URL: www.walden.co.jp Written by Yoshiyuki Muroya E-mail: yoshiyuki_muroya@walden.co.jp Phone +81 3 3553 3769 SHOFU (7979) Consolidated Fiscal Year Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) FY03/2015 19,688 1,159 1,114 581 36.5 18.0 1,360 FY03/2016 22,975 1,568 1,393 789 49.4 18.0 1,340 FY03/2017CoE 22,304 1,514 1,164 788 49.5 20.0 - FY03/2016 YoY 16.7% 35.3% 25.0% 35.8% - - - FY03/2017CoE YoY (2.9%) (3.5%) (16.4%) (0.1%) - - - Consolidated Half Year Sales OP RP NP EPS DPS BPS (Million Yen) (Yen) (Yen) (Yen) FY03/2016 11,600 842 825 495 - - - Q3 to Q4 FY03/2016 11,375 726 568 294 - - - FY03/2017 11,052 800 509 301 - - - Q3 to Q4 FY03/2017CoE 11,252 714 655 487 - - - FY03/2017 YoY (4.7%) (5.0%) (38.3%) (39.3%) - - - Q3 to Q4 FY03/2017CoE YoY (1.1%) (1.7%) 15.3% 65.6% - - - Source: Company Data, WRJ Calculation 1.0 Executive Summary (21 December 2016) Persistent Growth on A Local Currencies Basis 1 SHOFU, developing, manufacturing and selling dental materials, is trying to get at long-term growth in sales and earnings by means of persistently cultivating markets overseas. Sales overseas in FY03/2017 came down over the previous year, but volume has continued rising and sales overseas increased by 4.1% on a local currencies basis, implying persistent growth. Given firm demand in China, sales in Asia & Oceania, including those of China, increased by 8.8% on a local currencies basis. Thus, it appears that the Company is steadily taking in increasing demand in emerging countries. Meanwhile, in Japan where maturity prevails in the market, sales of new products represented by CAD/CAM-related materials & equipment were buoyant, but this was more than offset by intensifying competition, having resulted in sales coming down by 2.5% over the previous year. Going forward, the Company is to further beef up launch of new products in Japan, while exploring opportunities to merge and acquire other peers in the same industry on the overseas side to be preceded by that of Merz Dental GmbH, i.e., manufacturer of artificial teeth based in Germany which has been consolidated since the beginning of FY03/2016. On the overseas side, the Company is also keen on enhancing operations of own sales bases and sales network as well as expanding capacity of manufacturing at the same time. Meanwhile, the Company, actively working on returning earnings to shareholders, is going for commemorative dividend of 2.0 per share for its 95th anniversary in FY03/2017, resulting in annual dividend of 20.0 per share, implying payout ratio of 40.4%, up 2.0 from 18.0, implying payout ratio of 36.4%, in FY03/2016 results.
