Orix Corp

TSE:8591

Earnings Call Transcript 2020-Q3

[Operator]

Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for third quarter consolidated financial results for the 9-months period ended December 31, 2019.

The attendees at today's conference are Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Mr. Yano will give you a presentation on the third quarter financial results for about 15 minutes, and we will move to a Q&A session. The whole conference will take about an hour.

At this time, I'd like to turn the call over to Mr. Yano. Please go ahead.

[Hitomaro Yano, executive]

So good afternoon. Ladies and gentlemen, I am Yano from Treasury and Accounting Headquarters. I'd like to thank you all for your participation to this telephone conference. Thank you very much. So without further ado, we'd like to get started with the third quarter consolidated financial results presentation of ORIX for the 9-months period ended December 31, 2019.

Please refer to the second page. So as for the third quarter, the net income grew at -- by 3.4% year-on-year at JPY 244.3 billion. Annualized ROE was 11%. The progress year-to-date against the net profit target of JPY 300 billion is now at 81%, progressing nicely. However, due to the market uncertainty, we are not planning to revise the full year target of JPY 300 billion as of now.

Please move on to the next page. Let me now inform you the breakdown of segment profits. Please refer to the bar chart on the left. This shows the trend of segment profits for the first 5 years. Pale blue shows the gains on sales, while darker blue shows the profits other than gains on sales. So the profit other than gains on sales, in fact, has been growing steadily over the past 5 years. The 2 bar charts in the middle compares the year-to-date third quarter profits between the 2 years. Profit other than gains on sales grew steadily 7% Y-o-Y at JPY 238.5 billion. Contributions came mainly from NXT Capital as well as Avolon, the investment we made in the prior year.

Now over to profit from gains on sales. In the third quarter, on a year-to-date basis, it grew from JPY 75.3 billion in the prior year to JPY 114.5 billion, a sharp growth of 52%. In addition to the sales of ORIX Living and Houlihan Lokey, we posted gains on sales from private equity investments in Investment and Operation segment as well as Overseas segment. While we're proceeding with a generation of profit from gains on sales, we are continuing to make new investments in a selective manner, and we have shown some of these examples on the table to the right. So some of which are like wind power generation business in the Overseas after the -- which we have made an investment after the interim announcement as well as asset management business. Hence, we received capital in the United States.

So please refer to the next page, so segment profits and segment assets trend. Segment profit was up by 19% at JPY 352.9 billion. As you can see on the bar chart to the left, Corporate Financial Services and Maintenance Leasing, the profits were down, while all other 4 segments managed to increase their profits. As a result of ORIX making DAIKYO a wholly owned subsidiary in the third quarter, there was a reversal of deferred tax liability that reduced the corporate tax and others by about JPY 27 billion and, thereby, the contribution to the profit generation. This is why, although after-tax profit growth was limited to 3.4% in the quarter, both gains on sales and gross profits other than the gains on sales growth contributed to approximately 20% of growth at the segment -- for the segment profit.

So as for the segment asset, the assets, in fact, grew by JPY 861.5 billion, out of which impact from changing operating leasing accounting standards accounted for JPY 200 billion and the ForEx negative impact was JPY 48 billion. If we exclude this negative impact, the segment asset could have grew by JPY 710 billion. So that in the Retail segment, in the ORIX Bank as well as ORIX Life, the assets grew. And in the Overseas segment, the United States assets as well as the aircraft assets were the contributing factors to the growth of the asset.

Please move on to the next page. So from this stage onwards, I would like to present on the segment performances. First of all, the Corporate Financial Services. In the Corporate Financial Services, the segment profit grew -- unfortunately, declined by JPY 6.6 billion at JPY 13.2 billion. Agency fee income from life insurance businesses declined, but we are trying to diversify the offering of the products by ways of conducting our sales activities. At the same time, the accounting software as well as service provision done by Yayoi, we managed to achieve an increase in membership for fee-based support services and sales of packaged products. Impact from the accounting standard change as of the third quarter, the impact was JPY 1.4 billion in this specific segment.

Now please refer to the bar chart to the right. Under this negative interest rate environment, despite of the fact that there's a harsher competition, yields on loans was maintained at above 2%. Now in the domestic -- in the Japanese sales, we have been taking a cautious approach to the building of the asset at a lower spread but also, at the same time, we're trying to diversify the service income, such as accounting software that are offered for small businesses as well as packaged version, cloud version in order to maintain the top share, and if not, of course, grow the market share.

