Yushiro Chemical Industry / 5013

Transcription

1 Yushiro Chemical Industry / 513 COVERAGE INITIATED ON: LAST UPDATE: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 Yushiro Chemical Industry / 513 LAST UPDATE: INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Recent updates Highlights Trends and outlook Key points for analyzing company performance Quarterly trends and results Full-year company forecasts FY3/19 initial forecast (out May 11, 218) Outlook Medium-term plan (announced May 12, 217) Core objectives of the plan Previous medium-term plan (announced February 28, 214; ending FY3/17) Business Description Overview by business Overview by region Strengths and weaknesses Historical performance Income statement Balance sheet Cash flow statement Historical results Other information History News & topics Corporate governance and top management Dividend policy Major shareholders (as of March 31, 217) Principal group companies (as of March 217) Employees Profile /51

3 Yushiro Chemical Industry / 513 LAST UPDATE: Executive summary Business overview Yushiro specializes in the manufacture of metalworking oils and fluids (the company estimates its domestic market share at 19% and overseas at by volume in 215). Metalworking oils and fluids are lubricating oils used in metalworking such as cutting, rolling, and pressing. Within metalworking oils and fluids, the company has the leading domestic share for cutting oils and fluids by volume, at around 3 (company estimate for 215). Including indirect transactions, the automotive industry accounts for 8 9 of the company s metalworking oils and fluid sales. Yushiro says its metalworking oils and fluids are used for working metal parts by all Japanese automakers. The company claims that its market share of cutting fluids used by Japanese manufacturers is around 6. Significant market share comes from the high degree of accuracy of the company s advanced technologies for machined parts. According to Yushiro, as of May 216, its product YUSHIROKEN FGE 21 achieved surface roughness on cut parts around half that of similarly priced cutting oils and fluids offered by domestic and overseas competitors. The company s high market share also stems from an extensive product range. Although some 2 3 standard products account for 8 of its metalworking oils and fluids sales, Yushiro meets individual user needs by offering more than 2, products, giving it an edge over competitors. Its salespeople double as technical consultants, enabling them to provide the metalworking oils and fluids appropriate to various processed materials. The company s sales trajectory is closely linked to global production volume by Japanese automakers. At the time of the global financial crisis, Yushiro s sales bottomed out in tandem with Japanese automakers production volume, and then grew in step with the rise in production volume. (In the six years until 216, production volume by Japanese automakers increased 3.8%; in the six years until FY3/16 Yushiro s sales growth was 4.3 %.) Yushiro has expanded overseas operations in line with Japanese automakers shift toward overseas production. For this reason, the company with a high market share of metalworking oils and fluids for Japanese automakers has overseas segments whose sales ratios are higher than those at Japanese competitors. The Overseas segments (total of North and South America, China, and Southeast Asia and India operations) account for 46.6% of sales (FY3/18), higher than the 31.2% (FY2/18) at MORESCO Corporation (TSE1: 518), a competitor of the company s metalworking oils and fluids business. Trends and outlook On May 12, 217, Yushiro announced its 18th medium-term plan for the three years to FY3/2. The company s targets for the final year are JPY35.6bn in consolidated sales (+2.2% from FY3/17), JPY3.4bn in operating profit (+39.), JPY4.bn in recurring profit (+32.6%), and JPY2.6bn in net income (+53.2%). It has three core strategies: strengthening global selling power; enhancing competitiveness in core businesses; and establishing a system that can maximize synergies between group companies. Since the end of FY3/18, sales have been broadly in line with plan, but higher raw material costs appear to be having a bigger-than-expected impact on profits. In June 218, Yushiro is set to launch Wizard Gel, a self-repairing polymer gel that the company believes is instrumental in developing new businesses. Strengths and weaknesses Shared Research sees the company s strengths as threefold: strong technical capabilities in cutting oils and fluids, extensive product variety, and overseas development supported by Japanese automakers. Weaknesses: little experience in dealing with non-japanese automakers, differences in selling capabilities compared with top global players, and earnings being over-dependent on metalworking oils. 3/51

4 Yushiro Chemical Industry / 513 LAST UPDATE: Key financial data Income statement FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 25,626 27,193 23,473 19,884 23,135 23,482 24,217 26,833 29,61 3,68 29,65 31,565 33,5 YoY 1.2% 6.1% -13.7% -15.3% 16.3% % 1.8% 8.3% 5.6% % 6.1% Gross profit 8,52 8,754 6,81 6,15 7,444 6,61 6,775 7,416 8,127 9,29 9,666 1,92 GPM 33.2% 32.2% 25.9% 3.9% 32.2% 28.1% % % 32.6% 32. SG&A expenses 6,72 6,374 5,565 5,163 5,366 5,723 5,893 6,6 6,557 7,12 7,229 7,589 YoY 5.2% % -7.2% 3.9% 6.7% % 9.2% 8.6% SG&A ratio 23.7% 23.4% 23.7% % 24.4% 24.3% 22.4% 22.6% 23.2% 24.4% 24. Operating profit 2,448 2, , ,49 1,569 2,169 2,437 2,52 2,6 YoY % -78.3% 91.3% %.3% 59.9% 11.4% 38.2% 12.4% 2.7% 3.9% OPM 9.6% 8.8% 2.2% % 3.6% 5.3% 5.4% 7.1% 8.2% 7.9% 7.8% Recurring profit 2,869 2, ,491 2,464 1,298 1,615 2,285 2,521 2,947 3,17 3,243 3,25 YoY.2%.4% -69.4% % -47.3% 24.4% % 16.9% 2.4% 7..2% RPM 11.2% 1.6% 3.8% % % % 9.6% 1.2% 1.3% 9.7% Net income 1,834 1, , ,52 1,495 1,73 1,993 1,697 2,228 2,23 YoY 14.1% 2.7% -83.1% 41.7% % 51.8% 42.1% 13.9% % 31.3%.1% Net margin 7.2% 6.9% 1.4% 2.3% 6.2% % 5.6% 5.9% % 7.1% 6.7% Capital expenditures ,146 1,24 1,719 1, ,196 1, Depreciation 1,128 1,24 1, Goodwill amortization EBITDA 3,576 3,44 1,549 1,835 2,588 1,48 1,457 1,992 2,299 2,973 3,22 3,239 3,4 YoY % % % 15.4% 29.3% 7.7% 1.2% 5. EBITDA margin % 9.2% 11.2% % 7.9% 9.7% 1.8% 1.3% 1.1% R&D expenses 1,36 1,317 1,285 1,215 1,293 1,239 1,441 1,475 1,519 1,649 1,58 1,632 1,6 R&D ratio 5.3% 4.8% % 5.6% 5.3% % 5.4% 5.3% 5.2% 4.8% Per share data (JPY, adjusted for stoc Shares issued (year end; ') ,2 15,2 15,2 15,2 13,9 13,9 13,9 13,9 - EPS Dividend per share Book value per share 1,451 1,475 1,272 1,382 1,415 1,4 1,524 1,743 1,968 1,936 2,29 2,232 - Balance sheet (JPYmn) Current assets 13,884 14,544 1,95 13,317 14,636 14,913 14,67 15,26 16,342 16,565 17,913 19,148 Cash and cash equivalents 5,249 5,332 4,38 5,912 6,543 6,1 6,367 5,82 6,35 6,949 8,177 8,439 Accounts receivable 6,16 6,33 4,229 5,89 5,346 5,92 5,74 5,581 5,694 5,82 6,21 6,598 Inventories 1,973 2,376 1,785 1,787 2,223 2,354 2,794 3,12 3,678 3,265 3,219 3,692 Others Noncurrent assets 18,954 18,928 15,681 15,367 14,143 14,49 16,563 19,829 22,163 22,62 22,646 24,72 Tangible fixed assets 11,395 11,147 1,218 9,61 7,834 8,221 8,825 1,33 1,824 11,671 11,222 11,55 Intangible fixed assets Investments and other assets 7,47 7,75 5,314 5,597 6,125 5,53 7,41 8,936 1,518 1,235 1,872 12,57 Investment securities Long-term deposits Total assets 32,839 33,473 26,587 28,685 28,78 28,962 31,234 34,856 38,56 39,168 4,56 43,869 Current liabilities 6,81 7,655 5,6 6,374 6,493 6,536 6,79 7,38 7,723 7,73 7,843 8,332 Accounts payable 3,617 4,312 1,917 2,918 3,264 3,493 3,32 3,768 3,76 3,532 3,464 3,767 Short-term debt 859 1,195 1,456 1, ,295 1,371 1,437 1,784 1,724 1,724 1,738 Other current assets 2,325 2,148 1,633 2,67 2,314 1,748 2,18 2,13 2,179 2,447 2,655 2,827 Fixed liabilities 3,769 3,111 4,422 3,613 1,572 1,735 FY9/4 1,943 1,767 2,927 3,397 3,339 Long-term debt 1,795 1,387 2,83 2, Others 1,974 1,724 1,619 1,572 1,361 1,424 1,421 1,689 1,617 2,121 2,656 2,756 Net assets 22,269 22,76 17,158 18,697 2,714 2,69 22,816 25,64 29,15 28,536 29,318 32,197 Capital stock 4,249 4,249 4,249 4,249 4,249 4,249 4,249 4,249 4,249 4,249 4,249 4,249 Capital surplus 3,994 3,994 3,994 3,994 4,58 4,58 4,58 4,58 3,994 4,52 4,46 4,46 Retained earnings 14,88 14,938 14,65 14,974 16,62 16,382 17,61 18,183 18,16 19,573 2,544 22,229 Treasury stock ,579-2,579-1,454-1,454-1,454-1, Accum. other comprehensive income ,12-4,17-2,938-3,39-3,835-2, , Minority interests ,16 1,29 1,73 1,457 1,756 1,721 1,772 1,893 Total liability and equity 32,839 33,473 26,587 28,685 28,78 28,962 31,234 34,856 38,56 39,168 4,56 43,869 Statement of cash flows (JPYmn) Cash flows from operating activities 2,729 2,526 1,75 2,426 1, ,22 1,981 1,525 2,928 2,8 2,211 Cash flows from investing activities , ,361-1,419-2, ,241 Cash flows from financing activities -1,353-1,179-1,183-1, , Financial ratios Interest-bearing debt 2,654 2,582 4,259 3,43 1,126 1,66 1,659 1,691 1,934 2,53 2,465 2,321 Net cash 3,295 3, ,682 6,25 4,395 5,217 4,617 4,877 4,658 6,5 6,283 ROA (RP-based) 8.8% 8.7% 2.9% 5.4% 8.6% % 6.9% 6.9% 7.6% 7.6% 7.7% ROE 8.8% 8.7% 1.7% 2.7% 7.7% 3.6% 5.2% 6.6% 6.6% 7.4% 6.2% 7.7% Current ratio 24.1% % 28.9% 225.4% 228.2% 218.7% 25.6% 211.6% % 229.8% Fixed ratio 85.1% 83.4% 91.4% 82.2% 68.3% 67.9% 72.6% 77.4% 76.4% 79.2% 77.2% 76.8% Equity ratio 65.3% 65.1% 61.3% 61.7% 68.1% % 69.3% 7.8% % 69.1% Note: Figures may differ from company data due to differences in rounding methods. 4/51

