Bridge Report FREUND CORPORATION (6312)

Transcription

1 Bridge Report FREUND CORPORATION (6312) Iwao Fusejima, President Company Code No Exchange Industry President HQ Address Business Year End URL FREUND CORPORATION JASDAQ Machinery (Manufacturing) Iwao Fusejima Shinjuku TX Bldg Okubo, Shinjuku-ku Tokyo A pioneer in granulation and coating equipment, with top share of the Japanese coating equipment market and particular strengths in drug formulation technologies. February - Stock Information - Share Price Shares Outstanding (ex. Treasury Shares) Market Cap. ROE (actual) Trading Unit 954 8,622,380 shares billion 7.5% 100 shares DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual) % x x * Share price as of closing on November 6, Number of shares outstanding as of most recent quarter end, excluding treasury shares. ROE and BPS are based on the actual term end amounts. - Consolidated Earnings Trends - Fiscal Year Sales Operating Profit Current Profit Net Profit EPS ( ) Dividend ( ) February , , February , February , February ,236 1,065 1, February 2013Est. 16,200 1,200 1, * Estimates are those of the Company. A 2 for 1 stock split was conducted in June This Bridge Report presents FREUND CORPORATION s earnings results for the first half of fiscal year February Company Overview 2. Market Trends and Growth Strategy 3. First Half Fiscal Year February 2013 Earnings Results 4. Fiscal Year February 2013 Earnings Estimates 5. Conclusions 1

2 Key Points During the first half of fiscal year February 2013, sales and current profit rose by 24.0% and 119.0% year-over-year respectively. Machinery business segment sales grew on the back of favorable demand from domestic generic drug applications and expansion of its global business due in part to growth in pharmaceutical related products of the United States subsidiary. At the same time, contracted manufacture of dietary supplement products acted as a driver of growth in sales of the chemicals and foods segment. Full year estimates remain unchanged and call for 6.3% and 16.6% year-over-year growth in sales and current profits. Attainment rates of full year sales and current profit target are estimated to be 53.6% and 75.9% respectively. Despite these high attainment rates, estimates were left unchanged due to the potential delays in delivery of products, which see a seasonal peak in February, and potential for stronger than expected yen. In addition to increased output capacity by specialized generic drug manufacturers, expectations of an expansion in the market have contributed to steps to strengthen output by a large number of new pharmaceutical companies and their group companies. Therefore capital investments both within and outside of Japan have become active, and Freund is expected to see strong earnings as it implements measures to capture this demand. 1. Company Overview FREUND CORPORATION manufactures and sells granulating, coating, and drying machinery used by the pharmaceuticals (Oral dosage), foods, fine chemical and other industries, performs plant engineering, and manufactures and sells pharmaceutical excipients, food preservatives, dietary supplement food materials, and other products using these machinery. In the realm of coating machinery used in the main process of pharmaceutical manufacture, FREUND ranks third on a worldwide basis and boasts of a top share of the Japanese market of 70% (FREUND data). In addition, FREUND boasts of having over 300 intellectual properties including patent applications both within Japan and in overseas countries. The FREUND Group is comprised of two Japanese companies and three overseas companies, including intermediary holding company, for a total of five consolidated subsidiaries. What Are Granulating, Coating, and Drying Processes? Granulating is a process that uses powder to create granulations that improve the liquid and disintegrative properties of oral preparations. Furthermore, coating is the process where a thin membrane is placed on the surface of materials as a drug delivery system (A system to control the where and how long the preparation takes to dissolve, and control the effectiveness of the preparation within the human body. DDS: Drug Delivery System), to increase the effectiveness of drugs by controlling the effect of oral preparations, reducing (Masking) the bitterness of oral preparations to make them easier to ingest, and protecting oral preparations from ultraviolet light and humidity. Granulating and coating are both used in foods, including soups for cup noodles and cocoa, to make them dissolve rapidly after boiling water is added by taking advantage of the properties of the granulate format. One of the best examples of this type of coating is its use in Meiji Co., Ltd. Marble Chocolate and LOTTE Co., Ltd. gums. At the same time drying is used to describe the drying process for oral preparations and foods after they undergo the granulation and coating processes. The FREUND Group is able to respond to customers needs by supplying them with a wide range of equipment that feature the unique capability of being able to conduct all three functions of granulating, coating and drying in one single integrated process performed by one single machine. The manufacturing of machinery requires between four to five months, and thereafter requires an additional two to three months of electrical, plumbing and other plant engineering work. Therefore the time required to manufacture and install machinery in large plants could sometimes require as much as about one year. Contracted Manufacture of Pharmaceutical Excipients, Food Preservatives, and Dietary Supplement Foods 2