In FY03/2017, sales came in at 11,052m (down 4.7% YoY), operating profit 800m (down 5.0%) and operating profit margin 7.2% (down 0.1% point). Sales in Japan were 6,636m (down 2.5%) and sales overseas 4,416m (down 7.8%). On top of yen s appreciation against US dollar ( 106.43 per US dollar, yen s appreciation by 12.4%), yen got appreciated against euro, GBP and Chinese yuan at the same time, having resulted in sales overseas coming down over the previous year. By business segment, Dental-related Business to develop, manufacture and sell dental materials saw sales of 10,095m (down 4.5%), segment profit of 812m (up 2.5%) and segment profit margin of 8.0% (up 0.6% points), having accounted for 91.3% of sales as a whole for the Company and 101.8% of segment profit. Thus, earnings of the Company as a whole hinge on those of this business segment to a very large extent. Meanwhile, operating profit margin as a whole for the Company came down just marginally in spite of decreasing sales. This was due mainly to that gross profit margin came in at 59.2% (up 2.2% points). As mentioned, Dental-related segment saw segment profit margin of 8.0% (up 0.6% points). As far as we could gather, this was mainly driven by increasing volume on the overseas side where the Company is basically exposed to own products. For example, the Company saw increasing volume for chemical products for their profit margin to benefit from increasing volume, having improved sales mix. Still, on the Nail-related Business side (to develop, manufacture and sell nail materials for nail salons), the Company saw segment profit/loss turning negative due mainly to decreasing sales in Japan. FY03/2017 Company forecasts, after revision, are going for prospective sales of 22,304m (down 2.9% YoY), operating profit of 1,514m (down 3.5%) and operating profit margin of 6.8% (unchanged from the previous year). On 28 October, prior to release of results on 4 November, the Company came up with revision for Company forecasts for and those on a full-year basis. The former had a lot to do with yen appreciated more than initially assumed and slowing sales in Japan due to intensifying competition, while the latter assumes both yen s appreciation and intensifying competition in Japan to persist in H2. In regards to forex rates, full-year Company forecasts assume 103.98 per US dollar (yen s appreciation by 13.5% over the previous year), 116.46 per euro (12.0%), 139.38 per GBP (22.8%) and 16.32 per Chinese yuan (15.0%), based on an assumption that forex rates as of the end of Q2 remain unchanged throughout the period of H2. However, given yen having been depreciated so far, Company forecasts could be exceeded to the extent of the gap between assumed forex rates and the actual ones. 2 IR Representative: Yusuke Hidaka, Corporate Planning Department (ir@shofu.co.jp)
2.0 Company Profile Comprehensive Manufacturer of Dental Materials Company Name SHOFU INC. Website IR Information Share Price Established 15 May 1922 Listing 25 July 1963: Tokyo Stock Exchange 1st Section (Ticker: 7979) Capital 4,474m (As of the end of September 2016) No. of Shares 16,114,089 shares, including 230,175 treasury shares (As of the end of Sep. 2016) Main Features The leader of artificial teeth and abrasive materials in Japan Focus on operations overseas where the Company finds great room to cultivate Also involved with development, manufacturing and selling of nail materials Business Segments. Dental-related Business. Nail-related Business. Other Business Top Management President: Noriyuki Negoro Shareholders Mitsui Chemicals, Inc. 11.17%, The Bank of Kyoto, Ltd. 4.42% (As of the end of September 2016) Headquarters Higashiyama-ku, Kyoto-city, JAPAN No. of Employees Consolidated:1,103, Parent: 437 (As of the end of September 2016) 3 Source: Company Data
3.0 Recent Trading & Prospects FY03/2017 Results In FY03/2017, sales came in at 11,052m (down 4.7% YoY), operating profit 800m (down 5.0%), recurring profit 509m (down 38.3%) and net profit 301m (down 39.3%), while operating profit margin 7.2% (down 0.1% point). Compared with initial Company forecasts, sales fell short by 1,059m (8.7%), operating profit was better by 14m (1.8%), recurring profit fell short by 210m (29.2%) and net profit fell short by 205m (40.5%). Sales (Million Yen) 12,000 10,000 7,708 8,000 Dental-related Business Nail-related Business Other Business 10,570 10,095 8,922 6,000 4,000 2,000 0 Segment Profit 889 853 990 913 42 41 39 43 FY03/2014 FY03/2015 FY03/2016 FY03/2017 4 (Million Yen) Dental-related Business Nail-related Business Other Business 1,000 800 939 792 812 600 400 200 0 (200) 372 17 15 10 32 12 12 (3) (26) FY03/2014 FY03/2015 FY03/2016 FY03/2017 Source: Company Data According to the Company, yen s appreciation cut back sales by 573m over the previous year, 533m on the Dental-related Business side and 39m on the Nail-related Business side. Forex rates were as follows: 106.43 per US dollar (yen s appreciation by 12.4% over the previous year), 119.12 per euro (11.5%), 146.56 per GBP (21.5%) and 17.21 per Chinese yuan (11.1%). Thus, the Company saw yen s appreciation in regards to all the foreign currencies to book sales overseas across the board.