5 Yushiro Chemical Industry / 513 LAST UPDATE: Recent updates Highlights On August 7, 218, Yushiro Chemical Industry Co., Ltd announced earnings results for FY3/19; see the results section for details. On the same day, the company announced that it had acquired 1 of issued shares in QualiChem, Inc., which operates primarily in North America, through its North American subsidiary, making QualiChem its consolidated subsidiary. Acquisition price was USD56.5mn and advisory expenses were USD1.2mn for a total of USD57.7mn (approximately JPY6.5bn). The share transfer date is scheduled for late August, 218. QualiChem is a metalworking oils and fluids manufacturer with the North American market as its main business area. QualiChem is expanding its business to non-automobile fields, such as aircrafts and medical equipment, by utilizing its well-developed distributors and focusing on US and European customers. The company aims to generate synergies in raw material procurement and technology and expand the sales of company products by utilizing the North American sales channels of QualiChem. It expects that this acquisition can lead to efficient business expansion by utilizing company hubs outside of North America in the future. QualiChem, Inc. FY9/15 FY9/16 FY9/17 FY9/15 FY9/16 FY9/17 (USD') Act. Act. Act. (USD') Act. Act. Act. Sales 33,54 34,984 4,587 Net income (adjusted *) 1,77 2,268 3,58 YoY 4.3% % Operating profit 1,454 1,712 2,563 Net assets 5,45 6,195 7,86 YoY 17.7% 49.7% YoY 22.8% 26.9% OPM 4.3% 4.9% 6.3% Total assets 8,958 1,283 12,868 Recurring profit 1,425 1,716 2,543 YoY 14.8% 25.1% RPM 4.2% 4.9% 6.3% Net asset ratio 56.3% 6.2% 61.1% Net income 974 1,15 1,664 ROA (RP-based) 17.8% 22. Net margin 2.9% 3.3% 4.1% ROE % Note: Net income (adjusted) refers to net income excluding transaction costs with large shareholders On June 18, 218, Shared Research updated the report following interviews with the company. For corporate releases and developments more than three months old, please refer to the News and topics section. 5/51

6 Yushiro Chemical Industry / 513 LAST UPDATE: Trends and outlook Key points for analyzing company performance Shared Research considers the following points key when analyzing Yushiro s performance. Automakers and their parts suppliers, are principal users of Yushiro s metalworking oils and fluids. The company s sales closely correlate to global production by Japanese automakers. Overseas segments contribute substantially to earnings. Performance is susceptible to fluctuations in crude oil prices. Sales correlate to global production volume by Japanese automakers The company s sales are closely linked to global production volume by Japanese automakers, with a correlation coefficient of.956 for the relationship since 2 between full-year sales and Japanese automakers production volume (sum of fiscal year output domestically and calendar year output overseas). This is likely a reflection of Yushiro maintaining a 6 or so share of supplies to Japanese automakers domestic operations, and its solid progress in capturing demand from Japanese automakers expanding overseas. Automobile production volume (left: global; right: Japanese automakers) and the company s sales Global automobile production volume Sales (RHS) (mn units) (mn units) 97.3 Production units: Worldwide Sales (RHS) CY25 CY27 CY29 CY211 CY213 CY215 CY217 CY25 CY27 CY29 CY211 CY213 CY215 CY217 Overseas segments strong contributors The company s overseas sales ratio is substantial. Yushiro has steadily expanded operations since its 1973 foray into the Brazilian market. It currently operates in 12 locations in eight countries, situating bases near its customers production sites. Domestic and overseas segments sales and operating profit contributions (left: JPYbn; right: JPYmn) 35 Japan Overseas Overseas share of total sales (JPYmn) 5 4, Japan Overseas Overseas share of total OP FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 3, 4 3 2, 3 2 1, 2 1 1,559 1,5 1,675 1, , , FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/ The main factors affecting the company s operating profit are sales increases (closely correlated with the number of units produced globally by Japanese automakers) and fluctuation in the price of crude oil. By volume, base oil (similar to crude oil) accounts for roughly 5 of the raw materials for metalworking oil and fluids. Lubricant additives and other functional chemicals make up about 4, and others, 1. In Japan, the company is pretty much able to offset higher crude oil costs by raising sales prices, albeit with a time lag. In overseas markets, though, it is highly sensitive to crude oil price fluctuations. 6/51

7 Yushiro Chemical Industry / 513 LAST UPDATE: Quarterly trends and results FY3/17 FY3/18 FY3/19 FY3/17 FY3/18 FY3/19 YoY chg (JPYmn) Q2 Q3 Q4 Q2 Q3 Q4 Q2 Cons. Cons. Est. Change % of FY Sales 7,23 7,384 7,397 7,594 7,497 7,773 8,276 8,19 8,43 29,65 31,565 33,5 +1, Japan 3,922 4,7 4,112 3,889 4,57 4,237 4,46 4,114 4,388 15,993 16, North and South America 1,34 1,316 1,319 1,334 1,429 1,425 1,418 1,438 1,433 5,273 5,71 +4 China 1,17 1,16 1,39 1, ,32 1,236 1,287 1,38 4,273 4, Southeast Asia and India ,17 1,76 1,79 1,162 1,181 1,182 4,65 4, YoY -6.6% -5.6% -3.1% % 5.3% 11.9% 5.6% 7.3% % 6.1% Japan % 3.4% 4.1% % 8.2% North and South America -5.8% %.8% 9.6% 8.3% %.3% -1.3% 8.3% - China % -9.7% % 1.6% % 11.3% -8.8% 5. - Southeast Asia and India 1.3% % 22.4% 9.1% %.9% 9.9% 4.1% 1.7% - Gross profit 2,322 2,45 2,398 2,496 2,447 2,465 2,726 2,454 2,451 9,666 1, YoY 1.8% 6.7% % 5.4%.6% 13.7% -1.7%.2% % - GPM 32.1% 33.2% 32.4% 32.9% 32.6% 31.7% 32.9% 3.6% % pp SG&A expenses 1,87 1,724 1,766 1,932 1,791 1,832 1,879 2,87 1,895 7,229 7, YoY -2.3% -2.8% 4.9% 6.6% -.9% 6.3% 6.4% % % of sales % 23.9% 25.4% 23.9% 23.6% 22.7% % 24.4% pp Operating profit ,437 2,52 2, % -1 Japan North and South America China Southeast Asia and India Adjustments YoY % 24.2% 27.6% -13.1% 34.2% -35.1% -15.2% 12.4% 2.7% 3.9% Japan -28.2% % 68.1% % 63.2% -67.1% North and South America 157.4% % 3.6% -1.6% 21.7% 11.7% -2.3% 52.6% 12.4% - China 4.2% %.9% -57.4% -28.7% -7.4% -27.6% -31.7% -7.3% -29.1% - Southeast Asia and India 73.9% 1.3% -35.8% 1.9% 3.8% -3.1% 54.1% % -1.4% 5.8% - GPM 7.1% 9.8% % 8.8% 8.1% 1.2% 4.6% 6.9% 8.2% 7.9% 7.8% -.2pp -1.8pp Japan % 5.4% 4.1% % 8.2% 1.3% 5.3% 4.7% pp North and South America 9.3% 1.7% 9.1% % 8.8% 1.3% 7.3% 8.8% % pp China 14.6% % 18.4% 6.8% 1.9% 13.1% 12.4% 4.1% 16.4% 11.1% pp Southeast Asia and India 12.2% % 14.6% 14.7% 3.6% % 11.7% pp Non-operating income Recurring profit , ,17 3,243 3, % +78 YoY -12.1% 8.8% -5.1% 29.6% 2.3% 11.3% 21.7% -3.4% 9.9% 2.4% 7..2% RPM 9.1% 1.4% 12.7% 8.6% % 5.7% 1.8% 1.2% 1.3% 9.7% -.6pp +1.1pp +.3pp Net income ,697 2,228 2, % +79 YoY -58.2% % 118.9% 22.1% -49.6% 13.7% -14.9% 31.3%.1% Net margin % 3.3% 7.7% 8.4% 1.6% 1.6% 8.1% 5.7% 7.1% 6.7% -.4pp +1.5pp +.5pp Depreciation EBITDA , ,192 3,239 3,4 EBITDA margin 9.7% 12.4% % 11.1% 1.4% 12.4% 7.1% - 1.8% 1.3% 1.1% YoY 12.2% 21.4% -14.8% 21.2% 18.8% -11.8% 26.7% -25.2% - 7.8% 1. - R&D expenses ,58 1,632 1,6 YoY 2.6% -.2% -4.1% -13.4% % 9.3% % 3.3% -2. Forex (company figures for FY, SR est. for quarters) USD/JPY MXN/JPY BRL/JPY CNY/JPY THB/JPY MYR/JPY IDR/JPY (') INR/JPY Note: Figures may differ from company data due to differences in rounding methods. 7/51

