Good evening, ladies and gentlemen. Thank you for joining this telephone conference of ORIX Corporation for third quarter consolidated financial results for the nine months period ended December 31, 2019. The attendees at today's conference are Executive Officer, Head of Treasury and Accounting Headquarter, Mr. Yano. Mr. Yano will give you a presentation on the third quarter financial results for about 15 minutes and we will move to a Q&A session. The whole conference would take about an hour. At this time, I'd like to turn the call over to Mr. Yano. Please go ahead.

Good afternoon, ladies and gentlemen. I am Yano from treasury and accounting headquarters. I'd like to thank you all for your participation to this telephone conference. Thank you very much. So, without further ado, we'd like to get started with the third quarter consolidated financial results presentation of ORIX for the nine-month period ended December 31, 2019. Please refer to the second page. So, as for the third quarter, the net income grew by 3.4% year-on-year at ¥244.3 billion. Annualized ROE was 11%. The progress year-to-date against a net profit target of ¥300 billion is now at 81%, progressing nicely. However, due to the market uncertainty, we are not planning to revise the full-year target of ¥300 billion as of now. Please move on to the next page. Let me now inform you the breakdown of segment profits. Please refer to the bar chart on the. This shows the trend of segment profits for the first five years. Pale blue shows that gains on sales while darker blue shows the profits other gains on sales. So, the profit other than gains on sales, in fact, has been growing steadily over the past five years. The two bar charts in the middle compares the year-to-date third quarter profits between the two years. Profit other than gains on sales grew steadily 7% Y-o-Y at ¥238.5 billion. Contributions came mainly from NXT Capital, as well as Avolon, the investment we made in the prior-year. Now, over to profit from gains on sales. In the third quarter, on a year-to-date basis, it grew from ¥75.3 billion in the prior year to ¥114.5 billion, a sharp growth of 52%. In addition to the sales of ORIX Living and Houlihan Lokey, we posted gains on sales from private equity investments in Investment and Operation segment as…

Thank you, Mr. Yano. [Operator Instructions]. This is going to be from Mr. Muraki from SMBC Nikko Securities.

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

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

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

It is United States.

And the second question. Thank you. So, rather than the fourth quarter, I think it would impact the next fiscal period, I suppose. So, this new coronavirus, so what kind of risk implication do you foresee in terms of profit generation so far as you can see or foresee, like concessions, hotel management, aircraft, leasing may be affected by the decline of the numbers of passengers declining. So, have you been perhaps carrying out some simulation from the past experiences of like SARS in the past?

So, I think I have to refrain from giving you much of the details from various reasons, but as a result of this new coronavirus, Kansai International Airport and as well as Osaka International Airport, of course, will be affected, especially [indiscernible 0:19:50] International Airport. The number of flights, in fact, is on the decline. So, we would be affected negatively by this. And to begin with, as for Kansai International Airport businesses, at the time of acquisition, we were, of course, assuming that there will be a pandemic every certain intervals, so we have, in fact, incorporated this anticipation into the plan. So, of course, in the next year, we would have to suffer or be affected by this negative impact. And as for the hotel businesses, it is not making a sizable contribution to the profit generation as of now. So, you need not to worry very much about this hotel management businesses. As for the aircraft leasing, if it is only for like several months, then we're not affected greatly because, after all, the leasing contract is, in fact – is concluded on a long-term basis. So, we would not be affected by this because we would be in receipt of the leasing fees. But, of course, if the airline company starts to fail and may perhaps – that may perhaps affect us in a long term. But in our case, our aircraft that we own is focused on a narrowbody. So, therefore, even if there was to be failure, we would be able to recover the aircraft and transfer those aircraft to some other airline. So, therefore, that's what we think as of now. So, it is more of a qualitative description as supposed to quantitative. I'm sorry about this.

Next from Mitsubishi UFJ Morgan Stanley Securities. Mr. Tsujino, please.