Meanwhile, yen s appreciation cut back operating profit not so much, i.e., by no more than 42m over the previous year. This is because of exposure to foreign-currencies-denominated expenses which were reduced by yen s appreciation. For example, the Company saw lower-than-expected expenses for procurement in its operations to import dental-related equipment to sell in Japan as yen got appreciated against Swiss-franc to have been adopted to settle said procurement. FY03/2017: Factors to Have Made Changes in Operating Profit (YoY) +250 +200 +208 (Million Yen) +150 +100 +50 0 +77 +38 (4) (42) (64) (83) (170) (50) (100) (150) (200) Improvement in cost of sales ratio Decreases of R&D expenses Increases of sales Increases of depreciation Impacts from forex changes Increases of expenses for ads Increases of other expenses Increases of personnel expenses Source: Company Data On the other hand, but for impacts from forex changes, sales increased and there was improvement in cost of sales ratio, having increased operating profit. As far as we could gather, this was mainly driven by increasing volume on the overseas side where the Company is basically exposed to own products. For example, the Company saw increasing volume for chemical products for their profit margin to benefit from increasing volume, having improved sales mix. As a result, gross profit margin came in at 59.2% (up 2.2% points). On top of this, the Company saw decreases of R&D expenses, which was another factor to have increased operating profit. 5 In spite of all those positive factors to have increased operating profit, the Company saw operating profit of 800m (down 5.0% and/or decreases of 42m), given increases of expenses associated with personnel, ads and other. However, increases of said expenses are almost all related to aggressive sales promotions and frontloaded investments for the future and thus the Company is looking to future benefits stemming from here. At the end of the day, Company forecasts were rather exceeded in regards to operating profit, although sales fell short. Initial Company forecasts assumed buffer of expenses for strategic investments equating to 300m on a full-year basis, but the Company has hardly spent said expenses in, having resulted in expenses smaller than initially expected as far as we could gather. Nevertheless, recurring profit fell short of Company forecasts. This is due mainly to booking of forex loss of 263m at the non-operating level, stemming from reevaluation of foreign-currency-denominated debts and credits held by the Company. Said reevaluation is regularly implemented as of the end of every quarter based on the gap of forex rates in comparison with those of the most recent fiscal yearend. Initial Company forecasts assumed no change in forex rates from those as of the end of FY03/2016.
On the other hand, sales in Japan came in at 6,636m (down 2.5%) and sales overseas 4,416m (down 7.8%). In Japan where maturity prevails in the market, sales of new products represented by CAD/CAM-related materials & equipment were buoyant, but this was more than offset by intensifying competition. Sales overseas came down over the previous year by yen s appreciation, but volume has continued rising and sales overseas on a local currencies basis increased by 4.1%, implying persistent growth. Sales in Japan 8,000 7,000 6,000 5,000 (Million Yen) Industrial grinding materials (Other) Nail materials (Nail) Equipment & other (Dental) 4,000 Cements & other (Dental) 3,000 2,000 1,000 0 FY03/2015 FY03/2016 FY03/2017 Chemical products (Dental) Metal products (Dental) Abrasives (Dental) Artificial teeth (Dental) Sales Overseas 6,000 (Million Yen) Industrial grinding materials (Other) 5,000 4,000 Nail materials (Nail) Equipment & other (Dental) 6 3,000 Cements & other (Dental) 2,000 Chemical products (Dental) 1,000 Metal products (Dental) 0 FY03/2015 FY03/2016 FY03/2017 Abrasives (Dental) Artificial teeth (Dental) Sales Overseas by Region 6,000 (Million Yen) 5,000 4,000 3,000 2,000 1,000 Asia & Oceania Europe North America & Latin America 0 FY03/2015 FY03/2016 FY03/2017 Source: Company Data