3 Pharmaceutical excipients are ingredients that do not have any medicinal effects, but are ingredients that can be used to make pharmaceutical products easier to swallow and to increase their ability to be dissolved. FREUND boasts of a rich product lineup including nonpareil spherical granulates in easily controlled film thicknesses and with the high sphericity and sharpness of grain size distribution, and DILACTOSE direct tableting use lactose made into tablets with superior disintegrative properties. In addition, FREUND boasts of the second highest market share (FREUND estimates) of the food preservatives, such as those found as little paper slips in baumkuchen and other unbaked cake packages, after Mitsubishi Gas Chemical Company, Inc. (Product name AGELESS ). At the same time, the contracted manufacture of dietary supplement foods business leverages the unique equipment and formulation technologies acquired through its experiences in provision of products to the pharmaceutical and food industries. And while Mitsubishi Gas Chemical Company has the oxygen absorbing deoxidant AGELESS that is effective in controlling the growth of bacteria in the realm of food preservatives, FREUND has a product called Antimold, which is made from powdered granulates of ethanol evaporative agent using ethyl alcohol (Using the bacteriostasis function of alcohol) and Negamold, which boasts of the ability to act as an antioxidant with evaporative properties based on ethanol. Both products boast of prolonged bacteriostasis effect because they are based on powdered ethyl alcohol that gradually evaporates. Drug Formulation Process: Granulating (Application to Active Ingredients), Coating, Drying Processes Active Ingredient Loaded Coating Tableting Pharmaceutical Excipient Active Ingredient Coating Ingredient (Source: Kudoh Patent Office) <Business Segments and Group Companies> (1) Business Segments Freund s business can be divided into the machinery segment and chemicals and foods segment, with each accounted for 62.9% and 37.1% of sales in fiscal year February Machinery Segment Freund manufactures and sells granulating, coating and drying equipment used in pharmaceuticals, food, and chemical industry applications. The consolidated subsidiary FREUND-TURBO CORPORATION is focused upon providing clients with industrial use machinery including granulation, milling and classification equipment. During fiscal year February 2012, pharmaceutical product related and industrial related applications accounted for 83% and 17% of machinery segment sales, respectively. In overseas markets, FREUND is fortifying its business presence in Korea, China and other parts of Asia. At the same time its United States subsidiary is responsible for sales in North, Central and South Americas, Europe, the Middle East, and Africa. In addition, FRUEND-TURBO is currently preparing for launch of its overseas business. GRANUMEIST Granulating Machinery HI-COATER FZ Coating Machinery FLOW-COATER Drying Machinery with Spray System (Source: FREUND) 3

4 Chemicals and Foods Segment FREUND CORPORATION undertakes the manufacture and sales of pharmaceutical excipients, and FREUND KASEI Co., Ltd. manufactures food preservatives and dietary supplement foods (Jointly developed with customers of Freund equipment). Sales of pharmaceutical excipients, food preservatives, and dietary supplement foods account for 34%, 33% and 32% of this segment s sales respectively. Pharmaceutical Excipients Food Preservatives (Source: FREUND) Pharmaceutical product sales (Including pharmaceutical related equipment and excipients) accounted for 64.8% of total sales in fiscal year February 2012, and pharmaceutical excipients are manufactured at facilities which are compliant with the Good Manufacturing Practice (GMP) product quality management standards for pharmaceutical products defined by the Pharmaceutical Affairs Act, which is enforced by the Minister of Health, Labor and Welfare. FREUND s food preservative agents boast of top share of the ethanol evaporative agent market in Japan (FREUND estimate). With regards to food preservative agents, Mitsubishi Gas Chemical Company Inc. s AGELESS is well known, but AGELESS is a deoxygenating agent that uses ferrous oxidation to absorb oxygen to bring about bacteriostasis and prevent oxidation. In comparison, FREUND s deoxygenating agent uses ethyl alcohol in powdered form contained within specially designed small pouches filled with an ethanol evaporative agent. The bacteriostasis effect is derived from the gradual evaporation of alcohol and is therefore able to maintain the moist texture of products by avoiding the use deoxygenating agents. In addition, new products that have both oxygen absorbing and ethanol evaporative qualities called Negamold-Light and Negamold-Natural were launched in the market in October Both of these products boast of not only Antimold and anti-oxidant functions, but also enable foods to maintain their soft and moist textures. Negamold-Light is appropriate for use with sponge cakes, pancakes and other unbaked western confectionaries, while Negamold-Natural is appropriate for use with various Japanese confectionaries. (2) Group Companies The FREUND GROUP is comprised of the parent company, and a total of five consolidated subsidiaries, including two within Japan and three overseas. The two Japanese subsidiaries include FREUND KASEI Co., Ltd. and FREUND-TURBO CORPORATION, which was turned into a consolidated subsidiary through the acquisition of the former Turbo Kogyo Co., Ltd. in June 2010 and is focused upon the Group s goal of expanding the industrial machinery business (Non-pharmaceutical products). The milling and classifying processes technologies of the former Turbo Kogyo mutually complement the granulating and coating technologies of FREUND, and a fusion of these technologies has enabled FREUND to provide powder technologies in a wide range of applications to various fields. In addition, FREUND KASEI Co., Ltd. provides all of its food preservative agents to FREUND CORPORATION. At the same time, the three companies operating overseas include FREUND-VECTOR CORPORATION (formerly called VECTOR CORPORATION) operating in the United States, Freund Pharmatec Ltd. (Hereafter called the European subsidiary) operating in Ireland and aiming to conduct solutions business that combine equipment, pharmaceutical excipients, and manufacturing technologies, and FREUND INTERNATIONAL, LTD., which is an intermediary holding company. 4

