(million yen) (yen) (yen) (yen) consolidated quarter sales ... · order backlog on the machinery...

14
1 URL: www.walden.co.jp Written by Yoshiyuki Muroya E-mail: [email protected] Phone+81 3 3553 3769 FREUND CORPORATION (6312) Consolidated FY Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) FY02/2013 16,396 1,470 1,618 765 88.8 20.0 1,066.7 FY02/2014 17,616 1,286 1,341 787 91.4 25.0 1,187.5 FY02/2015CoE 18,000 1,340 1,420 800 92.8 30.0 - FY02/2014 YoY 7.4% (12.5%) (17.1%) 2.9% - - - FY02/2015CoE YoY 2.2% 4.2% 5.8% 1.5% - - - Consolidated Quarter Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) Q1 FY02/2014 4,656 562 581 309 - - - Q2 FY02/2014 4,224 281 291 161 - - - Q3 FY02/2014 3,545 156 172 68 - - - Q4 FY02/2014 5,189 286 295 248 - - - Q1 FY02/2015 3,506 (20) (0) (29) - - - Q1 FY02/2015 YoY (24.7%) - - - - - - Source: Company Data, WRJ Calculation 1.0 Executive Summary (31 July 2014) Firm Domestic Demand FREUND CORPORATION, involved with developments of machinery (incorporating proprietary formulation technology), mainly for pharmaceutical industry, is seeing a sharp recovery in order intake and order backlog on the Machinery side. Order intake and order backlog for existing machinery are rising sharply, driven by increasing demand for domestic generic pharmaceuticals in particular, while order intake associated with newly-introduced “TABREX”, which is tablet-printing machinery, is starting to take off on a full-fledged basis. The Company suggests that it takes 6 months to 9 months for incoming order intake to book sales, as has been the case so far, eventually suggesting that the bulk of accumulated order backlog as of the end of Q1 is to be booked as sales by the end of FY02/2015. Meanwhile, the Company has long-term growth potentials, as well. One of the major factors that are expected to contribute to future growth is ongoing developments of overseas markets on the Machinery side. Through the developments in here, the Company plans to raise its ratio of overseas sales from 24.9% in FY02/2014 to 30.0% in FY02/2017. Nevertheless, the Company’s quarterly earnings tend to fluctuate depending on the timing of orders, shipments and acceptance inspections. In Q1 FY02/2015, there was a swing downward as a whole. In Q1 FY02/2015, sales came in at ¥3,506m (down 24.7% YoY) and operating loss ¥20m (versus operating profit ¥562m in the previous year). On top of substantial decreases in sales, the Company suffered from one-off expenses almost ¥100m, having resulted in operating loss with the Company. By business segment, sales came in at ¥1,794m (down 41.1%) and operating profit ¥47m (down 90.4%) on the Machinery side, while sales ¥1,711m (up 6.4%) and operating profit ¥80m (down 50.3%) on the Chemical side. Operating loss

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Page 1: (Million Yen) (Yen) (Yen) (Yen) Consolidated Quarter Sales ... · order backlog on the Machinery side. Order intake and order backlog for existing machinery are rising sharply, driven

1

URL: www.walden.co.jp

Written by Yoshiyuki Muroya

E-mail: [email protected]

Phone:+81 3 3553 3769

FREUND CORPORATION (6312)

Consolidated FY Sales OP RP NP EPS DPS BPS

(Million Yen) (Yen) (Yen) (Yen)

FY02/2013 16,396 1,470 1,618 765 88.8 20.0 1,066.7

FY02/2014 17,616 1,286 1,341 787 91.4 25.0 1,187.5

FY02/2015CoE 18,000 1,340 1,420 800 92.8 30.0 -

FY02/2014 YoY 7.4% (12.5%) (17.1%) 2.9% - - -

FY02/2015CoE YoY 2.2% 4.2% 5.8% 1.5% - - -

Consolidated Quarter Sales OP RP NP EPS DPS BPS

(Million Yen) (Yen) (Yen) (Yen)

Q1 FY02/2014 4,656 562 581 309 - - -

Q2 FY02/2014 4,224 281 291 161 - - -

Q3 FY02/2014 3,545 156 172 68 - - -

Q4 FY02/2014 5,189 286 295 248 - - -

Q1 FY02/2015 3,506 (20) (0) (29) - - -

Q1 FY02/2015 YoY (24.7%) - - - - - -

Source: Company Data, WRJ Calculation

1.0 Executive Summary (31 July 2014)

Firm Domestic Demand

FREUND CORPORATION, involved with developments of machinery (incorporating proprietary

formulation technology), mainly for pharmaceutical industry, is seeing a sharp recovery in order intake and

order backlog on the Machinery side. Order intake and order backlog for existing machinery are rising

sharply, driven by increasing demand for domestic generic pharmaceuticals in particular, while order intake

associated with newly-introduced “TABREX”, which is tablet-printing machinery, is starting to take off on a

full-fledged basis. The Company suggests that it takes 6 months to 9 months for incoming order intake to

book sales, as has been the case so far, eventually suggesting that the bulk of accumulated order backlog as

of the end of Q1 is to be booked as sales by the end of FY02/2015. Meanwhile, the Company has long-term

growth potentials, as well. One of the major factors that are expected to contribute to future growth is

ongoing developments of overseas markets on the Machinery side. Through the developments in here, the

Company plans to raise its ratio of overseas sales from 24.9% in FY02/2014 to 30.0% in FY02/2017.