In Japan, sales of CAD/CAM-related materials & equipment increased by 15% over the previous year and accounted for 11% of sales as far as we could gather. In the first place, CAD/CAM-related materials & equipment represent those to cope with new format having been applicable to National Health Insurance Scheme since April 2014 to offer cost efficiency highest ever for patients in regards to the treatment of back teeth (premolars). The Company has successfully developed dental materials to cope with said new format based on hybrid resin (incorporating functionality somewhere between ceramics and resins), while steadily making progress of manufacturing and sales of said materials. Going forward, the Company is looking to persistent sales increases for said materials in line with ongoing increases of the treatment of back teeth (premolars) based on said new format. In regards to treatment of back teeth (premolars), it used to be the case that only so-called silver-capped teeth was applicable to National Health Insurance Scheme. However, since April 2014, superficially natural finish just like front teeth has been applicable. When of this is taken advantage, charges on patients are larger than existing scheme, but it appears demand for this is persistently increasing for its feature to provide patients with high aesthetic effects with limited increases of charges when compared with own expense dental care, suggesting its favorable cost efficiency meaningfully high generally speaking. CAD/CAM-related Materials & Equipment Equipment (Cutting & Processing Machine: DWX-50) 7 Materials (Images of Machined Hybrid Resin Block) Source: Company Data
The users of the Company s dental materials and equipment including those of CAD/CAM-related ones are dental clinics and dental technician s offices (some 20,000 in Japan) to process dental materials with diverse instruments and machinery. The latter represents specialty operators of dental materials processing, operating in line with detailed order from each dental clinic. So far it has been mandatory for CAD/CAM-related materials being processed at dental technician s offices and thus CAD/CAM-related equipment has been installed exclusively there. Meanwhile, sales overseas increased by 4.1% on a local currencies basis, having increased by 7.8% in North America & Latin America, decreased by 1.4% in Europe and increased by 8.8% in Asia & Oceania. In Europe, sales were negatively affected by adjustments associated with sales on an OEM basis to a specific customer in England, while recent trading suggests that the Company is steadily cultivating markets overseas, i.e., in North America & Latin America and Asia & Oceania. In particular, sales in China were so buoyant. Increasing sales overseas have a lot to do with improving local awareness on that the Company s products are relatively superior to those of competitors. The Company has been horizontally applying strategy that was proven to be successful in the United States to elsewhere overseas, i.e., that of efficient use of own MDRs (Medical Dental Representatives) for sales promotions. Meanwhile, concept of MiCD (Minimally Invasive Cosmetic Dentistry) project to have been well accepted in Japan for some time is now being extensively accepted overseas as well. The Company has been assigning own MDRs to have been locally hired and then trained for direct sales promotions and information provision to end users, i.e., dentists and dental technicians. MDRs are those who have sufficiently learned about academic expertise as well as expertise associated with own products to sell. Meanwhile, MiCD project supports cosmetic dentistry by introducing the way to pursue the best results on the aesthetic side while minimally invading natural teeth. 8
