Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for first quarter consolidated financial results for the three-month period ended June 30, 2019. The Attendee today is Executive Officer, Head of Treasury and Accounting Headquarters, Mr. Yano. Mr. Yano will give you a presentation on the first quarter financial results for about 20 minutes, and we will move to a Q&A session. The whole conference will take about an hour. At this time, I'd like to turn the call over to Mr. Yano. Please go ahead.

So this is Yano from Treasury and Accounting Headquarters. Thank you very much for your participation to this teleconference in spite of your busy schedule. So let us get started without further ado on the first quarter results of fiscal period of 2020 March end. Although the explanation was to be 20 minutes as being explained by the operator, but -- we'll be spending a little more than 20 minutes. Please refer to the second page of the deck that we have handed out to you, Overview Net Income and ROE. As you can see, fiscal year 2020 March end, the first quarter net income was down by 13% Y-o-Y and at ¥69.2 billion. Annualized ROE was 9.6%, which was below the midterm management target of 11%. However, as seen on the chart on the right-hand side of the same page, ROE tends to fluctuate from quarter-to-quarter, affected by the timing of capital gain generation and for other reasons. Please turn to the next page. The page shows the breakdown of pretax net profit. In order to facilitate for the better understanding of the growth of ORIX, especially from a long-term perspective, we have applied a new way of showing the trend of our performance. The left-hand side chart shows the trend of pretax net profit for the past five years. The dark blue part of the bar chart shows the segment profit excluding gains on sales. By referring to this bar chart, you can see that the segment profit excluding the gains on sales have been growing steadily over the past five years. Moreover, for the first quarter, from the new investments we made in NXT Capital in the prior year that is as well as Avolon, we managed to generate profit, which contributed to the growth of our…

[Operator Instructions] Mr. Muraki from Deutsche Securities.

I have two questions. So on Page 3, the summary for business performance, the slide, so the gains on sales of ¥27.8 billion was a so-so level, I think, was expressed by Mr. Yano. But the tax rate, in fact, is going to be stable this year. So I don't think you will be able to achieve what you have been able to in the prior year. So it is not a so-so level, but the gain on sales can be expected from here down the road? So this is what I want to confirm with you as at the end of the first quarter. And actually, the second question, the Overseas Business, especially dollar-denominated assets as well as liabilities. So the Overseas Businesses, the installment loans, in fact, had increased this time around, I believe. And according to the slide, Page 31, to the right-hand side, so the foreign currency procurement has been indicated through the pie chart, and I think there seems to be an increase in the total amount. So would you mind helping us to better understand this?

Thank you for your question. As to the gains on sales, as you have pointed out, this time, if it was not for the deferred tax assets -- we would not be able to grow if it was not for the large amount of gains on sales. So, so far -- so this is why -- that is awareness. And as to the Real Estate disposition and also, at the same time, living -- I mean by ORIX Living, these are elderly home care -- home for -- care home for elderly people, and we were considering to dispose those kind of assets. And I think we can be sure of a certain amount of gains on sales that could be generated this year as well. So we hope to grow the amount of gains on sales. But whether it is -- I don't know whether I can go as far as explaining it to be something that is ample and quite substantial, but for sure, we'll be able to generate more than we have done so in the first quarter. As for the dollar-denominated assets and liabilities, the U.S. businesses, in fact, is growing pretty much, and this is why it is expanding, this part. But in Asia, there was a large amount of loan that we have extended, and this is why we have a rise in the outstanding amount of loans. And so those are denominated -- or rather, foreign currency-denominated costs -- or denomination costs. In fact, this has only increased still. However, I think it should kind of settle down from here down the road.

The interest rate on a dollar-denominated basis, if it is to be hiked or if it is to shift towards -- upward, what kind of implication would it be for ORIX?

I have to be honest. So there are about 2,000 units in terms of the mismatch. So you see, we are, of course, keeping the mismatch to the minimum as much as possible, this is. That has been the explanation. So there are about ¥200 billion worth of mismatch. So therefore, if the interest rate starts to fall in United States, this would be positive for us. This is our interpretation.

As to that final point, in terms of the mismatch, this is not a duration mismatch. But do you mean by mismatch between the floating interest rate versus fixed? Is that what you mean?

Yes, exactly. And of course, if you were to go into the details of the duration, of course, it is pretty much mixed. But on a P&L basis, I think that's how -- I just wanted to express. And yes, that is a correct understanding between floating versus fixed. You see, in United States, there seems to be a direction to lower the interest rate.

