euglena / 2931 COVERAGE INITIATED ON: LAST UPDATE:

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1 euglena / 2931 COVERAGE INITIATED ON: LAST UPDATE: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 LAST UPDATE: INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Recent updates Highlights Trends and outlook Quarterly trends and results Full-year company forecast (initial estimates) Business development, medium- to long-term strategy Business, market, and value chain Business overview Strengths and weaknesses Historical performance Financial statements Income statement Balance sheet Cash flow statement Other information News and topics Corporate governance (as of December 216) Top management Dividend policy Shareholder composition Employees Profile /6

3 LAST UPDATE: Executive summary Corporate philosophy: making people and the Earth healthy The corporate philosophy of euglena is making people and the Earth healthy, harnessing outdoor mass cultivation technology for the microalgae Euglena gracilis ( Euglena ). As a biotechnology company originating at the University of Tokyo, euglena is cultivating various uses for the microalgae including functional foods, cosmetics, animal feed, and fuel. The microalgae 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 25 the company was the first in the world to succeed in outdoor mass culturing of food-use Euglena. In the mainstay Healthcare segment, the company produces and sells functional foods that make people healthy and cosmetics. Over the medium term, it intends to make the Earth healthy by commercializing diesel and aviation biofuel. The company was founded to solve the global nutrition problem, sparked by the malnutrition seen in Bangladesh. Short- to medium-term strategy euglena wants at least three cash flow pillars rooted in the Healthcare, Agriculture and Aquaculture Products, and Energy and Environment segments. It plans to invest the cash generated in new growth. It currently generates cash through OEM supply of Euglena products in the Healthcare segment but is beginning to generate cash flow through direct sales to consumers (B2C). euglena plans to use the cash generated from the Healthcare segment, a stable earnings base, to both grow the segment and invest in biofuel research and development over the medium term. In November 216, euglena announced two medium-term management targets for FY9/2: consolidated group sales of JPY3bn and the commercial production and supply of aviation and diesel biofuel made in Japan. Expanding B2C sales in the Healthcare segment As of FY9/17, almost all sales were from the Healthcare segment. The B2C sales business, a source of short-term growth, saw FY9/17 sales of JPY9.3bn and 21, regular customers. The company wants to expand this business to be on par with other health food companies (medium-term management targets are sales of JPY3bn (including JPY2bn in group B2C sales and 5, regular customers by FY9/2), and has invested aggressively in advertising to achieve this. In FY9/18 the company invested aggressively in direct sales cosmetics, to accelerate future growth. However, the company decided on a rapid policy change in 1H. This was because, although cost per order (CPO) results were in line with forecasts, the repeat rate fell below expectations and impacted lifetime value (LTV) and sales. The company planned to temporarily reduce upfront expenditure from 2H. In addition, the company aims to re-accelerate growth from FY9/19 by focusing on developing products to warrant investment in advertising expenses. Establishing the Agriculture and Aquaculture Products business In the Agriculture and Aquaculture Products segment, euglena aims to expand the Mungbean Project importing mung beans, which are used for growing bean sprouts, from Bangladesh and the prawn farming and feed research on Taketomi Island, Okinawa Prefecture. According to the company, the Mungbean Project contributes to Bangladesh s agricultural and economic development, and helps Japanese bean sprout producers reduce costs and mitigate risks of importing beans solely from China. euglena aims to expand into prawn farming through acquisitions, and transition from a B2B business model to one selling directly to consumers, as it has successfully done for health foods. The company believes that both the mung bean and prawn projects have the potential to generate several hundred million yen in cash. Aiming to establish a biofuel business euglena aims to produce and supply aviation biofuel for commercial flights by 22. It started construction of a pilot biofuel production plant on June 1, 217. It expects to complete construction on October 31, 218 and to begin operations in the first half of 219. The domestic jet fuel market is worth over JPY2bn, with hefty demand for reducing CO 2. The success of the biofuel business will depend on crude oil prices and whether euglena can lower production costs. The company has started testing a large-scale (1,sqm) microalgae cultivation pool utilizing paddy field creation techniques in advance of building a commercial plant, and is also looking to use Euglena residue (after the lipids have been extracted) for livestock and prawn feed, and has started joint research with Japan Agriculture Co-operative ZEN-NOH (National Federation of Agricultural Cooperative Associations). 3/6

4 LAST UPDATE: Key financial data Income statement FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales ,166 1,586 2,92 3,46 5,924 11,13 13,887 15, Healthcare ,164 1,581 2,87 3,39 5,98 11,93 13,877 Energy and Environment YoY % 34.2% 232.9% 58.7% 36.% 31.9% 45.6% 94.5% 87.4% 25.1% 8.% Healthcare % 34.2% 232.9% 58.4% 35.9% 32.% 45.6% 94.4% 87.8% 25.1% Energy and Environment % 1.% 45.7% 136.% -39.3% 1.7% Gross profit ,144 1,849 4,19 8,137 1,29 GPM 37.6% 54.1% 5.3% 53.3% 55.7% 54.3% 54.7% 6.7% 67.8% 73.3% 73.5% SG&A expenses ,76 3,543 7,443 9,258 YoY % -8.1% 67.% 48.6% 55.7% 75.2% 76.3% 17.6% 11.1% 24.4% SG&A ratio 98.6% 94.7% 64.8% 32.5% 3.4% 34.8% 46.3% 56.% 59.8% 67.% 66.7% Operating profit ,8 Healthcare ,122 1,577 1,92 Energy and Environment Adjustments YoY % 4.5% -42.7% -19.4% 234.7% 45.7% 37.% Healthcare % 15.4% -7.5% 2.2% 7.6% 4.5% 2.6% OPM -6.9% -4.6% -14.5% 2.8% 25.3% 19.4% 8.4% 4.7% 8.% 6.3% 6.8% -12.% Healthcare -6.9% -4.6% -14.5% 41.4% 44.% 37.3% 26.2% 21.6% 18.9% 14.2% 13.7% Energy and Environment % -7.1% -5.8% -5.4% -5.5% -1.9% -1.8% -2.2% Non-operating income (expenses) Financial income (expenses) Foreign exchange gains (losses) Other non-operating income (expenses) Recurring profit ,27-1,5 YoY % 3.6% -18.7% -27.7% 279.3% 3.% 27.8% RPM -61.3% -39.7% -13.8% 24.9% 26.9% 2.5% 12.7% 6.3% 12.3% 8.5% 8.7% -1.% Extraordinary gains (losses) Implied tax rate % 34.6% 39.3% 17.8% 38.4% 38.6% 27.6% 35.2% Non-controlling interest Net income attrib. to parent company shareholders ,65 YoY % -3.6% 144.4% -75.5% 297.4% 43.4% 16.7% Net margin -63.7% -41.% -12.4% 24.9% 17.6% 12.5% 23.1% 3.9% 7.9% 6.1% 5.7% -11.% Capital expenditures Depreciation Amortization of goodwill Per share data FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Shares issued (year end; mn) Treasury stock Shares outstanding (ex. treasury stock) Shares outstanding (average; mn) BPS (JPY) EPS (JPY) DPS (JPY) Balance sheet FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Current assets ,222 1,199 2,472 7,314 8,65 11,355 1,641 Cash and cash equivalents ,846 6,346 6,794 9,24 7,353 Accounts receivable ,59 1,26 Inventories ,562 Allowance for doubtful accounts Others Tangible fixed assets ,624 2,472 6,25 Intangible fixed assets ,175 1,238 1,627 Investments and other assets ,53 3, Investment securities ,982 2, Others Total assets ,236 1,373 3,286 11,28 14,523 15,526 18,858 Current liabilities ,393 1,612 1,74 Accounts payable Short-term debt Accounts payable-other; accrued expenses Income taxes payable Other current liabilities Noncurrent liabilities ,498 Long-term debt ,123 Net assets ,169 2,569 1,445 12,71 13,423 15,655 Shareholders' equity ,169 2,569 1,441 12,662 13,48 15,638 Treasury stock Valuation and translation adjustments Minority interests Total liabilities and capital ,236 1,373 3,286 11,28 14,523 15,526 18,858 Cash flow statement FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Cash flows from operating activities Cash flows from investing activities ,177 2, ,18 Cash flows from financing activities , ,296 Financial ratios FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Interest-bearing debt ,288 Net cash ,625 6,324 6,469 9,132 6,65 ROA (RP-based) % -2.4% 43.9% 33.% 25.% 11.4% 2.6% 5.6% 6.3% 7.% ROE % -22.7% 52.5% 26.5% 18.5% 25.8% 1.8% 4.1% 5.2% 5.4% Equity ratio 83.8% 89.% 74.2% 85.9% 78.6% 85.1% 78.2% 92.5% 87.2% 86.3% 82.9% 4/6

5 LAST UPDATE: Recent updates Highlights On August 7, 218, euglena Co., Ltd announced earnings results for Q3 FY9/18 (see the results section for details). On June 18, 218, Shared Research updated the report following interviews with the company. On May 11, 218, the company announced earnings results for 1H FY9/18 and a revision of its full-year earnings forecasts. For previous releases and developments, please refer to the News and topics section. 5/6

