It's time to begin the meeting. Thank you for taking time out of your busy schedule to join us for the Q2 earnings call by ORIX Corporation. My name is Uchida from Corporate Communications. I'll be serving as the MC. Today, we have Member of the Board, Representative Executive Officer, President CEO, Hidetake Takahashi, Senior Managing Executive Officer, CFO/CSO, Masataka Yamada, Executive Officer in charge of IR, Kazuki Yamamoto. Takahashi and Yamada will give you the briefing, which will be followed by Q&A. We expect this meeting to last approximately 90 minutes. Over to you, Takahashi-san.
I am Takahashi, Group CEO. Thank you very much for taking time out of your busy schedule to join us today for the ORIX Group financial results briefing. As for myself, I will provide an overview of our first half results, the progress of our key initiatives, and the acquisition of AerFin as a subsidiary, which will be followed by CFO Yamada, who will explain the details of our first half results, the progress of our asset management business, the full-year focus, and the shareholder returns. Please turn to page two of the presentation material. First of all, net income for the first half was JPY 856.2 billion, almost three times that of the same period of the previous year, driven by gains on sales of shares of ORIX Bank and multiple PE investees, as well as sales and value gains on KIOXIA shares, which we hold indirectly.
We achieved record high profit for our first half result. Our asset management business in Europe and the Americas expanded AUM on the back of active management, leveraging its quantitative and research capabilities, as well as its global distribution platform, resulting in growing their performances. In addition, the Aircraft and Ships business leveraged diverse sales channels, such as JOLs and funds, to advance asset rotation while selectively managing their asset holdings, contributing to profit growth. Meanwhile, in the U.S., we are proceeding with a review of our business portfolio. In Greater China, we are prioritizing risk reduction and recovery of new investments and recorded impairments on investees in first half. Please turn to the next page. E xplain the progress of the key initiatives. While it's quite varied, I think we are gaining up earnings power. Please turn to the next page.
Let me explain the progress of the key initiatives we announced at the beginning of the first fiscal year. While we need to closely monitor U.S. political developments, crude oil prices, interest rates, and inflation trends, the overall business environment remains generally solid. In this environment, we steadily executed our key initiatives. As part of portfolio optimization, we transferred all shares of ORIX Bank to Daiwa Next Bank in August. We also completed exits from multiple PE investees, including SUGIKO, Network Connex, and Peak. ORIX Capital Partners in the United States now has only two remaining portfolio companies. Regarding business model transformation, in May, we invested in Japan Nippon Information Industry, a company engaged in system development and operation, as the first deal of the PE fund formed with the Qatar Investment Authority.
In APAC, we launched ORIX Fleet, covering 11 countries, built around the fleet management and maintenance business model developed in Australia and combined with our know-how from Japan. We are also steadily expanding our asset management business, including forming a fund for a domestic battery storage development project and closing new funds at NXT in the United States. Now, CFO Yamada will explain the progress of asset management business in detail later on. As for the new businesses, we completed the acquisition of AerFin as a subsidiary on November 2 that allows us to enter the aircraft aftermarket. I will explain the details of this transaction on the next slide. Through the execution of these key initiatives, we are making steady progress toward realizing our long-term vision for 2035. Now, please turn to the next page.
I will now explain the acquisition of AerFin as a subsidiary, focusing on the strategic objectives. AerFin is engaged in the procurement, sale, leasing, and repair of aircraft engines and parts. AerFin has a business base of 600 customers across six continents. Its strength also lies in its high level of expertise in aircraft and engine asset management. Through this acquisition, we will expand our business base across the entire aircraft value chain. By leveraging AerFin's expertise and global customer base, we will maximize the asset value of the aircraft we own and manage and enhance the solutions that we offer to our customers. Now, in addition, by adding parts out as a new exit strategy to our conventional aircraft leasing and aircraft sales, we aim to diversify our earnings opportunities.
Moreover, by promoting the reuse of aircraft parts and engines, we also intend to contribute to advancing the circular economy. That concludes my presentation. Thank you.
I am Yamada, Group CFO and CSO. Thank you very much. My presentation will focus on specifics of our first half results, the progress in expanding our asset management business, and shareholder returns. Please turn to page five to begin with. First, the first half net income and the breakdown of second quarter profit is what I'm just about to explain. Net income for first half was JPY 856.2 billion. Of this, adjusted profits were JPY 317.5 billion, and KIOXIA sale and valuation gains were JPY 538.7 billion. Please note that all figures on this slide are shown on an after-tax basis. Please look at the graph.
The red boxes represent adjusted profits, and the gray boxes represent KIOXIA sale and valuation gains. Starting from the left, compared with the first quarter adjusted profits of JPY 159.1 billion, we recorded core profit of approximately JPY 100 billion in the second quarter. In addition to the asset management business led by Robeco, Aircraft, Ships, and Insurance performed well. Adding approximately JPY 90 billion in gains on the sales of ORIX Bank, while recording approximately JPY 30 billion in impairments made in Greater China, second quarter adjusted profits came to JPY 158.4 billion. Combined with the first quarter, adjusted profits for the first half totaled JPY 317.5 billion, reflecting steady accumulation profits. Next, regarding KIOXIA sale and valuation gains, we recorded JPY 417 billion in the second quarter, bringing the first half cumulative total to JPY 538.7 billion.
