euglena 2931
ユーグレナ
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Summary
The corporate philosophy of euglena is “making people and the Earth healthy,” harnessing outdoor mass cultivation technology for themicroalgae Euglena gracilis(“Euglena”).
Personal ProductsBiotechnology
Key dates
2016-11-08
Coverage initiation
Executive summary
Business overview
euglena harnesses outdoor mass culture technology for themicroalga Euglena gracilis (“Euglena”). As a biotech company started at the University of Tokyo, euglena is cultivating various uses for the microalga including functional foods, cosmetics, animal feed, and fuel. The microalga Euglena shares characteristics of both plants and animals, with the vitamins and minerals found in plants and the omega-3 fatty acids found in fish, making it a potential solution to malnutrition. In December 2005 the company was the first in the world to succeed in outdoor mass culturing of food-use Euglena. FY09/20 sales stood at JPY13.3bn (-4.7% YoY) while the company reported an operating loss of JPY1.8bn (versus an operating loss of JPY7.5bn in FY09/19). The Energy and Environment business is in a pre-commercial phase with a biofuel pilot plant in operation. Accordingly, almost all sales are derived by the Healthcare business, which also generates cash flow for investment in the Energy and Environment business.
Sustainability First: In August 2020, on the occasion of the 15th anniversary of its founding, euglena decided to update the company, changing its focus from Euglena gracilis to “Sustainability First.” Dispensing with the complexity of its former corporate philosophy (making people and the Earth healthy), vision, and slogan, the company has chosen Sustainability First as its “euglena philosophy” to define what sort of company it wants to be. This philosophy will remain unchanged into the future as the company works to create a strong organization. It has also changed its corporate logo from English to katakana characters to promote wider recognition in Japan. Hereafter, euglena aims to further develop its businesses with an emphasis on sustainability, helping customers discover more sustainable lifestyles through contact with its businesses and products. In the Healthcare business, it aims to support health that lasts a lifetime rather than just providing temporary fixes. It also aims to create circumstances in which consumers act in an environmentally conscious manner without needing to think about it, so that it will not matter how concerned they are with environmental issues. In the Energy and Environment business, euglena seeks to provide concrete solutions for Japan, which has relatively little experience in the use of biofuels. In addition, since organic growth alone does not generate an adequate sense of urgency to propel social reforms, the company says it strives to aggressively expand into new fields through M&A as it attempts to transform as many companies as possible into sustainable enterprises.
Healthcare segment: The company develops and sells functional foods and beverages that mainly use Euglena powder and cosmetics that use Euglena extract derived from Euglena powder. It mainly conducts sales through direct sales channels, but also sells to wholesalers and supplies OEM products to corporate customers. Furthermore, it is developing overseas sales channels including in China.
Made Q’sai a consolidated subsidiary: In January 2021, the company made health foods and skin care mail-order retailer Q’sai an equity-method affiliate, and added to its stake in May 2021. It made Q’sai a consolidated subsidiary in Q3 FY12/21 (49% stake), with earnings reflected in the income statement from Q4 FY12/21. In FY12/20, Q’sai booked sales of JPY24.6bn and EBITDA of JPY3.6bn. The company is targeting FY12/25 Q'sai sales of JPY30.0bn or above and EBITDA of JPY5.0–6.0bn or above.
Energy and Environment segment: The company estimates the global market for aviation biofuel will expand to JPY1tn by 2025 while the biodiesel fuel market increases to JPY7.5tn. This outlook undergirds the company’s decision to pursue full-scale commercialization of biofuel production. Its biofuel business pilot plant was in operation as of 2021, but even if testing goes according to plan, the company expects it will not be commercially viable until 2025. Until that point, pilot plant production will only be able to make a very small contribution to sales since its capacity is limited to 125kl/year. Since euglena has expensed costs for the pilot plant under R&D, there will be a cash outflow of over JPY500mn per annum if various subsidies are not considered.
Relationship between segments and business domains: The company defines business domains differently from business segments (Healthcare, Energy and Environment) reported in financial statements. There are three business domains: advanced investment (biofuel business, bioinformatics business), healthcare, and social business. The Healthcare segment includes the healthcare business, bioinformatics business, and social business while the Energy and Environment segment includes biofuel business. The company explained that it established business domains separately from the reported business segments to help investors better understand the movement of cash flow within the company and the significance of advanced investment. The company notes cash flow generated by the healthcare business domain is invested into advanced investment and social business domains to develop future businesses that will then return brand value to the healthcare business domain.
Trends and outlook
FY09/20 results: Euglena reported full-year FY09/20 sales of JPY13.3bn (-4.7% YoY). In Q4 alone, the company recorded sales of JPY3.8bn, marking an improvement from sales of JPY2.9bn in Q2 and JPY3.5bn in Q3. The company reported full-year FY09/20 operating loss of JPY1.8bn (versus loss of JPY7.5bn in FY09/19), recurring loss of JPY1.5bn (versus loss of JPY7.1bn), and net loss attributable to owners of the parent of JPY1.5bn (versus net loss of JPY9.8bn). In the Energy and Environment segment, the segment loss came to JPY986mn due to the full-scale launch of pilot plant operations. In the Healthcare segment, segment profit reached just JPY115mn on aggressive investment in advertising for growth brands.
FY12/21 company forecast (revised): The company announced revisions to its full-year FY12/21 earnings forecast on November 12, 2021. The revised company forecast calls for sales of JPY33.0bn (no change from previous forecast) and adjusted EBITDA of JPY650mn (previous forecast: JPY150mn). In cumulative Q4, adjusted EBITDA exceeded expectations at JPY1.0bn thanks to favorable digital marketing developments, expansion of sales through the distributor (wholesale) channel, optimization of advertising spending, and less-than-expected other SG&A expenses. Although the drop in adjusted EBITDA is forecast to be larger than expected in Q5 due to increased investment in advertising for FY12/22 and beyond and M&A-related expenses, full-year adjusted EBITDA is expected to exceed the previous forecast. The company is maintaining a conservative sales forecast, leaving it unchanged.