5 The regional sales of the FREUND-VECTOR can be divided between North America (54%), South America (25%), Europe and the African continent (11%), and the Middle East and Asia (10%). Also, Freund Pharmatec is promoting the development of DDS (drug delivery systems) drug formulation technologies using applications of the unique in-house seamless capsule technology and spherical format granules that enable controllable film thickness and small surface area. Freund Pharmatec also acquired GMP approval in July Also, during fiscal year February 2012 overseas sales accounted for 24.4% of total sales (Machinery segment alone), with 14.5%, 5.5% and 4.3% being derived from North and South Americas, Europe and Africa, and the Middle East and Asia respectively. As explained previously, FREUND is responsible for Asia while its United States subsidiary is responsible for South and Central Americas, Europe, the Middle East and Africa. FREUND KASEI Co., Ltd. FREUND-TURBO CORPORATION FREUND INTERNATIONAL, LTD. FREUND-VECTOR CORPORATION Freund Pharmatec Ltd. Food preservatives, confectionary decoration ancillary materials Industrial use (Non-pharmaceutical) granulating machinery, classifier machinery, wet process machinery, powder equipment development, manufacture and sales United States, intermediary holding company United States, granulating, coating machinery manufacture and sales (FY12/11; North America 54%, South America 25%, Europe and Africa 11%, Middle East and Asia 10%) Ireland, pharmaceutical new dosage form development and technology provision (Strengths of FREUND in the Pharmaceutical Product Related Business) (1) FREUND s Strengths: Provision of Drug Formulation Technologies Solutions for Pharmaceutical Excipients that Integrate Granulating and Coating Machinery The drug formulation process, which is the realm of FREUND s business, entails active ingredients to undergo granulation, coating and drying processes as part of the overall process of drug formulation making them into tablets and capsules. FREUND is able to differentiate itself from its competitors and raise its value by providing equipment and materials (Pharmaceutical excipients) that leverage drug formulation technologies (Processing technologies and knowhow) that respond to a wide range of customer requirements. Also FREUND s triumvirate equipment integrates equipment, materials, and formulation technologies and has a wide range of applications for new pharmaceutical and generic drug manufacturers. According to FREUND, FREUND is the only company that combines both drug formulation technologies with equipment manufacturing. In addition, FREUND boasts of over 300 intellectual property rights both within Japan and in overseas countries and its patent strategy has contributed largely to its earnings. 1 Contributions to The Life Cycle Management of New Pharmaceuticals Manufacturers While the pharmaceutical business is protected by patents, the patents are limited in the length of time they are effective. Therefore new pharmaceutical manufacturers endeavor to promote development required to acquire new drug patents even after drugs have been launched into the market. For example, use of new technologies that allow for fine tuning of the release of active ingredients may allow the recommended dosage to be reduced from an initial recommendation of three tablets, three times a day to only one tablet, once a day. These are areas where FREUND can leverage its materials and formulation technologies, and they represent large opportunities for FREUND to expand its businesses. 2 Contribution to The Manufacture of Generic Drugs In the process of pharmaceutical product development, generic drug manufacturers are promoting drug formulation research based on results of basic research on the active ingredients of pharmaceutical products for which patents have expired. Generic drugs can only be launched into the market after their bioequivalence and stability have been proven to be the same as previous drugs. However even after the basic patents (Substance patents) have expired, generic drug manufacturers, which also have their own knowhow in the realm of pharmaceutical excipients, will require the solutions 5

