Orix Corp

TSE:8591

Earnings Call Transcript 2022-Q2

[Operator]

Good evening, ladies and gentlemen, Thank you for joining this teleconference of ORIX Corporation for second quarter consolidated financial results for the 6-month period ended September 30, 2021. The attendees are: member of the Board of Directors, President and CEO, Mr. Inoue; Member of the Board of Directors and Managing Executive Officer; Mr. Taniguchi; Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano.

[Operator Instructions]

We will receive a presentation from Mr. Yano first half and Mr. Inoue second half, followed by Q&A. The duration of the meeting is expected to be approximately 1 hour. With that, we would like to begin the meeting. At this time, I would like to call upon Mr. Yano.

[Hitomaro Yano, executive]

I am Yano, Head of Finance and Accounting Headquarters. Thank you very much for joining us in the financial results briefing today despite of your busy schedule. I would now like to explain our financial results for the second quarter of the fiscal year ending March 2022. So please open Page 2 of the financial results briefing material on hand.

In the first half of FY 2022, net profit was up 56.3% from the previous year to JPY 146.7 billion. This is a progress of 58.7% against a full year profit forecast of JPY 250 billion. ROE on an annualized basis was 9.5%. Although we did not reach our target of 11%, we are getting closer to achieving double-digit figure.

We will continue to aim for improvement of the performance. Please see the chart on the right. This shows the trend of the quarter. Net income for the second quarter was JPY 81.5 billion, the highest level since the COVID-19 outbreak. You can see that we have recorded -- recovered to the level of the second and the third quarter of the fiscal year ended March 2020 before the outbreak of COVID-19. So please refer to the next page. The page shows the breakdown of segment profit. Segment income totaled JPY 240.1 billion, an increase of 53.1% compared with the same period of the previous fiscal year.

In this section, we explain our results by dividing them into base profit and investment gains. The dark navy color base profit on the chart shows an increase of 45.6% year-over-year, JPY 173.5 billion, which accounts for 72% of the total segment profit.

In the domestic market, the corporate financial service and maintenance leasing and real estate segment recorded significant increase. As for the overseas, 3 segments, excluding transportation equipment continued to perform well in the second quarter following the first quarter, contributing significantly to the increase in profit.

The pale blue-colored gain on sales increased by 77.1% year-over-year to JPY 66.6 billion. At ORIX USA, we recorded gains on the sales of RoadSafe, the leading U.S. traffic infrastructure safety service business in the first quarter, and in the second quarter due to exit of several PE investees.

In addition, in the Real Estate segment, we sold a total of 3 logistics facilities in the first half of the fiscal year. Safie Company Limited, a business partner of Corporate Financial Services, is a video recording service company focused on surveillance cameras. The IPO of this company resulted in gains on the sale of shares held as well as valuation gains, which also made a significant contribution.

Investment gains for the first half of FY March 2019 and the first half of FY March 2020 before the outbreak of COVID-19 was approximately JPY 70 billion-or-so. So you can see that the gain on sales returned to the level before the outbreak of COVID-19.

We intend to capture favorable market conditions to continue to realize gains on sales as well as improving base profit. Please refer to Page 4 and 5. Now breakdown of profits and assets by segment is shown on these 2 pages. The table is shown to allow the investor community to grasp the situation of the segment. Detailed information for each segment can be found from Page 21 and onwards. So please refer to them at your leisure time.

In this section, we will focus on some of the highlights. ORIX -- so first of all, ORIX USA and the banking and credit segment, which recorded gains on large-scale divestiture in the first quarter reported lower earnings compared to the previous quarter, while the other 8 segments reported higher earnings compared to the previous quarter.

Compared with the same period of the previous fiscal year, 5 segments of Corporate Financial Services and Maintenance Leasing, Real Estate, ORIX USA, ORIX Europe and Asia, Australia recorded increase in profit. But the extent of the increase in these segments was in units of JPY 10 billion, respectively, in terms of the rate of increase in rates -- that ranged from 67% to 446%.

In the Corporate Sales and Maintenance Fee segment, in the corporate sales unit, we recorded valuation gains and gains on sales associated with the IPO of an investee, as mentioned before, in the second quarter. In the automotive unit in addition to the strong performance of the used car market, the sales policy emphasizing profitability of assets resulting in a substantial increase in profit.

Rental unit also doubled earnings due to growing demand for rental products and the impact of rising prices in the used equipment market. In the Investment and Operations unit in the Real Estate segment, we generated gains in the sales of logistics and other facilities and hotels and inns continue to be affected by COVID-19 and have not really contributed to profits.

However, with the termination of emergency declaration, operations are gradually improving. If these unit recovers, we can expect further results. In DAIKYO profits doubled due not only to the sales of newly built condominiums, but also to the purchase and the resale of preowned condominiums as well as a steady performance in condominium and building management.

ORIX USA business. In addition to gains from the sale of a private equity investment, sales of real estate loan origination and asset management services such as [indiscernible] was strong. Regarding ORIX Europe, AUM continues to rise. The balance at the end of the second quarter was EUR 328 billion, a new record high on a quarterly basis. In particular, the balance of sustainable equity funds in which Robeco has strength has increased. And these AUM expansions have contributed to the increase in fee income.

