URL: www.walden.co.jp Written by Yoshiyuki Muroya E-mail: yoshiyuki_muroya@walden.co.jp Phone:+81 3 3553 3769 FREUND CORPORATION (6312) Consolidated FY Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) FY02/2011 13,257 680 698 516 60.0 15.0 922.3 FY02/2012 15,236 1,065 1,123 608 70.6 15.0 969.3 FY02/2013CoE 16,200 1,200 1,310 700 81.2 18.0 - FY02/2012 YoY 14.9% 56.6% 60.9% 17.7% - - - FY02/2013CoE YoY 6.3% 12.7% 16.6% 15.0% - - - Consolidated Half Year Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) Q1 to Q2 FY02/2012 7,002 430 454 244 - - - Q3 to Q4 FY02/2012 8,234 635 669 364 - - - Q1 to Q2 FY02/2013 8,679 893 994 370 - - - Q3 to Q4 FY02/2013CoE 7,521 307 316 330 - - - Q1 to Q2 FY02/2013 YoY 24.0% 107.8% 119.0% 51.6% - - - Q3 to Q4 FY02/2013CoE YoY (8.7%) (51.6%) (52.8%) (9.3%) - - - Source: Company Data, WRJ Calculation 0.0 Results Update (11 October 2012) 1 Growth in Latin America & Asia On 10 October, FREUND CORPORATION, mainly involved with developments, manufacturing and sales of Granulation & Coating Equipment for pharmaceutical industry, released its Q1 to Q2 FY02/2013 results. It has been revealed that, given surging sales in Latin America & Asia, earnings with the Company doubled year-on-year. On top of this, the Company also benefited from strengths in consigned manufacture of dietary supplements. We are going to attend results meeting, scheduled on 18 October as well as to interview with the Company so that we should be able to update/release our Company Report on the Company. Q1 to Q2 FY02/2013 Results In Q1 to Q2 FY02/2013, sales came in at 8,679m (up 24.0% YoY), operating profit 893m (up 107.8%), recurring profit 994m (up 119.0%) and net profit 370m (up 51.6%). Compared with initial Company forecasts (as of 10 April), sales were exceeded by 7.2%, operating profit by 48.8% and recurring profit by 44.1%. Not only did the Company see strong sales growth in overseas markets, particularly in Latin America & Asia, but also did it see steady growth in Japan, where it is believed that low birthrate and longevity work positively for the businesses with the Company. More importantly, the Company saw increasing sales with roughly stable gross profit margin, while well controlling SG&A expenses, eventually having resulted in far more growth in earnings than sales. Thus, operating profit and recurring profit have turned out to be much better-than-expected, but net profit was in line with initial projections. The key reason for this is that the Company suffered from costs 301m
at the extraordinary levels, stemming from patent infringement lawsuit of own US subsidiary, FREUND -VECTOR CORPORATION. Still, this is just an one-off issue, according to the Company, as the issue has been completely terminated, never generating any further costs nor any meaningful negative impacts for prospective earnings with the Company. FY02/2013 Company Forecasts In initial FY02/2013 Company forecasts (as of 10 April 2012), sales were expected to be 16,200m (up 6.3% YoY), operating profit 1,200m (up 12.7%), recurring profit 1,310m (up 16.6%) and net profit 700m (up 15.0%). Meanwhile, in Q1 to Q2 FY02/2013, the Company has achieved 53.6% of full-year prospective numbers in sales, 74.4% in operating profit and 75.9% in recurring profit. Still, full-year Company forecasts have remained unchanged to date. In regards to net profit, the Company has achieved no more than 52.9%, due to the costs mentioned earlier. As it could be recognized in Q1 to Q2 results, it appears that the Company is inclined to basically disclose conservative numbers for short-term prospects. The other thing to be spotted is that, although both order intake and order backlog marginally reduced sequentially in two quarters in a row in Q1 and Q2, as for the mainstay Machinery Segment, the Company suggests longer-term order trends remain favorable. The Company s IR contact: Corporate Administration