6 provided by FREUND, with its triumvirate of machinery that combines materials and formulation technologies, because of their need to establish their own unique drug formulations and knowhow. 2. Market Trends and Growth Strategy (1) Market Trends Growth within Japan is being driven by equipment demand from generic drug manufacturers. When compared with new drugs, generic drugs are lower in price and their diffusion helps to reduce the financial burden upon patients and contributes to improvements in the financial standing of medical health insurance system. Currently generic drugs account for only 22.8% of the market (Derived from the Ministry of Health, Labor and Welfare survey of pharmaceutical prices performed in September 2011) and the rate of their diffusion in the market is much lower than in Europe and North America. Among the reasons for the low diffusion of generic drugs are concerns about their quality and their stable provision, due in part to deficiencies in the amount of information provided about them. With regards to quality of and information about generic drugs, the Ministry of Health, Labor and Welfare has a target of raising the market share of generic drugs to over 30% by fiscal year 2012, and is implementing various steps to promote the use of generic drugs. With regards to stable provision, generic drug manufacturers are making aggressive capital investments to facilitate their supply capabilities. In addition, pharmaceutical manufacturers are endeavoring to differentiate themselves by increasing the value addition of their drugs by making them easier to ingest (For example, being able to take drugs without the need to drink water) in light of the intensifying competition amongst large pharmaceutical manufacturers in the realm of generic drugs. FREUND is expected to benefit from these trends because it can leverage its solutions which integrate equipment, materials, and manufacturing technologies Large Domestic Generic Drug Manufacturers' Capital Investments ( 100mn) Sawai Pharmaceutical Co., Ltd. Towa Pharmaceutical Co., Ltd. 3/10 3/11 3/12 3/13 Est. * Based on data derived from Sawai Pharmaceutical Co., Ltd. and Towa Pharmaceutical Co., Ltd. Looking at the global pharmaceutical market, the size of the market grew from $658.0 billion in 2006 to $956.0 billion in 2011, and is expected to grow even further to $1.175 to $1.205 trillion in 2016 (Source: IMS Institute for Healthcare Informatics which provides pharmaceutical products and healthcare services to patients in over 100 countries around the world). In particular, growth in newly developing countries was even more noteworthy with the market growing from $92.0 billion in 2006 to $191.0 billion in the five years to 2011, and expected to grow even further to $352.5 to $362.0 billion in the five years to 2016, a doubling of the market every five years. Furthermore, generic drugs are benefitting from not only growth in the overall market, but also from growth in their share of the market. 6

7 1,200 1, World Pharmaceutical Product Market Data ($1.0 billion) Est. Others Developing Countries Korea Japan Other Europe EU 5 Countries Canada US * Source: Created from IMS Market Prognosis, April 2012 (2) Fifth Midterm Business Plan VISION-50 (FY2/12 to FY2/14), Approaching FREUND s 50 th Anniversary FREUND will celebrate its 50 th year of operation in fiscal year February 2014 and has established targets for sales and operating profit of 20.0 and 2.0 billion respectively (Foreign exchangse assumptions: US$1 = 85, 1 Euro = 120). In order to achieve these targets, FREUND is in the course of implementing its 5 th Midterm Business Plan VISION-50. In the final year of the 4 th Midterm Business Plan (First phase) concluded in fiscal year February 2011, restructuring of each business segment and establishment of strategic targets was implemented. Following on the heels of this plan, FREUND established goals of expanding the scale of its business and maintaining growth in its 5 th Midterm Business Plan (Second phase). And three main points of the current Plan are the expansion of its existing businesses, full scale launch of new businesses, and fortification of its global strategy. 25,000 20,000 15,000 Sales Operating Profit Sales, Operating Profit Trend ( mn) 5 th Midterm Business Plan 4 th Midterm Business Plan Restructuring of Business Segments, Strategic Targets Established Structural Reforms to Expand Business Scale, Maintain Growth , , /05 2/06 2/07 2/08 2/09 2/10 2/11 2/12 2/13Est. 2/14Target. 0 1 Business Segment Specific Measures and Progress Machinery Segment The basic strategy for this segment entails the four main points of: 1) expansion of sales to the medical products industry, 2) development of new products and businesses, 3) global deployment, and 4) fortification of manufacturing functions. During fiscal year February 2012, FREUND strengthened its proposals including containment applications, for which there is strong demand, to generic drug manufacturers. Also new products including HI-COATER FZ and OptiMill (Grinding machinery, FREUND-TURBO) were introduced to the market. FREUND also implemented measures to fortify its group and reform its organization to cultivate the Asian market. 7