6 LAST UPDATE: Trends and outlook Quarterly trends and results Income statement FY9/16 FY9/17 FY9/18 FY9/16 FY9/17 FY9/18 FY9/16 FY9/17 FY9/18 YoY change Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Cml. Q3 Cml. Q3 Cml. Q3 Cons. Cons. Est. Q2 Q3 Cml. Q3 Sales 2,34 2,89 2,952 2,921 3,273 3,355 3,63 3,655 3,45 3,729 3,957 8,182 1,232 11,136 11,13 13,887 15, Healthcare 2,34 2,888 2,952 2,914 3,273 3,35 3,63 3,65 3,442 3,729 3,957 8,18 1,227 11,129 11,93 13, Energy and Environment Group B2C sales 1,447 1,751 1,748 1,889 2,115 2,366 2,375 2,46 2,445 2,752 2,881 4,947 6,856 8,78 6,836 9, ,222 Group B2B sales ,291 1,258 1,248 1,699 1, OEM, ingredients, and overseas ,622 1,867 1,562 2,41 2, Other YoY 11.4% 19.4% 86.6% 62.3% 39.9% 16.1% 22.1% 25.1% 5.4% 11.2% 9.8% 98.4% 25.1% 8.8% 87.4% 25.1% 8.% Healthcare 11.4% 11.5% 86.6% 62.6% 39.9% 16.% 22.1% 25.3% 5.2% 11.3% 9.8% 98.7% 25.% 8.8% 87.8% 25.1% Group B2C sales 23.8% 21.1% 165.2% 13.8% 46.1% 35.1% 35.9% 27.4% 15.6% 16.3% 21.3% 188.1% 38.6% 17.8% 158.5% 35.5% Group B2B sales 176.1% 137.6% 45.8% 18.1% -6.4% -2.3% 1.1% 14.3% -5.1% -1.5% 3.9% 13.9% -2.5% -.8% 74.1% 1.4% OEM, ingredients, and overseas -18.3% 6.7% -1.2% -17.1% 78.% -14.9% 3.1% 43.4% -24.6% -6.7% -14.9% -3.6% 15.1% -16.3% -6.7% 2.9% Other 9.9% 167.6% 416.7% 73.2% -66.7% -47.3% 1.1% -1.9% 335.7% 64.6% -42.% 246.7% -21.6% -.4% 355.2% -17.6% YoY 61.9% 6.6% 59.2% 64.7% 64.6% 7.5% 65.9% 65.8% 7.9% 73.8% 72.8% 6.5% 67.% 72.5% 61.6% 66.7% +6.3pp +3.3pp +6.9pp +5.5pp CoGS , ,78 2,19 2,641 2,861 2,966 3, CoGS-to-sales ratio 27.9% 25.7% 26.9% 26.6% 24.9% 26.1% 26.3% 28.4% 24.4% 25.4% 27.2% 26.8% 25.8% 25.7% 26.7% 26.5% -.6pp -.7pp +.9pp -.1pp Gross profit 1,687 2,147 2,158 2,145 2,457 2,479 2,655 2,618 2,69 2,784 2,879 5,992 7,591 8,271 8,137 1, GPM 72.1% 74.3% 73.1% 73.4% 75.1% 73.9% 73.7% 71.6% 75.6% 74.6% 72.8% 73.2% 74.2% 74.3% 73.3% 73.5% +.6pp +.7pp -.9pp +.1pp SG&A expenses 1,656 1,724 1,87 2,257 2,178 2,48 2,512 2,88 3,39 3,465 3,284 5,186 7,17 9,787 7,443 9, ,617 Selling expenses 1,179 1,262 1,268 1,681 1,568 1,855 1,779 1,33 2,188 2,519 2,122 3,79 5,22 6,829 5,39 6, ,627 Advertising expenses , , ,394 1,516 1,79 2,148 3,26 3,989 3,219 3, Other selling expenses 794 1,3 1,43 1,561 2,176 2,84 2,171 2, Personnel expenses , , Administrative expenses , , R&D expenses YoY 131.6% 113.4% 98.2% 13.5% 31.6% 43.9% 39.% -7.5% 39.5% 39.7% 3.7% 113.1% 38.3% 36.5% 11.1% 24.4% Selling expenses 164.9% 145.% 119.8% 135.8% 33.% 47.% 4.3% -2.9% 39.5% 35.8% 19.3% 141.3% 4.3% 31.3% 139.6% 21.2% Advertising expenses 198.3% 192.3% 123.7% 173.2% 35.9% 46.9% 39.9% -4.8% 42.1% 43.6% 9.1% 167.2% 4.9% 31.8% 169.1% 13.7% Other selling expenses 125.1% 11.9% 114.9% 9.% 28.4% 47.1% 4.8% 14.1% 35.3% 25.5% 32.% 113.% 39.4% 3.5% 16.% 32.2% Personnel expenses 78.2% 84.2% 62.8% 4.5% 4.8% 49.% 46.9% 44.4% 46.7% 37.1% 34.7% 73.9% 45.7% 39.% 62.8% 45.6% Administrative expenses 8.2% 73.7% 66.7% 53.4% 14.4% 19.8% 28.8% 3.4% 33.1% 75.7% 9.2% 73.4% 21.% 66.7% 67.1% 23.7% R&D expenses 63.9% 1.7% 47.% 42.9% 32.8% 33.2% 22.% 5.5% 36.1% 43.9% 6.5% 31.7% 28.8% 47.6% 35.% 21.7% SG&A ratio (% of sales) 7.8% 59.6% 61.2% 77.3% 66.6% 73.9% 69.7% 57.1% 88.1% 92.9% 83.% 63.4% 7.1% 87.9% 67.% 66.7% +21.5pp +19.pp +13.3pp +17.8pp Selling expenses 5.4% 43.7% 43.% 57.5% 47.9% 55.3% 49.4% 36.4% 63.4% 67.5% 53.6% 45.3% 5.8% 61.3% 48.5% 47.% +15.5pp +12.3pp +4.3pp +1.5pp Advertising expenses 3.9% 24.9% 24.% 36.7% 3.% 31.5% 27.4% 17.3% 4.4% 4.6% 27.3% 26.3% 29.6% 35.8% 29.% 26.4% +1.4pp +9.2pp -.2pp +6.2pp Other selling expenses 19.5% 18.8% 19.% 2.9% 17.9% 23.8% 21.9% 19.% 23.% 26.9% 26.4% 19.1% 21.3% 25.5% 19.6% 2.7% +5.1pp +3.1pp +4.4pp +4.2pp Personnel expenses 8.4% 7.3% 8.2% 8.3% 8.4% 9.3% 9.8% 9.6% 11.7% 11.5% 12.1% 7.9% 9.2% 11.8% 8.% 9.3% +3.3pp +2.2pp +2.2pp +2.6pp Administrative expenses 8.9% 6.% 6.9% 7.7% 7.3% 6.1% 7.3% 8.% 9.2% 9.7% 12.7% 7.2% 6.9% 1.6% 7.3% 7.2% +1.9pp +3.6pp +5.4pp +3.7pp R&D expenses 3.1% 2.8% 3.2% 3.7% 2.9% 3.2% 3.2% 3.1% 3.7% 4.1% 4.6% 3.% 3.1% 4.2% 3.2% 3.1% +.8pp +.9pp +1.5pp +1.1pp Operating profit , , ,937 Healthcare ,459 1,18-5 1,577 1, ,68 Energy and Environment Adjustments YoY -48.2% 227.1% 161.4% - 8.5% % % -47.8% % 37.% Healthcare 11.8% 17.% 19.3% -61.9% 121.% -78.8% -33.9% 571.3% % -24.% % 4.5% 2.6% OPM 1.3% 14.6% 11.9% -3.8% 8.5% -.% 4.% 14.5% -12.5% -18.3% -1.2% 9.8% 4.1% -13.6% 6.3% 6.8% -12.% -21.pp -18.2pp -14.2pp -17.7pp Healthcare 11.5% 21.% 19.8% 4.1% 18.1% 3.8% 1.7% 21.8% -3.6% -8.8% -1.2% 17.8% 1.8% -4.5% 14.2% 13.7% -21.7pp -12.6pp -12.pp -15.3pp Energy and Environment -2.% -1.6% -2.3% -1.3% -2.5% -1.5% -2.1% -2.5% -2.8% -3.7% -3.% -2.% -2.1% -3.2% -1.8% -2.2% -.2pp -2.2pp -.8pp -1.1pp Non-operating income Financial income Subsidiary income Gains on foreign exchange Equity in income of affiliates Other non-operating income Recurring profit , , ,27-1, ,875 YoY -6.9% 12.6% 136.4% % -69.2% -64.5% % -39.7% - 3.% 27.8% RPM 3.2% 16.2% 16.1% -2.6% 9.2% 4.3% 4.7% 16.2% -1.6% -14.3% -9.2% 12.5% 6.% -11.3% 8.5% 8.7% -1.% -19.8pp -18.6pp -13.9pp -17.3pp Extraordinary gains (losses) Pre-tax profit , , , ,873 Income taxes Implied tax rate -47.8% 33.9% 34.3% 31.9% 3.4% 37.2% 28.1% 39.1% -27.9% -.8% -2.9% 28.% 31.4% -9.3% 27.6% 35.2% Non-controlling interests Net income attributable to parent company shareholders , , ,79 YoY 15.3% 126.9% 153.9% % -71.1% -61.9% % -43.5% % 16.7% Net margin 4.7% 11.% 11.% -2.7% 6.4% 2.7% 3.4% 9.9% -13.4% -14.2% -9.4% 9.2% 4.1% -12.3% 6.1% 5.7% -19.8pp -17.pp -12.8pp -16.4pp EPS YoY 96.7% 12.1% 147.4% % -71.3% -62.1% % -43.9% % 599.9% EBITDA , ,14 1, ,733 YoY 23.9% 22.2% 138.1% % -76.6% -38.% % -27.2% % 39.3% EBITDA margin 4.3% 17.1% 14.6% -.4% 11.1% 3.5% 7.4% 18.2% -8.3% -13.8% -4.6% 12.5% 7.3% -8.9% 9.1% 1.2% -19.5pp -17.3pp -12.pp -16.2pp EBITDA + Advertising expenses 822 1,214 1,138 1,59 1,345 1,172 1,256 1,3 1,16 1, 897 3,174 3,773 3,3 4,233 5, , YoY 154.7% 196.3% 129.% 72.7% 63.7% -3.5% 1.4% 22.7% -17.8% -14.6% -28.6% % -2.4% 129.7% 19.9% Profit margin 35.1% 42.% 38.5% 36.3% 41.1% 34.9% 34.9% 35.6% 32.1% 26.8% 22.7% 38.8% 36.9% 27.% 38.1% 36.5% pp -1.9pp -9.9pp R&D expenses Depreciation Healthcare Energy and Environment Adjustments Goodwill amortization Healthcare Inventories ,113 1,348 1,613 1,562 1,763 2,16 2, ,613 2, , YoY 91.1% 73.9% 28.7% 5.6% 46.7% 56.6% 75.3% 83.3% 58.3% 49.6% 31.8% 28.7% 75.3% 31.8% 5.6% 83.3% Days in inventory Merchandise and finished goods ,18 1,17 1,181 1,355 1, ,18 1, , Work in process Raw materials and supplies Number of direct sales customers (') YoY 21.1% 181.4% 158.7% 59.9% 51.9% 39.8% 44.% 36.3% 35.7% 43.2% 46.% 158.7% 44.% 46.% 59.9% 36.3% QoQ change Monthly direct sales / Regular customers (avg.) 4,616 4,699 4,241 4,298 4,337 4,369 4,6 3,912 3,688 3,64 3, YoY -15.7% 3.9% -1.6% 4.4% -6.1% -7.% -4.3% -9.% -15.% -16.7% -16.1% QoQ change Note: Quarterly figures are calculated by subtracting cumulative figures for one quarter from those of the previous quarter. (For example, Q3 figures are obtained by subtracting 1H figures from cumulative Q3 figures.) Seasonal trend: Prawn farming sales, which are booked under other businesses, tend to increase in Q3 (January to March) and Q4 (April to June). Domestic mung bean sales fluctuate depending on the sorting period and import date, as mung beans are imported once a year from Bangladesh after sorting. 6/6