Nevertheless, the Company’s quarterly earnings tend to fluctuate depending on the timing of orders,

shipments and acceptance inspections. In Q1 FY02/2015, there was a swing downward as a whole.

In Q1 FY02/2015, sales came in at ¥3,506m (down 24.7% YoY) and operating loss ¥20m (versus operating

profit ¥562m in the previous year). On top of substantial decreases in sales, the Company suffered from

one-off expenses almost ¥100m, having resulted in operating loss with the Company. By business segment,

sales came in at ¥1,794m (down 41.1%) and operating profit ¥47m (down 90.4%) on the Machinery side,

while sales ¥1,711m (up 6.4%) and operating profit ¥80m (down 50.3%) on the Chemical side. Operating loss

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2

¥20m with the Company comprised collective operating profit from the two business segments and

elimination ¥149m. On the Machinery side, sales and earnings declined significantly, negatively affected by

major corrections of order intake and order backlog in Q4 FY02/2014, having temporarily taken place in line

with delayed order booking, etc. Meanwhile, in Q1 FY02/2015, they increased favorably over the year,

¥3,648m (up 20.5%) and ¥6,945m (up 27.7%), respectively. At the same time, the changes were so significant,

when compared with ¥1,853m and ¥4,991m, respectively, in Q4 FY02/2014. On the Chemicals side, sales

were driven by ongoing strengths of dietary supplements. However, a change in sales mix in line with

decreasing sales of highly-value-added pharmaceutical excipients forced this business segment suffer from

earnings correction, while hiking procurement prices of raw materials, mainly due to yen’s depreciation, was

another negative factor.

The Company’s new midterm management plan “Change & Challenge 2014 to 2016 (FY02/2015 to

FY02/2017)”, released on 17 April 2014, is calling for prospective sales ¥23,000m, operating profit ¥2,300m

and operating profit margin 10.0% in FY02/2017, i.e., the last year of the periods. Compared with sales

¥17,616m, operating profit ¥1,286m and operating profit margin 7.3% in FY02/2014, sales are to rise 9.3%

and operating profit 21.4% in terms of CAGR over the next three years, while operating profit margin up

2.7% points during the same periods. On the Machinery side, sales are to rise 8.9% in terms of CAGR

through “Global cultivations & enhanced new product developments”, while 10.0% on the Chemicals side

through “Focus on new products & pursuit of competitiveness on existing products”.

IR Representative: Corporate Administration Division (+81 3 5292 0215 [email protected])

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2.0 Company Profile

A Leader of Formulation Technology & Machinery for Pharmaceutical Industry

Company Name FREUND CORPORATION

Company Website

IR Information

Share Price

Established 22 April 1964

Listing 24 July 1996 (Tokyo Stock Exchange JASDAQ Standard: Ticker 6312)

Capital ¥1,035m (As of the end of May 2014)

No. of Shares 9,200,000 shares, including 577,722 treasury shares (As of the end of May 2014)

Main Features 70% share in the domestic market for granulation & coating machinery

One of the three major players on a global basis

An ample room to cultivate in overseas markets on the Machinery side

Businesses Ⅰ. Machinery

Ⅱ. Chemicals

Top Management Chairman & CEO: Yasutoyo Fusejima, President & COO: Iwao Fusejima

Shareholders Yasutoyo Fusejima 10.3%, FIL Corp. 9.0% (As of the end of February 2014)

Headquarters Shinjuku-ku, Tokyo JAPAN

No. of Employees Parent: 189, Consolidated: 369 (As of the end of May 2014)

Source: Company Data

3.0 Recent Trading & Prospects

Q1 FY02/2015 Results

In Q1 FY02/2015, sales came in at ¥3,506m (down 24.7% YoY), operating loss ¥20m (versus operating profit

¥562m during the same period in the previous year), recurring loss ¥0.7m (recurring profit ¥581m) and net

loss ¥29m (net profit ¥309m). Although sales declined sharply and the Company saw operating loss, the

results were effectively in line with the assumptions of initial Company forecasts. Meanwhile, as mentioned

earlier, order intake and order backlog on the Machinery side recovered so sharply.