As a result, net income for the first half was JPY 856.2 billion. Now, please turn to page six. I will now explain the first half segment profits for APAC, Infrastructure, Europe and Americas, and Insurance segments compared with the same period of the previous year. The total segment profits increased by JPY 749.6 billion year-over-year to JPY 1,147.4 billion. Three of the four segments posted profit increases. Infrastructure posted a profit decrease due to the absence of the large gains on the sales of Greenko and Hotel Universal Port Vita recorded in the previous fiscal year. First half profits for the APAC segment were JPY 916.4 billion, an increase of JPY 790.7 billion year-over-year.
KIOXIA sale and valuation gains amounted to JPY 795.7 billion, and if we exclude this impact, segment profits decreased by approximately JPY 5 billion year-over-year, mainly due to impairments recorded on investees in Greater China. On the other hand, the private equity investment unit realized a gain of approximately JPY 62.3 billion on the sale of SUGIKO. Infrastructure segment profits were JPY 82.1 billion, a decrease of JPY 118.9 billion year-over-year, which I mentioned at the outset reflects the absence of prior year gains. In this segment, the transportation equipment unit grew gains on aircraft sales and leasing revenues, allowing all subunits, Aircraft, Avolon, and ships posting profit increases. Meanwhile, the environment and energy unit posted a profit decrease as the domestic solar power business was affected by lower installation and curtailment.
Public infrastructure centered on airport concessions also continued to see a profit decrease due to a decline in Chinese passengers. Europe and Americas segment profits increased by JPY 71.5 billion year-over-year to JPY 91.8 billion. ORIX USA recorded sale and valuation gains on multiple PE investees, and the asset management business, including Robeco, continued to expand AUM, driving growth in asset management fee. Insurance segment profits increased by JPY 6.2 billion YoY to JPY 57.1 billion, supported by new policies from corporate and high-net-worth clients, centered on yen-denominated whole life insurance products that were revised or newly launched in the previous fiscal year. Resulting segment profit for the first half for this fiscal year was up by 188% year-over-year. Please turn to page seven. I would like to explain the status of our assets for the first half.
Segment assets increased by JPY 698.7 billion from the end of the previous fiscal year to JPY 14.9 trillion. In APAC, equity method investments increased significantly due to KIOXIA sale and valuation gains. Meanwhile, there was no significant changes in the other three segments. Infrastructure and Europe and Americas were selectively deploying capital in assets in areas with a growth potential, such as Aircraft, while selling existing assets at optimal timing. Details on segment profits and assets are provided from page 13 onward in the supplementary materials for your reference. Please turn to page eight. This page shows the progress rate of our segment profit against the full-year forecast across the three categories of finance, operation, and investment. Since we did not announce full-year forecast for each of the four segments at the beginning of the year, I will explain the progress rates according to these three categories.
For the fiscal year, we plan to use this framework to explain the second half as well.
Overall progress against the full-year plan was 164%. By category, even excluding KIOXIA sale and the valuation gains, which are included in investment, finance, operation, and investment have each progressed approximately 50%. First half segment profits for finance, JPY 6.3 billion. As insurance advanced, according to advanced acquisition of high-value policies in line with the strategy, progress against the full-year plan reached 51%. Operation recorded JPY 123.1 billion, with a progress rate of 51%. Although Rentec and environment energy were slightly behind plan, asset management, including Robeco, Aircraft and Ships, and Automobiles performed well, and operation as a whole progressed smoothly. Investment recorded JPY 93.8 billion, with a progress rate of 323%. Segment profits, excluding KIOXIA sales and valuation gains, was JPY 142.3 billion.
Although we recorded relatively large impairments in Greater China, valuation and sale gains on PE investees in the U.S. exceeded expectations, resulting in a progress rate of 49%. Please turn to the next page, page nine. This is about the capital recycling. In the first half of this year, we recorded capital gains of JPY 266.1 billion, and cash inflows from investment recovery amounted to approximately JPY 930 billion. The main divestments are listed in the presentation materials. Cash outflows from new investments totaled approximately JPY 340 billion. In addition to the PE investment in Nippon Information Industry, the first deal of our fund with the Qatar Investment Authority, we made investments primarily in logistics facilities, aircraft, ships, and U.S. real estate.
Capital recovery outpaced new investments in first half, but our pipeline for new investment is robust, and we expect new investments of more than JPY 800 billion for the full year. In the second half, we will proceed with investments in domestic real estate, domestic PE, aircraft, Osaka IR, and others. As the CEO explained earlier, we have completed acquisition of AerFin, an aircraft parts out company. Please turn to page 10. We are shifting to a model that expands AUM and fee revenue while also leveraging third-party capital, and I would like to explain the progress on this front. In the first half, we transitioned our battery storage plants to an asset management model, closed new funds through NXT Capital, a subsidiary of ORIX USA, and strengthened our distribution structure in the United States.
