Orix Corp

TSE:8591

Earnings Call Analysis

ORIX Aims for Record FY '24 Earnings and DPS

ORIX is on track to reach a full-year net income target of JPY 330 billion, representing 66% progress towards the goal. To hit this target, they must secure JPY 110.8 billion in net income in Q4. Share dividends plans are steady, promising JPY 94 per share if the FY '24 target is met, following a completed JPY 50 billion share buyback. Looking ahead, ORIX aims for a FY '25 net income of JPY 400 billion but will recalibrate plans due to changed economic conditions. Sector-wise, Corporate Financial Services sees consistent growth with a record 3-year profit streak. Real Estate and Investment & Concession segments also signaled robust gains, each posting over 100% profit increases. Energy and overseas businesses face headwinds from hedging costs and rate hikes, while Insurance benefits from rising investment incomes.

Earnings Target Progress and Shareholder Returns

The company is advancing steadily towards its annual net income target of JPY 330 billion, having achieved 66% of this goal. To reach this target in the fourth quarter, it needs to secure JPY 110.8 billion in net income. They communicated their commitment to achieving these aims through various deals in negotiation, along with a focus on growth in base profit. The dividend per share (DPS) plan remains unchanged with a JPY 85.6 per share or a payout ratio of 33%, whichever is higher. This could result in a DPS of JPY 94 if the company hits the net income target of JPY 330 billion. Furthermore, they completed a share buyback program of JPY 50 billion. Looking ahead, they are considering the path towards their FY '25 net income target of JPY 400 billion amid global economic shifts.

Quarterly Segment Performance

Various segments of the business displayed mixed performance. Corporate Financial Services and Maintenance Leasing saw modest growth, with a 2% increase in profits driven by fee-related businesses and M&A services. In contrast, the real estate segment delivered a substantial 110% profit increase year-on-year. Investments and concessions saw a remarkable 235% rise in profits, largely thanks to profitable exits and contributions from investments like Toshiba. Energy posted a 38% drop in profits, though this excludes gains from the previous year's sale of Ormat stake. While profits in the insurance segment surged 101% due to lower corporate payouts and higher investment income. Banking and Credit segment moderately grew by 8%, as real estate investment loans benefitted from higher long-term interest rates. However, the Aircraft and Ships segment reported a 5% decline in profits following aggressive asset sales last year.

Strategic Focus and Target Adjustments

Efforts are concentrated on achieving annual targets with no changes to the full-year projections. The company intends to control risks while simultaneously expanding profits, and management is actively directing efforts towards segments with higher likelihoods of success. Whether and how targets and forecasts within segments are communicated remains a subject of discussion, seeking to provide more transparency while avoiding confusion among stakeholders.

Investment Environment and Future Outlook

There is optimism about the future, with signs of stabilization in alternative investment environments, pointing to potential rebounds in infrastructure and renewable energy deals. Mid-cap deals may require more time, but overall, a shift from a defensive to a slightly more offensive investment stance is suggested. The company is cautious yet hopeful, looking toward new opportunities as interest rates stabilize and investment environments improve.

Earnings Call Transcript 2024-Q3

[Nakane, executive]

Thank you for joining us for the Teleconference of ORIX Corporation for the Third Quarter Consolidated Financial Results for the 9 months ended December 31, 2023.I'm the MC. My name is Nakane from IR Sustainability Department. Thank you for this opportunity. The attendee at this conference is Kazuki Yamamoto, Operating Officer responsible for Investor Relations. As we begin, we have a request for the participants. In order to avoid feedback, if you have a communication device such as mobile phone nearby, please make sure that it's turned off or it is away from the telephone.Yamamoto will provide an explanation followed by Q&A session, and we will spend approximately 1 hour for this meeting.Ms. Yamamoto, please start.