7 LAST UPDATE: Q3 FY9/18 earnings (out August 7, 218) Q3: Achieved a reduction in operating losses while increasing sales compared to Q2. The number of customers totaled 292, (+2, from Q2), steadily increasing towards the full-year target of 3, Q4: the company aims to bring EBITDA (loss of JPY182mn in Q3) and the Healthcare segment (losses of JPY49mn in Q3) into the black 2H: Euglena will put more resources toward the development of new products and increasing repeat purchases by regular customers, with the aim of getting LTV above CPO. Development of new products: Euglena aims to re-accelerate growth in the direct sales business from FY9/19 by developing attractive new products that will stimulate customer demand. Increasing repeat purchases: The company aims to increase LTV by strengthening initiatives to increase repeat purchases and improve cross-selling. Plan for domestic biofuel production: Preparations under way to get a system in place in preparation to start operation of a pilot production plant that is scheduled to be completed in October 218 Commenced a project (using the pilot plant) with Hirojiren aimed at expanding the use of biofuel (collecting used tempura oil, etc.) FY9/19: it is expected that a consolidated operating loss will arise from the lump-sum amortization of JPY5.8bn construction expenses for a pilot plant, built as part of domestic biofuel plans, upon delivery in. Hirojiren: Hiroshima Council for the Promotion of Collaboration between Government, Academia and the Automobile Industry, established in June 215. The organization promotes the revitalization of the automobile industry in Hiroshima. In June 218 the organization commenced the Hiroshima Your Green Fuel Project together with the company, aiming to build a local production for local consumption model for automobile fuel and expand the use of biofuel. Performance by quarter 4 Sales Gross profit Operating profit GPM (right axis) % 68% 7% 72% 74% 76% 73% 73% 75% 75% 74% 74% 72% 73% 3 66% 65% % % % 54% 53% 55% 57% 59% 59% 2 53% 55% (JPYbn) FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 8% 7% 6% 5% 4% 3% Number of group direct sales (B2C) regular customers (left) and group B2C sales (right) (') FY9/14 No. of regular customers: Chlorella Supply No. of regular customers: ex. Chlorella Supply QoQ change (right axis) FY9/ FY9/16 FY9/17 FY9/ (') ,5 +5 2, ,5 +2 1, FY9/14 Group B2C sales Selling expenses QoQ change (right axis) FY9/15 2, ,366 2,46 2,445 2,115 1,751 1,748 1,889 1,447 FY9/ FY9/ ,752 2, FY9/ /6

8 LAST UPDATE: Advertising expenses, operating profit, and EBITDA 2, 1,5 1, 5-5 EBITDA Advertising expenses EBITDA + Advertising expenses ,214 1,1381,59 1,345 1,172 1,2561,3 1,16 1, 897 2, 1,5 1, 5-5 Operating profit EBITDA + Advertising expenses Advertising expenses 1,142 1,59 1,2591,55 1,132 1, , FY9/14 FY9/15 FY9/16 FY9/17 FY9/18-1, FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Overview of results In Q3 FY9/18, the company posted sales of JPY4.bn (+9.8% YoY) and operating loss of JPY45mn (-JPY548mn YoY). Although the company did post an operating loss, the company reduced the loss in comparison to Q2 (operating loss of JPY681mn) by cutting advertising expenses. The company is aiming to bring EBITDA (operating profit/loss before depreciation and amortization; loss of JPY182mn in Q3) and Healthcare segment operating losses (losses of JPY49mn) into the black in Q4. Cumulative Q3 sales of JPY11.1bn are considered to be on target, at 74.2% of full-year target JPY15.bn. Cumulative Q3 operating loss of JPY1.5bn is considered to be the result of trends in marketing expenses such as advertising expenses, but is within expectations when considered against the full-year target operating loss of JPY1.8bn. With a contribution from Hook, a consolidated subsidiary acquired in April 218, the number of regular direct sales customers reached 292, (+2, compared to Q2), steadily increasing toward the full-year target of 3,,. Regarding downward revisions as of Q2 (reference) Decided to reduce advertising investment, as direct sales cosmetics repeat purchases took a longer period than expected and LTV decreased As the company is seeking to strengthen its earnings base in the medium to long term, it had laid out a spending plan calling for active spending on advertising and promotion and R&D activities in FY9/18 (with the scale of such spending to be determined flexibly based on cost performance). It followed this plan in 1H, spending on advertising for products that would have a greater lifetime value (LTV) than cost per order (CPO) and for direct sales cosmetics, which proved to have a good customer acquisition ratio in FY9/17. In 1H, it achieved the targeted efficiency for CPO, but LTV was below expectations. In terms of R&D, progress was as planned. In terms of M&A, it conducted two acquisitions, with earnings contributions expected from FY9/19 onward. Results of advertising and promotion did not meet expectations, and so a deviation from forecasts arose. In FY9/18 the company invested primarily in advertising in order to increase the numbers of regular direct sales customers of cosmetics, for which a high CPO efficiency is expected. However, even though the company was able to steadily obtain new customers in line with targets, there was a longer interval between repeat purchases than the company expected (taking months, rather than cosmetics being consumed within one month), so LTV fell below company expectations. It seems that features of the company s products (the cream spreads smoothly, only a small amount need be used) also contributed. As the expected CPO efficiency is being achieved, the option of pursuing increased regular customer numbers and sales could be considered. However, the company decided to reduce investment in advertising, on the basis that ostensibly increasing regular customer numbers (and sales) without corresponding LTV is meaningless. Euglena is scaling down ad spending in 2H and moving focus to new product development and increasing repeat purchases by regular customers. (The company started to reduce advertising expenses in March, but the remaining portion of past orders seems to continue in Q3). Aims to re-accelerate growth in the Healthcare segment from FY9/19 through successful new product development (1) New product development: The company aims to further lower CPO by developing attractive new products that will stimulate customer demand, with target of development shifting to areas where short-term (rather than medium- to long-term) results can be expected. (2) Increasing regular customer repeat purchases: the company aims to increase LTV by strengthening initiatives to increase repeat purchases and improve cross-selling. (3) Lower regular customer cancellation rate: the company will lessen the impact of reduced advertisement expenses, which resulted in fewer regular customer numbers by strengthening measures to reduce the cancellation rate. (4) Reallocation of management resources: the company is taking intensive measures such as reorganizing the allocation of management resources and clarifying the order of priorities to correct the distortions occurred in 1H, in 2H. 8/6