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 Q3 Q1 to Q4 Q1 Q1 to Q3 Q1 to Q4 YoY (Million Yen) 03/2016 03/2016 03/2016 03/2016 03/2017 03/2017 03/2017 03/2017 Net Chg. Sales 5,875 11,600 17,050 22,975 5,708 11,052 - - (548) CoGS 2,508 4,984 7,238 9,798 2,282 4,504 - - (480) Gross Profit 3,367 6,615 9,811 13,177 3,425 6,547 - - (68) SG&A 2,842 5,773 8,609 11,608 2,885 5,747 - - (26) Operating Profit 525 842 1,202 1,568 540 800 - - (42) Non Operating Balance 59 (17) (78) (175) (223) (291) - - (274) Recurring Profit 584 825 1,124 1,393 317 509 - - (316) Extraordinary Balance 0 10 (19) (41) 0 0 - - (10) Pretax Profit 584 835 1,105 1,352 317 509 - - (326) Tax Charges, etc. 216 333 378 557 87 206 - - (127) NP Belonging to Non-Controlling SHs 3 5 5 4 0 1 - - (4) Net Profit 363 495 720 789 230 301 - - (194) Sales YoY +26.4% +18.2% +16.3% +16.7% (2.9%) (4.7%) - - - Operating Profit YoY +24.6% (11.4%) (0.3%) +35.3% +2.9% (5.0%) - - - Recurring Profit YoY +49.7% (8.2%) (10.1%) +25.0% (45.7%) (38.3%) - - - Net Profit YoY +232.0% (22.1%) (5.8%) +35.8% (36.7%) (39.3%) - - - Gross Profit Margin 57.3% 57.0% 57.5% 57.4% 60.0% 59.2% - - +2.2% (SG&A / Sales) 48.4% 49.8% 50.5% 50.5% 50.5% 52.0% - - +2.2% Operating Profit Margin 8.9% 7.3% 7.0% 6.8% 9.5% 7.2% - - (0.1%) Recurring Profit Margin 9.9% 7.1% 6.6% 6.1% 5.6% 4.6% - - (2.5%) Net Profit Margin 6.2% 4.3% 4.2% 3.4% 4.0% 2.7% - - (1.5%) Tax Charges, etc. / Pretax Profit 37.0% 39.9% 34.2% 41.2% 27.4% 40.5% - - +0.6% 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 (Million Yen) 03/2016 03/2016 03/2016 03/2016 03/2017 03/2017 03/2017 03/2017 Net Chg. Sales 5,875 5,725 5,450 5,925 5,708 5,344 - - (381) CoGS 2,508 2,476 2,254 2,560 2,282 2,222 - - (254) Gross Profit 3,367 3,248 3,196 3,366 3,425 3,122 - - (126) SG&A 2,842 2,931 2,836 2,999 2,885 2,862 - - (69) Operating Profit 525 317 360 366 540 260 - - (57) Non Operating Balance 59 (76) (61) (97) (223) (68) - - +8 Recurring Profit 584 241 299 269 317 192 - - (49) Extraordinary Balance 0 10 (29) (22) 0 0 - - (10) Pretax Profit 584 251 270 247 317 192 - - (59) Tax Charges, etc. 216 117 45 179 87 119 - - +2 NP Belonging to Non-Controlling SHs 3 2 - (1) 0 1 - - (1) Net Profit 363 132 225 69 230 71 - - (61) Sales YoY +26.4% +10.8% +12.5% +17.8% (2.9%) (6.7%) - - - Operating Profit YoY +24.6% (40.2%) +41.2% - +2.9% (18.0%) - - - Recurring Profit YoY +49.7% (52.7%) (15.1%) - (45.7%) (20.3%) - - - Net Profit YoY +232.0% (75.0%) +75.8% - (36.7%) (46.2%) - - - Gross Profit Margin 57.3% 56.7% 58.6% 56.8% 60.0% 58.4% - - +1.7% (SG&A / Sales) 48.4% 51.2% 52.0% 50.6% 50.5% 53.6% - - +2.4% Operating Profit Margin 8.9% 5.5% 6.6% 6.2% 9.5% 4.9% - - (0.7%) Recurring Profit Margin 9.9% 4.2% 5.5% 4.5% 5.6% 3.6% - - (0.6%) Net Profit Margin 6.2% 2.3% 4.1% 1.2% 4.0% 1.3% - - (1.0%) Tax Charges, etc. / Pretax Profit 37.0% 46.6% 16.7% 72.5% 27.4% 62.0% - - +15.4% Source: Company Data, WRJ Calculation 9