Medium-term outlook: Cash flow from the healthcare business domain (here not including Q’sai) has been positive while euglena expects cash flow from the bioinformatics, social, and biofuel businesses to gradually turn positive. The company envisions the bioinformatics business being the first to turn profitable in the first half of the 2020s, followed by the social business, and then the biofuel business once commercialization commences in 2025. The company expects biofuel business to turn profitable in line with the planned 2025 commercialization. This is based on the assumptions that partner companies and sites will be decided in FY09/21 and construction of a commercial plant begins around 2023. The company expects the healthcare business domain to drive sales until biofuels are commercialized. Biofuel business sales are expected to expand sharply once commercialization starts, rising to about 40% of sales in 2030. At that time, the healthcare business is expected to account for another 40% of sales and the bioinformatics and social businesses each for 10% of sales.
Strengths and weaknesses
Shared Research sees the company’s strengths as: 1) the many diverse applications of Euglena, 2) its high market share of Euglena and high barriers to entry, 3) its originality and brand value through making advanced investment and social business its business domains besides the healthcare domain.
Shared Research sees the company’s weaknesses as: 1) its heavy reliance on Euglena to drive sales despite the material having low consumer recognition, 2) insufficient branding and unbalanced customer base/customer acquisition channels, and 3) continuing cash outflows given the need for operating expenses over JPY500mn each year in the Energy and Environment segment until product commercialization can be achieved.
Key financial data
Note: EBITDA (adjusted) is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation. Depreciation includes depreciation under R&D expenses.
Recent updates
Revisions to full-year earnings forecast
On November 12, 2021, euglena Co., Ltd. announced a revision to its full-year FY12/21 forecast.
Reasons for the revision
In cumulative Q4, adjusted EBITDA exceeded expectations, reaching JPY1.0bn, thanks to favorable digital marketing developments, expansion of sales through the distributor (wholesale) channel, optimization of advertising spending, and less-than-expected other SG&A expenses. Although in Q5, the drop in adjusted EBITDA is forecast to be larger than expected due to increased investment in advertising with an eye toward FY12/22 and later and M&A-related expenses, full-year adjusted EBITDA is expected to exceed the previous forecast. The company is maintaining a conservative sales forecast, leaving it unchanged.
Adjusted EBITDA is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation + impact of inventory step-up. Q'sai Co., Ltd. was acquired and made a consolidated subsidiary with a deemed acquisition date of June 30, 2021. Unrealized gains of JPY6.7bn were recorded in inventory assets at the time of consolidation due to the step-up of inventory. Stepping up is an accounting procedure involving the revaluation of inventory at the time of consolidation to net realizable value (amount after deducting estimated additional manufacturing costs and estimated direct selling expenses from the selling price). The unrealized gain will be expensed as a cost of sales, as the inventory is paid out when products are sold. The company explained that since the expensing of the unrealized gains recorded as a result of the step-up process is not expected to have an impact on cash flow, the affected amount will be added back when calculating adjusted EBITDA.
Made Daikyo Hiryo a wholly owned subsidiary through simple share exchange
euglena Co., Ltd. announced that it will make Daikyo Hiryo K.K. a wholly owned subsidiary through a simple share exchange.
The company announced that it will become the wholly owning parent and Daikyo Hiryo a wholly owned subsidiary through a simple share exchange. Daikyo Hiryo is a manufacturer of quality organic compound fertilizers and other products for use in agriculture and gardening. The company already has commercial products in the area of food and is working to commercialize fuel products, but this acquisition marks a full-scale entry into the fertilizer business.
The company says the impact of the share exchange on its FY12/21 results will be minor. It will examine the impact of the exchange on its FY12/22 results and plans to reflect that impact in its FY12/22 forecast to be announced in February 2022.
It plans to acquire 640 outstanding shares of Daikyo Hiryo through the share exchange, for which it will provide a number of its own shares to be calculated as JPY2mn divided by the volume-weighted average price of its common stock from November 17－24, 2021. The effective date of the exchange will be December 1, 2021.
In FY06/21, Daikyo Hiryo reported sales of JPY1.4bn, operating profit of JPY90mn, net income of JPY61mn attributable to owners of the parent, and net assets of JPY624mn.
Transition to a management structure that separates management and business execution
On September 29, 2021, euglena Co., Ltd. announced the transition to a management structure that separates management and business execution.
The company announced that starting October 1, 2021, president and CEO Mitsuru Izumo will be in charge of the company's management in the medium to long term, and Mr. Akihiko Nagata, who will assume the position of director, representative executive officer, and CEO, will be in charge of business execution. The company is shifting to a management structure that separates management and business execution to enable the formulation of medium- to long-term management policies, optimized allocation of management resources, acceleration of the pace of business, and strengthening of governance. Mr. Izumo, who had been in charge of both management and business execution, will give up his authority in business execution to focus instead on setting medium- to long-term management policies and on building and deepening relationships with various stakeholders as the head of group management, all the while embodying the company's "sustainability first" philosophy. Mr. Nagata, as CEO, will lead business execution to realize the management policy and accelerate the pace of business.
Extraordinary loss expected at consolidated subsidiary
euglena Co., Ltd. announced that it expected to record an extraordinary loss at its consolidated subsidiary.
The company announced that it expected to record an extraoridnary loss at its consolidated subsidiary, Q'sai Co., Ltd. in Q5 FY12/21 (FY12/21 is a 15-month year due to a change in accounting period).
Q'sai is reviewing and reforming its business strategy, products and services, and business operations, as well as updating its work style and optimizing the allocation of human resources. At this time of transition, Q'sai will implement the Next Career Support Program for employees who wish to pursue a new career outside the company. In this Next Career Support Program, the company plans to provide a special retirement benefit to employees who resign voluntarily and provide outplacement support through an outplacement services company. The bonus severance payments and outplacement support costs incurred through this program will be recorded as an extraordinary loss in Q5 FY12/21. At present, the number of applicants and the total amount of the bonus severance payments have yet to be determined, but the company expects to record an extraordinary loss of up to JPY470mn which will have a negative impact on net income of JPY160mn.
