Tsumura : First Quarter Business Results for Fiscal Year 2023（Conference Call）Q&A

First Quarter Business Results for Fiscal 2023 Q&A (for Investors) 【date】13:00-14:00, August 4, 2023

【presenter】 2 persons
Director, and CFO	Muneki Handa
Executive Officer, General Manager of Prescription Pharmaceutical Sales Division
	Yukinori Sorada
【questioner】 6 persons
Tokai Tokyo Research Institute	Takashi Akahane
Credit Suisse Securities	Fumiyoshi Sakai
Daiwa Securities	Anna Kato
SBI Securities	Ryuta Kawamura
Credit Suisse Securities	Kasumi Haruta
Mitsubishi UFJ Trust and Banking	Shinichiro Hyogo

*Names are in the order in which questions were received.

Akahane [Q]：

The first point I would like to bring up is on page 7 of the materials received. I also took a quick look at the figures and speculated on why operating profit was this low. This reflects the unrealized gain rather than high raw material expense. Moreover, this substantially impacted a quarter of operating profit. Although it only appears this way on the books, Tsumura actually experienced a sharp drop in operating profit.

Handa [A]：

Yes, you are correct.

Akahane [Q]：

Moreover, Tsumura built up its inventory, which had previously declined. Furthermore, this was not due to depreciation in the yen's value but an appreciation

1

in the yuan (RMB)'s value. Naturally, profit in China expanded owing to this. I just glanced at the consolidated financial results for the first quarter, the figures for merchandise and finished goods, and work in progress are fairly high. Is my understanding correct that this reflects impact from a build-up of inventory and an appreciation in the value of the yuan (RMB) owing to the foreign exchange rate?

Handa [A]：

Regarding inventory, raw materials and supplies are impacted by foreign exchange rates. In other words, performance on the China side. The impact in Japan from foreign exchange is approximately 1.2 billion yen. I am speaking about the impact to our balance sheet.

As you know, we touched upon the issue of unrealized gains. In 1Q of FY 2022, we ran out of a fair amount of inventory due to the impact of the Shanghai lockdown. Consequently, this was a period in which we realized gains. However, in the same quarter of FY2023, we have build-up inventory in preparation for the release of restricted shipments. This triggered an accumulation in unrealized gains. Owing to this structure, in a comparison with the same quarter in the previous year, the level of unrealized gains was high in contrast, and unrealized gains are a factor that pushes up the cost in sales significantly, just as you pointed out.

Akahane [Q]：

I understand. Accordingly, profit in 2Q is naturally likely to double and instead the impact from unrealized gains is likely to become fairly mild. Once the negative impact in 1Q is deleted, in the first half, the cost of sales ratio is likely to improve slightly.

Handa [A]：

Yes, that is correct. We plan to unwind the portion of unrealize gains in 2Q.

Akahane [Q]：

2

I have another question. As I believed, demand for Goreisan and Kamikihito is growing among your mainstay products, as well as demand for Ninjin'yoeito, a treatment for poor appetite. I came away with the impression that the main factor underpinning demand for these products, respectively, is COVID-19, or should I say the treatment of the after-effects of COVID-19. Am I misunderstanding this?

Sorada [A]：

First, from the standpoint of the after-effects of COVID-19, Kamikihito is more frequently used for the treatment of these after-effects. Regarding Goreisan and Ninjin'yoeito, the positive impact to demand, for instance in the case of Goreisan, is that recently it is being frequently used in various fields to treat patients complaining of dizziness or headaches. Particularly in cases where symptoms are brought on by a change in climate or barometric pressure. The volume of usage has increased significantly for headaches triggered by a change in barometric pressure. In addition, in new areas, it is being used to treat edema and swelling triggered by a cardiovascular disease. In light of this, the volume of usage of Goreisan is rising.

Meanwhile, the use of Ninjin'yoeito is increasing for the treatment of frailty and feebleness in senior citizens.

Akahane [Q]：

I understand. COVID-19, itself, is winding down slightly. The after-effects seem to be continuing considerably and the change in barometric pressure is just that, a change in atmospheric pressure. In addition, we are also experiencing typhoons. Is it okay to assume that the environment (business climate) in 2Q is likely to be extremely positive?

Soradaa [A]：

We have steadily lifted restrictions, and therefore we plan to enhance our sales activities.

3

Sakai [Q]：

I would like to confirm the unrealized gains that was brought up just now. I spoke with someone from IR yesterday, and asked if the actual figure, in other words powdered extract and crude drugs, was more important than the impact from foreign exchange translations. We discussed the fact that the actual amount reflects the build-up of raw materials in China in anticipation of the lift of shipment restrictions, and that on a consolidated basis, this portion will naturally be offset. In other words, offset as unrealized gains. Based on this, it appears the impact from foreign exchange translations is minimal. Looking at this from a different standpoint, the actual amount is increasing. This means that the shipments from China to Japan will rise going forward. Handa-san said this is a one-off item,but will this impact the statements of income to a certain extent going forward? Or, given the one-off factor, in this case the lifting of shipment restrictions, will this portion of impact be leveled off going forward or leveled off through inventory management and will not be a major disruptive factor, though this may be somewhat of an exaggeration? Anyway, is my understanding correct that this is not a variable factor?

Handa [A]：

Although this has been pointed out, we maintain a slightly long range for our processes spanning from purchasing to the build-up of inventories, commercialization of products, and sales. In light of this, the impact actually reflects the movement of goods, rather than foreign exchange translations. As I explained earlier, in 1Q FY 2022 performance was impacted by the lockdown of Shanghai while 1Q FY 2023 was exemplified by the build-up of products for which shipments were restricted. Owing to the combination of these two factors, the impact from restricted shipments was immense. In this manner, I believe we can label this quarter a special period.

Meanwhile, as you mentioned, we plan to implement an equalization of inventory . Going forward, naturally there is a certain degree of time left from purchasing to sales. Consequently, it is not a matter of realizing all of the unrealized gains to

4

generate profit. There will still be unrealized gains on our books from ordinary business transactions for a certain period of time. In light of this, I believe a major feature of FY 2023 is the impact from the previous fiscal year and the build-up of inventory impact, which substantially emerged.

Sakai [Q]：

So, in other words, what you are saying is that even though you a talking about external sales at the moment, what you mean is the shipment of inventory to Japan. So, your assumption is "an increase in sales to Japan." you are not talking about external sales in China, are you?.

Handa [A]：

That is correct. I am only talking about prescription Kampo sales in Japan. In that sense, we increased our inventory in anticipation of the lifting of shipment restrictions. So, we envisage unwinding these unrealized gains through strong sales of the inventory that has been built up here in Japan.

Sakai [Q]：

I have one more question. It is regarding Unisplendour. Did Tsumura suffer these unfortunate circumstances due to a misinterpretation that occurred inside the municipal office? In a way, it could be said Tsumura was a victim of these circumstances. What exactly happened due to this misinterpretation? Did the differences in interpretation result in the dissolution of the acquisition? Can you discuss this in a little more detail?

To rephrase, will this difference in interpretation impact Tsumura's acquisitions in China in some form moving forward? You have naturally done your due diligence. Nonetheless, when these types of situations occur, I would like to know if there will be a certain degree of impact, including whether there was some difference in the level of understanding. Can you please expound on this?

5