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Machinery: Quarterly Order Intake & Order Backlog

3,0

96

4,6

91

5,1

93

5,1

98

5,2

16

5,3

80

5,2

67

5,7

89

5,2

60

4,9

38

4,8

83

5,2

63

5,4

40

5,3

28

6,1

44

4,9

91

6,9

45

1,216

3,868

2,271 2,568 2,060

2,465 2,278

3,271 2,699

1,998 2,002 2,572

3,026 2,491 2,697

1,853

3,648

0

2,000

4,000

6,000

8,000

0

1,000

2,000

3,000

4,000

5,000Q

1 F

Y02

/20

11

Q2

FY0

2/2

011

Q3

FY0

2/2

011

Q4

FY0

2/2

011

Q1

FY0

2/2

012

Q2

FY02

/20

12

Q3

FY0

2/2

012

Q4

FY0

2/2

012

Q1

FY0

2/2

013

Q2

FY0

2/2

013

Q3

FY0

2/2

013

Q4

FY0

2/2

013

Q1

FY0

2/2

014

Q2

FY0

2/2

014

Q3

FY0

2/2

014

Q4

FY0

2/2

014

Q1

FY0

2/2

015

Q2

FY0

2/2

015

Q3

FY0

2/2

015

Q4

FY02

/20

15

Order Backlog (Million Yen) RHS Order Intake (Million Yen) LHS

Source: Company Data, WRJ Calculation

On the Machinery side, which accounted for 76.6% of operating profit (before elimination) with the Company

in FY02/2014, the Company makes great use of outsourcing in production and the gearing does not tend to

work very much. In other words, the Company is mainly exposed to variable costs, while not much exposed

to fixed costs. This was not exceptional in Q1 results and thus the Company remained making operating

profit, albeit almost nothing, in spite of substantial decreases in sales as much as down 41.1% over the year.

It should have been the case that the Company avoided making any operating loss as a whole, but one-off

negative factors came up, having resulted in almost ¥100m expenses booked, collectively, for retirement

allowance of a consolidated subsidiary’s director and for events, etc. associated with the Company’s 50th

anniversary.

Meanwhile, forex rates in Q1 came in at ¥102.8 per US$ (yen depreciated 11.2% over the year) and ¥140.1

per Euro (15.4%). The Company, having been exposed to overseas markets 24.9% out of total in terms of

sales in FY02/2014, must have benefited from here for sales with the Company.

In Q1, however, overseas sales accounted for only 11.5%. In other words, sales in Japan accounted for 88.5%

of sales with the Company, while 5.6% in North America (USA, Canada), 1.5% in Europe (France, UK, etc.),

4.5% in Other (Latin America, Asia, etc.). As far as we could gather, there are cases that figures are

misleading due to the issues associated with irregularities on a quarterly basis. Meanwhile, on the

Chemicals side, all sales are effectively booked in Japan and thus overseas sales with the Company are

effectively those on the Machinery side.

Thus, the Company failed to benefit from yen’s depreciation for sales on the Chemicals side, while having

suffered from yen’s depreciation for earnings in that there were imports of raw materials from Europe.

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Income Statement (Cumulative, Quarterly)

Income Statement Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Sales 4,656 8,881 12,427 17,616 3,506 - - - (1,150)

Cost of Sales 3,107 6,070 8,539 12,377 2,454 - - - (653)

Gross Profit 1,549 2,811 3,887 5,238 1,052 - - - (496)

SG&A 987 1,967 2,887 3,952 1,073 - - - +86

Operating Profit 562 843 1,000 1,286 (20) - - - (583)

Non Operating Balance 19 29 45 55 20 - - - +1

Recurring Profit 581 873 1,046 1,341 (0) - - - (582)

Extraordinary Balance 1 3 (18) (18) (0) - - - (2)

Pretax Profit 583 876 1,027 1,323 (1) - - - (584)

Tax Charges etc. 272 401 480 520 30 - - - (242)

Minorities' Interests 1 4 8 15 (2) - - - (3)

Net Profit 309 470 539 787 (29) - - - (339)

Sales YoY (1.5%) +2.3% (1.1%) +7.4% (24.7%) - - - -

Operating Profit YoY +13.8% (5.6%) (19.4%) (12.5%) - - - - -

Recurring Profit YoY +1.9% (12.2%) (22.9%) (17.1%) - - - - -

Net Profit YoY (7.1%) +27.2% (4.6%) +2.9% - - - - -

Gross Profit Margins 33.3% 31.7% 31.3% 29.7% 30.0% - - - (3.3%)

SG&A / Sales 21.2% 22.2% 23.2% 22.4% 30.6% - - - +9.4%

Operating Profit Margins 12.1% 9.5% 8.0% 7.3% (0.6%) - - - (12.7%)

Recurring Profit Margins 12.5% 9.8% 8.4% 7.6% (0.0%) - - - (12.5%)

Net Profit Margins 6.6% 5.3% 4.3% 4.5% (0.9%) - - - (7.5%)

Tax Charges etc. / Pretax Profit 46.8% 45.8% 46.8% 39.3% - - - - -

Income Statement Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Sales 4,656 4,224 3,545 5,189 3,506 - - - (1,150)

Cost of Sales 3,107 2,963 2,468 3,838 2,454 - - - (653)

Gross Profit 1,549 1,261 1,076 1,350 1,052 - - - (496)

SG&A 987 980 920 1,064 1,073 - - - +86

Operating Profit 562 281 156 286 (20) - - - (583)

Non Operating Balance 19 10 16 9 20 - - - +1

Recurring Profit 581 291 172 295 (0) - - - (582)

Extraordinary Balance 1 1 (22) 0 (0) - - - (2)

Pretax Profit 583 293 150 295 (1) - - - (584)

Tax Charges etc. 272 128 78 39 30 - - - (242)

