FREUND CORPORATION (6312)walden.co.jp/pdf/6312_freund_2017_02_q2_report_2016_11... ·...

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URL: www.walden.co.jp

Written by Yoshiyuki Muroya

E-mail: [email protected]

Phone：+81 3 3553 3769

FREUND CORPORATION (6312)

1.0 Executive Summary (4 November 2016)

Special Procurement Demand and New Product

FREUND CORPORATION, developing, manufacturing and selling machinery incorporating proprietary

formulation technology for pharmaceutical industry as the key earnings pillar, is seeing firm earnings. In

June 2015, Ministry of Health, Labour and Welfare raised its target for prospective penetration rate for

generic drugs up to 80% from 60% and aimed at achievement of this target in early stage and/or by the end

of FY2020 at the latest. Meanwhile, given upgrade for this target as explosives, manufacturers of generic

drugs have started up aggressively increasing capital expenditures. As a result, the Company, holding

market share of 60% to 70% in Japan regarding the mainstay equipment for pharmaceutical industry, has

been seeing consistent increases of order intake on the Machinery side. Presumably, the current penetration

rate of generic drugs is some 60%, implying further acceleration of order intake going forward. Meanwhile, it

is suggested that the Company is on the verge of benefiting from launch of new product. On top of existing

mainstay granulation / coating equipment, the Company has completed development and launch of

tablet-printing equipment (TABREX Rev.) for pharmaceutical industry and first order intake is now

imminent according to the Company. Meanwhile, the most recent strengths of order intake on the

Machinery side are basically driven by “special procurement demand” in a sense. At some point in the

process for Ministry of Health, Labour and Welfare to achieve the target by the end of FY2020, it could not

be avoided that this “special procurement demand” is to disappear. More importantly, however, the

Company is looking to increasing benefits from tablet-printing equipment (TABREX Rev.) as a new driver

for earnings going forward to compensate for said prospective adjustments.

Consolidated FY Sales OP RP NP EPS DPS BPS

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

FY02/2015 17,424 1,150 1,249 695 40.4 15.0 637.2

FY02/2016 19,027 1,346 1,394 961 55.7 12.5 668.6

FY02/2017CoE 20,000 1,900 1,900 1,180 68.4 15.0 -

FY02/2016 YoY 9.2% 17.1% 11.6% 38.1% - - -

FY02/2017CoE YoY 5.1% 41.1% 36.2% 22.8% - - -

Consolidated Half Year Sales OP RP NP EPS DPS BPS

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

Q1 to Q2 FY02/2016 7,697 198 252 123 - - -

Q3 to Q4 FY02/2016 11,330 1,148 1,142 837 - - -

Q1 to Q2 FY02/2017 8,762 687 708 306 - - -

Q3 to Q4 FY02/2017CoE 11,237 1,212 1,191 873 - - -

Q1 to Q2 FY02/2017 YoY 13.8% 245.6% 181.1% 147.8% - - -

Q3 to Q4 FY02/2017CoE YoY (0.8%) 5.6% 4.3% 4.3% - - -Source: Company Data, WRJ Calculation

http://www.walden.co.jp/

mailto:[email protected]

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In Q1 to Q2 FY02/2017, sales came in at ¥8,762m (up 13.8％ YoY), operating profit ¥687m (up 245.6%) and

operating profit margin 7.8% (up 5.3% points). Sales came in at ¥5,697m (up 14.1%), segment profit ¥567m

(up 272.6%) and segment profit margin 10.0% (up 6.9% points) on the Machinery side, while sales ¥3,065m

(up 13.3%), segment profit ¥357m (up 62.6%) and segment profit margin 11.6% (up 3.5% points) on the

Chemicals side. On the Machinery side, sales in Japan came in at ¥4,195m (up 23.7%) and ¥1,502m (down

6.1%) overseas, while the former was due mainly to steady booking of sales for order backlog associated with

generic drugs. In regards to improving segment profit margin, increasing sales were one of the key drivers

while non-reappearance of expenses (¥120m) for development, etc. associated with tablet-printing

equipment (TABREX Rev.) was another. On the Chemicals side, sales and segment profit were driven by

strengths of pharmaceutical excipients, while the Company benefited from cutback of some ¥70m in

expenses, having pulled out of R&D operations in Europe. In regards to pharmaceutical excipients, sales of

those for generic drugs where the Company is very competitive were firm in particular, having resulted in

improving sales mix.

FY02/2017 initial Company forecasts have remained unchanged, going for prospective sales of ¥20,000m (up

5.1% YoY), operating profit of ¥1,900m (up 41.1%) and operating profit margin of 9.5% (up 2.4% points).

