Orix Corp

TSE:8591

Earnings Call Analysis

ORIX's Steady Growth Overcomes Pandemic

ORIX Corporation reported a notable start to the fiscal year, marking a 2% increase in net income to JPY 63 billion, with the return on equity (ROE) remaining steady at 7%. Particularly impressive were the corporate financial services and maintenance leasing segments, expanding notably through auto-related businesses and private equity investments. Insurance also experienced a surge in earnings due to higher investment income, boosting the base profit to JPY 82.2 billion, a figure that eclipses the pre-pandemic performance. Although investment gains dipped by 27% to JPY 9.3 billion due to fewer large-scale exits, the company remains on track to achieve its typical yearly investment gains. The firm is actively pursuing opportunities amid post-pandemic recovery, as indicated by profits in COVID-affected segments like facility operations and concessions reaching their highest since the pandemic began. Moreover, ORIX is committed to rewarding shareholders, having executed 36% of its JPY 50 billion share buyback program.

A Resilient Financial Performance Amidst the COVID-19 Recovery Phase

The first quarter of fiscal year 2024 has exhibited a sturdy financial performance for ORIX, with a modest 2% year-over-year climb in net income to JPY63 billion, and an annualized Return on Equity (ROE) of 7%. Highlighting segments were corporate financial services and maintenance leasing, benefiting from growth in auto-related businesses, private equity investment, and insurance, the latter buoyed by augmented investment income.

Steady Segment Profit Growth and Shareholder Rewards

Segment profit sprouted by 6% to JPY91.5 billion thanks to the contributions from core businesses. While the mainstay profit drove a 12% year-on-year elevation to JPY82.2 billion, investment gains witnessed a decline of 27% to JPY9.3 billion due to a relative deficit in large-scale exits. Despite these variances, a share buyback program valued at JPY50 billion reflects the firm's continuous commitment to returning value to shareholders.

Bouncing Back from Pandemic-Led Stagnation

The revitalization post-pandemic inertia is reflected in the concession businesses like Kansai International Airport, which soared to 1.06 million international passengers. This uplift is complemented by the booming performance in corporate financial services, maintenance leasing, and particularly the auto business, that thrived on focused profitability strategies, envisioning a return to pre-pandemic affluence.

Diverse Segment Dynamics Define the Quarter

The quarter unraveled mixed results across segments. The real estate division faltered with a 17% drop in profits, while the private equity investment section surged by 151%. The environment and energy segment, despite a 14% profit contraction, showed promise with growing global demand for renewable assets. The insurance sector emerged as a robust performer with a remarkable 68% profit increment, leveraging favorable forex movements and interest rates.

Global Operations Navigate Economic Challenges

Internationally, operations faced contrasting fortunes. In the U.S., profits rose by 61% through stringent risk management, while Europe grappled with a 55% profit downturn due to high interest rates and the Russia-Ukraine conflict fallout. The Asia and Australia segment saw a 37% profit downturn, impacted by the absence of prior year's sale gains, yet showing resilience through asset growth after adjusting for forex impacts.

Forward Outlook: Balancing Macroeconomic Factors

While the first quarter progress appears tepid when construed against the JPY330 billion full-year profit plan, ORIX anticipates a step-by-step buildup to meet the year-end goals. The firm remains unflustered by inflation and solar power generation caps, instead, harnessing these factors effectively within its business model. With a vigilant eye on fiscal indicators like interest rates and exchange rates, ORIX strategizes to sustain profitability and growth.

Earnings Call Transcript 2024-Q1

[Operator]

So it is now time to get started. Thank you for joining us for the First Quarter Consolidated Financial Results for the three-month period ended June 30, 2023. This is the ORIX Corporation meeting. And today, we have the attendee Hitomaro Yano, Executive Officer responsible for Accounting and IR. [Operator Instructions] There's going to be a presentation by Mr. Yano, followed by Q&A, and the whole meeting should last approximately one hour.

Mr. Yano, the floor is yours.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Thank you for the introduction. I am Yano, Head of the Treasury and Accounting and Investor Relations. Thank you very much for joining us today. Well, without further due, I will give a brief overview of the first quarter FY '24 March end results. Please see Page 2 of the deck that shows you the executive summary just as usual that covers today's main points. The first is net income and ROE.

ORIX posted a 2% year-on-year increase in net income to JPY63 billion, and annualized ROE of 7%. The segment that performed well was corporate financial services and maintenance leasing, fueled by expansion of our auto-related businesses, PE investment, where industries continue to grow in insurance, driven by higher investment income that is. As a result, the first quarter base profit hit JPY82.2 billion, surpassing pre-COVID level.

The second is acceleration of reopening momentum. The rapid increase in inbound tourists visiting Japan has led to growth in earnings of concession including Kansai International Airport and facilities operations hotels and inns. In the aircraft leasing business, earnings continued to recover from the pandemic on the back of strong performance at airlines.

Third is capital recycling, the yen we converted during the first quarter as a result of rising US dollar and euro interest rates. This environment has allowed ORIX to seek high returns on the sales of domestic assets primarily in real estate such as logistics centers. In addition, some industries are suffering from labor shortages, which has led to business opportunities for ORIX, which can capitalize upon the expertise the company has built efficiently managing physical assets.

