ORIX Corporation (NYSE:IX) Q3 2023 Earnings Call Transcript

ORIX Corporation (NYSE:IX) Q3 2023 Earnings Call Transcript February 6, 2023

Operator: It is time to start. Good evening, and thank you for joining us for this telephone conference of ORIX Corporation for the third quarter consolidated financial results for the nine months period ended December 31, 2022. I am from . My name is Nakone. I’ll be the Master of Ceremony for today. Thank you for this opportunity. Today’s conference is attended by Mr. Hitomaro Yano, Executive Officer responsible for Accounting and IR and I would like to ask the participants to kindly either turn off your mobile phone or other communication devices or move them away from the telephone in order to prevent feedback. Mr. Yano will give the presentation followed by Q&A and we expect this meeting to take about one hour. Mr. Yano, the floor is yours.

Hitomaro Yano: Hi . Good afternoon. This is Hitomaro Yano, Executive Officer responsible for Accounting and IR. Thank you for joining us in this financial results briefing today despite your busy schedule. I will begin by explaining the results for the third quarter of fiscal year ending March 2023. Please refer to Page 2 of the materials on hand. I will first review the executive summary. First, please note that net income for the first nine months of the fiscal year was JPY211.4, although it was only several millions at the end, but we did manage to record year-over-year. The annualized ROE was 8.6%. Net income for the third quarter increased by 50% from the second quarter. This is ORIX’s second highest quarterly net income since the pandemic started following the fourth quarter of the previous fiscal year in which we recorded an investment gain on the .

Second, thanks to progress in reopening businesses that have been strongly impacted by COVID-19 and continuing to recover towards higher profits. The Insurance segment also experienced a significant decrease in COVID-19 related payout expenses compared to the first half of the year. Third, I would like to highlight on capital recycling. In the second half of the fiscal year, we’ve continued to both make new investments and exit mainly in our focused businesses of overseas renewable energy and domestic PE. Through this we are increasing profitability by replacing assets. The fourth key point is shareholders return. Last May, we approved a share buyback program of JPY50 billion and have already completed the acquisition and cancellation of 23.43 million shares, which is approximately 2% of our signing shares.

We plan to pay big dividends for the full year as previously indicated. So please refer to Page 3 for third quarter FY ’23 March end ORIX recorded sharp increase of 50% versus second quarter for the quarterly net income. The aforementioned recovery in the Insurance segment played a part while strong performance at Transtrend in ORIX Europe led to booking of a performance fee. The partial sale of our stake in leading geothermal energy producer, Ormat in the Environment Energy segment also contributed. Now please turn to Page 4. The page shows breakdown of segment profit. Nine months segment profit was up JPY290.7 billion. Please see the bar chart on the right. The breakdown of quarterly segment profit for the past two years is shown. Net income for the third quarter increased 15% year-on-year and 44% quarter-on-quarter to JPY120.7 billion.

Please look at the left hand side bar chart where you can see that investment gains for the fiscal year have returned to a usual level. I’ll explain the details on individual segment pages later. Now please turn to Page 5. This page describes the earnings improvement due to progress in with opening of the economy. The bar chart on the left shows the trend in segment profit for the three COVID impacted businesses of Aircraft and Ships facility operations and concessions. In the fourth quarter of the previous fiscal year, we posted losses of JPY11.2 billion, but a steady recovery in profits thereafter resulted in a positive JPY5.6 billion in segment profits for the third quarter. In Aircraft and Ships the passenger market in North America and Europe remained strong, and aircraft leasing profits are in an up-trend.

Hotels and Inns and other facility operations have recently achieved an occupancy rate of about 80%, thanks in part to the government’s nationwide travel support program and ADR has mostly recovered the FY ’20 March level. In the concession business, the number of progress on international routes has increased rapidly following the Japanese Government’s easing of border measures in October, 2022. Kansai Airport results are reflected in ORIX’s Group’s earnings with a three months lag, so we expect a full flash recovery in profits to take away in the next fiscal year. However, based on the current number of passengers, we believe that we are within striking range of returning to black. We expect further improvement in performance in all our COVID impacted businesses as travelers from China return.