So let us move on to the next page, so this is going to be the Maintenance Leasing segment. Maintenance Leasing segment profit was down by JPY 4.6 billion at JPY 25.8 billion. Also, the leasing income grew steadily. And the Rentec, thanks to the replacement boom in the IT-related businesses, we managed to grow the profit. And in order for us to broaden the client base, unfortunately, we spent more SG&A expenses resulting in the decline in the profit.

Corporate finance, just like the Corporate Financial Services, there was a negative impact from the leasing accounting standard change by JPY 1.9 billion as for the asset, while Auto remained to be flat. Rentec grew as a result of building up IT-related assets. ORIX Group, of course, is carrying out diverse area of businesses. We are taking much consideration into some areas such as environment. And in order to achieve a sustainable -- to make a positive contribution to sustainability, such as promotion of use of environmental-friendly cars and providing vehicles that enjoys a better fuel efficiency as well as a better driving method. And as a result of this, from November of last year, we have introduced hydrogen -- fuel cell car using hydrogen.

Next is the Real Estate segment. The segment profit grew by JPY 1.3 billion year-on-year, and it was JPY 56.1 billion. In the second quarter, we transferred ORIX Living shares and we posted large gains on sales. For DAIKYO, delivery of condominium happened earlier than the previous year, and the profit was increased by JPY 7.7 billion. We are continuing with the sales of real estate assets considering the strong market, and we are also continuously investing into new projects such as hotels and logistic facilities.

One new logistic facility was completed in Aichi Prefecture last October. As we indicated during the interim presentation, in the next several years, we'll be investing into logistics, hotels as well as ryokans in the amount of JPY 200 billion to JPY 300 billion. And as we made a release on the 29th of January, we integrated 8 hotel management companies for the 18 hotels that we have to form ORIX Hotel Management Company in order to get talents and educate them and consolidate and standardize operations so that we can really focus on service, specialty and governance so we can further increase the management business.

Next is Investment and Operation. Segment profit was up by JPY 24.5 billion year-on-year and was JPY 55.6 billion. And the Cornes AG profit uptake started, which we invested into last year in the third quarter. We sold one PE project, and the profit was up by JPY 18.6 billion from JPY 11.4 billion to JPY 30 billion, and this is a major increase year-on-year. We also continued the new investment, for example, invested into Kobayashi Kako in January. This company is a generic company, taking care all the way from API sourcing to manufacturing and sales and also R&D. And ORIX has invested into health care businesses, including lease finance as well as animal health pharmaceuticals. We have functionalities that have high affinity with Kobayashi Kako. We will continue to expand the health care business through the enterprise value enhancement of Kobayashi.

Next is Energy and Environment. Mega solar business is strong. Profit increased from JPY 10.2 billion to JPY 10.5 billion this year -- this quarter. And for this fiscal year, we acquired the -- all of the shares of the wind power company which we co-invested overseas. Now it's a wholly owned subsidiary. And in Japan, we have secured into a capacity of 1 gigawatt for solar, and we are actively promoting geothermal as well as wind power business.

Moving on to concession business centering around airport management. The visitors from overseas is increasing. And in addition to that, we received some insurance payment due to typhoon damage 2 years ago, and the profit was pushed up from JPY 9.5 billion to JPY 15 billion, which is an increase of JPY 5.5 billion. In order to deal with inbound tourist increase, we are doing [ technological ] innovation at airports that we manage. In the Osaka International Airport, a new terminal will open in July this year. And we will also begin the renovation of the first terminal building of Kansai International Airport so that it will be completed by Osaka Expo in 2025.

Next page, please. This is the Retail segment. The segment profit went up by JPY 4.2 billion, and the profit level was JPY 70.4 billion. For life insurance, we expanded our product portfolio, including a foreign currency-denominated whole life insurance, and the number of policies in force increased and the premium income also increased. Profit was up by JPY 2.9 billion. It went up from JPY 39.5 billion to JPY 42.4 billion.

Moving on to banking. Loans for condominiums for investment is increasing, pushing up our finance revenues. And the gross margin ratio is at the 2% level, which is a high profitability level among the peers in Japan, and we are continuing to grow.