8 Basic Strategies 1 Expansion of medical product industry related sales: Fortify strategy for generic drugs 2 New products, new business development: Strengthen design capabilities, Integrate VECTOR technologies to launch new products, full scale entry into industrial machinery 3 Global deployment: Develop the Asian markets 4 Fortify manufacturing structure: Strengthen alliances with cooperative plants During fiscal year February 2013, FRUEND will accelerate its new product development, complete development of fluid bed granulation drying equipment multiple function test equipment, and achieve results in the research and development of granulate coating technology. Furthermore, global deployment entails fortification of FREUND s functions in India, Korea, China and other parts of Asia and FREUND-VECTOR s facilities in North America, South and Central Americas, Europe, the Middle East, and Africa. Moreover, preparation of FREUND-TURBO products, including industrial machinery (Non-pharmaceutical), for launch in Europe and North America are underway. Chemicals and Foods Segment The basic strategy for this segment entails 1) the increase sales of pharmaceutical excipients, 2) expand food industry related business, and 3) implement its global strategy. During fiscal year February 2012, FREUND promoted collaboration between this segment and the machinery business segment to develop solutions that integrate equipment, materials (additives), and manufacturing technologies that strengthen their relationship with generic drug manufacturers. The Company also began conducting surveys of overseas markets during the second half. Basic Strategy 1 Expand pharmaceutical excipient sales: Strategic expansion of solid formulations (Fortify sales in generic drug market), aggressively grow sales of immune response enhancing agents 2 Expand food industry related business: Expand supplement related product sales, expand food preservative sales 3 Global strategy: Develop Asian markets During fiscal year February 2013, FREUND will implement measures to aggressively cultivate the Asian markets, including the shift of sales agencies from trading firms specializing in machinery to trading firms specializing in chemicals (Until now machinery trading firms which sold chemical products as part of its machinery and equipment sales business). Furthermore, Freund Pharmatec will strengthen its development function to achieve profitability of its drug formulation solutions in Europe. 2 Progress in Research and Development Machinery Segment During the first half of February 2013, the machinery segment achieved two main results in its research and development functions including development of fluid bed granulation drying equipment multiple function test equipment and research and development of minute granule coating technology. Fluid bed granulation drying equipment is used to describe FLOW-COATER, and multiple function type machinery including FLOW-COATER, in addition to standard fluid bed, Granurex (Particulate granulization use), SFC Units (Heavy granulization use), wurster unit (Granule coating use), and Lateral Nebulization Unit (Granule coating use). Recently, pharmaceutical companies have been heavily using orally dissolving tablets as new dosage forms in their pursuit of easy to ingest products. However quickly dissolving tablets are often very bitter tasting. In order to resolve this issue, the active ingredients are formed into spherical granules of 200 to 300μm in size, and FREUND was successful in developing a test machines that mask the bitterness with a coating that covers their surfaces that boasts of not only fluid bed granulation function, but also has heavy particulate capability (Heavy particulate manufacturing that cannot respond to fluid bed granulation) and makes the above mentioned particulate manufacture (Spherical particles of 200~300μm in size, coating) possible. 8