And if that is going to be the case, up until now, the floating rate, I think you have been building up the loan portfolio to that end. But from here down the road, are you going to stick to the skew towards disclosing? Or would you be perhaps shifting or making a change or rebalancing your portfolio towards fixed, like corporate bonds, for example? So is there any kind of changes to your policy due to an interest rate lowering environment?

It is not that we, in fact, bet on the interest rate trend, but rather, municipal bond or corporate bond, you see it is very much dependent on how it goes well with the projects -- different projects. So it's not that interest rate -- just because interest rate is going to be lowered, we are not going to be changing the large portion of our portfolio. So if we were to talk about municipal bonds, we do have some long-term municipal bond, so it is, in fact, pushing up the long-term end. However, from an interest rate perspective, we do not intend to change our management policy, that is.

Next question is from Mr. Watanabe, Daiwa Securities.

I am Watanabe. I have two questions. The first question is about asset sale proceeds. This is overlapping with the previous question. For the first quarter, it was low. At the beginning of the fiscal year, your had certain assumption on the pipeline. Has there been any changes to your assumption? From the second quarter, I suppose that you have major large assets sale you're planning to do. Were you intentionally reducing the amount of asset sales in the first quarter? In the medium-term strategic direction update, in Q2 -- next meeting, are you saying that you are changing the KPI itself? Or are you going to revise the targets for different KPIs? Which is the case? And also, on Page 5, there were some equity ratio. The end of June figure is disclosed. What is the intention behind the disclosure of this figure?

Regarding the asset sales profit -- proceeds, to be honest with you, for the major items, so far, it is difficult for us to make any comments on our plans at this time -- point because there are different possibilities. Of course, in real assets, there are certain expectations already, but for other areas as well, we are thinking about some projects. But so far, whether they materialize or not is not something we can comment on at this point in time. So now for the regular items, we have some items in Real Estate and real estate -- really, the living item as well. And also, PE exits, we are thinking about them. So we would like to just execute them one by one. Sorry, that's all the comments I can give. For the second quarter question, because of the nature of the question, we just have to tell you that we can answer your question only in Q2. But including those possibilities, as for the future direction, we are internally discussing them. Of course, in Q1, we thought that, that would be the question that you might ask. But sorry to tell you this, but you have to wait for another 3 months when we can give you a more specific direction and we can talk more specifically about our plans for shareholder returns. So sorry, I'd like to ask for a little patience. There is some other question you asked related to this.

Yes. On Page 5, there was an equities employment -- employed capital ratio you disclosed on Page 5.

Yes. To a certain extent, risks are important factors for us. Therefore, sometimes -- you asked us a lot about D/E ratio but we are not simply looking at the D/E ratio. We are looking at different aspects because of the changes in business nature and we have to tightly control the risks in the transition stage. That's why we are giving focus on this number. It's not only for the end of the year or the interim period we have to show this figure. We thought that we should show these figures every time. That's why, for the first quarter, on the BS, the dividend has declined dramatically and the interest rates are changing, so the equity has not grown so much. That's why this was kept flat.

Mitsubishi UFJ Morgan Stanley, Tsujino-san.

This time, so the profit excluding capital gains, in fact, is up, was your explanation. However, like maintenance leasing...

I think, sorry, we are finding it difficult to hear you.

How about this?

Yes, that is better. Thank you.

So profit excluding capital gains, in fact, is increasing, which we can understand on a longer trend. But the maintenance fees or corporate financial services, I think, is on the decline. And also, Environment and Energy is also on a downward trend, I believe. So for -- but capital gain, you would have to make up for the shortcoming. Is that what you're thinking? Or -- so the first question is with regard to what your expectation is. And referring to the material, this time around, information, it is not just the service income, but you, in fact, indicate the level of expectations for the capital gain. And the next year -- I suppose it's the same for this year. But that -- could it be the case for the next year as well? Because you -- [CUTL], the new group will be introduced in the next year. So would there be some negative implications, which means that you may have to build up more capital gain? I think this kind of trend is likely to persist. So you said that you have updated this time, but you see a decline in dividend, and that is something that investors are particularly sensitive about nowadays. So including that, may I take it that -- would you be incorporating this in the calculation of ROE as well?