The fourth point is shareholders' return. In May 2023, we announced a JPY50 billion share buyback program. As of the end of July, we have completed JPY17.8 billion in buyback or 36% of the program.

Please turn to the next page. As I previously discussed, the first quarter net income came in at JPY63 billion, up 2% year-on-year, and this translates to an annualized ROE of 7%. The right-hand chart shows quarterly trends in net income and ROE for the last two years. The first quarter net profit was the second highest in the four years since the start of COVID pandemic.

Please note that from this fiscal year, we have retroactively adjusted our past and needs to reflect changes to the accounting standards for the insurance segment. As a result, FY '23 March net income changed from [JPY1273.1] (ph) billion to JPY290.3 billion. The following pages which focus on segment-level information also reflects some changes to the way we calculate segment profit. Specifically, we reduced the method to distribute profit for business shares between two different segments.

As a result, although it may be small amount, segment profits in the corporate financial services and maintenance leasing segments increased while building the energy and environment segment decreased. Please note that these changes have also been affected retroactively for the past fiscal year.

Now, please turn to the next page. This page shows the breakdown of segment profit. Segment profit rose 6% year-on-year to JPY91.5 billion. Please look at the right-hand chart, which shows segment profits by quarter. The light blue indicates base profits, the dark blue, investment gains. Base profits were up 12% year-on-year to JPY82.2 billion. This figure was higher than the first quarter for FY '20 March end or FY '19 March end.

Profit growth was skewed primarily by progress in opening and healthy earnings in insurance. I'll explain the details in the following segment page. Now meanwhile, investment gains were down 27% year-over-year to JPY9.3 billion, owing to a lack of large-scale exits during the first quarter when ORIX only recorded several smaller exits. Investment gains, as you can see on the right-hand chart, tend to fluctuate substantially depending on the quarter. Please note, however, that is shown on the left-hand chart, ORIX has consistently utilized a certain level of investment gains for the past five years, averaging more than JPY100 billion per annum. We plan to realize further investment gains during the remainder of the fiscal year and achieve a typical year of investing gains.

Now, please turn to Page 5. This page focuses on reopening related businesses. The left-hand side chart shows segment profit trends for the three COVID-impacted businesses, aircraft and shipping, facility operations and concessions. For the first quarter, both the facility operations and concession posted their highest level of quarterly segment profits since the start of the pandemic. Aircraft and ships are seeing this earnings recovery trend and the three businesses in total recorded segment profit of JPY4.6 billion, a dramatic improvement from the JPY300 million in losses a year ago.

Now, aircraft concession centers on Kansai International Airport, so loss has shrink dramatically following a strong rebound in international passenger numbers. Please note that owing to a lapse in reporting Kansai Airport's earnings in ORIX Group, the first quarter figures reflect results for the January to March 2023 quarter. Kansai International Airport boasted 1.06 million international passengers in March, and that figure surpassed 1.35 million in June, reaching 63% of their June 2019 level.

In facility operations, a robust increase in inbound tourists has helped over-expense ABR while still maintaining high levels of customer services. And RevPAR in June at directly operated hotels were 119% of the June 2019 levels, while those facility inns were 114%. They helped the business achieve the first quarter profit in the first quarter since the start of the pandemic.

Aircraft leasing are expected to recover further as narrow-body lease rates already surpassing their pre-COVID levels and are continuing to rise. In order of the COVID-impacted businesses, we anticipate additional growth as Chinese tourists return to Japan. On the following page, you can see the latest trend in indices that illustrate recovery in each businesses, so please take a look at these as well.

Please skip Page 6 and move on to Page 7. Auto user segment specific tries to explain each segment's results. First is corporate financial services and maintenance leasing. Segment profit rose 20% year-on-year to JPY19.9 billion. In corporate financial services, fee-related businesses performed well, including insurance sales and real estate intermediary services. Segment profits rose sharply year-over-year as we booked the valuation loss of our stake in an industry a year earlier. Profit growth in the auto business as a result of profitability-focused sales activities, we have been carrying out over the last several years, and growth in the rental car business.

In addition, prices for used cars remain high. Rental profits were down year-over-year, owing to higher depreciation expenses caused by upfront investments in rental ICT equipment, ahead of expected Windows-related upgrade demand. The business also booked costs associated with the operation of new large fully automated warehouse, the third location in Japan. Excluding these, results were solid.

So please turn to the next page. The page shows the real estate segment. Segment profits were down 17% year-over-year to JPY10 billion. In the real estate investment and facility operations unit, earnings improved in the facility operations business, hotels and inns as outlined earlier. Meanwhile, profits were down year-over-year, owing to the absence of investment gains booked a year earlier from the sales of large logistics facilities and other properties. Now, DAIKYO secured a strong year-over-year increase in profits, bolstered by healthy sales of high-priced condos by procuring sites with excellent locations.

Please turn to the next page. Next is PE investment and concessions. Segment profit rose 151% year-over-year to JPY5.7 billion. In the PE Investment business unit, financial performance improved on the completion of Kobayashi Kako-related costs as well as contributions from indices that were purchased on FY '23 March, DHC and HEXEL Works. Please note that the first quarter results include just two months, February and March 2023 of profits from DHC consolidated in the ORIX Group earnings.