Minorities' Interests 1 3 3 7 (2) - - - (3)

Net Profit 309 161 68 248 (29) - - - (339)

Sales YoY (1.5%) +6.9% (8.8%) +35.5% (24.7%) - - - -

Operating Profit YoY +13.8% (29.6%) (55.0%) +25.1% - - - - -

Recurring Profit YoY +1.9% (31.1%) (52.3%) +13.1% - - - - -

Net Profit YoY (7.1%) +331.7% (65.0%) +24.3% - - - - -

Gross Profit Margins 33.3% 29.9% 30.4% 26.0% 30.0% - - - (3.3%)

SG&A / Sales 21.2% 23.2% 26.0% 20.5% 30.6% - - - +9.4%

Operating Profit Margins 12.1% 6.7% 4.4% 5.5% (0.6%) - - - (12.7%)

Recurring Profit Margins 12.5% 6.9% 4.9% 5.7% (0.0%) - - - (12.5%)

Net Profit Margins 6.6% 3.8% 1.9% 4.8% (0.9%) - - - (7.5%)

Tax Charges etc. / Pretax Profit 46.8% 43.9% 52.3% 13.5% - - - - -

Source: Company Data, WRJ Calculation

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Segmented Information (Cumulative, Quarterly)

Segmented Information Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Machinery 3,048 5,733 7,667 11,004 1,794 - - - (1,253)

Chemicals 1,608 3,148 4,759 6,611 1,711 - - - +103

Sales 4,656 8,881 12,427 17,616 3,506 - - - (1,150)

Machinery (5.9%) +2.1% (0.4%) +11.0% (41.1%) - - - -

Chemicals +8.1% +2.8% (2.3%) +2.0% +6.4% - - - -

Sales (YoY) (1.5%) +2.3% (1.1%) +7.4% (24.7%) - - - -

Machinery 65.5% 64.6% 61.7% 62.5% 51.2% - - - -

Chemicals 34.5% 35.4% 38.3% 37.5% 48.8% - - - -

Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Machinery 496 758 925 1,242 47 - - - (449)

Chemicals 162 257 324 379 80 - - - (81)

Operating Profit (Elimination) 659 1,015 1,250 1,621 128 - - - (531)

Elimination (97) (171) (249) (335) (149) - - - (52)

Operating Profit 562 843 1,000 1,286 (20) - - - (583)

Machinery +18.4% +4.2% (3.9%) +6.0% (90.4%) - - - -

Chemicals +13.9% (14.2%) (32.4%) (32.9%) (50.3%) - - - -

Operating Profit (YoY) +13.8% (5.6%) (19.4%) (12.5%) - - - - -

Machinery 75.3% 74.7% 74.0% 76.6% 37.1% - - - -

Chemicals 24.7% 25.3% 26.0% 23.4% 62.9% - - - -

Operating Profit (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Machinery 16.3% 13.2% 12.1% 11.3% 2.7% - - - (13.6%)

Chemicals 10.1% 8.2% 6.8% 5.7% 4.7% - - - (5.4%)

Elimination (2.1%) (1.9%) (2.0%) (1.9%) (4.3%) - - - (2.2%)

Operating Profit Margin 12.1% 9.5% 8.0% 7.3% (0.6%) - - - (12.7%)

Segmented Information Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Machinery 3,048 2,684 1,933 3,337 1,794 - - - (1,253)

Chemicals 1,608 1,540 1,611 1,851 1,711 - - - +103

Sales 4,656 4,224 3,545 5,189 3,506 - - - (1,150)

Machinery (5.9%) +13.0% (7.0%) +50.4% (41.1%) - - - -

Chemicals +8.1% (2.2%) (10.9%) +14.9% +6.4% - - - -

Sales (YoY) (1.5%) +6.9% (8.8%) +35.5% (24.7%) - - - -

Machinery 65.5% 63.5% 54.5% 64.3% 51.2% - - - -

Chemicals 34.5% 36.5% 45.5% 35.7% 48.8% - - - -

Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Machinery 496 261 166 316 47 - - - (449)

Chemicals 162 94 67 54 80 - - - (81)

Operating Profit (Elimination) 659 356 234 371 128 - - - (531)

Elimination (97) (74) (77) (85) (149) - - - (52)

Operating Profit 562 281 156 286 (20) - - - (583)

Machinery +18.4% (15.2%) (28.9%) +51.3% (90.4%) - - - -

Chemicals +13.9% (39.9%) (62.5%) (35.7%) (50.3%) - - - -

Operating Profit (YoY) +13.8% (29.6%) (55.0%) +25.1% - - - - -

Machinery 75.3% 73.5% 71.1% 85.3% 37.1% - - - -

Chemicals 24.7% 26.5% 28.9% 14.7% 62.9% - - - -

Operating Profit (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Machinery 16.3% 9.8% 8.6% 9.5% 2.7% - - - (13.6%)

Chemicals 10.1% 6.1% 4.2% 3.0% 4.7% - - - (5.4%)

Elimination (2.1%) (1.8%) (2.2%) (1.6%) (4.3%) - - - (2.2%)

Operating Profit Margin 12.1% 6.7% 4.4% 5.5% (0.6%) - - - (12.7%)