Next page, please. This is the last segment, Overseas business. Segment profit went up by JPY 36.3 billion and stood at JPY 131.9 billion. With regard to U.S. OCU, NXT Capital that we acquired helped grow the asset management business, and the profit went up by JPY 11.3 billion from JPY 38.5 billion to JPY 49.8 billion year-on-year. In the third quarter, we acquired a mortgage loan servicing company called Hunt Real Estate Capital in the U.S. In addition to the license of Fannie Mae and FHA, we will add Freddie Mac license, meaning that we can expect further growth in the mortgage loan servicing area.

In the former Robeco Groep Asset Management, the business is done by OCE. And as the market shifts from active to passive, the fee pressure has been very tough, and the profit actually went down by JPY 3.6 billion from JPY 28.3 billion to JPY 24.7 billion. However, out of this reduction, about half, JPY 1.7 billion, is due to exchange rate between euro and yen.

Next is the aircraft and ships. New investment from previous year, Avolon, a profit uptake contributed to increase the profit by JPY 5.1 billion from JPY 27.7 billion to JPY 32.8 billion. In Asia and Australia, the gain on sale of shares that we have invested in the first quarter as well as the absence of the negative contribution from IL&FS which we had to account for in the previous year, the profit went up from JPY 1.2 billion to JPY 24.6 billion, which is an increase of JPY 23.4 billion, major increase.

Moving on to the next page, financial soundness. The funding status is very positive, and we have extra room for funding from borrowing from financial institutions as well as capital markets. We are trying to shift to long term, and our long-term debt ratio is over 90%. In order to diversify our funding methods and manage the company sustainably, we issued green bonds. And the JPY 10 billion that's issued will be allocated to our solar power business.

Please turn to the graph on the right. This is employed capital ratio. As of December 2019, it stands at 85%. While continuing new investments, we will continue to replace the assets and build the internal reserve, and the number has gone down from the previous year. And we would like to continue to control this carefully.

Lastly, the last page shows the summary. Third quarter for the fiscal year ending March 2020, net income was at JPY 244.3 billion with an annualized ROE of 11%. At the interim announcement, we mentioned that we are aiming for JPY 300 billion net income for this full year, and we are on track to achieve that. And we will continue to pay attention to shareholders' return and aim for sustainable growth.

Thank you very much for your kind attention.

[Operator]

Thank you, Mr. Yano. We are now ready for the Q&A session.

[Operator]

[Operator Instructions]

[Masao Muraki, analyst]

This is going to be Mr. Muraki from SMBC Nikko Securities. I have 2 questions. The first is with regard to capital gains or gains on sales. So in the 3 months in the third quarter, there is some equity method investment. And also, as a result of JPY 25.2 billion of sales that was made by selling affiliated companies as well as subsidiaries in both in Japan as well as United States, if you could be so kind enough to tell us the size of these sales. And in fact, the level of profit is higher as for the third quarter. So are you expecting to generate around the same in the fourth quarter in terms of the sales of the investment that you have been making in the past?

[Hitomaro Yano, executive]

So we, unfortunately, we cannot disclose the names of the businesses that we have invested, but it is about JPY 11 billion of an investment. For PE, JPY 8 billion of profit has been generated and JPY 16 billion in Japan. And outside of Japan, it is JPY 8 billion. So we did manage to generate quite a nice amount of profit from these investments that we had made. So we have come so far, but it has been almost planned, and we should be proceeding with further generation of profit from these investments that we have been making in the fourth quarter as well.

[Masao Muraki, analyst]

So when you say overseas, would you be so kind enough to share with us the geographical location?

[Hitomaro Yano, executive]

It is United States.

[Masao Muraki, analyst]

And the second question?

[Hitomaro Yano, executive]

So rather than the fourth quarter, I think it would impact the next fiscal period, I suppose.

[Masao Muraki, analyst]

So this new coronavirus, so what kind of risk implication do you foresee in terms of profit generation so far as you can see -- foresee like concessions, hotel management, aircraft, these things may be affected by the decline of the numbers of passengers declining. So have you been perhaps carrying out some simulation from the past experiences like SARS in the past?

[Hitomaro Yano, executive]

So we -- there are -- I think I have to refrain from giving you much of the details for various reasons. But as a result of this new coronavirus, Kansai International Airport as well as Osaka International Airport, of course, would be affected, especially Kansai International Airport. The number of flights, in fact, is on the decline, so we would be affected negatively by this.