Meanwhile, prospective annual dividend of ¥15.0, implying payout ratio of 21.9%, have also remained

unchanged. Q1 to Q2 results were better than expected, but the Company suggests that it could be too early

to upgrade full-year prospects, given possibility for timing of booking sales on the Machinery side to be

delayed by unexpected factors as in the past. On top of this, Company forecasts have not assumed any sales

of tablet-printing equipment (TABREX Rev.). When compared with the existing mainstay granulation /

coating equipment which are customized to a large extent, tablet-printing equipment (TABREX Rev.) which

are basically standardized require less time for booking sales after order placement, i.e., 6 months to 8

months and 4 months, respectively. Thus, the Company suggests opportunities to book sales on top of

assumptions, when it sees order placement for the first unit in a short-term view. Meanwhile, in regards to

substantially improving earnings as a whole, the Company suggests that it benefits from above-mentioned

issues on a full-year basis, i.e., non-reappearance of expenses for development, etc. associated with

tablet-printing equipment (TABREX Rev.) on the Machinery side and cutback of expenses due to pullout of

R&D operations in Europe on the Chemicals side.

IR Representative: Corporate Communications Department (+81 3 6890 0767 [email protected])


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2.0 Company Profile

A Leader of Formulation Technology and Machinery for Pharmaceutical Industry

Company Name FREUND CORPORATION

Company Website

IR Information

Share Price

Established 22 April 1964

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

Capital ¥1,035m (As of the end of August 2016)

No. of Shares 18,400,000 shares, including 1,155,478 treasury shares (As of the end of Aug. 2016)

Main Features Leading the domestic market for granulation / coating equipment with market

share of 60% to 70% in Japan

One of the three major players on a global basis

Expectations for tablet-printing equipment (TABREX Rev.) belong to new

domain

Businesses Ⅰ. Machinery

Ⅱ. Chemicals

Top Management President & CEO: Iwao Fusejima

Shareholders Yasutoyo Fusejima 10.0%, FIL Corp. 8.9%, The Master Trust Bank of Japan (trust

account) 7.4% (As of the end of August 2016)

Headquarters FREUND Bldg., 6-25-13 Nishishinjuku, Shinjuku-ku, Tokyo, JAPAN

No. of Employees Consolidated: 388, Parent: 227 (As of the end of August 2016)

Source: Company Data

http://www.freund.co.jp/english/

http://www.freund.co.jp/english/ir/

http://www.bloomberg.com/quote/6312:JP

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3.0 Recent Trading & Prospects

Q1 to Q2 FY02/2017 Results

In Q1 to Q2 FY02/2017, sales came in at ¥8,762m (up 13.8％ YoY), operating profit ¥687m (up 245.6％),

recurring profit ¥708m (up 181.1％) and net profit ¥306m (up 147.8％), while operating profit margin 7.8%

(up 5.3% points).

When compared with initial Company forecasts, sales were better by ¥762m (9.5%) and by ¥317m (85.7%)

for operating profit. It appears that results were better for both Machinery and Chemicals. On the

Machinery side, the Company suggests that overshoots have something to do with sales booking rather

frontloaded but its impacts were not so substantial.

Sales

Machinery: Order Intake

Source: Company Data, WRJ Calculation

0

1,000

2,000

3,000

4,000

Q1

02/1

3

Q2

02/1

3

Q3

02/1

3

Q4

02/1

3

Q1

02/1

4

Q2

02/1

4

Q3

02/1

4

Q4

02/1

4

Q1

02/1

5

Q2

02/1

5

Q3

02/1

5

Q4

02/1

5

Q1

02/1

6

Q2

02/1

6

Q3

02/1

6

Q4

02/1

6

Q1

02/1

7

Q2

02/1

7

Q3

02/1

7

Q4

02/1

7

Pharmaceutical-related(Machinery)

Industrial-related(Machinery)

Pharmaceutical Excipients(Chemicals)

Food Preservatives(Chemicals)

Dietary Supplements(Chemicals)

(Million Yen)

79

79

79

79

92 95 96 97 102

102

102

105 1

19

120

120

121

115

111

0

50

100

150

0

1,000

2,000

3,000

4,000

5,000

Q1

02/1

3

Q2

02/1

3

Q3

02/1

3

Q4

02/1

3

Q1

02/1

4

Q2

02/1

4

Q3

02/1

4

Q4

02/1

4

Q1

02/1

5

Q2

02/1

5

Q3

02/1

5

Q4

02/1

5

Q1

02/1

6

Q2

02/1

6

Q3

02/1

6

Q4

02/1

6

Q1

02/1

7

Q2

02/1

7

Q3

02/1

7

Q4

02/1

7Yen / US dollar Japan (Million Yen)FREUND-VECTOR (Million Yen) Overseas (Million Yen)

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Earnings as a whole for the Company hinge on those of Machinery. Particularly, the Company is highly

exposed to the mainstay equipment for pharmaceutical industry and they are effectively all represented by

granulation / coating equipment, according to the Company.