The full-year consolidated earnings forecast for FY12/21 announced on August 13, 2021 was for two indicators: sales and adjusted EBITDA (EBITDA [operating profit + goodwill amortization and depreciation] + subsidy income + stock-related compensation). The company has stated that the extraordinary loss it expects to book in connection with the Next Career Support Program will have no impact on its previously announced full-year forecast.
Trends and outlook
Quarterly trends and results
Note: EBITDA (adjusted) is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation. Depreciation includes depreciation under R&D expenses.
Note: Cumulative figures are totals of quarterly data, so they may differ from the company’s cumulative figures.
Q4 FY12/21 results
Results overview
Change in fiscal year-end: As announced on June 14, 2021, the company amended its Articles of Incorporation to change its fiscal year from October 1–September 30 to January 1–December 31. Accordingly, the 17th fiscal year will be a 15-month accounting period from October 1, 2020 to December 31, 2021.
In cumulative Q4 FY09/21, euglena reported sales of JPY23.3bn (+74.9% YoY), operating loss of JPY4.0bn (versus loss of JPY1.8bn in Q4 FY09/20), recurring loss of JPY3.7bn (versus loss of JPY1.5bn), net loss attributable to owners of the parent of JPY2.4bn (versus loss of JPY1.5bn), and adjusted EBITDA of JPY1.0bn (versus loss of JPY732mn). Q'sai Co., Ltd., which the company acquired, was consolidated in the Q4 income statement. Q'sai contributed JPY6.2bn in sales, JPY153mn in operating profit, JPY20mn in recurring profit, and JPY728mn in adjusted EBITDA.
In the Healthcare segment, the number of regular direct sales customers in Q4 was 340,000, representing an increase of 20,000 from 320,000 in Q3. The online direct sales ratio exceeded 50%. Advertising expenses in Q4 (three months) were JPY1,284mn, almost the same as JPY1,285mn in Q3. Direct sales in Q4 increased 32.5% YoY to JPY3.9bn. These figures do not include contributions from Q'sai.
In the Energy and Environment segment, the company began preliminary design work for the site of a planned commercial biofuel plant in October 2021. The company also said it would begin a review of its plans to conduct large-scale Euglena culture verification testing in Indonesia in light of the COVID-19 pandemic and the situation of local partners. While the company intends to pursue such large culture verification and commercialization projects overseas, it is considering keeping these efforts based in Japan for the time being.
Full-year FY12/21 forecast: The company announced revisions to its full-year FY12/21 earnings forecast on November 12, 2021. The revised company forecast calls for sales of JPY33.0bn (no change from previous forecast) and adjusted EBITDA of JPY650mn (previous forecast: JPY150mn). In cumulative Q4, adjusted EBITDA exceeded expectations at JPY1.0bn thanks to favorable digital marketing developments, expansion of sales via the distributor (wholesale) channel, optimization of advertising spending, and less-than-expected other SG&A expenses. Although the drop in adjusted EBITDA is forecast to be larger than expected in Q5 due to increased investment in advertising for FY12/22 and beyond and M&A-related expenses, full-year adjusted EBITDA is expected to exceed the previous forecast. The company is maintaining a conservative sales forecast, leaving it unchanged. For further details, see the Company forecast for FY12/21 section later in this report.
Change in management structure: On September 29, 2021, the company announced the transition to a management structure that separates management and business execution. Starting October 1, 2021, president and CEO Mitsuru Izumo has been in charge of the company's management for the medium to long term, and Mr. Akihiko Nagata, who assumed the position of director, representative executive officer, and CEO, has been in charge of business execution. The company has shifted to a management structure that separates management and business execution to enable the formulation of medium- to long-term management policies, optimized allocation of management resources, acceleration of the pace of business, and strengthening of governance. Mr. Izumo, who had been in charge of both management and business execution, gave up his authority in business execution to focus instead on setting medium- to long-term management policies and on building and deepening relationships with various stakeholders as the head of group management, all the while embodying the company's "sustainability first" philosophy. Mr. Nagata, as CEO, now leads business execution, working to realize the management policy and accelerate the pace of business.
Breakdown of results by segment
Healthcare segment (Q'sai Co., Ltd. included)
In cumulative Q4 FY09/21, the Healthcare segment reported sales of JPY23.2bn (+74.7% YoY) and segment loss of JPY1.8bn (versus profit of 115mn in Q4 FY09/20). The segment loss includes an increase in expenses of JPY2.7bn due to stepping-up of inventory and intangible assets and goodwill amortization of JPY453mn resulting from purchase price allocation following the consolidation of Q'sai.
Direct sales
The number of regular direct sales customers in Q4 was 340,000, representing an increase of 20,000 from 320,000 in Q3. The online direct sales ratio exceeded 50%. Advertising expenses in Q4 (three months) were JPY1,284mn, almost the same as the JPY1,285mn in Q3. Direct sales in Q4 increased 32.5% YoY to JPY3.9bn.
Wholesale
Wholesale sales in Q4 increased 126.9% YoY to JPY497mn.
Q'sai Co., Ltd.
Q'sai, which the company acquired, was consolidated in the Q4 income statement. Q'sai contributed JPY6.2bn in sales, JPY153mn in operating profit, JPY20mn in recurring profit, and JPY728mn in adjusted EBITDA. At end-Q4, Q'sai had 483,000 regular customers.
Energy and Environment segment
In Q4 FY09/21, the Energy and Environment segment reported sales of JPY52mn (versus JPY16mn in Q4 FY09/20), and due to the launch of operation at the pilot plant, posted a segment loss of JPY943mn (versus loss of JPY986mn).
The company began preliminary design work for the site of a planned commercial biofuel plant in October 2021. This consists of creating the conceptual design, which precedes the baseline design and follows the feasibility study.
The company also announced that it would begin a review of its plans to conduct large-scale Euglena culture verification testing in Indonesia in light of the COVID-19 pandemic and the situation of local partners. While the company intends to pursue such large culture verification and commercialization projects overseas, it is considering keeping these efforts based in Japan for the time being.