[Kazuki Yamamoto, executive]

Thank you for the introduction. Good afternoon, and thank you for joining us for ORIX Group's earnings despite of your busy schedule today. Thank you very much, indeed. My name is Kazuki Yamamoto, Head of Corporate Planning and Investor Relations and ORIX. I have to taken over this role from my predecessor, Mr. Hitomaro Yano.Let me start with a brief explanation of Q3 FY '24 March results. Please turn to Page 2 for the executive summary. So there are 3 points that I would like to explain. The first is the third quarter net income. Net income came in at JPY 91.1 billion. Base profits rose in inbound tourism related businesses, real estate, domestic PE investment and insurance allowing ORIX to post the second highest levels of both base profits and segment processing the full year since the start of the pandemic. Quarterly profit for the second highest after this year in which gains on the Yayoi export profit. The second is year-to-date net income for the 9 months ending December 2023. Net income rose 3% year-over-year to JPY 219.2 billion. As we discussed in the first half results briefing, we expected that most of the realization of capital gains will come in the latter half of FY '24 March end. We continue to make steady progress in realizing this investment gain in numbers of deals, which are currently under negotiation, which should allow us to attain a full year net income target of JPY 330 billion, which were best unchanged. So the third point is shareholders' return. In May of last year, ORIX approved a share buyback program of JPY 50 billion. We have executed a full amount of the program and retired a total of 19.89 million shares. There are no changes to our dividend policy, which was announced back in May.Now please turn to the next page. Net income for the 9 months ended December 2023 rose 3% year-over-year to JPY 219.2 billion, with annualized ROE for the same period coming in at 8%. The right-hand chart shows trends in quarterly net income and ROE for the past 4 years. ORIX achieved its second highest ever quarterly net income since the start of the pandemic. In the third quarter of JPY 91.9 billion, an increase of 40% Q-on-Q. The ROE in the chart in the annualized net income for each quarter, which improved to 9.7% in the third quarter. So we should be able to achieve the full year target so that we'll be able to achieve our target for the ROE for the year.Please turn to Page 4. Here, I will discuss the breakdown of segment profit. Segment profits for the 9 months ended December 2023 rose 9% year-over-year to JPY 319.2 billion. The chart on the bottom of the slide show historical trends in segment profit on a full year, quarterly and 9-month basis from left to right. The dark blue is base profit, while the light blue is investment gains. Please refer to the far right chart of third quarter year-to-date 9-month performance. Base profits in dark blue rose 16% year-over-year to JPY 268.8 billion. In addition to the recovery in businesses related to inbound tourism, expansion in investment income in the insurance segment and higher domestic PE industry earnings contributed to this strong number. The light blue investment gains for the 9-month period indicate an 18% year-over-year decline to JPY 50.4 billion, but ORIX supported investment gain from real estate and PE exit in the third quarter of JPY 26.9 billion, multiplying this figure by 4 equals more than JPY 100 billion in investment gains. In fact, as shown in the chart, the amount consistently averaged more than JPY 100 billion for the first 5 years. As I mentioned earlier, we are aggressively moving forward with exits during the second half.Now please turn to Page 5 and Page 6. These pages outline profits and assets by segment. ORIX domestic businesses were strong and are on track to meet their full year targets. Overseas businesses saw profits fall owing to the impact of elevated interest rates and our stance of the limiting risks, considering economic uncertainty. That said, we think it is necessary to continue to carefully watch for the timing where interest rates and economic climate will bottom out.Now as shown on Page 6, some segments posted growth in assets due to forex impacts, new PE investment, insurance, reflecting higher securities investment and greater investment in aircraft and leases in Asia and Australia. A detailed overview of trends in each segment will be shared later. Now what has contributed to the base profit were APAC concessions and the facilities operations.Please turn to Page 7. The chart shows segment profit, trends for or excess three COVID impacted businesses of concession facilities, operations and aircraft shifts. The left shows a full year segment profit while the right