9 Furthermore as mentioned above, granulate coating of 200μm in diameter is used heavily by medical product manufacturers, but research for coating of even smaller granules has also begun. Therefore, FREUND is currently conducting research on masking surface coating technologies for pharmaceutical ingredients 50μm in diameter and the commercial use of this technology is now within sight. Chemicals and Foods Segment During the first half of fiscal year February 2013, the chemicals and foods segment was able to achieve successes in its research and development activities including new direct tableting use excipients development, new direct tableting use granulate lactose new grade development, and new food preservative market launch. In the tablet machining (The process of forming tablets) process, excipients are added (Excipients that are added for the purpose of forming, increasing volume, dilution) to the active ingredient. Diluting agents are input to the tablet machining machinery and need to be converted to granulate form in order to prevent them from being dispersed when still in powder form. New direct tableting use excipients is used to describe multi-tool and isomaltose, which are types of sugar alcohols, granulate sized excipients used in the tableting process, and are the target products being used in the development of highly popular health foods. These are very rare products for which there are only one or two types of competing products, and FREUND s products are superior in their ability to be formed into tablets. Specifically, they can be formed into very hard tablets that do not break down, but can retain high dissolvability. Furthermore, FREUND s direct tableting machining granulate form lactose is sold under the product name DILACTOSE, and is available in the R 170μm and S 90μm granulate sizes. Compared with R size granulate, the average granulate size of 70μm was developed most recently, and has improved hardness and disintegrative characteristics when ingested. In addition, this allows the choice of excipients that do not interact with the main pharmaceutical ingredients, and FREUND s various products including lactose, multi-toll, isomaltose, and other differing ingredients to be used as tableting machining excipients. FREUND has developed other food preservative agents by coming up with technologies to combine ethanol with antioxidants to develop and market launch the new products Negamold-Light and Negamold-Natural, which combine the functions of antioxidants and ethanol. 3 Global Strategy FREUND CORPORATION is developing Asian markets including India, and FREUND-VECTOR is developing markets in South and Central Americas, Europe, the Middle East and the African continent. Currently overseas sales are based primarily in developed countries and are conducted in line with the standards of the food and drug authorities in each of the respective countries. Therefore products sold tend to be high end products, but going forward FREUND is expected to strengthen the sales of middle ranged products to developing countries as their demand is expanding. Furthermore, Freund Pharmatec has cultivated the solutions provision type of business in Europe since it was established in January The Company was established to provide research and development support functions in its facilities to pharmaceutical manufacturers. Furthermore the Company receives active ingredients of drugs from pharmaceutical manufacturers to help improve the masking effect and make them easier to ingest, protect them from ultraviolet light and humidity, and to create samples that satisfy customers demands for drug delivery systems. These efforts include provision of manufacturing technologies to cultivate sales of granulate coating and drying equipment, and pharmaceutical excipients. FREUND-VECTOR CORPORATION FREUND CORPORATION GROUP began transactions with FREUND-VECTOR CORPORATION (Previously known as VECTOR CORPORATION) in 1974 as its United States sales agent. In 1979, technologies for and contracted production of HI-COATER (Automatic sugar and film coating equipment), and in 1986 technologies for FLOW-COATER were provided to the Company. In 1997, the lack of a successor to the Company led to the transfer of its shares and its conversion to a subsidiary. The name of the Company was subsequently changed in 2011 to FREUND-VECTOR CORPORATION

10 marked the 40 th year of its operations, and in 2013 investments to expand capacity are expected to be implemented. As reflected in the graphs below, the Company s earnings are trending favorably. Orders, Orders Backlog Trend Sales, Operating Profit Trend Orders Orders Backlog Sales Operating Profit (Source: FREUND) The weaker demand for granulating equipment caused by the Lehman Shock in Europe and North America is on a course to recovery. Furthermore, demand for medical products is growing on the back of improvements in living standards accompanying economic growth in the South and Central Americas and the Middle East, and equipment demand is growing in line with growth in consumption. Amidst these trends, the strengthened marketing efforts of FREUND-VECTOR are beginning to yield results, with US dollar based sales rising to record highs for eight consecutive years (Furthermore the real breakthrough in growth has yet to be seen as global business development is still in early phase.). FREUND-TURBO CORPORATION FREUND-TURBO CORPORATION is currently promoting preparations for its businesses in Europe and North America (Industrial use machinery). The business of the Company is still only worth about 1.0 billion, but FREUND-TURBO is the leading company in various fields that require granule size reduction and high levels of technologies in niche products such as copying machine toner, battery electrodes, cosmetics (powder form), and extremely hard materials (Carbon and titanium). In other words, the Company has products and technologies which respond to the highly critical demands of customers and has fortified its marketing capability as a member of the FREUND CORPORATION GROUP. Consequently, earnings trended strongly despite weakness in the capital investment trends within Japan. In the future, FREUND-TURBO expects to leverage FREUND-VECTO s sales channels to expand its businesses in Europe and North America. For the time being, responses to demand will be made from manufacturing facilities within Japan, but over the medium term, the overseas production by FREUND-VECTOR is being contemplated. 3. First Half Fiscal Year February 2013 Earnings Results (1) First Half Earnings 1H FY2/12 Share 1H FY2/13 Share YY Change Initial Estimate Divergence Sales 7, % 8, % +24.0% 8, % Gross Profit 2, % 2, % +23.0% - - SG&A 1, % 1, % +2.1% - - Operating Profit % % % % Current Profit % % % % Net Profit % % +51.6% % * Figures include reference figures calculated by Investment Bridge Co., Ltd. Actual results may differ (applies to all tables in this report) Sales, Current Profit Rise 24.0%, 119.0% Year-Over-Year Sales rose by 24.0% year-over-year to billion. Favorable sales to generic drug manufacturers and expanded sales in 10