Segmented Information (Cumulative, Quarterly) Segmented Information Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Q1 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q3 Q1 to Q4 YoY (Million Yen) 03/2016 03/2016 03/2016 03/2016 03/2017 03/2017 03/2017 03/2017 Net Chg. Dental-related Business 5,344 10,570 15,589 20,999 5,258 10,095 - - (475) Nail-related Business 509 990 1,399 1,893 428 913 - - (77) Other Business 21 39 61 82 21 43 - - +4 Sales 5,875 11,600 17,050 22,975 5,708 11,052 - - (548) Dental-related Business 490 792 1,159 1,515 554 812 - - +20 Nail-related Business 25 32 18 22 (21) (26) - - (58) Other Business 6 12 17 22 6 12 - - 0 Segment profit 523 838 1,195 1,559 539 798 - - (40) Elimination 2 4 6 8 1 2 - - (2) Operating Profit 525 842 1,202 1,568 540 800 - - (42) Dental-related Business 9.2% 7.5% 7.4% 7.2% 10.5% 8.0% - - +0.6% Nail-related Business 4.9% 3.2% 1.3% 1.2% (4.9%) (2.8%) - - (6.1%) Other Business 28.6% 30.8% 27.9% 26.8% 28.6% 27.9% - - (2.9%) Elimination 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - - (0.0%) Operating Profit Margin 8.9% 7.3% 7.0% 6.8% 9.5% 7.2% - - (0.0%) Segmented Information Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YoY (Million Yen) 03/2016 03/2016 03/2016 03/2016 03/2017 03/2017 03/2017 03/2017 Net Chg. Dental-related Business 5,344 5,226 5,019 5,410 5,258 4,837 - - (389) Nail-related Business 509 481 409 494 428 485 - - +4 Other Business 21 18 22 21 21 22 - - +4 Sales 5,875 5,725 5,450 5,925 5,708 5,344 - - (381) Dental-related Business 490 302 367 356 554 258 - - (44) Nail-related Business 25 7 (14) 4 (21) (5) - - (12) Other Business 6 6 5 5 6 6 - - 0 Segment profit 523 315 357 364 539 259 - - (56) Elimination 2 2 2 2 1 1 - - (1) Operating Profit 525 317 360 366 540 260 - - (57) Dental-related Business 9.2% 5.8% 7.3% 6.6% 10.5% 5.3% - - (0.4%) Nail-related Business 4.9% 1.5% (3.4%) 0.8% (4.9%) (1.0%) - - (2.5%) Other Business 28.6% 33.3% 22.7% 23.8% 28.6% 27.3% - - (6.1%) Elimination 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - - (0.0%) Operating Profit Margin 8.9% 5.5% 6.6% 6.2% 9.5% 4.9% - - (0.7%) Source: Company Data, WRJ Calculation 10 Cash Flow Statement (Cumulative) Cash Flow Statement Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Q1 Q1 to Q3 Q1 to Q4 Q1 Q1 to Q3 Q1 to Q4 YoY (Million Yen) 03/2016 03/2016 03/2016 03/2016 03/2017 03/2017 03/2017 03/2017 Net Chg. Operating Cash Flow - 829-1,511-1,012 - - +183 Investing Cash Flow - 1,032-748 - (396) - - (1,428) Operating CF & Investing CF - 1,861-2,259-616 - - (1,245) Financing Cash Flow - (2,021) - (2,152) - (434) - - +1,587 Source: Company Data, WRJ Calculation
Balance Sheet (Quarterly) Balance Sheet Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Cons.Act Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 YoY (Million Yen) 03/2016 03/2016 03/2016 03/2016 03/2017 03/2017 03/2017 03/2017 Net Chg. Cash & Deposit 4,257 4,204 4,250 4,413 4,581 4,449 - - +245 Accounts Receivables 3,245 3,010 2,730 3,185 2,933 2,907 - - (103) Inventory 5,561 5,617 5,888 5,620 5,510 5,480 - - (137) Other 1,219 1,150 1,149 1,047 1,063 799 - - (351) Current Assets 14,282 13,981 14,017 14,265 14,087 13,635 - - (346) Tangible Assets 7,096 6,976 6,849 6,727 6,574 6,553 - - (423) Intangible Assets 1,688 1,848 1,787 1,762 1,561 1,510 - - (338) Investments & Other Assets 6,697 6,148 6,561 5,549 5,624 5,787 - - (361) Fixed Assets 15,481 14,973 15,198 14,039 13,760 13,851 - - (1,122) Total Assets 29,764 28,955 29,216 28,305 27,848 27,486 - - (1,469) Accounts Payables 667 546 672 647 520 492 - - (54) Short Term Debt 2,405 130 255 385 504 504 - - +374 Other 2,371 2,071 1,818 2,017 2,224 1,969 - - (102) Current Liabilities 5,443 2,747 2,745 3,049 3,248 2,965 - - +218 Long Term Debt 111 1,985 1,860 1,729 1,604 1,479 - - (506) Other 1,992 2,137 2,257 2,026 1,979 1,990 - - (147) Fixed Liabilities 2,103 4,122 4,117 3,755 3,583 3,469 - - (653) Total Liabilities 7,546 6,870 6,863 6,804 