8 Yushiro Chemical Industry / 513 LAST UPDATE: FY3/19 earnings (out August 7, 218) : Sales up 7.3% YoY and operating profit down 15.2% (JPY1mn). Operating profit fell for each regional segment due to the impact of higher raw material costs. However, recurring profit increased 9.9% (JPY78mn) due to improvements in equity-method gains (+JPY152mn) Japan: Sales up 8.2%, driven by an increase in the number of automobiles produced. Operating profit fell 12. (-JPY33mn) due to higher raw material costs North and South America: Sales rose.3% YoY. US sales were flat, Mexico sales were down, and Brazil sales were up. Operating profit down 2.3% (- JPY32mn) owing to higher personnel expenses and raw material costs China: sales were up 11.3% but operating profit declined 31.7% (down JPY2mn) due to rising labor and raw material costs. Sales for Japanese manufacturers grew Southeast Asia and India: Sales rose 9.9%, and operating profit fell 5.7% (JPY9mn). Sales grew steadily in India, which moved into the black for the first time in FY3/18. However, profits fell in FY3/19 due to higher raw material costs Topics: Announced acquisition of US-based QualiChem (USD4.6mn in sales in FY9/17, operating profit of USD2.6mn). Acquisition price was approximately JPY6.5bn Earnings: Sales (left) and operating profit (right) Japan North and South America China Southeast Asia and India 24% % % % % -4% -8% -12% FY3/ FY3/15 FY3/16 FY3/17 FY3/18 FY3/ Japan North and South America China Southeast Asia and India Adjustments OPM (LHS) (JPYmn) FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 18% 16% 14% 12% 1 8% 6% 4% 2% -2% Results summary In FY3/19, sales rose 7.3% YoY to JPY8.bn, operating profit fell 15.2% YoY (-JPY1mn) to JPY556mn, recurring profit rose 9.9% YoY to JPY867mn, and net income jumped 13.7% YoY to JPY655mn. In each regional segment, sales rose but profits fell. The results on consolidated basis also saw higher sales but lower operating profit. However, recurring profit was up YoY due to improvements to equity-method gains (JPY198mn, up JPY152mn YoY). Operating profit fell due to the impact of higher raw material costs as well as higher personnel expenses in South America, North America, and China. The company maintained an operating profit. The company assumed oil prices at USD63.8 per barrel for FY3/19; however, the WTI average between January and March was USD62.9 and USD67.9 from April to June. Announcement of acquisition of US-based QualiChem On the same day as earnings results announcement, the company announced that it had acquired 1 of issued shares in QualiChem, Inc., which operates primarily in North America, through its North American subsidiary, making QualiChem its consolidated subsidiary. Acquisition price was USD56.5mn and advisory expenses were USD1.2mn for a total of USD57.7mn (approximately JPY6.5bn). The share transfer date is scheduled for late August, 218. QualiChem is a metalworking oils and fluids manufacturer with the North American market as its main business area. QualiChem is expanding its business to non-automobile fields, such as aircrafts and medical equipment, by utilizing its well-developed distributors and focusing on US and European customers. The company aims to generate synergies in raw material procurement and technology and expand the sales of company products by utilizing the North American sales channels of QualiChem. It 8/51

9 Yushiro Chemical Industry / 513 LAST UPDATE: expects that this acquisition can lead to efficient business expansion by utilizing company hubs outside of North America in the future. QualiChem, Inc. FY9/15 FY9/16 FY9/17 FY9/15 FY9/16 FY9/17 (USD') Act. Act. Act. (USD') Act. Act. Act. Sales 33,54 34,984 4,587 Net income (adjusted *) 1,77 2,268 3,58 YoY 4.3% % Operating profit 1,454 1,712 2,563 Net assets 5,45 6,195 7,86 YoY 17.7% 49.7% YoY 22.8% 26.9% OPM 4.3% 4.9% 6.3% Total assets 8,958 1,283 12,868 Recurring profit 1,425 1,716 2,543 YoY 14.8% 25.1% RPM 4.2% 4.9% 6.3% Net asset ratio 56.3% 6.2% 61.1% Net income 974 1,15 1,664 ROA (RP-based) 17.8% 22. Net margin 2.9% 3.3% 4.1% ROE % Note: Net income (adjusted) refers to net income excluding transaction costs with large shareholders Results by regional segment Japan FY3/19 sales increased 8.2% YoY to JPY4.4bn (up JPY331mn), operating profit was JPY232mn (down 12., or JPY33mn YoY), and the OPM fell 1.2pp YoY to 5.3%. Sales increased YoY, driven by expanded production at automobile-related companies, Yushiro s main customers. Operating profit decreased as the impact of higher raw material costs surpassed the sales increase. In the medium-term plan, the key strategies for the domestic business call for strengthening sales channels, increasing sales of oils and fluids for materials processing, building a global manufacturing line to strengthen cost competitiveness, and pursuing joint research with tool and machinery manufacturers and universities. Sales (left) and operating profit (right) FY3/ FY3/14 FY3/15 Sales FY3/16 FY3/17 FY3/18 FY3/ % 6% 4% 2% 4.8% % % FY3/13 2.1% 2.3% % % 4.9% 4.3% 3.7% 3.8% FY3/14 Operating profit FY3/15 3.2% % 6.3% 5.4% 4.1% FY3/16 FY3/17 OPM (LHS) % FY3/18 8.2% % % FY3/19 (JPYmn) Automobile and motorcycle production in Japan FY3/13 Four-wheeler production units in Japan (mn) Two-wheeler production units in Japan (mn) FY3/14 FY3/15 FY3/16 FY3/17 FY3/ FY3/15 FY3/16 Source: Shared Research based on company materials and data from the Japan Automobile Manufacturers Association, Inc. FY3/17 FY3/18. 9/51

10 Yushiro Chemical Industry / 513 LAST UPDATE: North and South America FY3/19 sales rose.3% YoY to JPY1.4bn (up JPY4mn), operating profit was JPY126mn (down 2.3% YoY, or JPY32mn), and the OPM fell 2.3pp YoY to 8.8%. Sales were roughly flat at the US subsidiary, but decreased at South American subsidiaries in Mexico. Sales at subsidiaries in Brazil were up, showing mixed results. The US subsidiary reported flat sales despite weak demand for automobiles and a 2% decline in production (down 4% at Japanese automakers). The results at South American subsidiaries was attributable to a decrease in production volume for Japanese manufacturers in Mexico, and an improvement in the macro environment in Brazil. On the earnings front, operating profit was down due to higher raw material costs and increased personnel expenses as the company reinforces its sales staff.. In the medium-term plan, basic strategies for the overseas business are strengthening sales capabilities by establishing a network of dealers and distributors and increasing its sales force, improving business efficiency by actively sharing information between group companies (including in Japan), and expanding sales bases in the US, China, and Southeast Asia. In FY3/18, the company moved steadily forward with expansion of sales personnel, and worked to strengthen sales channels with limited sales personnel resources. Further expansion of sales regions and offices will require human resources who can provide technical follow-up, and the company will take gradual steps in this direction over the three years. We expect that the company will benefit further from increased sales staff by the final year. Sales (left) and operating profit (right) FY3/ FY3/ FY3/15 Sales Subsidiaries sales in the US (left) and Mexico (right) FY3/16 FY3/17 FY3/18 FY3/ % % 8.4%.8 8% % 9.6% % % 4.2% 3.4% % 1.8% %.9% % -4% FY3/13 FY3/14 Operating profit FY3/15-1 FY3/ OPM (LHS) 1.7% 9.3% 9.1% 11.1% 1.3% 8.8% 8.8% % FY3/17 FY3/18 FY3/19 (JPYmn) US subsidiary sales (local currency) Mexico subsidiary sales (local currency) FY3/16 FY3/17 FY3/18 7. (USDmn) FY3/16 FY3/17 FY3/18 1 (MXNmn) 1/51

11 Yushiro Chemical Industry / 513 LAST UPDATE: Automobile production (above), automobile production by Japanese automakers (below) US production units FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 1 US production units % of sales (mn) (mn) Brazil production units Mexico production units FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 (mn) North America production units % of sales (mn) Latin America production units % of sales (mn) (mn) FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 Source: Shared Research based on company materials and data from the Japan Automobile Manufacturers Association, Inc.. China FY3/19 sales rose 11.3% YoY to JPY1.bn (up JPY15mn), operating profit was JPY43mn (-31.7% YoY, down JPY2mn), and the OPM dropped 2.6pp YoY to 4.1%. Sales have recovered from Q2 FY3/18 onward; however, the rising cost of raw materials continued to impact operating profit. Steel-related sales accounted for roughly one quarter of FY3/17 sales in China. An increase in automobile-related sales and market share gains in Japan helped to offset the decline in FY3/18 steel-related sales. In, higher production volume from Japanese manufacturers also continued to contribute. However, operating profit appears to have been affected by a rise in personnel and raw materials costs, such that profit fell even though sales rose. Sales (left) and operating profit (right) FY3/ FY3/ FY3/15 Sales FY3/16 FY3/ FY3/ FY3/ %.6 1.1% 1.4% 9.9.7% 9.7% 1 6.3% FY3/13 FY3/14 Operating profit 16.6% 14.6% 12.9% 12.6% % FY3/ FY3/ % OPM (LHS) 14.6% FY3/ % 16.8% 13.1% 12.4% 1.9% % FY3/ % 43 FY3/19 (JPYmn) /51