And to begin with, as for Kansai International Airport's businesses, at the time of acquisition, we were, of course, assuming that there will be a pandemic every certain intervals. So we have, in fact, incorporated this anticipation into the plan. So of course, in the next year, we would have to suffer or be affected by this negative impact. And as for the hotel businesses, it is not making a sizable contribution to the profit generation as of now. So you need not to worry very much about this hotel management businesses.

As for the aircraft leasing, if it is only for like several months, then we're not affected greatly because, after all, the leasing contract is, in fact, is concluded on a long-term basis. So even -- so we would not be affected by this because we would be in receipt of the leasing fees. But of course, if the airline company starts to fail and may perhaps -- that may perhaps affect us in the long term. But in our case, our aircraft that we own is focused on the narrow-body. So therefore, even if there was to be a failure, we would be able to recover the aircraft and transfer those aircraft to some other airlines. So therefore, that's what I -- what we think as of now. So it is more of a qualitative description as opposed to quantitative. I'm sorry about this.

[Operator]

Next from Ms. Tsujino, Morgan Stanley Securities.

[Natsumu Tsujino, analyst]

Two questions. Profit of Kansai Airport going forward?

[Hitomaro Yano, executive]

Ordinary profit, 26% for the first half of this year. That's the information we've got. And the foreign visitors account for like 30% of all the flight passengers in Kansai International Airport.

[Natsumu Tsujino, analyst]

What about the fixed costs, or should I say, expenses? Can you reduce this in the short term? Can you please give us some insight into this?

And the second question is about the PE investment. In Japan, JPY 16 billion, this is quite sizable. We don't know when you made the investment. But up until several years ago, you were doing investments of like JPY 10 billion ago. But how much investment did you make in the first place in this PE project? And how many years did you hold it and the result -- which resulted in this number? Can you please also refer to the industry that this PE is involved in?

And also, for the U.S. project, JPY 8 billion per deal seems to be quite large, too. And there was no press release about this. So if possible, I would like to know the background, how much did you invest and how many years did you hold? So on and so forth.

[Hitomaro Yano, executive]

Thank you for your question. Starting with the Kansai International Airport. In terms of sales, of course, we have to pay a certain amount of rent, and variable expenses. It's sometimes people-related and as far as the salary is concerned or people are concerned. In terms of deal with the BCP, we are discussing what to do, what to do with the part-timers and so on and so forth. Profit-wise, with pandemic, we have to expect some level of decline. And that's the answer to your first question.

Regarding the PE deals, I need to apologize. When we can disclose details, we try to do that as much as possible. But depending on the deal, the counter-party does not want us to disclose information, which means that we cannot disclose information. For the domestic PE deal, this was -- this happened in the last several years, within the last 5 years, I would say. And we are checking how much investment we've made in the first place, so please bear with us for a moment. Excuse me, we are unable to give you the accurate information right now. The amount was not very high. But I'm sorry, I don't have the number at hand. So please allow us to get back to you later. But it was not a huge amount, which means that the profit level was quite high. That's our understanding.

[Natsumu Tsujino, analyst]

So is it about JPY 10 billion?

[Hitomaro Yano, executive]

Well, we have to check. JPY 10 billion-sized deals are becoming more common or normal. And I don't want to give you a wrong answer, so please allow us to get back to you later on.

As far as the overseas PE deal is concerned, I don't have any solid number at hand right now, but it was a type of a start-up company. In other words, it was incurring losses in the past. So IRR is not very high. But because we had to account for the losses of the past, the capital gain looks bigger and the book value right now is very small. The book value, when we make the sales, looks very small, but of course, we are making proper profit. So several billions of yen, we'll invest it into this project with this outcome.

[Operator]

Next is from Daiwa Securities, Mr. Watanabe, please.

[Kazuki Watanabe, analyst]

So I am Watanabe from Daiwa Securities. I have 2 questions. So first of all, with regard to the progress that is made in terms of the profit generation, the progress is [ 51% ], which is pretty high. And I think there was some uncertainty, but is there any kind of anticipation or assumption that you have for the fourth quarter?

And as for the guidance for the next year is going to be the second question. And I'm sure you're going to be disclosing, but as to the dividend, what is your idea as to the disclosure of dividend? Because I think you're going to be sharing us the EPS -- expected level of EPS.