While the parent company is in charge of operations in Japan and Asia (China, India, Korea, etc.) on the

Machinery side, FREUND-VECTOR CORPORATION or its US subsidiary is in charge elsewhere,

comprising North America, Latin America, Europe, etc. Given that said US subsidiary is inclined to see

sales concentrated in H2 every year, sales and segment profit on the Machinery side are also concentrated in

H2. At the end of the day, this is the case as a whole for the Company.

Operations in Japan and Asia, run on a parent basis, are all accounted for by those of ¥-denominated

trading, while FREUND-VECTOR CORPORATION is all exposed to US-dollar-denominated trading. In

regards to said US subsidiary, the Company suggests annual sales of some US$40m and pretax profit of

US$4m and both of them are directly influenced by changes of forex rate (yen versus US dollar) on the

Company’s consolidated income statement, etc. Meanwhile, FY02/2017 Company forecasts assume ¥105.0

per US dollar.

The Company’s machinery for pharmaceutical industry, i.e., granulation / coasting equipment, has very high

exposure to generic drugs. As far as we could gather, some 80% of sales are associated with generic drugs

both in Japan and overseas.

In Q2, the Company saw increases of no less than 13.9% over the previous year for order intake on a

12-quarter moving average basis on the Machinery side, which is supposed to imply midterm sales trends. It

appears that this was mainly driven by unprecedentedly consistent rise of order intake in the mainstay

Japan. As far as we could see, upgrade for prospective penetrating target for generic drugs by Ministry of

Health, Labour and Welfare in June 2015 generated order intake increasing quarter on quarter for four

consecutive quarters (Q3 FY02/2016 to Q2 FY02/2017) which had never been seen in historical patterns of

order intake. Meanwhile, it appears that existing pattern has remained almost unchanged in regards to

FREUND-VECTOR CORPORATION that accounts for the bulk of order intake overseas.

Meanwhile, tablet-printing equipment (TABREX Rev.) to have been newly launched in the market

represents one belonging to new domain, apart from existing granulation / coasting equipment,

incorporating functionality to print identification information on the surface of tablets with objectives to

avoid accidental ingestions and/or erroneous prescriptions.

The Company had once developed and launched first generation model for this, but this was followed by

implementation of strategy to exclusively focus on development of new model (or second generation one, i.e.,

TABREX Rev.) to better cope with needs from pharmaceutical industry. In FY02/2016, the Company saw

expenses to do so, while almost no further expenses were seen in Q1 to Q2. This led to cutback of expenses

by ¥120m over the previous year and this is to persist in H2.

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Identification of tablets by means of “printing” is said to be superior to that of existing “engraving” and thus

the former is likely to replace the latter going forward. This replacement should enhance demand for the

Company’s tablet-printing equipment (TABREX Rev.) and the Company is looking to this as a new growth

driver for prospective earnings in a long-term view.

Machinery: Order Intake on A 12-Quarter Moving Average Basis

Machinery: Quarterly Order Intake

Machinery: Quarterly Order Backlog


2,584 2,591 2,652 2,646 2,740 2,815 2,893 2,966 3,021 3,206

(0.3%)+4.7% +5.6% +7.9% +6.1%

+8.7% +9.1%+12.1% +10.2%

+13.9%

(30.0%)

(20.0%)

(10.0%)

0.0%

10.0%

20.0%

30.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

Q102/15

Q202/15

Q302/15

Q402/15

Q102/16

Q202/16

Q302/16

Q402/16

Q102/17

Q202/17

Q302/17

Q402/17

Order Intake on A 12-Quarter Moving Average Basis (Million Yen) YoY (%)

3,6482,550 3,017 3,193 3,833

2,900 2,938 3,441 3,6904,717

+20.5%+2.3% +11.9%

+72.3%

+5.1% +13.7%(2.6%) +7.8% (3.7%)

+62.6%

(200.0%)

(150.0%)

(100.0%)

(50.0%)

0.0%

50.0%

100.0%

0

2,000

4,000

6,000

8,000

Q102/15

Q202/15

Q302/15

Q402/15

Q102/16

Q202/16

Q302/16

Q402/16

Q102/17

Q202/17

Q302/17

Q402/17

Quarterly Order Intake (Million Yen) YoY (%)

6,945 7,235 7,226 6,6838,901 8,676 7,976 7,086

8,3199,766

+27.7%+35.8%

+17.6%

+33.9%+28.1%

+19.9%+10.4% +6.0%

(6.5%)

+12.6%

(80.0%)

(60.0%)

(40.0%)

(20.0%)

0.0%

20.0%

40.0%

0

5,000

10,000

15,000

Q102/15

Q202/15

Q302/15

Q402/15

Q102/16

Q202/16

Q302/16

Q402/16

Q102/17

Q202/17

Q302/17

Q402/17

Quarterly Order Backlog (Million Yen) YoY (%)

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Income Statement (Cumulative, Quarterly)

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

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

(Million Yen) 02/2016 02/2016 02/2016 02/2016 02/2017 02/2017 02/2017 02/2017 Net Chg.