The concession unit posted smaller losses for the fourth consecutive quarter, aided by the recovery in international passengers, as I mentioned earlier. The unit is on track to return to profitability on a full-year basis for FY '24 March. Please turn to the next page.

The page shows the environment and energy segment. Segment profits were down 14% year-over-year to JPY3 billion. In the domestic energy business, profits were down on lower income from power sales caused by output caps on solar power generation in some regions. In the overseas energy business, profits were down slightly year-over-year at Elawan, owing to poor weather in Spain and a higher euro interest rate. Despite this, Greenko earnings were up year-over-year. Now demand for renewable energy assets remains strong globally, and we are expanding our capacity with Elawan as the center. Profits are continuing to grow.

Please turn to the next page. In the insurance segment, profits were up 68% year-on-year to JPY19.2 billion. The weaker yen and high-interest rate contributed to growth in investment income. In addition, Japan's May 2023 decision to legally reclassify COVID-19 led to further declines in COVID-19-related payout expenses. As I mentioned before, changes to accounting rules for the insurance segment has led to an increase in profit, particularly in the fourth quarter. Please turn to the next page.

This is the banking and credit segment. Profits in banking were up year-on-year, helped by higher financial revenues from real estate investment loans on the back of higher long-term interest rates. In addition to fees rose on an increase in trust assets and one-time loss booked in FY '23 March, first quarter also contributed to higher profits. In the credit unit, we booked CECL reversal in the fourth quarter FY '23 March, which led to a decline in FY 2024 March first quarter quarter-to-quarter, but earnings are mostly flat.

Please to the next page. In aircraft and ships segment, 33% decline was posted in profit to JPY3.6 billion. The ship business posted lower profits on the absence of the sales gains from a year earlier when ORIX made the timely sales of its owned ship fleet. The income leasing profits were up year-on-year as recovery in passenger demand led to growth in the number of owned aircraft and higher lease income from rising lease rates. Avolon posted losses on par with previous first quarter owing to the higher dollar funding costs on that from when the investment was made. As with [OS] (ph), Avolon profits on a current basis continue to grow fueled by growth in leasing income and the assets were higher owing to the increasing in higher aircraft holdings in the equity business, changes in forex also contributed. Please turn to the next page.

ORIX USA profits rose 61% to JPY9.7 billion. ORIX USA has implemented strict risk management controls for both new and existing deals in light of the US business climate. And this has allowed the segment to control losses, including credit losses. On the three business verticals, credit business posted higher profits helped by stable financial revenues and gains on the sale of small deals. In the real estate business, Lument first quarter origination volumes were up quarter-on-quarter, and surpassed the year earlier level and earnings boost was seen from higher interest rates, leading to higher profits.

Meanwhile, the FY had lower fewer deals this quarter, which led to lower profits year-on-year. In private equity, there were limited capital gains in the first quarter leading to flat profits year-on-year. Please note that the assets rose owing to changes in forex and excluding that, it's down slightly. Page 23 has features a breakdown of that business line, so please refer to this page as well.

Please turn to the next page. This is ORIX Europe. Segment profits were down 55% year-on-year to JPY4.2 billion. AUM growth was sluggish in FY '23, March, owing to the impact of high interest rates and Russia-Ukraine conflicts. However, AUM has recovered slightly with the launch of active ETF product and other measures. Nonetheless, higher euro interest rates resulted in higher funding costs, which led to year-on-year decline in profit.

Please turn to the next page. This is Asia and Australia. Segment profit was down 37% year-on-year to JPY8 billion, on the absence of a gain on the sale of a Southeast Asian affiliate a year earlier. Assets rose by JPY120.3 billion, of which JPY82 billion was due to changes in Forex. So excluding forex impact, the net asset has increased.

Please to the next page. Now I would like to give an overview of first quarter results and progress using the categories we disclosed at the Q4 earnings announcement. For domestic segments, both financial and non-financial categories posted higher earnings year-on-year. The financial category, in particular, shows stable growth, showing a stable good start. Overseas segment, results were below year-earlier levels due to higher funding costs caused by higher interest rates and also ongoing uncertainty in the US economic outlook.

And we are taking strict risk management stance in the US, and we have maintained healthy asset quality and low non-performing ratio. Please note that the overseas category, energy category and some seasonal factors have come into play, which typically leads to lower profits in the first quarter. This completes my explanation about the Q1 results. And now I would like to talk about the business climate as well as the remainder of this fiscal year.

Please turn to the next page, Page 18. I will start with a discussion on the macroeconomic climate and our current status. As for interest rates, as outlined in the past quarters, ORIX works to keep its profit entity to interest rate changes low through asset-liability matching. Although a 1% increase in euro interest rates is JPY2 billion to JPY3 billion, negative impact on annual pretax profit, we have worked to increase the fixed rate loans even after reduce this entity further. Yen weakness and lower interest rates in Japan have encouraged overseas investors to increase investment in Japan. This environment should allow ORIX to improve our returns even further through exits in domestic assets, including real estate properties like logistics facilities.