In the Asia and Australia segment, some investees recorded impairment losses in the previous fiscal year, but income from investees increased in the current fiscal year. In addition, leasing increased in South Korea and China, while in Australia, auto leasing performed well, resulting in a significant increase in profit.

Please turn to Page 5. Segment assets increased mainly in the Environment and Energy segment and the Asia and Australia segment. In the Environmental and Energy segment, we successfully completed the M&A of Elawan, a Spanish-based renewable energy company in July. In the Asia and Australia segment, we are increasing the lease assets, primarily in South Korea and China, where COVID-19 impact had a lesser impact. As a result of these factors, segment asset ROA on an annualized basis improved to 2.6%, a year-on-year increase of 0.9%. Like ROE, we would like to continue to improve ROA.

And finally, once again, looking back at our overall performance, we can say that the second quarter has been returned to pre-COVID level. Despite the fact that some units continue to experience sluggish earnings due to the impact of COVID-19, thanks to the strong performance of other units. That's all from me.

Next, we would like to invite our CEO, Mr. Inoue.

[Makoto Inoue, executive]

My name is Makoto Inoue, ORIX Group CEO. Thank you. And please refer to Page 6 as well as Page 7. So with regard to ESG-related matters, I will be reporting to you later on. So first of all, ORIX Group reported JPY 146.7 billion net income for the first half of FY '22 March. This is 53.6% year-over-year, an increase that is. And this is an achievement of 58.7% of our full year net income target of JPY 250 billion.

Although the situation remains unpredictable, the impact from the COVID shock is waning, and we see some green shoots that economic activity will normalize in the second half. So for this reason, we would like to accelerate our investment activities. We expect interest rate to turn upwards towards the end of 2021.

Central banks with the exception of BOJ beginning tapering. Although there are several concerns such as rising resources prices and the slump in real estate prices in China, we will continue to seek worldwide new investment opportunities, while retaining a somewhat cautious stance.

We expect the 3 COVID challenged businesses, aircraft leasing, hotels and inns operations and airport concessions to steadily recover, although they did not contribute to earnings in FY '21 March end or FY '22 March end of first half.

ROE has improved from 6.4% to 9.5%. So we think that a return to 10% is simply a matter of time. As to the credit rating, S&P upgraded ORIX outlook from A- negative to A- stable. As of the end of October, we have made steady progress in share repurchases, completing JPY 38.4 billion of our JPY 50 billion buyback program, which was announced in May of this year.

We will also pay an interim dividend of JPY 39 per share, in line with the promise full year dividend of JPY 78 per share. As for shareholders' return policy for FY '22 March end and beyond, we would decide in light of both second half result and a medium-term outlook. In any case, we plan to present adequate and appropriate and sound shareholder returns of shareholders' return policy at the time.

Please turn to Page 8. ORIX posted investment gains of JPY 66.6 billion for the first half by asset sales of overseas private equity. The Environment and Energy segment and domestic real estate capital gains and from the IPO of an investee in our Corporate Financial Services segment also contributed positively. This represents a sharp increase of 77% year-over-year. Now in the Real Estate segment, ORIX sold 3 logistics centers against the backdrop of strong e-commerce demand and a healthy appetite for assets among overseas investors.

We have a pipeline of more than JPY 100 billion centered around Tokyo Metropolitan area and the plan to continue our successful develop, operate and sell business model of asset recycling for logistic centers for the time being. Since last fiscal year, we have completed approximately JPY 800 billion in new investments, primarily in the environment and energy, asset management and private equity, despite a market climate favorable for sellers focused on direct negotiations with the seller rather than a bidding process has allowed ORIX to invest at an entry price that match with our price discipline stance.

Our acquisitions of Spain, India-based global renewable energy operators, Elawan Energy and Greenko have completed, and we are now shifting to the post-merger integration stage. Both investments are on track with our initial plans in terms of both generating capacity and profit outlook. By expanding our renewable energy footprint overseas, led by Elawan and Greenko, ORIX aims to increase its global renewable energy generating capacity to roughly 8 gigawatts by 2026.

Now please turn to Page 10. While a simple comparison is difficult, but it is estimated that the market cap of public companies that has a renewable energy capacity of 570 megawatts is estimated to be JPY 360 billion. And the acquisition cost of private businesses that has a capacity of 708 megawatts is estimated to be at the JPY 200 billion.

So our Environment and Energy segment that has a capacity of 848 megawatts would be an enterprise value of more than JPY 400 billion, we believe. In addition, when our capacity under construction and the pipeline from Elawan and Greenko are taken into account, we believe this segment has a great potential to create substantial future value.

Now please turn to Page 11. On September 28, Osaka Prefecture and City announced that a consortium of companies led by ORIX and MGM had been selected to operate the City's planned integrated resort development. In April 2022, we and Osaka Prefecture and City plan to apply to the central government for approval of our area development plan.