9 LAST UPDATE: The company will aim for a return to positive operating cash flows and the re-acceleration of growth trends, by continuing investments that focus on cost-effectiveness and growth potential from FY9/19. Although there will still be a full-year operating loss, euglena plans to push the Healthcare segment into the black for 2H via these initiatives. The company plans to accelerate growth in the Healthcare segment again through successful new product development. Accordingly, there is no change to the policy of increasing direct sales. Further, the company expects sales growth through cross-selling (that there is little overlap between food and cosmetics regular customers is a source of potential), cosmetics for beauty salon distribution, and strengthening OEM. By reducing advertising expenses to the minimum level necessary, it appears to be possible (depending on the level of the reductions) for the Healthcare segment to achieve an operating profit in 2H (in 1H the Healthcare segment had an operating loss of JPY451mn, and consolidated advertising expenses [almost all of which were in the Healthcare segment) were JPY2.9bn). It is expected that consolidated operating loss will continue in 2H, due to (1) Expenses relating to business expansion and advancing research: increases to expenses such as personnel expenses, management expenses, and R&D expenses; and (2) M&A: expenses increase such as Financial Advisory (FA) expenses, Due Diligence (DD) expenses, and goodwill (JPY77mn to be amortized using the straight-line method over ten years) for Hook, a subsidiary the company acquired in Q2. This can be considered as upfront expenditure for future growth. For FY9/19 as well, it seems that the company plans to control advertising expenses, assessing its percentage of sales. However, as excessive control of advertising expenditure could hinder growth, its balancing act with investments that focus on cost-effectiveness and growth potential is needed. In FY9/19, will re-emphasize creation of Healthcare segment operating cash flows and progress with biofuel R&D The company targets positive operating cash flows in FY9/19 (although the outlook is significantly negative cash flows due to lump-sum amortization of construction expenses). That is, the company intends to re-emphasize its original stance of positive free cash flow for the company as a whole by creating positive operating cash flows in the Healthcare segment and progressing with biofuel R&D. The company has left the target for consolidated group sales unchanged from the one in medium-term plan (JPY3.bn) in FY9/2. Reference Healthcare segment 4, 3, 2, 1, -1, FY9/12 4% Sales Operating profit OPM (right axis) 3,273 3,35 3,63 3,65 3,442 3,729 3,957 36% 3% 2,888 2,952 2,914 26% 28% 29% 22% 22% 2,34 21% 22% 22% 21% 21% 21% 22% 2% 18% 1,793 18% 1,162 1,3721,582 17% 11% 11% % % % Q3 FY9/13 Q3 FY9/14 Q3 FY9/15 Q3 FY9/16 Q3 FY9/17 Q % % FY9/18 Q3 4% 3% 2% 1% % -1% 3,5 3, 2,5 2, 1,5 1, 5 FY9/14 Parent B2C sales FY9/16 épauler FY9/ FY9/14 Group B2B sales FY9/16 FY9/ OEM, ingredients, and overseas FY9/14 FY9/16 FY9/ FY9/14 Other FY9/16 FY9/18 9/6

10 LAST UPDATE: SG&A expenses (JPYbn) (JPYbn) % 31% 36% 45% 5% 52% 47% 4% 53% 59% 61% FY9/12 Personnel expenses Administrative expenses R&D expenses Selling expenses SG&A ratio FY9/13 FY9/14 52% % 7% 62% 59% 62% % % 74% 67% 6% % FY9/15 FY9/16 FY9/ % % 93% 83% FY9/18 14% 12% 1% 8% 6% 4% 2% % For details on previous results, please refer to the Historical financial statements section. 1/6

11 LAST UPDATE: Full-year company forecast (initial estimates) Income statement FY9/15 FY9/16 FY9/17 FY9/18 Est. 1H 2H FY 1H 2H FY 1H 2H FY 1H Est. 2H Est. FY Est. Sales 2,542 3,382 5,924 5,23 5,873 11,13 6,628 7,258 13,887 18, YoY 74.9% 112.3% 94.5% 15.7% 73.7% 87.4% 26.7% 23.6% 25.1% % Gross profit 1,712 2,37 4,19 3,834 4,33 8,137 4,936 5,273 1,29 - YoY 96.8% 135.7% 117.4% 124.% 86.5% 12.4% 28.8% 22.5% 25.5% GPM 67.3% 68.2% 67.8% 73.3% 73.3% 73.3% 74.5% 72.6% 73.5% SG&A expenses 1,523 2,2 3,543 3,379 4,63 7,443 4,659 4,599 9,258 - YoY 88.1% 125.3% 17.6% 121.9% 11.1% 11.1% 37.9% 13.2% 24.4% - - SG&A-to-sales ratio 59.9% 59.7% 59.8% 64.6% 69.2% 67.% 7.3% 63.4% 66.7% - - Operating profit YoY 214.9% 249.1% 234.7% 14.3% -16.6% 45.7% -39.% 181.1% 37.% OPM 7.4% 8.5% 8.% 8.7% 4.1% 6.3% 4.2% 9.3% 6.8% Recurring profit ,27 - YoY 514.9% 194.5% 279.3% 74.2% -3.2% 3.% -17.8% 89.6% 27.8% RPM 12.3% 12.3% 12.3% 1.4% 6.8% 8.5% 6.7% 1.5% 8.7% Net income attrib. to parent company shareholders YoY 682.9% 195.1% 297.4% 12.9% -11.2% 43.4% -29.7% 97.9% 16.7% Net margin 7.6% 8.1% 7.9% 8.2% 4.2% 6.1% 4.5% 6.7% 5.7% EBITDA , , YoY 197.2% 216.6% 29.% 143.4% 4.1% 56.8% -19.4% 122.8% 39.3% EBITDA margin 9.6% 11.9% 1.9% 11.4% 7.1% 9.1% 7.2% 12.9% 1.2% Capital expenditures Depreciation Goodwill amortization Medium-term targets (out November 9, 216) In November 216, euglena announced two medium-term management targets for FY9/2: consolidated group sales of JPY3bn and the production and supply of aviation and diesel biofuel made in Japan for practical use. The company intends to concentrate on expanding the group s B2C sales and launching new businesses. There is no change to the company s thinking in FY9/18. Medium-term management targets and FY9/18 initiatives are outlined below. Sales (JPYbn) 3 25 B2C sales FY9/8 FY9/11 FY9/14 FY9/17 FY9/2 Est. Shared Research based on company data Other Consolidated group sales of JPY3.bn: Aggressive investment in FY9/18 to re-accelerate group direct sales euglena's sales were JPY13.9bn in FY9/17, and the company aims to more than double that figure by FY9/2. To achieve these (JPYbn) 4 goals, the company plans to ensure the group s B2C sales of JPY2.bn, expand the contributions of group earnings from group B2B sales and overseas businesses, and invest aggressively in acquisitions. In FY9/18, to reaccelerate group direct sales, the company plans to invest heavily in advertising for new regular customer acquisition. The company decided not to disclose forecasts for the operating profit line and below in order to retain flexibility on the scale and timing of advertising spending. euglena aims to increase the number of regular direct sales customers by 9, YoY to 3, by end-fy9/18. This would represent an acceleration from the 6, increase in FY9/17, on the road to the company s target of 5, regular customers by FY9/2. These targets are for existing businesses only. Any related acquisitions would add to these figures B2C sales Q3 Q3 FY9/14 FY9/ Other FY9/ Q FY9/ Q3 The company plans to achieve a further JPY1.bn in sales other than direct sales through overall growth, with no major change in the sales composition for group B2B sales and OEM supply, ingredients, and other items. The company expects additional growth in group B2B sales and overseas (China) businesses in FY9/18, and further growth in FY9/19 through other (Agriculture and Aquaculture Products sector) business. The company s thinking on its businesses for FY9/18 (profit targets not disclosed) is outlined following. 11/6

12 LAST UPDATE: Sales composition FY9/14 Other 1% OEM and ingredients 65% Group B2C sales 26% Group B2B sales 8% FY9/15 OEM and ingredients 37% Group B2B sales 16% Other 2% Group B2C sales 45% FY9/16 OEM and ingredients 18% Group B2B sales 15% Other 5% Group B2C sales 62% FY9/17 OEM and ingredients 18% Group B2B sales 12% Other 3% Group B2C sales 67% FY9/2 Group B2C sales 67% Shared Research based on company data FY9/18 company plan (out November 1, 217) FY9/18: Targeting 3% sales growth. Forecasts from operating profit down not disclosed to allow flexible decision-making on scale and timing of growth spending euglena forecast sales of JPY18.bn in FY9/18, but did not disclose forecasts from the operating profit line downward. The company decided not to disclose the figures because it wanted flexibility regarding the timing and scale of advertising spending needed to accelerate growth in group direct sales, and planned to aggressively spend on advertising to acquire new regular customers. Ordinarily euglena has retained a certain amount of profits when spending on advertising, but in FY9/18 it will aim to free itself from these restraints, and accelerate growth in group direct sales with an eye on FY9/2 targets. At its results briefing, the company said that it decided not to disclose profit forecasts, but it would like to meet its targets of JPY18.bn in sales and 3, regular customers. Shared Research will be watching this closely. Putting aside the thinking behind traditional advertising expenses, company aims to optimize investment where needed and boost potential earning power The Healthcare segment has a recurring revenue business structure built on increasing advertising spend every year and building up regular customer numbers. The company s stance on ad spend is as follows: it will invest aggressively if lifetime value (LTV) is significantly above cost per order (CPO). However, lifetime value extends over more than a single year, so does not neatly fit the annual profit cycle. As a result, even if there is a high return available for a small cost, if the investment cannot be totally recouped during the fiscal year, in some cases euglena will not be able to invest as it is constrained by its published forecasts. FY9/17 was one such year. The company was forced to keep a lid on its ad spend on direct sales cosmetics. Theoretically, as long as LTV exceeds CPO (customer acquisition is efficient), profits should build into the future. Assuming that the company stops investment spending at a certain point in time, it should be able to obtain profit equivalent to the total LTV of regular customers acquired to date. euglena uses the phrase potential earning power (EBITDA (operating profit + depreciation and amortization) + advertising expenses) to illustrate this concept. At end-fy9/17, this was JPY5.9bn in the Healthcare segment. This is equivalent to the EBITDA the company could expect in FY9/18 if it did not spend any money on advertising. In FY9/18, the company will invest in advertising aggressively in order to accelerate growth of its potential earning power. The focus of investment will be on products with high customer acquisition efficiency. In FY9/18, euglena plans to concentrate its advertising spending on direct sales cosmetics. This has proven effective, and the product line has considerable scope to grow. However, the company is also working to improve the efficiency of its direct sales food advertising, and if it becomes more efficient than that for cosmetics, it said it might reallocate investment toward food direct sales. CPO: Cost per order. Expenses incurred to obtain one order from a customer LTV: Lifetime value. Calculation of how much profit can be obtained from a customer from initial transaction through final transaction 12/6