Please refer to the following page for a summary of the trends and recovery indicators for each businesses. Now, the bar chart on the right shows the trend in segment profit for insurance, payouts to policy holders with COVID increase and segment profit fell to JPY2.1 billion in the second quarter, particularly in the wake of the seventh wave peak of the infections. However, the eligibility criteria for receiving benefits were changed from late September, 2022. Only policy holders meeting certain conditions are now eligible for payouts for quarantining at home. As a result, payout expenses have declined from the third quarter and profits have recovered. Please turn to Page 7. Next I will comment about capital recycling, which supports our sustainable growth.

Capital recycling involves constant monitoring of capital efficiency, making exits in assets and businesses as needed while continually making new investments. This will increase earnings growth rate and lead to improved ROA and in turn ROE. The box on the left shows exits and new investments in the overseas renewable energy business. As I mentioned earlier, in the third quarter, we sold 7.8% of 19.7% stake in Ormat shares in the marketplace resulting in a gain of about JPY15 billion in addition to retaining 10% or more of Ormat shares. We will continue to discuss outside directors to support further growth of the business. Furthermore, we plan to acquire the remaining 20% of Elawan where we acquired an 80% stake in July, 2021 and make it a wholly owned subsidiary in the fourth quarter of 2023.

In addition to that we will be able to make most of the result, we will be able to make more flexible and swift decisions regarding business and financial strategies such as acquisitions and new business development. Now the box on the right shows exits and new investment in our domestic PE business. In 2014, we acquired a major precious metal recycling company called NET Japan, which we sold in a trade sale in the third quarter. We achieved a high return on the deal of MOIC of three times and 16.4% of IRR. In addition, as recently announced, we acquired a majority stake in DHC, a leading Japanese manufacturer of cosmetics and health foods by promoting the smooth succession of DHC businesses further starting its compliance system, corporate governance, and implementing a new growth strategy, we to aim increase its corporate value while enhancing profitability and achieve an IRR of at least 20%.

Now, Page 8 and Page 9 are a summary of segment information, but today I will explain it by using the specific slides for each segment, so please go all the way to Page 12. The first segment is the Corporate Financial Services and Maintenance Leasing segment. Segment profit decreased 9% year-over-year to JPY56.4 billion, but excluding the set of YoY in FY 2022 and investment and valuation gains on an investee recorded in the previous fiscal year, segment profit increased. In Corporate Financial Services, service revenues increased from the previous fiscal year due to strong performance in various fee businesses. The auto unit posted a year-over-year increase in segment profit versus the previous year when it achieved a record high. This was thanks to the continued higher market, high market price for used car and the recovery in car rentals for the pandemic from the rent posted record high profits as well.

Now please see Page 14. The page shows Real Estate segment. The investment and operation unit showed an increase in profits due to improved earnings at Hotels and Inns, thanks to progress in reopening as I explained earlier. In Daikyo profits declined versus the previous year. A number of condominium unit FY 2022 skewed to the first half of the fiscal year and in line with our full year forecast. In real estate too, we operate a capital recycling type business model whereby we procure and develop land by ourselves, lease up property and then sell it at the right time in the market. Please see Page 16, PE Investment and Concession. Now PE Investment unit posted a loss in the previous fiscal year due to losses at Kobayashi Kako, but the investment portfolio has been sorted for this fiscal year.

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Even excluding losses at Kobayashi Kako, segment profits increased. In the Concession unit the number of passengers in international routes continued to increase in addition to those in the domestic routes and this shrunk the loss. Again, I expect earnings to grow at an exciting pace as earnings are already on recovery track and inbound tourists from China begin to arrive in near earnest. Please see Page 18, this is Environment and Energy segment. Profit increased 86% year-on-year to JPY34.1 billion. As I explained, in addition to the partial sale of stake in the energy company, we also benefited from higher electricity spot prices in some of overseas regions, which led to higher electricity sales revenues. In the domestic market sales increased in the solar power generation business due to the continued fine weather.

We expect the global shift towards renewable energy to accelerate, partly due to the prolonged war in Russia and Ukraine. We are already operating 3.4 gigawatt energy production facilities in Japan and abroad, and we plan to grow this to 10 gigawatt by the fiscal year ending March, 2030. In addition to we will have Greenko, a major Indian renewable energy company where we hold a 20% stake to develop its pipeline. Please turn to Page 20, Insurance segment. As I mentioned, profit decreased compared to previous year due to an increase in COVID-19 related payout expenses for patients isolating at home. Meanwhile, since last September of last year, eligibility for benefits has been limited to those with high risk of severe symptoms. So we expect the COVID-19 related expenses picked out in the first half of this year.