Source: Company Data, WRJ Calculation

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Sales by Region (Cumulative, Quarterly)

Sales by Region Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Japan 3,991 7,286 9,990 13,233 3,102 - - - (888)

North America (USA, Canada) 275 813 913 1,503 195 - - - (80)

Europe (France, UK, etc.) 309 548 655 701 52 - - - (257)

Other (Latin America, Asia, etc.) 79 232 866 2,177 156 - - - +76

Sales 4,656 8,881 12,427 17,616 3,506 - - - (1,150)

Japan +15.5% +13.0% +1.5% +3.4% (22.3%) - - - -

North America (USA, Canada) (4.4%) +36.0% +34.4% +58.6% (29.1%) - - - -

Europe (France, UK, etc.) +22.0% +12.1% (7.0%) (9.2%) (83.1%) - - - -

Other (Latin America, Asia, etc.) (89.1%) (79.7%) (35.4%) +16.1% +95.7% - - - -

Sales (YoY) (1.5%) +2.3% (1.1%) +7.4% (24.7%) - - - -

Japan 85.7% 82.0% 80.4% 75.1% 88.5% - - - -

North America (USA, Canada) 5.9% 9.2% 7.4% 8.5% 5.6% - - - -

Europe (France, UK, etc.) 6.7% 6.2% 5.3% 4.0% 1.5% - - - -

Other (Latin America, Asia, etc.) 1.7% 2.6% 7.0% 12.4% 4.5% - - - -

Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Sales by Region Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Japan 3,991 3,294 2,704 3,243 3,102 - - - (888)

North America (USA, Canada) 275 538 99 589 195 - - - (80)

Europe (France, UK, etc.) 309 239 106 45 52 - - - (257)

Other (Latin America, Asia, etc.) 79 152 634 1,310 156 - - - +76

Sales 4,656 4,224 3,545 5,189 3,506 - - - (1,150)

Japan +15.5% +10.2% (20.3%) +9.5% (22.3%) - - - -

North America (USA, Canada) (4.4%) +73.6% +22.4% +120.0% (29.1%) - - - -

Europe (France, UK, etc.) +22.0% +1.3% (50.3%) (32.6%) (83.1%) - - - -

Other (Latin America, Asia, etc.) (89.1%) (63.2%) +222.6% +146.0% +95.7% - - - -

Sales (YoY) (1.5%) +6.9% (8.8%) +35.5% (24.7%) - - - -

Japan 85.7% 78.0% 76.3% 62.5% 88.5% - - - -

North America (USA, Canada) 5.9% 12.7% 2.8% 11.4% 5.6% - - - -

Europe (France, UK, etc.) 6.7% 5.7% 3.0% 0.9% 1.5% - - - -

Other (Latin America, Asia, etc.) 1.7% 3.6% 17.9% 25.3% 4.5% - - - -

Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Source: Company Data, WRJ Calculation

Sales by Region: Machinery (Cumulative)

Sales by Region: Machinery Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Japan na 4,148 na 6,652 na - - - -

North America & Latin America na 861 na 2,883 na - - - -

Europe & Africa na 548 na 702 na - - - -

Middle East, Asia & Oceania na 173 na 766 na - - - -

Sales 3,048 5,733 7,667 11,004 1,794 - - - (1,253)

Japan na +21.3% na +4.2% na - - - -

North America & Latin America na (28.4%) na +64.0% na - - - -

Europe & Africa na +12.5% na (8.7%) na - - - -

Middle East, Asia & Oceania na (65.7%) na (23.6%) na - - - -

Sales (YoY) (5.9%) +2.1% (0.4%) +11.0% (41.1%) - - - -

Japan na 72.3% na 60.4% na - - - -

North America & Latin America na 15.0% na 26.2% na - - - -

Europe & Africa na 9.6% na 6.4% na - - - -

Middle East, Asia & Oceania na 3.0% na 7.0% na - - - -

Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% - - - -

Source: Company Data, WRJ Calculation

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Cash Flow Statement (Cumulative)

Cash Flow Statement Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Operating Cash Flow na 674 na 1,227 na - - - -

Investment Cash Flow na 35 na (423) na - - - -

Operating CF + Investment CF na 709 na 803 na - - - -

Financing Cash Flow na (195) na (226) na - - - -

Source: Company Data, WRJ Calculation

Balance Sheet (Quarterly)

Balance Sheet Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act  

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YoY

(Million Yen) 02/2014 02/2014 02/2014 02/2014 02/2015 02/2015 02/2015 02/2015 Net Chg.