Sales 3,002 7,697 13,081 19,027 3,912 8,762 - - +1,065

Cost of Sales 1,976 5,266 8,931 12,921 2,559 5,900 - - +634

Gross Profit 1,026 2,431 4,150 6,106 1,352 2,862 - - +431

SG&A 1,050 2,232 3,423 4,759 1,057 2,175 - - (57)

Operating Profit (24) 198 727 1,346 295 687 - - +488

Non Operating Balance 24 53 57 47 18 21 - - (31)

Recurring Profit (0) 252 784 1,394 314 708 - - +456

Extraordinary Balance (3) (2) (24) (253) (227) (230) - - (227)

Pretax Profit (3) 249 759 1,141 86 478 - - +229

Tax Charges, etc. 28 132 344 187 37 172 - - +39

NP Belonging to Non-Controlling SHs (3) (6) (6) (6) - - - - +6

Net Profit (29) 123 422 961 48 306 - - +182

Sales YoY (14.4%) +4.4% +8.9% +9.2% +30.3% +13.8% - - -

Operating Profit YoY - +96.8% +24.3% +17.1% - +245.6% - - -

Recurring Profit YoY - +78.8% +17.6% +11.6% - +181.1% - - -

Net Profit YoY - +242.4% +25.5% +38.1% - +147.8% - - -

Gross Profit Margin 34.2% 31.6% 31.7% 32.1% 34.6% 32.7% - - +1.1%

SG&A / Sales 35.0% 29.0% 26.2% 25.0% 27.0% 24.8% - - (4.2%)

Operating Profit Margin (0.8%) 2.6% 5.6% 7.1% 7.5% 7.8% - - +5.3%

Recurring Profit Margin (0.0%) 3.3% 6.0% 7.3% 8.0% 8.1% - - +4.8%

Net Profit Margin (1.0%) 1.6% 3.2% 5.1% 1.2% 3.5% - - +1.9%

Tax Charges, etc. / Pretax Profit - 53.2% 45.3% 16.4% 43.8% 36.0% - - (17.2%)

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 3,002 4,694 5,384 5,945 3,912 4,850 - - +156

Cost of Sales 1,976 3,289 3,665 3,990 2,559 3,341 - - +51

Gross Profit 1,026 1,404 1,719 1,955 1,352 1,509 - - +104

SG&A 1,050 1,181 1,190 1,336 1,057 1,117 - - (63)

Operating Profit (24) 223 528 619 295 392 - - +168

Non Operating Balance 24 29 3 (9) 18 2 - - (26)

Recurring Profit (0) 252 532 610 314 394 - - +142

Extraordinary Balance (3) 0 (22) (228) (227) (2) - - (3)

Pretax Profit (3) 253 509 381 86 392 - - +138

Tax Charges, etc. 28 104 211 (156) 37 134 - - +30

NP Belonging to Non-Controlling SHs (3) (3) 0 0 - - - - +3

Net Profit (29) 152 298 538 48 257 - - +105

Sales YoY (14.4%) +21.5% +16.1% +9.8% +30.3% +3.3% - - -

Operating Profit YoY - +83.2% +9.1% +9.6% - +75.6% - - -

Recurring Profit YoY - +78.2% +1.1% +4.8% - +56.3% - - -

Net Profit YoY - +131.2% (0.6%) +49.9% - +68.8% - - -

Gross Profit Margin 34.2% 29.9% 31.9% 32.9% 34.6% 31.1% - - +1.2%

SG&A / Sales 35.0% 25.2% 22.1% 22.5% 27.0% 23.0% - - (2.1%)


Recurring Profit Margin (0.0%) 5.4% 9.9% 10.3% 8.0% 8.1% - - +2.8%

Net Profit Margin (1.0%) 3.3% 5.5% 9.1% 1.2% 5.3% - - +2.1%

Tax Charges, etc. / Pretax Profit - 41.2% 41.4% - 43.8% 34.3% - - (6.9%)


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Segmented Information (Cumulative, Quarterly)