shows quarterly trends. Total segment profit for the 3 businesses for the 9-month period were at JPY 26.6 billion, up by JPY 17.7 billion year-over-year. Even though there is still 1 quarter left in the fiscal year, these businesses have recovered by about JPY 50 billion from the worst period of losses marked during the pandemic. Although there are some seasonal fluctuations, steady growth should allow us to achieve additional expansion on a way recovery to the JPY 70 billion in annual segment profit. Now, inbound traffic from all countries and regions, excluding China, continues in an upward trend. Airbus concessions returned to the black ink in second quarter and profits continued to expand in the third quarter. In December last year, Kansai International Airport opened its new international terminal departures area, which it had been working on during COVID closures. This leads to large-scale renovation of the airport scheduled for completion in Spring 2025. The airport is taking measures such as increasing smart lane baggage inspection facilities in an effort to combat labor shortages and ongoing expansion, aiding tourism should lead to further growth in ORIX Group's earnings. Now by the way, Kansai Airport's earnings are included in ORIX Group's consolidated earnings with the 3 months fact. So the third quarter figures represent July, September 2023 numbers.Now please turn to Page 8. In airport leasing, these fees are continuing to rise as passenger demand in the U.S. and Europe is at a record high levels, airline earnings recovery and the tight supply demand for aircraft. Although dollar-based interest rates are pushing capital costs higher, there is strong demand in the secondary market for aircraft purchases and the 3 types of fee income, these revenue gains on the sales of aircraft management fees are all rising. In the facilities operations segment, we have endeavored to raise RevPAR by delivering superior services to our customers and maintaining high post-COVID occupancy rates. As a result, in December 2023, RevPAR stood at 138% of the 2019 level for directly operated sales and at 128% for inns. As shown in the slide, segment profits for the 9 months ending December 2023 in the facilities operations business was JPY 7.7 billion, already higher than the JPY 5.6 billion for the full year of 2020 March end. We believe further profit growth remains possible as we see room for additional hikes in RevPAR and should benefit from the second block of our new luxury KARAKU brand, which opened at end of 2023.Now please turn to Page 9. Next, I will share the progress we made with the result for the third quarter versus the full year target using the 4 categories we started to employ last fiscal year. Within Japan, segment profits in both the financial and non-financial category businesses were up year-over-year, making strong progress versus a full year target, in particular, domestic non-financial businesses for help both by inland related demand and the real estate segment with strong demand for properties from overseas investors fueled by yen's weaknesses led to property sales. For this reason, it could overshoot our full year target for the category. Now, the overseas segment saw profit decline owing to an absence of investment gains booked on the sales of a partial stake in Ormat in the Environment and Energy segment in the previous fiscal year and higher euro interstates. While we have some distance from meeting our full year targets, we will focus on building up earnings while continuing to control risks. Moreover, assets in these regions remain healthy. Please note that ORIX USA has very little exposure, either direct or indirect to commercial real estate. International markets in the aircraft and ships remain strong, and we aim to continue to grow our earnings through capital recycling. As for the baseball club, the posting fee from pitcher Yoshinobu Yamamoto's transfer was booked as pretax earnings in the other non-term segment area.Please refer to Page 10. Our exposed net income of JPY 219.2 billion for the 9 months ended December 2023, representing progress of 66% towards our target of JPY 330 billion. In order to achieve this target, ORIX will need to book net income of JPY 110.8 billion on pretax profits of JPY 165 billion in the fourth quarter. In addition to growth in base profit, we are moving steadily forward with several of these, which are in the negotiation phases with buyers and aim to achieve our full year earnings targets. Regarding shareholder returns, our DPS plans remain unchanged at either JPY 85.6 per share or a payout ratio of 33%, whichever is higher. This translates to DPS of JPY 94 if we achieve our FY '24 margin net income target of JPY 330 billion. As mentioned