ORIX Corporation (IX) Q3 2024 Earnings Call Transcript

ORIX Corporation (NYSE:IX) Q3 2024 Earnings Call Transcript February 7, 2024 2:30 AM ET

Company Participants

Makoto Takahashi – Investor Relations Sustainability Promotion Division

Kazuki Yamamoto – Operating Officer-Investor Relations

Conference Call Participants

Naruhiko Sakamaki – Mizuho Securities

Masao Muraki – SMBC Nikko Securities

Kazuki Watanabe – Daiwa Securities

Koki Sato – JPMorgan Securities

Futoshi Sasaki – Nomura Securities

Wataru Otsuka – SBI Securities

Yuki Yaginuma – Bank of America

Taiki Okada – UBS Securities

Koichi Niwa – Citi

Operator

We will now begin the financial results briefing of KDDI Corporation for the Third Quarter of Fiscal Year Ending March 2024. I am Nakoji [Phonetic] of Public Relations Department and will serve as the moderator today. This briefing will be held in this venue and also broadcast live on YouTube and other media. Three financial results related materials are posted on our KDDI IR website. For the attendees in the venue, please check your handout.

Let me introduce the four participants today, Makoto Takahashi, President, Representative Director and CEO; Nanae Saishoji, Managing Executive Officer, CFO and Executive Director of Corporate Sector; Kenji Aketa, Executive Officer and Executive Director of Corporate Management Division; Shigeru Ezoe, General Manager of Accounting Department.

President Takahashi, please.

Makoto Takahashi

It’s time to start the meeting. Thank you for joining us for this conference of ORIX Corporation’s for the Third Quarter Consolidated Financial Results for the nine months ended December 31, 2023. I’m the MC. My name is Nakane from IR Sustainability Department. Thank you for this opportunity.

The attendee at this conference is Kazuki Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we have a request for the participants. In order to avoid feedback, if you have a communication device such as mobile phone nearby, please make sure that it’s turned off or it is away from the telephone. Yamamoto will provide the explanation followed by Q&A session and we will spend approximately one hour for this meeting. Mr. Yamamoto, please start.

Kazuki Yamamoto

Thank you for the introduction. Good afternoon and thank you for joining us for ORIX Group’s earnings despite of your busy schedule today. Thank you very much indeed. My .name is Kazuki Yamamoto, Head of Corporate Planning and Investor Relations at ORIX. I have taken over this role from my predecessor, Mr. Hitomaro Yano.

Let me start with a brief explanation of Q3 FY24 March results. Please turn to page two for the executive summary. So there are three points that I would like to explain. The first is the third quarter net income. Net income came in at 91.1 billion yen, base profits rose in inbound tourism-related businesses, real estate, domestic PE investments and insurance allowing ORIX to post the second highest levels of those base profits and segment profits in the four years since the start of the pandemic. Quarterly profits were the second highest after the year in which gains on the Yayoi exit was booked.

The second is year-to-date net income for the nine month ending December 2023. Net income rose 3% year-over-year to 219.2 billion yen. As we discussed in the first half results briefing, we expected that most of the realization of capital gains would come in the latter half of FY24 March end. We’re continuing to make steady progress in realizing this investment gains in numbers of deals which are currently under negotiation, which would allow us to attain a full year net income target of 330 billion yen, which was left unchanged.

So the third point is shareholders return. In May of last year ORIX approved a share buyback program a 50 billion yen. We have executed the full amount of the program and retired a total of 19.89 million shares. There are no changes to our dividend policy, which was announced back in May.

Now please turn to the next page. Net income for the nine months ended December 2023 rose 3% year-over-year to 219.2 billion yen with annualized ROE for the same period coming in at 8%. The right hand chart shows trends in quarterly net income and ROE for the past four years. ORIX achieved its second highest ever quarterly net income since the start of the pandemic in the third quarter of 91.9 billion yen, an increase of 40% to QonQ. The ROE in that chart in annualized net income for each quarter, which improved to 9.7% in the third quarter. So we should be able to achieve the full year target so that we’ll be able to achieve our target for the ROE for the year.

Please turn to page four. Here I will discuss the breakdown of segment profits. Segment profits for the nine months ended December 2023 rose 9% year-over-year to 319.2 billion yen. The chart on the bottom of the slide show historical trends in segment profits on a full year, quarterly, and nine months basis from left to right. The dark blue is base profits, while the light blue is investment gains. Please refer to the far right chart of third quarter year-to-date nine months performance. Base profits in dark blue rose 16% year-over-year to 268.8 billion yen. In addition to a recovery in businesses related to inbound tourism, expansion in investment income in the insurance segment and higher domestic PE earnings contributed to the strong number. The light blue investment gains for the nine month period indicate an 18% year-over-year decline to 50.4 billion yen but ORIX posted investment gains from real estate and PE exit in the third quarter of 26.9 billion yen; multiplying this figure by four equals more than 100 billion yen in investment gains. In fact, as shown in the chart, the amount consistently averaged more than 100 billion yen for the first five years. As I mentioned earlier, we are aggressively moving towards — forward with exits during the second half.