Cash & Deposit 4,082 4,168 3,958 4,600 3,546 - - - (535)

Accounts Receivables 4,460 4,476 4,291 4,409 4,557 - - - +96

Inventory 1,925 2,078 2,252 1,675 2,335 - - - +409

Other 612 662 705 646 790 - - - +178

Current Assets 11,081 11,385 11,208 11,331 11,230 - - - +149

Tangible Assets 2,975 2,964 2,967 3,052 2,993 - - - +18

Intangible Assets 201 191 180 178 181 - - - (20)

LT Investment Securities etc. 941 942 944 988 936 - - - (4)

Fixed Assets 4,118 4,098 4,092 4,219 4,112 - - - (6)

Total Assets 15,199 15,484 15,301 15,550 15,342 - - - +142

Accounts Payable 2,381 2,517 2,300 2,068 1,706 - - - (674)

Short Term Debt - - - - - - - - -

Other 2,415 2,316 2,310 2,333 2,830 - - - +415

Current Liabilities 4,796 4,834 4,611 4,402 4,537 - - - (259)

Long Term Debt - - - - - - - - -

Other 800 785 755 754 733 - - - (67)

Fixed Liabilities 800 785 755 754 733 - - - (67)

Total Liabilities 5,597 5,619 5,367 5,157 5,270 - - - (327)

Shareholders' Equity 9,974 10,133 10,201 10,450 10,204 - - - +230

Adjustments (371) (269) (267) (57) (132) - - - +239

Total Assets 9,602 9,864 9,934 10,392 10,072 - - - +470

Total Liabilities & Net Assets 15,199 15,484 15,301 15,550 15,342 - - - +142

Equity Capital 9,473 9,731 9,799 10,239 9,930 - - - +457

Interest Bearing Debt - - - - - - - - -

Net Debt (4,082) (4,168) (3,958) (4,600) (3,546) - - - +535

Equity Capital Ratio 62.3% 62.8% 64.0% 65.8% 64.7% - - - +2.4%

Net-Debt-Equity Ratio (40.9%) (41.1%) (38.8%) (44.0%) (34.8%) - - - +6.2%

ROE (Net Profit / Average Equity) 13.2% 10.0% 7.6% 8.1% (1.2%) - - - (14.4%)

ROA (Net Profit / Average Total Assets) 15.4% 11.5% 9.2% 8.8% (0.0%) - - - (15.4%)

Total Assets Turnover 123% 109% 93% 133% 91% - - - -

Inventory Turnover 6.5 5.7 4.4 9.2 4.2 - - - -

Days of Inventory 57 64 83 40 87 - - - -

Quick Ratio 178% 179% 179% 205% 179% - - - -

Current Ratio 231% 236% 243% 257% 248% - - - -

Source: Company Data, WRJ Calculation

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FY02/2015 Company Forecasts

FY02/2015 Company forecasts have remained unchanged, going for prospective sales ¥18,000m (up 2.2%

YoY), operating profit ¥1,340m (up 4.2%), recurring profit ¥1,420m (up 5.8%) and net profit ¥800m (up

1.5%). Meanwhile operating profit margin is expected to be 7.4% (up 0.1% point). In regards to H1,

prospective sales are ¥7,600m (down 14.4%), operating profit ¥340m (down 59.7%) and operating profit

margin 4.5% (down 5.0% points), suggesting major corrections of sales and earnings. Thus, sales and

earnings are to substantially improve in H2 over H1, while the contents of Q1 results, mentioned earlier,

imply high probability for full-year Company forecasts to be met, as far as we could see.

Quarterly Sales & Operating Profit Margin

4,7

28

3,9

50

3,8

86

3,8

30

4,6

56

4,2

24

3,5

45

5,1

89

3,5

06

4,0

93

5,2

00

5,2

00

10.4% 10.1% 8.9%6.0%

12.1%

6.7%4.4% 5.5%

(0.6%)

8.8% 9.6% 9.6%

(10.0%)

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

0

2,000

4,000

6,000

Q1

FY0

2/2

013

Q2

FY0

2/2

013

Q3

FY0

2/2

013

Q4

FY0

2/2

013

Q1

FY0

2/2

014

Q2

FY0

2/2

014

Q3

FY0

2/2

014

Q4

FY0

2/2

014

Q1

FY0

2/2

015

Q2

FY0

2/2

015

Q3

FY0

2/2

015

Q4

FY0

2/2

015

Sales (Million Yen) Operating Profit Margin (%)

Source: Company Data, WRJ Calculation (quarterly forecasts in Q3 and Q4 FY02/2015: half-year Company forecasts, pro rata)

Prospective sales ¥18,000m (up 2.2% YoY) comprise ¥11,200m (up 1.8%) on the Machinery side and

¥6,800m (up 2.9%) on the Chemicals side. Meanwhile, Company forecasts are based on ¥103.0 per US$ and

¥142.0 per Euro versus ¥97.7 per US$ and ¥129.8 per Euro in FY02/2014, assuming further yen’s

depreciation over that of FY02/2014.

In regards to prospective dividend per share, the Company forecasts are going for ¥30.0, comprising

ordinary dividend ¥25.0 and commemorative dividend ¥5.0 for the Company’s 50th anniversary, while

implying payout ratio 32.3%, collectively. Compared with ¥25.0, implying payout ratio 27.4%, in FY02/2014,

the Company is going to increase dividend per share as much as add-ons by that of commemorative and the

payout ratio is to rise as well. Meanwhile, the Company announced that it raised its payout ratio target up

to 30% from 20%, at the release of the Company’s new midterm management plan “Change & Challenge

2014 to 2016” on 17 April 2014.