11 overseas markets contributed to a 26.7% year-over-year increase in machinery segment sales to billion and a 19.2% year-over-year growth in contracted production of dietary supplement foods and other products in the chemicals and foods segment sales to billion. With regards to profits, gross profit margins declined slightly due in part to the influence of the stronger yen but restraint in fixed costs, which account for nearly half of sales, general and administrative expenses allowed operating profit to rise by just under 2.1 times year-over-year to 893 million. Redemptions from insurance policy cancelations ( 77 million) also contributed to the improvement in operating profits. The higher profit absorbed extraordinary loss arising from litigation related expenses ( 301 million) and allowed net profit to rise by 51.6% year-over-year. Furthermore, capital investments declined from 51 million in the previous term to 31 million, and depreciation from 137 million to 111 million, while research and development expense remained flat at 204 million. Divergence from Initial Estimates In the machinery segment, orders, product delivery and training trended favorably. Furthermore chemicals and foods segment benefitted from stronger than expected demand for contracted manufacturing of products, allowing sales to rise above estimates. The higher sales contributed to higher marginal profitability and both operating and current profits also exceeded initial estimates by large margins. Segment Sales, Operating Profit 1H FY2/11 Share 1H FY2/12 Share YY Change Machinery 4, % 5, % +26.7% Chemicals, Foods 2, % 3, % +19.2% Total Sales 7, % 8, % +24.0% Machinery % % +84.2% Chemicals, Foods % % +60.0% Adjustments Operating Profit % (2) Segment Trends 1 Machinery 1H FY2/12 YY Change 1H FY2/13 Share YY Change Orders 4, % 4, % Orders Backlog 5, % 4, % Pharmaceutical related 3, % 4, % +30.7% Industrial related % % +10.2% Sales 4, % 5, % +26.7% Operating Profit % % Foreign Exchange ( /$) 円 円 While the booking of large overseas projects caused order backlog at the end of the first half to decline, orders trended favorably and rose by 3.8% year-over-year to billion. With regards to sales, favorable demand from Japanese generic drug manufacturers and expansion of FREUND-VECTOR s global business contributed to 30.7% and 10.2% year-over-year growth in sales of pharmaceutical and industrial related applications respectively. By company, FREUND benefitted from favorable demand from generic applications, in addition to growth in exports to India and Korea. FREUND-VECTOR also saw increases in sales to South and Central Americas, Europe, and the Middle East in addition to North America, and was able to offset the impact of the higher yen to achieve record high sales in yen terms. FREUND-TURBO, which operates business in the industrial related realm, also saw an 8.6% 11

12 year-over-year growth in sales. By geographic region, strong growth was recorded in both Japanese and overseas markets, with increase in Puerto Rico and Mexico in South and Central Americas, Ireland and France in Europe, and Turkey in the Middle East, and Korea, China, Taiwan and India in Asia. The average exchange rate rose by 2.24 to per US dollar during the term. Group Sales, Profits 1H FY2/12 YY Change 1H FY2/13 Share YY Change FREUND-VECTOR CORPORATION 1, % 1, % +36.0% FREUND-TURBO COPORATION % +8.6% FREUND CORPORATION 2, % 3, % +30.8% Adjustments Sales 4, % 5, % FREUND-VECTOR CORPORATION % % +35.6% FREUND-TURBO COPORATION % +88.2% FREUND CORPORATION, and adjustments % +99.6% Operating Profit % % +84.2% Geographic Regional Sales 1H FY2/12 YY Change 1H FY2/13 Share YY Change Japan 2, % 3, % +19.4% North, South Americas 1, % 1, % +11.9% Europe, African Continent % % +35.2% Middle East, Asia % % % Sales 4, % 5, % +26.7% 2 Chemicals and Foods Business 1H FY2/12 YY Change 1H FY2/13 Share YY Change Pharmaceutical Excipients % % +2.6% Food Preservatives % % -0.8% Dietary Supplements, Others % 1, % +71.7% Sales 2, % 3, % +19.2% Operating Profit % % Exchange Rate (Yen/Euro) 円 円 Sales grew by 19.2% year-over-year to billion. Pharmaceutical excipients and food preservatives, which were negatively impacted by the Great East Japan Earthquake in the same term of the previous year, trended favorably. The contribution of contracted manufacturing of dietary supplement food products, which Freund is involved with from the development stage, allowed sales of dietary supplement and others to rise by a large margin of 71.7% year-over-year. By company, the contribution of dietary supplement food product contracted manufacturing allowed FREUND COPORATION to see growth in its sales. However FREUND KASEI Co., Ltd., which manufactures food preservatives, recorded a decline in its sales. At the same time, Freund Pharmatec (Ireland), which aims to provide solutions integrating equipment, pharmaceutical excipients, and manufacturing technologies, is in the premarketing stages and has yet to book sales. The average exchange rate was strengthened by to per Euro. 12