Regarding the transition of our battery storage plants to an asset management model, as we announced in September, we began construction of the Yufu Battery Storage Plant and Yonezawa Plant through a joint investment with three external investors. This is the first project in our battery storage plant development to utilize external capital, and our equity stake is 23.7%. This initiative enhances our capital efficiency as we will handle asset management services, such as supporting decision-making and the development and operation of storage plants and business management, as well as maintenance. In the United States, NXT Capital recently closed new funds on its largest-ever scale through a variety of investment structures. In addition to getting new institutional investors, we also increased commitments from existing investors. NXT Capital's lending business continues to perform solidly, and we intend to further expand it going forward.
ORIX USA has also newly established Capital Formation Team. In addition to giving it product development functions, we are strengthening the organizational structure by hiring a head of the Americas and expanding staffing in priority areas. We will also deepen collaboration with ORIX Europe to further strengthen our product capabilities, client coverage, as well as global distribution capabilities. We are also building a sales structure targeting domestic institutional investors, such as life insurance and pension funds. We are also looking to sell various private asset funds formed by ORIX USA to Japanese institutional investors. Expanding our asset management business is central to our growth strategy, and we plan to provide updates going forward. Please turn to page 11. This is our full-year forecast. Our net income continues to be significantly affected by fluctuations by the price of our KIOXIA shares held by Toshiba.
Based on KIOXIA's share price of JPY 18,095 at the end of September, we expect to record KIOXIA sales and valuation losses of approximately JPY 190 billion in the third quarter. Regarding sensitivity of our KIOXIA sale and valuation gains, based on Toshiba's holdings of KIOXIA shares at the end of September, we estimate that every JPY 1,000 change in KIOXIA's share price would fluctuate after-tax gains by JPY 12.8 billion. KIOXIA's closing share price last Friday, November 6th, was JPY 8,511, for your reference. In addition, as it is currently difficult to forecast the KIOXIA sales and valuation gains we will record in the fourth quarter, we are keeping our full-year net income forecast unchanged at JPY 530 billion, as announced in the beginning of the year.
As mentioned earlier, adjusted profits are progressing steadily, driven mainly by asset management business in Europe and the U.S., as well as aircraft and ships. Please turn to page 12. Shareholder returns. The interim dividend is JPY 113.56 per share, calculated by multiplying EPS based on adjusted profits by a dividend payout ratio of 39%. This is an increase of JPY 19.8 year-over-year and the interim dividend for the previous fiscal year. Our full-year dividend forecast remains unchanged at JPY 187.36. Regarding share buybacks, against the total repurchase limit of JPY 250 billion announced in May, we have repurchased JPY 175.5 billion at the end of October, which is a progress of 70%. That concludes my presentation. Thank you very much for your attention.
Thank you. We are now ready for the Q&A session. If you wish to ask a question, please press the raise hand button at the bottom of the Zoom screen. When your name is called out, please unmute yourself and ask your question. If you wish to ask a question, please refrain from asking more than one question. Also, please tell us who you are and where you are from before asking the question. There will be about 15 minutes of Q&A session for the media, followed by Q&A by the investors as well as the analysts. Let' s begin f rom Nihon Keizai Shimbun, Sugawa-san, over to you.
Thank you very much for the opportunity. Can you hear me okay?
Yes, we can.
Thank you. I am from Nihon Keizai Shimbun. [Sugawa] is my name.
The impact from interest rate hike is what I want to be asking you about. While the interest rate is continuing to rise, what is the impact? Also, how have you been dealing with the passing on to the prices of leasing, for example?
Thank you for the question. Inclusive of the leasing businesses, if there was to be any asset that may fluctuate as a result of the rise and decline of the interest rate, we do it in an ALM manner, and so therefore, impact is not that large. There are, of course, other businesses such as real estate business and others. We do procure the money and thereby the fund, and therefore, through the increase of the interest rate, there will be an impact that is given to the procurement cost.
Over time, we are passing it on to the sales price, inclusive of the inflationary pressure. If there was to be any product or services of ours that may have no flexibility in terms of the, excuse me, changes that can be brought about to the prices, then we would target at carrying out asset allocation. That is all.
If I could add to what has been shared from a financial perspective, and also as to the sensitivity towards forex. We have shown on page 38 that we have handed out on the left-hand side bottom. From this time, we have shown you the specific numbers as to the sensitivity. Please refer to it. Thank you.
Thank you.
Thank you. Next, from Nikkan Kogyo Shimbun, Ishikawa-san, ask your question.
Yes, this is Ishikawa. Can you hear me? With Nikkan Kogyo Shimbun, I have two questions. One is about unauthorized access. This is a big management challenge in the group. In the life insurance company, there was a possibility of a breach. What is the size or scope, and also what are the countermeasures? That is the first question.
Yes, I would like to respond to your first question. As you have pointed out, through the distributors of ORIX Life, information breach due to unauthorized access, and also for private equity investees, DHC and White Essence, B2C PE investees also experienced unauthorized access and data breach, unfortunately. For now, we do not recognize any material impact on the management, but we believe that appropriate measures need to be implemented. First of all, for the whole group, minimum security standard is already defined.
Whether or not this minimum standard is sufficient is reviewed and monitored on a regular basis so that it can be revised as needed. Also stopping the intrusion, detecting early, and minimizing damage, as well as recovering as quickly as possible. These are the measures that we need to implement thoroughly. Also, management of the vendors will also help us implement management and control. Thank you.