Other News
Purchase Price Allocation (PPA) associated with the consolidation of Q'sai Co., Ltd.
Intangible assets in PPA: Goodwill amounted to JPY11.6bn (amortization period of 20 years), customer-related assets JPY16.6bn (14 years), and trademark rights JPY900mn (20 years). The company recognized deferred tax liabilities of JPY5.3bn on these intangible assets. The annual amortization of intangible assets is expected to be JPY1.8bn, and the reversal of deferred tax liabilities is expected to be JPY374mn.
Unrealized gains of JPY6.7bn were recorded in inventory assets due to the step-up of inventory. Stepping up is an accounting procedure involving the revaluation of inventory at the time of consolidation to net realizable value (amount after deducting estimated additional manufacturing costs and estimated direct selling expenses from the selling price). The unrealized gain will be expensed as a cost of sales, as the inventory is paid out when products are sold. The impact of the inventory step-up was JPY2.7bn in Q4, reducing the gross profit margin from 81% to 37%. The impact of the step-up lessened with the exhaustion of inventory from end-June 2021, and is expected to be eliminated in about a year. Moreover, the company explained that since the expensing of the unrealized gains recorded as a result of the step-up process is not expected to have an impact on cash flow, the affected amount will be added back when calculating adjusted EBITDA.
Daikyo Hiryo becomes a wholly owned subsidiary through a simple stock swap
On November 2, 2021, the company announced that it would become the wholly owning parent and Daikyo Hiryo a wholly owned subsidiary through a simple stock swap. Daikyo Hiryo is a manufacturer of quality organic compound fertilizers and other products for use in agriculture and gardening. The company already has commercial products in the area of food and is working to commercialize fuel products, but this acquisition marks a full-scale entry into the fertilizer business.
The company says the impact of the share exchange on its FY12/21 results will be minor. It will examine the impact on results and reflect that impact in its FY12/22 forecast to be announced in February 2022.
The company plans to acquire 640 outstanding shares of Daikyo Hiryo through the stock swap, for which it will provide a number of its own shares to be calculated as JPY2mn divided by the volume-weighted average price of its common stock from November 17－24, 2021. The effective date of the stock swap will be December 1, 2021.
In FY06/21, Daikyo Hiryo reported sales of JPY1.4bn, operating profit of JPY90mn, net income of JPY61mn attributable to owners of the parent, and net assets of JPY624mn.
Company forecast for FY12/21
Note: FY09/19 operating loss includes about JPY6.4bn in construction-related costs booked as R&D expenses.
Note: EBITDA (adjusted) is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation + impact of inventory step-up. Depreciation includes depreciation under R&D expenses.
Revision of full-year FY12/21 earnings forecast (released November 12, 2021)
Reasons for revision
In cumulative Q4, adjusted EBITDA exceeded expectations, reaching JPY1.0bn, thanks to favorable digital marketing developments, expansion of sales through the distributor (wholesale) channel, optimization of advertising spending, and less-than-expected other SG&A expenses. Although the drop in adjusted EBITDA is forecast to be larger than expected in Q5 due to increased investment in advertising with an eye toward FY12/22 and later and M&A-related expenses, full-year adjusted EBITDA is expected to exceed the previous forecast. The company is maintaining a conservative sales forecast, leaving it unchanged.
Adjusted EBITDA is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation + impact of inventory step-up. Q'sai Co., Ltd. was acquired and made a consolidated subsidiary with a deemed acquisition date of June 30, 2021. Unrealized gains of JPY6.7bn were recorded in inventory assets at the time of consolidation due to the step-up of inventory. Stepping up is an accounting procedure involving the revaluation of inventory at the time of consolidation to net realizable value (amount after deducting estimated additional manufacturing costs and estimated direct selling expenses from the selling price). The unrealized gain will be expensed as a cost of sales, as the inventory is paid out when products are sold. The company explained that since the expensing of the unrealized gains recorded as a result of the step-up process is not expected to have an impact on cash flow, the affected amount will be added back when calculating adjusted EBITDA.
Revision of full-year earnings forecast due to change in fiscal year-end (announced August 13, 2021)
As announced on June 14, 2021, the company plans to amend its Articles of Incorporation to change its fiscal year from October 1–September 30 to January 1–December 31. Accordingly, the 17th fiscal year will be a 15-month accounting period from October 1, 2020 to December 31, 2021. In light of the three-month extension of the accounting period and recent trends in earnings, the company decided to revise its full-year earnings forecast announced on May 14, 2021. The revised full-year FY12/21 forecast calls for sales of JPY33.0bn (previous forecast: JPY22.0bn) and adjusted EBITDA of JPY150mn (previous forecast: loss of JPY200mn).
Reasons for the revision
Sales: The company expects sales to exceed the previously announced full-year forecast due to the current strong performance of C COFFEE and other products in the Healthcare segment and the addition of the three months (October–December 2021) due to the change in the fiscal year-end.
Adjusted EBITDA: The company expects adjusted EBITDA to grow in the October 2020–September 2021 period on optimization of advertising spending and scrutiny of expense items. Customer acquisition efficiency for C COFFEE exceeded company expectations, and the company increased its advertising budget as it thought it could recoup its advertising spending for C COFFEE relatively quickly. On the other hand, the company forecasts a modest adjusted EBITDA loss for October–December 2021, which will be added to the period due to the change in fiscal year-end, due to increased spending on advertising and promotional activities. In October–December 2021, the company expects a positive impact from Q’sai despite higher investment during the period, outweighed by a drag from the legacy euglena on expanded investment. The company expects these factors to result in the full-year adjusted EBITDA returning to the black and exceeding the previous target.
The direct sales business model in the Healthcare segment recoups advertising expenses through regular purchases over time, so direct sales advertising in October–December 2021 should drive an increase in the number of regular customers and an improvement in earnings from FY12/22 onward. Advertising spending in wholesaling is aimed at securing shelf space when it is reallocated this autumn. The company has flagged ongoing aggressive investment in FY12/22.
The company expects the Energy and Environment segment to post an EBITDA loss in Q4 due to its usual scheduled maintenance (costing roughly JPY200mn) during the quarter.