12 Yushiro Chemical Industry / 513 LAST UPDATE: Sales (left) and operating profit (right) on a local currency basis applying quarterly average forex rates (Shared Research estimates) FY3/ FY3/14 Sales (local currency; SR est.) FY3/15 FY3/16 FY3/17 Automobile production units in China (left: all manufactures; right; Japanese automakers) FY3/13 Source: Shared Research based on data from the Japan Automobile Manufacturers Association, Inc FY3/ FY3/19 (CNYmn) China production units (mn) FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/ FY3/ FY3/ FY3/14.4 OP (local currency; SR est.) FY3/ FY3/ FY3/ FY3/ FY3/ FY3/19 (CNYmn) China production units (mn) 1.4 FY3/15 FY3/16 FY3/17 FY3/18 FY3/ Southeast Asia and India FY3/19 sales rose 9.9% YoY to JPY1.2bn (up JPY16mn YoY), operating profit was JPY148mn (down 5.7%, or JPY9mn YoY), and the OPM deteriorated 2.1pp YoY to 12.. Sales in Thailand, Malaysia, India, and Indonesia were robust. Sales are growing steadily in India, which achieved an operating profit in FY3/18. Operating profit fell YoY due to the impact of higher raw material costs, despite higher sales. India: The shift to local production in India is nearly complete, and sales almost reached the breakeven point in FY3/19. The company now has a business structure under which sales growth translates into profit growth; profits started building in Q2 FY3/18, and in FY3/18 the company achieved its first profit since it was founded in 28. In this segment, profits in Indonesia and Thailand were the highest, followed by Malaysia. In FY3/18, profits in Thailand and Malaysia fell YoY owing to onetime expenses, but the segment as a whole nonetheless grew profits YoY on the back of strong performances in Indonesia and India. Operations at the company's new plant in Malaysia got underway in December 217; the new plant is an important addition to the company's production capacity in that region, and will produce not only to meet domestic demand in Malaysia but also for the growing markets in Vietnam, the Philippines, and other countries in the region. In FY3/19 the company aims to grow profits despite incurring costs associated with the new plant. Sales (left) and operating profit (right) FY3/ FY3/14 FY3/15 Sales FY3/16 FY3/ FY3/18 FY3/19 (JPYmn) Operating profit OPM (LHS) % % 14.6% 14.7% % % 12.2% % % 7.1% % % 4.1% 3.3% 3.6% 5.6% % %. -1 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/ /51

13 Yushiro Chemical Industry / 513 LAST UPDATE: Subsidiary sales on a local currency basis FY3/16 Thailand subsidiary sales (local currency) FY3/ FY3/ (THBmn) FY3/16 Malaysia subsidiary sales (local currency) FY3/ FY3/ (MYRmn) FY3/16 Indonesia subsidiary sales (local currency) FY3/ FY3/ (IDRbn) FY3/16 India subsidiary sales (local currency) FY3/ FY3/ (INRmn) For details on previous quarterly results, see the Historical financial statements section. 13/51

14 Yushiro Chemical Industry / 513 LAST UPDATE: Full-year company forecasts FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 F3/18 FY3/19 FY3/2 (JPYmn) FY FY FY FY FY FY FY Init. Est. Change MTP 3-yr CAGR Sales 23,482 24,217 26,833 29,61 3,68 29,65 31,565 33,5 +1,935 35,6 Japan 16,364 15,857 16,189 16,327 16,742 15,993 16,868 North and South America 2,73 3,277 4,118 4,818 5,345 5,273 5,71 China 2,9 3,125 3,652 4,476 4,685 4,273 4,488 Southeast Asia and India 1,514 1,957 2,872 3,438 3,96 4,65 4,498 YoY % 1.8% 8.3% 5.6% % 6.1% 6.3% 6.3% Japan 1.9% -3.1% 2.1%.9% North and South America -5.7% 21.2% 25.7% % -1.3% 8.3% China 9.4% 7.8% 16.9% 22.6% 4.7% -8.8% 5. Southeast Asia and India -3.1% 29.3% 46.8% 19.7% 13.6% 4.1% 1.7% Gross profit 6,61 6,775 7,416 8,127 9,29 9,666 1,92 - YoY -11.3% 2.6% % 14.3% % - GPM 28.1% % % 32.6% SG&A expenses 5,723 5,893 6,6 6,557 7,12 7,229 7,589 - YoY 6.7% % 9.2% 8.6% SG&A ratio 24.4% 24.3% 22.4% 22.6% 23.2% 24.4% Operating profit ,49 1,569 2,169 2,437 2,52 2, ,4 Japan North and South America China Southeast Asia and India Adjustments YoY -57.7%.3% 59.9% 11.4% 38.2% 12.4% 2.7% 3.9% 3.8% 11.7% Japan % 28.8% % North and South America -63.3% 42.2% 8.3% -16.8% 8.3% 52.6% 12.4% China % 55.3% % -7.3% -29.1% Southeast Asia and India -9.1% % 153.8% -1.4% 5.8% GPM 3.7% 3.6% 5.3% 5.4% 7.1% 8.2% 7.9% 7.8% -.2pp 9.6% Japan 2.8% 2.9% 3.6% 3.6% 3.6% 4.7% 5. North and South America % 5.1% 3.6% 5.8% % China 8.8% % 14.2% 16.1% 16.4% 11.1% Southeast Asia and India 1.3% -1.7% 7.3% 5.8% 12.9% 12.3% 11.7% Non-operating income (expenses) Recurring profit 1,298 1,615 2,285 2,521 2,947 3,17 3,243 3, , YoY -47.3% 24.4% % 16.9% 2.4% 7..2% 23.1% 9.9% RPM % % 9.6% 1.2% 1.3% 9.7% -.6pp 11.2% Net income 693 1,52 1,495 1,73 1,993 1,697 2,228 2, ,6 YoY -51.7% 51.8% 42.1% 13.9% % 31.3%.1% 16.6% 15.3% Net margin % 5.6% 5.9% % 7.1% 6.7% -.4pp 7.3% Capital expenditures 1,146 1,24 1,719 1, ,196 1, -196 Depreciation EBITDA 1,48 1,457 1,992 2,299 2,962 3,192 3,239 3, EBITDA margin % 7.9% 9.7% 1.8% 1.3% 1.1% -.1pp R&D expenses 1,239 1,441 1,475 1,519 1,649 1,58 1,632 1,6-32 % of sales 5.3% % 5.4% 5.3% 5.2% 4.8% -.4pp Foreign exchange rate US USD/JPY Mexico MXN/JPY Brazil BRL/JPY China CNY/JPY Malaysia MYR/JPY Thailand THB/JPY India INR/JPY Indonesia IDR/JPY (') Japanese makers' o/s prod. (CY; ') CY211 CY212 CY213 CY214 CY215 CY216 CY217 CY218 Asia 7,547 8,51 9,56 9,113 9,472 1,92 1,87 North America 3,69 4,254 4,541 4,786 4,823 4,989 4,767 US 2,422 3,325 3,627 3,813 3,848 3,976 3,765 South America 1,3 1,235 1,284 1,591 1,821 1,86 1,93 Total (incl. Near and Middle East) 13,384 15,823 16,757 17,476 18,95 18,979 19,741 Asia 12.6% 6..6% 3.9% % North America 38.6% 6.7% 5.4%.8% 3.4% -4. US 37.3% 9.1% 5.1%.9% 3.4% -5.3% South America 19.9% % 14.4% 2.2% 2.4% Total (incl. Near and Middle East) 18.2% 5.9% 4.3% % 4. Note: Figures may differ from company data due to differences in rounding methods. Earnings (sales: left, operating profit: right) Japan China North and South America Southeast Asia and India FY3/11 FY3/13 FY3/15 FY3/17 FY3/19 Est ,5 3 2,5 2 1,5 1 4, 3, 2, 1, 5-5 (JPYmn) 2, ,79 Japan North and South America China Southeast Asia and India Adjustments OPM (LHS) 2,52 2,437 2, ,49 1, ,6 FY3/11 FY3/13 FY3/15 FY3/17 FY3/19 Est. 3,4 16% 14% 12% 1 8% 6% 4% 2% -2% 14/51