The Democrats really won in the election, and the data center-related policy could be changed. How is this going to impact your business or investment going to future?
Yes. AI data center-related exposure in the United States. Maybe environment energy would have a favorable environment, but either way, the exposure that we have is very much limited, and therefore, we do not expect a big impact from this.
Prices and the interest rates could impact our business, and in terms of interest rates, we do have mortgage business in the United States, where we have a relatively high sensitivity, and therefore, we will continue to monitor the macroeconomic trend closely. That is all from me. Thank you.
Thank you very much for the question. The next person, anyone who wants to ask the question, please depress the raise of the hand button. No questions? If there are no further questions, excuse me.
Just a second, please. Horiuchi-san from Bloomberg, allow me to unmute. I am Horiuchi from Bloomberg. I hope you can hear my voice okay. Yes, we can. Thank you for the opportunity. After the election in United States, equity market has declined pretty much. AI as well as semiconductor-related stocks, the stock price has declined. You will be affected, I'm sure, indirectly because of your exposure to KIOXIA. What will be the impact as a result of this share price decline? I am sure it is too early stage for you to determine what would be the impact, but especially after this intermediate election, do you have any impact that you foresee?
In short, that was for sure would be an impact that we would be receiving onto the KIOXIA shares. So far as our earnings is concerned, Toshiba's equity method earnings, in fact, is calculated as of November's share price. The impact, in fact, will be determined by this month. By three quarters, JPY 190 billion, on page 11, as you can see, is what we foresee, b ut as compared to end of September, the share price is even lower at this point in time. I think a larger impact will be given to us or to the shares. You see KIOXIA is held by Toshiba, which we own. So far as KIOXIA share is concerned, I think it is about 16% or so.
In terms of this large size holding that is reported officially, we have already proceeded to the divestment, and whether we would keep up the same pace or not is something that is uncontrollable. However, as a result of selling these shares, we will be able to mitigate the impact that is given by the shares fluctuation or the share price fluctuation. Of course, the global equity market is continuing to fluctuate, and of course, it would affect Robeco and other asset managers' earnings to the end of the year earnings result. That is our understanding. If I may add to what has been explained by our CEO, and if you could refer to the page that is projected right now. Just as being said by Takahashi, as of the third quarter, KIOXIA sale and the valuation gain, JPY 190 billion has been shown.
As of Friday last week, JPY 8,501 or so, as compared to the previous share price, it is a decline by JPY 9,600. Therefore, if you were to think about post-tax, about JPY 120 billion of our sale as well as valuation loss. Of course, we never know. It is outside of our control as to how the share price is going to fluctuate over time, b ut just to indicate where we are at. Thank you very much.
Any other questions? Nikkei newspaper, Kawase.
Yes, it's me again. Thank you. About the transport, I understand that Aircraft did very well. Can you please elaborate on the background of this performance?
First of all, with regard to aircraft.
Relatively young age aircraft are in the center of the situation of very tight supply-demand relationship. Through JOL and also investors, we sold aircraft and recorded gains on sales. The situation is very similar with our ships, vessels. Own ships are being sold. We are also shifting to asset management. This is the group-wide policy, which means that going forward, we will not just be simply selling fleets, but also we will be preparing funds. We are getting ready. We cannot share any details at this point in time today, but quite soon, we should be able to provide you with some kind of news release or announcement. Especially with regard to aircraft, we believe that this situation is likely to continue over the midterm, and therefore, we are bullish on aircraft. Also with ships, not just buying, selling used vessels, but also ordering new vessels to be manufactured.
That's what we do. We want to exert a presence within the market with these efforts.
I would like to add, Mr. Takahashi talked about how well the Aircraft business is doing within ORIX Group, but also Avolon Equity Fleet announced the quarterly results just the other day, and they have gained on sale of aircraft, and the earnings have gone up.
Any more questions from the media? Please press the raise of the hand button at the bottom of the Zoom screen if you have any questions. No more questions? There seems to be no further questions from the media. It is really earlier than scheduled, but we would like to conclude the Q&A session for the media. From here onwards, Tomioka of the IR department is going to proceed with the next section.
We would like to now invite the questions from the investors as well as the analysts. SMBC Nikko Securities, Muraki-san, please.
I am Muraki from SMBC Nikko. I have one question about the ROE. On page 30, on the right-hand side, adjusted ROE, your expectation for this year as well as the next year onwards, your expectation is what I want to know. The first half was JPY 4.5 trillion on average, that was, but KIOXIA's profit, I think you are targeting JPY 530 billion or so for the full year, and that is 11.7% if you were to take that into account. Just on and around 10% if you were to exclude ORIX Bank. What is your expectations as of now? 11.0% would be your forecast for the next year if we were to put that all together. What is going to be your expectations for the denominator as well as the numerator in calculating ROE?
On page 30, the numbers that we have shown here, this is really based on the first half actual result, and we have converted on an annual, it is calculated on an annualized basis. As you can see, this is the calculation that we have applied for KIOXIA as well. Throughout the year, the ROE for the full year, that is, inclusive of, we have to reflect the share price, but there are so many uncertainties that we cannot incorporate in the simulation as compared to end of September. If the trends as it is, I think the profit level would be much lower, so the ROE would be much lower than what is shown here on page 30. March 28 end, the ROE we target at is 11%. That is our target, as you know, as have been said.