13 LAST UPDATE: Potential earning power (left, JPYbn), Regular customer numbers (right, s) (JPYbn) EBITDA Advertising Regular direct customers (right axis) FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Est. FY9/2 Est. (') (') FY9/12 euglena (food) épauler (food, cosmetics) euglena (cosmetics) FY9/13 Focus ad spending on direct sales cosmetics with high acquisition efficiency 3years since inception FY9/14 FY9/ years since inception FY9/16 FY9/17 15 months since inception Slow capex in favor of profits FY9/18 Selling and advertising expenses (JPYbn) Advertising expenses Other selling expenses Advertising expense ratio (right axis) Other selling expense ratio (right axis) 37% 31% 2 3% 31% % 24% % % 22% % 19% 2% 18% % 17% 16% 15% 17% 19% 16% 18% 2% 19% 19% 21% 22% % 19% 14% % 11% % Q3 Q3 Q3 Q3 Advertising expenses % of sales (right axis) (JPYbn) 4% 29% 35% 4 26% 28% 3% 25% 3 17% 2% 21% 2% 15% 2 11% 14% % 1 7% 5% % % FY9/13 FY9/15 FY9/17 Healthcare business Group direct sales (B2C) B2C sales to regular purchase customers are a key sales indicator, and euglena plans to increase the number of regular customers from 21, at end-fy9/17 (+6, YoY) to 3, at end-fy9/18 (+9, YoY), and 5, at end-fy3/2. The 3, target does not include increases due to acquisitions during the year. The company expects growth to be in products with high customer acquisition efficiency. At the start of the fiscal year, euglena expected growth to be mainly in its direct sales of one cosmetics. In direct food sales, it took five years to have 5, regular customers, but one reached this mark in one year and three months. Customer acquisition efficiency is also high from the viewpoint of advertising spend. In 2H FY9/17, euglena said it constrained its ad spending, which slowed down customer acquisition, and a more aggressive stance would see customer numbers once again accelerate. The company planned to step up its efforts in FY9/18, and make adjustments starting in Q3 with an eye on how potential earning power and operating profit were trending. With regard to one, not only is customer acquisition efficiency high, but the company expects to grow average revenue per customer (ARPU). Following the May 216 launch of one all-in-one cream, the company extended the lineup with the December 216 launch of the high-end one all-in-one cream ER, and the October 217 launch of one sensitive skin cream for those with sensitive skin. In the midst of these activities, euglena worked on horizontal extensions into cleansing and foundations with one melting aroma cleansing, launched in March 217, and one perfect BB cream, and one finishing powder, in October 217. Shared Research is keeping an eye on the potential for customers of all-in-one cream to purchase other items and increase ARPU. 13/6

14 LAST UPDATE: Regular purchase customers (End-September 218 and 22 are targets) (') FY9/ FY9/ FY9/ FY9/ FY9/18 FY9/19 FY9/2 Shared Research based on company data The company plans to continue actively pursuing acquisitions. Shared Research believes acquisition targets include OEM suppliers of its products, companies such as mail order operators that can be easily integrated into the group, and companies without successors (in the mail order industry, the number of aging business owners is growing). Group sales through distributors In group sales through distributors (wholesaling of the company s products to secondary markets such as convenience stores), the focus is on product development and sales promotion. euglena proactively develops products, aiming for bestsellers. According to the company, it has more potential bestsellers than usual in its pipeline. The company plans to spend more on sales promotion than in FY9/17, and looks set to spend more on sales support at the store level starting in 2H. Further, in November 217, the company opened its second directly operated store at Matsuzakaya Ueno. The store will sell cosmetics (B.C.A.D and one), supplements, and food. The aim is to boost recognition of the company s products. The company also said in FY9/18 it would like to turn around the performance of its euglena art subsidiary following a poor FY9/17. Overseas and other Overseas, the OEM business in China is worth watching. In the domestic Healthcare segment, euglena shifted its business structure from OEM supply to direct sales. The company said it would like to build an OEM supply platform in China with a similar aim. The company is looking for a major OEM partner that understands its brand image and has growth potential. The company would like to secure an OEM partner during FY9/18, which it sees as a critical year. It appears that there are no particularly noteworthy developments in mung beans, prawn farming, or quinoa in the Agriculture and Aquaculture Products segment. Energy and Environment business The company confirmed the schedule for its biofuel pilot plant: it started construction in June 217, and aims to finish in October 218 and begin operations in 1H 219. euglena will recruit personnel and make other preparations in FY9/18. We also understand that the company is proceeding with necessary investigations and preparations for a commercial plant to be built in 22 or thereafter. The following figure shows the roadmap as of November 217. Roadmap for producing and supplying biofuel for commercial use Pilot plant Construction (to be completed at end-october 218) Operation start in 1H 219 (aim for commercial flight by 22) Commercial plant Planning and preparation Construction and operation Shared Research based on company data 14/6

15 LAST UPDATE: Historical company forecasts vs. results Initial Estimates versus Results FY9/13 Results FY9/14 Results FY9/15 Results FY9/16 Results FY9/17 Results Cons. vs. Est. Cons. vs. Est. Cons. vs. Est. Cons. vs. Est. Cons. vs. Est. Sales Initial Estimates 2, % 3, % 4, % 11,86 +.2% 15, -7.4% As of 2, % 3, % 4, % 11,86 +.2% 15, -7.4% As of Q2 2, % 3, % 5,923 +.% 11,86 +.2% 15, -7.4% As of Q3 2, % 3, % 5,923 +.% 11,1 +.% 15, -7.4% Results 2,92 3,46 5,924 11,13 13,887 Operating profit Initial Estimates % % % % % As of % % % % % As of Q % % % % % As of Q % % % % % Results Recurring profit Initial Estimates % % % % 1,1 +9.7% As of % % % % 1,1 +9.7% As of Q % % % % 1,1 +9.7% As of Q % % % 1, -5.5% 1,1 +9.7% Results ,27 Net income Initial Estimates % % % % % attributable to As of % % % % % parent company As of Q % % % % % shareholders As of Q % % % % % Results /6

16 LAST UPDATE: Business development, medium- to long-term strategy History of business development: OEM supply of health foods sales through distributors direct sales. Next, energy Corporate philosophy of making people and the Earth healthy" The corporate philosophy of euglena Co., Ltd. (euglena) is making people and the Earth healthy. It harnesses outdoor mass cultivation technology for the microalgae 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 microalgae, including functional foods, cosmetics, animal feed, and fuel. In December 25 it became the first company in the world to succeed in the outdoor mass culturing of Euglena, and as of FY9/16 it had no competitors that produced microalgae on the same scale. In the mainstay Healthcare segment, the company focuses on the production and sale of functional foods. 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 cultivation of Euglena; entered the health food market via the Healthcare segment The company was established in August 25, but efforts to commercialize products using Euglena began before then, in 2. The founders secured outdoor cultivation pools and utilized the results of algae 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, 25. In 26 the company launched euglena v22 supplements and two other products in the health food market in 26, and began OEM supply on the back of a capital tie-up with ITOCHU Corporation (TSE: 81) in May 28, a foothold for the Healthcare segment. Sales and gross profit margin (JPYbn) OEM, ingredients, and overseas Group B2B sales (JPYbn) OEM, ingredients, and overseas Group B2B sales 16 Group B2C sales Other 8% 5 Group B2C sales Other Energy-related GPM (right axis) 74% Energy-related GPM (right axis) % 73% 4 68% % 61% 1 54% 53% 56% 54% 55% 5% 3 5% % % % % % FY9/7 FY9/9 FY9/11 FY9/13 FY9/15 FY9/17 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 75% 7% 65% 6% 55% 5% Expand Euglena product lineup, starting with higher selling price per kg The company formulated the five Fs 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, the company 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 2, 212, and commenced full-fledged direct-to-consumer (B2C) sales. 16/6

17 LAST UPDATE: The Five Fs of biomass and business expansion 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 FY9/1 and succeeded in establishing an earnings base. However, with OEM supply it is difficult to control growth and brand image. To enhance its brand image in line with its Tokyo Stock Exchange listing, in FY9/13 the company transitioned from an OEM-based business model to its current model focusing on direct-to-consumer sales. In tandem with this shift, the company stepped up M&A activity. It is aiming to extend its value chain by bringing OEM clients into the euglena group so it can expand production bases and sales routes. Business model shift in the food sector Transforming the earnings structure The shift in business model has transformed euglena s earnings structure. As an OEM supplier, the company s advertising and SG&A expenses were relatively low, as was GPM. Now, with direct sales, which has a recurring revenue business structure built on increasing advertising spend every year to build up regular customer numbers, the advertising and SG&A expense burden is relatively high but so is GPM. The direct sales model has a number of other advantages: when increasing the number of regular customers, the fixed cost ratio declines due to the volume effect; once sales promotion and other upfront expenditures have successfully established a solid customer base, advertising and SG&A expenses can be reduced, substantially contributing to earnings. Also, with direct-to-consumer sales the company can control its brand image. The company s stance on ad spend is as follows: it will invest aggressively if lifetime value (LTV) is significantly above cost per order (CPO). However, lifetime value extends over more than a single year, so does not neatly fit the annual profit cycle. As a result, even if there is a high return available for a small cost, if the investment cannot be totally recouped during the fiscal year, in some cases euglena will not be able to invest as it is constrained by its published forecasts. FY9/17 was one such year. The company was forced to keep a lid on its ad spend on direct sales cosmetics. Theoretically, as long as LTV exceeds CPO (customer acquisition is efficient), profits should build into the future. Assuming that the company stops investment spending at a certain point in time, it should be able to obtain profit equivalent to the total LTV of regular customers acquired to date. euglena uses the phrase potential earning power (EBITDA (operating profit + depreciation and amortization) + advertising expenses) to illustrate this concept. At end-fy9/17, this was JPY5.9bn in the Healthcare segment. This is equivalent to the EBITDA the company could expect in FY9/18 if it did not spend any money on advertising. CPO: Cost per order. Expenses incurred to obtain one order from a customer LTV: Lifetime value. Calculation of how much profit can be obtained from a customer from initial transaction through final transaction 17/6