As far as prospective payout ratio 32.3% in FY02/2015 is concerned, one-off commemorative divided is one of

the factors for the Company to achieve the new target 30%. Going forward, in FY02/2016 and later on, the

Company, being keen on returning earnings with shareholders, is likely to increase ordinary dividend to

achieve the target.

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Long-Term Prospects

The Company’s new midterm management plan “Change & Challenge 2014 to 2016 (FY02/2015 to

FY02/2017)”, released on 17 April 2014, is calling for prospective sales ¥23,000m, operating profit ¥2,300m

and operating profit margin 10.0% in FY02/2017, i.e., the last year of the periods. Based on results in

FY02/2014, sales are to rise 9.3% and operating profit 21.4% in terms of CAGR, through FY02/2015 to

FY02/2017, while operating profit margin up 2.7% points during the same periods. Meanwhile, forex rates

are assumed at ¥100.0 per US$ and ¥145.0 per Euro.

Targets of "Change & Challenge 2014 to 2016"

12,9

43

13,2

57

15,2

36

16,3

96

17,6

16

18,0

00

23,0

00

7.5%

5.1%

7.0%

9.0%

7.3% 7.4%

10.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017

Sales (Million Yen) Operating Profit Margin (%)

Source: Company Data, WRJ Calculation

Prospective sales ¥23,000m in FY02/2017 (increasing 9.3% in terms of CAGR) comprise those on the

Machinery side ¥14,200m (8.9%) and on the Chemicals side ¥8,800m (10.0%). In regards to Machinery, the

Company mentions “Global cultivations & enhanced new product developments”, as the key strategy. As far

as we could gather, the core of the issue refers to the best corporate efforts to incorporate future local

demand in China and India as well as in Latin America, former Eastern Europe area and Middle East where

sales promotions are conducted by own consolidated subsidiary based in the United States, by means of

developing and launching new products to cope with local needs. In regards to Chemicals, “Focus on new

products & pursuit of competitiveness on existing products” is mentioned as the key strategy.

.

Sales by Business Segment : "Change & Challenge 2014 to 2016"

7,950 8,094 9,582 9,914

11,004 11,200

14,200

4,992 5,163 5,653 6,482 6,611 6,800

8,800

0

5,000

10,000

15,000

FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017

Machinery Chemicals(Million Yen)

Source: Company Data, WRJ Calculation

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“Global cultivations & enhanced new product developments”, the key strategy on the mainstay Machinery

side, having accounted for 76.6% of operating profit (before elimination) with the Company in FY02/2014, is

expected to lead to persistently increasing exposure to overseas sales with the Company. Overseas sales

ratio is expected to reach 30.0% in FY02/2017 versus 24.9% in FY02/2014.

Overseas Sales Ratio : "Change & Challenge 2014 to 2016"

29.9%24.4% 22.6% 21.9%

24.9%30.0%

48.7%

40.0%35.9% 36.3%

39.8%

48.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017

Overseas Sales Ratio (%) Overseas Sales Ratio (Machinery, %)(Million Yen)

Source: Company Data, WRJ Calculation

While assuming that overseas sales with the Company are generated only on the Machinery side even in a

midterm view as well as being based on figures in “1) Sales and profit/loss by segment” and “2) Information

on sales by region” of Segmented Information on the Company’s financial statements, overseas sale ratio on

the Machinery side is to go up to 48.6% in FY02/2017 versus 39.8% in FY02/2014.

The key strategy for the last midterm management plan “Vision-50 (FY02/2012 to FY02/2014)” also related

to cultivations of overseas markets, i.e., “Enforcement of global strategy”. Nevertheless, overseas sales ratio

remained roughly unchanged though the periods. Compared with 24.4% in FY02/2011, i.e., the year just

before the periods, the ratio came in at 24.9% in FY02/2014. “Vision-50” was going for sales ¥20,000m in

FY02/2014, but the Company failed to meet the target by seeing sales falling short 11.9%. The primary

negative factor to have been mentioned for this is “Delayed developments of products to cope with demand in

emerging countries”. Thus, the gist of “Change & Challenge 2014 to 2016” is that the Company has

determined to resume own activities with redoubled efforts in regards to business developments in China

and India.

According to the data available in the Company’s presentation document to have been delivered to investors

attending a meeting in which the Company disclosed new midterm management plan “Change & Challenge

2014 to 2016”, the market for pharmaceuticals is to increase 3.9% to 4.5% in terms of CAGR through 2012 to

2017 (US$965bn to between US$1,170bn and US$1,200bn) on a global basis. At the same time, it is

suggested that developed countries are expected to see decreasing shares out of the total, by region, in 2017,

as found in 31% (down 3% points from 2012) for United States, 13% (down 2% points) for EU5 (France,

Germany, Italy, Spain and United Kingdom) and 9% (down 3% points) for Japan. On the other hand,

emerging countries are expected to see increasing shares, as found in 15% (up 7% points) for China and 33%

(up 2% points) for other regions. In regards to China, the market is expected to increase some 18% in terms

of CAGR.

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12

Thus, the market for pharmaceuticals on a global basis is expected to continue expanding in a midterm view,

driven by increasing demand from emerging counties. At the end of the day, this will drive demand for

equipment to manufacture pharmaceuticals and the Company is trying to incorporate demand like this with

the Company’s group as much as possible.