Now, please turn to page five and page six. These pages outline profits and assets by segment. ORIX domestic businesses were strong and are on track to meet their full year targets. Overseas businesses saw profits for fall owing to the impact of elevated interest rates and outstanding limiting risks considering economic uncertainty. That said, we think it is necessary to continue to carefully watch for the timing where interest rates and economic climate will burn them out.

Now, as shown on page six, some segments posted growth in assets due to ForEx impacts, new PE investment, insurance, reflecting higher securities investment and greater investment across and leases in Asia and Australia. A detailed overview of trends in each segment will be shared later.

Now, the base — what has contributed to the base profit, airport concession and the facilities operations; please turn to page seven. The chart shows segment profit trends for or at least three COVID impacted businesses of concession, facilities operations, aircraft and ships. The left shows a full year segment profits, while the right shows quarter trends. Total segment profits for the three businesses for the nine month period were net 26.6 billion yen, up by 17.7 billion yen year-over-year. Even though there is still one quarter left in the fiscal year, these businesses have recovered by about 50 billion again, from the worst period or losses marked during the pandemic. Although there are some seasonal fluctuations, steady growth should allow us to achieve additional expansion on the way to recovery to the 70 billion yen in annual segment profit.

Now, inbound traffic from all countries and regions, excluding China, continues in an upward trend. Airport concessions returned to the blacking in second quarter, and profits continued to expand in the third quarter. In December last year, Kansai International Airport opened its new international terminal departures area, which it had been working on during COVID closures. This leads to large scale renovation of the airports scheduled for completion in spring 2025. The airport is taking measures such as increasing smart lane baggage inspection facilities in an effort to combat labor shortages and ongoing expansion in inbound tourism, should lead to further growth in ORIX Group’s earnings. Now, by the way, Kansai Airport earnings are included in ORIX Group’s consolidated earnings, with a three-month lag, so the third quarter figures represent July, September 2023 numbers.

Now please turn to page eight. In aircraft leasing, lease fees are continuing to rise, as passenger demand in the US and Europe is at a record high levels, airline earnings recovery and tight supply demand for aircraft. Although dollar-based interest rates are pushing capital costs higher, there is strong demand in the secondary market for aircraft purchases and the three types of fee income these direct revenue gains on the sales of aircraft management fees are all rising.

In the facilities operations segment, we have endeavored to raise RevPAR by delivering superior services to our customers and maintaining high post-COVID occupancy rates. As a result, in December 2023, RevPAR stood at 138% of the 2019 level for directly operated hotels and at 128% for in. As shown in the slide, segment profits for the nine months ending December 2023 in the facilities operation business were 7.7 billion, already higher than the 5.6 billion yen for the full year of 2020 March end. We believe further profit growth remains possible, as we see room for additional hikes in RevPAR and should benefit from the second block of our new luxury Karaku brand, which opened at end of 2023.

Now please turn to page nine. Next I will share the progress we made with the result for the third quarter versus the full year target using the four categories we started to employ last fiscal year. Within Japan, segment profits in both the financial and non-financial category businesses were up year-over-year making strong progress vs. a full year target in particular. Domestic non-financial businesses were helped both inbound-related demand and the real estate segment were strong demand for properties from overseas investors fueled by Yen’s weaknesses that the property sells. For this reason, it could overshoot our full year target for the category. Now, the overseas segments, so profits declined, owing to an absence of investing games booked on the sale of a [Indiscernible] in the environment and energy segments in the previous fiscal year, and higher Euro intersect. While we have some distance from meeting our full year targets, we will focus on building up earnings while continuing to control this. Moreover, assets in these regions remain healthy. Please note that RX USA has very little exposure, either direct or indirect to commercial real estate. International market in the aircraft and ships remain strong and we aim to continue to grow our earnings through capital recycling. As for the baseball club, the posting fee from pitcher Yoshinobu Yamamoto’s transfer was booked as pre-tax earnings in the other non-fin segment area.

Please refer to page 10. Our exclusive net income of 219.2 billion yen for the nine months ended December 2023, representing progress of 66% post our target of 330 billion yen. In order to achieve this target, ORIX will need to book net income 110.8 billion yen on pre-tax profits of 165 billion yen in the fourth quarter. In addition to growth in base profits, we are moving steadily forward with several of these which are in the negotiation phases with buyers, and aim to achieve our full year earnings targets.

Regarding shareholder returns, our DPS plans remain unchanged at either 85.6 yen per share or a payout ratio of 33% whichever is higher. This translates to DPS of 94 yen if we achieve our FY24 margin net income target of 330 billion yen. As mentioned earlier, we completed our entire share buyback program of 50 billion yen and of which some has already been cancelled. Regarding of our FY25 margin net income target of 400 billion yen, the global macro economic climate has changed significantly since our initial outlook.