The total investment will be around JPY 1.08 trillion, with the likely opening of the facility around 2029. As the site sits on the reclaimed land, we will finalize our construction plans after a thorough ground survey. ORIX has several preconditions that must be met as the process moves forward, but we continue to steadily progress our plans.

Now this -- please refer to Page 12. ORIX plans to announce its latest sustainability report within this month. Although I would ask you to refer to the report for details, ORIX road map for promoting sustainability and identification of material issues and focus areas as part of our company's efforts to contribute to sustainable society will be shown in the report.

At today's Board of Directors meeting, ORIX Group's basic policy for sustainability and key ESG-related themes and goals were approved. We also established a Sustainability Committee as a new executive body. Under the direction of the Board of Directors, the committee will outline specific measures to achieve our key ESG-related goals, and we'll work to realize these themes and goals by setting medium- to long-term sustainability-related targets for each business unit. Now this chart outlines ORIX's ESG-related material issues and focus areas.

For reducing climate change risk, there are 6 material issues and focus areas, including setting GHG emissions reduction goals. As for reducing social risks, including human rights risk, we have outlined 3 material issues and focus areas, including continuing to strengthen our sustainable investing and lending policy, code of conduct and risk management systems to adequately cover new and emerging social risk areas.

As for strengthening governance based on transparency, compliance and integrity, we have identified 5 material issues and focus areas, including continuing to strengthen the independence of the Board of Directors so that the Board may provide appropriate and effective oversight over the management business execution from an independent and objective perspective.

Please turn to Page 13. In addition to these material issues and focus area, our key ESG-related goals are as follows: outside directors to account for over half of the composition of the group Board by June 2023 Shareholders' Meeting. Female directors to account for over 30% of the composition of the Board by the end of fiscal year ended March 2030. Female employees to account for over 30% of management positions in ORIX Group by the end of fiscal year ended March 2030. Reduce ORIX Group GHG emissions by 50% compared to the fiscal year ended March 2020 by the end of fiscal year March 2030.

ORIX Group to achieve new net 0 GHG emissions by the end of fiscal year ended March 2050. Reduce ORIX Group's investment and credit balance in GHG emitting industries by 50% compared to the fiscal year ended March 2020 by the end of March 2030. ORIX Group to achieve a 0 investment and credit balance in GHG emitting industries by the end of fiscal year March 2040.

Please turn to Page 14. ORIX Group's sustainable investment and lending policy established in September 2019. Based on this, the investment and lending committee and the segment management with the requisite authority approved and disapproved investments. Our basic policy is to make decisions based on the thorough consideration of the environmental and social effects of each transaction. In addition to sovereign risks such as government finances and legislation, human rights risks are also key factors for investment and credit-related decisions in countries and regions determined as high risk in relation to human rights.

Transactions prohibited in cases with companies where there are human rights risks or grounds of suspicion for such risks, sectors in which transactions are prohibited and sovereign transactions in which there are concerns or concern cases of human rights issues.

Transactions are, of course, also prohibited with organizations that carry out forced labor, child labor, human trafficking or any other practices defined as human rights offenses by the U.K. Modern Slavery Act. Organizations that are operating in countries, regions determined as high risk in relation to human rights violations and have participated in human rights violations and business and practices in sectors in which new transactions are prohibited. The Board of Directors' primary focus is determining mid- to long-term management strategy, capital policy and deciding upon policies and direction to ensure sustainable growth. The Board will direct and manage ORIX Group sustainability efforts as well.

Please turn to Page 15. ORIX will establish a new Sustainability Committee and executive body to oversee management of ESG-related key themes and goals. Following the clear determination of strategy, KPIs and schedule for sustainability effort, the committee will report to and seek approval from the Board.

The ORIX Group CEO will serve as Chair of the Sustainability Committee with its activities supported by the Sustainability Committee Secretariat. Members will be comprised of segment and business heads with direct ESG-related responsibilities, and the committee will be run flexibly with other responsible parties attending as warranted by the matters under consideration, and we will also consider inclusion of third-party experts.

The Sustainability Committee has the following rules: One, discuss specific policies such as goals, discuss conflicts between short-term profit growth and long-term growth, discuss TCFD mandated measures to reduce climate change risk, share information from within and outside Japan related to sustainability and to discuss what to report to the Board of Directors.

Please turn to Page 16 and 17. ORIX Group's greenhouse gas emissions were 1.266 million tonnes in fiscal year ended March 2020. 2 coal biomass coal-fired power plants in the Environment and Energy segment accounted for 941,000 tonnes of this total, while Saitama waste processing facilities generated 93,000 tonnes. The Real Estate segment accounted for 85,000 tonnes, while other businesses were 147,000 tonnes.

By March 2030, ORIX aims to reduce emissions to 50% of March 2020 levels and aims to achieve net 0 emissions by March 2050. We have specific measures to accomplish this. First, ORIX operates highly efficient coal biomass, coal-fired power generation plants in 2 locations, 1 in Soma, Fukushima, output of 112,000 kilowatts, came online in April 2018; and 1 in Kitakyushu, Fukuoka, 112,000 kilowatt, December 2018.