The number of policies enforced has continued to increase and the premium income has risen. In addition, asset management has seen steady results and investment incomes have been increasing. Segment assets decreased. This is mark-to-market and rise in both Japanese and interest rates resulting in our lower valuation. However, the market value of debt has also declined since the duration of policy reserves of, or liabilities longer than that of assets. The rise of interest rates, particularly in yen, has been a positive for embedded value. So in other words, interest rate rise and revenues rose faster than increasing insurance expenses and profits increased. Please turn to Page 22, Banking and Credit. Banking unit revenue from real estate loans for investment continued to be firm despite the absence of a one-time profit booked for the previous year.

In the credit business, we are actively investing advertising to develop a new ORIX money product which resulted in decline in profits. However, performance is in line with expectations and loan balance is increasing. Please turn to Page 24, Aircrafts and Ships segment. Profit increased JPY14.2 billion year-on-year to JPY17 billion. As mentioned, the aircraft leasing business has the benefits from rebound from passenger markets, particularly North America and Europe. In addition to leasing revenue, service revenue from aircraft management is strength and it grew. Avolon earnings are also on the upward trend reducing its losses. Please note that the financing costs from investing in Avalon are included in the profit report. The Ships unit boosted earnings, but partly reflecting the sale on ships in response to federal market prices as well as financial income from ships financing deals.

Please turn to Page 26, ORIX USA. Segment profit fell sharply from the previous year when it had shipped record high to JPY33 billion. The decline was primarily due to fewer PE exits caused by changes in the macroclimate and the origination fees and in the real estate lending limit. The capital gains improved in the second and third quarter compared to first quarter. Please turn to Page 27. We currently are in the process of adjusting risk controls or CUs in light of the uncertain economic outlook in the U.S. We have strengthened our governance framework in order to achieve additional growth in our asset management business, utilizing investor capital such as establishing asset management investment and with our committee in addition to the investment committee.

The asset quality of ORIX USA is sound. It appears that the assets have increased due to the FX effect, but we aim to keep the asset sized to a certain level and the dollar denominated asset has actually declined.

Transtrend: Please turn to Page 32. Asia and Australia segment profit decreased 3% compared to the previous year to JPY34.1 billion amid ongoing re-openings in Asian countries. We expected new deals and in India and Indonesia in addition to Australia and South Korea, and the declined profit is due to absence of gain on sale of the previous fiscal year. This completes the segments. Please turn to Page 10. With regard to shareholder return, our basic policy is to distribute one third of net income to dividends, one third to investments and the remainder to retained earnings and the share buybacks. Dividend for the current fiscal year is JPY 85.6 or dividend payout ratio over 33%, whichever is higher. However, the dividend payout ratio will be 40% assuming the net income forecast announced November last year, over JPY250 billion can be achieved, including the share buyback of JPY50 billion the total payout ratio is 60% for the fiscal year.

Now, I would like to talk about our credit ratings. Last week S&P reduced the outlook from stable to negative to reflect our execution as investment in DHC. Although the downgrade itself is undesired change from our perspective, we undertake for our risk management, for our portfolio and plan to proceed with our capital recycling strategy while both maintaining and strengthening the financials. By providing appropriate information disclosure to rating agencies, we hope to improve mutual understanding. Meanwhile, please note that the rating action will not affect the basic policy of our shareholder returns. Lastly, we understand that the economic environment continues to be uncertain worldwide, and strengthening the risk management system is important.

Nonetheless, we do see some bright news on the horizon, such as the progress of reopening around the holdings in Japan. In the domestic PE and other fields we are seeing numerous inquiries for potential investments, including large project, while maintaining a cautious and selective stance we intend to actively seek investment opportunities towards achieving the midterm goal of what we announced last May, which is net income of JPY440 billion and the 11.7% ROE in the fiscal year ending March, 2025. Thank you very much for your kind attention. Now the floor is open for questions.

Transtrend: Please turn to Page 32. Asia and Australia segment profit decreased 3% compared to the previous year to JPY34.1 billion amid ongoing re-openings in Asian countries. We expected new deals and in India and Indonesia in addition to Australia and South Korea, and the declined profit is due to absence of gain on sale of the previous fiscal year. This completes the segments. Please turn to Page 10. With regard to shareholder return, our basic policy is to distribute one third of net income to dividends, one third to investments and the remainder to retained earnings and the share buybacks. Dividend for the current fiscal year is JPY 85.6 or dividend payout ratio over 33%, whichever is higher. However, the dividend payout ratio will be 40% assuming the net income forecast announced November last year, over JPY250 billion can be achieved, including the share buyback of JPY50 billion the total payout ratio is 60% for the fiscal year.