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



Machinery 1,826 4,992 8,663 13,037 2,413 5,697 - - +705

Chemicals 1,176 2,704 4,417 5,990 1,498 3,065 - - +360

Sales 3,002 7,697 13,081 19,027 3,912 8,762 - - +1,065

Machinery +1.7% +23.5% +21.2% +19.2% +32.2% +14.1% - - -

Chemicals (31.3%) (18.7%) (9.1%) (7.6%) +27.4% +13.3% - - -

Sales (YoY) (14.4%) +4.4% +8.9% +9.2% +30.3% +13.8% - - -

Machinery 60.8% 64.9% 66.2% 68.5% 61.7% 65.0% - - -

Chemicals 39.2% 35.1% 33.8% 31.5% 38.3% 35.0% - - -

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

Machinery (9) 152 578 1,189 220 567 - - +415

Chemicals 81 219 404 519 178 357 - - +137

Segment Profit 72 371 983 1,709 398 924 - - +552

Elimination (97) (173) (255) (362) (103) (237) - - (64)

Operating Profit (24) 198 727 1,346 295 687 - - +488

Machinery - +21.6% (5.5%) +7.3% - +272.6% - - -

Chemicals +1.1% +13.6% +25.7% +9.6% +117.5% +62.6% - - -

Segment Profit (YoY) (43.6%) +16.8% +5.2% +8.0% +449.5% +148.6% - - -

Machinery (12.9%) 41.0% 58.8% 69.6% 55.3% 61.4% - - -

Chemicals 112.9% 59.0% 41.2% 30.4% 44.7% 38.6% - - -

Segment Profit (Composition Ratio) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% - - -

Machinery (0.5%) 3.1% 6.7% 9.1% 9.1% 10.0% - - +6.9%

Chemicals 7.0% 8.1% 9.2% 8.7% 11.9% 11.6% - - +3.5%

Elimination (3.2%) (2.2%) (2.0%) (1.9%) (2.6%) (2.7%) - - (0.5%)


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



Machinery 1,826 3,166 3,671 4,373 2,413 3,284 - - +117

Chemicals 1,176 1,528 1,713 1,572 1,498 1,566 - - +38

Sales 3,002 4,694 5,384 5,945 3,912 4,850 - - +156

Machinery +1.7% +40.8% +18.2% +15.3% +32.2% +3.7% - - -

Chemicals (31.3%) (5.5%) +11.7% (3.0%) +27.4% +2.5% - - -

Sales (YoY) (14.4%) +21.5% +16.1% +9.8% +30.3% +3.3% - - -

Machinery 60.8% 67.4% 68.2% 73.6% 61.7% 67.7% - - -

Chemicals 39.2% 32.6% 31.8% 26.4% 38.3% 32.3% - - -

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

Machinery (9) 161 425 611 220 347 - - +185

Chemicals 81 137 185 114 178 178 - - +41

Segment Profit 72 299 611 726 398 526 - - +226

Elimination (97) (75) (82) (106) (103) (133) - - (57)

Operating Profit (24) 223 528 619 295 392 - - +168

Machinery - +108.3% (12.5%) +23.1% - +114.7% - - -

Chemicals +1.1% +22.7% +43.7% (24.4%) +117.5% +29.9% - - -

Segment Profit (YoY) (43.6%) +57.7% (0.7%) +12.0% +449.5% +75.7% - - -

Machinery (12.9%) 54.0% 69.7% 84.2% 55.3% 66.0% - - -

Chemicals 112.9% 46.0% 30.3% 15.8% 44.7% 34.0% - - -

Segment Profit (Composition Ratio) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% - - -

Machinery -0.5% 5.1% 11.6% 14.0% 9.1% 10.6% - - +5.5%

Chemicals 7.0% 9.0% 10.8% 7.3% 11.9% 11.4% - - +2.4%

Elimination (3.2%) (1.6%) (1.5%) (1.8%) (2.6%) (2.8%) - - (1.1%)



9

Sales by Region: Machinery (Cumulative, Quarterly)

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



Japan 1,213 3,391 5,304 7,668 1,819 4,195 - - +803

North America & Latin America 300 807 1,993 3,491 437 1,104 - - +297

Europe & Africa 235 328 730 982 92 263 - - (64)

Middle East, Asia & Oceania 77 465 635 894 63 134 - - (330)

Overseas 612 1,600 3,359 5,368 594 1,502 - - (98)