[Hitomaro Yano, executive]

For the third quarter, I'm very happy that the performance was pretty good. So JPY 16 billion of gains on sales. So we're not expecting the amount to be as large as that. So in other words, it was not totally unexpected. That kind of a progress, as expected, slightly above our expectation. And I'm sure we'll be able to proceed just as smoothly in the fourth quarter, but we are not foreseeing a great amount of gains on sales to be generated. So the amount would be smaller than that of the third quarter, we think.

[Kazuki Watanabe, analyst]

So how much of an impact would be given from the pandemic in the fourth quarter?

[Hitomaro Yano, executive]

I don't think we will be affected greatly because you see from the accounting perspective, there is a delay by 3 months from Kansai International Airport. And so therefore, this pandemic would affect our financial performances in the next year and not this year. So there should be not much of a discrepancy that is made against the initial guidance. But in terms of the actual performances, but of course, we would like -- we would have to, of course, go into much of the granularity which may affect some positives as well as negatives. So in other words, we would have to go through the process of scrutinization. And that's what I -- what we think about the quarter -- the next quarter and the full year.

[Kazuki Watanabe, analyst]

So in other words, there's a high probability of achieving the profit target?

[Hitomaro Yano, executive]

I will not be able to say for sure at this point in time, but JPY 300 billion achievement is pretty, I think, highly probable, I would say.

And as for the second question, as of now, what we have -- we will not be able to share with you anything more than what we have disclosed at the time of the interim results announcement. So unfortunately, but I would have to ask you to wait until the full year performance announcement. But as of now, as we stand, it is exactly the same as the interim result announcement statement that we have made.

[Operator]

Moving on to Merrill Lynch Japan, Mr. Sasaki.

[Futoshi Sasaki, analyst]

And I have 2 questions. Earlier, you talked about inbound tourism, and I would like to know the size of this. You run hotel and the traditional Japanese inns. What is the percentage of this annual revenue against the Real Estate business in total? And how much of that is inbound tourism-related?

[Hitomaro Yano, executive]

Hotels and inns, profit-wise, it's several billions of yen. And sometimes, it can be 0 or negative if we face a worst-case scenario, but that's not what we would expecting.

In terms of inbound tourism, the largest sizes of hotels and inns that we have is actually Suginoi. Suginoi is the largest hotel that we have. Of course, we have visitors from overseas, but majority of the customer base is domestic customers. And therefore, we don't expect a big impact on the biggest hotel we have. We have a small hotel called Cross Hotel in Osaka, which may be more impacted by the change in inbound tourism, but the revenue is quite small there. So I don't think you need to be concerned about the lower revenue from this impact.

[Futoshi Sasaki, analyst]

I think the number of flights in Kansai International Airport in February, is it declining? Is it changing?

[Hitomaro Yano, executive]

Yes, we have seen some changes with the flights to and from China. We don't know the exact number yet. But some of the flights were canceled.

[Futoshi Sasaki, analyst]

Non-aircraft business, I think you disclosed the regional information, and 70% is China, I think.

[Hitomaro Yano, executive]

Most profitable non-aircraft business will have to be maybe largely impacted by this. I do agree that there will be some impact by China for this business.

[Futoshi Sasaki, analyst]

Okay. Second question about the outlook of next year. At the interim announcement, you indicated the midterm direction, and you explained the JPY 1.3 trillion pipeline in detail. It's been 3 months. Has there been any changes to the pipeline? Did it increase? Did it decrease? Any additional information that you can add to the pipeline information?

[Hitomaro Yano, executive]

No major changes so far. What we have planned originally is underway. And as was mentioned, Hunt has already been realized. It's solid now. It's been 3 months, and we always receive more information. So actually, there are some projects which were not in the pipeline at the time 3 months ago. And we have to see how many of them can be realized, but unfortunately, we cannot share the details with you yet. It's still premature. But please, I think that we are always considering new projects.

[Futoshi Sasaki, analyst]

The JPY 1.3 trillion outlook has not reduced from 3 months ago?

[Hitomaro Yano, executive]

That is correct. If there's anything major, of course, we will try to be flexible. But at this point in time, there is no change in the pipeline.

[Operator]

From JPMorgan, we have Otsuka-san.