15 Yushiro Chemical Industry / 513 LAST UPDATE: FY3/19 initial forecast (out May 11, 218) Targets sales growth in all segments/business bases For FY3/19, the company forecasts sales of JPY33.5bn (+6.1% YoY), operating profit of JPY2.6bn (+3.9% YoY), recurring profit of JPY3.3bn (+.2% YoY), and net income attributable to parent company shareholders of JPY2.2bn (+.1% YoY). Yushiro projects sales growth for all business bases, and has discounted higher raw material costs in its operating profit forecast. With FY3/18 results, the company announced a new medium-term plan ending in FY3/2. FY3/19 is the middle year of the new plan. Based on the company s long-term vision Yushiro Global 1, the company aims to strengthen global sales capabilities, become more competitive in core business, and establish a structure for maximizing group synergies (see the Medium-term plan section for details). As it did in the first year, FY3/18, in FY3/19 Yushiro intends to take necessary actions to attain medium-term targets based on these goals. Aiming to book operating profit at all subsidiaries, and increase profits everywhere except Mexico; growth to be constrained by raw material price fluctuations In terms of the business climate for FY3/19, Yushiro anticipates solid performances both domestically and overseas, despite lingering concerns about economic deceleration in China. It believes other factors also warrant attention, including uncertainty over the global economic outlook and developments on financial and capital markets, as well as trends in crude oil and raw material prices. Yushiro forecasts YoY sales growth in all segments and at all subsidiaries. In the US, Yushiro expects weak auto production to dampen its performance, but anticipates gradual effects from measures to increase sales. In Mexico, it plans profit growth on par with FY3/18 (+18% YoY), while for Brazil the company has a cautious outlook in view of current economic trends. In China, Yushiro expects to grow sales for automotive applications in particular, underpinned by firm output at Japanese automakers. In Malaysia, it targets double-digit sales growth, but is wary of political uncertainty, in light of customers high export weightings. In India and Indonesia, Yushiro expects earnings to remain strong. For operating profit, the company expects a large portion of the effect of sales growth (+JPY5mn) and domestic price revisions (+JPY38mn) to be canceled out by raw material price fluctuations (-JPY6mn). Its earnings forecasts assume a crude oil price of USD63.8/bbl, up 21% from USD52.7/bbl in FY3/18 and accordingly factor in the negative impact of higher imported raw material prices on profits at overseas bases and the parent. Yushiro sees stronger sales driving profit growth in all regions except Mexico. It expects higher raw material costs to have a significant effect, particularly on overseas markets, but in the case of Mexico the company is wary also of fixed cost increases and US political developments. FY3/18 operating profits were distributed quite evenly across geographical segments, at JPY497mn for China, JPY535mn for North and South America, and JPY527mn for Southeast Asia and India. In FY3/19, the company expects profit growth in Southeast Asia and India to drive earnings, and looks for higher profits in China to compensate for a slight fall in profits in North and South America. In China, raw material and labor costs are likely to increase owing to environmental restrictions and rising crude oil prices. Nonetheless, Yushiro looks for profits to grow owing to stronger sales. It projects somewhat lower profits for North and South America, although forecasts higher sales and higher profits for the US. The US subsidiary will continue increasing the headcount to strengthen sales capabilities in accordance with the medium-term plan, but as well as incurring costs this should also boost sales. Yushiro expects earnings from Southeast Asia and India to be powered by Indonesia and Thailand, where profits are relatively large in scale. It also anticipates profit contributions from sales growth in Malaysia and India. 15/51

16 Yushiro Chemical Industry / 513 LAST UPDATE: Factors expected to impact operating profit 3,4 1 3,2 3, ,8 2, ,4 2,2 2,52 2,6 2, (JPYmn) FY3/18 Operating profit Sales expansion Sales price revisions Cost reductions Changes in raw material costs Increase in expenses FY3/19 Operating profit 16/51

17 Yushiro Chemical Industry / 513 LAST UPDATE: Outlook FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 F3/18 FY3/19 FY3/2 (JPYmn) FY FY FY FY FY FY FY Init. Est. Change MTP 3-yr CAGR Sales 23,482 24,217 26,833 29,61 3,68 29,65 31,565 33,5 +1,935 35,6 Japan 16,364 15,857 16,189 16,327 16,742 15,993 16,868 North and South America 2,73 3,277 4,118 4,818 5,345 5,273 5,71 China 2,9 3,125 3,652 4,476 4,685 4,273 4,488 Southeast Asia and India 1,514 1,957 2,872 3,438 3,96 4,65 4,498 YoY % 1.8% 8.3% 5.6% % 6.1% 6.3% 6.3% Japan 1.9% -3.1% 2.1%.9% North and South America -5.7% 21.2% 25.7% % -1.3% 8.3% China 9.4% 7.8% 16.9% 22.6% 4.7% -8.8% 5. Southeast Asia and India -3.1% 29.3% 46.8% 19.7% 13.6% 4.1% 1.7% Gross profit 6,61 6,775 7,416 8,127 9,29 9,666 1,92 - YoY -11.3% 2.6% % 14.3% % - GPM 28.1% % % 32.6% SG&A expenses 5,723 5,893 6,6 6,557 7,12 7,229 7,589 - YoY 6.7% % 9.2% 8.6% SG&A ratio 24.4% 24.3% 22.4% 22.6% 23.2% 24.4% Operating profit ,49 1,569 2,169 2,437 2,52 2, ,4 Japan North and South America China Southeast Asia and India Adjustments YoY -57.7%.3% 59.9% 11.4% 38.2% 12.4% 2.7% 3.9% 3.8% 11.7% Japan % 28.8% % North and South America -63.3% 42.2% 8.3% -16.8% 8.3% 52.6% 12.4% China % 55.3% % -7.3% -29.1% Southeast Asia and India -9.1% % 153.8% -1.4% 5.8% GPM 3.7% 3.6% 5.3% 5.4% 7.1% 8.2% 7.9% 7.8% -.2pp 9.6% Japan 2.8% 2.9% 3.6% 3.6% 3.6% 4.7% 5. North and South America % 5.1% 3.6% 5.8% % China 8.8% % 14.2% 16.1% 16.4% 11.1% Southeast Asia and India 1.3% -1.7% 7.3% 5.8% 12.9% 12.3% 11.7% Non-operating income (expenses) Recurring profit 1,298 1,615 2,285 2,521 2,947 3,17 3,243 3, , YoY -47.3% 24.4% % 16.9% 2.4% 7..2% 23.1% 9.9% RPM % % 9.6% 1.2% 1.3% 9.7% -.6pp 11.2% Net income 693 1,52 1,495 1,73 1,993 1,697 2,228 2, ,6 YoY -51.7% 51.8% 42.1% 13.9% % 31.3%.1% 16.6% 15.3% Net margin % 5.6% 5.9% % 7.1% 6.7% -.4pp 7.3% Capital expenditures 1,146 1,24 1,719 1, ,196 1, -196 Depreciation EBITDA 1,48 1,457 1,992 2,299 2,962 3,192 3,239 3, EBITDA margin % 7.9% 9.7% 1.8% 1.3% 1.1% -.1pp R&D expenses 1,239 1,441 1,475 1,519 1,649 1,58 1,632 1,6-32 % of sales 5.3% % 5.4% 5.3% 5.2% 4.8% -.4pp Foreign exchange rate US USD/JPY Mexico MXN/JPY Brazil BRL/JPY China CNY/JPY Malaysia MYR/JPY Thailand THB/JPY India INR/JPY Indonesia IDR/JPY (') Automobile unit production (CY; ') CY211 CY212 CY213 CY214 CY215 CY216 CY217 CY218 US 8,662 1,333 11,64 11,661 12,16 12,18 11,19 Brazil 3,44 3,39 3,712 3,146 2,428 2,156 2,7 Mexico 2,565 2,885 2,929 3,22 3,399 3,466 3,774 China 18,426 19,271 22,126 23,725 24,478 28,119 29,15 India 3,94 4,179 3,889 3,845 4,162 4,519 4,79 Japan (FY) 9,267 9,551 9,912 9,591 9,188 9,357 9,683 YoY 3.1% 3.8% -3.2% -4.2% 1.8% 3. Japanese makers' o/s prod. (CY; ') CY211 CY212 CY213 CY214 CY215 CY216 CY217 CY218 Asia 7,547 8,51 9,56 9,113 9,472 1,92 1,87 Europe 1,411 1,484 1,537 1,654 1,669 1,758 1,941 North America 3,69 4,254 4,541 4,786 4,823 4,989 4,767 US 2,422 3,325 3,627 3,813 3,848 3,976 3,765 South America 1,3 1,235 1,284 1,591 1,821 1,86 1,93 Africa Oceania Total (incl. Near and Middle East) 13,384 15,823 16,757 17,476 18,95 18,979 19,741 Asia 12.6% 6..6% 3.9% % Europe 5.2% 3.6% 7.6%.9% 5.3% 1.4% North America 38.6% 6.7% 5.4%.8% 3.4% -4. US 37.3% 9.1% 5.1%.9% 3.4% -5.3% South America 19.9% % 14.4% 2.2% 2.4% Africa 6.4% -6.6% 4.2% -9.8% % Oceania 8.2% 4.8% -15.2% 1.7% Total (incl. Near and Middle East) 18.2% 5.9% 4.3% % 4. 17/51