So I think my answer to the second part of your question is yes. I think I would have to say that. But starting from the first question. For sure, if you were to refer to the information, the Corporate Financial Services, the profit is down. Maintenance Leasing, also, the profit is down. That is the case. And also, Environment and Energy as well. But from the full year business performance, by separating or breaking down into 16 different units, I think you can have a better understanding of our overall picture of the matter. But after all, it's a business portfolio, so therefore, some businesses are up while the others are down. And so we try to capture the harvest, and we try to enjoy the harvest. And of course, you see there may be some other times when there will be certain seasonality from harvesting of certain businesses. So in the Corporate Financial Services, would we be able to recover the business in the future or not? If that is your question, unfortunately, we will not be able to give you a specific timing as to the recovery that is -- that can be expected. So of course, for sure, we would continue to remain to be active and try to -- in the business operations and, thereby, increasing the profit wherever possible. So excluding the gains on sales -- so this is the reason why that excluding gains on sales, we have been able to enjoy a steady growth of our segment. That comes from segment profit, but of course, there will be ups and downs over time. But overall, we would like to have a good control over the total businesses. And for this reason, overall -- so you may ask us the question, so is it really okay, the overall trend line? And what would happen to the dividend payout, you may wonder, of course, as has been asked by your question. So at this point in time, I will not be able to share with you the precise intent on our part. But in the second quarter, we would like to address your question in a more precise manner. I'm sorry whether I have answered your question or not.

Well, after all -- I'm sorry to have asked so many negative factors, but in the Overseas Businesses, I know that you have managed to decrease the SG&A. And Asia, Hong Kong, the disposition of the assets may amount to somewhere around ¥7 billion as well, I suppose. So as a result of reducing the expenses, is it something that is sustainable? If you could help me understand.

So as to the SG&A in the overseas, there are some positives that is enjoyed in some of the markets, whereas some negatives in some of the markets. But overall, we are trying to revisit the expense incurrence. But ORIX Europe, for example, Robeco's AUM, the personnel cost, HR costs, dependent on the profit generation, that would, of course, fluctuate, the level of bonus payout. So that would affect the overall business performance as well and SG&A, more specifically. So the asset management side of our business and other, of course, administration cost, we would like to change many of the fixed cost to that of the variable cost. But overall overseas, Asia business is recovering, and in Asia, we have been able to generate quite a sizable amount of gains on sales. So I think it is trending, I think, okay in general.

Next?

This is Sakamaki from Nomura Securities. I have two questions. The first is about overview 2, excluding segment profit. For Avolon and NXT, what was the exact -- the contribution from those 2 entities in overseas, Avolon and NXT? The total is shown to be ¥5.2 billion. And what is the breakdown? Excluding the segment profit and capital gain, how much was the contribution from them? Second is the corporate finance. The agent premium for life insurance business has gone down. Is this trend going to continue going forward, agency is down?

Regarding NXT and Avolon, please look at Page 12. For Overseas Business, the numbers are shown. For NXT, it is ¥2.3 billion, and Avolon is ¥3.2 billion. So this was exact contribution profit from them, and this is included in the noncapital gain. So the total is ¥5 billion -- ¥5.5 billion. That's the contribution profit from NXT and Avolon. Regarding the Corporate Financial Services business, as I mentioned earlier, the benefit of ORIX is that we can look at the timing and quickly come up with a product that is needed by the market. Several years ago, we have started selling the solar panel, which contributed a lot to the profit. And last year, we sold the life insurance business, which was quite significant. But now this is being hold -- put on a hold. So how long does -- is it going to continue, and can we come out with the new products to cover up for the loss? I can't comment on the exact time line yet. However, for the life insurance as well, sooner or later, we can figure out what is needed and what is not needed in the market. Then, we can be -- go aggressive once again. We can't just leave it as it is, so we have to come up with new products as well. There are other products as well, like brokerage business of real estate, which is growing as well. Of course, we have to make a recovery in this business. We are aware of that. And if I could say once again, depending on the timing, we have the capability to find exactly what is needed by the market. So that is something that we like to do this time again.

From Merrill Lynch, Sasaki-san.

So this is Sasaki from Merrill Lynch. On Page 13, the third box, I have 2 questions. So at the time of full year business performance explanation, Mr. Inoue has said about the repurchase of your shares. I thought that he was going to share with us your policy. So in the midterm business plan, I think you're going to be incorporating this idea as at the time of interim result announcement. So is it that you're going to be revisiting the midterm business plan and you're now going to be sharing this at the time of the full year business performance information session?

Let me again answer to that question then, that part of the question. From that perspective, so at the time of -- yes, for sure, Mr. Inoue had said he's sharing his policy about the shares repurchase at the time of full year business performance information provision. And he -- what -- so as a conclusion, so inclusive of repurchase program, the total shareholders return policy is going to be shared at the time of the second quarter result announcement, and we are discussing vigorously as to the updating of the policy. So we're going to be updating on the policy. It's not that we're going to be making changes right now, but we are -- the discussion is ongoing.