The 28 March end and the 27 March end, the difference, if the share price is going to stabilize, and from Toshiba, if KIOXIA sales was to be divested further below 10%, then of course there will be further fluctuation, especially on the numerator side, that is. If the share price remains to be unchanged around the same as right now, then if we were to assume the current share price to remain to be the case, then 28 March end, the ROE, I think will be around the same as compared between the right and the left, but 11% originally would remain to be our target for the end of the year in any case. Well, adjusted ROE has been shown.
So the right-hand side adjusted ROE, it is not affected very much by a KIOXIA share price, but this is regarded to be your potential or kind of earnings power.
So 11.7% I think is a calculation that you would be able to arrive at. But on an adjusted basis, what is the percentage? And if you were to aspire to achieve 11%, or are you going to be aspiring to achieve 11% still?
Well, in terms of the potential earnings power, we have sold, of course, our banking subsidiary on the right-hand side. H ow you are going to perceive this is something that you have to think about, b ut I think the potential earnings power is a little lower than what you see.
11% is what we aim to achieve at the end of the fiscal period, and we would do our best for the remaining months in order to achieve the target that we set by to achieve.
Okay, thank you very much.
This is Takahashi. You know, at the beginning of November, to all the divisions and departments, I have sent out a message. So the budget for the next year, by following certain steps, we will go into the process of compiling the numbers for the end of the year. So please continue to watch over the development of this process that is now taking place at our company. Just as been shared by Yamada just now, after the fine-tuning, the adjustment, the ROE, we still do aim at achieving 11%, and that is remains to be unchanged for now.
So in other words, the process that we will be following will be in light of this target. Thank you.
Thank you very much. Morgan Stanley Securities, Takemura-san, please ask your question.
Yes, thank you. This is Takemura, Morgan Stanley, and I have one question about the current status of your investments. Slide number nine. For the first half, you have the actuals, JPY 340 billion, a nd at the end of Q1, I think this was about JPY 80 billion. So can you please explain the difference between the two numbers? That's my question. And looking at the projects executed, I see U.S. real estate as being the difference between Q1 and Q2, but I'm sure that there are others. AerFin, approximately JPY 100 billion. This is probably included in this number. That is my interpretation. So can you please explain the difference, the increase? And also for the full year, JPY 800 billion target, do you see still many attractive deals that you could invest into? What is your outlook? Thank you.
JPY 340 billion new investment in the first half, and the difference is approximately JPY 260 billion. It's actually quite evenly distributed in terms of which investments are made, not just one big piece. Some multifamily debt and also equity, we have entered into that segment in the U.S. real estate as well using balance sheet. We are doing equity investment, and a lso logistics facilities, we are investing actively in that area. We have a very aggressive plan for aircraft as well, and everything is progressing smoothly. Osaka IR is progressing according to plan as well. It' s evenly distributed across the board, f or the full year, we believe that the trend will not change in a large way. We will continue to focus on these important areas.
We understand that the variation is changing, so we have to be careful about investment, but we will continue our investment plan. Depending on the situation, for ships, Australian fleet business, for example, if we have an opportunity like that, we would be actively looking into those opportunities as well.
That is very clear. Thank you very much.
Thank you for the question. From JPMorgan, Mr. Sato-san, please.
I am Sato from JPMorgan. I think three months ago, you provided us with a communication. I think we have asked the question, what is the most challenged business, Elawan, Hilco, and the Greater China equity investment? Referring to the earnings result this time, you have carried out an impairment in China. Hilco, just for the quarter, you have generated some profit. In a renewed manner, let me ask the question with regard to the challenged businesses. What is your understanding as you stand right now? Any changes that have taken place over the past three months is my question.
Allow me to answer the question.
Just as you have shared, Elawan and Greater China and also United States, especially Hilco, these are the businesses that we— I think that is what we observed last time. Hilco, for this quarter, we did manage to at least break even, if not generating some profit. There are special activities. In other words, there was some asset divestment, and that had resulted in some profit generation. The fundamental part is still, there are no positive changes. There will be no kind of sanctity, so far as the actions that we may have to be taking. We would have a close communication with our U.S. business in deciding on what to be done. Capital solution, the pipeline for that, over the past 12 months or so, there was no kind of move whatsoever, but we are beginning to see some signs.
On a cost basis, the top line is beginning to show some positive turnaround. As for Greater China, on the other hand, in the prior quarter, yes, we have carried out some impairment, a small amount, this time as well. It is an equity method holding on a mark-to-market basis. The book value versus the market value, if there was to be any differences, we had to carry out the impairment. That is what it was. As for Greater China, again, we would not perceive anything to be sacred. We would step in and take any actions if necessary, and we would be reviewing the strategy, and that is why we may have to be posting some P&L accordingly. As for Elawan, asset allocation has not proceeded, and that is the biggest headache for us. The divestment, the plan has been constituted.