In FY12/21, the income statement will reflect consolidation of newly acquired Q'sai for six months, as well as 15-month results of the rest of the euglena group.
Revisions to full-year forecast (May 14, 2021)
Exercise of call options to start the process to make Q’sai Co., Ltd. a consolidated subsidiary
At a meeting held on May 14, 2021, the company’s board of directors approved a resolution to acquire additional shares of Q Partners, which owns all outstanding shares of Q’sai, in order to increase the company’s stake from 12.84% to 49%. To do this, it will exercise call options on shares of Q-Partners held by AP Fund and Tokyo Century Corporation under a shareholders’ agreement previously concluded among the three companies.
By exercising the call options, the company plans to acquire additional shares of Q-Partners on May 17, 2021, and make Q’sai a consolidated subsidiary via Q-Partners, with a deemed acquisition date of June 30, 2021. Balance sheet items of Q-Partners and Q’sai will be included in consolidated financial results from end-Q3 FY09/21, and income statement items from Q4 FY09/21. The company has already raised the funds required to exercise the call options by issuing new shares through an overseas share subscription announced on April 7, 2021. The company expects consolidated sales to reach JPY40.0bn in FY09/22, when Q’sai will make its first full-year contribution to results.
Revisions to full-year FY09/21 forecast
Reasons for revisions
The company plans to exercise call options to make Q’sai a consolidated subsidiary via Q-Partners, with a deemed acquisition date of June 30, 2021 (with euglena holding a 49% stake). It has therefore calculated a new full-year forecast that includes the earnings of Q-Partners and Q’sai for July–September 2021. According to euglena, the upward revisions are almost entirely due to the contribution of Q’sai to consolidated earnings. It expects the subsidiary to contribute around JPY6.0bn in sales and around JPY600mn in EBITDA. Although Q’sai had been drawing down its advertising expenses in recent years, euglena says the revised forecast is premised on bringing the subsidiary’s advertising outlays back up to former levels in the early stages after consolidation.
Other than the inclusion of earnings from Q-Partners and Q’sai, factors reflected in the revised forecast are the inclusion of earnings from LIGUNA Co., Ltd., which became a wholly owned subsidiary on March 1, 2021 (originally announced on January 21, 2021), a decrease in non-operating profit because subsidy income the company initially planned to record in the Energy and Environment segment in FY09/21 was moved back to Q2 FY09/22, and an increase in costs such as audit fees associated with Q Partners and Q’sai becoming consolidated subsidiaries.
Adjusted EBITDA moved into the black in Q2 FY09/21 owing to the company’s measures to curb advertising costs in the healthcare business coupled with biofuel-related subsidy income from the New Energy and Industrial Technology Development Organization (NEDO) and local governments. In 2H, however, the company plans to ramp up advertising investments, and expects to incur scheduled repair expenses at the pilot plant in Q4. Consequently, the revised EBITDA forecast, after excluding the effects of the absence of the above-mentioned subsidies and contributions from Q’sai, remains unchanged. The company says it will invest in advertising to the fullest extent possible while remaining within the range of its full-year revised EBITDA forecast of negative JPY200mn.
Supplementary information provided alongside Q1 FY09/21 results (as of February 2020)
The company made no changes to the FY09/21 full-year forecast announced on November 13, 2020.
Progress versus this forecast reached 25.7% for sales. The initial forecast for FY09/21 called for quarterly sales to remain roughly flat at JPY3.8bn, and progress in this respect appears in line with that assumption.
The investment in Q’sai and the conversion of LIGUNA into a wholly owned subsidiary were announced after the release of the initial forecast and are accordingly not included in the assumptions for the forecast. As of February 2021, equity-method accounting will apply to the company’s investment in Q’sai.
In FY12/20, Q’sai reported sales of JPY24.6bn and EBITDA of JPY3.6bn. This well exceeded performance in euglena’s Healthcare business in FY09/20, when sales came to JPY12.9bn and adjusted EBITDA was JPY1.0bn. The company targets FY05/22 sales at LIGUNA of JPY2.0bn. Factoring in cost revisions, the company forecasts FY05/22 EBITDA at LIGUNA of JPY370mn. For additional information on Q’sai and LIGUNA, please see the section titled Q1 FY09/21 results.
Initial forecast (released November 13, 2020)
The company’s FY09/21 earnings forecast calls for sales of JPY15.2bn (+14.1% YoY) and adjusted EBITDA of -JPY630mn (-JPY732mn in FY09/20). The company announced estimates for sales and adjusted EBITDA, adding the latter to its items for disclosure to better illustrate its ability to generate cash flow in line with the shift to a focus on cash flow management. Adjusted EBITDA is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation. The company has also not disclosed its profit targets, including for operating profit. The company has not disclosed segment earnings forecasts.
Healthcare segment
The company expects sales in the Healthcare segment to improve on the contribution from product sales to regular direct sales customers, where there was a shift toward net gains in FY09/20, and the positive effects from enhanced multi-channel initiatives and investment in digital marketing and branding. It expects the higher segment sales to contribute to consolidated sales reaching a record high in FY09/21.
The company forecasts quarterly sales in FY09/21 will be flat at slightly below the JPY3.8bn recorded in Q4 FY09/20, although it anticipates a change in the sales mix. For 1H FY09/21, euglena expects hit products launched in 2H FY09/20, namely diet health food “Charcoal Coffee” and cosmetics product “one”, to drive sales, but looks for supplement “Karada ni Euglena” to post sales growth in 2H FY09/21. While euglena assumes the number of regular purchase customers will increase throughout the year, it expects the rate of increase to be lower than in 2020. The change in sales mix will likely depress the average spend per regular purchase customer while the anticipated change in the sales mix could also lead to a slight decline in gross profit margins.
Advertising expenditures excluding costs for TV commercials are projected to remain flat at around the JPY1.0bn level recorded in Q4 FY09/22. In addition, some quarters will likely see additional spending for TV commercials. The advertising investment strategy for FY09/21 is aimed at retaining fixed regular customer numbers for “Charcoal Coffee” and “one” while also investing to expand multichannel marketing of “Karada ni Euglena.”