18 Yushiro Chemical Industry / 513 LAST UPDATE: Progress toward medium-term plan targets Yushiro is taking steps to attain the goals outlined in its medium-term business plan. From an earnings perspective, sales are on track to meet the goal of average annual growth of 6.3% (6.6% in FY3/18, target of 6.1% in FY3/19), while profits are being affected by higher-than-expected raw material costs (with crude oil derivatives accounting for more than half). In Japan, the company has established a system to pass on increased costs in the form of higher selling prices, albeit with a time lag, but this is not the case overseas. It should be noted, though, that this can work in the company s favor when crude oil prices soften. Implementation of basic strategies In the medium-term plan, basic strategies for the overseas business are strengthening sales capabilities by establishing a network of dealers and distributors and increasing its sales force, improving business efficiency by actively sharing information between group companies (including in Japan), and expanding sales bases in the US, China, and Southeast Asia. The key strategies for the domestic business call for strengthening sales channels, increasing sales of oils and fluids for materials processing, building a global manufacturing line to strengthen cost competitiveness, and pursuing joint research with tool and machinery manufacturers and universities. At the overseas business, all three basic strategies are making steady contributions to higher sales. Thus, although production volume of Japanese automakers is on a downward trajectory in the US and Mexico, in FY3/18, sales stayed even YoY in the US and increased YoY in Mexico. The company also commissioned a new plant in Malaysia in December 217. Yushiro similarly made progress in implementing its key strategies for the domestic operation, with the effort to increase sales of oils and fluids for materials processing leading to a 12% YoY increase in sales of the product, such that fluids for plastic working (which include oils and fluids for materials processing) generated 7.2% of parent sales (+.4pp YoY). In addition, thanks to its strategy to pursue joint research with universities, Yushiro plans to launch a self-repairing polymer gel that it believes is instrumental in developing new businesses in June 218. Self-repairing polymer gel The company developed its self-repairing polymer gel, Wizard Gel, in conjunction with Osaka University. In addition to being self-repairing, this hydrogel (in which water is the dispersion medium) has several other characteristics including resistance to dryness, high elasticity, and toughness. The gel s chemical structure is such that even when severed it will self-repair within several tens of seconds of contact being reestablished between sections of separated materials. Yushiro intends to launch Wizard Gel in June 218, although it has made no allowance for such sales in FY3/19 forecasts. While the likely applications are unclear, at the results briefing the company said it had begun looking at applications in the medical arena, and had provided samples to organizations in several fields to consider potential applications. Yushiro believes, for example, that if used as a material for organ models, the market could be worth around JPY1bn, with potential for annual growth of around 1. 18/51

19 Yushiro Chemical Industry / 513 LAST UPDATE: Performance trends and forecasts: sales (left) and operating profit (right) Japan China Historical company forecasts and results North and South America Southeast Asia and India FY3/11 FY3/13 FY3/15 FY3/17 FY3/19 Est ,5 3 2,5 2 1,5 1 4, 3, 2, 1, 5-5 (JPYmn) 2, ,79 Japan North and South America China Southeast Asia and India Adjustments OPM (LHS) 2,52 2,437 2, ,49 1, ,6 FY3/11 FY3/13 FY3/15 FY3/17 FY3/19 Est. 3,4 16% 14% 12% 1 8% 6% 4% 2% -2% Results vs. Initial Est. FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 FY3/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales (Initial Est.) 19,47 2,28 24,44 25,95 26,2 28,4 33,2 3,7 31,7 33,5 Sales (Results) 19,884 23,135 23,482 24,217 26,833 29,61 3,68 29,65 31,565 Results vs. Initial Est. 2.1% 14.1% -3.9% -6.7% 2.4% 2.3% -7.6% -3.6% -.4% Operating profit (Initial Est.) ,45 1,17 1,26 1,7 1,8 2,2 2,7 2,6 Operating profit (Results) 987 2, ,49 1,569 2,169 2,437 2,52 Results vs. Initial Est. 19.3% 136.1% -39.4% -24.7% 11.8% -7.7% % -7.3% Recurring profit (Initial Est.) 5 1,29 1,88 1,65 1,98 2,5 2,6 2,9 3,4 2,23 Recurring profit (Results) 1,491 2,464 1,298 1,615 2,285 2,521 2,947 3,17 3,243 Results vs. Initial Est % % 15.4%.8% 13.3% % Net income (Initial Est.) ,15 1, 1,27 1,7 1,6 1,8 2,2 2,23 Net income (Results) 452 1, ,52 1,495 1,73 1,993 1,697 2,228 Results vs. Initial Est % % 5.2% 17.7%.2% 24.6% -5.7% 1.3% Note: Figures may differ from company data due to differences in rounding methods. Note: The FY3/12 forecast was announced along with results. 19/51

20 Yushiro Chemical Industry / 513 LAST UPDATE: Medium-term plan (announced May 12, 217) On May 12, 217, Yushiro unveiled its 18th medium-term plan ending in FY3/2. The new plan is based on the company s long-term vision. Objectives are strengthening global sales capability, becoming more competitive in core businesses, and establishing a structure for maximizing group synergies. Based on these objectives, the company set core strategies for its overseas business; domestic business; strategic investment; and new businesses. Numerical targets are shown in the above table, including FY3/2 sales of JPY35.6bn (JPY6.bn increase from FY3/17, +2.2%) and operating profit of JPY3.4bn (+JPY1.bn, +39.). Although the company has not disclosed a breakdown by region, we understand that most of the sales increase will be from overseas businesses. The following is a summary of the core objectives and strategies of the 18th medium-term plan Performance trends and forecasts: sales (left, JPYbn) and operating profit (right, JPYmn) Japan North and South America China Southeast Asia and India YoY (left axis) FY3/1 FY3/12 FY3/14 FY3/16 FY3/18 Est FY3/2 Est. 4 4, 35 3,5 3 3, 25 2,5 2 2, 15 1,5 1, (JPYmn) 2, ,79 Japan North and South America China Southeast Asia and India Adjustments OPM (left axis) 2,6 2,437 2, ,569 1, FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 Est. 3,4 FY3/2 Est. 12% 1 8% 6% 4% 2% -2% Core objectives of the plan Strengthening global sales capabilities In its 17th medium-term plan, Yushiro focused on setting up production and R&D bases and improving profits in Japan and overseas by optimizing the sourcing of raw materials and products globally. The 18th medium-term plan aims to strengthen sales capabilities by increasing the sales force and establishing sales networks to gain market share in growing overseas markets. The company is especially concentrating on building a sales network (representative offices and distributors) for each business base to cultivate new customers. Yushiro has around 6 market share (volume basis) in cutting oils and fluids, and metalworking oils for automakers. However, in the larger category of metalworking oils and fluids, its share drops to around 2 in the domestic market and only globally. In many cases, a customer may use Yushiro products in Japan, but not at its overseas bases. The company commented that because customers are spread out over many regions, local business bases suffer low business efficiency and labor shortages. In other words, there is plenty of room for growth by increasing the customer base. We understand that Yushiro has not previously engaged in aggressive sales expansion strategies as set out in its latest medium-term plan. The company started focusing on North America and China at the beginning of FY3/18 and is likely to extend these efforts to Southeast Asia. Basic strategies for the overseas business are strengthening sales capabilities by establishing a network of dealers and distributors and increasing its sales force, improving business efficiency by actively sharing information between group companies (including in Japan), and expanding sales bases in the US, China, and Southeast Asia (see above for details). 2/51

21 Yushiro Chemical Industry / 513 LAST UPDATE: Segment sales (left, North and South America; center, China; right: Southeast Asia and India) North and South America sales YoY (left axis) China sales YoY (left axis) Southeast Asia and India sales YoY (left axis) FY3/11 FY3/13 FY3/15 FY3/17 FY3/11 FY3/13 FY3/15 FY3/17 FY3/11 FY3/13 FY3/15 FY3/17 Becoming more competitive in core business The 17th medium-term plan aimed to make the company s domestic core business more competitive by forming a structure that integrates sales and technology, working on responding more quickly to customers, shortening product development time, improving customer satisfaction, and rebuilding its distributor network to strengthen sales. The 18th medium-term plan seeks to continue and further extend these measures. The key strategies for the domestic business call for strengthening sales channels, increasing sales of oils and fluids for materials processing, building a global manufacturing line to strengthen cost competitiveness, and pursuing joint research with tool and machinery manufacturers and universities. Yushiro has a large market share in cutting oils and fluids, and metalworking oils for automakers. However, in the larger category of metalworking oils and fluids, its share drops to around 2 in the domestic market. For example, Yushiro s share of lubricants for plastic working is low. Under the 18th medium-term plan, the company set up a project team in Japan to pioneer business areas other than cutting oils and fluids, and metalworking oils. Yushiro also launched a project to cultivate new customers among small and mid-size companies to further build up its customer base in Japan. These are new measures that were not part of the previous plan, and although they may take some time to show results, we will be watching progress closely. Japan sales (left) and operating profit (right) 12% 1 8% 6% 4% 2% -2% -4% Japan sales YoY (left axis) 17. 7% % % % % % 6.7% 1,79 Operating profit OPM (left axis) (JPYmn) 1,4 1,2 4.7% 1, 3.6% 3.6% 3.6% 8 2.8% 2.9% % FY3/11 FY3/ FY3/11 FY3/15 Establish structure to maximize group synergies During the previous medium-term plan, Yushiro acquired JCBC, which makes metal surface treatment agents and aircraft chemicals, in April 215. While Yushiro is involved with the metalworking oils and fluids used in machining, JCBC s forte is in the surface treatment agents used prior to machining. Further, JCBC has partnerships with aircraft manufacturers, a new industry for Yushiro. In the 18th medium-term plan, Yushiro aims to establish a structure that actively utilizes the information it holds to improve management efficiency and speed, making it easier to generate group synergies. We believe that as of FY3/17, sales were not sharply increasing given that it takes time to attract new customers, but positive effects were beginning to appear. Considering JCBC s production capacity, we think it will be more effective to sell Yushiro products to JCBC customers than for Yushiro to sell JCBC products. We will be monitoring the effects of the medium-term plan closely. For reference, the following is a summary of the previous medium-term plan. 21/51