earlier, we completed our entire share buyback program of JPY 50 billion and of which some have already been canceled. Regarding our FY '25 margin net income target of JPY 400 billion, the global macroeconomic climate has changed significantly since our initial outlook. So we will discuss the path towards achieving this target and specific measures as part of our FY '25 margin business planning processes. Regarding our view on monetary policy and its impact, we think there is a -- I would like to take this opportunity to share. We think there is a possibility that negative interest rates could end in Japan around Spring, which will push up the interest rate upward. Higher yen interest rates should positively impact ORIX Group earnings, particularly at ORIX Bank and in the insurance segment. However, we expect only a gradual pace to interest rate hikes. And therefore, please note, we have no plans to change our current portfolio strategy or Policies. We expect cuts in U.S. dollar interest rates to start around summer. Lower U.S. dollar interest rates should provide support to expansion in earnings, particularly our ex-USA's real estate and PE businesses. Lower euro interest rate would help reduce hedging costs for ORIX Europe and positive for recycling activities for renewable energy projects at Elawan. So dollar and yen interest rate decline would be supportive to the strategy of our ex in many of the times.I would like to continue with the status of each segment. First, Corporate Financial Services and Maintenance Leasing. Please turn to Page 12. For the 9 months ended December 2023, the segment profit was up 2% year-on-year at JPY 59.2 billion. Profits were higher in Corporate Financial Services, thanks to solid earnings in fee-related businesses and profit contribution from M&A intermediary services. In auto, rental car demand remained strong and the prices for used autos continue to trend at high levels. In addition, policy of prioritizing more profitable business during sales activities has yielded results, pushing the auto business to its third year in a row of record profits by end of Q3. And the segment is poised to post record profit for the full year again. Assets were flat overall with assets in Corporate Financial Services slightly lower and rental car fleet in the Auto division being renewed.Please turn to Page 14. This is the real estate segment. Segment profits were up 110% year-on-year to JPY 51.4 billion for the first 9 months. Investment & Facilities segment realized a large investment gain in Q3, resulting in the substantial increase in profits year-on-year. Daikyo profits have grown year-on-year for 3 consecutive quarters, contributing to the segment's sharp increase in profit. We are proactively selling properties in the asset recycling business like logistics centers and also initiating new development projects in carefully selected areas and Daikyo continues to acquire sites in favorable areas. And all-in-all, the segment assets increased by JPY 70.6 billion versus the end of the prior year. We will continue this business model to invest in high potential projects and turning them possible.Please turn to Page 16 for the investment and concession. Segment profits rose 235% year-on-year to JPY 23 billion. The PE investment achieved strong profit gains on the back of exits during Q3 and also thanks to profit contribution from DHC, which invested in the prior fiscal year. And the profit from concession is increasing. As with the real estate, our first aim is rapid return to pre-COVID profit levels, and our approach is working, which is investment made during the financial period. Segment assets were up JPY 195.4 billion versus the prior year-end following LP investment and mezzanine financing to Toshiba.Please turn to Page 18. Segment profit was down by 38% year-on-year to JPY 19.8 billion. Excluding the impact of last year's gain on sale of our partial Ormat stake, profits were up year-on-year. The bottom left graph shows the segment profits. In the domestic business, profits for the 9 months was steady year-on-year, although output caps for solar power generation in some regions impacted earnings in the first quarter, high number of 20 days from Q2 offset this negative impact. And the profit from overseas Energy business were lower year-on-year, owing to the absence of the earlier gains and the higher hedging costs over the season investment of the elevated interest rates. Meanwhile, advanced power sales volume increased, thanks to higher generating capacity. Last year, major renewable energy company decided to withdraw from an offshore wind project. However, we still see strong demand for renewable energy worldwide. This business is positioned as a growth driver, and we