Approximately JPY 4 billion profit before tax is generated by these 2 sites. There are several ways to reduce CO2 emissions from these plants. We could raise the woodchip mix to maximum of 40% or we could look for alternative for coal fuel in order to increase the efficiency even further. And also, we can consider refurbishing to biomass and consider other ideas such as a mixture of fuels as well as carbon capture and utilization technologies. However, if we judge, it will be difficult to cut emissions group-wide by 50% by 2020, then we would need to either reduce the scale of these plants or shut them down.

The cost of decommissioning of these plants would be approximately JPY 17 billion. We plan to make a final decision while taking careful stock of our future CO2 reduction efforts and the reduction contributions from our renewable energy business.

ORIX Environmental Resources business, Yorii waste processing facility generates 93,000 tonnes of CO2 emissions per year. However, this facility which subcontracts waste processing from providers disposing household or commercial waste, melts waste at high temperature, which produces gas.

This makes the facility capable of high rate of recycling, allowing it to contribute to proper waste disposal while maintaining strict environmental standards. Although ORIX environmental resources disposes of various materials appropriately in this role as a contractor, we are required to report emissions generated from these operations as part of group total under the International Greenhouse Gas Protocol.

We plan to carefully watch developments for revisions to international emissions reporting rules as well as trends and discussions for carbon pricing rulemaking by the Japanese government. And if necessary, we will consider installation of carbon capture technology.

Please turn to Page 18. I would like to add that ORIX Group has already made more than 3 million tonnes in CO2 reduction contributions through its renewable energy business, including solar power generation. In addition, ORIX Group contributes to climate change solutions and the shift away from the fossil fuels through our renewable energy business, including Greenko, Elawan and geothermal panel plant developer, Ormat Technologies.

That concludes my explanation. And I believe that we're moving on to Q&A, and I'm looking forward to answering your questions. Thank you.

[Operator]

[Operator Instructions]

So the first question comes from SMBC Nikko Securities. Mr. Muraki, please.

[Masao Muraki, analyst]

So on Page 2, you have the full year forecast and the progress that has been made so far. According to Mr. Inoue, so it looks as if your outlook from the second quarter -- second half onwards is pretty right, so why did you not carry out an upward revision? Is it because the upward revision is minimal? Or because in light of the possible divestment of Yayoi, is there a possibility of revising upwards your second half forecast? So what are we to expect going forward?

[Makoto Inoue, executive]

So I know that the investment committee, you have published various different reports on our company. But with regard to Yayoi, nothing has been decided as to a possible divestment, although much has been said. So there are numbers of restrictions. So this is why I would have to refrain from telling you anything further than this. But I think at a high probability, there could be a possibility of revising up with our full year result.

But at this point in time, to be honest with you, we do not know as to the magnitude of this upward revision. So maybe in the third quarter results of timing, perhaps we would know how much of an achievement can be achieved vis-à-vis, of course, our full year forecast. I think our decision will be made around that time.

And especially with regard to aircraft-related businesses in Europe, the integration and consolidation of the market is underway. So this is yet to be decided as to what is to be done. And as to the hotels and inns, now that the COVID-19 pandemic is almost over and done with, so we are beginning to see an increase in the booking. So how much improvement in terms of the performance is yet to be known. So there are numbers of uncertainty still. So this is why at this point in time, the announcement of the second half -- the first half, I'm sorry, the second quarter, we are yet to know as to what kind of magnitude of upward revision may perhaps be feasible. So this is why.

And on the timing of the third quarter performance announcement, we may be able to give you further details. I hope this answers to your question.

[Masao Muraki, analyst]

That was very clear. And one thing, and that is related to this year's forecast, performance forecast. So you had -- you have given us the explanation with regard to the shareholders' policy that you're going to be making a decision at the end of this fiscal year. You're talking about the policy for the shareholders' return for this fiscal period or onwards?

[Makoto Inoue, executive]

As for this fiscal period, so JPY 250 billion of an achievement would allow us to pay out JPY 78 of a full year dividend. So if we can achieve an overshoot of JPY 250 billion, JPY 78 would not be enough to convince the investment -- the community, I suppose. So this is why by referring to the result of the third quarter, we may have to revisit the plan of ours in terms of the dividend payout.

So this may be the achievement to the end of JPY 300 billion or JPY 100 billion, how fast can we get to that extent, we would have to, of course, discern and decide on the shareholders' return policy for the next fiscal year and onwards.

So in other words, it applies for both, in other words, for this fiscal period as well as this year and beyond. And also at the same time, that includes, of course, not just the payout, but also at the same time, shares repurchase program as well. So by end of December, at the time -- maybe at the timing of the third quarter result announcement or maybe at the full year performance announcement. At the moment, it is yet to be decided as to the timing.

[Operator]

Daiwa Securities, Watanabe-san.

