euglena 2931
ユーグレナ
Recent Updates
2022-05-16
2022-03-22
2022-02-14
Get in touch
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 Co., Ltd. harnesses outdoor mass culture technology for the microalga Euglena gracilis (“Euglena”) in the development of functional foods, cosmetics, animal feed, and fuel. In its mainstay Healthcare business, the company mainly manufactures and sells functional foods and cosmetics, but in the medium term in aims to commercialize biodiesel fuel, aviation biofuel, and other products in the Energy and Environment business, which has a biofuel pilot plant in operation in a pre-commercial phase. Accordingly, almost all sales are generated by the Healthcare business, which also creates cash flow for investment in the Energy and Environment business. In FY12/21, sales amounted to JPY34.4bn, operating loss was JPY6.6bn, and adjusted EBITDA was JPY1.4bn. Straightforward YoY comparisons are not possible in part because FY12/21 was an irregular 15-month accounting period and in part because the company acquired Q'sai Co., Ltd. during this period.
Euglena is considered an alga like kelp and wakame, but it grows to just 0.05mm and is a unique organism classified as both plant and animal. Located at the bottom of the food chain, it has supported life on Earth since ancient times. Being capable of taking in both organic and inorganic substances contained in the water in which it lives, Euglena has nutrients typically found in both plants and animals, even producing lipids internally. Other advantages of Euglena include: 1) as a plant, it produces nutrients through photosynthesis and absorbs carbon dioxide, making it effective in combating global warming; 2) as with animal cells, it has no cell walls, making it easier to digest than plant matter; and 3) it contains a unique component, Paramylon, a type of dietary fiber that is highly oil absorbent and digestion-resistant. There are various types of Euglena, including those suitable for use in food products and those containing much lipids and are suitable to be used in biofuel. In December 2005, the company was the first in the world to succeed in outdoor mass culturing of food-use Euglena, and since then has been developing businesses mainly around products based on Euglena.
Healthcare segment: Through its Healthcare segment, the company has developed and sold 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. Additionally, the company made Q'sai, a direct sales retailer dealing in health foods and cosmetics, a consolidated subsidiary (with a 49% stake), reflecting Q'sai's earnings in its income statement from Q4 FY12/21. As of Q5 FY12/21, approximately 60% of the company's sales were generated through Q'sai, while the remaining 40% stemmed from other businesses.
Energy and Environment segment: The company estimates that the global market for aviation biofuel will expand to JPY1tn by 2025 while the biodiesel fuel market increases to JPY7.5tn. Accordingly, the company has indicated that it intends to pursue full-scale commercialization of its biofuel production. The company launched pilot operations at its pilot plant in spring 2019, and the plant remained in operations as of 2022. However, the company does not expect its commercial plant to be complete until 2025, even if operations at the pilot plant progress smoothly. 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 capital investment for the pilot plant (approximately JPY6.4bn) under R&D, there will be a cash outflow of over JPY500mn per annum if various subsidies are not considered. As of February 2022, the primary raw material used to produce the company's biofuel was economically advantageous waste cooking oil, and the company was using euglena-based materials for pilot biofuel production.
Earnings potential of the commercial plant: At its year-end results briefing for FY12/21, the company stated that the commercial plant it plans to complete in 2025 has an earnings potential of JPY50.0bn in sales and JPY10.0bn in adjusted EBITDA. In calculating potential sales, the company assumed a biofuel price of JPY200 per liter and a portion of the plant's annual production volume that corresponds to its equity in the plant (250,000kl). The actual price of biofuel in early February 2022 was JPY295/ per litter. Adjusted EBITDA was estimated assuming an EBITDA margin of 20% or above.
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.
Trends and outlook
FY12/21 results (15-month period): euglena reported full-year FY12/21 sales of JPY34.4bn, operating loss of JPY6.6bn, recurring loss of JPY6.4bn, net loss attributable to owners of the parent of JPY5.0bn, and adjusted EBITDA of JPY1.4bn.