Now, I would like to talk about our credit ratings. Last week S&P reduced the outlook from stable to negative to reflect our execution as investment in DHC. Although the downgrade itself is undesired change from our perspective, we undertake for our risk management, for our portfolio and plan to proceed with our capital recycling strategy while both maintaining and strengthening the financials. By providing appropriate information disclosure to rating agencies, we hope to improve mutual understanding. Meanwhile, please note that the rating action will not affect the basic policy of our shareholder returns. Lastly, we understand that the economic environment continues to be uncertain worldwide, and strengthening the risk management system is important.

Nonetheless, we do see some bright news on the horizon, such as the progress of reopening around the holdings in Japan. In the domestic PE and other fields we are seeing numerous inquiries for potential investments, including large project, while maintaining a cautious and selective stance we intend to actively seek investment opportunities towards achieving the midterm goal of what we announced last May, which is net income of JPY440 billion and the 11.7% ROE in the fiscal year ending March, 2025. Thank you very much for your kind attention. Now the floor is open for questions.

Operator: Thank you. So the first person is from Nomura Securities. Sakamaki San, please?

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Q&A Session

Naruhiko Sakamaki: Thank you very much. My name is Sakamaki from Nomura Securities. Thank you for the opportunity. Now, I would like to ask you a question, and at this time the Ormat their holding that are remaining, I think you’re going to be holding onto 10% or more stake. Is your strategy or I believe that it is the expression of your intending retaining the rest of the 10% or more. And also with regard to geothermal energy, I read an article saying that there has been some changes in the earnings, so any, so if you could be so kind enough to tell us your involvement and also your intent in the geothermal businesses?

Hitomaro Yano: As to Ormat, so this time we’ve sold about 8% of the stake, and I think we would like to maintain the rest of the stake for the time being. And the capital recycling, in fact is a strategy that we are pursuing as we have been explaining. I don’t know how long we will be retaining the shares, but for the time being, we’d like to hold onto it. And the reason why we have decided to sell 8% of the stake is because for the reason of this chapter recycling in the areas of geothermal, yes, we are trying to en engage ourselves in the geothermal businesses here in Japan, but getting consent, the approval is not that easy because you need to of course excavate and there seems to be not very many deals that you can engage yourself in.

On the other hand, renewable energy, of course, is remaining to be strong with the share price being steady as well. So therefore, we have decided to set off some stake of Ormat and post some capital gain and we use the capital that we have gained from the sales of Ormat and dedicate the capital to renewable energy elsewhere. So this is the decision that we have made. And talking about renewable energy businesses, for sure, we have every intent in wanting to expand our businesses in the renew energy, but it doesn’t mean to say that we quit our idea on the geothermal, but it’s just that we have decided to make a selection and concentration and Elawan of course, is 100% Greenko. The new development is going to be proceeded and for the timing and there could perhaps be a possibility of M&A of new renewable energy related businesses.

I hope this answers your question.

Naruhiko Sakamaki: Yes, thank you very much. That was very helpful.

Operator: Thank you. from BofA Securities please?

Futoshi Sasaki: Yes, this is Sasaki from Bank of America. Just one question, thank you for this opportunity. We’re now in February and next fiscal year is the business plan must be probably formulated within your organization. And at this point in time, how do you see the fiscal year ending March, 2024 in terms of business as well as performance as much as you can share with us? Thank you.

Hitomaro Yano: Yes. With regard to next fiscal year’s numbers, we were hoping to talk about that in May when we conduct our next earnings call. JPY250 billion for the fiscal year is the number that we have announced and we want to achieve JPY440 billion in two years time. Compared to two years ago when we formulated this plan, of course the environment is different now. And last May how much profit in two to three years? I think we showed you our outlook, but we may have to revisit these assumptions and that’s exactly what we’re doing right now. So looking into the next two years, we would like to share some of the information about next fiscal year in coming May. Well, recovery from COVID-19 is in sight, which is positive news.