Sales 1,826 4,992 8,663 13,037 2,413 5,697 - - +705

Japan (13.5%) +31.3% +18.6% +15.5% +49.9% +23.7% - - -

North America & Latin America +13.7% (22.1%) +11.6% +31.1% +45.8% +36.8% - - -

Europe & Africa +335.9% +228.9% +185.0% +123.0% (60.5%) (19.8%) - - -

Middle East, Asia & Oceania +3.8% +43.7% +0.4% (25.3%) (17.6%) (71.2%) - - -

Overseas +56.1% +9.6% +25.5% +24.8% (3.0%) (6.1%) - - -

Sales (YoY) +1.7% +23.5% +21.2% +19.2% +32.2% +14.1% - - -

Japan 66.5% 67.9% 61.2% 58.8% 75.4% 73.6% - - -

North America & Latin America 16.4% 16.2% 23.0% 26.8% 18.1% 19.4% - - -

Europe & Africa 12.9% 6.6% 8.4% 7.5% 3.9% 4.6% - - -

Middle East, Asia & Oceania 4.2% 9.3% 7.3% 6.9% 2.6% 2.4% - - -

Overseas 33.5% 32.1% 38.8% 41.2% 24.6% 26.4% - - -

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

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



Japan 1,213 2,178 1,912 2,364 1,819 2,375 - - +197

North America & Latin America 300 507 1,186 1,498 437 666 - - +159

Europe & Africa 235 93 401 251 92 170 - - +77

Middle East, Asia & Oceania 77 387 170 259 63 71 - - (316)

Overseas 612 988 1,758 2,009 594 908 - - (79)

Sales 1,826 3,166 3,671 4,373 2,413 3,284 - - +117

Japan (13.5%) +84.4% +1.2% +9.2% +49.9% +9.1% - - -

North America & Latin America +13.7% (34.4%) +58.1% +70.7% +45.8% +31.5% - - -

Europe & Africa +335.9% +103.3% +157.0% +36.5% (60.5%) +82.6% - - -

Middle East, Asia & Oceania +3.8% +55.7% (44.9%) (54.1%) (17.6%) (81.7%) - - -

Overseas +56.1% (7.4%) +44.6% +23.5% (3.0%) (8.1%) - - -

Sales (YoY) +1.7% +40.8% +18.2% +15.3% +32.2% +3.7% - - -

Japan 66.5% 68.8% 52.1% 54.1% 75.4% 72.3% - - -

North America & Latin America 16.4% 16.0% 32.3% 34.3% 18.1% 20.3% - - -

Europe & Africa 12.9% 3.0% 10.9% 5.8% 3.9% 5.2% - - -

Middle East, Asia & Oceania 4.2% 12.3% 4.6% 5.9% 2.6% 2.2% - - -

Overseas 33.5% 31.2% 47.9% 45.9% 24.6% 27.7% - - -

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


10

Balance Sheet (Quarterly)

Cash Flow Statement (Cumulative)

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



Cash & Deposit 4,682 4,640 4,040 4,042 4,263 4,900 - - +259

Accounts Receivables 4,308 4,533 5,240 5,694 4,832 4,994 - - +460

Inventory 2,458 2,880 2,884 2,432 2,968 3,578 - - +698

Other 874 855 733 884 980 848 - - (7)

Current Assets 12,323 12,910 12,898 13,053 13,045 14,321 - - +1,410

Tangible Assets 3,348 3,300 3,299 3,135 3,109 3,210 - - (89)

Intangible Assets 140 216 197 182 93 80 - - (135)

Investments & Other Assets 948 935 917 835 807 756 - - (178)

Fixed Assets 4,437 4,452 4,414 4,153 4,010 4,047 - - (404)

Total Assets 16,761 17,362 17,313 17,206 17,056 18,369 - - +1,006

Accounts Payables 2,536 2,922 2,976 2,580 2,617 3,341 - - +418

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

Other 2,767 2,958 2,646 2,735 2,952 3,441 - - +482

Current Liabilities 5,303 5,881 5,622 5,315 5,570 6,782 - - +901

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

Other 654 630 602 361 326 339 - - (291)

Fixed Liabilities 654 630 602 361 326 339 - - (291)

Total Liabilities 5,958 6,512 6,225 5,677 5,896 7,122 - - +610

Shareholders' Equity 10,640 10,792 11,091 11,630 11,394 11,652 - - +859

Adjustments 162 57 (4) (101) (235) (405) - - (463)

Total Assets 10,802 10,850 11,087 11,529 11,159 11,246 - - +396

Total Liabilities & Net Assets 16,761 17,362 17,313 17,206 17,056 18,369 - - +1,006

Equity Capital 10,625 10,850 11,087 11,529 11,159 11,246 - - +396

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

Net Debt (4,682) (4,640) (4,040) (4,042) (4,263) (4,900) - - (259)