6,832 6,435 - - (435) Shareholders' Equity 19,229 19,364 19,461 19,530 19,470 19,541 - - +177 Other 2,988 2,720 2,892 1,970 1,545 1,510 - - (1,210) Net Assets 22,217 22,084 22,353 21,500 21,015 21,051 - - (1,033) Total Liabilities & Net Assets 29,764 28,955 29,216 28,305 27,848 27,486 - - (1,469) Equity Capital 22,149 22,010 22,272 21,414 20,929 20,957 - - (1,053) Interest Bearing Debt 2,516 2,115 2,115 2,115 2,108 1,983 - - (132) Net Debt (1,741) (2,089) (2,135) (2,298) (2,473) (2,466) - - (377) Equity Ratio 74.4% 76.0% 76.2% 75.7% 75.2% 76.2% - - +0.2% Net Debt Equity Ratio (7.9%) (9.5%) (9.6%) (10.7%) (11.8%) (11.8%) - - (2.3%) ROE (12 months) 4.0% 2.1% 2.5% 3.7% 3.0% 2.8% - - +0.7% ROA (12 months) 4.8% 3.8% 3.6% 4.8% 3.9% 3.8% - - (0.0%) Days for Inventory Turnover 202 207 238 200 220 225 - - - Quick Ratio 138% 263% 254% 249% 231% 248% - - - Current Ratio 262% 509% 511% 468% 434% 460% - - - Source: Company Data, WRJ Calculation 11
FY03/2017 Company Forecasts FY03/2017 Company forecasts, after revision, are going for prospective sales of 22,304m (down 2.9% YoY), operating profit of 1,514m (down 3.5%), recurring profit of 1,164m (down 16.4%) and net profit of 788m (down 0.1%), while operating profit margin of 6.8% (unchanged from the previous year). On 28 October, prior to release of results on 4 November, the Company came up with revision for Company forecasts for and those on a full-year basis. On a full-year basis, Company forecasts have been revised down by 2,345m (9.5%) in sales, by 155m (9.3%) in operating profit, by 356m (23.4%) in recurring profit and by 296m (27.3%) in net profit. However, prospective dividend of 20.0 per share, implying payout ratio of 40.4%, has remained unchanged. Meanwhile, Company forecasts for H2 have been revised down by 1,286m (10.3%) in sales and by 169m (19.1%) in operating profit. In regards to both of them, Company forecasts assume yen s appreciation and intensifying competition in Japan seen in persisting in H2. In regards to forex rates, Company forecasts assume 103.98 per US dollar (yen s appreciation by 13.5% over the previous year), 116.46 per euro (12.0%), 139.38 per GBP (22.8%) and 16.32 per Chinese yuan (15.0%), based on an assumption that forex rates as of the end of Q2 remain unchanged throughout the period of H2. Forex Rates (Impacts of 1 Yen Appreciation) FY03/2017 Sales OP FY03/2016 (Yen) CoE (Million Yen) (Million Yen) US dollar 120.17 103.98 (27) (9) euro 132.35 116.46 (29) (5) GBP 180.66 139.38 (2) 0 Chinese yuan 19.21 16.32 (84) (1) US dollar (YoY) +9.2% (13.5%) - - euro (YoY) (4.6%) (12.0%) - - GBP (YoY) +2.2% (22.8%) - - Chinese yuan (YoY) +11.3% (15.0%) - - 12 Source: Company Data, WRJ Calculation
Long-Term Prospects The Company s midterm management plan (FY03/2016 to FY03/2018) is going for prospective sales of 28,471m, operating profit of 2,978m and operating profit margin of 10.5% in the last fiscal year of the plan, i.e., FY03/2018, suggesting CAGR of 13.1% for sales and 37.0% for earnings during said period, while going for ROE of 8.5% (versus 2.8% in FY03/2015) in FY03/2018. Sales in Japan are expected to see CAGR of 5.8% versus 26.4% for sales overseas (16.5% on an existing basis but for impacts from Merz Dental GmbH), resulting in overseas sales ratio of 43.7% in FY03/2018. Meanwhile, although prospective earnings target in FY03/2018 has not been revised to date, recent trading in FY03/2017 to have shown a tendency to fall short of initial expectations, suggest that said earnings target are likely to be delayed in terms of timing of achievement. Prospects for Long-Term Earnings 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 6.2% 15,985 Sales (Million Yen) Operating