Division (+81-3-5292-0215 ir@freund.co.jp) Our Company Report on the Company, based on Q1 FY02/2013 results is available as follows: 2 1.0 Executive Summary (20 July 2012) Progressing Overseas Developments FREUND CORPORATION, mainly involved with developments, manufacturing and sales of Granulation & Coating Equipment for pharmaceutical industry, is making favorable progress in its plan to develop overseas markets. The Company posted sales associated with a large-sized overseas project in Q1 FY02/2013, resulting in almost quadrupling earnings during the same period. There is a high potential to further pursue new opportunities overseas, particularly, in emerging countries, while the Company finds reasonable opportunities in the domestic market where demand on the generic side will remain firm. The Company believes a paradigm shift, increasingly less distinguishing generic drugs from new drugs, is currently taking place, and this benefits the Company. In Q1 FY02/2013, sales came in at 4.7bn (up 45.2% YoY) and operating profit 0.5bn (up 3.7x), suggesting a very strong earnings trend with the Company. By region, sales came in at 3.5bn (up 40.3%) in Japan and 1.3bn (up 60.5% YoY) in overseas markets. By segment, Machinery saw sales 3.2bn (up 55.4%) and Chemicals 1.5bn (up 27.2%). The core part of Machinery is accounted for by Granulation & Coating Equipment for pharmaceutical industry, in which domestic demand was very strong and overseas sales shot up by sales booking for a large-sized project. Overseas sales with the Company are effectively all associated with Machinery. Order intake of Machinery in Q1 FY02/2013 came in at 2.7bn (up 31.0% YoY), suggesting a persistent strengths, but order backlog was inevitably forced to adjust, albeit not much, in line with sales
booking for the aforementioned project, having resulted in 5.3bn as of the end of Q1 FY02/2013 versus 5.8bn as of the end of FY02/2012. In regards to Chemicals, consigned manufacture of a dietary supplement increased favorably, having driven the trading most significantly. According to the management plan, VISION-50, prospective sales in FY02/2014 are set at 20.0bn and operating profit 2.0bn (versus 15.2bn and 1.1bn, respectively, in FY02/2012 results). Growth in sales and earnings in FY02/2014 are anticipated to sequentially accelerate. While recent pickup in overseas sales, consequently, has a lot to do with increasing demand in developed countries, the prospective key driver in FY02/2014 is expected to be surging local demand in emerging countries. The Company s IR contact: Corporate Administration Division (+81-3-5292-0215 ir@freund.co.jp) 2.0 Company Profile A Leader of Granulation & Coating Equipment for Pharmaceutical Industry Company Name FREUND CORPORATION Company Website IR Information Share Price Established 22 April 1964 Listing 24 July 1996 (JASDAQ Standard: 6312) Capital 1,036m (As of the end of May 2012) No. of Shares 9,200,000 shares, including 577,620 treasury (As of the end of May 2012) Main Features 70% share in the domestic market for Granulation & Coating Equipment One of the three major players, on a global basis Developing markets in emerging countries Businesses Ⅰ. Machinery Segment Ⅱ. Chemicals Segment Top Management Chairman & CEO: Yasutoyo Fusejima, President & COO: Iwao Fusejima Shareholders Yasutoyo Fusejima 10.7%, FIL Corp. 9.3% (As of the end of February 2012) Headquarters Shijuku-ku, Tokyo JAPAN No. of Employees Consolidated: 358, Unconsolidated: 170 (As of the end of May 2012) 3 Source: Company Data 3.0 Recent Trading & Prospects Q1 FY02/2013 Results In Q1 FY02/2013, sales came in at 4.7bn (up 45.2% YoY), operating profit 0.5bn (up 3.7x), recurring profit 0.6bn (up 3.8x) and net profit 0.3bn (up 4.3x). In the mainstay Machinery, sales came in at 3.2bn (up 55.4% YoY) and operating profit 0.4bn (up 3.0x), while 1.5bn (up 27.2%) and 0.1bn (up 88.7%), respectively, for Chemicals. In Machinery, the Company spots that sales associated with a large-sized overseas project were booked, contributing to the strengths, on top of steady increases in sales on the