So we will discuss the path towards achieving this target and specific measures, as part of our FY25 margin business planning processes. Regarding our view on monetary policy and its impact, we think there is — I’d like to take this opportunity to share. We think there is a possibility that negative and interest rates could end in Japan around spring, which will push up the interest rate upward. Higher yen interest rates should positively impact ORIX Group earnings, particularly at ORIX Bank and in the insurance segment. However, we accept only a gradual pace to interest rate hikes, and therefore, please note we have no plans to change our current portfolio strategy or so policies.

We expect cuts in US dollar interest rates to start around summer. Lower US dollar interest rates should provide support to expansion in earnings, particularly ORIX USA’s real estate and PE businesses. Lower Euro interest rate would help reduce housing costs for ORIX Europe and positive for recycling activities for renewable energy projects at Elawan. So dollar and Yen’s interest rates decline would be supported to the strategy of ORIX in many of the times.

I would like to continue with the status of each segment. First, corporate financial services and maintenance leasing, please turn to page 12. For the nine months ended December 2023, the segment profit was up 2% year-on-year at 59.2 billion yen. Profits were higher in corporate financial services, thanks to solid earnings in fee-related businesses and profit contribution from M&A and into services. In auto, rental car demand remained strong and the prices of what used autos continue to trend at high levels. In addition, for this year, prioritizing more profitable business during sales activities has yielded results pushing the auto business to its third year in a row of record profits by end of Q3 and the segment is poised to post record profits for the full year again. Assets are flat overall with assets in corporate financial services slightly lower and rental car fleet in the auto division being renewed.

Please turn to page 14. This is the real estate segment. Segment profits were up 110% year-on-year to 51.4 billion yen for the first nine months. Investment in facilities segment realized a large investment gain in Q3, resulting in a substantial increase in profits year-on-year. Daikyo profits have grown year-on-year for three consecutive quarters contributing to the segment’s sharp increase in profits. We are proactively setting properties in the asset recycling business like logistics centers and also initiating new development projects in carefully selected areas and Daikyo continues to acquire sites in favorable areas. And all-in-all the segment assets increased by 70.6 billion yen versus the end of the prior year. We will continue this business model to invest in high potential projects and turning them profitalble.

Please turn to page 16 for the investment and concession. Segment profits rose 235% year-on-year to 23 billion yen. The PE investment achieved a strong profit gains on the back of exits during Q3 and also thanks to profit contributions from DHC, which we invested in the prior fiscal year. And the profit from concession is increasing as with real estate. Our first aim is rapid return to pre-COVID a profit levels and our approach is working, which is investment made during the pandemic period. Segment asset were up 195.4 billion versus the prior year end, pulling out the investment and mezzanine financing to Toshiba.

Please turn to page 18. Segment profit was down by 38% year-on-year to 19.8 billion yen. Excluding the impact of last year’s gain on sale of our partial Ormat stake, profits were up year-on-year. The bottom left graph shows the segment profits. In the domestic business, profits for the nine month were steady year-on-year. Although output caps for solar power generation in some regions impacted earnings in the first quarter, high number of sunny days from Q2 offset this negative impact. And the profits from overseas energy business were year-on-year owing to the absence of earlier gains and the higher hedging costs of overseas investments as a result of elevated Euro interest rates. Meanwhile, ORIX power sales volume increased, thanks to higher generating capacity. Last year, a major renewable energy company decided to withdraw from an offshore wind project, however, we still see strong demand for renewable energy worldwide. This business is positioned as a growth driver and we will utilize experience both overseas and in Japan to originate new opportunities.

Moving on to insurance segment on page 20. Segment segments profits were up 101% to 53.4 billion. COVID related insurance payouts from last year fell and high investment income held the segment post sharply higher profits. Premium income, mostly from wholesale — whole life insurance was also healthy. Segment assets rose by 155.3 billion yen owing to an increase in investment securities and impact of FX.

Please turn to page 22, banking and credit segment. Segments profits were up 8%, 26.9 billion yen. In banking, profits are up year-on-year, earnings from real estate investment loan grew on the back of higher long-term interest rates, while the increase in deposit interest was kept at a certain level. In addition, Orix Bank continues to grow it’s trust assets and the higher earnings from trust banking also contributed. Earnings in the credit unit were flat year-on-year. Segment assets were up 51.8 billion yen, reflecting the increase in lending as a bank that focuses in merchant banking. As part of this business, Orix Bank originates loans for corporate clients in priority areas such as renewable energy and logistics centers, and then securitizers the assets into debt products and using the trust banking license and sell these products to investors.

Please turn to page 24, aircraft and ships. Segment profit fell 5% year-on-year to 16.1 billion yen. In the ship segment, profits were down year-on-year as the business aggressively sold ship holdings last year, took advantage of the several pricing, but this is lining with projections and the ships prices remain high and in the segment we sold four vessels this fiscal year. Aircraft leasing, as I mentioned earlier, is enjoying healthy progress. At Avolon, highest total interest rates have been a drag and the business was loss making on a cumulative basis in the nine months. However, the operating environment is improving and it has been profitable for the two consecutive quarters in Q2 and Q3, even after the hedging costs. Segment assets were up 123.2 billion yen versus the prior year end reflecting the impact in FX and the aircraft purchases.