18 LAST UPDATE: Potential earning power (left, JPYbn), Regular customer numbers (right, s) (JPYbn) EBITDA Advertising Regular direct customers (right axis) FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Est. FY9/2 Est. (') (') FY9/12 euglena (food) épauler (food, cosmetics) euglena (cosmetics) FY9/13 Focus ad spending on direct sales cosmetics with high acquisition efficiency 3years since inception FY9/14 FY9/ years since inception FY9/16 FY9/17 15 months since inception Slow capex in favor of profits FY9/18 A changing cost structure: SG&A expenses (left), SG&A expenses as a percentage of sales (right) (JPYbn) Personnel expenses Administrative expenses R&D expenses Selling expenses SG&A ratio Gross margin FY9/13 FY9/14 FY9/15 FY9/16 FY9/ % 75% 7% 65% 6% 55% 5% 45% 4% 18% 16% 14% 12% 1% 8% 6% 4% 2% % FY9/13 Personnel expenses Administrative expenses R&D expenses FY9/14 FY9/15 FY9/16 FY9/17 Note: The company is trying to get an OEM supply business fully launched in China. It is searching for a major partner that can understand brand image management, similar to the domestic market (as of November 217). Medium- to long-term strategy Long-term goals One of euglena s goals is to solve the global malnutrition challenge. The company can be benchmarked against companies such as Ajinomoto (TSE: 282), Yakult (TSE: 2267), Nestlé (SIX: NESN) of Switzerland, and Danone (Euronext: BN) of France. Euglena is the core product and the company is establishing cultivation technology that cannot be reverse-engineered, while protecting research results with patents. Short- to medium-term strategy Three pillars of cash flow: direct sales, agriculture and aquaculture sector, and aviation biofuel The company wants at least three cash flow pillars in the Healthcare, Agriculture and Aquaculture Products, and Energy and Environment segments. It plans to invest the cash flow generated in new growth. In the Healthcare segment it currently generates cash through OEM supply of Euglena products but is beginning to generate cash flow through its B2C sales business. The company plans to use the cash generated from the Healthcare segment, a stable earnings base, to grow the segment and invest in medium-term growth goals such as biofuel research and development. 18/6

19 LAST UPDATE: Performance (sales) (JPYbn) OEM, ingredients, and overseas Group B2B sales (JPYbn) OEM, ingredients, and overseas Group B2B sales 16 Group B2C sales Other 8% 5 Group B2C sales Other Energy-related GPM (right axis) 74% Energy-related GPM (right axis) % 73% 4 68% % 61% 1 54% 53% 56% 54% 55% 5% 3 5% % % % % % FY9/7 FY9/9 FY9/11 FY9/13 FY9/15 FY9/17 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 75% 7% 65% 6% 55% 5% Healthcare segment Business model transformation: from OEM supply to direct sales and sales through distributors In the Healthcare segment euglena is transitioning from a business model based on OEM supply to a direct-to-consumer sales model. The company s target markets by scale are categorized as follows, and the company aims to expand beyond Euglena products into the entire food sector. Stage 1 (direct sales): Limited segment of the domestic market such as through mail-order sales Stage 2 (sales through distributors): Entire domestic market Stage 3 (overseas markets): Overseas markets To succeed, the company recognizes that rather than selling generic products like aojiru (green vegetable juice), it will need to sell unique products with strong branding encouraging customers to purchase products because they are made from Euglena. Target channels The company is simultaneously pursuing initiatives through all three sales channels. Direct sales: In a limited segment of the domestic market, raising awareness of core products that that use Euglena such as midorijiru (euglena farm s green juice) through mail order, face-to-face sales, and cross-selling to encourage purchases of related products Sales through distributors: Developing its own products, such as Euglena beverage for the entire domestic market, and selling through mass market operators such as convenience stores and general merchandisers Overseas markets: Cultivating overseas markets through alliances with partner companies As of FY9/16, direct sales were driving growth, and the company was concentrating management resources here. It aims to follow a growth trajectory by pursuing the domestic market and overseas markets. Market scale Health food related markets Other related markets Euglena Health Food Approx. JPY4.6bn Q3 FY9/16 sales 4 Comparable markets Aojiru (green vegetable juice) Approx. JPY6.bn 216 Est. by Fuji Keizai Marketing Research Vegetable juice market Approx. JPY15.bn 216 Est. by Kagome (domestic) Chlorella Approx. JPY2.bn 212 by Yano Research Institute Lactic acid bacteria beverage market Approx. JPY1.bn 216 Est. by Kagome Comparable companies Yamada Bee Farm JPY43.1bn FY214 group sales (honey, etc.) Kagome, Yakult and others (domestic) Q SAI CO., LTD. JPY32.8bn FY12/15 sales (aojiru, etc.) Yazuya Co., Ltd. JPY22.bn FY213 sales (garlic products, etc.) Market development The company s market development efforts comprise a branding strategy and a patent strategy (both applicable to stages 1 3), and cost reductions (mainly for stages 2 and 3). Branding strategy The company s branding strategy is to create a compelling story that will motivate customers to buy the company s Euglena products because they are made by euglena. The strategy also includes building a positive corporate image through socially significant initiatives such as social projects in Bangladesh and aviation biofuel development. 19/6

20 LAST UPDATE: The company is using brand control to minimize the ability of other companies to take market share even if they do enter the Euglena market. This approach is also aimed at preventing the reputational damage that could occur if other companies offer lower-quality Euglena. In addition to its creating a brand image of an abundance of nutrients and Euglena produced in Ishigaki, the company continues to announce research results promoting the health benefits of regular consumption of Euglena such as alleviating symptoms of influenza, gastric ulcers, and rheumatoid arthritis. In addition, euglena is promoting its brand image through existing projects such as biofuel, the Mungbean Project with the Grameen Group, and hands-on support and R&D support for technology ventures through the Real Tech Fund (an investment business limited partnership). R&D successes Press release Topic Effects Patent applied Announced Nov. 216 Continuous intake of Euglena powder and special Confirmation of research results suggesting Nov nd Euglena Research Association compound Paramylon suppression of hepatic fibrosis by nonalcoholic steatohepatitis (NASH) Oct. 216 Continuous intake of Euglena powder and special Confirmation of research results suggesting Oct. 216 Food % Function (online; UK) compound Paramylon suppression of elevated blood glucose levels Oct. 216 Kalahari watermelon Confirmation of influenza virus growth May th meeting, Kinki branch, Japan Society of Nutrition and Food Science inhibitory effect May 216 Euglena powder extract Confirmation of inhibition of Rotavirus growth Mar. 216 May 216 7th Annual Meeting of the Japan Society of Nutrition and Food Science Nov. 215 Continuous intake of Euglena powder and special Alleviating rheumatoid arthritis Nov st Euglena Research Association compound Paramylon Jul. 215 Continuous intake of Euglena powder and special Alleviating stomach ulcer symptoms Apr. 216 Jun th Annual Meeting of the Vitamin Society of Japan compound Paramylon Feb. 215 Continuous intake of Euglena powder and special Alleviating influenza symptoms Nov nd Annual Meeting of the Japanese Society for Virology compound Paramylon Apr. 214 Continuous intake of Euglena powder and special Adjusting immune balance Apr. 214 compound Paramylon May 213 Usage of Paramylon film as wound treatment Wound treatment effect of Paramylon film May 213 May th Annual Meeting of the Vitamin Society of Japan agent Patent strategy The company considers its patent strategy a core strategy that is not limited to the Healthcare segment. It is working to establish cultivation technology that cannot be reverse engineered, and protecting the resulting products with patents. If euglena patented the cultivation technology itself, and the patented expertise leaked out and a competitor used its technology, it would be difficult to prove from the resulting Euglena product whether the company s patents had been infringed upon or not, so the patent would not be meaningful. Instead, as Euglena is a living organism, it is not possible to reverse engineer the company s cultivation technology by using Euglena grown through repeated cell division in its special culture liquid. Furthermore, the company s products use dried Euglena, which cannot be brought back to life and cultured. For these reasons, the company divides its management assets into (patented) intellectual property and (non-patented) trade secrets. The company is careful to patent assets such as hardware that can be reverse engineered. Even if a competitor were to succeed in mass culturing Euglena, the company believes it could differentiate itself on the basis of accumulated product and brand value. It thinks that it would be difficult for potential competitors to reproduce core product values such as Euglena that contains 59 nutrients and Euglena aviation biofuel that meets jet fuel regulations simply through mass culturing, as these features require certain expertise. Cost reduction Following the company s success in mass culturing Euglena in December 25, two major technological innovations in 27 and 21 plus larger production facilities enabled the company to substantially reduce production costs. The company also began commercializing Euglena from products with higher unit prices by weight. Costs have not yet fallen to the level required for use in aviation biofuel, and looking only at price (not health benefits), euglena s main product in the Healthcare segment, midorijiru (euglena farm s green juice) (priced at JPY4,2 for g sachets) is much more expensive than similar aojiru (green vegetable juice) offerings (JPY3,/3 3.3g sachets for Suntory and JPY3,/3 3.5g sachets for Q sai). Note: the company released euglena s matcha style green juice in 217 (JPY3,3 for 31 3g sachets). Two technological innovations in 27 and 21: In 27, the introduction of a new type of culturing facilities enabled larger-scale production. An innovation in culture liquid in 21 successfully shortened the production process. Since then, the company has continued to cut costs on both the facility and culture liquid fronts, and reduced the time required for the culturing process from one week to three days. Room for reducing CoGS is limited, as the direct sales department already has a gross profit margin of more than 8%, and the majority of CoGS are from boxing and packaging. However, improving production costs by 5% would significantly impact GPM when conducting a full-fledged rollout of products to convenience stores and general merchandisers. Reducing production costs 2/6