domestic side. In Chemicals, consigned manufacture of dietary supplement, based on the Company s formulation technology, contributed. Machinery, having accounted for 74.6% of operating profit with the Company, mainly relates to Granulation & Coating Equipment for pharmaceutical industry. The Company s equipment are used in literally granulating & coating diversified oral agents etc., produced by new drug manufacturers as well as by generic drug manufacturers. These processes are indispensable for pharmaceuticals to sufficiently realize own efficacy. Only after such processes, all those oral agents etc. are enable to be efficiently absorbed by human bodies in many respects. By region, sales in Japan were 3.5bn (up 40.3% YoY), North America (USA, Canada) 0.3bn (down 13.0%), Europe (France, UK etc.) 0.3bn (up 2.9x) and other (Latin America, Asia etc.) 0.7bn (up 2.0x). Sales overseas here are effectively all related to the mainstay Machinery, by segment. Sales in Europe (France, UK etc.), where sales of the aforementioned large-sized project are presumed to have been booked, picked up so sharply, while increasing sales in other (Latin America, Asia etc.) contributed to sales with the Company more significantly. Quarterly Sales & Operating Profit Margin 6,000 5,000 4,000 3,000 0.9% Sales (Million Yen) Operating Profit Margin (%) 7.9% 10.2% 10.4% 6.5% 6.2% 7.4% 7.4% 5.8% 5.6% 4.1% 3.1% 15.0% 10.0% 5.0% (0.0%) 4 2,000 (5.0%) 1,000 0 2,523 3,493 3,360 3,881 3,255 3,747 3,811 4,423 4,728 3,372 4,050 4,050 (10.0%) (15.0%) 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 Source: Company Data, WRJ Calculation (H2 quarterly forecasts in FY02/2013 are based on half year Company forecasts, equally divided into two) Operating profit margin came in at 10.4%, up as much as 6.3% points from 4.1% in Q1 FY02/2012 results. Gross profit margin came in at 29.2%, down 1.2% points from 30.3%, but SG&A expenses hardly increased, having resulted in their ratio to sales coming down by 7.5% points to 18.7% from 26.2%. The Company s products are assembled by external consigned makers to a large extent, and thus gross profit margin with the Company shows a tendency to remain almost stable. In Q1 FY02/2013, the Company appears to have seen some net inflow in free cash flow, after seeing decent net inflow 1.1bn in FY02/2012. As of the end of Q1, total assets stood at 14.0bn, net assets 8.8bn and net
cash 3.3bn (no debts). This may suggest that the Company suffers from excess cash in a sense, but it should be said that the Company sees sufficient capital efficiency, given implied ROE 8.0% in FY02/2013, based on net assets 8.8bn as of the end of Q1 and prospective net profit 0.7bn in FY02/2013 Company forecasts. FY02/2013 Company Forecasts In FY02/2013, Company forecasts are going for prospective sales 16.2bn (up 6.3% YoY), operating profit 1.2bn (up 12.7%), recurring profit 1.3bn (up 16.6%) and net profit 0.7bn (up 15.0%). Meanwhile, dividend per share is planned at 15.0 (payout ratio 22.2%), up 3.0 per share from 15.0 (25.0%) in FY02/2012. The Company has a target 20% for its payout ratio, while even higher ratio is now expected to feed through. Still, it should be the case for the Company to further increase returns with shareholders in a long-term view, when piling up cash with the Company is considered. Q1 results showed better-than-expected trends, having achieved 58.4% of prospective sales in H1 Company forecasts, 82.3% in operating profit, 82.6% in recurring profit and 89.7% in net profit, but full-year Company forecasts have remained unchanged to date. Meanwhile, order intake in the mainstay Machinery came in at 2.7bn (up 31.0% YoY), implying ongoing strengths for the near-term earnings with the Company. Nevertheless, order backlog on the Machinery side stood at 5.3bn as of the end of Q1, having marginally decreased from 5.8bn as of the end of Q4 FY02/2012. This has a lot to do with the aforementioned sales booking for a large-sized project overseas. On top of this, it could be spotted that this one-off adjustment in order backlog is also attributable to the fact that Q1 order intake is relatively smaller than other quarters, every year, due to a seasonal factor. 