22 Yushiro Chemical Industry / 513 LAST UPDATE: Previous medium-term plan (announced February 28, 214; ending FY3/17) The company s 17th three-year plan, which began in FY3/14, has five core strategies: 1) expanding global bases 2) expanding global market share 3) boosting customer satisfaction in Japan 4) improving profitability by optimizing raw materials procurement 5) entering new fields through new technologies, tie-ups, and M&A Expanding global bases Yushiro completed a metalworking oils and fluids plant in India in April 214 and one in Mexico in July 214. It plans to expand its operations in all three Overseas segments: Southeast Asia and India, North and South America, and China. Expanding global market share The company commenced operations at its ASEAN Technical Center in Thailand in January 214, which covers product development and launch for Malaysia, Indonesia, and India, in addition to Thailand. The company aims to develop and launch new products tailored to the needs of local companies, as opposed to products developed using technologies in Japan. It is also considering establishing a technical center for North and South America. Further, the company has expanded its scope of M&A to include overseas companies (such as local companies in the US), not just Japanese companies. By accelerating global expansion, Yushiro aims to boost its share of the global market for metalworking oils and fluids to 1 by volume over the long term. (The company estimates its market share at in 212.) Boosting customer satisfaction in Japan Yushiro believes the Japanese market for metalworking oils and fluids is shrinking because the plants that use these fluids tend to follow automakers as they shift their operations overseas. As such, to increase sales the company is investing aggressively overseas. At the same time, a track record in Japan is key to getting Japanese automakers 9 of sales to use its cutting oils and fluids at overseas bases. Boosting customer satisfaction in Japan is therefore essential. Yushiro aims to increase customer satisfaction through accelerating responses to customer demand and product development by linking sales and technology operations. It also plans to cultivate a distributor network to increase sales. Improving profitability by optimizing raw materials procurement By volume, base oil (similar to crude oil) accounts for about 5 of the company s raw materials for metalworking oil and fluids. Lubricant additives and other functional chemicals make up roughly 4, and others 1. Crude oil derivatives make up nearly 6 of raw materials, so the company s profitability is affected by crude oil prices. (In FY3/16, the sensitivity of the parent s operating profit to crude oil price change of one US dollar per barrel was JPY22mn.) Yushiro has a global network comprising 12 overseas locations to respond to raw material price fluctuations. It is also working to gather accurate information about raw materials and select optimal suppliers. Through these initiatives, the company expects to improve earnings in Japan and overseas. Entering new fields through new technologies, tie-ups, and M&A Yushiro is highly dependent on metalworking oils and fluids for automobiles (8 9 of sales, including indirect transactions). But to accelerate improving profitability of businesses other than metalworking oils and fluids, it aims to expand into new areas through new technologies, tie-ups, and M&A. For organic growth, the company aims to focus investment on its core technologies, while seeking opportunities for M&A and tie-ups to obtain access to fields related to existing business. 22/51

23 Yushiro Chemical Industry / 513 LAST UPDATE: JCBC In April 215, Yushiro acquired JCBC, which makes metal surface treatment agents and aircraft chemicals. While Yushiro is involved with the metalworking oils and fluids used in machining, JCBC s forte is in the surface treatment agents used prior to machining. The company believes this combination allows it to make comprehensive proposals. Further, JCBC has partnerships with aircraft manufacturers, a new industry for Yushiro. Yushiro expects synergies with JCBC, including business development for its cutting oils and fluids for carbon fiber reinforced plastic (CFRP). Self-repairing polymer gel In March 216, Yushiro announced a successful joint development with Osaka University of a self-repairing polymer gel. This gel s chemical structure re-establishes contact between sections of separated materials, restoring them to their original state. The company says that this gel has shape memory that enables the material to return to its original shape even if stretched to more than 2x its original size. The company presented the product at the International Nanotechnology Exhibition and Conference in January 216, at the Technical Show Yokohama 216 in February, and at the Medical Device Development Expo in June. According to the company, exposure of the new self-repairing polymer gel at those exhibitions led to numerous inquiries. In particular, with regard to the Medical Device Development Expo in June 216, Yushiro notes that it provided samples to more than 2 of the 197 companies that visited its booth. Although Yushiro has no concrete sales plans at the moment, it believes the gel could be instrumental in developing new businesses. Polymer gel and self-repairing process Contact 再接触 re-established Separated 切断 Repaired 修復 23/51

24 Yushiro Chemical Industry / 513 LAST UPDATE: Business Description Yushiro specializes in the manufacture of metalworking oils and fluids (the company estimates its Japanese market share by volume at19% and overseas market share at in 215). The business is divided into two segments, metalworking oils and fuels (9 of FY3/16 sales) and building maintenance chemicals (). Metalworking oils and fluids are lubricating oils used in metalworking processes such as cutting, rolling, and pressing. Within metalworking oils and fluids, the company has the leading share by volume of the Japanese market for cutting oils and fluids, at around 3 (company estimates for 215). In particular, the company thinks that its domestic market share in cutting fluids used by Japanese manufacturers is around 6. In the building maintenance chemicals business, Yushiro manufacturers and sells waxes, cleaners, and removers used in buildings and trains. Sales by segment FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16 FY3/17 FY3/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales 23,473 19,884 23,135 23,482 24,217 26,833 29,61 3,68 29,65 31,565 Metalworking Oils and Fluids 2,9 16,929 21,639 22,8 22,715 25,186 27,543 29,57 27,958 - Building Maintenance Chemicals 1,685 1,525 1,496 1,474 1,52 1,647 1,518 1,623 1,647 - Industrial Waste Disposal 1,779 1, YoY -13.7% -15.3% 16.3% % 1.8% 8.3% 5.6% % Metalworking Oils and Fluids -14.9% -15.4% 27.8% 1.7% 3.2% 1.9% 9.4% % Building Maintenance Chemicals -1.9% % % 9.7% -7.8% 6.9% 1. Industrial Waste Disposal -1.1% -19.7% % of sales Metalworking Oils and Fluids 85.2% 85.1% % 93.8% 93.9% 94.8% 94.7% 94.4% - Building Maintenance Chemicals 7.2% 7.7% % 6.2% 6.1% 5.2% 5.3% 5.6% - Industrial Waste Disposal 7.6% 7.2% Origin of the company name Founder Kanichi Morimoto named the company Yushiro by combining the first syllables of the Japanese words for oil, resin, and wax. The company got its start by providing warp yarn sizing oil to the textile industry, using proprietary blending technology. Yushiro later developed and began supplying metalworking oils and fluids for the automotive industry. Business model The company s metalworking oils and fluids are mostly made up of mineral oil and other base oils distilled from crude oil, vegetable oils such as palm oil, and functional chemicals, which include lubricant additives and rust-proofing agents. Yushiro purchases the raw materials and uses dissolving and mixing kettles to produce metalworking oils and fluids. Yushiro supplies metalworking oils and fluids to manufacturers of automobiles, automotive parts, machines, and bearings as 2-liter drums and 18-liter cans. Its customers use these fluids to control the amount of friction on drills and other tools used in the production process, extending tool life by covering tools directly with lubricant during machining. Metalworking oils and fluids can be recycled and used over six months to several years. Still, the fluids are consumed during manufacturing, so need to be replaced daily. When new materials are used for parts, the old fluids are discarded and completely replaced by fluids suited to the new materials. Yushiro develops metalworking oils and fluids that match user specifications. If a customer specifies the material to be used for a metal part, the company tailors its fluids considering geometric precision, productivity, and the production environment. Initial products are developed before orders are received, but once developed the company can anticipate ongoing orders as fluids are depleted during use and need to be replenished. 24/51

25 Yushiro Chemical Industry / 513 LAST UPDATE: Yushiro s fluids can be used for metalworking for as few as three years or as long as 1 years or more. During the machining process, they may become mixed with cuttings, change density, or alter components, so ongoing efforts are needed to maintain quality. Yushiro provides technical support to customers post-delivery. It also conducts on-site quality improvement measures. Metalworking oils and fluids Metalworking oils and fluids are used when cutting away metal, as in machining, as well as in casting, pressing, rolling, extrusion, and other plastic working processes. Metal parts are made by casting and plastic working aluminum, iron, and other materials, with cleaning and rust-proofing performed as part of the cutting and other machining processes. Metalworking oils and fluids are used at all of these stages. Metalworking oils and fluids extend the life of the tools used to manufacture metal parts, reduce surface roughness, increase dimensional precision, and improve workability on the factory floor. These fluids increase tool life by increasing lubricity. Products used in metalworking Machining: The use of cutting tools and machine tools to process materials (such as parts for machinery) by cutting, grinding, and polishing. Casting: Iron, steel, or other metals are liquefied at high temperatures, poured into molds, and cooled to produce desired shapes. Plastic working: Mechanical force is used to shape materials, which retain their characteristics (plasticity) even after that force is removed. This approach is used to form materials into products of prescribed geometries and dimensions. Types of metalworking oils and fluids Metalworking oils and fluids can be grouped into cutting oils and fluids, which are used when cutting metals into parts; aluminum die-cast release agents, which assist the smooth separation of aluminum parts from their molds; and plastic working agents, used in press and other forming processes. Cutting oils and fluids Cutting oils and fluids, Yushiro s mainstay products, are used mostly for cutting parts for automobile engines, transmissions, and undercarriages. Cutting involves the use of cutters and machine tools to remove materials typically aluminum and iron thereby machining it to desired geometries and dimensions. Typical applications are turning (where the tool is fixed and the part to be cut is rotated) and hole-making. The main roles of cutting oils and fluids are lubrication and cooling. Lubrication is important to reduce friction between the cutting tool and the material; this reduces cutting resistance and tool wear. Insufficient lubrication increases wear on tools. Cutting generates heat due to friction between the cutting tool and the material, as well as to plastic deformation; lubricants help to remove this heat. Both lubrication and cooling are needed to extend tool and machine life. 25/51