The second question. So whenever you come up with the business plan, inclusive of midterm management plan, you may start from year-end and then you would share the new plan in the new year. But in revisiting the plan, I think you're spending more time than usual, it seems. Does that mean that there's going to be a major decision to be made? Why are you taking more time than usual in putting together the plan this time?

Well, as to the revision of the plan, of course, we are constantly discussing over the topic of the business plan, management plan, and so we're just sharing with you where we are at. So this is something -- business as usual for us. So it's just that we wanted to be quite transparent as to where we are at to the investors this time around. So to be honest with you, for the first quarter, so we could have -- so we thought that it was not a good idea for us not to share any of our idea as to the shareholders policy. But just so that you know that we are going to be making an announcement at the time of the second quarter end. So does that make any sense?

Well, you see just because Mr. Inoue had mentioned about the shareholders -- shares repurchase, so you felt the need as IR -- the Head of IR to fill the obligation, to be disclosing the current work in progress.

Yes, that's what it is exactly.

So -- and some other thing. So we are constantly revisiting the whole thing in any case. And if you could update from a shareholder's perspective, I think that would be very helpful because, you see, anything that you make an announcement for doesn't necessarily bring about positive results so far to the share price so....

Next question is from Citigroup, Niwa-san.

Regarding expenses and investments, could you give us some more details? Regarding the expenses, in the presentation material, Page 23, there were SG&A information. Compared with the last year, there was an increase of about 6%. What is the background behind this increase? By segment, it seems that the investment -- future investment, you have mentioned some of the specific reasons. But despite the slow growth in profit, how much are you expecting wherever you can reduce SG&A? Is there any item you can reduce for the rest of this fiscal year? That's my first question. The second question is about the execution of the investments. In the first quarter, how much was spent on what kind of investees in the first quarter? And regarding the full year pipeline, how much progress have you made so far vis-à-vis the full year pipeline?

Thank you very much for your question. Regarding SG&A, overall numbers are quite complex and some are misleading. For example, NXT Capital investment may go up, and that means that SG&A will go up. And Cornes AG goes up, and then SG&A goes up. And so there are some differences depending on the item. So I can't make you a general comment. In ORIX Europe, as I said, the bonus payment is declining, and this is another item. So I can't give you a general comment. But for SG&A, this is something that we are carefully monitoring, especially in Japan, as was pointed out earlier. Sales-related and the maintenance-related business in Japan, we'd like to have a close monitoring going forward. But for SG&A expenses, if I -- I don't want to go into the details here, but there were some changes in lease accounting standards. There were 2 One is operating lease accounting standard change. We are a lessee, and we are borrowing some property and build the -- building and lease. And also, sometimes, we lease the land and set up the solar panels to do the power generation business. So for those land leased on a long time, we have put this onto the balance, so this is more than ¥200 billion increase in on-balance-sheet investments. And also regarding SG&A, in the past, we were calling this item initial direct costs. When it comes to the lease acquisition, there are some expenses incurred, and this could be deferred during the lease period. But this is no longer the case. It's not acceptable anymore. It's not a big amount, but in Japan, there is an impact of about more than ¥1 billion. This represent an increase in SG&A. So because of this, for the domestic financial services and maintenance lease, there was a negative impact from this. So that was some of the detailed items. But anyways, we would like to have a close monitoring over SG&A expenses going forward. I hope I answered your questions.

How about the investment execution?

Okay. For investments, to be frank, for the first quarter, there was not a major item. Of course, on a day-to-day basis, we are looking at different items; for example, reshuffling of securities investments. This is included in investments so the amount go up and down, but nothing major that we have to tell investors about. But investments of a certain size, like a PE investment in Japan and so forth, there are several in the pipeline, and also in overseas, there are medium-sized investments up and coming in our pipeline. Therefore, the question is -- how much we are including in this fiscal year is the question, but we can't give any specific comments on those. So we're going to make a press release whenever they are materialized. But as we did last year, we would like to proactively promote investments this year, but we are keenly aware of the pricing because of the environment. So wherever the pricing is still high, we will not invest. So we are trying to keep the discipline that -- while we aggressively invest.

Regarding the -- what you said last, you said that there are uncertainties about the economic outlook. In terms of the business investment execution, last year, the amount exceeded ¥1 trillion. Are you thinking in line with this amount? Or are you trying to reduce compared with last year?

Well, the pricing of those assets are still very high. Therefore, whatever is available on market are the ones which are very difficult for us to buy, although there are a lot of offerings to us. But our stance is to keep a cautious stance.

From JPMorgan.