Regarding inflation, while this does impact a variety of ORIX businesses, we have been able to pass along higher costs through maintenance leasing rates, rental fees like condominium prices, hotel and inn RevPAR and product prices for overseas renewable energies, among others. Finally, labor shortage is a critical issue for automobile and aircraft maintenance operations and for management of solar power generation facilities.

Outsourcing of management of these assets is likely to increase, and this should allow ORIX to capitalize on the expertise in capably managing these assets to expand business opportunities. Our asset management portfolio is outlined on Page 30 of the presentation material. Please refer to that as well.

Moving on to the last page. The key theme for the fiscal year continues to be capital recycling. As explained earlier, we have noticed a stronger momentum for investment among our overseas investors for domestic real estate NPE assets. Demand is particularly robust in real estate. ORIX consistently generates a certain level of investment gains each fiscal year and plans to continue exits going forward in this fiscal year as well. In domestic PE investment, we have improved the value of a number of investees following a period of active management and have multiple companies close to exit.

And environment and energy segment, Elawan, which ORIX acquired in '21, has been steadily developing new assets and expanding its operating capacity, and the company plans to sell some of these assets during the fiscal year. And like other segments, continued capital recycling.

In ORIX USA, we maintain a cautious stance in new investments, but most of our existing PE investees have enjoyed their growing earnings. So we continue to look for opportunities to exit at the right time. And for this fiscal year, we will continue to see uncertainty in climate, but we see some positive aspects as well, such as progress in reopening and in weakness. And we will continue to work towards achieving a full-year target of JPY330 billion in net income, which we announced in May and also then reach JPY400 billion in net income and ROE of 10.4% for fiscal 2024 March. While caution is still necessary, we plan to continue to grow proactively while looking for more investment opportunities.

Thank you for your kind attention. That's all from me.

[Operator]

Thanks for your attention and interest. We're now ready for the Q&A session. [Operator Instructions]. So we have from Daiwa Securities, Watanabe, asking the question to begin with.

[Kazuki Watanabe, Daiwa Securities]

I am Watanabe from Daiwa Securities. I'm referring to Page 41, and that is to do with capital usage ratio going up to 39%. It was, I think, the end result of acquiring DHC. What is your total level? So I know that you have been explaining about capital recycling today, which was pretty positive. But JPY100 billion of five years investment gain was to be achieved. But based on this capital usage ratio, do you think that there may be some acceleration?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Thank you very much for asking the question. So as to the capital usage ratio, yes, we were impacted by DHC acquisition as we have been sharing with you from some time ago. So whether this is correct or not, but we are constantly referring to this level. And whether it goes up to the level of 90% or not is a yardstick that we would apply. In other words, we would not like to end up having excess amounts of capital for the sake of the investors, the shareholders and also remain to be agile in carrying out the M&A, if it proves to be right from the timing perspective.

So we have just gone over that level currently, so which means that we may perhaps consider exiting from some of the investments and with 90% [indiscernible]. And so we are making a slow start, as we have explained. But the real estate, in fact, the demand remains to be strong. At the time when we put together the plan, if we were to sell a certain property, we had kind of estimated or simulated the amount of investment gains on the sales of the properties, but we are now beginning to feel that this assumption currently, the price may be higher than initial assumption or expectation. So the PE investments here in Japan as well as domestic real estate investment and also overseas renewable energy investments, and there could be some other businesses as well.

So we would continue to, of course, manage all these businesses. And although I said JPY100 billion of an average investment gain could be generated just like any other usual years. And we may have to exceed that as well. So as an issuer or a developer, we would like to continue to recycle the capital so that we would like to continuously generate profit on a recurring basis and this is what we want to display and prove to investment community. I hope this answers your question.

[Kazuki Watanabe, Daiwa Securities]

Thank you very much. So from that perspective, the investment gain this year from JPY100 billion, do you think that there could be an overshoot from JPY100 billion, that is expected?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Well, as for the investment gains, it's not something that is controllable to hit that on JPY100 billion. So therefore, there could be a possibility of overshooting such a guideline.

[Kazuki Watanabe, Daiwa Securities]

Okay. Thank you very much.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Thank you.

[Operator]

SMBC Nikko Securities, Muraki. Please, ask your question.

[Masao Muraki, SMBC Nikko Securities]

Yes, this is Muraki. I have one question. JPY330 billion profit plan for the full year. Is this still your best estimate at this point in time. On Page 17, you are showing the progress. Well, if we calculate the progress from this, most of them are below 25%. And investment gain plan progress is just about 10%. And I think you're saying that you can catch up. But I think the base profit on Page 18, there is a downward arrow. How much of a concern is this, so financing costs, interest rate and also inflation impact? And over it doesn't really say there is a limit to the output of solar power generation. And against the base plan, is this going to be a material impact? Can you please elaborate?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Thank you for your question. I clearly understand where your question is coming from. With regard to base profit, looking at the past to the second half, base profit tends to increase. And I have mentioned the reopening situation and the concession clearly is showing a recovery. The base profit may not shoot up, but every quarter, we expect gradual growth in base profit. That is my current scenario. And then you can add investment gains on top of that. In the first quarter, the progress rate, as you mentioned, is quite low, but there is no need to see this inadequate decline. So things will be built one by one, step by step in order to achieve the full-year objective. That's the scenario.