The online direct sales ratio in FY09/21 is expected to exceed that of FY09/20.
Energy and Environment segment
The company forecasts ongoing segment losses in the Energy and Environment segment on the launch of full-scale pilot plant operations and initiatives aimed at achieving the use of aviation biofuel in commercial flights.
The company defines adjusted EBITDA as including subsidy income. The New Energy and Industrial Technology Development Organization (NEDO) selected the aviation biofuel business being advanced by euglena and its research on using microalgae for use in fuel applications for the public project “Development of Production Technologies for Biojet Fuels.” A detailed breakdown of the public project subsidies has not been disclosed, but JPY500–3,000mn will be allotted in 2020–2024 to a group of four companies including euglena for demonstration of microalgae basic technology while supply chain model subsidies are projected at about JPY6,850mn (this includes proposals from a different group of companies) for 2020–2024. Accordingly, euglena will likely receive annual subsidies of several hundred million yen through FY2024.
The pilot plant started full-scale operation from Q2 FY09/20. R&D expenditures are expected to be somewhat higher in FY09/21 as the pilot plant will be operational for the full year.
Historical company forecasts vs. results
Medium to long-term outlook
Initiatives promoting sustainability
In August 2020, to mark the 15th anniversary of its founding, euglena decided on a corporate update, changing its focus from Euglena gracilis to “Sustainability First.” This reflects the expanded business portfolio and more diverse stakeholder constituency 15 years after its founding. Dispensing with its complex corporate philosophy (making people and the Earth healthy), vision, and slogan, the company chose Sustainability First as its “euglena philosophy” to define what sort of company it wants to be. This philosophy will remain unchanged into the future as the company works to create a strong organization. It has also changed its corporate logo from English to katakana characters to promote wider recognition in Japan.
Hereafter, euglena aims to further develop its businesses with an emphasis on sustainability, helping customers discover more sustainable lifestyles through contact with its businesses and products. The company aims to leverage cutting-edge R&D to its businesses to develop sustainable solutions for social problems. In the Healthcare business, it wants to support health that lasts a lifetime rather than just providing temporary fixes. It also aims to create circumstances in which consumers act in an environmentally conscious manner without needing to think about it, so that it will not matter how concerned they are with environmental issues. In the Energy and Environment business, euglena seeks to provide concrete solutions for Japan, which has relatively little experience in the use of biofuels. In addition, since organic growth alone does not generate an adequate sense of urgency to propel social reforms, the company says it intends to aggressively expand into new fields through M&A as it attempts to transform as many companies as possible into sustainable enterprises.
“Sustainability First” as the euglena philosophy
Updating its image from “the Euglena gracilis company,” the company has designated Sustainability First as the euglena philosophy regarding the sort of company it wants to be. Sustainability First indicates the company’s wish that all of the group’s stakeholders will constantly consider how their own happiness can coexist with the happiness of others and what they can do to achieve this.
Under its former corporate philosophy (making people and the Earth healthy), euglena developed businesses centering on healthcare, energy, and the environment. When thinking about what sort of company it wished to become, euglena concluded that growth should be driven by efforts to ameliorate social issues. It thinks that sustainability is not a short-term issue, but rather something that it can carry on addressing far into the future. Going forward, the company will move beyond simple use of Euglena gracilis to develop businesses with an emphasis on sustainability. It aims to ensure that the happiness of its various stakeholders can coexist with the happiness of others. In addition, it hopes this emphasis will help customers discover more sustainable lifestyles through contact with its businesses and products.
New corporate logo
Logotype
As it was deemed that the English-alphabet euglena logo was difficult for Japanese to read, the company’s new logo uses katakana characters to promote wider recognition in Japan. The company also selected the versatile, easily readable Mincho font so that it can be used in a wide range of fields, from biofuel to food and cosmetics.
Logo mark
Taking the infinity symbol, which creates an image of sustainable development, as a motif, the company chose a design that evokes the liveliness of Euglena gracilis cells, while also hinting at the “e” that is the first letter of the word euglena and the “S” of sustainability.
Tagline: “Live, enjoy, become sustainable.”
The company wants sustainability to become a more familiar concept, so that people will feel it is applicable to them and will incorporate it into their lives and alter their behavior. For this reason, it has placed “sustainable” next to the easily accessible words “live” and “enjoy,” giving the impression of a certain degree of equivalence.
New corporate color
The company has set its unique “Sustainable Green” as its new corporate color. Sustainable Green is a single-color representation of the Earth’s cycles, mixing the deep green of evergreen trees, symbolizing permanence, with a blue that puts one in mind of the sea and sky. The company decided to change its corporate color from the original green to a new color that expresses euglena’s commitment to a sustainable world, while also conveying a greater sense of people and the Earth.
Business domains and cash flow
The company defines business domains differently from business segments (Healthcare, Energy and Environment) reported in financial statements. There are three business domains: advanced investment (biofuel business, bioinformatics business), healthcare, and social business. The Healthcare segment includes the healthcare business, bioinformatics business, and social business while the Energy and Environment segment includes biofuel business. The company explained that it established business domains separately from the reported business segments to help investors better understand the movement of cash flow within the company and the significance of advanced investment. The company notes cash flow generated by the healthcare business domain is invested into advanced investment and social business domains to develop future businesses that will then return brand value to the healthcare business domain.
The advanced investment domain is expected to become a new pillar of earnings growth supported by investment of cash flow generated by the healthcare business domain. The company aims to provide concrete solutions to climate change (covering sustainable development goals [SDGs] 7 and 13) through the biofuel business and solutions for lifelong health (SDG 3) through the bioinformatics business. The company reported an adjusted EBITDA of -JPY870mn in FY09/20. Income was comprised of JPY220mn in sales and JPY140mn in subsidies.
The healthcare domain is the pillar of group earnings and generates resources for investment into other areas. The policy is to maintain advertising expenses within the scope of adjusted EBITDA growth. The company looks to facilitate lifelong health (SDGs 3 and 12). In FY09/20, adjusted EBITDA was JPY1bn and sales were JPY12.9bn. Note: This commentary does not include the impact of the Q'sai acquisition (discussed later).