We want to accelerate the rotation, and we are working on the plan right now. If it starts to rotate in a positive way, I'm sure we will be able to enjoy some recovery.
Okay, thank you very much.
Thank you.
Thank you. Next, Watanabe-san, Daiwa Securities, please ask your question.
Yes, this is Watanabe, Daiwa Securities. Page 11, I have a question about guidance. Adjusted profit, JPY 17.5 billion higher. For the full year, according to best effort, how much will it be? At the end of December, once KIOXIA price is fixed, you should be able to have a clearer understanding about the profit. When do you think you can update us on this number?
Yes, adjusted profit target. I think that is the first question. Landing outlook. We do not have that yet. As we said in the previous quarter, JPY 530 billion was the estimate in the beginning of the year, and JPY 80 billion worth of KIOXIA equity-related profit was included. Net of that, it should be about JPY 450 billion. We are progressing. Sorry, JPY 480 billion, excuse me.
We are making steady progress toward that target. Also, in order to fill this gap, the difference, we are implementing multiple activities, and that is all we can share with you at this point in time. Going forward, we expect some updates, and as you said, KIOXIA share price is one big factor. At the end of December, we wanna see where the share price will be, and we would like to provide you with an update without much delay.
Before the third quarter earnings call, do you think you will make an announcement?
It depends on the situation. Depending on the situation, it may be possible, or at the very latest, we should be able to share this information when we do the Q3 earnings call.
That is very clear. Thank you.
The next person is from Nomura Securities. Sasaki-san, please.
I am Sasaki from Nomura Securities. Thank you very much for this opportunity. From the second half onwards, would you mind sharing your understanding of the earnings? On page five as well as page 11, adjusted profit, may I ask you the way of thinking? JPY 100 billion, and the first half and the second half expectation. About JPY 100 billion of an adjusted profit has been incorporated every quarter. In three months, the adjusted profit with the current run rate, is it correct? This January to March, what is your expectation in terms of the expansion that you foresee?
Well, thank you very much. Allow me to answer the question. Run rate of JPY 100 billion or not is something that I would not be able to say yes or no, b ecause simply put, if you were to build that JPY 100 billion each, then it would be close to JPY 530 billion. But in the first half, it tends to skew towards the first half. Whether the run rate is JPY 100 billion per quarter, I would not be able to conclude that it is the case. Please understand.
As for March 28 end, I would have to repeat the same. Whether the run rate is JPY 100 billion or not, it is dependent on KIOXIA as well, and also ORIX Bank's divestment was incorporated as well. There is some one-time gain that would have to be reflected. At this point in time, I would not be able to conclude anything in a crystal clear manner.
So in the next year then, if I could start conjuring up the image for the next year's earnings, so four times of the adjusted profit, how much more can you top up this JPY 530 billion of this year? How much more can you kind of build up on top of JPY 530 billion? Do you have your image or your idea? Please share us.
So from SMBC Nikko, I think Muraki-san had asked the question, and I had provided the response. We are working on the planning process right now. So just talking about the base, JPY 100 billion times four. So JPY 400 billion for four quarters. Maybe slightly higher than that, but that is just the rough image, b ut in addition to that, the recurring divestment, but the private equity, real estate-related sales, it is dependent on what we are to incorporate. The pluses and minus may differ in accordance with that.
It is, again, you know, something that we need to specify in the plan that we are working on right now. So if you could give us a little more time. So ROE of 11%, it is not that we have decided to pull down the flag of this 11% of ROE. So we would try to, of course, continue to grow our businesses. Therefore, please know that that is the target that remains unchanged.
Okay, thank you very much.
Thank you very much. Next, Sakamaki-san, Mizuho Securities, please ask your question.
Yes, this is Sakamaki, Mizuho Securities. I have a question, just one. Page nine, capital recycling. Second half cash in flow, JPY 1.2 trillion is the remaining target. So where do you think this will happen? And also, leading up to the second half, where do you need to de-risk in terms of asset assessment in Greater China because of the market price changes? Maybe in the first half, you had to behave passively, but in Greater China and others, are there any areas you should be de-risking intentionally? Thank you.
For capital recovery, leading up to the second half, there are some Aircraft as well as ships, capital recycling that will be happening. So that is one way of recovery.
As I mentioned before, in the U.S. as well as in China, we will be reviewing our businesses and assets, and we may make some strategic decisions depending on the situation, and that is another way of recovery that is baked into this to some extent. That is the background. As far as the risk is concerned, of course, this is very much related. As interest rate goes up in the U.S., what is the exposure that we should be having? That's one. And also, in Greater China, we have longstanding investments. So for those ones with long durations, which one is core versus non-core, we should discern the differences and think about the risks accordingly.
Thank you. I have a follow-up question. PE investees in the U.S., you still have two of them still on the list, still remaining.
Now, PE exit, what is expectation for the remaining two projects? You have already shared with us some expectation about the profit.
PE profit from Network Connex is very exceptional, and for the other two, we do not expect that to be at the same magnitude.
I understand. Thank you.
Thank you for the question. Next is from BofA Securities, Tsujino-san, over to you.