Thank you. Two questions. Profit of Kansai Airport going forward. Ordinary profit, 26% for the first half of the year. That's the information we've got. And foreign visitors account for like 30% of all the flight passengers in Kansai International Airport. What about the fixed cost? Or should I say expenses? Can you reduce this in the short term? Can you please give us some insight into this? And the second question is about the PE investment. In Japan, ¥16 billion, this is quite sizable. We don't know when made the investment, but up until several years ago, you were doing investments of like ¥10 billion ago. But how much investment did you make in the first place in this PE project and how many years did you hold it, which resulted in this number? Can you please also refer to the industry that this PE is involved in? And also, for the US project, ¥8 billion per deal seems to be quite large too and there was no press release about this. So, if possible I would like to know the background. How much did you invest and how many years did you hold, so on and so forth?

Thank you for your question. Starting with the Kansai International Airport, in terms of sales, of course, we have to pay certain amount of rents and variable expenses is sometimes people related. And as far as the salary is concerned or people are concerned, in terms of deal with BCP, we are discussing what to do, what to do with the part-timers and so on and so forth. Profit-wise, with pandemic, we have to expect some level of decline, and that's the answer to your first question. Regarding the PE deals, I need to apologize. When we can disclose details, we try to do that as much as possible, but depending on the deal, the counterpart does not want us to disclose information, which means that we cannot disclose information. For the domestic PE deal, this happened in the last several years, within the last five years, I would say. And we are checking how much investment we made in the first place. So, please bear with us for a moment. Excuse me. We are unable to give you the accurate information right now. The amount was not very high, but I'm sorry, I don't have the number at hand. So, please allow us to get back to you later. But it was not a huge amount which means that the profit level was quite high. That's our understanding.

So, is it about ¥10 billion?

Well, we have to check. ¥10 billion size deals becoming more common or normal, and I don't want to give you a wrong answer. So, please allow us to get back to you later on.

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

Thank you.

Next is from Daiwa Securities. Kazuki Watanabe, please.

So, I am Watanabe from Daiwa Securities. I have two questions. First of all, with regard to the progress that is made in terms of the profit generation, the progress is 81%, which is pretty high. And I think there was some uncertainty, but is there any kind of anticipation or assumption that you have for the fourth quarter? And as for the guidance for next year is going to be the second question and I'm sure you're going to be disclosing. But as to the dividend, what is your idea as to the disclosure of dividend because I think you're going to be sharing us the EPS, expected level of EPS. For the third quarter, I'm very happy that the performance was pretty good. So, ¥16 billion of gains on sales. So, we're not expecting the amount to be as large as that. So, in other words, it was not totally unexpected. It had kind of the progress as expected, slightly above our expectation. And I'm sure we'll be able to proceed just as smoothly in the fourth quarter. But we're not foreseeing a great amount of gains on sales to be generated. So, the amount will be smaller than that of the third quarter, we think.

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

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

Thank you very much for that. So, in other words, there is a high probability of achieving the profit target?

I would not be able to say for sure at this point in time, but ¥300 billion achievement is pretty, I think, highly probable, I would say. And as for the second question, as of now, what we have – we would not be able to share with you anything more than what we have discussed at the time of the interim results announcement. So, unfortunately, I would have to ask you to wait until the full year performance announcement. But as of now, as we stand, it is exactly the same as the interim results announcement statement that we have made.

Moving on to Merrill Lynch Japan. Mr. Sasaki.

Yes, thank you. And I have two questions. Earlier, you talked about inbound tourism and I would like to know the size of this. You run hotel and traditional Japanese Inns. What is the percentage of this annual revenue against real estate business in total? And how much of that is inbound tourism related?

Hotels and inns, profit-wise, it's several billions of yen and sometimes it can be zero or negative if we face worst case scenario, but that's not what we're really expecting. In terms of inbound tourism, the largest sizes of hotels and inns that we have is actually Suginoi – Suginoi is the largest hotel that we have. Of course, we have visitors from overseas, but majority of the customer base is domestic customers. And therefore, we don't expect a big impact on the biggest hotel we have. We have a small hotel called Cross Hotel in Osaka, which may be more impacted by the change in inbound tourism, but the revenue is quite small there. So, I don't think you need to be concerned about the lower revenue from this impact. Thank you.