Since FY12/21 was an irregular 15-month accounting period, simple YoY comparisons are not possible. Sales in Q5 were in line with the company's expectations, remaining flat versus Q4. Q'sai's results were included in the income statement from Q4. The operating loss factored in JPY4.8bn in expenses due to inventory step-ups following the consolidation of Q'sai. Adjusted EBITDA in Q5 was lower than that in Q4 due to upfront expenditures in the Healthcare segment, but it was above the revised forecast as the company optimized advertising spending. Consequently, adjusted EBITDA for the full year was JPY1.4bn, exceeding the company's revised forecast of JPY650mn.
FY12/22 company forecast: The company's full-year FY12/22 earnings forecast calls for sales of JPY48.0bn and adjusted EBITDA of JPY2.1bn. FY12/21 was an irregular 15-month accounting period, and the company also acquired Q'sai during the period, making simple YoY comparisons impossible. For the Healthcare segment, the company forecasts record-high sales owing to the net increase in regular purchase customers in FY12/21, investments in digital marketing and branding, the strengthening of multichannel marketing initiatives, and full-year contributions from Q'sai, which was made a consolidated subsidiary in FY12/21. In the Energy and Environment segment, the company expects to remain in the red due to the operation of the pilot plant and the continuation of large-scale Euglena culture verification testing, as well as efforts to build a plant for the commercial production of biodiesel and aviation biofuel. The company expects to receive subsidy income for its aviation biofuel production verification testing and overseas verification testing of biofuel-use microalgae cultures.
Medium-term outlook: At its FY12/21 results briefing session, euglena stated that it would aim for three consecutive fiscal years of growth through FY12/23 and sales of around JPY100bn from FY12/26 onward (see note below). The company expects sales of JPY48.0bn in FY12/22 and aims for sales growth of over 10% in FY12/23 as well, driven by continued growth in the Healthcare segment and full-year contributions from Q'sai. The company also expects adjusted EBITDA to grow continuously over the next three years to FY12/23. It aims to achieve sales of around JPY100bn in FY12/26 and beyond through sustainable growth of the Healthcare segment and the commercialization of the biofuel business.
Strengths and weaknesses
Shared Research sees the company’s strengths as: 1) high market share of Euglena and expertise in its cultivation, 2) the many diverse applications of Euglena, and 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) continuing cash outflows given the need for operating expenses of over JPY500mn each year in the Energy and Environment segment until product commercialization can be achieved, 2) necessity for maintaining high growth expectations in order to raise additional investment capital for Q'sai from capital markets, and 3) heavy reliance on Euglena to drive sales despite the material having low consumer recognition.
Key financial data
Note: EBITDA (adjusted) is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation + cost of sales related to inventory step-up for acquisition accounting. Depreciation includes depreciation under R&D expenses.
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.
Q1 FY12/22 results
Results overview
Q1 FY12/22 results: euglena reported Q1 FY12/22 sales of JPY10.8bn, operating loss of JPY727mn, recurring profit of JPY81mn, net income attributable to owners of the parent of JPY40mn, and adjusted EBITDA of JPY1.6bn. Since FY12/21 was an irregular 15-month accounting period, simple YoY comparisons are not possible. Q'sai's results were included in the income statement from Q4 FY12/21 (July–September 2021).
FY12/22 company forecast: The company maintained its initial forecast. It said that results were tracking largely as expected, despite sales lagging slightly. It plans to expand advertising from Q2 onward in the Healthcare segment in a bid to meet its full-year target. Adjusted EBITDA was 74.0% of the full-year forecast, as subsidy income was concentrated in March owing to seasonal reasons. For further details, including the assumptions that went into these forecasts, see the Company forecast for FY12/22 section later in this report.
Breakdown of results by segment
The company previously had two reporting segments: the Healthcare segment and Energy and Environment segment. However, from Q1 FY12/22 it changed these due to the difficulty in classifying the business of subsidiaries along these lines and the increasing number of activities the company is involved in. Following is a year-on-year comparison based on the new classifications.