[Kazuki Watanabe, analyst]

Yes. This is Watanabe with Daiwa Securities. Additional question about the shareholder return policy. If the profit level is higher than expected, not just dividend, but also share buyback may be increased. Is that a correct understanding? And what about the return -- shareholder return policy from next year and beyond? Are you going to set the actual dividend amount or payout ratio or depending on excess capital, you will create a new formula for shareholder return? What are you considering at this point?

[Makoto Inoue, executive]

Basically, in the last 1.5 years because of COVID-19, we did announce -- make an announcement about the payout ratio. But if the profitability level improves, in terms of absolute amount, of course, it will go up. But in terms of the payout ratio, we want to go back to normal.

And as I explained before, dividend should be based on 1/3 of profit. And in addition, even if the profitability goes up, if the dividend is lower than the previous fiscal year, it would not be probably acceptable. So we have to set the minimum level and also look at the payout ratio, we announced the payout ratio.

And once we go back to the normal level, how much should be the payout ratio that we will be maintaining for the long term. So we would like to announce such a plan in the future. In addition to that, we will consider a share buyback on top of that. That's the basic policy.

[Kazuki Watanabe, analyst]

I see. For this fiscal year, is there going to be an increase of share buybacks?

[Makoto Inoue, executive]

Well, JPY 39 billion and JPY 50 billion is the target. So in December or January, we will probably reach the JPY 50 billion mark. So January-February is not really a good timing to -- we may announce additional share buyback at that time or maybe we will announce another one for the next fiscal year instead. We have not decided yet.

[Operator]

The next question is Mitsubishi UFJ Morgan Stanley Securities, Tsujino-san, please.

[Natsumu Tsujino, analyst]

As to the capital gain, or it is a question related to capital gains. In the first half, I know there were numbers of capital gains that you were able to enjoy and also private equity-related businesses have performed pretty well in the overseas, such as in the United States. And also you enjoyed a pretty good performance in terms of the real estate businesses.

And there could be a divestment of Yayoi as well, which means that in the next fiscal period, so you may have generated pretty sizable profit in this year, which means that if there was to be a quite a large amount of overshoot in this year. There could be maybe a negative base effect in the next year perhaps. Yayoi, for sure, is going to be quite a significant deal, but the pace that you're currently enjoying, what -- maybe the speed was to fast, would you reckon? And do you think that there could be a slowdown? Or do you think that you can keep up the pace? So what are we to expect going forward?

[Makoto Inoue, executive]

Well, thank you very much for the difficult question. So I think I would say that this is going to be a cruising speed, and we hope to kind of jot out a very smooth upward kind of curve. But of course, capital gains could, of course, experience ups and downs and so JPY 300 billion. And in thinking about the 2030, we may perhaps move up the schedule a bit or there could be a delay somewhat, but that is very much dependent on the market conditions after all.

So we will have to continue to refer to the market condition. So I don't think it is possible for us to draw out a smooth line -- upward line going forward. So this is why. But hopefully, we don't want to, of course, create such a bumpy kind of -- very volatile kind of line going forward. So this is why the divestment of private equity, of course, is still progressing.

So we hope to draw out a slightly smoother line than perhaps anticipated. So this is why, it goes without saying inclusive of the shareholders' return, such as payout ratio, we hope to achieve a smoother kind of line in order to convince the investment community. So I hope this answers your question.

[Natsumu Tsujino, analyst]

Yes, for sure. Although your profit, of course, trend may be a little bumpy, but it will not be the case for the shareholders' return, that is what you're saying?

[Makoto Inoue, executive]

Now talking about the concessions segment, this time. The segment profit was JPY 1.5 billion, I think -- I believe it was. So looking at the P&L of the segment, expenses of the segment was JPY 14 billion. So I think it was reversed back. So I know that the cost of goods may have increased as well. But if you refer to such a number, especially in the investment area, I don't know how much of -- I don't know, a push up has been kind of artificially created. Yano-san is going to be answering to your question.

[Hitomaro Yano, executive]

So if you could refer to the appendix material and negative of JPY 8 billion of, I think, segment expenses is what you're referring to. I'm sorry, but there is a nondisclosure agreement that we cannot -- we have to, of course, abide with. So all we can say is there was a certain amount of gain. And of course, we have numbers of investment. And we -- and in some cases, we may have to refrain from disclosing the details.

And we do not have a fund accounting. So with regards to the investment-related businesses, it would appear on the balance sheet, which means that the profit that is generated by this -- the said company will be added to our P&L. So the private equities profit and loss, the fluctuation, in fact, will be -- would affect our consolidated earnings. So please do understand that there will be some fluctuation over time. I hope this answers your question.

[Natsumu Tsujino, analyst]

So -- yes, understand, but this fluctuation, there are some positives on one hand, but there could be some negatives, on the other hand. So I have to imagine that.

[Hitomaro Yano, executive]

Well, yes, if you were to perceive it in a negative manner, that may be the case. But each of those investees if they were to generate the profit means that their enterprise value, of course, will be further enhanced in the future. So this is why -- please do not just focus on the downside. Please refer to the sunny side of the matter, if you will. Thank you.