With regard to macroeconomy, euro interest rate. Well, most of the other interest rates are mostly neutral. So there is not much concern and euro was the biggest concern, but JPY2 billion to JPY3 billion was mentioned earlier. Now in this fiscal year, compared to the previous fiscal year, we have started to increase the hedge volume slowly. And as of today, the sensitivity is much lower than what's indicated on this slide. So going forward, the annual sensitivity is below JPY1 billion level, which means that euro interest rate increase should not have a material negative impact on us. Well, we don't believe that we should hedge against everything, but we believe that the current level is probably appropriate.

With regard to inflation, I believe that was the next part of the question. Material costs increase and labor shortage can result from inflation. So material cost, of course, and the construction cost has gone up. But the real estate price increase and further lowering of expected yield and increase in price is much larger than the increase in other cost. So I believe that the inflation is actually positive for us. These are some of the smaller impacts, but in hotels and inns, occupancy cannot really be increased very much because it's harder to find people to work there.

But still, within the limited number of headcounts, we can increase the services and we can increase ADR, and in the end, we are having a positive situation. So we are coming back to the pre-COVID level. In other words, we're taking advantage of the inflation in order to increase the service prices that we offer. So in that sense, we want to be able to ride this wave and we're actually able to increase the top-line. And we are also seeing an increase in the bottom line as a result of that. I think that should be it. Am I right? Or was there anything else?

[Masao Muraki, SMBC Nikko Securities]

Solar power generation.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes. Up on output, yes, that is true, but we do not expect a major impact from that. We're actually selling energy as well and the market is volatile. The cost may go up or down or there may be a competition against other companies, and we may not be able to increase the price that we sell the electricity at. So we have to look at this carefully. But in terms of solar power generation, the profit contribution is very stable. I see. So maybe the arrow on Page 18, I think there are more upward arrow downward arrows, yes. That's how I prepared this material. That was the meaning of this slide.

[Masao Muraki, SMBC Nikko Securities]

Thank you.

[Masao Muraki, SMBC Nikko Securities]

Thank you very much for the question.

[Operator]

From [indiscernible] Securities, we have Otsuka asking the question.

[Unidentified Analyst]

I am Otsuka from [indiscernible] Securities. I hope you can hear my voice okay.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes.

[Unidentified Analyst]

Thank you. So I'm referring to the data book numbers, what has been explained by Yano, just now, so your clarification or confirmation. Just as usual, you have the procurement cost and also the asset yield return on assets and also the foreign currency and if you were to calculate the spread. So I think it is 5% for the first quarter that just ended, and it was 6% in the last first quarter, in the last year that is.

And so therefore, that is kind of downsizing the spread as a result of the foreign currency impact. So on Page 18, the reason why the euro procurement, the funding cost, in fact, is resulting in such numbers or because you are treating those phenomena, so therefore, the spread may not have downsized from here down the road, it may perhaps trend flat. So if you could be so kind enough to explain that. Thank you.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes, your, I think, assumption is exactly the same as mine. And to begin with, so talking about the asset side, and that is financial asset only and on the liability side, other than the financial liability, there are some equity investments as well that is included. But talking about the financial assets, so the assets and liability matches. And this is why, just as I explained earlier, euro, rather, OCE -- our OCE business and some part of Elawan that is, the investment that we have been making, the procurement cost, I mean the funding cost, in fact, has been pushed up. But as for euro, so because of the interest rate fluctuation, we think -- well, we have the position not to be susceptible to the changes of the interest rate. So we're working on the ALM so that we will not be largely impacted by the changes. I hope this answers your question.

[Unidentified Analyst]

Yes, thank you very much.

[Operator]

Mitsubishi, UFJ Morgan Stanley. Tsujino, please proceed.

[NatsumuTsujino Mitsubishi, UFJ Morgan Stanley]

You mentioned about the impact of reopening eastern access and also real estate. I think this is the operation or management only, so daily contribution and also investment gains, I subtract exact from the information that I received. And what kind of improvements do you think you will see in each of these items? In terms of concessions, JPY450 million in red. And then JPY8.9 billion in red, and then just under JPY2 billion in red in these three quarters, and there was an improvement from January through March, but the improvement was not that impressive.

So going forward, what do you think will happen? April through June, was there any special high cost? Was it a special item and maybe the actual improvement was much better than this? If that is the case, please talk about that? And also, if you look at the real estate operations only, there are activities and it was JPY1.2 billion from October to December. And then it went to deficit, and then JPY1.4 billion in April, June. So in the past, if you just looked at the operation, it was about JPY3 billion. So what do you think you need to do in order to go back to that level? Do you expect that level of recovery before the end of the fiscal year? That's my question.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Thank you. In terms of concession, it is a related affiliated company. I don't know to what extent I can comment. But January through March for them, every year sees cost for repair, which means that fixed cost tends to be posted in a high amount in January through March, and that's basically April through June this year, which means that there is a big recovery. So the April through June, and our July through September should see more growth. That's what we expect. And for concessions, we have seen a good recovery, so we do have high expectations.