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

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

Non-aircraft business, I think you disclosed the regional information and 70% is China, I think. Most profitable non-aircraft business will have to be maybe largely impacted by this.

I do agree that there will be some impact by China for this business.

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

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

So, ¥1.3 trillion outlook has not reduced from three months ago?

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

Thank you.

Thank you very much. From JP Morgan, we have Otsuka san.

I am Otsuka from JPMorgan. Thank you very much for this opportunity. I have first question. I'm sorry to be persistent, but the FY 2020 March end, the net profit, as has been shared by Mr. Yano, there could be an overshoot – there is a possibility of an overshoot. At that point in time, I'd like to ask you the question with regard to the dividend, 30% of payout ratio or ¥76, whichever higher, you said, at the time of interim announcement. So, if payout ratio is to be 30% and the EPS calculation will be ¥76, so if ¥300 billion, there's an overshoot of ¥300 billion, there could be a possibility of dividend being higher than ¥76, which means that 30% of payout ratio is to be applied for. So, if the bottom line needs to be more than ¥300 billion, so the dividend will be higher than that of ¥76. Am I correct in thinking so?

Yes, exactly.

Okay. Thank you very much.

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

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

So, Corporate Financial Services and Maintenance Leasing, there aren't much of capital gains. So, the reason why they are negative is because, there are some negatives and that was reflected to the negative contribution. And also, others, the gains on sales, it's not that we have managed to increase the amount of capital gains greatly, but there was a small contribution. And as for the PE investment that we have sold, ¥16 billion. So, this was for the capital gain on a year-to-date basis. We have some others. So, ¥20 billion or so of an additional, in other words, if it was not for the negative. So, even if we were to exclude that, we did manage to increase the profit. Be it that Kansai International Airport, we don't have any capital gains. So, therefore, an increase in profit in such a magnitude. And also, life insurance, we did sell some real estate, so we don't have that this year. So, therefore, we would be going much into the granularity. So, life insurance, we acquired Hartford Life Insurance in the past and that was mark-to-market. And if the market becomes volatile, it will affect the performance negatively. So, in the last year, the insurance was negative, but this year it is positive. So, this was reflected too. More than anything, the overseas, we managed to increase the profit – pretty much, that is. And NXT, Avolon were the contributors. And also, higher FX, the negative factors have been eliminated this time.

So, as for Corporate Financial services and Maintenance Leasing, the expenses due to the changes in the accounting standard, cost increased and that pushed down the profit level. But in the next quarter and in the next fiscal period, this would be normalized. So, of course, there is a factor of top line that has to be incorporated. However, may I take it that the negative factors will be taken away from here down the road?

Yes, that is our expectation. Thank you very much.

Next question comes from Mr. Niwa, Citigroup Securities.

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

Yes, I would like to respond to your first question first. This is for investment purposes, studio style apartments or condominiums. This is growing. At ORIX Bank, we are providing loans for studios, condominiums and also condominiums with multiple rooms, which are targeted at different markets. If there are multiple rooms, we are not really increasing so much, but studio style is increasing. So, we're increasing the loan for that. In terms of spread, we are doing our best to maintain the spread. We don't want to go into a price competition and generally the market is increasing and that is pushing up our assets, and that is helping the profit increase. We are hoping to continue with organic growth, if possible. As far as risk management is concerned, there are three different steps. So, studio type apartments are developed, certain developers. We have to have a good relationship with those developers, so we can assess the assets properly and also assess the credit of the people who want to take out the loan. And these are things that are pretty normal and we just do them properly. And the uncollected rate is quite low. And the allowance allocation, 0.1% or below for bad debts. The performance, the number is quite low. In other words, our credit status is very healthy.

So, that's the first question. Thank you. Thank you for the details. Second question is about shareholder returns. There are two sub questions. On page 18, you're saying that you want to sustain the growth, but also consider the shareholder returns. What does this mean? On page 20, you're talking about one ¥100 billion of share buyback. Does this change or does it not change? That's the first sub question. And the second sub question is, you have not really announced the details of the share buyback that happened in January. And looking at the ¥100 billion share buyback program, do you plan to complete the whole amount? And if you do not complete it, do you have a plan B, a backup plan? Please try to share information as much as you can.