According to the original plan, we were not really expecting a big number for next fiscal. We may be able to expect a little bit more than before. That is one thing that I can say. Insurance revenue income may be one of those potential positive factors, but including those, we will have to take another look at if this is clear and please wait, be patient with us. Wait until May. Thank you.

Futoshi Sasaki: I understand that at the full year earnings announcement you can give us more specifics, but what about the confidence for the JPY440 billion? Have you changed the confidence level?

Hitomaro Yano: Level of confidence is very difficult to talk about, but we will do our best to achieve the objective and we are discussing exactly how we can do that. So that is unchanged.

Futoshi Sasaki: Thank you very much for your answer.

Operator: Thank you very much. So from SMBC Nikko Securities, Muraki San please?

Masao Muraki: So going away from the fifth financial earnings, DHC I know that you had completed your acquisition as you had explained, if you could be so kind enough to give us a little more color? So IRR of 10% as compared to that last year’s profit double was still lower than your expectation. So any kind of wasteful waste that you can see and you foresee making improvements? And how would you be able to realize the turnaround of the profit generation going forward?

Hitomaro Yano: So JPY300 million or so that is, and one thing that I can say for sure at this point in time, they do have a current asset which is pretty ample. So we would very much like to make use of that as well. So we don’t think this JPY300 billion is a higher price that we have paid. And talking about this company, DHC, so the prior — from the prior owner of the business, the chairperson, we have succeeded the businesses. So they have not been making use of advertisement and promotional costs very much. So we would very much like to concentrate our effort in that as well. And we can foresee ourselves rolling other businesses in the overseas location as well. So these are in our plan. And also on the other hand, we need to of course reinforce governance.

So therefore our — making use of our of course manpower as well, that is in of course improving the businesses. So that’s our plan. Which means in the next fiscal period, the cost tends to increase, which means that the profit level is not something that we can expect to improve in the next year and also financially speaking.

Masao Muraki: So JPY300 billion was appropriated for the acquisition, but the cash in fact is held at the company. So that could be paid out as a dividend to ORIX in the short run, do you think?

Hitomaro Yano: Yes. Yes. And the first point that you have made is true as well. Yes, we would very much like to incur some costs in order to improve the businesses. So I don’t know how much of a profit that we will be able to generate in the first year of the acquisition, but of course we would have to pay for the due diligence cost as well. So there will be some negative or other cost that we would have to incur in the first year, but we would like to of course take a little more time in turning around the businesses for the better. Thank you very much.

Operator: Thank you. Daiwa Securities, Watanabe San, please ask your question?

Kazuki Watanabe: Yes this is Watanabe, Daiwa Securities. Profit progressing at high level, what would be the impact and also the confidence? I think every year to the four quarter you were doing some measures and you talked about risk management. Are there any things that we should be careful about going into the fourth quarter and do you think the current situation would impact the capital allocation in any way except for exceeding the JPY332.1 billion?

Hitomaro Yano: I’m sorry, can you please repeat the last part of the question once again?

Kazuki Watanabe: So the dividend policy, if you are going to upgrade the dividend, you have to basically exceed the previous year’s profit. But if there is going to be, if there is going to be something good if you overshoot or do much better than the profit from last year or against the target?

Hitomaro Yano: I’m sorry, what was the first question?

Kazuki Watanabe: About the fourth quarter?

Hitomaro Yano: Oh, I’m sorry. Well, we will just continue to account for impairment and as we usually do in a steady manner. It’s not as if we will do something special for the fourth quarter, but in the second quarter and fourth quarter, generally speaking, we tend to see these numbers come up. But it’s not as if there is no impairment, no write off right now. Of course we are doing so many different things and we will continue to see some level of a write off, but we have not really identified any big potential issue so far. That is the current situation, but there will be some here and there that is the current situation. So that’s the first question’s answer. Now as far as the dividend is concerned, 33% or previous year’s number whichever’s higher, that is what we communicated for this fiscal year and this will stay the same. This will be unchanged. That’s all I can say to you. Would that be okay?

Kazuki Watanabe: Yes, thank you. Thank you for your answer.

Operator: Thank you very much. Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.

Natsumu Tsujino: Well, first of all, with regard to the U.S., if you could be so kind enough to give me some idea as to your approach right now. So I think there are some losses of JPY10.5 billion from the securities that was held and on the other hand, there’s JPY4.2 billion of profit. So I was looking into these perhaps noises and the segment profit is about JPY5.1 billion, and it was lower than the first quarter, but then higher than April to June. So this sales, the impairment loss that was posted, where did it come from? And also in actual fact, how’s the business like right now and Lument so how is it like towards 2023 margin, how would it perform going forward?