26 Yushiro Chemical Industry / 513 LAST UPDATE: Yushiro explains that tools are the high-end consumables of the automobile production process (accounting for 1x the annual cost to manufacturers of metalworking oils and fluids). For this reason, automakers choice of metalworking oils and fluids is important, as it affects machining capabilities and can prolong tool and machinery life. For instance, the company explains that if new metalworking oils and fluids can extend tool life by 2 3 compared with conventional fluids, customers can spend up to twice as much on them. Main automotive uses of the company s metalworking oils and fluids Role of cutting oils and fluids Customers Automobile and automotive manufacturers make up about two-thirds of Yushiro s customer base for metalworking oils and fluids, with manufacturers of machinery and bearings constituting most of the remainder. Parent sales of metalworking oils and fluids by customer category (left, FY3/16; middle, FY3/17; right, FY3/18) Photovoltaic and semiconductors 2.6% Steel 3.4% Bearing 7. FY3/16 Other 7. Photovoltaic and semiconductors 1.8% Steel 4.1% Bearing 6.6% FY3/17 Other 8.6% Photovoltaic and semiconductors 2. Steel 3.4% Bearing 6.7% FY3/18 Other 6. Machinery 13.8% Automobile and automobilerelated 65.7% Machinery 13.8% Automobile and automobilerelated 65.1% Machinery 14.3% Automobile and automobilerelated 67.1% Yushiro specializes in products for automotive use (accounting for 8 9 of sales, including indirect transactions). Based on the technical expertise it has amassed since its establishment in 1944, it now counts all Japanese automakers as its clients. Of the automakers that use its metalworking oils and fluids, more than 9 are Japanese. Automakers are also the end-users of most products provided by Yushiro s overseas subsidiaries. According to Yushiro, it supplies around 6 of the cutting oils and fluids used domestically by Japanese automakers. The reason for this high share lies in a solid reputation among customers for the cutting performance of its fluids, a technology accumulated over many years. (One of its products achieves half of the surface roughness on cut parts compared to similarly priced cutting oils and fluids offered by domestic and overseas competitors.) The company supplies products to all Japanese automakers and is not a member of any specific auto conglomerate. Core strategies The company s core strategy is to increase adoption of its products by Japanese automakers at their locations overseas based on a track record with these companies in Japan. 26/51

27 Yushiro Chemical Industry / 513 LAST UPDATE: Of the automakers that use Yushiro s metalworking oils and fluids, more than 9 are Japanese manufacturers (the company does business with all Japanese automakers). Yushiro estimates its share at around 6 of the domestic market for cutting oils and fluids. Strategy underpinned by R&D structure Yushiro has an R&D base in Japan, Yushiro Technical Center (established in November 1999), and an overseas R&D base in Thailand, ASEAN Technical Center (established in January 214). Yushiro Technical Center The Yushiro Technical Center develops products with the aim of increasing satisfaction among Japanese automakers in Japan so they will use more of Yushiro s products overseas. The following table outlines the elemental technologies required of metalworking oils and fluids. Because automakers recycle and reuse these fluids, they need to retain characteristics sufficient for each production process. For this reason, Yushiro provides customers with ongoing after-sales support. Eight elemental technologies Synthesis Essential for the development of new additives Lubrication Essential for the working of materials Corrosion-proofing Used to protect metal surfaces from rust and corrosion Preserving, mildew-proofing Used to prevent quality deterioration due to bacteria Emulsification, dispersion, solubilization Essential for the development of water-soluble products Analysis Used in product development and for determining the causes of problems ASEAN Technical Center The ASEAN Technical Center was established to help the company respond swiftly to the needs of local customers in the ASEAN and India region. This center mainly works with the company s bases in Thailand, Indonesia, Malaysia, and India, dispatching support engineers from Japan as needed. Example of product improvement The company compared production using previous cutting oils and fluids (developed in the 2s) and newly developed products ( ) by a certain automotive parts manufacturer of differential ring gears a drivetrain component. In this study, surface roughness as a result of lathe turning (in which the cutting tool is fixed and the part rotates) with the new cutting fluids was one-fourth the previous level. Fluid life was six times longer, and the usage was reduced by 3 through a lower dilution rate. The life of water-soluble cutting oils and fluids is affected by the propagation of microorganisms over long periods of use, and these products are disposed of when the processing parts are contaminated with rust. Rz, a unit of surface roughness, indicates the average level of roughness at 1 points. Roughness is measured according to the gap between two parallel lines along the length of the profile curve at the third point from the highest trough and the third point from the lowest valley. Target customer: Company "A" (automotive parts manufacturer) Target part: Differential ring gear (drivetrain component; photo below) Processing method: Lathe turning (cutting tool fixed, work rotates) Existing cutting oil: YUSHIROKEN FGE 35 (general-purpose emulsion) New cutting oil: YUSHIROKEN FGE 21 (newly developed, highly lubricating emulsion) Results: Surface roughness: 4.3µm (Rz).96 µm (Rz) Oil life: One month six months Dilution ratio: 13% 1 Reduced to 1/4 6 times 3 cut in usage Improved machining surface quality Reduced amount of cutting oil used 27/51

28 Yushiro Chemical Industry / 513 LAST UPDATE: Comparison with competitors products The graph below was prepared by Yushiro s technical center, comparing surface machining performance data on AC4C, a type of standard cast aluminum used to test machining quality. The reaming process involves using a drill to adjust the diameter and surface of a hole in the materials. The experiment tested comparably priced fluids produced by the company as well as competitors in Japan and overseas (companies A, B, and C). The results show that using YUSHIROKEN FGE 21 reduced surface roughness to approximately half the level of the machining using company C s product. Machined material Machining method Tool dimensions T ool material Measurement parameter AC4C-T6 (AC4C: a standard aluminum cast material; T6: surface processing) Straight reamer (open and tap a hole in the material) 13.3mm in diameter Carbide tool Machined surface roughness (Ra) Results The surface machined using YUSHIROKEN FGE 21, Yushiro Chemical's cutting oil, had roughness half of what can be achieved with general emulsion Reaming surface roughness (Ra) Samples A, B, and C are similarly priced oils produced by Yushiro Chemical's competitors in Japan and overseas. R&D expenditure The company maintains an R&D expenditure ratio of around 5 6%. In conjunction with the global strategies pursued by its major customers, Yushiro is gauging trends at domestic headquarters of its customers and conducting basic research and product development in Japan with a focus on reflecting customer needs into new product development. Starting with technical centers across Asia, the company is working on overseas research activities with the aim of having its overseas subsidiary R&D departments rapidly developing products that accurately identify customer needs. By also offering support from Japan, it is building strategic product lines that accurately reflect the needs of local production sites, while actively cultivating new customers. R&D expenses to sales ratio (JPYmn) Japan Overseas % of sales 1,8 1,649 1,632 1,58 1,6 1,519 1,441 1,475 1,36 1,4 1,317 1,285 1,293 1,215 1,239 1,2 1, FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/17 7% 6% 4% 3% (JPYmn) FY3/14 FY3/15 R&D expenses FY3/16 % of sales FY3/17 FY3/18 6% 4% R&D staff (left: number) and number of patents held (right) 12 R&D personnel in Japan Overseas secondees FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/ Japan Overseas FY3/7 FY3/9 FY3/11 FY3/13 FY3/15 FY3/17 28/51

29 Yushiro Chemical Industry / 513 LAST UPDATE: Overview by business Metalworking oils and fluids business The metalworking oils and fluids business constitutes about 9 of sales. Sales of metalworking oils and fluids by product Parent sales of metalworking oils and fluids by product (left, FY3/16; middle, FY3/17; right, FY3/18) Fluids for photovoltaic and semiconductors 3.3% Casting agents 5.9% Plastic working agents 5.9% Cleaners, rustproofing agents 9.7% FY3/16 Other 9.3% Cutting oil 65.9% Fluids for photovoltaic and semiconductors 2.3% Casting agents 6.2% Plastic working agents 6.8% Cleaners, rustproofing agents 9.4% FY3/17 Other 11.7% Cutting oil 63.6% Fluids for photovoltaic and semiconductors 2.8% Casting agents 6. Plastic working agents 7.2% Cleaners, rustproofing agents 9. FY3/18 Other 9.1% Cutting oil 65.9% Building maintenance chemicals business constitutes about of the company s total sales. The building maintenance chemicals business accounted for about of sales. In this business, Yushiro provides waxes, cleaners, and removers used on the floors and windows of large shopping centers, convenience stores, etc. It also supplies floor waxes and outer panel cleaners for trains including for Japan Rail trains in Tokyo and Tokaido Shinkansen (bullet trains). The company has the technology to compound polymer resin (latex), the raw material of waxes that affects their performance. The technology allows it to manufacture building maintenance chemical products that respond to user needs, unmatched by industry peers. Further, the company is going beyond supplying products, and contributing to advancing the industry by holding seminars for users on chemicals, floor materials, and regulations. While most users are companies that handle maintenance of buildings and trains, the company also supplies washing machine cleaners for household use as an OEM (original equipment manufacturer) for Japanese home appliances majors including Panasonic Corporation (TSE1: 6752), Hitachi, Ltd. (TSE1: 651), Mitsubishi Electric Corporation (TSE1: 653), and Toshiba Corporation (TSE1. 652). Products in Yushiro s building maintenance chemicals business Overview by region Overseas subsidiaries produce and sell metalworking oils and fluids, developing comprehensive strategies for specific regions. For this reason, the company groups its businesses into regional segments. It has four segments: the Japan segment, the North and South America segment, the China segment, and the Southeast Asia and India segment. 29/51