Next is ORIX USA on page 26. Segment profits were down 16% year-on-year to 27.8 billion and the primary reason for this was fewer capital gains booked in the PE business. Meanwhile, the credit business saw earnings rise. We have strengthened risk management from early stage and become very selective with new deals and been running in credit cost despite elevated interest rates, while still enjoying higher financial earnings. Breakdown of profits by this line can be found on page 27 of your handout for your reference later. Segment assets are down by 10.8 billion versus prior year end, even after considering the impact of weaker yen because we have been selective. While we cannot be overly optimistic owing to the lack of visibility concerning this market, we continue to operate the business with an awareness that it might bottom out quite soon.

Please turn to page 28. This is ORIX Europe. Segment profits fell 42% year-on-year to 20.8 billion yen in the prior year and the year before OCE ebooks performance fees of higher than a 10 billion but because of the market situation this shrink, and increase in hedging costs stemming from higher interest rates lead to lower profits. OCE has launched — developed and launched some active ETF. This is clear and OCE is promoting efforts to cross sell financial products across different group companies.

Please turn to page 30 Lastly, I would like to talk about the Asia and Australia segment. Segment profits were down 40% year-on-year, 20.7 billion yen. Although leasing and loans were growing in South Korea, Australia and Asia, profits will lower year-on-year on the absence of the gain on sale of the station affiliate. Segment assets were up 163.4 billion yen versus prior year end reflecting the impact of FX and new lease executions.

Segment assets and overview of Asia is shown on page 31 for your reference. And, as the footnote says, ORIX’s exposure to Taiwan through leasing and investments is as little as 70 billion yen accounting for just 4.4% of assets in this segment. And in fiscal year 2024 March end overall interest rates have remained higher and longer than anticipated in Europe and America, and earnings growth overseas has suffered. Meanwhile, benefits from a weaker yen and strong in-bound travel demand have helped our domestic business profit trend above plan. We will concentrate on achieving our net income target of 330 billion yen for fiscal year 2024 March end, and then lay the foundation to reaching the fiscal year 2025 March end net profit target of 400 billion yen.

That concludes my explanation about Q3. Thank you for your kind attention.

Question-and-Answer Session

Operator

Thank you. We are now ready for the Q&A session. [Operator Instructions] So we have from Mizuho Securities, Sakamaki san. Over to you.

Naruhiko Sakamaki

I am Sakamaki from Mizuho Securities. I have one question to ask. So achieving the target for this year and also planning for the increase of profit in the next year, and also your plan to have capital recycling, could you mind updating by referring to page eight of your slide? And there have not been any updates from November, I believe. So any kind of outlook for the exit, the size? Any kind of changes that you have been experiencing from the time of the second quarter results, if you could give us a flavor?

Kazuki Yamamoto

Thank you very much for asking the question. So please refer to page 38, as I’ve been said, so there has been no update, as you have mentioned, but currently we are considering in the second half for us, in the first half of next year. There has been no major changes. For this year, the capital recycling that would allow us to exit some of the projects, the deals, so we are going to proceed with the deal by taking much of the time so that it will be a tail heavy this fiscal year. So therefore, with the deals that we are proceeding with, it is progressing just as scheduled. However, by end of March, at the closing of fiscal period, in order to achieve that target, it doesn’t mean to say that we’ll be relaxing some of the terms and conditions in order to achieve the target. So we are proceeding with a negotiation in a very cautious manner with a buyer so that we’ll be able to continue to build the profits in a steady manner. As for the third quarter, so be, a sort of real estate, we did manage to exit some of the deals, but in the fourth quarter as well we hope to proceed with the same. As for the next fiscal period, you have asked the question about the next fiscal period, which is within the scope of the next — the plan, but that there will be some changes in the macroeconomic conditions such as ForEx, so as far as some of the deals that we have listed, so we would like to of course refer to the changes in the climate and continue to build up the profit. I’m sorry that I won’t be able to share with you any specific numbers, but I hope this would answer to your question.

Naruhiko Sakamaki

Yes. Thank you so much.

Operator

Thank you. SMBC Nikko Securities’ Muraki san, please ask your question.

Masao Muraki

This is Muraki. I have a question. 400 billion for next year, I understand this is still being discussed. And for this fiscal year, high interest rate is continuing and you’re trying to offset the negative overseas with the domestic performance and the next year is that direction. Maybe your assumption is that the direction will not change, but 400 billion yen, this was already very high to begin with. And as you are discussing what is the level of the base plan or the range or direction? Can you please maybe share more information about these things because I don’t want to see a big surprise three months down the line? At this point in time, can you please suggest the direction that the company is going to?