will utilize our experience both overseas and in Japan to originate new opportunities.Moving on to insurance segment on Page 20. Segment profits were up 101% to JPY 53.4 billion. Corporate-related insurance payouts from last year fell and higher investment income helped segment post sharply higher profits. Premium income, mostly from whole life insurance was also healthy. Segment assets rose by JPY 155.3 billion, owing to an increase in investment securities and the impact of FX.Please turn to Page 22, Banking and Credit segment. Segment profits were up 8% to JPY 26.9 billion. In banking, profits were up year-on-year. Earnings from real estate investment loan grew on the back of higher long-term interest rates, while the increase in deposit interest was kept at a certain level. In addition, ORIX continues to grow its trust assets and higher earnings from trust banking also contributed. Earnings in the credit unit were flat year-on-year. Segment assets were up JPY 51.8 billion, reflecting the increase in lending as the bank focuses in merchant banking. As part of this business, ORIX Bank originates loans for corporate clients in priority areas such as renewable energy and logistics centers and then securitizes the assets into debt products and using the trust banking license and sell these products to investors.Please turn to Page 24, Aircraft and Ships. Segment profit fell 5% year-on-year to JPY 16.1 billion. In the Ship segment, profits were down year-on-year as the business aggressively sold ships holdings last year, taking advantage of the several pricing, but this is line with projections and the ships prices remain high. And in this segment, we sold 4 vessels this fiscal year. Aircraft leasing, as I mentioned earlier, is enjoying healthy progress. At Avolon, highest interest rates has been a drag and the business was loss-making on a cumulative basis in the 9 months. However, the operating environment is improving, and it has been profitable for the 2 consecutive quarters in Q2 and Q3. Even after the hedging costs. Segment assets were up JPY 123.2 billion versus the prior year end, reflecting the impact in FX and aircraft purchases.Next is ORIX USA on Page 26. Segment profits were down 16% year-on-year to JPY 27.8 billion. And the primary reason for this was fewer capital gains booked in the PE business. Meanwhile, the credit business saw earnings rise, we have strengthened risk management from early stage and become very selective with new deals and been running in credit costs despite elevated interest rates while still enjoying higher financial earnings. Breakdown of profit by this line can be found on Page 27 of your handout for your reference later. Segment assets were down by JPY 10.8 billion versus prior year-end. Even after considering the impact of weaker yen -- well, because we have been selective, while we cannot be overly optimistic to the lack of visibility concerning this market, we continue to operate business with an awareness that it might bottom-out quite soon.Please turn to Page 28. This is ORIX Europe. Segment profits fell 42% year-on-year to JPY 20.8 billion. In the prior year and the year before, OCE booked performance fees of higher than JPY 10 billion, but because of the market situation, this shrunk. And the increase in hedging costs stemming from high yield interest rates, that's still our profits. OCE has developed and launched some active ETF this fiscal year and is promoting efforts to cross-sell financial products across different group companies.Please turn to Page 30. Lastly, I would like to talk about the Asia and Australia segment. Segment profits were down 40% year-on-year, JPY 20.7 billion. Although leasing and loans were growing in South Korea, Australia and Asia profits were lower year-on-year on the absence of the gain on sale of station affiliate. Segment assets were up JPY 163.4 billion versus prior year-end, reflecting the impact of FX and new lease executions.Segment assets and overview of Asia is shown on Page 31 for your reference. And as the footnote says, exposure to Taiwan as leasing and investment is as little as JPY 70 billion accounting for just 4.4% of assets in this segment. And in fiscal year '24 March, overall interest rates have remained higher for and longer than anticipated in Europe and America and the earnings growth overseas has suffered, meanwhile, benefits from a weaker yen and strong inbound travel demand has helped domestic business profit trend above plan. We will concentrate on achieving our net income target of JPY 330 billion for fiscal year '24 margin and then made a foundation to reaching the fiscal year '25 margin profit target of JPY 400 billion.That concludes my explanation about Q3. Thank you for your continuation.