Main changes: Business activities in the areas of agri-tech (agriculture and aquaculture products) and bioinformatics, previously included in Healthcare, and social business were transferred to Other businesses, as were advanced technology research business activities previously included in Energy and Environment. The company also changed the name of the Energy and Environment segment to the Biofuels segment.
In order to better assess operating results of individual reporting segments, incidental M&A expenses are no longer allocated to individual segments, but rather recorded as companywide expenses in segment income adjustment.
Healthcare segment
In Q1 FY12/22, the Healthcare segment reported sales of JPY10.1bn (+167.8% YoY) and segment loss of JPY129mn (versus profit of JPY175mn in Q1 FY12/21). The segment loss included expenses of JPY783mn due to stepping-up of inventory and JPY457mn in intangible assets and goodwill amortization resulting from purchase price allocation following the consolidation of Q'sai.
The company constrained advertising spending in light of worsening advertising performance. Demand for dietary products declined for seasonal reasons. As a result, sales, primarily direct sales, fell versus Q5 FY12/21.
Biofuels segment
In Q1 FY12/22, the Biofuels segment reported sales of JPY22mn (JPY2mn in Q1 FY12/21) and segment loss of JPY178mn (segment loss of JPY148mn).
Other businesses
In Q1 FY12/22, the Other businesses reported sales of JPY677mn (JPY128mn in Q1 FY12/21) and a segment loss of JPY48mn (segment loss of JPY68mn).
Company forecast for FY12/22
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.
Initial company forecast (released February 10, 2022)
The company's full-year FY12/22 forecast calls for JPY48.0bn in sales and JPY2.1bn in adjusted EBITDA. Simple YoY comparison is not possible since FY12/21 was an irregular 15-month period, and the company acquired Q'sai during the period.
The company has begun disclosing adjusted EBITDA in addition to sales to indicate cash flow generation and promote the shift to cash flow-oriented management. Adjusted EBITDA is calculated as EBITDA (operating profit + goodwill amortization and depreciation) + subsidy income + stock-based compensation + the impact of inventory step-ups. The company does not disclose forecasts for other profit items, such as operating profit, nor does it disclose forecasts by segment.
Healthcare segment
The company forecasts record-high Healthcare segment sales owed to the net increase in regular purchase customers in FY12/21, investments in digital marketing and branding, the strengthening of multichannel marketing initiatives, and full-year contributions from Q'sai, which was made a consolidated subsidiary in FY12/21. The company has not disclosed a detailed breakdown of its forecast for sales in the Healthcare segment. However, euglena has stated that it expects an increase in sales generated through both Q'sai and non-Q'sai businesses.
Non-Q'sai businesses
In FY12/22, Q'sai will contribute to the company's consolidated results throughout the year and become an additional factor driving adjusted EBITDA. This additional boost to EBITDA can also be interpreted as an expansion of the company's investment capacity. In FY12/22, the company intends to increase its investment in advertising for businesses other than Q'sai in the Healthcare segment.
In addition to its launch of the CONC cosmetics brand in February, the company plans to launch a new sustainability-oriented cosmetics brand in FY12/22. The new brand will be rolled out gradually as the company adjusts product lines and advertising for the brand. Accordingly, the company anticipates it will incur precursory expenses for the new cosmetics brand in FY12/22.
Q'sai
LBO loans associated with Q'sai include financial covenants that limit advertising investment. Accordingly, the company has indicated that it will primarily invest in the digitalization of marketing efforts and its rebranding of Q'sai, which is aimed at shifting Q'sai away from its existing single-product mail-order model.
The operating loss in FY12/21 factored in JPY4.8bn in expenses related to inventory step-ups accompanying the consolidation of Q'sai. However, these expenses will be significantly smaller in FY12/22, and the company expects the remaining balance at end-FY12/21 of JPY1.9bn to be eliminated during FY12/22. These inventory step-ups will be expensed as inventory at the time of Q'sai's acquisition is eliminated. Accordingly, the company expects improvement in terms of operating profit/loss through 2H FY12/22. Note that expenses related to inventory step-ups do not affect adjusted EBITDA, as the affected amounts are added back when calculating adjusted EBITDA (as cost of sales related to inventory step-up for acquisition accounting).
