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 17,500 1,000 1, FY02/2014 YoY 7.4% (12.5%) (17.1%) 2.9% FY02/2015CoE YoY (0.7%) (22.3%) (21.8%) (28.3%) Consolidated Half Year Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) Q1 to Q2 FY02/2014 8, Q3 to Q4 FY02/2014 8, Q1 to Q2 FY02/2015 7, Q3 to Q4 FY02/2015CoE 10, Q1 to Q2 FY02/2015 YoY (17.0%) (88.0%) (83.8%) (92.3%) Q3 to Q4 FY02/2015CoE YoY 16.0% 103.1% 94.0% 66.9% Executive Summary (12 November 2014) 1 V-Shaped Recovery in Q4 FREUND CORPORATION, involved with developments of machinery (incorporating proprietary formulation technology) mainly for pharmaceutical industry as the key earnings source, is to see chronologically improving earnings, short-term. On the Machinery side, sales have been adjusted for some time, while order backlog has renewed its record high level. As far as we could gather, sales have been delayed due mainly to external factors associated with some customers to supply with own machinery. More importantly, however, sales are now expected to be increasingly realized in Q3 and Q4 in FY02/2015, resulting in substantially improving earnings particularly in Q4. Meanwhile, the Company is trying to get at long-term earnings growth by means of consistently incorporating increasing demand in pharmaceutical emerging countries. According to midterm management plan (FY02/2015 to FY02/2017), sales are to increase 9.3% and operating profit 21.4% in terms of CAGR during the three-year period. The Company 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 plan. In Q1 to Q2 FY02/2015, sales came in at 7,371m (down 17.0% YoY), operating profit 101m (down 88.0%) and operating profit margin 1.4% (down 8.1% points). On the Machinery side, sales came in at 4,043m (down 29.5%), operating profit 125m (down 83.5%) and operating profit margin 3.1% (down 10.1% points), while sales 3,328m (up 5.7%), operating profit 193m (down 24.8%) and operating profit margin 5.8% (down 2.4% points) on the Chemicals side. Operating profit of the Company comprised operating profit in the two business segments and elimination negative 217m. Thus, earnings of the Company were

2 negatively affected by adjustments on the Machinery side to a large extent. In here, sales slowed down sharply in the mainstay domestic market of Japan, while sales of low-profit-margin projects were booked also in Japan. On top of this, the Company enhanced promotion activities for future sales in pharmaceutical emerging countries more aggressively than initially planned. Meanwhile, on the Chemicals side, sales were buoyant across the board, including pharmaceutical excipients, food preservatives and dietary supplements, but earnings came down in here too, due mainly to increased expenses in line with yen s depreciation against Euro. FY02/2015 Company forecasts are going for prospective sales 17,500m (down 0.7% YoY), operating profit 1,000m (down 22.3%) and operating profit margin 5.7% (down 1.6% points). All those numbers are based on earnings revision made on 3 October When compared with initial Company forecasts, sales were revised down 500m (2.8%) and operating profit 340m (25.4%). Meanwhile, operating profit in Q1 to Q2 fell short of initial Company forecasts 239m (70.3%) and therefore prospective operating profit in H2 is now supposed to fall short 102m (10.2%). The Company suggests negative factors in Q1 to Q2 will remain in H2. Nevertheless, the Company, keen on sharing earnings with shareholders, has not made change for prospective dividend per share IR Representative: Corporate Administration Division ( ir@freund.co.jp) 2.0 Company Profile A Leader of Formulation Technology & Machinery for Pharmaceutical Industry 2 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 August 2014) No. of Shares 9,200,000 shares, including 577,722 treasury shares (As of the end of August 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 pharmaceutical emerging countries 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 August 2014) Headquarters Shinjuku-ku, Tokyo JAPAN No. of Employees Parent: 209, Consolidated: 376 (As of the end of August 2014) Source: Company Data