[Wataru Otsuka, analyst]

I am Otsuka from JPMorgan. I have first question. I'm sorry to be persistent, but the FY '20 March end, the net profit, as has been shared by Mr. Yano, there could be an overshoot -- there is a possibility of an overshoot. At that point in time, I'd like to ask you the question with regard to the dividend, 30% of payout ratio or JPY 76, whichever higher, you said, at the time of interim announcement. So if payout ratio is to be 30% and the EPS calculation will be JPY 76, so if JPY 300 billion is an overshoot of JPY 300 billion, there could be a possibility of dividend being higher than JPY 76, which means that 30% of payout ratio is to be applied for. So if the bottom line needs to be more than JPY 300 billion, so the dividend will be higher than that of JPY 76. Am I correct in thinking so?

[Hitomaro Yano, executive]

Yes, exactly. Yes. This is exactly what we have announced at the time of the second quarter announcement, and we stick to it.

[Wataru Otsuka, analyst]

And the second question, on Page 3, you talked about the gains on sales. It is very difficult to see the breakdown by different segments, if you could be so kind enough to share with us. The segment profit increased by 7%. And NXT, Avolon, in fact, contributed greatly to this segment profit. So the Corporate Financial Services and Maintenance Leasing, in fact, was a negative contributor. So the 7% increase, JPY 16 billion, as you have said, which means that by segment -- I'm sure there are some other factors other than what you have shared so far. So would you be -- would you mind elaborating on this matter?

[Hitomaro Yano, executive]

So Corporate Financial Services and Maintenance and Leasing, there isn't -- there aren't much of capital gain. So the reason why they are negative is because they are -- there are some negatives, and that was reflected to the negative contribution. And also as well as some others, the gains on sales, it's not that we have managed to increase the amount of capital gains greatly, but there was a minimum contribution -- small contribution.

And as for the PE investment that we have sold, JPY 16 billion, so this was for the capital gains on a year-to-date basis. We have some others. So JPY 20 billion or so of an addition, in other words, if it was not for the negative. So even if you were to exclude that, we did manage to increase the profit, be it the Kansai International Airport, we don't have any capital gains, so therefore, an increase in profit in such a magnitude. And also, for life insurance, we did sell some real estate. So we don't have that this year. So therefore, we would be going much into the granularity.

So life insurance, we acquired Hartford Life Insurance in the past, and that was mark-to-market. And if the market becomes volatile, it will affect the performance negatively. So in the last year, the Hartford Insurance was negative. But this year, it is positive. So this was reflected, too. More than anything, the Overseas, we managed to increase the profit pretty much, that is, and NXT and Avolon were the contributors. And also IL&FS, the negative factors have been eliminated this time.

So as for Corporate Financial Services and Maintenance and Leasing, the expenses, due to the changes in the accounting standard, cost increased, and that pushed down the profit level. But in the next quarter and in the next fiscal period, this will be normalized. So of course, there is a factor of top line that has to be incorporated.

[Wataru Otsuka, analyst]

However, may I take it that the negative factors will be taken away from here down the road?

[Hitomaro Yano, executive]

Yes, that is our expectation.

[Operator]

Next question comes from Mr. Niwa, Citigroup Securities.

[Koichi Niwa, analyst]

Two questions. Retail segment and the shareholders' return. Retail segment, mortgage loan continues to be strong, and the mortgage loan especially is increasing. Can you tell us a breakdown of which one is -- which ones are growing? And what are the economic terms? And is the risk management done properly? What is the rate? And fourth quarter and beyond, how should we look at this? So more details about mortgage loans, please?

[Hitomaro Yano, executive]

Yes, I would like to respond to your first question first. This is for investment purposes. Our studio-style apartments or condominiums, this is growing. At ORIX Bank, we are providing loans for studios, condominiums and also condominiums with multiple rooms, which are targeted at different markets. If there are multiple rooms, well, we are not really increasing so much, but studio style is increasing. So we are increasing the loan for that.

In terms of spread, we are doing our best to maintain the spread. We don't want to go into a price competition. And generally, the market is increasing, and that is pushing up our assets and that is helping the profit increase. We are hoping to continue with organic growth, if possible.

As far as risk management is concerned, there are 3 different steps. So studio-type apartments are developed by certain developers. We have to have a good relationship with those developers so we can assess the assets properly and also assess the credit of people who want to take up a loan. These are things that are pretty normal, and we just do them properly. And the uncollected rate is quite low. And the allowance allocation, 0.1% or below. For bad debt, the performance, the number is quite low. In other words, our credit status is very healthy. So that's the first question.