21 LAST UPDATE: by a single percentage point might not have a major impact on the GPM in the direct sales market, but for sales to convenience stores and general merchandisers this could bolster GPM by several percentage points. The market is also larger, so the impact on total gross profit would be amplified by the sales volume. The midorimushi beverage the company launched sells for JPY24 (recommended retail price), which is relatively high, but rather than lowering its price the company is working to make the drink an attractive product for which customers will be willing to pay a higher price. While the Euglena beverage is priced at JPY24, a vegetable juice (Itoen) on the same shelf is priced at JPY1, so even if the Euglena beverage is differentiated based on function, Shared Research believes the company will need to reduce the unit price in order to capture some of the vegetable juice market (Kagome estimate of JPY149.2bn in 216) and lactic acid bacteria drink market (JPY97.7bn). Assuming Euglena beverage has a retail price of JPY24, a wholesale price of JPY12, and CoGS of JPY5 (gross profit of JPY7), lowering the retail price to JPY15 (wholesale price of JPY75 and gross profit of JPY25) would mean the company has to sell almost three times as much product to achieve the same gross profit. Similarly, lowering the retail price to JPY12 (wholesale price of JPY6 and gross profit of JPY1) would require seven times the sales amount. The risks, therefore, are high. The company believes that rather than lowering prices and making up the difference through higher quantities, it is preferable to maintain a retail price of JPY24 and make the product attractive to consumers at that price. Shifts in sales composition and GPM 1% 8% OEM, ingredients, and overseas Group B2B sales Group B2C sales Other Energy-related GPM (right axis) 2% 3% 1% 3% % 1% % 4% 9% 6% 5% 1% 1% 1% 1% 1% 1% 2% 2% 9% 3% 2% 2% 2% 4% 7% 7% 6% 11% 15% 15% 7% 22% 23% 6% 27% 5% 6% 29% 4% 41% 42% 42% 6% 51% 62% 61% % 1% 5% 5% 75% 7% 6% 1% 11% 59% 64% 65% 7% 66% 66% 65% 4% 2% % 92% 87% 91% 87% 84% 81% 79% 78% 73% 7% FY9/12 FY9/13 FY9/14 62% 58% 43% 42% Maximizing LTV; increasing advertising and SG&A expenses 14% 13% 19% FY9/15 37% 28% 18% 21% 19% 12% 22% 16% 17% 16% The company still has substantial room to reduce general expenditures. Integrating the two companies converted to subsidiaries in FY9/16 are reducing shared costs, such as distribution and call center expenses, and contributing to profits. As of FY9/17, however, the company was still working to expand its direct sales route and continues to be at a stage of repeatedly reinvesting profits to attract new customers. 19% 19% 14% 15% FY9/16 16% 13% FY9/17 12% 12% 13% 6% 55% 5% The Healthcare segment has a recurring revenue business structure built on increasing advertising spend every year and building up regular customer numbers. The company s stance on ad spend is as follows: it will invest aggressively if lifetime value (LTV) is significantly above cost per order (CPO). However, lifetime value extends over more than a single year, so does not neatly fit the annual profit cycle. As a result, even if there is a high return available for a small cost, if the investment cannot be totally recouped during the fiscal year, in some cases euglena will not be able to invest as it is constrained by its published forecasts. FY9/17 was one such year. The company was forced to keep a lid on its ad spend on direct sales cosmetics. Theoretically, as long as LTV exceeds CPO (customer acquisition is efficient), profits should build into the future. Assuming that the company stops investment spending at a certain point in time, it should be able to obtain profit equivalent to the total LTV of regular customers acquired to date. euglena uses the phrase potential earning power (EBITDA (operating profit + depreciation and amortization) + advertising expenses) to illustrate this concept. At end-fy9/17, this was JPY5.9bn in the Healthcare segment. This is equivalent to the EBITDA the company could expect in FY9/18 if it did not spend any money on advertising. In FY9/18, the company will invest in advertising aggressively in order to accelerate growth of its potential earning power. The focus of investment will be on products with high customer acquisition efficiency. In FY9/18, euglena plans to concentrate its advertising spending on direct sales cosmetics. This has proven effective, and the product line has considerable scope to grow. However, the company is also working to improve the efficiency of its direct sales food advertising, and if it becomes more efficient than that for cosmetics, it said it might reallocate investment toward food direct sales. CPO: Cost per order. Expenses incurred to obtain one order from a customer LTV: Lifetime value. Calculation of how much profit can be obtained from a customer from initial transaction through final transaction 21/6

22 LAST UPDATE: Potential earning power (left, JPYbn), Regular customer numbers (right, s) (JPYbn) EBITDA Advertising Regular direct customers (right axis) FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Est FY9/2 Est. (') (') FY9/12 euglena (food) épauler (food, cosmetics) euglena (cosmetics) FY9/13 Focus ad spending on direct sales cosmetics with high acquisition efficiency 3years since inception FY9/14 FY9/ years since inception FY9/16 FY9/17 15 months since inception Slow capex in favor of profits FY9/18 As stated, the company has aggressively invested in ad spending, taking into account product lifetime value (LTV) and cost per order (CPO). Following is a more detailed overview of LTV and CPO. Profit = (LTV CPO) x number of customers The company aims to maximize impact based on the following formula: profit = (LTV CPO) x number of customers. It is working to increase LTV and the number of customers while reducing CPO, focusing particularly on raising LTV. The company is pursuing a number of measures to raise LTV: 1) Raise spend per customer: Encourage a purchasing shift from midorijiru (euglena farm s green juice) to euglena PLUS, the higher-end supplement. 2) Cross-selling: Generate additional sales through the sale of related food products and cosmetics. 3) Retention rate: Analyze the reasons for lapses in regular purchases, and introduce new products such as MEDICA+ to avoid losing regular customers to other companies health foods such as blueberries. An increase in new regular customers is closely linked with CPO. The company s approach is to devise advertising strategies to set CPO based on assumed LTV, and invest aggressively in advertising when it will be most impactful while holding back at other times, taking into consideration the effects of ad volume and media exposure. LTV>CPO Calculating LTV is not easy, as the calculation is based on a large number of regular customers, and the company s direct sales customer base has rapidly expanded. However, assuming that around 5% of regular customers leave each month, the average duration would be 2 months (1% of one month 5%). Under these assumptions, LTV = JPY3,78/month x 2 months = JPY75,. These figures are based on prices for midorijiru (euglena farm s green juice). Using instead the prices for épauler s Super Euglena (regular purchases at JPY4,743/month) would result in LTV of JPY95,. Considering the number of regular customers (93, for euglena and 47, for épauler as of July 216), the average would be JPY82,. With cost of sales of 15% and transportation expenses of 5%, the company could spend up to 8%, or JPY65,, on advertising. midorijiru (euglena farm s green juice): The company s mainstay product. Regularly priced at JPY4,2, the drink is available for JPY3,78 per month to customers who sign up for a subscription. Shipping is free, and the contract can be cancelled at any point up to 1 days prior to the next shipment. Super Euglena: épauler s conventional mainstay product. Regularly priced at JPY6,5, it is available on a monthly subscription basis at JPY4,743 per month. Euglena Natural Rich: épauler s new mainstay product, launched in September 215. Regularly priced at JPY5,45, it is available on a monthly subscription basis at JPY3,978 per month. Future profits = LTV ( retention rate) number of new customers We estimate that future profits can be generated if costs per regular customer are around JPY2, less than LTV. Given that attracting new customers is key to increase profits, achieving company forecasts for 2H FY9/16 requires continued investment in ads to ensure growth, or as in FY9/18, withholding profit forecasts but disclosing targets for regular customer numbers is an option. Still, the impact of advertising tends to fall when multiple ads are concentrated into a short period of time. As reducing advertising expenses to zero would not necessarily result in immediate cancellations, the calculations assume a certain level of ongoing demand. 22/6