Kazuki Yamamoto

Thank you. As you have mentioned, for this fiscal year high interest rate means that we’re struggling with overseas business and we tried to offset that negative with strong performance in Japan; that is true. And for next year, we do not believe that the interest rate would come down that easily outside of Japan, we cannot really be that optimistic. But if you think about US credit, for example, as we gain more visibility into how the risk is changing, we will try to assess the situation carefully and try to be active where we can. So, we actually are talking about specific strategies, as we plan for next year right now. On page 10, of the handout, and this is something that was already disclosed last time, and this is basically the launchpad for next fiscal year. And 400 billion yen is the target what we are trying to aim for and this is the assumption of the plan. And then we will try to assess where we can see more room for growth or where we should not try too hard. And for each of the segment, we are discussing between the management and segment head and negotiate these details. Now, Mr. Inoue has already spoken about the mid-term’s direction and 300 billion yen should be like a stable level ORIX and that we should be able to aim for 400 billion as well, but we want to do that without expanding the balance sheet too much. And this is why we want to do a combination of capital recycling approaches. So, this basic direction remains unchanged. And hopefully the spring we will not share any negative surprises with you.

Masao Muraki

Thank you. As you have said, bottoming out or maybe the change in the interest rate direction, in the United States, you are trying to shrink your credit portfolio and they are talking about that as well as investment in real estate, is that correct?

Kazuki Yamamoto

Yes, especially credit and the current interest environment, real estate and mortgage business cannot be done very actively, but potentially, there is strength in these markets in the United States. So, once the interest rate hike eases and once it starts to come down, then for example, housing development or bond issuance, maybe we can see some positive signs there. And in terms of private equity or equity investment, mid-cap corporate will continue to struggle in terms of performance. So, for debt and equity when believe that the flow is kind of frozen, we did not expect a sudden improvement there, but we will continue to work strongly what we have within a business portfolio right now.

Masao Muraki

That’s very clear. Thank you very much.

Operator

Thank you for the question. Next we have Daiwa Securities, Mr. Watanabe. Over to you.

Kazuki Watanabe

Thank you. I am Watanabe from Daiwa Securities. I would like to ask one question, and I can refer to page 44 and that is with regard to the capital policy. So the expression in fact that change, so sustainable growth, but also at the same time growing ROE by efficient usage of their capital. Was there anything at the backdrop at the time of calculation, the buy back and also the DPS, any kind of idea to this based on this page?

Kazuki Yamamoto

Thank you. Well, just as you had mentioned, yes, we made a slight change in the expression. As I had mentioned at the very beginning, that inbound traveling in fact has been driving our growth, so therefore the base profit has been growing and the segment profit. We are beginning to feel the positivity from those growth implications. So therefore, it is not that we will be dependent on the capital gain, but we would like to continue to invest in the base profit generation businesses that should be improving our ROE. And also with regard to the capital policy that you have asked, so at the time of the benefit of being kind of eliminated or dropped, we thought that there is some positivity in expanding the DPS going forward. So, just as being asked by Muraki san earlier, the business plan and the discussion of business plan, inclusive of the BOD discussion, we would like to, of course, continue to discuss over this topic, however, PD of one times and going beyond one times, in fact, is something that has to be endorsed by a solid equity story, but if you could give us a little more time for us to arrive at a final idea. About the shareholders return is going to be expanded or is this the direction for this fiscal period, well, recently, so, in the capital market, the new [Indiscernible], for example, there has been a lot of discussion about the possible investment by the retail investors. So, we would like to appeal to as broad shareholder base as much as possible. So, on the basis of a shareholder return, so what will be the ideal capital policy based on this reaction that we may get from the shareholders, so this is how we want to arrive at the shareholders return policy for this year. Thank you.

Operator

Thank you very much. JPMorgan Securities, Sato san, please ask your question.

Koki Sato

Yes, I have a question. With regard to Asian business, are there any specific risks that you are aware of or focused on? Maybe it is not very serious, but from the first quarter, I think there has been some impact; I want to know which line and which region this is happening. And on page 31 is showing a more detailed breakdown of each country, especially in China and also greater China for equity investment, are you seeing some risks there? In order to welcome the new fiscal year in a clean way, earlier you were talking about possible impairment in Q4, but should we account for that or not? Thank you.