Having said that, hotels and inns, well, we have a very good feel for this segment. As of today, I would say the situation is actually better than pre-COVID. Hotels and Inns operations have seasonality, usually better in spring and autumn and worse in winter. If we look for the pandemic, we were actually running deficits in winter season. So if you exclude the seasonality, if you take that out, you can see that we have seen steady recovery quarter-by-quarter. And again, we have high expectations for this segment as well.

[NatsumuTsujino Mitsubishi, UFJ Morgan Stanley]

Hotels and Inns and concessions on their own, how much increase in profit can we see? That might be another question. But for these two, we expect a big growth. Mr. Muraki asked a similar question earlier, I think base profit, what will happen to base profit going forward?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Well, since we have these expectations in these areas, we believe that a certain amount of growth is definitely possible and for aircraft as well. So we [indiscernible] and this is also cycling, and we can sell aircraft which will push up the profit. So for these three particular segments, we expect a further growth in profit. In terms of recovery from the pandemic, in terms of corporate financial services, rental car is showing a very good recovery as well. And that's one other piece of contributions that we see.

[NatsumuTsujino Mitsubishi, UFJ Morgan Stanley]

That's all from me. Occupancy-wise, I understand that it's a pre-COVID level. But maybe because of inflation, profit will not recover to JPY3 billion to JPY4 billion on a quarterly level yet. Is that true or not?

[Hitomaro Yano, Executive Officer for Accounting and IR]

In terms of occupancy, because of labor shortage, occupancy itself is actually quite difficult to raise. But in hotels and Inns, we have increased unit price. And as a result, what we call RevPAR, as you can see on Page 6 of the handout. Compared to 2019, we have seen some increase, so we can expect some positive results here. Thank you.

[NatsumuTsujino Mitsubishi, UFJ Morgan Stanley]

I Understand.

[Operator]

Thank you Tsujino. Now, over to Sasaki from Nomura Securities.

[Futoshi Sasaki, Nomura Securities]

I am Sasaki from Nomura Securities. Can you hear my voice okay?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes, we can hear you well.

[Futoshi Sasaki, Nomura Securities]

Thank you for the opportunity. I have two questions. The first, according to -- I don't think Yano has mentioned this. With regard to the new investment. So after the first quarter, there might be some, of course, positives and negatives. And also, you have mentioned about labor shortages. In the case of hotels, the luxury hot sales construction impact is proceeding in Japan and condominium price has been rising, too. So in terms of the timing -- so with regard to first -- the new investment, has there been any kind of strategy changes after the first quarter? Do you have any idea? Thank you very much. That's the first question.

And the second question, Robeco, the asset management side of your business. I suppose if you were to exclude the forex impact, AUM, I think it's turning to them, I think, has decreased and the outflow of funds, I think, is continuing from last year. And do you know anything about the notification of the cancellation? How do you foresee the development at the asset management companies?

[Hitomaro Yano, Executive Officer for Accounting and IR]

So first of all, let me start with the new investment. This time, where it was just -- it was the first quarter, and this is why. Now that I had, of course, paid the attention for the first quarter performance. And also the second quarter, how we foresee the second quarter, so this is why I have not made at all mention about the new investment. But the PE investment, we do have some actual outcome. We do have the actual case of new investments and real estate related, so it is capital recycling after all. So we have new development, and as for hotels and inns.

So there were initial plan on our part, such as Suginoi in Oita, we had rebuilt the hotel, and that was quite sizable even during the period of the COVID-19 pandemic. So we have been working on the development of our hotels. And how long the real estate, the boom may continue, but the construction cost is rising. So we need to turn cautious. We cannot, of course, continue to enjoy the heydays, that should not be the case. But we have, of course, been developing ourselves and we'll be able to increase the value that way. So it means that we can always develop and hold as opposed to develop an exit. So we would like to continue that way.

And going forward, on a much longer perspective, so at the time of the closing of the second quarter results, I suppose we'll be able to share some examples of our PE investment. And to answer the second part of your question, Robeco and other asset management AUM, please, I think please refer to the numbers that appear on the material that we have provided to you. We called it at data book. And we quoted as supplementary information for the three months ended June 30, 2023, that we disclosed. So we have furnished the bulletin report as well as the presentation material and also this supplementary information, and that 2023 shows the level of AUM.

Unfortunately, in the second quarter, the net new money or the inflow of money was JPY2.9 billion of a decline. Page 23, but if you were to revert to the outstanding balance, 23 March end, JPY296.1 million and JPY305.1 billion thereafter. So in 2023, April to June, which means that we had increased the AUM at the end of the period. And the net new money was on decline as you can see from the chart on Page 21, and we have been covering it somewhat by the appreciation of the prices of the financial products. But we would try to, of course, do whatever we can to increase the net new money going forward. So I hope this answers your question.

[Futoshi Sasaki, Nomura Securities]

Robeco, the asset class that you are struggling the most, is it alternative asset or equity or a bond? I'm not sure, to be honest.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Robeco, they are good at managing traditional financial products. So I think they would like to perhaps increase the alternative assets. So in other words, you are struggling with the traditional assets rather than anything new or newer. Robeco, and we had had covered Capital and Boston Partners. Those are the asset managers that we own. And the US harbor is struggling, so we are converting the win which the management has done to access for the company going forward.