3 3.0 Recent Trading & Prospects Q1 to Q2 FY02/2015 Results In Q1 to Q2 FY02/2015, sales came in at 7,371m (down 17.0% YoY), operating profit 101m (down 88.0%), recurring profit 141m (down 83.8%) and net profit 36m (down 92.3%). Compared with initial Company forecasts, sales fell short 229m (3.0%), operating profit 239m (70.3%), recurring profit 249m (63.8%) and net profit 164m (82.0%). According to suggestions in Earnings Revision released on 3 October 2014, the shortfall had a lot to do with larger-than-expected expenses to promote future sales in pharmaceutical emerging countries, advent of low-profit-margin projects in Japan and expenses overshoots on the Chemicals side due to forex changes, i.e., yen s depreciation against Euro. 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%) 4,728 3,950 3,886 3,830 4,656 4,224 3,545 5,189 3,506 4,093 5,200 5,200 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/ % 15.0% 10.0% 5.0% 0.0% (5.0%) (10.0%) 3 (quarterly forecasts in Q3 and Q4 FY02/2015: half-year Company forecasts, pro rata) On the Machinery side, sales came in at 2,583m (down 37.7%) in Japan, 1,036m (up 20.4%) in North America & Latin America, 100m (down 82.1%) in Europe & Africa and 324m (up 86.7%) in Middle East, Asia & Oceania, by region. It appears that sales in Japan came down sharply over the year, due mainly to non-reappearance of large-sized projects and to that sales were delayed by external factors associated with some customers to supply with own machinery. In regards to the latter, the Company argues that there were cases where timing for the Company s machinery to be inspected for booking sales was delayed in line with delayed construction of customers factory facilities where the machinery was to be installed. Meanwhile, overseas sales trends by region have a tendency to be misleading on a half year basis, as they are affected by timing of booking sales of each project to a large extent. Still, a trend suggested by the Company is that surging sales in Brazil is the main reason for buoyant sales in North America & Latin America.

4 As discussed above, the Company is exposed to overseas markets, e.g., North America & Latin America, etc. to a meaningful extent, on the Machinery side, suggesting that sales and earnings were boosted by yen s depreciation against US$. Nevertheless, yen s depreciation against Euro squeezed earnings on the Chemicals side more significantly. On the Chemicals side, raw materials are imported from Europe, while the Company runs an R&D center in Europe (in Ireland). Yen s depreciation against Euro increased expenses associated with the former and the latter. 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 3,506 7, (1,509) Cost of Sales 3,107 6,070 8,539 12,377 2,454 5, (869) Gross Profit 1,549 2,811 3,887 5,238 1,052 2, (640) SG&A 987 1,967 2,887 3,952 1,073 2, Operating Profit ,000 1,286 (20) (742) Non Operating Balance Recurring Profit ,046 1,341 (0) (732) Extraordinary Balance 1 3 (18) (18) (0) (3) Pretax Profit ,027 1,323 (1) (736) Tax Charges etc (297) Minorities' Interests (2) (4) Net Profit (29) (434) Sales YoY (1.5%) +2.3% (1.1%) +7.4% (24.7%) (17.0%) Operating Profit YoY +13.8% (5.6%) (19.4%) (12.5%) - (88.0%) Recurring Profit YoY +1.9% (12.2%) (22.9%) (17.1%) - (83.8%) Net Profit YoY (7.1%) +27.2% (4.6%) +2.9% - (92.3%) Gross Profit Margins 33.3% 31.7% 31.3% 29.7% 30.0% 29.4% - - (2.2%) SG&A / Sales 21.2% 22.2% 23.2% 22.4% 30.6% 28.1% % Operating Profit Margins 12.1% 9.5% 8.0% 7.3% (0.6%) 1.4% - - (8.1%) Recurring Profit Margins 12.5% 9.8% 8.4% 7.6% (0.0%) 1.9% - - (7.9%) Net Profit Margins 6.6% 5.3% 4.3% 4.5% (0.9%) 0.5% - - (4.8%) 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 3,506 3, (359) Cost of Sales 3,107 2,963 2,468 3,838 2,454 2, (215) Gross Profit 1,549 1,261 1,076 1,350 1,052 1, (143) SG&A ,064 1, Operating Profit (20) (159) Non Operating Balance Recurring Profit (0) (149) Extraordinary Balance 1 1 (22) 0 (0) (1) Pretax Profit (1) (151) Tax Charges etc (54) Minorities' Interests (2) (0) Net Profit (29) (95) Sales YoY (1.5%) +6.9% (8.8%) +35.5% (24.7%) (8.5%) Operating Profit YoY +13.8% (29.6%) (55.0%) +25.1% - (56.7%) Recurring Profit YoY +1.9% (31.1%) (52.3%) +13.1% - (51.4%) Net Profit YoY (7.1%) % (65.0%) +24.3% - (59.2%) Gross Profit Margins 33.3% 29.9% 30.4% 26.0% 30.0% 28.9% - - (0.9%) SG&A / Sales 21.2% 23.2% 26.0% 20.5% 30.6% 25.8% % Operating Profit Margins 12.1% 6.7% 4.4% 5.5% (0.6%) 3.2% - - (3.5%) Recurring Profit Margins 12.5% 6.9% 4.9% 5.7% (0.0%) 3.7% - - (3.2%) Net Profit Margins 6.6% 3.8% 1.9% 4.8% (0.9%) 1.7% - - (2.1%) Tax Charges etc. / Pretax Profit 46.8% 43.9% 52.3% 13.5% % % 4