[Koichi Niwa, analyst]

Second question is about shareholder return. There are 2 sub-questions. On Page 18, you are saying that you want to sustain the growth but also consider the shareholder return. What does this mean? On Page 20, you're talking about JPY 100 billion of share buyback. Does this change? Or does it not change? That's the first sub-question.

And the second sub-question is, you have not really announced the details of the share buyback that happened in January. And looking at the JPY 100 billion share buyback program, do you plan to complete the whole amount? And if you do not complete it, do you have a plan B, a backup plan? Please try to share information as much as you can.

[Hitomaro Yano, executive]

Thank you for your question. We did have a hard time deciding how to write Page 18 and ended up with an unclear expression. But Page 20 says what we explained in the second quarter. We have not changed this intention, and we want to follow through. That's the meaning of Page 18. In other words, there's been no change. And that's the first sub-question, I think.

And the second sub-question, what's happening with the share buyback program. I need to apologize that I cannot really talk about this in this conference call.

As far as the progress in the month of January is concerned, we will try to disclose information as soon as possible, which is the day after tomorrow. So please wait for that release. We appreciate your patience. And we will continue to do what we can in a steady manner. That's all we can say right now. And we intend to implement what's indicated on Page 20.

[Operator]

From Mizuho Securities, we have Mr. Sato.

[Koki Sato, analyst]

I'm Sato from Mizuho Securities. The first question is with regard to Avolon investment. As to the actual performance that appears on Page 15, the contribution profit from Avolon, so the 3 months, in fact, was quite sizable if you were to take out the year-to-date as of second quarter. Is it because of the aircraft divestment?

And also, the second question is regard to the impact from pandemic. The CEO -- with regard to LCC, I think there is going to be -- the condition is going to be pretty tough, I understand. So as of now, Avolon, Chinese-affiliated airlines as well as low-cost carriers, if you could be so kind enough to share with us your idea as of now.

[Hitomaro Yano, executive]

So first of all, with regard to Avolon, as you have pointed out, there was some gains on sales. So therefore, it tends to fluctuate from quarter-to-quarter. In the third quarter, there was gains on sales, as a matter of fact. But from -- there was some accounting twist as well which had impacted the overall performance as of the third quarter.

[Koki Sato, analyst]

So if you could be so kind enough to share with us the size.

[Hitomaro Yano, executive]

It is not that large, however, but it is in the -- I think it was in the range of several billion of yen. So that was one factor.

[Koki Sato, analyst]

And so if you could go into a little bit of the details.

[Hitomaro Yano, executive]

I don't think we should go into much of the details because I don't think it will be helpful. So at the time of M&A, the acquisition, at the time of acquisition, so after the accounting treatment, so after a year, there was some adjustment of a stake from an accounting perspective, accounting treatment. And because you see that happens fairly often because we carry out M&A quite often like Robeco, for example, PPA was conducted after a year. And we have checked with the, of course, auditing firm as to the conclusion from the accounting perspective, but what we have done to Avolon, there was some gap and there seems to be, of course, some discrepancy from quarter-to-quarter. And Avolon, the size was fairly large, and therefore, there was an impact from these accounting treatment changes. And so there has been some differences that was caused as a result.

[Koki Sato, analyst]

Okay. And as to the exposure, if you could be so kind enough to share with us the exposure for the Avolon.

[Hitomaro Yano, executive]

I think Avolon does disclose some numbers which we can share with you. Let us check the numbers. So for Asia Pacific, 40-some percentage is the disclosure. So Asia Pacific, we have a little more exposure to Asia Pacific region, for sure. And the exposure to LCC seems -- tend to be shorter in terms of time period and also that the lease terms tend to be better and higher for the fees. And so it would be -- will be affected by the decision, the management idea and control, and that's where we should be good at.

[Koki Sato, analyst]

So the second, no one has asked the question, so I feel that I dare to ask, and that is with regard to the holding co. So by when, what needs to be done, whether you're going to be migrating the holding structure or not? I know that you have not arrived at any kind of decision that the net profit on a long term, net growth, I know that you have indicated the growth to be achieved in the long run, so in the next 3 to like 5, 6 years. So I think the gains on sales was included in this net profit generation that you foresee an ROE of 11% to be recovered in the not too far out in the future, I think, was said. So gains on sales -- the profit from gains on sales, so on the interview or like on the report or presentation by CEO, Mr. Inoue, is it connected? Is it linked to what he has been stating?