4.0 Business Model

Formulation, the Key Technology

The Company’s main business is to develop, manufacture and sell granulation & coating machinery for

pharmaceutical industry. In the domestic market, the Company holds an overwhelming 70% share, while

presumably being one of the three major players, on a global basis. The remaining 30% in the domestic

market is held by Powrex Corporation (unlisted) which is in charge of selling products made by Glatt GmbH

(based in Germany), i.e., the largest player on a global basis.

The other key player, on a global basis, is GEA Group, based in Denmark, and thus the three major players,

on a global basis, are Glatt GmbH, GEA Group and the Company. In order to survive competition on a global

basis, the Company plans to continue developing and launching new products, incorporating local needs,

regions to regions, including Japan, Europe, Americas and emerging markets for pharmaceuticals as the

place of their consumptions.

Business Model : Pen and Ink

Pen and Ink

Business Model of Hardware and Software

Hardware

Formulation Machine

Pharmaceutical

Excipients

Pen Ink

Software

Formulation Technology

Tablet Capsule

GranulationCoating Microfabrication

As the distinguished feature, holding

technology of hardware and software at a

time

Hardware, refers to formulation

(granulation, coasting) machinery and

pharmaceutical excipients, while

software to formulation technology to

manufacture the hardware

Competitors are pure Machinery makers

to a large extent, while the Company’s

distinguished feature enables itself to

develop new technologies, etc. prior to

the competitors

Tablet Formulation Process, Granule Formulation process

【Granule Formulation process】 PulverizationMixing・Granulation・Coating

【Tablet Formulation Process】Mixing Tableting

Granulation CoatingGranulation DryingPulverization

Source: Company Data

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On the mainstay Machinery side, sales came in at ¥11,044m (up 11.0% YoY) and accounted for 76.6% of

operating profit (before elimination) with the Company in FY02/2014, while having comprised

pharmaceutical industry 88% and industrial-related 12% in terms of sales by application. That is to say, that

this business segment is heavily exposed to capital expenditures by pharmaceutical industry. Given a

reasonably high overseas sale ratio 39.8% on the Machinery side, while a management strategy to cultivate

overseas markets is enhanced, the Company is increasingly exposed to capital expenditures by

pharmaceutical industry on a global basis, as far as we could gather.

The Company’s machinery for pharmaceutical industry effectively all relates to granulation & coating

machinery, applied in tablet formulation process and granule formulation process, i.e., some parts of the

manufacture of pharmaceuticals. On top of this, the Company has been developing “TABREX,” which is

tablet-printing machinery, for some time. Order intake for TABREX is now starting to pick up, implying that

the Company is starting to get involved with new domains in the market for pharmaceuticals.

In regards to tablet-printing machine TABREX, some seven competitors appear to have launched

equivalents in the market to date. However, until most recently, the Company’s products have remained

very competitive, generating profit margin as high as existing granulation & coating machinery.

For information, granulation refers to processing into particles having a predetermined shape through

mixing drug compounds as an active ingredient of the medicament and additives to control various functions

at a predetermined ratio. Meanwhile, coating refers to formation of functionality films on the surface of

tablet so that emission limits to control drug resolution in the tablet surface are achievable and so is

masking to block the bitterness.

Granulation Machinery

(Machinery)

Coating Machinery

(Machinery)

Diversified Chemicals

(Chemicals)

“Granumeist”

“Hi-Coater FZ”

Source: Company Data

The Company basically operates own sales forces in Japan and in United States, while largely exposed to

sales through local sales agents elsewhere, such as Europe and Asia. It is taken for granted that the

Company has to spare some expenses to sell own machinery, and the Company is currently in the pursuit of

best balance between the two, reviewing cost efficiency for both.

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Meanwhile, on the Chemicals side, having accounted for the remaining 23.4% of operating profit with the

Company in FY02/2014, where the Company is involved with manufacture and sales of pharmaceutical

excipients, food preservatives, dietary supplements, etc. In regards to pharmaceutical excipients, the

Company runs production facilities complying with GMP (Good Manufacturing Practice) standards, as

taken for granted.

Food preservatives are adopted as those for baumkuchen, for example, as well as for other diverse foods. In

regards to dietary supplements, the Company implies that it is heavily involved with joint developments of

final products with its customers, while outsourcing the manufacturing of final products to subcontractors

that have adopted the Company’s granulation & coating machinery.

Disclaimer

Information here is a summary of “IR Information” of the Company, compiled by Walden Research Japan,

from a neutral and professional standing point, in the form of a report. “IR Information” of the Company

comprises a) contents of our interview with the Company, b) contents of presentations for institutional

investors, c) contents of timely disclosed information and d) contents of the homepage etc.

Company Name: Walden Research Japan Incorporated

Headquarters Office:#1110 4-12-4 Hatchobori, Chuo-ku, Tokyo 104-0032, JAPAN

URL: www.walden.co.jp

E-mail: [email protected]

Phone:+81 3 3553 3769

Copyright 2014 Walden Research Japan Incorporated