FREUND CORPORATION (6312)

Transcription

1 URL: Written by Yoshiyuki Muroya Phone: FREUND CORPORATION (6312) Consolidated FY Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) FY02/ ,396 1,470 1, ,066.7 FY02/ ,616 1,286 1, ,187.5 FY02/2015CoE 18,000 1,340 1, 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, Q2 FY02/2014 4, Q3 FY02/2014 3, Q4 FY02/2014 5, Q1 FY02/2015 3,506 (20) (0) (29) Q1 FY02/2015 YoY (24.7%) Executive Summary (31 July 2014) 1 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

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 ( ir@freund.co.jp) 2

3 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 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.

4 Q1 FY02/2011 Q2 FY02/2011 Q3 FY02/2011 Q4 FY02/2011 Q1 FY02/2012 Q2 FY02/2012 Q3 FY02/2012 Q4 FY02/2012 Q1 FY02/2013 Q2 FY02/2013 Q3 FY02/2013 Q4 FY02/2013 Q1 FY02/2014 Q2 FY02/2014 Q3 FY02/2014 Q4 FY02/2014 Q1 FY02/2015 Q2 FY02/2015 Q3 FY02/2015 Q4 FY02/2015 3,096 4,691 5,193 5,198 5,216 5,380 5,267 5,789 5,260 4,938 4,883 5,263 5,440 5,328 6,144 4,991 6,945 Machinery: Quarterly Order Intake & Order Backlog 5,000 4,000 3,000 2,000 1, ,216 3,868 Order Backlog (Million Yen) RHS 2,271 2,568 2,060 2,465 2,278 Order Intake (Million Yen) LHS 3,271 2,699 1,998 2,002 2,572 3,026 3,648 2,491 2,697 1,853 8,000 6,000 4,000 2,000 0 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. 4 Meanwhile, forex rates in Q1 came in at per US$ (yen depreciated 11.2% over the year) and 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.

5 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 Sales 4,656 8,881 12,427 17,616 3, (1,150) Cost of Sales 3,107 6,070 8,539 12,377 2, (653) Gross Profit 1,549 2,811 3,887 5,238 1, (496) SG&A 987 1,967 2,887 3,952 1, Operating Profit ,000 1,286 (20) (583) Non Operating Balance Recurring Profit ,046 1,341 (0) (582) Extraordinary Balance 1 3 (18) (18) (0) (2) Pretax Profit ,027 1,323 (1) (584) Tax Charges etc (242) Minorities' Interests (2) (3) Net Profit (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% % 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 Sales 4,656 4,224 3,545 5,189 3, (1,150) Cost of Sales 3,107 2,963 2,468 3,838 2, (653) Gross Profit 1,549 1,261 1,076 1,350 1, (496) SG&A ,064 1, Operating Profit (20) (583) Non Operating Balance Recurring Profit (0) (582) Extraordinary Balance 1 1 (22) 0 (0) (2) Pretax Profit (1) (584) Tax Charges etc (242) Minorities' Interests (2) (3) Net Profit (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%) % (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% % 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%

6 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 Machinery 3,048 5,733 7,667 11,004 1, (1,253) Chemicals 1,608 3,148 4,759 6,611 1, Sales 4,656 8,881 12,427 17,616 3, (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 , (449) Chemicals (81) Operating Profit (Elimination) 659 1,015 1,250 1, (531) Elimination (97) (171) (249) (335) (149) (52) Operating Profit ,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 Machinery 3,048 2,684 1,933 3,337 1, (1,253) Chemicals 1,608 1,540 1,611 1,851 1, Sales 4,656 4,224 3,545 5,189 3, (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 (449) Chemicals (81) Operating Profit (Elimination) (531) Elimination (97) (74) (77) (85) (149) (52) Operating Profit (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%) 6

7 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 Japan 3,991 7,286 9,990 13,233 3, (888) North America (USA, Canada) , (80) Europe (France, UK, etc.) (257) Other (Latin America, Asia, etc.) , Sales 4,656 8,881 12,427 17,616 3, (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 Japan 3,991 3,294 2,704 3,243 3, (888) North America (USA, Canada) (80) Europe (France, UK, etc.) (257) Other (Latin America, Asia, etc.) , Sales 4,656 4,224 3,545 5,189 3, (1,150) Japan +15.5% +10.2% (20.3%) +9.5% (22.3%) North America (USA, Canada) (4.4%) +73.6% +22.4% % (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%) % % +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% 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 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, (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%