5 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 1,794 4, (1,689) Chemicals 1,608 3,148 4,759 6,611 1,711 3, Sales 4,656 8,881 12,427 17,616 3,506 7, (1,509) Machinery (5.9%) +2.1% (0.4%) +11.0% (41.1%) (29.8%) Chemicals +8.1% +2.8% (2.3%) +2.0% +6.4% +5.7% Sales (YoY) (1.5%) +2.3% (1.1%) +7.4% (24.7%) (17.0%) Machinery 65.5% 64.6% 61.7% 62.5% 51.2% 54.9% Chemicals 34.5% 35.4% 38.3% 37.5% 48.8% 45.1% Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Machinery , (633) Chemicals (63) Operating Profit (Elimination) 659 1,015 1,250 1, (697) Elimination (97) (171) (249) (335) (149) (217) - - (45) Operating Profit ,000 1,286 (20) (742) Machinery +18.4% +4.2% (3.9%) +6.0% (90.4%) (83.5%) Chemicals +13.9% (14.2%) (32.4%) (32.9%) (50.3%) (24.8%) Operating Profit (YoY) +13.8% (5.6%) (19.4%) (12.5%) - (88.0%) Machinery 75.3% 74.7% 74.0% 76.6% 37.1% 39.3% Chemicals 24.7% 25.3% 26.0% 23.4% 62.9% 60.7% Operating Profit (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Machinery 16.3% 13.2% 12.1% 11.3% 2.7% 3.1% - - (10.1%) Chemicals 10.1% 8.2% 6.8% 5.7% 4.7% 5.8% - - (2.4%) Elimination (2.1%) (1.9%) (2.0%) (1.9%) (4.3%) (2.9%) - - (1.0%) Operating Profit Margin 12.1% 9.5% 8.0% 7.3% (0.6%) 1.4% - - (8.1%) 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 1,794 2, (435) Chemicals 1,608 1,540 1,611 1,851 1,711 1, Sales 4,656 4,224 3,545 5,189 3,506 3, (359) Machinery (5.9%) +13.0% (7.0%) +50.4% (41.1%) (16.2%) Chemicals +8.1% (2.2%) (10.9%) +14.9% +6.4% +4.9% Sales (YoY) (1.5%) +6.9% (8.8%) +35.5% (24.7%) (8.5%) Machinery 65.5% 63.5% 54.5% 64.3% 51.2% 58.2% Chemicals 34.5% 36.5% 45.5% 35.7% 48.8% 41.8% Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Machinery (184) Chemicals Operating Profit (Elimination) (166) Elimination (97) (74) (77) (85) (149) (67) Operating Profit (20) (159) Machinery +18.4% (15.2%) (28.9%) +51.3% (90.4%) (70.4%) Chemicals +13.9% (39.9%) (62.5%) (35.7%) (50.3%) +19.1% Operating Profit (YoY) +13.8% (29.6%) (55.0%) +25.1% - (56.7%) Machinery 75.3% 73.5% 71.1% 85.3% 37.1% 40.9% Chemicals 24.7% 26.5% 28.9% 14.7% 62.9% 59.1% Operating Profit (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Machinery 16.3% 9.8% 8.6% 9.5% 2.7% 3.5% - - (6.3%) Chemicals 10.1% 6.1% 4.2% 3.0% 4.7% 6.9% % Elimination (2.1%) (1.8%) (2.2%) (1.6%) (4.3%) (1.8%) % Operating Profit Margin 12.1% 6.7% 4.4% 5.5% (0.6%) 3.2% - - (3.5%) 5