[Futoshi Sasaki, Nomura Securities]

Thank you very much. I would like to perhaps ask you the further questions at a later stage. So over to the next person.

[Operator]

JPMorgan, Sato Koki. Yes.

[Koki Sato, JPMorgan]

Yes. Can you hear me okay?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes. Continue.

[Koki Sato, JPMorgan]

Thank you. I would like to ask you to give me some more explanation about the aircraft and ships. So in line with concession and real estate kind of recovery, do you expect -- I want to understand that based on the trend. But also the ship were already included in the different quarters in the past, Avolon can be excluded but pure aircraft profit is difficult for us to see. So for example, on Page 13, this is the segment profit and the quarterly trend. Can you maybe give us more information about this so that we can see the breakdown of the aircraft trend for example? And excluding Avolon, just over JPY2 billion decline in profit is seen. And if you exclude the sales of marine vessels, what is the situation? Can you please explain this in a little bit more detail?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Well, ships did not have a big impact. That was our assumption. That is why we put them together with the aircraft. But for first quarter of '23 March, eight ships were sold and we gained a lot from that sales. Roughly speaking, in the first quarter last year, JPY4 billion profit in ships. And in this fiscal year, in this quarter, JPY2 billion. So that's the scale as of June. And if we exclude that, the remainder is aircraft. And the aircraft is growing year-on-year. Lease fees are increasing overall. And also because of job, we can sell aircraft as well. So we expect to see growth going forward.

For ships, we made a clear decision to sell. And the assumption was very clear. So when the situation is bad, we buy and when the situations are good, we always sell. So there could be some ups and downs. But we also have [indiscernible] methodology for ships. We also have shipped loans as well. Marine vessel loans, which provides us with a spread based on the value of the vessel. And we can do this because we can operate the vessels and we can provide loans.

And if anything happens, we can always repossess the vessel. And that is why we want to keep our steady method with ships at least for the time being. So aircraft is recovering steady in a nice way. And for this fiscal year, our profit for ships is lower than the prior year. But still, as you can see that already in the plan, that decline in ship can be more than compensated by the aircraft. That's all from me, thank you.

[Koki Sato, JPMorgan]

I just want to double-check the numbers. Last year, shipped JPY4 billion in the first quarter and the JPY2 billion this fiscal year. This is a very rough number. Okay? If that the rough number, if we exclude those numbers, non-Avolon aircraft is only increasing several hundreds of millions of yen. So it's only a slight increase?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes, that's correct.

[Koki Sato, JPMorgan]

And the data book P&L shows, well, -- this is no longer a segment operating profit. You're using a different expression. But the equity method contribution prior to the contribution, the number is lower than the prior year. And on Y-o-Y, excluding Avolon, there is an increase in the equity method part. So aircraft recovery is contributing to the first quarter basically in the equity method -- this Avolon equity method, a profit increase in Avolon. Let me double-check. I'm not saying anything wrong, I'm I?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Avalon profit, Avolon does its own earnings announcement. And one month later, we can capture the profit to our financials. So that is why we see increase in the equity method. But we're also charging interest rate for that investment and the US interest rate is going up, that's negative. So Avolon recovery looks weak if you just look at the segment profit that is the current status. Aircraft and ship sometimes, we have a joint venture with funds to own aircraft and vessels. And sometimes, we have equity method applied to the profit and losses, but that's quite rare. So this equity method profit or loss is mostly Avolon related. Debt cost, this is profit before the charging of the debt cost.

[Koki Sato, JPMorgan]

That’s very clear. Thank you very much.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Thank you.

[Operator]

Question from Okada, from UBS Securities. Please.

[Taiki Okada, UBS Securities]

I'm Okada from UBS Securities. As for myself, I'd like to ask a question about the Page 28. I'm referring to your US businesses. So the three businesses of United States need explaining a little more into detail. As compared to three months ago, in each of these segments, what has changed? And if we were to refer to the base of profit, the credit has returned. However, real estate private equity on a year-over-year basis, unfortunately, you have experienced a decline. So as compared to three months ago, I think your view to US economy may have improved. But based on those backdrops, in other words, the economic environment or conditions, how do you foresee the businesses trending going forward?

[Hitomaro Yano, Executive Officer for Accounting and IR]

So as for the US businesses, well, we would, of course, hope that to increase the top-line for sure. But the credit so far, we have not been increasing the bad loans or bad debt. And of course, for the time being, because I will not be able to say anything in a manner for the future. But we think that the current trend can be continued. But as for the base profit for the real estate, it is difficult to segregate the two. The Boston Financial for the low-income bracket people, we securitize the real estate asset. But it varies from quarter-to-quarter. This quarter, there was none, and this is why the base profit, unfortunately, we experienced a decline.