8 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 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 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 Cash & Deposit 4,082 4,168 3,958 4,600 3, (535) Accounts Receivables 4,460 4,476 4,291 4,409 4, Inventory 1,925 2,078 2,252 1,675 2, Other Current Assets 11,081 11,385 11,208 11,331 11, Tangible Assets 2,975 2,964 2,967 3,052 2, Intangible Assets (20) LT Investment Securities etc (4) Fixed Assets 4,118 4,098 4,092 4,219 4, (6) Total Assets 15,199 15,484 15,301 15,550 15, Accounts Payable 2,381 2,517 2,300 2,068 1, (674) Short Term Debt Other 2,415 2,316 2,310 2,333 2, Current Liabilities 4,796 4,834 4,611 4,402 4, (259) Long Term Debt Other (67) Fixed Liabilities (67) Total Liabilities 5,597 5,619 5,367 5,157 5, (327) Shareholders' Equity 9,974 10,133 10,201 10,450 10, Adjustments (371) (269) (267) (57) (132) Total Assets 9,602 9,864 9,934 10,392 10, Total Liabilities & Net Assets 15,199 15,484 15,301 15,550 15, Equity Capital 9,473 9,731 9,799 10,239 9, Interest Bearing Debt Net Debt (4,082) (4,168) (3,958) (4,600) (3,546) Equity Capital Ratio 62.3% 62.8% 64.0% 65.8% 64.7% % Net-Debt-Equity Ratio (40.9%) (41.1%) (38.8%) (44.0%) (34.8%) % 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 Days of Inventory Quick Ratio 178% 179% 179% 205% 179% Current Ratio 231% 236% 243% 257% 248%

9 Q1 FY02/2013 Q2 FY02/2013 Q3 FY02/2013 Q4 FY02/2013 Q1 FY02/2014 Q2 FY02/2014 Q3 FY02/2014 Q4 FY02/2014 Q1 FY02/2015 Q2 FY02/2015 Q3 FY02/2015 Q4 FY02/2015 4,728 3,950 3,886 3,830 4,656 4,224 3,545 5,189 3,506 4,093 5,200 5,200 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 6,000 4,000 2,000 0 Sales (Million Yen) Operating Profit Margin (%) 10.4% 12.1% 10.1% 8.9% 8.8% 9.6% 9.6% 6.0% 6.7% 4.4% 5.5% (0.6%) 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) (10.0%) (quarterly forecasts in Q3 and Q4 FY02/2015: half-year Company forecasts, pro rata) 9 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 per US$ and per Euro versus 97.7 per US$ and 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 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.

10 12,943 13,257 15,236 16,396 17,616 18,000 23,000 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 per US$ and per Euro. Targets of "Change & Challenge 2014 to 2016" 30,000 25,000 20, % Sales (Million Yen) Operating Profit Margin (%) 9.0% 7.0% 7.3% 7.4% 10.0% 12.0% 10.0% 8.0% 15, % 6.0% 10, % 5, % 0 FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/ % 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.. 10 Sales by Business Segment : "Change & Challenge 2014 to 2016" (Million Yen) Machinery Chemicals 15,000 11,004 11,200 9,582 9,914 10,000 7,950 8,094 5,000 6,482 6,611 6,800 4,992 5,163 5,653 14,200 8,800 0 FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017

11 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" (Million Yen) 60.0% 48.7% 50.0% 40.0% 29.9% 30.0% Overseas Sales Ratio (%) Overseas Sales Ratio (Machinery, %) 48.6% 40.0% 39.8% 35.9% 36.3% 30.0% 24.4% 22.6% 24.9% 21.9% 20.0% 10.0% 0.0% FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017 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/ 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.

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 Pen Hardware Formulation Machine Software Ink Formulation Technology Pharmaceutical Excipients 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 12 Coating Granulation Microfabrication Tablet Capsule 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 Tablet Formulation Process Pulverization Mixing Granulation Granulation Drying Tableting Coating Granule Formulation process Pulverization Mixing Granulation Coating Source: Company Data

13 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. 13 Granulation Machinery (Machinery) Coating Machinery (Machinery) Diversified Chemicals (Chemicals) Granumeist Source: Company Data Hi-Coater FZ 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.

14 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. 14 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:# Hatchobori, Chuo-ku, Tokyo , JAPAN URL: info@walden.co.jp Phone: Copyright 2014 Walden Research Japan Incorporated