Energy and Environment segment
The company expects the Energy and Environment segment to remain in the red due to the operation of the pilot plant and the continuation of large-scale Euglena culture verification testing, as well as efforts to build a plant for the commercial production of biodiesel and aviation biofuel. The company expects to receive subsidy income for its aviation biofuel production verification testing and overseas verification testing of biofuel-use algae cultures.
Historical company forecasts vs. results
Medium- to long-term outlook
At its FY12/21 results briefing session, euglena stated that it would aim for three consecutive fiscal years of growth through FY12/23 and sales of around JPY100bn from FY12/26 onward (see note below). The company expects sales of JPY48.0bn in FY12/22 and aims for sales growth of over 10% in FY12/23 as well, driven by continued growth in the Healthcare segment and full-year contributions from Q'sai. The company also expects adjusted EBITDA to grow continuously over the next three years to FY12/23. It aims to achieve sales of around JPY100bn in FY12/26 and beyond through sustainable growth of the Healthcare segment and the commercialization of the biofuel business.
Outlook for individual segments
Healthcare segment
In FY12/22, the company projects overall consolidated sales of JPY48.0bn, and is also aiming for sales growth of more than 10% in FY12/23. Presumably, these targets rest on the assumption of growth in the Healthcare segment. This presumption has been made because the company expects minimal contributions from the Energy and Environment segment, as the volume of biofuel that can be produced at the pilot plant is very limited.
Although the company will prioritize growth investments in FY12/22, it expects this investment to generate significant improvement in EBITDA margins during FY12/23. Despite anticipated expansion in advertising spending within its Healthcare segment in FY12/22, the company suggests that margins will improve in FY12/23 as a rise in its regular purchase customer count contributes to sales.
Growth strategy
FY09/19 was the first fiscal year euglena recorded a YoY decline in sales and missed its earnings targets. This is partly explained by worse-than-expected performance of the company’s strategy in the Healthcare business, which has become its primary source of earnings, due to (1) low awareness and use of Euglena, (2) lack of coordination between group companies, ingredients, and product brands, and (3) lopsided procurement channels and customer base.
Through its brand portfolio strategy, the company aims to achieve effective and sustainable growth by establishing several key brands and focusing its advertising investment on brands that perform the best. In both the food product and cosmetic categories, the company's brand portfolio will be expanded to include sustainable products, products that facilitate "aging well," and products that foster the creation of progressive markets. According to the company, its research has demonstrated a strong correlation between sustainability awareness and health awareness. Therefore, the company believes that the quantity and quality of its sustainability initiatives will be a source of competitive advantage and enable the company to distinguish itself from competitors in the healthcare field. Additionally, euglena aims to become a leader in the "well-aging" market, through which companies provide customers with products and services that facilitate better aging. With regard to products that foster the creation of progressive markets, euglena aims to cultivate additional new markets through the establishment of new products in the same vein as "C COFFEE."
Through its digital marketing strategy, the company is shifting away from offline marketing, which has historically been its primary focus, and toward digital marketing. The company believes that digitalization will be necessary if it hopes to reach consumers in their mid-20s to mid-40s, but it also projects that digitalization will become an increasingly important part of its approach toward consumers in their mid-40s to mid-60s over time.
Under its multi-channel strategy, the company aims to increase the ratio of sales it generates through channels other than direct sales (mail-order) channels, such as brick-and-mortar drugstores and supermarkets. The company has adopted this strategy because these channels are the most popular avenues through which consumers in their mid-20s to mid-40s purchase health products (dietary supplements). The company attributes the strength of major health product companies, such as FANCL Corp. (TSE1: 4921) and DHC Corporation (unlisted), to their adoption of multi-channel strategies.