Hitomaro Yano: Well, on Page 27, if you could refer to Page 27 then, so just as you have mentioned, the PE investment, the capital gain has been generated from some PE investment. I would like to refrain from mentioning the actual specific names. There are different pieces of PE investment that we have made and generated some capital gain from. And as you have said, the appropriation of that was made. So there are two. So a specific appropriation of reserves and also see through. So when we change some outlook of the future, we may have to add some reserves. And referring to Page 27, the credit, the base profit has declined as a result of the reserves that we had to increase and the others that affected our performance. So we have estate in Lument and also, we call it as BFIM in other words Boston Financial for low-income bracket people, so we develop housing and we securitize it.

So these deals, in fact, will create some ups and downs. And so therefore, there has been some, as I say, ups and downs in our earnings as a result, but the first quarter was the bottom, and we did manage to recover from the bottom somewhat. So the real estate Lument, in fact, has not fully recovered yet, and that is because of the interest rate being pretty kind of volatile, so we have to see it shutting down. But I’m not — we are not worried about credit very much though. Of course, we would have to have a conservative outlook. So far as the reserve appreciation is concerned, but there is nothing major that concerns us. And as for PE investment, there are some, I think, actions that will be taken. Whether these actions will be taken in the fourth quarter or in the next fiscal period, but there will be certain amount of exits as well.

So towards the next fiscal period, how much more can we improve the earnings is yet to be known, but for sure, we are aiming to increase the profit. On the other hand, as to the U.S. businesses, as I had shared a little earlier, we don’t particularly intend to increase the asset in a dramatic way. So just like OCE the public assets — not in the public asset management businesses, but the fund formation and all of that, so more than before, we would very much like to increase the businesses, not in a dramatic manner, but thereby, of course, recover the business of ORIX USA and that is our idea. I hope this answers your question.

Natsumu Tsujino: Yes, yes. Well, talking about the vehicles, the transportation equipment, you in fact shared that you did manage to post some profit from selling ships, the vessels, but you have not shared very many kind of details. Avolon, yes, that is held on equity method. That is okay. But the other like gain on sales for those assets, I think it will be helpful if you could be so kind enough to share us a little more details.

Hitomaro Yano: Well, from that perspective, with regard to ships, at this point in time, there are some extraordinary factors that needs to be taken into account because ships after all, every year, on a continued basis, we don’t — we would be able to generate profit on a constant basis. But rather we would kind of approach it in a conservative manner and if they were ever possible, we would try to generate profit. So for ships, I don’t know how to explain, but for this fiscal period, maybe several billions of yen, several billions of yen, I would say, for ships.

Natsumu Tsujino: This fiscal period, you mean by four, three months of this fiscal period — for this quarter?

Hitomaro Yano: No, no, for the full year, I mean, for full year, several billions of yen.

Natsumu Tsujino: So several billions of yen for the full year, meaning that I think you’re talking about the little more sizable business, right?

Hitomaro Yano: Well, it’s not a big size, somewhere in the middle if you could be so kind enough to understand where we’re coming from.

Natsumu Tsujino: So this fiscal period as compared to the first half, it will be smaller in the first half in any case. Is that what you’re saying?

Hitomaro Yano: Yes. So for the transportation equipment, the recovery of the business, so it is not affected by the primary reasons, may I take it?

Natsumu Tsujino: What do you mean by, you mean, oh one time reasons? In other words, sales — in other words, you are recovering in the businesses as opposed to the gain on sales.

Hitomaro Yano: I don’t know how to express it like DAIKYOs condominium, sales of condominium or whether you would regard that to be a gain on investment, because after all, like aircraft, like in the case of JOL, we do sell to Japanese investors as well as fund and we regard that to be our ordinary businesses and that is recovering for sure. In the case of aircraft leasing, of course, rates are recovering and also we are selling some of the aircraft as well and the fees are increasing as well. So those are improving. On the other hand ships, gain on sales of ships may perhaps, may perhaps be generated bit by bit in this year as well as in the next. So JOL sales, you would not like to describe it to be gain on sales, but those are included as well, may I take it. Yes.