The objectives of the social business domain are advancing commercialization and boosting brand awareness. It aims to eliminate malnutrition in developing countries (SDGs 1 and 2). In FY09/20, adjusted EBITDA was -JPY80mn. Income was comprised of JPY40mn in sales and JPY110mn in subsidies.
Corporate and other businesses generated adjusted EBITDA of JPY790mn in FY09/20. Income was JPY200mn in sales.
Assumptions of timing of profitability and sales by business domain
Cash flow from the healthcare business domain (excluding Q’sai, which will be discussed later in this report) has been positive while euglena expects cash flow from the bioinformatics, social, and biofuel businesses to gradually turn positive. The company envisions the bioinformatics business being the first to turn profitable in the first half of the 2020s, followed by the social business, and then the biofuel business once commercialization commences in 2025.
The company expects biofuel business to turn profitable in line with the planned 2025 commercialization. This is based on the assumptions that partner companies and sites will be decided in FY09/21 and construction of a commercial plant begins around 2023.
The company expects the healthcare business domain to drive sales until biofuels are commercialized. Biofuel business sales are expected to expand sharply once commercialization starts, rising to about 40% of sales in 2030. At that time, the healthcare business is expected to account for another 40% of sales and the bioinformatics and social businesses each for 10% of sales.
Consolidation of Q’sai (added in May 2021)
On December 15, 2020, the company, along with two partners, the “AP Fund” served by Advantage Partners Inc. (unlisted), and Tokyo Century Corporation (TSE1: 8439), had jointly entered into an agreement to acquire all outstanding shares of Q’sai Co., Ltd., from its current owner, Coca-Cola Bottlers Japan Holdings Inc. (TSE1: 2579). The acquisition was set to be made via a special purpose company (SPC) jointly established by euglena, the AP Fund, and Tokyo Century. The share transfer took place on January 29, 2021, and the company acquired additional shares in the SPC in May 2021; Q’sai became a consolidated subsidiary at end-Q3 FY12/21 (with euglena holding a 49% stake; earnings reflected in the income statement from Q4 FY12/21). Q’sai is a mail-order retailer operating in health foods and cosmetics. While its customer base is different from that of euglena, its business model is similar to euglena’s Healthcare business. Detailed information regarding Q'sai can be found in the Healthcare business discussion in the Business, market, and value chain section.
Key elements of joint agreement to acquire Q’sai
The three partner companies—euglena, the AP Fund, and Tokyo Century— will acquire all outstanding shares of Q’sai Co., Ltd.
Within one year of the acquisition, Q’sai is expected to become a consolidated subsidiary of euglena (completed in May 2021).
Working together with euglena, the AP Fund, and Tokyo Century, Q'sai will take steps to transform its business from a simple mail-order house for health foods and cosmetics, and become a company dedicated to supporting its customers in their efforts to “age well.”
Details of acquisition
Working through the SPC, the three partner companies will acquire all outstanding shares of Q’sai from Coca-Cola Bottlers Japan Holdings. The acquisition will be paid for in cash, with the funds for the acquisition coming from euglena, the AP Fund, and Tokyo Century, along with additional funding coming from bank loans. Initially, the AP Fund will hold a 67.22% stake in the SPC, euglena a 12.84% stake, and Tokyo Century a 19.94% stake. Plans call for the ownership stakes to change over time, however, with euglena’s stake potentially rising to 49% within the first year following the acquisition and Q’sai becoming a consolidated subsidiary of euglena (completed in May 2021). For the time being, the AP Fund will take the lead in PMI.
Further down the road, both the AP Fund and Tokyo Century plan to exit their investments in Q’sai, though neither has commented as to exactly when or how they plan to exit. For its part, euglena wishes to have the option of eventually making Q’sai a wholly owned consolidated subsidiary. The shareholder agreement for the SPC has been structured accordingly, providing euglena with a call option giving it the right to buy out its two partners after two and a half years have elapsed since the acquisition was finalized. The total cost of buying out the interests of AP Fund and Tokyo Century at that time would vary depending on the exact timing, but could be no less than JPY26.2bn. After three and a half years have elapsed since the acquisition was finalized, the partners will have the right to sell their interest (three parties together or otherwise) in the SPC to outside investors; this includes the possibility of public offering of shares in accordance with terms and conditions of the original agreement. After four years have elapsed since the acquisition of Q’sai, the AP Fund and Tokyo Century will have the right to sell their entire interest in the SPC to euglena, provided Q’sai’s EBITDA has reached a pre-determined level. Depending on the exact level of EBITDA being generated by Q’sai, the total cost to euglena for buying out its two partners at that point could range from as low as JPY14.3bn to as high JPY23.9bn.
Goals of joint acquisition
For its part, euglena sees value in Q’sai stemming from its strong product development capabilities that has successfully turned out new hit products on both the health food and cosmetics fronts over the years, Q’sai’s large mail-order customer base of some 370,000 that it has built up over many years (most of which are seniors in their 60s), and Q’sai’s expertise in the mail order business, including its television commercial marketing expertise and call center operations.
Going forward, plans call for the AP Fund and Tokyo Century to lend their experience and expertise in implementing management reforms and post-merger integration to help Q’sai broaden its product lineup and improve its branding, while euglena lends its expertise in digital marketing to help Q’sai further expand its customer base to the “pre-senior” (45 and over) demographic.
Current status and outlook
In FY12/20, Q’sai reported sales of JPY24.6bn and EBITDA of JPY3.6bn. This well exceeded performance in euglena’s Healthcare business in FY09/20, when sales came to JPY12.9bn and adjusted EBITDA was JPY1.0bn. Of Q’sai’s sales, 39% (about JPY9.6bn) came from the all-in-one cosmetic product “cola・rich” and 38% (about JPY9.3bn) from “Hiza Support Collagen” (a functional food claiming to improve knee movement). Just 10% (about JPY2.5bn) of sales came from kale aojiru (green vegetable juice). Q’sai has a direct sales customer base of some 380,000 (monthly active customer count as of December 2020), most of whom are seniors. Direct sales account for 88% of the company’s sales. After the acquisition, the company will widen its target demographic to include younger consumers and expand its outreach to the 45 and over “pre-senior” demographic.