6 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 3,102 5, (1,414) North America (USA, Canada) , (116) Europe (France, UK, etc.) (439) Other (Latin America, Asia, etc.) , Sales 4,656 8,881 12,427 17,616 3,506 7, (1,509) Japan +15.5% +13.0% +1.5% +3.4% (22.3%) (19.4%) North America (USA, Canada) (4.4%) +36.0% +34.4% +58.6% (29.1%) (14.4%) Europe (France, UK, etc.) +22.0% +12.1% (7.0%) (9.2%) (83.1%) (80.0%) 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%) (17.0%) Japan 85.7% 82.0% 80.4% 75.1% 88.5% 79.6% North America (USA, Canada) 5.9% 9.2% 7.4% 8.5% 5.6% 9.5% Europe (France, UK, etc.) 6.7% 6.2% 5.3% 4.0% 1.5% 1.5% Other (Latin America, Asia, etc.) 1.7% 2.6% 7.0% 12.4% 4.5% 9.4% Sales (Composition) 100.0% 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 3,102 2, (526) North America (USA, Canada) (36) Europe (France, UK, etc.) (181) Other (Latin America, Asia, etc.) , Sales 4,656 4,224 3,545 5,189 3,506 3, (359) Japan +15.5% +10.2% (20.3%) +9.5% (22.3%) (16.0%) North America (USA, Canada) (4.4%) +73.6% +22.4% % (29.1%) (6.8%) Europe (France, UK, etc.) +22.0% +1.3% (50.3%) (32.6%) (83.1%) (76.0%) Other (Latin America, Asia, etc.) (89.1%) (63.2%) % % +95.7% % Sales (YoY) (1.5%) +6.9% (8.8%) +35.5% (24.7%) (8.5%) Japan 85.7% 78.0% 76.3% 62.5% 88.5% 71.6% North America (USA, Canada) 5.9% 12.7% 2.8% 11.4% 5.6% 13.0% Europe (France, UK, etc.) 6.7% 5.7% 3.0% 0.9% 1.5% 1.5% Other (Latin America, Asia, etc.) 1.7% 3.6% 17.9% 25.3% 4.5% 13.9% Sales (Composition) 100.0% 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 2, (1,565) North America & Latin America na 861 na 2,883 na 1, Europe & Africa na 548 na 702 na (448) Middle East, Asia & Oceania na 173 na 766 na Sales 3,048 5,733 7,667 11,004 1,794 4, (1,689) Japan na +21.3% na +4.2% na (37.7%) North America & Latin America na (28.4%) na +64.0% na +20.4% Europe & Africa na +12.5% na (8.7%) na (82.1%) Middle East, Asia & Oceania na (65.7%) na (23.6%) na +86.7% Sales (YoY) (5.9%) +2.1% (0.4%) +11.0% (41.1%) (29.5%) Japan na 72.3% na 60.4% na 63.9% North America & Latin America na 15.0% na 26.2% na 25.6% Europe & Africa na 9.6% na 6.4% na 2.5% Middle East, Asia & Oceania na 3.0% na 7.0% na 8.0% Sales (Composition) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% - - -