[Operator]

BofA Securities, Sasaki-san.

[Futoshi Sasaki, analyst]

Yes, this is Sasaki, Bank of America. There are 2 questions. Mid- to long-term performance, how do you view this? That's the question. Q2 earnings results. No change to the midterm management plan announced this time around. And in Q3 and end of the year, maybe there's going to be additional updates. COVID-19 impact is weakening and the outlook is becoming more clear. So originally you had just JPY 400 billion, JPY 500 billion and with COVID-19, you started talking about the JPY 300 billion, for example. Now the COVID-19 situation is improving. What is your long-term outlook?

And the global renewable energy, this is my concern. European and American major players, they provided guidances and warnings, saying that the equipment cost is going up, environment is changing. And I feel that the tide is changing. There's a sea change. So in relation to the long-term performance outlook, how does it look to you?

[Makoto Inoue, executive]

I usually show you the JPY 300 billion and JPY 400 billion chart, and this is on Page 47 this time as a reference material. COVID-19 impact is actually lessening. And we can go back to JPY 300 billion much faster than expected. And based on that, JPY 300 billion and JPY 400 billion midterm objective is shown here, but maybe we have to reconsider the time line because aircrafts and concession and hotels, if all of them go back to normal, we are talking about approximately additional return of JPY 80 billion to JPY 100 billion.

So if your target is JPY 300 billion, JPY 400 billion, and there is capital gain, as you can see on Page 47, well, we have to maybe reconsider this chart and present it to you. Otherwise, it will become just a graphical representation. That is why it is not in the main part of the slide deck.

[Futoshi Sasaki, analyst]

Elawan and Greenko and the other projects, what would be the profit contribution? And when will it begin?

[Makoto Inoue, executive]

For example, Avolon for next fiscal year, we expect a big increase, but we don't know exactly how much, by how much. So that is why we could not really provide a specific explanation this time. But the JPY 300 billion market target should be quite easily and maybe even JPY 400 billion as well.

But going forward, including MICE IR, we will be doing more greenfield projects. Elawan has a lot of pipeline, but many of them, most of them actually are greenfield, which means that it will take them 2, 3 years before they start contributing to the profit.

And we need more time before we can show you a nice, steady, constant growth plan. In other words, we cannot really share the detailed numbers at this point in time. Please give us some more time. And please understand that our explanation is a little bit vague because of that reason. What was the other question?

[Futoshi Sasaki, analyst]

Well, I don't really need the detailed number. But how do you feel, Mr. Inoue, JPY 400 billion and JPY 500 billion was the target before COVID-19, do you think you can go higher than that? That's the sense I'm getting from you, but is that correct interpretation?

[Makoto Inoue, executive]

Well, I'm always positive, as you know. So I always feel positive. And I want to go back and recover as quickly as possible. And in the beginning, we thought it would take maybe 1 or 2 years longer, but now it seems that we can go back to the previous level more quickly. So it's a half hope and have confidence, that would be the correct interpretation, I think.

[Futoshi Sasaki, analyst]

Understood. Renewable energy, European players profit outlook are becoming more challenging where we're seeing more warnings coming from those players. But over the mid- to long-term performance for ORIX, do we have to be concerned about that? You mentioned that there are many greenfield projects and how do you see this?

[Makoto Inoue, executive]

Well, with renewable energy, we have many things in our pipeline. And there are 3 things -- or 3 things we can do. One is we keep holding those projects to enjoy the full profit -- full year profit. The second is once it's established, we can sell it to a fund -- pension funds at a cap of 3%. Many investors actually buy these projects. So our target is about around 8% NOI. So we try to sell the project so that we can get gains or hold or we can build a fund and manage the fund. So these are the 3 different methods that are being considered.

We need to figure out which is the best way. And if we're going to build the fund of our own, how big is it going to be? Because if it's less than JPY 1 billion, a fund size, it's not really meaningful. So we are discussing this involving U.K.

We don't want to be cherrypick too much, but good ones, we want to hold. And the medium NOI, we want to sell. And if it's low, but it's a good project, maybe it should be included in the fund. So that will be the strategy. So this is more of a profit adjustment, so to speak. So profit growth trend can be more constant and steady. Does that answer your question?

[Futoshi Sasaki, analyst]

Understood. And last, but not least, in your presentation today, you talked about ESG, you spent a lot of time as the CEO to explain about ESG. That's my impression. Contributing to the society does not necessarily equal contribution to the shareholders. That's my impression. So in your mind, ORIX initiative towards ESG. How should it be reflected in the share price? Can you please simply talk about this?

[Makoto Inoue, executive]

To be quite honest, if you look at other manufacturers and trading companies and compare them against ORIX, 1.26 million tonnes of CO2 emission is not such a big emission. And out of that, 900,000 tonnes comes from something we started 10 years ago, probably my fault. But in Fukushima and Fukuoka prefectures, we have the fuel mix combustion and JPY 17 billion costs will be incurred if we're going to deal with it.