The company targets sales of at least JPY30bn and EBITDA of at least JPY5.0–6.0bn for Q’sai in FY12/25. While television advertising ahead of the acquisition was curbed in order to prioritize profit, the company plans from FY12/21 to increase spending on advertising and promotion (including online measures) to achieve renewed growth and promote measures to improve management. The company states these efforts will cause a temporary dip in EBITDA. The company’s targets for FY12/25 do not assume large-scale synergies from the acquisition, but rather are based on the assumption that reviews in the advertising investment strategy for existing products will lead to the number of new customers exceeding cancellations. The targets do not factor in sales of expenses for new products that may be launched moving forward. Within the mail-order industry, JPY30.0bn is seen as the maximum level of sales that a single-product mail-order company can achieve; in FY12/17, Q’sai achieved sales of JPY29.7bn and EBITDA of JPY5.2bn.
The company expects that an immediate benefit from the acquisition will be the ability to streamline the costs of functions it shares with Q’sai, to the tune of a few hundred million yen per year. Over the longer term, euglena expects to be able to offer Q’sai its expertise in digital and multichannel marketing, while benefiting from access to Q’sai’s production line.
Business, market, and value chain
Business overview
With mass culture technology for the Euglena gracilis microalga at its core, the company engages in diverse R&D activities related to Euglena. It applies these research results to develop the Healthcare segment (production and sale of food and cosmetics containing Euglena) and the Energy and Environment segment (aiming to create a biofuel business).The company defines business domains differently from business segments (Healthcare, Energy and Environment) reported in financial statements. There are three business domains: advanced investment (biofuel business, bioinformatics business), healthcare, and social business. The Healthcare segment includes the healthcare business, bioinformatics business, and social business while the Energy and Environment segment includes biofuel business. The company explained that it established business domains separately from the reported business segments to help investors better understand the movement of cash flow within the company and the significance of advanced investment. The company notes cash flow generated by the healthcare business domain is invested into advanced investment and social business domains to develop future businesses that will then return brand value to the healthcare business domain.
The advanced investment domain is expected to become a new pillar of earnings growth supported by investment of cash flow generated by the healthcare business domain. The company aims to provide concrete solutions to climate change (covering sustainable development goals [SDGs] 7 and 13) through the biofuel business and solutions for lifelong health (SDG 3) through the bioinformatics business. The company reported an adjusted EBITDA of -JPY870mn in FY09/20. Income was comprised of JPY220mn in sales and JPY140mn in subsidies.
The healthcare domain is the pillar of group earnings and generates resources for investment into other areas. The policy is to maintain advertising expenses within the scope of adjusted EBITDA growth. The company looks to facilitate lifelong health (SDGs 3 and 12). In FY09/20, adjusted EBITDA was JPY1bn and sales were JPY12.9bn. Note: This commentary does not include the impact of the Q'sai acquisition (discussed later).
The objectives of the social business domain are advancing commercialization and boosting brand awareness. It aims to eliminate malnutrition in developing countries (SDGs 1 and 2). In FY09/20, adjusted EBITDA was -JPY80mn. Income was comprised of JPY40mn in sales and JPY110mn in subsidies.
Corporate and other businesses generated adjusted EBITDA of JPY790mn in FY09/20. Income was JPY200mn in sales.
What is Euglena?
Euglena gracilis is a type of microalga, as are Spirulina and Chlorella. Measuring 0.05mm in diameter, Euglena is classified as both plant and animal. Positioned at the bottom of the food chain pyramid, Euglena is thought to have been on the planet since ancient times. Able to take in water-based organic and inorganic substances, Euglena contains both phytonutrient and animal nutrients and generates lipids. Like plants they produce nutrients through photosynthesis and absorb CO2, so are effective in fighting global warming. Like animal cells, Euglena cells do not have walls, so are easier to digest than plants. They also contain a unique dietary fiber, Paramylon. There are various types of Euglena, including those that can be used in food and those that can be used in biofuel with high oil ratios.
History of business development
Biotech company harnessing original mass culture technology to develop range of applications for microalga Euglena gracilis
It harnesses outdoor mass culture technology for the microalga Euglena gracilis, from which the company name is derived. A biotechnology company originating at the University of Tokyo, euglena is cultivating a variety of uses for the microalga, including functional foods, cosmetics, animal feed, and fuel. In December 2005 it became the first company in the world to succeed in the outdoor mass culturing of Euglena. In the mainstay Healthcare segment, the company focuses on the production and sale of functional foods and cosmetics. Over the medium term, the company intends to produce and supply biodiesel and aviation biofuel for commercial use in the Energy and Environment segment. The company was founded to help solve the global nutrition challenges, sparked by the malnutrition seen in Bangladesh.
First to succeed in large-scale outdoor culture of Euglena; entered the health food market via the Healthcare segment
The company was established in August 2005, but efforts to commercialize products using Euglena began before then, in 2000. The founders secured outdoor culture pools and utilized the results of microalga research conducted mainly at the University of Tokyo. These efforts led to the world’s first successful outdoor mass culturing of Euglena for use in food on December 16, 2005. In 2006 the company launched “euglena v22” supplements and two other products in the health food market in 2006, and began OEM supply on the back of a capital tie-up with ITOCHU Corporation (TSE: 8001) in May 2008, a foothold for the Healthcare segment.
Expand Euglena product lineup, starting with higher selling price per kg
The company formulated the “five F's of biomass” (see the following table), which describe its strategy for introducing Euglena products: starting with products with high unit price by weight (selling price per kilogram). While reducing production costs, euglena expanded its product lineup from functional foods to highly functional cosmetics and general foods. It further lowered costs, enhanced its level of recognition and trustworthiness by listing on TSE Mothers on December 20, 2012, and commenced full-fledged direct-to-consumer (B2C) sales.