7 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 3,546 3, (600) Accounts Receivables 4,460 4,476 4,291 4,409 4,557 4, Inventory 1,925 2,078 2,252 1,675 2,335 2, Other Current Assets 11,081 11,385 11,208 11,331 11,230 11, (145) Tangible Assets 2,975 2,964 2,967 3,052 2,993 2, Intangible Assets (21) Investments & Other Assets Fixed Assets 4,118 4,098 4,092 4,219 4,112 4, Total Assets 15,199 15,484 15,301 15,550 15,342 15, (141) Accounts Payable 2,381 2,517 2,300 2,068 1,706 1, (861) Short Term Debt Other 2,415 2,316 2,310 2,333 2,830 2, Current Liabilities 4,796 4,834 4,611 4,402 4,537 4, (310) Long Term Debt Other (69) Fixed Liabilities (69) Total Liabilities 5,597 5,619 5,367 5,157 5,270 5, (379) Shareholders' Equity 9,974 10,133 10,201 10,450 10,204 10, Adjustments (371) (269) (267) (57) (132) (168) Total Assets 9,602 9,864 9,934 10,392 10,072 10, Total Liabilities & Net Assets 15,199 15,484 15,301 15,550 15,342 15, (141) Equity Capital 9,473 9,731 9,799 10,239 9,930 9, Interest Bearing Debt Net Debt (4,082) (4,168) (3,958) (4,600) (3,546) (3,567) Equity Capital Ratio 62.3% 62.8% 64.0% 65.8% 64.7% 64.9% % Net-Debt-Equity Ratio (40.9%) (41.1%) (38.8%) (44.0%) (34.8%) (34.7%) % ROE (Net Profit / Average Equity) 13.2% 10.0% 7.6% 8.1% (1.2%) 0.7% - - (9.2%) ROA (Net Profit / Average Total Assets) 15.4% 11.5% 9.2% 8.8% (0.0%) 1.8% - - (9.6%) Total Assets Turnover 123% 109% 93% 133% 91% 101% Inventory Turnover Days of Inventory Quick Ratio 178% 179% 179% 205% 179% 178% Current Ratio 231% 236% 243% 257% 248% 248% 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 (645) - - (1,320) Investment Cash Flow na 35 na (423) na (108) - - (143) Operating CF + Investment CF na 709 na 803 na (754) - - (1,464) Financing Cash Flow na (195) na (226) na (253) - - (57)

8 FY02/2015 Company Forecasts FY02/2015 Company forecasts are going for prospective sales 17,500m (down 0.7% YoY), operating profit 1,000m (down 22.3%), recurring profit 1,050m (down 21.8%) and net profit 565m (down 28.3%). All those figures are of earnings revision made on 3 October 2014, while there were no changes in the prospects at the release of Q1 to Q2 results on 8 October When compared with initial Company forecasts, sales were revised down 500m (2.8%), operating profit 340m (25.4%), recurring profit 370m (26.1%) and net profit 235m (29.4%). Nevertheless, prospective dividend per share has remained unchanged at 30.0 and thus currently implying payout ratio 45.8%, up from 32.3% prior to the revision. Basically, negative factors for the shortfall in Q1 to Q2 results are to persist in H2. Nevertheless, their impacts are to get smaller and thus downgrade for prospective operating profit in H2 is no more than 102m (to 898m from 1,000m, 10.2%). Machinery: Quarterly Order Intake & Order Backlog 5,000 4,000 3,000 2,000 1, ,216 3,096 3,868 4,691 2,271 2,568 2,060 2,465 2,278 5,193 5,198 Order Backlog (Million Yen) RHS 5,216 5,380 5,267 3,271 2,699 1,998 2,002 2,572 3,026 2,491 2,696 1,853 5,789 5,260 4,938 4,883 Order Intake (Million Yen) LHS 5,263 5,440 5,328 6,144 4,991 3,648 6,945 2,549 7,235 8,000 6,000 4,000 2, 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 Meanwhile, sales are expected to increase 37.4% in H2 over Q1 to Q2 results (to 10,128m from 7,371m), which is expected to be driven by increasing sales on the Machinery side. As of the end of Q2, order backlog on the Machinery side stood at 7,235m, up 35.8% over the year, having renewed the record high and thus sales in H2 are expected to steadily expand. In particular, sales are to be concentrated in Q4 and thus earnings as well. In regards to incoming order intake, there were some adjustments in Q2 over Q1 (to 2,549m from 3,648m), but this had a lot to do with volatility on a quarterly basis. When this volatility is adjusted, it should be the case that incoming order intake on the Machinery side was on the steady rise. In terms of four-quarter moving-average, incoming order intake in Q2 came in at 2,687m, up 6.5% over the year.

9 Long-Term Prospects 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 plan. Based on the 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 period. Meanwhile, forex rates are assumed at per US$ and per Euro. Targets of Business Performance in "Change & Challenge 2014 to 2016" 30,000 25,000 20,000 15, % Sales (Million Yen) Operating Profit Margin (%) 9.0% 7.0% 7.3% 5.7% 5.1% 10.0% 12.0% 10.0% 8.0% 6.0% 10,000 5, ,943 13,257 15,236 16,396 17,616 17,500 23,000 FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/ % 2.0% 0.0% 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 the Machinery side, 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 pursuit of the best corporate efforts to incorporate future local demand in pharmaceutical emerging countries, i.e., China, India, Latin America, former Eastern Europe area and Middle East by means of developing and launching new products to cope with local needs. In regards to the Chemicals side, Focus on new products & pursuit of competitiveness on existing products is mentioned as the key strategy. 9 Sales by Business Segment : "Change & Challenge 2014 to 2016" (Million Yen) 15,000 Machinery Chemicals 14,200 10,000 5,000 11,004 10,700 9,582 9,914 7,950 8,094 6,482 6,611 6,800 4,992 5,163 5,653 8,800 0 FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017