Natsumu Tsujino: Okay, thank you very much.

Operator: Thank you very much. JPMorgan Stanley Securities, Otsuka-san, please.

Wataru Otsuka: Yes, thank you. JPMorgan, Otsuka speaking. Page 5, reopening update until recently is shown. For the midterm information previously, the segment profit for the full year was JPY60 billion for the fiscal year ending March 2025. And so what is the confidence? Do you think is the progress steady and as expected, even if it’s a qualitative assessment, if you could share that with us that would be great?

Hitomaro Yano: Yes. We want to recover to this level by fiscal year ending March 2025 and we did have our concerns. But in this fiscal year, the recovery started at a faster pace than we expected, although it’s not sufficient yet. And for next year, we believe that the number will be a little bit better than what we announced last May. And hopefully, in two years’ time, we can achieve JPY60 billion or even higher, if possible. So the speed of recovery is a little bit faster than we had originally anticipated.

Wataru Otsuka: Concession and the Aircraft and Ships both?

Hitomaro Yano: Yes that’s correct and the Hotels and Inns as well.

Wataru Otsuka: I see.

Hitomaro Yano: Hotels and Inns unfortunately, the ratio against the total profit is relatively small. So that recovery will not contribute to a great extent, but this is domestic and this is something that we can see firsthand that there is a recovery happening.

Wataru Otsuka: Understand, thank you.

Operator: Thank you. So the next is from Morgan Stanley MUFG Securities, Nagasaka-san, please.

Mia Nagasaka: Hello, this is Morgan Stanley MUFG Securities, Nagasaka is my name. Thank you very much for this opportunity. On Page 32, Asia as well as Australia, I would like to ask some questions. And as a result of reopening, I know that the new execution is underway in Asia and in the first half, considering risk, I thought that you are not executing new investment. But in which area of Asia are you engaging yourself in new businesses and also the outlook going forward? And also, if you were to exclude gains on investments, if you could be so kind enough to share as your look as well in Asia?

Hitomaro Yano: Asia, Korea, in fact, has been pretty steady. So we have been increasing our asset in Korea. On the asset base, rather, we did reduce it dramatically because you see €“ unless you see €“ you carry through new investment, it would continue to decline in any case. So we were refraining from making new investments. But like Indonesia and other areas, but we are now back in then. In other words, we are increasing the new investment. So in which area, more specifically those kind of countries that I have just mentioned. So as for ourselves, in the Asian region, we want to make sure that we would continue to base ourselves on leasing and increase profit thereby. But of course, we are making investment as well in China, Greater China, I mean, not just Mainland China, but we are making some investments.

So we would, of course, foresee ourselves exiting from those businesses on the other hand as well. And whether we would be happy to be making a new investment in China, I think we would remain to be pretty cautious. But in Asia, as well as in Australia, we would — we are very much looking forward to making new investments. So that’s about it. I hope this answers your question.

Mia Nagasaka: Yes. Thank you very much.

Operator: Thank you. Citigroup Securities, Niwa-san please.

Koichi Niwa: Thank you. This is Niwa from Citi. I have a question about M&A pipeline. According to the material used in the midterm announcement, for the second half of next year, you had JPY400 billion planned and the JPY300 billion, I think may be invested, but should we consider this pipeline still being built?

Hitomaro Yano: Well, thankfully, we are getting more and more new deals, which means well, it’s maybe lower than JPY300 billion, but it’s rebuilding once again. We don’t do everything and anything. We apply a cautious view, but also at the same time, we are adding more and more new deals into the pipeline, while applying a cautious view. As far as DHC is concerned, since it is a sizable investment and a certain number of people will be allocated and the management will be done also appropriately. That’s the current situation.

Koichi Niwa: If you could comment — DHC, I think this is a little bit different from your traditional investments. And using DHC as a trigger, do you think that will make a difference in terms of sourcing of deals and expanse of the deals or do you think it is basically the same as a traditional project? Can you maybe talk about the difference before and after DHC, if you can share some comments?

Hitomaro Yano: Depending on the size, of course, the players differ in any market. And the several tens of billion was the size that we have been doing. And now we are doing one that is a little bit bigger. So it’s not necessarily a question of whether there is a change. But anyway, would we do this? And if we’re successful, maybe we will do more of those. And we want to continuously expand our business, and this is the first step towards that. That’s how we see it.

Koichi Niwa: That was very informative. Thank you.