Thank you for your question. We did have a hard time deciding how to write page 18 and ended up with unclear expression, but page 20 says what we explained in the second quarter. We have not changed this intention and we want to follow through. That's the meaning of page 18. In other words, there's been no change. And that's the first sub question, I think. And the second sub question, what's happening with the share buyback program. I need to apologize that I cannot really talk about this in this conference call. As far as the progress in the month of January is concerned, we will try to disclose the information as soon as possible, which is the day after tomorrow. So, please wait for that release. We appreciate your patience. And we will continue to do what we can in a steady manner. That's all we can say right now. And we intend to implement what's indicated on page 20.

I see. Thank you.

Thank you very much. From Mizuho Securities, we have Mr. Sato. So, please start the question.

I'm Sato from Mizuho Securities. The first question is with regard to Avolon investment. As to the actual performance that appears on page 15, the contribution profit from Avolon, so the three months impact was quite sizeable. If you were to take out the year-to-date, as of second quarter, is it because of the aircraft divestment? And also, the second question is with regard to the impact from pandemic. With regard to LCC, I think the condition is going to be pretty tough, I understand. So, as of now, Avolon, Chinese affiliated airlines as well as low cost carriers, if you could be so kind enough to share with us your idea as of now? So, first of all, with regard to Avolon, as you have pointed out, there was gains on sales. So, therefore, it tends to fluctuate from quarter to quarter. In the third quarter, there was gains on sales as a matter of fact, but there was some accounting twist as well, which had impacted the overall performance as of the third quarter. So, if you could be so kind enough to share with us the size.

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

And so, if you could go into a little bit about details?

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

Okay. Thank you very much for that. And as to the exposure, if you could be so kind enough to share with us the exposure for the Avalon.

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

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

It is not linked very much. Of course, we would try to generate a steady amount of profit and there were some articles that appeared in the newspaper, which could be misleading, I have to admit. And Inoue, our CEO, has been sharing with you from long time back, he's very mindful of the governance structure of ORIX. And each and every group company would have the governance remaining to be intact, and thereby, the business being operated in a healthy condition. And each of the companies, of course, like carrying out an IPO, being listed and the parent company may be delisted, it sounds very healthy. But he did say that, but it is not something that we plan to happen or that did happen in a short time period, in a foreseeable future. So, the group governance, you have to make sure that we would do a good job of group governance by ways of building a healthy structure, and that's what we are thinking about. So, in other words, we're not trying to change the structure in a dramatic way and thereby causing problems to the investment community. That is not in our idea. Thank you. We received a question earlier about the PE investment in Japan. And I said, please let's get back to you, but we found out that there is an investment of approximately ¥10 billion and the ¥16 billion gain on profit was posted. And we have also incorporated the net income as well during this time. So, the total profit is actually larger than the number mentioned today.

Mitsubishi UFJ Morgan Stanley, Tsujino san.

Yes, it's me again. Question about the share buyback. At the end of October, you gave us a presentation saying that ROE has been declining for a while and dividend payout 30%. Can it be kept? That was one of the questions that came up. And ¥1 trillion buyback is too big, but ¥100 billion per year is possible and ¥100 billion and 65% of the total return is the way to look at that shareholder return these days, that's the trend? Now, we are facing May and June coming. So, the number of flights are declining. It may not be a pandemic yet, but we will have a clearer number for the Kansai Airport by June. And more numbers will be coming out. And for the next fiscal year, as was mentioned in the previous presentation, the situation is going to be quite tough. So, what about the timing of share buyback? What is your plan? What is your intention going forward? That's my question. Before you made the change last autumn, you were maintaining 11% to 12%. In order to do that, you would do share buyback, but the decision will have to be made.

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

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

The basic thinking has not really changed from what I explained in the second quarter, but what decisions do we make during the fiscal year…?

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

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

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

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

I see. Thank you very much.

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

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

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