And Scope 3 includes automobile, ships and aircrafts. We need to really understand the needs of our customers so we can use low-emission engines or maybe convert to electric vehicles. But anyway, we will not be receiving a big negative damage. If you look at overseas, our auto lease for coal companies and also electrical plants. This balance is approximately JPY 23.5 billion, and the risk is just 5 years. So we can make necessary adjustments and reduce the emission without causing a big damage to the business. So we promote ESG initiative. And we do not consider that were causing any damage to our investors through these efforts.

[Operator]

So from JPMorgan, Otsuka-san, please.

[Wataru Otsuka, analyst]

This is Otsuka from JPMorgan. Do I limit my question to 2 or 1?

[Makoto Inoue, executive]

Well, we asked -- it's okay, 1 or 2, whichever of your choice.

[Wataru Otsuka, analyst]

So please refer to Page 3. So in the first half, you managed to generate JPY 173.5 billion. But what is your takeaway as a management? And I'm sure there are a number of factors that have contributed to this profit generation inclusive of ForEx and also supported by the market conditions, for sure.

As compared to your initial expectation, this JPY 173.5 billion, what is your assessment? And if you were to double this JPY 173.5 billion, in fact, it is larger in terms of the profit sizes compared to pre-COVID period. So this is the one and only question of mine.

[Unknown Executive]

So as compared to pre-COVID period or refer into this number, this is more of a cruising speed, I would regard. And to be honest, that this is something that we were able to achieve without exerting a huge amount of effort. But for sure, the Corporate Financial Services have done pretty well and also banking and credit and life insurance, they were not affected by COVID-19 in a negative way that is.

And this is why they were able to generate more profit. And in Asia as well as in Australia, so during the pandemic, they were -- so they had to, of course, keep a moratorium or they had to refrain from carrying out an aggressive operation by the government's direction.

[Wataru Otsuka, analyst]

So this was done without exerting a huge amount of efforts, in other words. So what you have included in the base profit, such as the sales of secondhand cars, for example. In fact, in other words, without exerting a huge amount of effort, is that right?

[Makoto Inoue, executive]

So you see, it is more of a secondhand cars. The releasing of those secondhand cars are pretty profitable. So this is why automotive business, in fact, has enjoyed the expansion of their profit. And also, the sales of secondhand car was a pretty -- had trended pretty well as well. So for automotive segment -- for automotive businesses, I think they were pretty grateful for what had happened as a result of pandemic. So thank you.

[Operator]

Sato-san, Mizuho Securities.

[Koki Sato, analyst]

Yes. This is Sato, Mizuho Securities. Page 52, about the capital utilization rate, 91% is the recent number. And can we please talk about this? Depending on the investment and turnover, it may go up and down or up or down. And I think your target was around 80-some. Accounting-wise, some things are not counted as lead in profit, which is not -- which is part of this. So if you add those things, can we expect the available capital level to be quite high? So 91% from the management perspective, what does this number say to you?

[Hitomaro Yano, executive]

That's a very difficult question. Yes. This is Yano responding to your question. The reason that this number went up is Greenko and Elawan mostly. 80% is not really a target for us. Right now, we don't want to have any excess capital. So we feel comfortable with the number around 90%. But we have to respond to the situation in case something happens. And this is also an internal calculation. It's not an absolute number, please understand that as well. So there is a portfolio turnover which is happening on a day-to-day basis. So we don't expect the number -- this number to worsen. We believe that maintaining the current level is fine for us. I hope this answers your question.

[Koki Sato, analyst]

Just one thing. In that case, rather than thinking that you have excess capital, you will be actively making investments. So it's a balance between the investment cadence and also the turnover? And is this the right level?

[Hitomaro Yano, executive]

Well, it's not that we have to replace or turn them over. Well, we don't decide everything based on just shareholders' capital. We look at risk and return of what we have and make the final decision. So this is not the only criteria for decision-making, please understand that. There are many other factors involved. So we want to enhance the capital and asset efficiencies and increase the absolute profitability and profitability per share. And based on those assumptions, we will be changing the items in our portfolio.

[Operator]

From UBS Securities, Okada-san.

[Taiki Okada, analyst]

Okada is my name from UBS Securities. As for myself, I would like to asked question about Osaka MICE IR on Page 11. Referring to the KPI number, the number of traffic and also the expectation for the revenue as compared to what was announced by Osaka Prefecture as for the City, I think it is exceeding the numbers that was announced by the prefecture and the city. So what is at the backdrop in revising upwards the numbers that you have shown on this page? And also, providing that there is going to be a disclosure, so the return on investment to this project, is there any kind of expectations that you have as of now?

[Makoto Inoue, executive]

So with regard to MICE IR, the numbers, in fact, had -- to the numbers that Osaka Prefecture and City has announced, this is just our tentative expectation. And the inbound tourist was, of course, taken into account from several years back. But at the moment, the traffic, in fact, that we expect is just limited to the Japanese people.

And that is the basis of the plan. This is going to be a pretty difficult simulation. But in the next 10 years or 20 years, and of course, it depends on how long we can run this or operate this facility, but IRR of 20% impact is expected. And so this is why we came up with this JPY 1.08 trillion of initial investment.