5 Order Intake & Order Backlog in Machinery Segment 7,000 6,000 5,000 4,000 3,000 2,000 3,096 1,216 Order Backlog (Million Yen) Order Intake (Million Yen) 5,789 5,193 5,198 5,216 5,380 5,267 4,691 3,868 2,271 2,568 2,060 2,465 2,278 3,271 5,261 2,700 1,000 0 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 Source: Company Data, WRJ Calculation The Company, developing overseas markets including those of emerging countries, is exposed to risk associated with changes in forex rates, but the impacts here will not be very substantial, according to the Company. Company forecasts in FY02/2013 are based on 80 per US$, while a swing of 1 per US$ is
estimated to produce a swing of 38m pa in sales and 2m pa in operating profit (yen s appreciation is a factor to reduce the numbers and vice versa). Long-Term Prospects For FY02/2014, which is the 50 th Anniversary of the Company, prospective sales are set at 20.0bn, operating profit 2.0bn and operating profit margin 10.0% (versus 15.2bn, 1.1bn and 7.0%, respectively, in FY02/2012 results), in the management plan, VISION-50. To date, the Company has finished a stage of reorganization by segment & establishment of strategic targets, and is currently in the phase of pursuit for scale enlargement & changes in constitution for the sake of consistent growth. For example, the Company is aiming at further expansion in existing business, full-fledged involvements with new business domains and ensuring global expansion. More in details, it appears that the key issue with the management plan is to enhance sales of the mainstay Granulation & Coating Equipment for pharmaceutical industry ( further expansion in existing business ) in emerging countries by consistently making progress in market developments in there, eventually, ensuring global expansion. As for full-fledged involvements with new business domains, the key issue is related to the enhancement of industrial-machinery-related business, that were acquired by the deal in June 2010, i.e., developments, manufacturing and sales of Particle-Processing Equipment, Fine Grinding of Synthetic Resins on a consignment basis etc. (currently carried out by consolidated subsidiary FREUND TURBO CORPORATION). When prospective numbers in FY02/2014 and those of Company forecasts in FY02/2013 are simply compared, sales are to rise 23.5% to 20.0bn from 16.2bn and operating profit 66.7% to 2.0bn from 1.2bn, during the same period. At a glance, it may look excess growth in sales and earnings is estimated here, but this should be reasonable when prospect that the Company is to benefit from surging local demand for pharmaceuticals in emerging countries like BRICs is feeding through in FY02/2014. 6 Long-Term Prospects 25,000 20,000 15,000 10,000 5.3% Sales (Million Yen) Operating Profit Margin (%) 7.1% 7.5% 7.0% 7.4% 5.1% 10.0% 12.0% 10.0% 8.0% 6.0% 4.0% 5,000 0 11,539 13,104 12,943 13,257 15,236 16,200 20,000 2.0% 0.0% FY02/2008 FY02/2009 FY02/2010 FY02/2011 FY02/2012 FY02/2013 FY02/2014 Source: Company Data, WRJ Calculation