Kazuki Yamamoto

As you have mentioned, Asia and Australia area has ex China, Asia and also greater China, and there are discrepancies external Asia, Australia, South Korea and India. This is where we have our strengths like lease and also finance related to real estate, this is where we see business opportunities. So, we will continue to maintain businesses there. And possible challenges would include, as you can see on page 31, and the message that you want to deliver on this page was, for example, number for Hong Kong finance and also banking business. And in terms of credit, the market is not really improving, it is actually worsening. So, we are evaluating our assets and this is resulting in the correct credit allowance. So, we trying to be strict with risk definition, we are being extremely cautious. And as you can see in section two, at least for general business, especially for China domestic market, at least customers credit status has to be of course assessed very carefully, but we do have assets, so we believe that we can continue this business. And the third point is, as you have mentioned, as far as equity investments are concerned, we need to be very risk sensitive and we are. China related investment and its demand is actually decreasing overseas. And also Chinese domestic investors are becoming more selective about what investments are attractive to them. We have no belief that the situation will improve quickly just this year and next year, so equity investments will not be added newly in defense. We will maintain the current investees and if there are additional inquiries, maybe we will pursue opportunities to sell more actively. Now, for each quarter, we are reviewing the assets of course on a regular basis, but policy of holding these assets and also future business policy will have to be looked at so that we can make the correct judgment there. And in the business plan, within the strategy for Greater China, we will be discussing this and the result of discussion will impact what we do but anyway, we are trying to formulate the policy right now. So, that’s about the Asia and China, I hope that answer your question

Koki Sato

That was very clear. Thank you very much.

Operator

Thank you for the question. Nomura Securities’ Mr. Sasaki, over to you.

Futoshi Sasaki

I am Sasaki from Nomura Securities. I have one question. The third quarter results, the earnings results, I have a question about. So 101.4 billion yen, it is pretty sharp, but the way this increase of the profit comes from, if you could explain on a year-over-year or quarter-on-quarter basis, especially the increase on the base profit if you could be so kind enough to give us a further details. As to the numbers, the base profit roughly about 100 billion and you may have a further room to improve this further. And also, you in fact explained to us that there are a number of PE that you may perhaps be able to exit and thereby generate investment gains. So segment the profit of 30 billion yen or so, would this be maintained in the coming year, which means that the 100 billion yen is achievable. So, if you could be so kind enough to explain this, thank you.

Kazuki Yamamoto

So, first of all, so relatively speaking, the first quarter is the first full quarter, what is driving the quarterly, so it is the corporate finance and also the leasing and insurance, so, in a steady manner. In the third quarter what has improved more, so in the PE investment, the new investments such as the HC and also Toshiba mezzanine loan extension, in fact, has contributed to the base profit generation or increase in the base profit and also environmental and energy in the third quarter, so we did manage to generate some positive results. And in the third quarter, and the fourth quarter, especially in the overseas location, things were slowing down — sorry in the first and the second quarter. However, we felt that things had — summer started to show some signs of a bottoming out, so at least bottoming. So this is why there has been some improvement in the third quarter. So these have contributed to 101.4 billion out of which 10 billion is improvement in domestic market, 5 billion in the overseas businesses, so I think that’s a rough split. It is not a detailed number as such, but this is my understanding. And as for the fourth quarter, unfortunately, especially in the renewable energy related there is a seasonal factor, especially during winter the solar power and also Greenko in India, there will be a seasonal negative factor that we would have to experience. So this is why in the fourth quarter — so whether it would go — exceed 101.4 billion, so after this seasonal factor being incorporated, we — in any case, we want to of course achieve what we aspire to achieve but still these are some of the negative factors that we have to foresee. Well in that case, in the third quarter 101.4 billion the base profit was generated and of course there will be some seasonal factor that you will be experiencing in the fourth quarter, which means that there will be a decline in the profit. But the HC and Toshiba mezzanine loan profit generation may perhaps contribute to the full year result in the next year and if the overseas businesses starts to kind of bottom out then the Orix Bank’s spread may perhaps improve as well.

Futoshi Sasaki

So do you think that we can remain to be optimistic and if that is true, I don’t know, but on a quarterly basis, you’ll be able to generate 100 billion yen worth of base profit and 130 billion yen, which means that you may be able to achieve this 400 billion yen for the full year. Do you think it is too early for you to conclude your profit generation to 400 billion yen to that extent already?

Kazuki Yamamoto

Well, you know, this is something that we are already kind of communicating to each and every headquarters, but of course, they will have to work on the bottom up in arriving at those numbers by different divisions and sectors and segments. So this is why in this policy and direction of ours, we should not of course miss out on the timing, the opportunity. And also with the base profit, we hope to achieve 100 billion yen or even more every quarter, and top it up with the investment gains, so that we be able to achieve 100 — well, 400 billion yen for the whole year. So, although it was a planned number, but we are exerting much of the effort in achieving this goal of ours, so if you could understand.

Futoshi Sasaki

Thank you very much. Well, I’m very sorry for this, but I just want to follow up, you know, there was a question by Daiwa Securities, there is one clarification that I require. So, payout ratio 33%, so are there any kind of headwinds to this 33% of payout ratio, with regard to the shareholder return, you want to broaden the shareholder space. And so you are considering to make some changes in the shareholders return in order to broaden the shareholder base?

Kazuki Yamamoto

So payout ratio 33%, we’re not thinking about the direction in lowering this payout ratio for sure, because you know, referring to the payout ratio of many of the listed companies and other financial companies and also trade companies, we have been studying those peers, as examples, and also we have dropped this benefit that are provided to the shareholders. So, therefore, I would like to maintain the payout ratio at the current level, and we would think about the possibility to even increasing this or heightening it.