[Hitomaro Yano, executive]

It doesn't -- it is not linked very much. Of course, we have -- we would try to generate a steady amount of profit. There were some articles that appeared in the newspaper, which could be misleading, I have to admit. And Inoue, our CEO, has been sharing with you from a long time back. He is very mindful of the governance structure of ORIX and that each and every good company would have the governance remaining to be intact and, thereby, the business being operated in a healthy condition. And each of the companies, of course, like carrying out an IPO, being listed and the parent company may be delisted sounds very healthy. But he did say that, but it is not something that we plan to happen or that it happens in a short time period in the foreseeable future.

So the group governance, we have to make sure that we would do a good job of group governance by ways of building a healthy structure. And that's what we are thinking about. So in other words, we are not trying to change the structure in a dramatic way and, thereby, causing problems to the investment community. That is not in our idea.

[Operator]

[Operator Instructions]

[Hitomaro Yano, executive]

If I may comment. We received a question earlier about the PE investment in Japan. And I said, please, let us get back to you. But we found out that the original investment was approximately JPY 10 billion, and JPY 16 billion gain on profit was posted. And we have also incorporated the net income as well during this time, so the total profit is actually larger than the number mentioned today.

[Operator]

Ms. Tsujino, Morgan Stanley.

[Natsumu Tsujino, analyst]

A question about the share buyback. At the end of October, you gave us a presentation saying that ROE has been declining for a while and the dividend payout, 30%. Can it be kept? That was one of the questions that came up.

And the JPY 1 trillion buyback is too big, but JPY 100 billion per year is possible. And JPY 100 billion and the 65% of the total return is the way to look at the shareholder return these days, that's a trend? Now we are facing a May and June coming?

[Hitomaro Yano, executive]

So the number of flights are declining. It may not be a pandemic yet, but we will have a clearer number for the Kansai Airport by June, and more numbers will be coming out.

[Natsumu Tsujino, analyst]

And for the next fiscal year?

[Hitomaro Yano, executive]

As was mentioned in the previous presentation, the situation is going to be quite tough.

[Natsumu Tsujino, analyst]

So what about the timing of a share buyback? What is your plan? What is your intention going forward? That's my question. Before you made a change last autumn, you were maintaining 11% or 12%. In order to do that, you would do a share buyback. But the decision will have to be made...

[Hitomaro Yano, executive]

Excuse me, excuse me. I think your -- the sound is breaking up, and I had a hard time listening to you.

[Natsumu Tsujino, analyst]

So I don't want to prolong this question. The question really is, when do you make the decision about these things? You said something 2.5 years ago, which was you make the decision sometime during the fiscal year, and that was okay. But have you changed the way you think about the timing?

[Hitomaro Yano, executive]

The basic thinking has not really changed from what I explained in the second quarter.

[Natsumu Tsujino, analyst]

But what decisions do we make during the fiscal year about share buyback, decision about share buyback? You mentioned before that the share buyback will be leveraged in order to maintain the 12%. That was your story previously, not the current story, but the previous story. And at that time, I think you said, because of this method, it is difficult to make the decision before the beginning of the year because you don't know what the ROE is going to turn out to be. So you said that it was okay, acceptable to make decisions flexibly sometime during the fiscal year, at least that's how I remember the story to be. And I was wondering whether your thinking has changed or not since then.

[Hitomaro Yano, executive]

So your question really is, during the period of share buyback program, do we change our attitude?

[Natsumu Tsujino, analyst]

No, no, no. That's not my question. I'm talking about something that's separate from what's happening this fiscal year. For this fiscal year, I understand it's middle of May. But after that, what do you do?

[Hitomaro Yano, executive]

Oh, I see. I understand your question now. As mentioned before, we have not really changed our stance from what we said last time. So JPY 100 billion was announced as a program. We're trying to do this right now. And for the next program, we will formulate a policy again and share that with you. So we have not changed our stance since we spoke to you at the end of October or beginning of November last year.

[Operator]

We are now ending the Q&A session. Mr. Yano, please go ahead.

[Hitomaro Yano, executive]

So thank you all very much for your participation despite your busy schedule. Thank you for taking part in this teleconference. I'm sorry that I may not have been able to reply to some of your questions in the optimal manner, but I would like to follow up, if necessary. Thank you very much.

[Operator]

Thank you. That concludes today's conference. Thank you for your participation, and you may now disconnect.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]