Profit Margin (%) 6.8% 6.8% 5.4% 5.9% 4.5% 16,028 18,258 19,688 22,975 22,304 10.5% 28,471 15.0% 50,000 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 13 FY03/2012 FY03/2013 FY03/2014 FY03/2015 FY03/2016 FY03/2017 FY03/2018 FY03/2019 FY03/2020 FY03/2021 FY03/2022 Source: Company Data, WRJ Calculation (FY03/2017: Company forecasts, FY03/2018: midterm management plan) On the other hand, in FY03/2022, when the Company celebrates its 100th anniversary, the Company is calling for prospective sales of 50,000m ( 17,000m in Japan, 33,000m overseas and thus overseas sales ratio of 66.0%) to be achieved as well as operating profit of 7,500m and operating profit margin of 15.0%. In Japan, the populations are on the gradual decreases as well as dental caries treatment, but demand is picking up in the domain of aesthetic appreciation, dental caries preventions, etc. This suggests to the Company that the market in Japan has a high potential to maintain the current levels at least going forward, but the market is unlikely to grow steadily in a long-term view. On the other hand, the Company finds steady and persistent growth potential overseas for dental treatment, taking into account increasing populations in emerging countries as well as growth in economy and thus improvements of living standards in there. Meanwhile, the Company is actively implementing all kinds of measures to take in demand in Japan and overseas in a long-term view as discussed so far.
4.0 Business Model Contributing to Dentistry on A Global Basis The Company, claiming for contributing to dentistry on a global basis by means of creative corporate activities as the corporate philosophy, mainly runs Dental-related Business. The key contents here are development, manufacturing and selling of diverse dental materials: Artificial teeth are materials for dentures and implants, while abrasive materials are to grind affected areas and/or to polish dental crowns. Metals are foundation materials for dental crowns and implants. Chemical products are those for implants, stuffing for affected areas, gums of dentures and those of more diversified applications. Cements & other include bonding materials for implants and stuffing, while equipment & other are those for diverse purposes associated with dental treatment and related finesse. Thus, the Company is heavily involved with diverse dental materials as well as equipment. As far as artificial teeth, abrasive materials, chemical products and cements & other are concerned, the Company basically develops, manufactures and sells own products, while equipment & other basically representing trading of procured merchandises. Generally speaking, the former carries gross profit margin relatively higher than the latter and it appears that artificial teeth and abrasive materials carry gross profit margin highest due to their high competitiveness. In regards to chemical products, the Company is keen on beefing up volume in particular, as gross profit margin should go up in line with volume increases. On top of this, the Company also deals with metals, although it is not easy to create value here, according to the Company. 14
Mainstay Products in Dental-related Business Artificial Teeth Ceramic Teeth Hard-Resin Teeth Resin Teeth Dental Porcelains Metals Abrasive Materials Diamond Silicon Carbide Rubber Other Instruments Chemical Products Composite Resins For Crowns & Bridges Other Resins For Denture Bases Cements & Other. 15 Luting Cements Filling Cements Embedding Materials Gypsums Source: Company Data
16 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: info@walden.co.jp Phone +81 3 3553 3769 Copyright 2016 Walden Research Japan Incorporated