4.0 Business Model Granulation & Coating Equipment for Pharmaceutical Industry The Company s main business is to develop, manufacture and sell Granulation & Coating Equipment for pharmaceutical industry. In the domestic market, the Company holds overwhelming 70% share, while presumably being one of the largest 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 equipment, incorporating local needs, regions to regions, including emerging countries. Segmented Information Segmented Information Cons.Act Cons.Act Cons.CoE Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act FY FY FY YoY Q1 Q1 to Q2 Q1 to Q3 Q1 to Q4 Q1 YoY (Million Yen) 02/2011 02/2012 02/2013 Net Chg. 02/2012 02/2012 02/2012 02/2012 02/2013 Net Chg. Machinery 8,095 9,583 10,200 +1,488 2,086 4,434 6,753 9,583 3,241 +1,155 Chemicals 5,163 5,654 6,000 +490 1,170 2,568 4,060 5,654 1,488 +318 Sales 13,258 15,236 16,200 +1,979 3,256 7,002 10,813 15,236 4,729 +1,473 Machinery 620 907 - - 138 395 744 907 419 +281 Chemicals 389 470 - - 76 187 303 470 143 +67 Adjustments (329) (312) - - (80) (153) (228) (312) (68) +12 Operating Profit 680 1,065 1,200 +135 134 430 818 1,065 494 +361 Machinery 7.7% 9.5% - - 6.6% 8.9% 11.0% 9.5% 12.9% - Chemicals 7.5% 8.3% - - 6.5% 7.3% 7.5% 8.3% 9.6% - Adjustments (2.5%) (2.0%) - - (2.5%) (2.2%) (2.1%) (2.0%) (1.4%) - Operating Profit Margin 5.1% 7.0% 7.4% - 4.1% 6.1% 7.6% 7.0% 10.4% - Segmented Information Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Q1 Q2 Q3 Q4 Q1 YoY (Million Yen) 02/2012 02/2012 02/2012 02/2012 02/2013 Net Chg. Machinery - - - - 2,086 2,348 2,319 2,830 3,241 +1,155 Chemicals - - - - 1,170 1,398 1,492 1,594 1,488 +318 Sales - - - - 3,256 3,746 3,811 4,423 4,729 +1,473 Machinery - - - - 138 257 348 163 419 +281 Chemicals - - - - 76 112 115 168 143 +67 Adjustments - - - - (80) (72) (76) (84) (68) +12 Operating Profit - - - - 134 297 388 247 494 +361 Machinery - - - - 6.6% 11.0% 15.0% 5.8% 12.9% - Chemicals - - - - 6.5% 8.0% 7.7% 10.5% 9.6% - Adjustments - - - - (2.5%) (1.9%) (2.0%) (1.9%) (1.4%) - Operating Profit Margin - - - - 4.1% 7.9% 10.2% 5.6% 10.4% - Source: Company Data, WRJ Calculation 7 The Company s business comprises Machinery and Chemicals by segment. In Machinery (63% of sales and 66% of operating profit in FY02/2012), sales associated with pharmaceutical industry account for 83%, in which the main constituents are Granulation & Coating Equipment and its peripheral equipment. The remaining 17% of sales relate to industrial machinery. Meanwhile, Chemicals comprise Pharmaceutical Excipients (34% of sales in the segment), Food Preservatives (33%) and Health Foods (dietary supplement) etc. (32%).
Granulation (Machinery) Coating (Machinery) Chemicals Granumeist Hi-Coater FZ Source: Company Data On top of the parent company, business in Machinery is conducted by the Company s consolidated subsidiaries, i.e., FREUND-VECTOR CORPORATION and FREUND TURBO CORPORATION. The former is based in US and in charge of developing markets in Americas and Europe, while the latter is in charge of developing and manufacture industrial-related equipment. On the Chemicals side, on top of the parent company, consolidated subsidiaries, i.e., FREUND CHEMICALS CORPORATION and FREUND PHARMATEC LTD. are operating the businesses. The former makes Food Preservatives, while the latter, based in Ireland, is currently in the process of developing of new formulations based on the key technologies for microspheres, which are likely being in the stage of preliminary marketing towards the end of FY02/2012. Sales in this segment are effectively all related to those in Japan. 8 Disclaimer Information here is a summary of IR Information of the Company, compiled by Walden Research Japan, from a neutral and professional standing point, in the form of a report. IR Information of the Company comprises a) contents of our interview with the Company, b) contents of presentations for institutional investors, c) contents of timely disclosed information and d) contents of the homepage etc. Company Name: Walden Research Japan Incorporated Headquarters Office:#1110 4-12-4 Hatchobori, Chuo-ku, Tokyo 104-0032, JAPAN URL: www.walden.co.jp E-mail: info@walden.co.jp Phone:+81 3 3553 3769 Copyright 2012 Walden Research Japan Incorporated