Thank you for the opportunity. First of all, this impairment in Greater China, how much has it fallen? The remaining amount or the outstanding balance is how much? What was your decision behind this impairment? If you could be so kind enough to share us further details of this. Also, NXT Capital, there is a balance sheet risk, I understand. The AI data center, for example, the exposures that you may have concerns for, how much would that be?
Allow me to answer to the question. First of all, with regard to Greater China, for this quarter, the impairment we have posted. It is an equity method company that is public, and the market value versus the book value, there is more than 30% of discrepancy, and that would have to be the case for the impairment.
Impairment had to follow such a rule. That's what it is, so far as the Greater China is concerned. On the other hand, in Greater China, not just limited to listed entity that we invest in, even for non-public or anything that has no market value, the investment that we have made to equity or some the leasing of the equity and fixed income. We are, in fact, reviewing our strategy for that. Hopefully, that would lead to a strategic action on our part, and whether it would result in profit or loss is what we have to watch over the development for. With regard to NXT Capital, lower middle market in United States, in the LBO, the senior loan portion, that is the ABD portion.
Huge kind of data center or AI-related, it is outside of the scope of our main target, whether it is for the better or worse. Currently, it may be for the better, but that's where we are. If I may add to what has been shared, in the second quarter, JPY 40 billion of impairment in Greater China, vast majority of this. China Water Affairs, there is a listed company which we have our holding on equity method, and just as been said by Yamada, based on the impairment rule, we have just followed the rule and impaired the portion. Thank you.
In that case, the Greater China, the non-public equity, as well as loans, I do not know whether it can be recognized to be a budget. You did not decide to go further than where you have done, because you do have certain concerns, right?
Well, on the budget basis, we don't really take into account, so far as the budget is concerned. In coming up with the projection for the next year, we would either impair or appropriate some reserves, I mean, provisions for the anticipated losses. We would just treat it accordingly, in accordance with the accounting rule.
Can you not give us any kind of indication as to the extent?
Well, at this point in time, we have no idea, to be honest. I do not know whether I am answering to your question in the right way, but we would have to just wait for how it would unfold.
Okay, understood. Thank you so much.
Thank you. UBS Securities, Niwa-san, please ask your question.
Yes, this is Niwa speaking. This is not about the earnings, but Tsujino-san asked about data center. I would like to ask a question as well. Both in Japan and outside of Japan, data center has become an asset class, and ORIX has discerning capabilities, not just for real estates, including semiconductor-related. That is our estimation. How attractive is data center as an investment project from your perspective, or is it not attractive? Is it the price factor that is kind of stopping you from investing, or are you waiting for the market to mature and expand? How do you define attractive asset class for ORIX, in other words?
Lender or provider of that capital, from that position, especially for ORIX USA, we do have exposure in this segment. For Japan, within Japan, you are correct.
Logistic warehouse development and also renewable energy development is something that we do. We have capability to develop the core to some extent. ORIX Real Estate, for example, has a secured logistics land, and that could be converted into a data center, and that is a possibility that we are investigating. At ORIX Rentec, computing power, GPU lending is also another possibility that we are pursuing. However, relatively speaking, I would say that we are behind other players. I think we have to be honest about that. Mid to long term, what would happen to the demand for AI and data center? Well, if the assumption is that they will continue to grow robustly, then over the mid to long term, our slow move is not necessarily too slow. We can catch up going forward. We want to clearly analyze where our strengths lie and respond appropriately.
I know that I'm not giving a straightforward answer, and my answer is quite abstract, but that is all from me. Thank you.
Thank you. If you could comment on the following. In Japan, how do you decide whether or not to accelerate this business segment? What would be the trigger?
Well, this is not limited to Japan, but the most difficult thing is to think about not just land, but also power capacity. There is only a limited number of locations where these things can build. This is the bottleneck. Therefore, some kind of policy support would be needed. If the policy turns out to be supportive, then there would be investment opportunities, more opportunities, not just for us, but for all the players.
I see. Thank you. That was very informative.
Thank you so much. The next person is from SBI Securities. Otsuka-san, over to you.
Hi, I'm Otsuka from SBI Securities. I hope you can hear my voice okay.
Yes, we can.
On page 24, ORIX USA, this is the question. With regard to the profit level that you foresee, in the middle, the segment profit that we see for this year, the pink PE is JPY 331 million of profit. The asset is on the decline, but there are some remaining, and the profit, the generation from the asset is limited, you said. This JPY 1 million, this may perhaps be not existent, but we foresee some profit, and Hilco Real Estate is not contributing to profit generation. From next year onwards, how do I foresee your profit trend to be?
From Takahashi, allow me to answer the question. The right-hand side bar chart, segment assets, JPY 12 billion or so.
It has expanded as a result of Hilco's acquisition, but the profit level of JPY 3 million or so is to be targeted, was or is our immediate target, I suppose. Just referring to the first half, we have already achieved the level. In the explanation of the first half result, ORIX Capital Partners, certain names, divestment had contributed greatly. If we were to exclude that, the middle of the left-hand side, on the segment profit side, you can see a dark blue as well as pale blue part, and no colors advisory and the investment is investor Hilco. The core profit, JPY 200 million, JPY 2 million, JPY 3 million, and ROA of 3%. We would like to reconfigure or restructure the portfolio is our immediate challenge.