As for PE investment, unfortunately, so exit is not that smooth at this point in time. And this is why private PE was on decline in terms of the base profit. So the investee of the PE, we are charging the interest rate and the cost impact has been rising. So this has resulted in the negative consequences. So that, in fact, are the major factors to the negative base profit. And we have been, of course, giving other directions to ORIX USA, not to overstretch and because you see the current conditions that does not allow them to be that successful with the businesses that we have been running. So by making use of -- by making use of the leverages, and if the PE investment may start to recover, we may be able to enjoy a better performance going forward. I hope this answers your question.

[Taiki Okada, UBS Securities]

Thank you. Just one follow-up question. So the PE exits in the United States, I suppose there have been one or two perhaps PE exits. So that situation, in fact, remains to be unchanged going forward as well.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Did I say one or two? I may have said one or two or three, but are you asking me the question whether we have said so for the first quarter results three months ago, the timing or throughout the year, there could be a possibility of some exits. And there are some equity investments that we have made to keep the association or the partnership going. But we may be able to perhaps exit out of some, one or two perhaps, investment. I may have expressed that in such a way. And we would like to, of course, stick to such a plan. We have not, of course, not realized that, but I think we do foresee an opportunity to exit out of those investments.

[Taiki Okada, UBS Securities]

Thank you very much.

[Operator]

Citigroup, Niwa, please.

[Koichi Niwa, Citigroup]

Yes, this is Niwa, Citigroup. Can you hear me?

[Hitomaro Yano, Executive Officer for Accounting and IR]

Yes, we can hear you.

[Koichi Niwa, Citigroup]

Thank you. Question about banking, two questions. One is impact of ICC for this fiscal year and next fiscal year. How do you think this will impact your company performance? What is your analysis? Was it a surprise or not? And secondly, strategically, green and nonrecourse loans are done, but what is the current status? And what is the current status of the spread? Thank you.

[Hitomaro Yano, Executive Officer for Accounting and IR]

ORIX Bank is a bank. So higher interest rates would generally have a positive impact on the banking business. They do a lot of loans for small condominiums for investment purposes, but many of them are linked to the long-term prime rate. You may be surprised, but it's true. So if the five-year interest goes up, then ORIX Bank's profit actually goes up, that is the structure. So interest rate increase, especially yield curve steepening is actually quite beneficial for ORIX Bank.

BOJ's interest rate policy change. It is very difficult to judge how much of a change they've actually made. But mid to long-term zone interest rate will continue to creep up, which is good for us. I don't know to what extent we can expect more. But yes, we do have expectations. That's my explanation about banking business, mostly loans for investment purposes. Other than that, we are just making all our efforts, we are getting people together and Environment Energy Head, Nishikori, now moved to banking business. And he's using his own network to grow the business, and the business is growing by several hundreds of billions of yen.

But if not of the accumulation gain, we will take advantage of the trust function and the sale of the assets and to turn this into another capital recycling business. So in terms of impact for the group, maybe it doesn't look like much, but at the banking business level, there's definitely steady growth. So please continue to watch them for a while. That's the kind of status.

[Koichi Niwa, Citigroup]

Thank you very much for your very detailed explanation. That was very clear.

[Operator]

So it is almost time to finish up this session. So the next question is going to be the final question from Sakamaki of Mizuho Securities. Before we ask Yano to close the session.

[Naruhiko Sakamaki, Mizuho Securities]

So I am Sakamaki from Mizuho Securities. Thank you. And I would like to ask questions about Asia as well as Australia. So in the last year, you shared with us the idea of increasing the asset, but I don't think you have been generating much of the profit. So the contribution to the profit as revenue as a result of the asset funding balance of assets that you have been building up over time. How long does it take?

[Hitomaro Yano, Executive Officer for Accounting and IR]

So with regard to Asia as well as Australia, the traditional leasing business and also investing business are the two major businesses. And the traditional, that is equity method holding, and we have been selling those assets as well. So the profit that we have been generating, in fact, are patchy, but we have decreased the asset of the leasing during the period of COVID pandemic. So the contribution from that leasing businesses although gradual, but we are beginning to generate some profit. So investment, in fact, does fluctuate over time. So it doesn't look -- it is suboptimal.

But in the great China, we have been making quite a bit of investment in the past. But as for the new investment, we have not been that proactive. While we would like to rather work on the exit of the investment that we have made in the overseas location. I don't know how much. But in Asia as well as in Australia, inclusive of Greater China, that is, we would foresee the opportunity to exit out of those investments so that we can make a positive contribution to the revenue as well as profit that could be generated. So I hope this is -- I think that this may not answer to your question in a direct manner. But this is how we foresee.

[Naruhiko Sakamaki, Mizuho Securities]

Okay. Thank you very much.

[Operator]

Thank you, Yano. Closing remarks, please.

[Hitomaro Yano, Executive Officer for Accounting and IR]

Well, thank you again for joining today. I have already explained quite a lot. So there's not much more for me left to say. But considering the current environment, you can see how we started the first quarter, JPY330 billion for this fiscal year, we definitely want to achieve this. And also, on the other hand, we want to continue to invest so that we can continue to grow into the next fiscal year as well. And we appreciate your kind support. Please watch us. I'm sure that you have many more questions, and IR team will be happy to respond to any questions you may have. Thank you very much again for your kind participation.

[Operator]

Thank you, and that concludes the first quarter earnings announcement. Thank you very much for your kind participation.