Futoshi Sasaki

So, you would be considering that otherwise, the shareholders would not be interested in investing in your shares.

Kazuki Yamamoto

Exactly, so, which means of course we will have to — it will be indispensable, it will be quite necessary for us to increase the profit so that EPS can be grown. And so a couple of words, in other words, the profit growth, and at the time when Daiwa Securities had asked the question, so the efficient capital management and all this coupled with, of course, growing our profit, and so, therefore, achieving our ROE as well as achieving PBR of more than one time.

Futoshi Sasaki

Thank you very much for that. I’m sorry that I have added some questions. Thank you.

Operator

Thank you. SBI Securities’ Otsuka, please ask your question.

Wataru Otsuka

Yes. I hope you can hear me.

Kazuki Yamamoto

Yes, we can hear you.

Wataru Otsuka

I’m looking at page nine and on the far right full year target is shown and there’s 800 for maintenance and for insurance there’s some other number, 52 billion for real estate. If this is going to be higher than this, would you be making some adjustments or updates in the third quarter? Maybe if you do that, that would be easier for people like us from outside to understand. So my question is, at the Board meeting level, have you discussed this? Are you discussing this? Please let me know. And based on that discussion, was this disclosure authorized or was it not discussed at all at the BOD? That’s my question. Thank you.

Kazuki Yamamoto

Thank you very much. On page nine, we have the full year target and this has not been changed from the beginning of the term. As the item is reported to BOD and discussed, we always use the latest forecast to assess the probability of achievement of the plan and the business overview. When it comes to disclosure, according to the 10 segments, or the four categories, if we try to show the latest forecast, the assumptions may be different, and it will be very confusing as to what we’re aiming for. So, as far as the disclosure goes, we are still using the same number as we did in the beginning of the year. We explained that there is maybe a bit of a long way to go, but on the ground, we are trying to control the risk, but also trying to expand the profit as well. So, in terms of business, control the business direction, the overall target has not really changed. And wherever we see more likelihood of success, we will — we are trying to increase the amount of profit coming from that segment, and the management and the people in the ground are communicating with each other in that manner. We will continue to disclose the target as we have done so far.

Wataru Otsuka

I’m sorry, I’m confused. You didn’t change it. But from the outside perspective, this is very difficult to understand. There is no visibility into the achievability of these targets, if you don’t update them.

Kazuki Yamamoto

I understand that we do see some upside or downside to these numbers and we can communicate those upsides and downsides. But for particular segment, if we inform you of the latest updates, it would be misleading, that’s our understanding, but we will try to provide as much color as possible for our communication.

Wataru Otsuka

While this is my opinion, but the maybe you can provide a range or write something in the document so that we can understand it better.

Kazuki Yamamoto

I see your point and we will discuss what can be done. So maybe rather than talking about segment, we’re talking about full buckets here, and especially in the third quarter, as we get closer to the end of the year, maybe there are more information that we can share with you somehow, so we will try to discuss the possibility of doing that.

Wataru Otsuka

Thank you.

Operator

Thank you for the question. So from Bank of America, Yaginuma san please.

Yuki Yaginuma

Yes, I am Yaginuma. Can you hear my voice okay?

Kazuki Yamamoto

Yes, we can.

Yuki Yaginuma

So, alternative investments, the asset manager in Europe as well as the United States from January to March in 2024 fundraising and exit, there are a number of companies that are turning positive. So from your perspective, this capital recycling environment, how do you perceive this? Do you think that it has bottomed out and thereby you are beginning to turn slightly more bullish than before and, the direction, if there was any changes from the last quarterly result session?

Kazuki Yamamoto

So as alternative fund, there has been a comment of the signs of bottoming out. So there has been a message, a positive message being incorporated. So the main battlefield of infrastructure or renewable energy, the sizable deals, in fact, those kinds of opportunities may start to emerge earlier than before. So the mid cap, however, the timeline, from the business earnings perspective, it may take a little more time for the mid caps. And in addition to that, our US operations, so far as the US operation is concerned, real estate as well as mortgage business in those areas, especially the housing related, because of the long-term interest rate, we do foresee that they’re beginning to come down that may work out to be positive as well, which means that they would — which we have no major concern as to further deterioration. But of course, we would continue to control the credit risk but in the next year’s plan, we would start to sort of see some positive kind of move towards exploring new investment, so that the sourcing capabilities, as the order stance, may perhaps be — will — there could be a shift from — well we haven’t changed it yet, but there could be a possibility of our stance turning from defensive to maybe slightly offensive. So, things are beginning to show some signs of moving to the positive zone. Thank you.

Operator

Thank you. UBS Securities’ Okada san, please ask your question.