Out of this JPY 1.08 trillion, JPY 580 billion accounts for the construction cost and all others are expenses for the operation. So 10% and above of IRR is pretty, I think, achievable, we think. So with that in mind, we have come up with this simulation. So MGM, in fact, had come up with a number, which is almost double of our number. But we have -- we don't -- our expectation is not as high as MGM, but because we have only limited the traffic to the Japanese people, and we have not extended over and beyond such an expectation. So this is how we have realized about this number.

[Operator]

Citigroup Securities, Niwa-san.

[Koichi Niwa, analyst]

Yes, this is Niwa with Citi. Can you hear me okay?

[Makoto Inoue, executive]

Yes, we can hear you.

[Koichi Niwa, analyst]

About ESG business opportunities. This is a follow-up to the Sasaki-san question. Other than power generation, when it comes to supply chain as a whole, aircraft, automobiles and ships were identified as big impact areas. What are the initiatives that are already underway? And what are your near future plans for these areas, accelerating the purchase of [indiscernible] and what is ORIX's advantage as opposed to the competitors within the domestic market?

[Makoto Inoue, executive]

Depending on the segment, what we do is different. With aircraft, whether this is fortunate or not, stage 4 engine, younger aircraft, that's what we have, and with Avolon, again, we have new models. CO2 emission is not really critical for us. Within the aviation industry, by 2030, CO2 has to be reduced and maybe 0 emission by 2050. What is the alternative fuel, the whole industry is already moving into that direction. So we will continue to provide aircraft according to those changes to the aircraft compared to the companies.

Within Scope 3, of course, we have to monitor the CO2 and not just Scope 1, Scope 2 but also Scope 3 has to be taken into consideration as we continue to manage our ESG initiatives. So employees and the supply chain, we have to monitor the CO2 emitted by them. So how to do this is, we just same thing with automotive and also ships.

We have to convert into ecoships as early as possible, which means that we may have to accelerate the replacement of these assets. As for the automotive, we are focused on hybrid vehicles right now, but there are still a lot of internal combustion engines and very few customers who actually use EVs. How to convert to electric vehicles is going to be the biggest challenge for our automotive segment.

In the next few years, we need to see progress in terms of reduction contribution. We have to change the model. And asset-based lease and finance team will face this challenge. This is going to be the biggest challenge, I think. So we have target for '30 and '50, we are basically binding ourselves to these targets as we continue to manage the company. I hope that answers your question.

[Koichi Niwa, analyst]

A follow-up question. Compared to the existing players, competitors, what would be ORIX's strength?

[Makoto Inoue, executive]

Well, strength is fast decision-making and selling of assets which produce a lot of CO2, even if we have to post impairment. We are much more agile than other players. I hope that you will see us that way.

[Operator]

So it is time for us to close the session. So this -- the next person is going to be the final question. Sakamaki-san from Nomura Securities.

[Naruhiko Sakamaki, analyst]

I'm Sakamaki from Nomura Securities. I have one question. I know that -- sorry for being persistent. But with regard to shareholders' return as well as investment, you may not be able to give us a clear answer as compared to the prior briefing session, what has been the changes in your mindset because your business performance expectation, in fact, the prospect is becoming kind of brighter. So do you think that you are turning a little more aggressive in terms of making further investment, I understand. So is there any kind of changes in mindset of the CEO?

[Makoto Inoue, executive]

There have been no changes in my mindset, as a matter of fact. Because after all, talking about the business performance, you see, 1/3 will be -- should be appropriated for the payout and the rest for the investment, and that remains to be unchanged. So the JPY 250 billion, as has been announced at the beginning of the fiscal period, and we were very much affected negatively by the COVID-19.

And you see it was COVID-19 everywhere until summer. But all of a sudden, beyond our expectation, I don't know whether the government has come out with a fake number, but in any case, it looks as if the pandemic is beginning to show some signs of closing down.

So -- but of course, still things remain to be unpredictable. So -- and of course, if there was to be a big kind of increase in terms of the profit, it's -- we don't want to be that kind of volatile in our expectations. So I really want you to wait until the next quarter before -- this is my request, before you hear anything more -- anymore from our company, okay?

[Operator]

So with this, we'd like to conclude the Q&A session. So Mr. Inoue, would you like to give us the closing remarks?

[Makoto Inoue, executive]

Thank you all very much for asking a lot of questions. So the question was related to ESG and because of the COVID-19, the market is pretty volatile. And we were not sure as to how to what extent we were able to achieve our target. But you see we have not come to an extent whereby we can loudly say that we are confident in achieving our profit. JPY 250 billion is quite achievable, but how far can we go over and beyond this JPY 250 billion is yet to be known. And of course, for sure, we are going to continue to consider the shareholders' return. So if you could wait a little more before we can make a further announcement. So that is my request.

[Operator]

So that concludes today's financial briefing session of ORIX. Thank you for your participation, and you may now disconnect. Thank you.