These three strategies began to bear fruit in FY12/21, when the company observed an increase in its regular purchase customer count, had an online direct sales ratio of 50% (excluding impact from Q'sai), and expanded sales generated through non-direct sales channels. FY12/21 was an irregular 15-month fiscal year, but for the 12 months through Q4, excluding the impact of the acquisition of Q'sai, Healthcare segment sales surpassed sales recorded in FY09/18 to reach a record high. The company intends to continue implementing these three strategies in FY12/22 and later. It believes that these strategies will be particularly beneficial in the case of Q'sai because as of FY12/21, most of the latter's sales were generated through offline channels, and the company projects that it can generate growth in Q'sai's sales by leveraging its online marketing expertise.
Supplemental information regarding Q’sai Co., Ltd.
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.
Energy and Environment segment
Commercial plant schedule (outlook as of February 2022)
In October 2021, the company began basic preliminary engineering at the site where it plans to build its commercial plant. This basic preliminary engineering follows a previously conducted feasibility study and constitutes a stage of conceptual design that precedes the actual basic engineering stage. The number of planned construction sites has been narrowed down to two locations, and the company has lined up potential partners for both of them. As soon as agreements are reached with these potential partners, the company plans to start basic engineering and complete the commercial plant during 2025. Following the plant's completion, the company aims to launch full-scale operations in 2026. Based on its equity in the plant, the company expects its share of the plant's annual biofuel production volume in 2025 will amount to at least 250,000kl. By 2030, the company aims to raise this amount to at least 1mn kl.
Sales potential of commercial plant (outlook as of February 2022)
At its year-end results briefing for FY12/21, the company stated that it expects its commercial plant (slated for completion in 2025) to have the potential to generate JPY50.0bn in sales and adjusted EBITDA of JPY10.0bn. In calculating potential sales, the company assumed a biofuel price of JPY200 per liter and the plant's annual production volume corresponding to its equity in the plant of 250,000kl. Adjusted EBITDA was estimated assuming an EBITDA margin of 20% or higher.
In addition, competition surrounding the procurement of waste cooking oil, the primary raw material used to produce the company's biofuel, is intensifying due to growth in demand. However, based on information from the commercial plant plans of relevant companies that was available as of February 2022, euglena believes that the supply–demand gap surrounding biofuels will continue to persist in 2026 and later. Additionally, the company projects that biofuel will continue to be traded at a premium until this supply–demand gap is eliminated.
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, market, and value chain
Business overview
Business structure
The company harnesses outdoor mass culture technology for the microalga Euglena gracilis (“Euglena”) in the development of functional foods, cosmetics, animal feed, and fuel. In its mainstay Healthcare business, the company mainly manufactures and sells functional foods and cosmetics, but in the medium term in aims to commercialize biodiesel fuel, aviation biofuel, and other products in the Energy and Environment business, which has a biofuel pilot plant in operation in a pre-commercial phase. Accordingly, almost all sales are generated by the Healthcare business, which also creates cash flow for investment in the Energy and Environment business. In FY12/21, sales amounted to JPY34.4bn, operating loss was JPY6.6bn, and adjusted EBITDA was JPY1.4bn. Straightforward YoY comparisons are not possible in part because FY12/21 was an irregular 15-month accounting period and in part because the company acquired Q'sai Co., Ltd. during this period.
About Euglena
Euglena is considered an alga like kelp and wakame, but it grows to just 0.05mm and is a unique organism classified as both plant and animal. Located at the bottom of the food chain, it has supported life on Earth since ancient times. Being capable of taking in both organic and inorganic substances contained in the water in which it lives, Euglena can have nutrients typically found in both plants and animals, even producing lipids internally. Other advantages of Euglena include: 1) as a plant, it produces nutrients through photosynthesis and absorbs carbon dioxide, making it effective in combating global warming; 2) as with animal cells, it has no cell walls, making it easier to digest than plant matter; and 3) it contains a unique component, Paramylon, a type of dietary fiber that is highly oil absorbent and digestion-resistant. There are various types of Euglena, including those suitable for use in food products and those containing much lipids and are suitable for use as biofuel. In December 2005, the company was the first in the world to succeed in outdoor mass culturing of food-use Euglena, and since then has been developing businesses mainly around products based on Euglena.
