something else. We want to be very flexible in doing this. Environment and 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.

Speaker 4

I see. That's very clear. Thank you. Congratulations on the baseball championship, winning the championship.

Makoto Inoue (President and CEO)

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

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

Thank you for the question. Unfortunately, we have to bring this session to a close. From UBS Securities, Okada-san, this is going to be the final question that we're going to be entertaining.

Speaker 11

With regard to U.S., I have two questions. First of all, the interest rate hike, what has been the impact to your businesses? I want to better understand. You have been stopping new businesses, business execution. 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. If you could give us a little more color to this.

The second question with regard to Lument, so the improvement with the government agency is underway, I heard. 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? So far as you can share with us, what is your outlook?

Makoto Inoue (President and CEO)

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.

Talking about the housing market, it is B2C businesses, and if we were to securitize that and selling to Fannie Mae as well as Freddie Mac, which means that during that time, the spread will become tightened or become tighter. And of course, you know, there are several months before we can divest or dispose. We work on the floaters basically, but the spread of course would widen. Therefore, with regard to the disposition, our spread will be impacted. Quite naturally. Therefore, JPY 10 billion or so profit that was generated in the past, whether it would be halved or it will be lower by 50%, but it will be lower in any case.

As to the interest rate impact, we work on the floater, therefore, with regard to our pre-existing portfolio, we are not affected by the interest rate hike. Because of the interest rate hike, the borrowers' quality unfortunately may deteriorate. There is such risk. This is why I think we have to do a better job of risk management. 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. The fixed rate, you know, deals are almost none. We work on the floaters basically. We're not basically affected by the hike of the interest rate.

However, because the spread is going to be widened, and if we were to sell our asset to the third party, we may have to sell at some certain discount, otherwise we may not be able to make a smooth exit. 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 transpire and kind of proceed.

Speaker 11

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

Makoto Inoue (President and CEO)

Yano will answer to the question. Credit, you said credit, you mean by credit USA?

Hitomaro Yano (Executive Officer)

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 to your question.

Speaker 11

Yeah. Thank you. That was clear.

Makoto Inoue (President and CEO)

Thank you.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

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

Makoto Inoue (President and CEO)

JPY 200 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. JPY 200 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.

Sachiko Nakane (Head of Investor Relations and Sustainability Promotion Department)

That concludes the second quarter earnings call for FY 2023 March end. Thank you very much for being a part of this meeting until the very end.