If I may add, the focus of U.S. is three areas, and I may have mentioned this in the previous quarter as well. NXT Capital's direct lending, and we mentioned earlier, the fund, we are forming a new fund. We think that we will be able to recoup some profit from there. Capital solution for Hilco, inclusive of liquidation, as of now, there seems to be a sign of a pickup recently. In the next 12 months, 24 months, we hope to see the trend becoming a little more refreshed. The third is real estate. If I could repeat myself, multifamily's equity is the area that we have entered. We are trying to build up the balance as of now. We hope that those will be the contributing factor for the earnings.
What has been shared by Yamada-san just now? I think that there is no reflection onto the numbers that we foresee. This is something that we can foresee going forward. Yes, for sure, that is the focus area. Multi-family equity, for example, we are trying to build up the balance and the Hilco as well. We can start to see, or we have started to see the signs of a turnaround. NXT as well, we have raised the fund as well. These are some of the expectations that we have.
In terms of the timeline, from the outside of ORIX, I feel that you said 3% of a target. It may take a little while until you can achieve such a target. What is your understanding so far as the timeline is concerned?
As soon as possible, that would be better for sure.
I would, to be honest, two to three years from now.
Okay, thank you very much. Thank you.
Thank you. The floor is open for questions. If you have a question, please press the raise-the-hand button at the bottom of the screen. JPMorgan Securities, Sato-san, please ask your question.
Thank you. This is my second round. Muraki-san asked a question, and you responded, but I did not quite understand that response, the answer. Can we go back to ROE for next fiscal year once again, your view on ROE? You say adjusted. This fiscal year, volatility is high, and that is why you are using this reference number. That is my understanding. Next fiscal year, you have the 11% target. You are not necessarily saying that 11% after adjustment? I want some clarification, especially for equity increase. What is your response on page 29, for example?
Share buyback, ROE 11% is the focus, and you will be doing a share buyback dynamically depending on the situation a nd on cumulative basis, you would have a profit and loss coming from KIOXIA shares. Is that going to be included in the equity trimming scope or not? That will change the picture. That will change the situation. Can you please provide some additional explanation?
Yes, I would like to respond. It is very difficult to give you a straightforward answer because according to the page that you are referring to, the ROE page 30, I believe. Again, on the left-hand side, we have the usual formula, which results in 35.8%, and then adjusted ROE of 14.1%. There is a huge gap between the two. Again, the assumption is that this is an annualized number based on the performance, actual performance of the first half.
KIOXIA's share price is trending at a certain level, and based on that, the profit and equity, the numerator number is bigger because of that. As of last Friday and as of today, if you look at the share price, this gap, even for this fiscal year, is smaller than what you see. For 28 March fiscal year end, if the number trends steadily around this level, then the gap for the denominator is not that big, and also the numerator difference is also not so big. I f the share price fluctuates again and goes back to the end of September price, then it would come back to the number that you see on this slide. In other words, the gap will be bigger. I apologize, I cannot give you a straightforward answer because everything is dictated by the KIOXIA share price trend.
We want to look at the KIOXIA share price at the end of December in order to figure this whole thing out and then report back to you. As far as timing is concerned, at the very least, at the Q3 earnings call, we would like to tell you about the 11% March end 2028. Based on that, and what are the numbers that we are using and what the indices will be following, I would like to share, we would like to share all of that at that timing.
I would like to add, if I may.
Yes, please.
Non-cash loss on evaluation, I think there are other things as well if you look at the details. If I am to give you as straight an answer as possible, KIOXIA volatility is too high, and also impact on a consolidated performance is too big.
This is why we introduced the adjusted ROE concept in the first quarter of the fiscal year. Having said all that, non-GAAP financial indices to be used as target is not necessarily ideal. That is how we are thinking. As long as the current trend continues, as long as the current trend persists, Toshiba will be dribbling down on KIOXIA shares, and over time, in line with that, volatility impact on our performance should also get smaller. Allow us to have some more time to understand the overall trend and then decide which indices we will target. Also for the numerator, net profit. This actually relates to the dividend payout, and inclusive of that, please give us some more time to deliberate on this a little bit further.
As Yamada has already explained, after the new year beginning, by the time we do the third quarter earnings call, including the outlook for the full year, we are hoping that we will be able to provide you with an answer. That is all from me. Thank you.
Understand. Thank you very much.
Thank you for the question. We see no hands, so I would like to conclude the session for now. I would like to invite our CEO, Takahashi, to give us the closing remarks.
I think there was a lot of concentration on one particular topic so far as the Q&A is concerned. KIOXIA's sale and valuation, both gain and loss, in fact, is one of the hardest topics. I am very sorry we were unable to give a straightforward answer to the question, but because I really want you to focus on the base profit. For sure, what we can do is to continue to grow this base profit and to strengthen our potential in profit generation power. If that strengthens, then we will be able to carry out this capital recycling and add to the base profit any gains on sales.
We would like to take a step-by-step approach in those executions. I would seek for your continued support, and please watch over the development of our businesses. Thank you very much. 2027's March end, the second quarter earnings briefing, we would like to conclude the session. Thank you all very much for joining us despite your busy schedule and right through to the end. Thank you so much.