[Nakane, executive]

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

[Naruhiko Sakamaki, analyst]

I am Sakamaki from Mizuho Securities. I have 1 question to ask. So achieving the target for this year and also planning for the increase of property in the next year and also your plan for capital recycling. Would you mind updating by referring to Page 8 of your slide, and there have not been any update from November, I believe. So any kind of outlook for the exit, the size, any kind of changes that you have been experiencing from the time of the second quarter results. If you could give us a flavor.

[Kazuki Yamamoto, executive]

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

[Nakane, executive]

SMBC Securities, Muraki-san. Please ask your question.

[Masao Muraki, analyst]

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

[Kazuki Yamamoto, executive]

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

[Masao Muraki, analyst]

As you have said, bottoming out or maybe the change in the interest rate direction. In the United States, you are trying to shrink your credit portfolio, and you're talking about that as well as the investment in the United States. Is that correct?

[Kazuki Yamamoto, executive]

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

[Nakane, executive]

Next, we have Daiwa Securities, Mr. Watanabe. Over to you.

[Kazuki Watanabe, analyst]

I'm Watanabe from Daiwa Securities. I would like to ask one question. And I'd like to refer to Page 44, and that is with regard to the capital policy. So the expression in fact has changed. Saw sustainable growth, but also at the same time, growing ROE by efficient usage of the capital. Was there anything at the backdrop at the time of calculation, the buyback and also the DPS, any kind of idea to this based on this page.

[Kazuki Yamamoto, executive]

Well, just as you have mentioned, yes, we made a slight change in the expression. As I had mentioned at the very beginning, the inbound trading, in fact, has been driving our growth. So therefore, the base profit has been growing and the segment profit, we are beginning to feel the positivity from those growth implications. So therefore, it is not that we will be dependent on the capital gain, but we would like to continue to invest in the base profit generation businesses. That should lead us in improving our ROE. And also with regard to the capital policy that you have asked. So at the time of the benefit of being kind of eliminated or dropped, we thought that there is some positivity in expanding the GPS going forward. So just as being asked by Muraki-san earlier, the business plan in the discussion of business plan, inclusive of the BoD discussion, we would like to, of course, continue to discuss over this topic. However, PDR 1times and going beyond 1 times, in fact, it's something that has to be endorsed by a solid equity story, but if you could give us a little more time for us to award final idea. But the shareholders' return is going to be expanded or is this the direction for this fiscal period. Well, recently, so in the capital market, the new NISA, for example, there has been a lot of discussion of the possible investment by the regional investors. So we would like to appeal to as broad shareholder base as much as possible. So on the basis of a shareholders' return, wo what would be the ideal capital policy based on this reaction that we may get from the shareholders. So this is how we want to arrive at the shareholders' return policy for this year.

[Nakane, executive]

JPMorgan Securities, Sato-san, please ask your question.

[Koki Sato, analyst]

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

[Kazuki Yamamoto, executive]

As you have mentioned, Asia and Australia area has ex-China, Asia and also Greater China. And there are some discrepancies, external Asia, Australia, South Korea and India. This is where we have our strength like lease and also finance related to real estate. This is where we see business opportunities. So we will continue to maintain our businesses there. And the possible challenges would include, as you can see on Page 31, and the message that I want to deliver on this page was, for example, #4 Hong Kong, Finance and also banking business. And in terms of credit, the market is not really improving. It is actually worsening. So we are evaluating our assets, and this is resulting in the credit allowance. So we are trying to be strict with risk definition. We are being extremely cautious. And as you can see in Section 2, lease for general business, especially for China domestic market. Lease and customers' credit status has to be, of course, assessed very carefully, but we do have assets. So we believe that we can continue this business. And the third point is, as you have mentioned, as far as equity investments are concerned, we need to be very risk sensitive and we are. China-related investment in its demand is actually decreasing overseas. And also Chinese domestic investors are becoming more selective about what investments are attractive to them. We do not believe that the situation will improve quickly just this year and next year. So equity investments will not be added newly in this sense. We will maintain the current investees and if there are additional inquiries, maybe we will pursue opportunities to sell more actively. Now for each quarter, we are reviewing the assets, of course, on a regular basis, but policy of holding these assets and also future business policy will have to be looked at so that we can make the correct judgment there. And in the business plan within the strategy for Greater China, we will be discussing this and the result of the discussion will impact what we do. But anyway, we are trying to formulate the policy right now. So that's about Asia and China.I hope that answers your question.

[Nakane, executive]

Nomura Securities, Mr. Sasaki, over to you.