Healthcare segment
In the 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. Further, it is developing overseas sales channels including in China. The company made Q'sai, a direct sales retailer dealing in health foods and cosmetics, a consolidated subsidiary (with a 49% stake), and began reflecting Q'sai's earnings in its income statement from Q4 FY12/21. As of Q5 FY12/21, approximately 60% of the company's sales were generated through Q'sai, while the remaining 40% stemmed from other businesses.
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. The company launched pilot operations at its pilot plant in spring 2019, and the plant remained in operations as of 2022. However, even if testing goes according to plan, the company expects a commercial plant will not be completed 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 capital expenditures for the pilot plant (JPY6.4bn) under R&D, there will be a cash outflow of over JPY500mn per annum if various subsidies are not considered. As of February 2022, the primary raw material used to produce the company's biofuel was economically advantageous waste cooking oil, and the company was using euglena-based materials for pilot biofuel production.
Sales potential of commercial plant
At its year-end results briefing for FY12/21, the company stated that it expects its commercial plant (slated for completion in 2025) to have the potential to generate JPY50.0bn in sales and adjusted EBITDA of JPY10.0bn. In calculating potential sales, the company assumed a biofuel price of JPY200 per liter and the plant's annual production volume corresponding to its equity in the plant of 250,000kl. Adjusted EBITDA was estimated assuming an EBITDA margin of 20% or higher.
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.
History of business development
Outdoor mass cultivation technology
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.
Entry into the health food market through 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.
Product lineup expansion
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.
Establish Healthcare segment base through OEM supply, shift toward a B2C sales business model
By expanding its OEM supply, euglena booked an operating profit in FY09/10 and succeeded in establishing an earnings base. However, the company transitioned from an OEM-based business model to its current model focusing on direct-to-consumer sales in FY09/13, because it felt OEM supply would make it difficult to control growth and brand image (on the assumption it would compete with direct-to-consumer sales) and in light of the company’s improved brand image following its Tokyo Stock Exchange listing. B2C sales in the Healthcare segment accounted for over 70% of segment sales in FY09/18. In tandem with this shift in business model, the company stepped up M&A activity. It has aimed to extend its value chain by bringing OEM clients into the euglena group so it can expand production bases and sales routes.
Strengthening branding
FY09/19 was the first fiscal year euglena recorded lower sales YoY and missed its earnings targets. This is partly explained by worse-than-expected performance of the company’s strategy in the Healthcare business, which has become its primary source of earnings due to (1) low awareness and use of Euglena, (2) lack of coordination between the company, ingredients and materials, and product brands, and (3) lopsided procurement channels and customer base. In response to these conditions, the company has implemented brand portfolio, digital marketing, and multi-channel strategies since FY09/20.
Efforts to produce and supply biofuel for commercial use
The company estimates the global market for aviation biofuel will expand from JPY1.0bn in 2018 to JPY1tn by 2025 while the biodiesel fuel market increases from JPY4.5tn in 2019 to JPY7.5tn. In FY09/19, the company constructed a pilot plant for the production of biofuel with an investment of roughly JPY6.4bn, and is conducting tests to achieve commercial production of aviation biofuel and biodiesel. The biofuel business’ pilot plant is operational as of 2021, but even if testing goes according to plan, euglena does not expect the commercial plant to be completed until 2025.
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.” Dispensing with its complex corporate philosophy (making people and the Earth healthy), vision, and slogan, euglena 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.
Consolidation of Q’sai
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 will 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 FY09/21 (with euglena holding a 49% stake). 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.
Healthcare segment
Strictly speaking, gross profit includes gross profit in the Energy and Environment business, however it is not considered here because almost all sales are derived from the healthcare business.