10 Global cultivations & enhanced new product developments, the key strategy on the mainstay Machinery side, having accounted for 76.6% of operating profit (before elimination) for the Company in FY02/2014, is expected to lead to persistently increasing exposure to overseas sales for the Company. Overseas sales ratio is expected to reach 30.0% in FY02/2017 versus 24.9% in FY02/2014. "Change & Challenge 2014 to 2016": Overseas Sales Ratio (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 of 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 of the Company s financial statements, overseas sale ratio on the Machinery side is to reach 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 referred to cultivations of overseas markets, i.e., Enforcement of global strategy. Nevertheless, overseas sales ratio remained roughly unchanged though the period. Compared with 24.4% in FY02/2011, i.e., the year just before the period, 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 reason to have been mentioned for this shortfall is Delayed developments of products to cope with local demand in pharmaceutical 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 pharmaceutical emerging countries. According to data available in the Company s presentation document for Q2 FY02/2015 results, the market for pharmaceuticals on a global basis 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). 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 over 2012) for the 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, pharmaceutical 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.

11 Thus, the market for pharmaceuticals on a global basis is expected to continue expanding in a midterm view, driven by increasing demand from pharmaceutical 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 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 Japan, the Company sees 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 sells 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, across the board, in Japan, Europe, Americas and pharmaceutical emerging countries. Business Model : Pen and Ink Pen and Ink Business Model of Hardware and Software Pen Hardware Formulation Machine Software Ink Formulation Technology Pharmaceutical Excipients Holding technology of hardware and software at a time as the distinguished feature Hardware refers to formulation (granulation, coasting) machinery and pharmaceutical excipients, while software to formulation technology to manufacture the hardware 11 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

12 On the mainstay Machinery side, sales came in at 11,004m (up 11.0% YoY) and accounted for 76.6% of operating profit (before elimination) of 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, this business segment is heavily exposed to capital expenditures by pharmaceutical industry. Given a reasonably high overseas sale ratio 39.8%, while management strategy to cultivate markets in pharmaceutical emerging counties is enhanced, it appears that the Company is increasingly exposed to capital expenditures by pharmaceutical industry on a global basis. The Company s machinery for pharmaceutical industry has been effectively all granulation & coating machinery, applied in tablet formulation process and granule formulation process, i.e., some specific parts of the manufacture of pharmaceuticals. Meanwhile, incoming order intake for TABREX, which is tablet-printing machinery to be launched in the market in H2 FY02/2015, is currently kicking in on a full-year basis, suggesting that the Company is starting to get involved with a new domain in the market associated with pharmaceuticals. In regards to tablet-printing machine TABREX, some 7 competitors appear to have developed equivalents, but, until most recently at least, the Company s products in here have remained very competitive, likely to generate 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. 12 Granulation Machinery (Machinery) Coating Machinery (Machinery) Diversified Chemicals (Chemicals) Granumeist Source: Company Data Hi-Coater FZ

13 The Company has basically set up own sales network in Japan and the United States, while largely exposed to indirect sales through local sales agents elsewhere such as Europe and Asian countries. 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 direct sales and indirect sales in Europe and Asian countries by means of reviewing cost efficiency for both. Meanwhile, on the Chemicals side, sales came in at 6,611m (up 2.0% YoY) in FY02/2014, having accounted for the remaining 23.4% of operating profit of the Company. In here, the Company is involved with manufacture and sales of pharmaceutical excipients (30% of sales), food preservatives (29%) and dietary supplements (41%). Pharmaceutical excipients are additional agents to formulate drug substances (into tablets, coating agents, orally fast disintegrating tablets, capsules, granules, etc.) in the manufacture of pharmaceuticals, properly making drug substances exert their functions. 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 own customers, while outsourcing the manufacture of final products to subcontractors that have adopted the Company s granulation & coating machinery. 13 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