Equity Capital Ratio 63.4% 62.5% 64.0% 67.0% 65.4% 61.2% - - -

Net-Debt-Equity Ratio (44.1%) (42.8%) (36.4%) (35.1%) (38.2%) (43.6%) - - -

ROE (12 months) 6.8% 7.5% 7.3% 8.5% 9.5% 10.4% - - -

ROA (12 months) 7.8% 8.3% 8.2% 8.1% 10.1% 10.4% - - -

Total Assets Turnover 72% 108% 124% 138% 92% 106% - - -

Inventory Turnover 3.2 4.6 5.1 6.6 3.4 3.7 - - -

Days of Inventory 114 80 72 56 106 98 - - -

Quick Ratio 170% 156% 165% 183% 163% 146% - - -

Current Ratio 232% 220% 229% 246% 234% 211% - - -


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



Operating Cash Flow - 472 - 290 - 1,480 - - +1,008

Investment Cash Flow - (278) - (432) - (268) - - +9

Operating CF & Investment CF - 194 - (142) - 1,211 - - +1,017

Financing Cash Flow - (299) - (331) - (247) - - +52


11

FY02/2017 Company Forecasts

FY02/2017 initial Company forecasts have remained unchanged, going for prospective sales of ¥20,000m (up

5.1% YoY), operating profit of ¥1,900m (up 41.1%), recurring profit of ¥1,900m (up 36.2%) and net profit of

¥1,180m (up 22.8%). Thus, Company forecasts assume operating profit margin of 9.5% (up 2.4% points),

while prospective annual dividend of ¥15.0, implying payout ratio of 21.9%, having also remained

unchanged.

Sales, Operating Profit Margin

Source: Company Data, WRJ Calculation (Q3 and Q4 FY02/2017: half-year Company forecasts, pro rata)

In regards to sales, Company forecasts assume concentration in H2, which was actually the case over the

past two years in row. Meanwhile, in regards to improving operating profit margin, the Company benefits

from increasing sales as well as decreasing expenses both on the Machinery side and on the Chemicals side,

respectively, some ¥280m and some ¥140m, i.e., collectively some ¥420m. When compared with

assumptions of Company forecasts going for net increases of ¥553m in operating profit over the previous

year, it appears that those issues are the key drivers for increasing earnings.

On the Machinery side, expenses to develop tablet-printing equipment (TABREX Rev.) are basically not to

reappear. On the Chemicals side, expenses to run operations of R&D center in Europe (Freund Pharmatec

Ltd.) have been gone since the end of FY02/2016, having sold 100% shares of said operations then. Said

operations used to see expenses only.

Meanwhile, the Company officially sets target of 30% for payout ratio. Given this, it should be the case at

the end of the day that the Company is to upgrade above-mentioned prospective annual dividend of ¥15.0,

implying payout ratio of 21.9%.

3,5

06

3,8

65

4,6

39

5,4

13

3,0

02

4,6

94

5,3

84

5,9

45

3,9

12

4,8

50

5,6

18

5,6

18

(0.6%)3.2%

10.4% 10.4%

(0.8%)

4.8%

9.8% 10.4%7.5% 8.1%

10.8% 10.8%

(10.0%)

0.0%

10.0%

20.0%

0

2,000

4,000

6,000

Q1

FY

02/2

015

Q2

FY

02/2

015

Q3

FY

02/2

015

Q4

FY

02/2

015

Q1

FY

02/2

016

Q2

FY

02/2

016

Q3

FY

02/2

016

Q4

FY

02/2

016

Q1

FY

02/2

017

Q2

FY

02/2

017

Q3

FY

02/2

017

Q4

FY

02/2

017

Sales (Million Yen) Operating Profit Margin (%)

12

Long-Term Prospects

The Company is likely to see favorable earnings growth in a midterm view. The government of Japan or

Ministry of Health, Labour and Welfare has set target to beef up penetration rate of generic drugs, which

will drive prospective earnings for the Company. However, in the process of the target to be achieved in early

stage and/or by the end of FY2020 at the latest, demand associated with this is to be inevitably gone. More

importantly, the Company is looking to tablet-printing equipment (TABREX Rev.) as a new driver for

prospective earnings to compensate for adjustments stemming from here.

Long-Term Prospects


Midterm management plan “Change & Challenge 2014 to 2016 (FY02/2015 to FY02/2017)”, released on 17

April 2014, was calling for prospective sales of ¥23,000m, operating profit of ¥2,300m and operating profit

margin of 10.0% in FY02/2017, i.e., the last year of the plan, assuming forex rate of ¥100 per US dollar and

¥145 per euro. However, the most recent FY02/2017 Company forecasts are going for prospective sales

smaller by ¥3,000m (13.0%) and operating profit smaller by ¥400m (17.4%). By business segment, sales on

the Chemicals side are to be far below assumptions, while prospective sales on the Machinery side are to be

met, when assumptions of the most recent Company forecasts are to be met.

On the Chemicals side, it appears that sales of dietary supplements have been much worse than initially

assumed. As far as we could see, “Focus on new product & pursuit of competitiveness on existing product”,

i.e., the key initiatives of the plan on the Chemicals side have not been working very well.