Operator: Thank you very much. UBS Securities, Okada-san, please.

Taiki Okada: I am Okada from UBS Securities. I have one question. As you have mentioned earlier, the outlook for USA, I would like you to follow up a bit. So I know that you are becoming a little more stringent in the control of businesses. But the segment profit of JPY105 billion is expected as well. So this profit outlook and also the risk management, how do you strike the right balance between the two? So going forward, like PE credit, real estate, what is your idea in the effort that you’ll be expecting in those areas? Please give us some more color.

Hitomaro Yano: Yes, as I have mentioned, as of today, so the profit that has declined. We don’t think the question, of course, you had asked is only, I think, justifiable because I think in two years, whether we will be able to recover back to JPY105 billion or not is to be questioned. We would not like to kind of changed the split. But if at all possible, we’d like to, of course, grow the businesses and whether we are going to give up on the businesses in the U.S., that is the answer to the question would be no. Although we will be become a little more stringent in terms of risk management, but we are continuing in the asset management businesses and the PE as well as credit and real estate businesses. So of course, making use of other people’s capital and using the leverage, we would very much like to continue to generate profit.

And we would remain €“ we would, of course, continue to evolve our strategy and the risk management on one hand. But even if you want to talk about asset management, we mean by broader sense of asset management. So making use of other people’s capital in other words, or incorporating other people’s capital, we would very much like to continue pursuing our strategy. So at this point in time, there is nothing that we will be able to kind of show as the evidence of the success of this strategy, but we would very much like to continue to pursue this way.

Taiki Okada: Thank you very much.

Operator: Thank you. Mitsubishi UFJ Morgan Stanley Tsujino-san, please.

Natsumu Tsujino: Yes, thank you. In the beginning of the year, there was an obvious comment and then in August, it was basically reversed and in the second half, the sentiment was similar once again. And I know that you have seen some exits after a lot of the efforts having been made. From summer until now with regard to exits, is there any change in terms of your sense for these exits? Maybe you’re not too optimistic yet, but you may be able to exit from some of the projects. Can you give me a sense of how you feel about the general direction of these exits?

Hitomaro Yano: In this fiscal year, yes, there was a slowdown in the United States, as you know, and we had some investments on last year. We didn’t really have to do anything and they basically sold one after the other, but unfortunately, within this fiscal year, the situation is very different. And other than that, for domestic real estate the situation continues to be positive. Domestic PE investments about how to increase the value and also who will be the potential buyers, we try to figure those things out, and we spend a certain amount of time on those. And I don’t think that these situations have deteriorated that much and also aviation is coming back. It’s recovering. So since general sense is quite positive, quite good.

I understand that there may have been some concerns, but we will continue to work on our exits and we believe that we can do them. And in the next fiscal year as well, we can expect certain number of exits happening. And I would like to emphasize once again that capital recycling is what we do, we promote. So it’s not just increasing the number of investments randomly. We continue to recycle to make ourselves stronger and more profitable. So we will continue to work on our exit plan, and we do not have any specific concerns about that right now. I hope that answers your question.

Natsumu Tsujino: And in the United States and also in Asia, you have some gain on valuation of the funds. And Asia is small, but I understand that the situation is improving. So in terms of gain on valuation, is there anything that we can hear from you today?

Hitomaro Yano: Well, we’re not doing the valuation of the funds ourselves, so we cannot really talk about the gain or positive aspects of that. But we do have some funds mostly overseas and we just received that assessment or evaluation and we just reflect that into numbers. But I don’t think that would have a huge impact on our general performance. But looking at those numbers, maybe it’s possible to talk about a certain trend, but it’s not extremely positive, as negative, excuse me. Thank you.

Natsumu Tsujino: Thank you very much for your answer.

Operator: Thank you very much. So there seems to be no more questions. We would like to end the Q&A session. So Yano is going to provide closing remarks.

Hitomaro Yano: So once again, I would like to thank all of you to have joined us in this briefing session. So we did manage to generate some profit, a pretty good profit in the third quarter and going forward, we’d like to continue to further effort in building our profit more. So please continue to watch about the development of our businesses. And as of today, if there was to be any further questions, by all means, please contact our IR Department. We are happy to of course, answer your questions on an individual basis. With this, I would like to close, conclude today’s conference. Thank you for your participation.

Operator: Thank you for your participation right to the end and you may now disconnect.