Otsuka is my name from JPMorgan. So I'm sorry to repeat the questions that was addressed to you already, but just to avoid the confusion. On Page 3, in the summary, in bracket 2, the dark blue, second -- so segment profit excluding gains on sales for the first quarter as compared to the prior year, I think you only managed to grow by ¥300 million. But in the second quarter, third quarter, it starts to build up so that, as being shown on this page, you'll be able to enjoy a steady growth. This is the first question. So if you could answer to the first question.

Yes. That is our expectation. But how far can we grow this amount of profit by the end of the year, we are yet to know. But for sure, we would like to increase. So it is only about ¥300 million as being mentioned by yourself, so it is not enough to outspokenly say that it was quite high.

So of course, there was NXT Capital investment. I understand that there was some impairment included -- incorporated for the domestic sales or maintenance, for example. As compared to the prior year, it was on the decline. So the new investment versus the existing businesses -- or the existing businesses were covered up -- the shortcoming was covered up by the new investments. And on Page 14, the midterm direction, I think you have given us the update -- on Page 13, that is. So as a result of this question, on Page 15, would it -- it could be a case whereby you have not made any changes to the KPIs that are shown on Page 15. I'm not asking you whether you're going to be changing it or not. The reason why you're making the mention of this, can you kindly tell us the reason why? Because it's been a year since this midterm management had -- plan had been launched, so like the growth on an annual basis of the profit or ROE. Is there any major changes to the business environment that propels you to make changes to these KPIs? I wonder why, at this point in time, you're mentioning the fact that you're revisiting the midterm management plan.

As of now -- I'm sorry but I would have to say that this is all I can say for now. It's just that we are revisiting the management -- the midterm management plan, which may result in changing this KPI or not changing this KPI. So it could be one or the other. And so at the time of the FY end result announcement -- from where that was, there are some, of course, conflicts between the achievement of these different sets of KPI, of course, and how much of an investment activity is to be pursued. Of course, we are, for sure, going to continue on with our investment activities in order to continue to grow our business. But to what extent, how much, at what point in time is, of course, yet to be known. So as of now, as we stand, it's just that we want to share our way of thinking and the direction as at the second quarter.

So as you have said, from the time of putting together this midterm management plan, I thought that it was, "Oh no, there's changes in the environment and so on and so forth," right? So this contradiction -- the conflict between different KPIs, I think, was known already.

Of course. We want to, of course, keep the health conditions of our businesses while, of course, growing our businesses. And of course, we knew that there was certain conflicts between different KPIs, for sure, at the time when we do -- did put together this plan. But of course, knowing that, we want to continue to revisit the whole thing.

While you knew about the conflict and you have started to go and operate your businesses under this plan, but it looks as if you're -- you feel the need to change -- bring about changes.

Well, in a sense, yes.

Next question.

I'm Sato from Mizuho Securities. I have two questions. The first one is related to maintenance lease. This time, SG&A has gone up. After Q2, is this going to -- trend going to continue? Or is it going to go back to the normal trend? For the gain from the sale of used cars, you said there was an increase year-on-year despite a very difficult environment which is going on. Are you hitting the bottom at the moment? Second question is global theme. Are you going to stick to your target of increased earnings -- or the net income, I mean? How important is it?

For the maintenance lease, as I said, there was a change in the accounting standards. And also, in the maintenance business, there were different burdens from the service fees. Because of those, the SG&A is on an uptrend. Of course, we would like to take actions towards that, but this fiscal year, please consider that the SG&A will be going up year-on-year. And regarding the sale of used cars, yes, we are hitting bottom to a certain extent. To be honest with you, it is very difficult market to foresee the future trend because it can be affected by many different reasons and factors. Overall, we are not living in a world where the cars are selling like pancakes. And therefore, I can't tell you when exactly we can recover the gain from sale of used cars. But for RV, we have a cautious stance, so we can adjust the gain from sale of assets to that level. So that's my first -- my answer to the first question. And regarding the second question, if I answer your question, I would be predicting the future, so it's very difficult to answer your question. But to your question, I can say that there are several different assets with unrealized profits. So if we are to make profits for a single year, it is quite easy for us to do so. For such a company, what is the direction for this fiscal year is the question, I think, and this is the important point that we have to make a decision on. Did I answer your questions?

Well, yes. Sorry for the difficult questions.

[Operator Instructions] There are no more questions. Mr. Yano, please go ahead.

Some final remarks from Mr. Yano. This is Yano again. Thank you very much for your participation in spite of your busy schedule. And so I have been answering to your questions so far, and that's where we are at. And we would just have to continue to exert effort so that we'd be able to present a good result in the second quarter.

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