13 Group Sales, Profits 1H FY2/12 YY Change 1H FY2/13 Share YY Change FREUND KASEI Co., Ltd % % -5.7% Freund Pharmatec Ltd FRUND CORPORATION 2, % 3, % +19.3% Adjustments Sales 2, % 3, % FREUND KASEI Co., Ltd % Freund Pharmatec Ltd FRUND CORPORATION and adjustments % Operating Profit % % Exports % (3) Financial Position and Cash Flow Financial Position 2/12 8/12 2/12 8/12 Cash, equivalents 3,035 3,546 Payables 2,810 2,518 Receivables 4,954 4,411 Unpaid Taxes Inventories 1,874 1,759 Advances Received 1, Current Assets 10,554 10,278 Retirement Reserves Tangible Fixed Assets 2,861 2,830 Liabilities 5,852 5,332 Intangible Fixed Assets Net Assets 8,489 8,728 Investments, Others Liabilities and Net Assets 14,342 14,060 Fixed Assets 3,787 3,782 Interest Bearing Liabilities - - At the end of the first half, total assets declined by 281 million from the end of the previous term to billion. Among the factors influencing this decline were the booking of large projects as sales and declines in receivables and advances received, and increases in cash and equivalents. Equity ratio improved by 3% points to 61.3%. With regards to cash flow, declines in advances received and increases in tax burdens ( 140 million to million due to tax refund in the previous year) contributed to a decline in operating cash flow and allowed 582 million in free cash flow to be secured. Cash Flow 1H FY2/12 1H FY2/13 YY Change Operating Cash Flow 1, % Investing Cash Flow Free Cash Flow 1, % Financing Cash Flow Cash and Equivalents at Term End 3,047 3, % 4. Fiscal Year February 2013 Earnings Estimates Full Year Consolidated Earnings FY2/12 Share FY2/13 Estimate Share YY Change Sales 15, % 16, % +6.3% Operating Profit 1, % 1, % +12.7% Current Profit 1, % 1, % +16.6% Net Profit % % +15.0% Full Year Earnings Estimates Remain Unchanged, Sales and Current Profit to Rise 6.3% and 16.6% Attainment rates of full year earnings estimates as of the end of the first half stood at 53.6%, 74.4%, 75.9% and 52.9% of sales, and operating, current and net profits respectively. Despite the strong first half performance, the potential for delays in 13

14 delivery of orders which are concentrated in February and stronger than expected exchange rates ( 80 per US dollar, in FY2/12, and 105 per euro, per euro in FY2/12) has led FREUND to maintain its outstanding earnings estimates. Capital investments are expected to be 500 million (Compared with 120 million in the previous term) due to increases in capacity in the assembly plant of FREUND-VECTOR and in food preservative manufacturing facilities. At the same time 300 and 400 million in depreciation and research and development expenses ( 264 and 390 million in the previous term respectively) are expected to be booked respectively. Dividend is expected to be raised by 3 per share to 18 per share (Based on a payout ratio of 20%). Segment Sales FY2/12 Share FY2/13 Estimate Share YY Change Machinery 9, % 10, % +6.4% Chemicals, Foods 5, % 6, % +6.1% Sales 15, % 16, % +6.3% In both Japanese and overseas markets, increases in sales of both pharmaceutical and industrial related applications are expected to boost machinery business segment sales by 6.4% year-over-year to 10.2 billion. Contracted manufacture of dietary supplement foods and generic drug applications are expected to allow sales of chemicals and foods business segment to rise by 6.1% year-over-year to 6.0 billion. 5. Conclusions While full year earnings estimates have remained unchanged, operating profit may exceed estimates by 40% to around 1.5 billion should deliveries and validations progress as expected. Therefore, the operating profit target of 2.0 billion established in the last year of the Fifth Midterm Business Plan is now within sight. Furthermore, should foreign exchange trend in line with assumptions of 85 per US dollar and 120 per euro, then large increases over estimates may be expected. In addition to increases in capacity of specialized generic drug manufacturers, many new drug manufacturers are also implementing measures to fortify their output capacity in expectation of an expansion in the market. Therefore, capital investments in both the Japanese and overseas markets are expected to be highly active and can be expected to contribute to favorable earnings for FREUND. This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration. Copyright(C) 2012 Investment Bridge Co., Ltd. All Rights Reserved. 14