Taiki Okada

Your three businesses, I would like to understand the business environment. Starting with credit, asset is slightly increasing and profit is also growing. By asset class, is there a specific asset class that you have some credit concerns? I understand there is no CRA [Phonetic] exposure, but what about the other asset classes? Private equity exit, alternative investment was just mentioned, but private equity exit environment right now, maybe the — well in the past maybe the price was not satisfactory, but is it improving? And also the profit momentum of real estate has not really recovered and BS issuance has to recover otherwise or on its own cannot really recover the profit level. Is that the correct understanding?

Kazuki Yamamoto

Thank you for your questions. Please turn to page 27. Credit, as you have mentioned, we are increasing the asset slightly and also the profit is up. Main drivers include the following, investment grade AAA class yield and spread has tightened somewhat more recently, but we believe that this is the level at which we can consider investment. So, we are pushing forward with that to some extent and it has some positive impact. But we need to pay close attention to asset quality, which means that investment grade that is easier for us to assess or review is mostly targeted. And concerns would be for relatively high-risk portion, asset management or servicing kind of capability would be needed, which means that in the credit segment we don’t go after big risks. And also early stage growth names, still early to look at it as credit, but the market investors are already tapping into that expecting recovery in the future. So, we will be taking a look at asset classes in great detail. CBSR [Phonetic], yes, we are owning that as part of investment to some extent, but these are not really plain vanilla office type thing. We are actually investing into various assets. So high sharing or investment or loans, we don’t really have those so much. As far as business state goes, agency is seeing a recovery trend and also long-term interest rate is going down, which means that housing stocks will increase. Inflation is also a factor. Origination environment, we’ll have to recover a little bit more until we strengthen our efforts again. We have done some restructuring and some efforts but we will cautiously look at this market. And the human resource and platform in this segment is also a focus. As far as PE investment is concerned, of course price is important but funding of the buyer is one of the challenges. In mid cap, especially regional banks in the US, their lending appetite has not really recovered fully or sufficiently. And the buyers that would be interested in our portfolio are still waiting for that improvement before they start negotiating. And of course, we are carefully monitoring the movement of different companies, and interest rate hike is affecting performance, so we need to see performance improvement in portfolio companies and buyers need to have sufficient funds, and those will be the catalysts for this business.

Taiki Okada

Thank you very much for a very detailed explanation.

Operator

Thank you for the question. So, the time is almost up. So the next person is going to be the last question. Niwa san of Citi Securities, over to you.

Koichi Niwa

Thank you very much. I am Niwa from Citi. ORIX Europe — can you hear my voice? I’d like to ask a question about ORIX Europe. So AUM is expanding in ORIX Europe, however, inflow of the money in fact has not been solid. So although you are generating the profit, but it looks as if things are pretty tough. So what is your takeaway of the business in actuality? So there seems to be a stability of the businesses and profitability may be high, however, in the next year, and also for the mid-term going over and beyond 40 billion yen and becoming a driver of your growth, I cannot have confidence in ORIX Europe’s businesses going forward. I know that you’re working on the capital recycling, but what is your understanding of this segment? So this is my question. Thank you.

Kazuki Yamamoto

Thank you for the question. So well, there was a question from Otsuka san as well, so these overseas segments, vis-à-vis our target and the progress that we have made so far, so there seems to be a difficulty in achieving our full year target at this point in time. So ORIX Europe, the biggest driver, in fact, is the hedge cost. Euro denominated funding cost, in other words, fortunately, is that dragger, it is a negative aspect. So Robeco and others, so it is slightly away from the performance of Robeco, for example. So internally, it is our policy for ALM, as a matter of fact, but the fully hedge making use of ForEx — forward ForEx, and making the issuance of the corporate bond, for example so that will be a little more accurate in terms of financing — finance management. And also AUM of Robeco, for example, because of the market recovery, the business conditions are improving slightly, but the asset management businesses as a whole, that’s expanding and also the fee level competition. Structurally, the competition is getting harsher. So in order for us to make up for these negative factors, we may have to introduce new products, and also from mutual fund to ETF, in other words, a trend shift, just like it has been the case in United States. So I think we would have to be applying some ingenuity to the business operations. But at any rate, if it was not for the hedge costs, the investment return for us has been positively contributing to the overall business performance. So therefore, to the industry as well as the Euro, we would have to foresee how the trend is going to be going forward, that will determine our strategy going forward.

Koichi Niwa

Thank you very much. That was very helpful.

Kazuki Yamamoto

Thank you.

Operator

That concludes the Q&A session and final word from Yamamoto san.

Kazuki Yamamoto

Thank you. I wasn’t ready for this, but as I said before, for this fiscal year, we’re struggling overseas but it’s been offset by the performance in Japan and we will continue to complete the projects that we’re working on. And by doing so, we want to achieve the target that we have disclosed and we will have deep discussion about what to do for the next fiscal year. And at the year-end earnings announcement, we are hoping to share with you our future direction. Thank you very much for taking time out of your busy schedule and sorry about going over the scheduled time. Thank you.

Operator

Thank you and that concludes the third quarter consolidated financial results for the nine months ended December 31, 2023. Thank you for staying until the end of the program.