[Futoshi Sasaki, analyst]

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

[Kazuki Yamamoto, executive]

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

[Futoshi Sasaki, analyst]

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

[Kazuki Yamamoto, executive]

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

[Futoshi Sasaki, analyst]

I just want to follow up. There was a question by Daiwa Securities. There's one clarification that I require. So payout ratio of 33%. So are there any kind of headroom to the 33% payout ratio. With regard to the shareholder return, you want to broaden the shareholder base. And so you are considering to make some changes in the shareholders' return in order to broaden the shareholders' base, so payout ratio of 32%.

[Kazuki Yamamoto, executive]

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

[Futoshi Sasaki, analyst]

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

[Kazuki Yamamoto, executive]

Exactly. So which means, of course, we would have to, it would be indispensable. It will be quite necessary for us to increase the profit so that EPS can be grown. And so coupled with, in other words, the profit growth. And at the time when Daiwa Securities had asked the question, so the efficient capital management and also coupled with, of course, growing profit. And so therefore, achieving our ROE goal as well as achieving PDR more than 1 times.

[Nakane, executive]

SBI Securities, Otsuka-san, please ask your question.

[Wataru Otsuka, analyst]

I am looking at Page 9. And on the far right, full year target is shown and this JPY 800 million for maintenance and for insurance, there's some other number, JPY 52 billion for real estate. If this is going to be higher than this, will you be making some adjustments or updates in the third quarter? Maybe if you do that, that would be easier for people like us from outside to understand. So my question is, at the Board meeting level, have you discussed this? Are you discussing this? Please let me know. And based on that discussion, was this disclosure authorized or was it not discussed at all at the BoD, that's my question.

[Kazuki Yamamoto, executive]

On Page 9, we have full year target. And this has not been changed from the beginning of the term. As the items reported to BoD and discussed, we always use the latest forecast to assess the probability of achievement of the plan and the business overview. When it comes to disclosure, according to the segments or the 4 categories, if we try to show the latest forecast, the assumptions may be different, and it will be confusing as to what we are aiming for. So as far as the disclosure goes, we are still using the same number as we did in the beginning of the year. We explained that there is maybe a bit of a long way to go. But on the ground, we are trying to control the risk, but also trying to expand the profit as well. So in terms of business control business direction, the overall target has not really changed. And where we see more likelihood of success, we are trying to increase the amount of profit coming from that segment and the management and the people on the ground are communicating with each other in that manner. We will continue to disclose the target as we have done so far.

[Wataru Otsuka, analyst]

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

[Kazuki Yamamoto, executive]

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

[Wataru Otsuka, analyst]

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

[Kazuki Yamamoto, executive]

I see your point, and we will discuss what can be done. So maybe if I'm talking about segment, you're talking about 4 buckets here and especially in the third quarter, as we get closer to the end of the year, maybe there are more information that we can share with you somehow. So we will try to discuss the possibility of doing that.

[Nakane, executive]

So from Bank of America, Yaginuma-san please.

[Yuki Yaginuma, analyst]

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

[Kazuki Yamamoto, executive]

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

[Nakane, executive]

UBS Securities, Okada-san, please ask your question.

[Taiki Okada, analyst]

U.S. 3 businesses. I would like to understand the business environment, starting with credit, asset is slightly increasing and profit is also growing. By asset class, is there a specific asset class that you have some credit concerns? I understand there is no CRE exposure, but what about the other asset classes. Private equity exit, alternative investment was just mentioned, but the private equity exit environment. Right now, maybe, well, in the past, maybe the price was not satisfactory, but is it improving. And also, the profit momentum of real estate has not really recovered. MBS issuance has to recover. Otherwise, ORIX on its own cannot really recover the profit level? Is that the quite understanding?

[Kazuki Yamamoto, executive]

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

[Nakane, executive]

So the time is almost up. So the next person is going to be the last question. Niwa-san of Citi Securities. Over to you.

[Koichi Niwa, analyst]

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

[Kazuki Yamamoto, executive]

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

[Operator]

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

[Kazuki Yamamoto, executive]

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

[Nakane, executive]

Thank you. And that concludes the third quarter consolidated financial results for the 9 months ended December 31, 2023. Thank you for staying until the end of the program.