However, on the Machinery side, demand from generic drug industry in Japan has been buoyant beyond

expectations. Given demand better than expected, the Company set the utmost management policy to avoid

any opportunities loss in here. As a result, the Company advocates that it has been too hard to allocate

management resources as much as initially planned on development of markets overseas. Due mainly to

this, it appears that sales overseas are not to be as large as initially planned in spite of yen weaker than

initially assumed.

15,236 16,396 17,616 17,42419,027 20,000

7.0%

9.0%

7.3%6.6%

7.1%

9.5%

0.0%

5.0%

10.0%

0

10,000

20,000

30,000

40,000

FY02/2012 FY02/2013 FY02/2014 FY02/2015 FY02/2016 FY02/2017 FY02/2018 FY02/2019

Sales (Million Yen)

Operating Profit Margin (%)

13

Sales

Segment Profit

Sales of Machinery (By Region)


9,582 9,91411,004 10,941

13,03714,150

5,6536,482 6,611 6,482 5,990 5,850

0

10,000

20,000


Machinery

Chemicals

(Million Yen)

907

1,172 1,2421,108

1,189

470565

379474 519

0

1,000

2,000


Machinery

Chemicals

(Million Yen)

5,8706,384 6,652 6,639

7,668

3,712 3,5304,351 4,303

5,367

0

5,000

10,000


Machinery (Japan)

Machinery (Overseas)

(Million Yen)

14

4.0 Business Model

Formulation, the Key Technology

The Company’s mainstay business relates to developing, manufacturing and selling granulation / coating

equipment for pharmaceutical industry. In here, the Company is one of the three largest players on a global

basis. It appears that Glatt GmbH (based in Germany) is the largest and GEA Group (based in Denmark)

the second largest together with the Company. Meanwhile, in Japan, the Company is leading the market

with market share of 60% to 70%, while the key competitor in Japan is Powrex Corporation (unlisted) which

sells products made by Glatt GmbH.

Business Model

Being involved with both hardware and

software

Hardware represents formulation (granulation

/ coating) equipment and pharmaceutical

excipients, while software to formulation

technology to manufacture hardware

All the competitors on the Machinery side are

basically pure makers of equipment

The Company’s distinguished feature;

enabling itself to develop new technologies, etc.

prior to competitors with proprietary expertise

FREUND Group’s Business Fields based upon Pharmaceutical Products Manufacturing Processes


15

According to the Company’s presentation document for Q1 to Q2 FY02/2017 results, sales on the Machinery

side are classified into those associated with pharmaceutical industry and those of industrial-related,

accounting for 88% of sales and 12%, respectively. As far as sales associated with pharmaceutical industry

are concerned, effectively everything has been of granulation / coating equipment to date, literally applied in

granulation and coating processes in the manufacturing of pharmaceuticals. Granulation represents

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 represents formation of functionality films on the surface of tablets so that emission

limits to control drug resolution in the tablet surface are achievable and so is masking to block the bitterness,

etc.

Serial Granulation & Drying Tablet-Printing Equipment Pharmaceutical Excipients

Granuformer

TABREX Rev. Granutol F (Fine)

Granulation, mixing and drying all

on a serial basis

Printing identification information

on the surface of tablets with

objectives to avoid accidental

ingestions and/or erroneous

prescriptions

Miniaturized particles,

diversifying applications


Meanwhile, on the Chemicals side, the Company is involved with developing, manufacturing and selling of

pharmaceutical excipients: sales of ¥1,150m (up 15.7% YoY) in Q1 to Q2 FY02/2017, food preservatives:

sales of ¥927m (down 3.0%) and dietary supplements: sales of ¥987m (up 31.0%). As far as pharmaceutical

excipients are concerned, the Company is exposed to exports (to Korea and Taiwan) but just less than 2% of

sales.

Pharmaceutical excipients are additives to formulate drug substances into tablets, coating agents,

orally-fast-disintegrating tablets, capsules, granules, etc. in the manufacturing of pharmaceuticals, making

drug substances properly exert their functions. At the moment, the Company is seeing increasing exposure

to those of generic drugs where the Company is very competitive and thus carrying gross profit margin

meaningfully high.

16

In regards to food preservatives, adopted as those for baumkuchen and diverse other foods, the Company

currently sees decreasing sales and earnings due to intensifying competition. Meanwhile, in regards to

dietary supplements, the Company suggests that it is heavily involved with joint development of final

products with own customers, implying production activity by customers is the key driver for sales in here.

Currently, the situation is that extended adjustments by customers are followed by reasonable recovery, but

it appears that this is unlikely being sustainable going forward, according to the Company.

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

Head office: #1110 4-12-4 Hatchobori, Chuo-ku, Tokyo 104-0032, JAPAN

URL: www.walden.co.jp

E-mail: [email protected]

Phone：+81 3 3553 3769

Copyright 2016 Walden Research Japan Incorporated

http://www.walden.co.jp/


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