23 LAST UPDATE: SG&A and advertising expenses (JPYbn) Advertising expenses Other selling expenses Advertising expense ratio (right axis) Other selling expense ratio (right axis) 37% 31% 2 3% 31% % 24% % % 22% % 19% 2% 18% % 17% 16% 15% 17% 19% 16% 18% 2% 19% 19% 21% 22% % 19% 14% % 11% % Q3 Q3 Q3 Q3 Advertising expenses % of sales (right axis) (JPYbn) 4% 29% 35% 4 26% 28% 3% 25% 3 17% 2% 21% 2% 15% 2 11% 14% % 1 7% 5% % % FY9/13 FY9/15 FY9/17 Shared Research based on company data Perspective on OEM supply The company is transitioning from an OEM supply-based business model to focus on direct sales. Although OEM supply remains an important source of cash flow, the company stopped cultivating new OEM clients following its 214 agreement with Takeda Pharmaceutical Co., Ltd. (TSE: 452). The company is shifting its business model to accelerate growth, improve the earnings structure, and control its brand. Brand control: As the number of OEM clients increases, maintaining a consistent brand for products containing Euglena becomes difficult due to individual OEM client companies differences in product positioning and advertising methods. In addition, some advertising possibly contravened the Pharmaceutical Affairs Act and was not in line with euglena s intentions, such as ads promoting the Euglena diet. Such factors were undesirable from a brand control perspective and led to decisions to limit or acquire OEM clients. Positioning of the Healthcare segment, other product groups Cosmetics undergoing same shift as health foods: OEM supply sales through distributors direct sales Within the five Fs of biomass, cosmetics command high unit prices by weight. The company is making the same shift for cosmetics as for health foods: face-to-face sales OEM supply sales through distributors direct sales. OEM supply accounts for around half of sales, with sales of euglena s B.C.A.D. brand making up the rest. In May 215, euglena acquired two companies with sales routes to small businesses such as hair and beauty salons, and merged them into euglena art Co., Ltd. in July 215 to create a sales channel for high-end products. For the beauty salon route, the company expanded its product lineup with the July 11, 216 launch of haircare products, which have strong demand and are easy to sell in hair salons. In May 16, 216, euglena made its first foray into a direct sales skincare brand with an all-in-one face cream called one. As with health foods, the company aims to increase direct sales of cosmetics. Following the May 216 launch of one all-in-one cream, the company extended the lineup with the December 216 launch of the high-end one all-in-one cream ER, and the October 217 launch of one sensitive skin cream for those with sensitive skin. In the midst of these activities, euglena worked on horizontal extensions into cleansing and foundations with one melting aroma cleansing, launched in March 217, and one perfect BB cream, and one finishing powder, in October 217. Shared Research is keeping an eye on the potential for customers of all-in-one cream to purchase other items and increase ARPU. Chlorella (Yaeyama Shokusan) In addition to Euglena-related products sold through the B2C sales business (including épauler) and OEM supply, the Healthcare segment includes Chlorella and cosmetics. The Chlorella business is handled by Yaeyama Shokusan, which became a wholly owned subsidiary in March 213. euglena s policy is to not make advertising and R&D investments in these products, but they generate steady cash flow. Agriculture and Aquaculture Products segment Potential for a new core cash source The company s philosophy of making people and the Earth healthy goes beyond businesses involving Euglena. As of FY9/16, the main source of cash flow was the food business, particularly direct sales products, and the company sees the Agriculture and Aquaculture Products segment as a potential new cash source. 23/6

24 LAST UPDATE: In the Agriculture and Aquaculture Products segment, in October 214 the company acquired Yukiguni Maitake s stake in Grameen Yukiguni Maitake Ltd. (now Grameen euglena Ltd.), amounting to 49.49% of common shares and 1% of non-voting preferred shares. In September 215 euglena converted Taketomi Prawn Farm (now euglena Taketomi Prawn Farm) to a wholly owned subsidiary. The company s overseas development is progressing with the aim of alleviating malnutrition and rural poverty, as shown by JICA s adoption of the company s survey on quinoa production and sales structure creation in Bhutan in July 217. Mungbean Project The company believes that Grameen euglena s Mungbean Project will eventually generate cash flow. Social significance and revenue source The Mungbean Project offers benefits for Bangladesh, Japan, and euglena. For Bangladesh, the project provides employment opportunities in farming areas, the chance to improve nutrition, and cultivation technology support for increasing crop yields and quality. For Japan, the project offers a way to ensure a steady supply of mung bean imports, which are used for growing bean sprouts (mung beans account for more than 8% of all domestic bean sprout production). Almost all mung beans are imported, and 9% of imports are from China. This project provides a way to counter price fluctuation risk and offers steady and low cost supply of mung beans for Japanese bean sprout producers, many of which are going out of business. For euglena, the project is a way to ensure a revenue source by selling mung beans imported by Grameen euglena to Japanese bean sprout producers. A substitute to imports from China, where prices are rising In this project, Grameen euglena purchases mung beans harvested by cooperating farmers at higher prices than are offered in their local markets and exports them to euglena in Japan. In accordance with Grameen euglena s Articles of Incorporation, any remaining profits are directed toward local social contributions. euglena sells the imported mung beans at Japanese market prices to domestic bean sprout producers, earning profits on the price difference. Import prices on mung beans have risen since 213, peaked in 215, then stabilized. Prices rose due to growing demand within China, decreasing acreage devoted to the cultivation of mung beans as farmers in China shift to crops with higher earnings potential such as corn, and yen depreciation. Mung bean import volume (1, tons, JPY/kg), imports by country (November 216 October 217, tons) (1,MT) China Myanmar Bangladesh Other Avg. import price (right axis) China Myanmar (JPY/kG) CY8 CY9 CY1 CY11 Source: Shared Research based on trade statistics CY12 CY13 CY14 CY15 CY16 CY17 Bangladesh 278 1% Myanmar 16,696 27% China 44,18 72% Others 237 % (tons) euglena s profits: Margin on wholesale prices Between October 216 and September 217, Japan imported JPY14.3bn (+19.6% YoY, JPY11.8bn from China, +14.7%) worth of mung beans at an average unit price of JPY232/kg (+12.6%, JPY256/kg for mung beans from China, +22.6%). By comparison, in the five months of November, February, and April June, Japan imported JPY47mn worth of mung beans from Bangladesh (-61.4% YoY vs JPY123mn in the previous year (two months: January and February)), at an average price of JPY17/kg (-2.5%, JPY175). Had the company imported all of these beans from Bangladesh and sold them in Japan at JPY232/kg, it would have generated JPY17.2mn in profits (278 tons x JPY( )/kg). The company s selling price of Bangladeshi mung beans in Japan is lower than the selling price of beans imported from China. The company imports beans from Bangladesh at a lower price than its selling price to ensure a profit. 24/6

25 LAST UPDATE: Boosting profits through larger import quantities and better quality The company understands that profits are based on import volume x (wholesale price import price), but it believes this amount could increase if the number of cooperating local farmers increases, which would boost import quantities and the amount of land devoted to growing the beans, and if wholesale prices rise as quality improves. Bean quality: The company says that if the quality of mung beans from China is indexed at 1, those produced in Bangladesh had a quality of around 8 in 215. The lower wholesale price than China reflects this difference. Improving the quality of beans from Bangladesh should reduce the discount against beans produced in China, much of which could be added directly to euglena s margin. Working with the United Nations and Bangladeshi government to train farmers, the biggest bottleneck to expansion In 215 (mung beans are typically harvested in May or June, and then shipped to Japan after sorting around November or later), more than 3, farmers participated in the Mungbean Project, and the corresponding farming area has grown to a total of more than 2,ha. Due in part to inclement weather, in 216 the import volume is expected to fall to around 33 tons, but in 217 the company expects the crop volume to expand to around 2, tons (crops planted in 216 and contributing to performance in FY9/18). Forecasts call for the sorting of 1, tons designated for export to Japan, with the remainder sold locally. In 218 (planted in 217, contributing to FY9/19 earnings), the company targets 3, tons (1,5 tons for export). Outlook for the Mungbean Project Contribution to earnings: FY9/16 FY9/17 FY9/18 FY9/19 Planted Area (ha) Approx. 1,5 Approx. 2, Approx. 2, Approx. 3, Harvested Amount (tons) Approx. 1,4 Approx. 8 Approx. 2, Approx. 3, Exported Amount (tons) Approx. 7 Approx. 3 Approx. 1, Approx. 1,5 Even in 218, the amount of mung beans the Mungbean Project is projected to export to Japan would only account for 2 3% of Japan s imports of 61,63 tons (in the 12 months to September 217). The bottleneck is the number of participating farmers in Bangladesh. To address this situation, Grameen euglena agreed to form a business alliance with a Bangladeshi government-affiliated development institution, the Palli Karma-Sahayak Foundation (PKSF), which is supported by a subsidy from the International Fund for Agricultural Development (IFAD). This alliance leverages PKSF s network of 2mn farmers to train those interested in participating in the Mungbean Project. Through this alliance, the company expects to triple the number of participating farmers to 1, over a three-year period. Ignoring potential weather impact, this figure would correspond to a tripling of production to 6, tons (with 3, tons exported to Japan). If crop yields and quality increase, leading to higher wholesale volumes and prices, the project could further contribute to the company s profits. Grameen euglena Ltd. business (left) and business alliance with PKSF (right) euglena Taketomi Prawn Farm euglena Taketomi Prawn Farm (prawn farming in Taketomi) generates annual sales of around JPY2 3mn (sales of JPY28mn and recurring profit of JPY9mn in FY8/15) and the company expects this new initiative to generate stable earnings by ensuring stable profitability. In foods, euglena is transitioning its business model from OEM supply to sales through distributors and direct sales to consumers. In prawn farming, it also aims to expand from wholesale to direct sales. Summer is the optimal season for wild-caught prawn, but 25/6

26 LAST UPDATE: in winter prices reach their highest levels as demand spikes toward the end of the year. For direct sales to consumers, the company aims to improve profitability by freezing prawn farmed during the off-season to meet demand during peak seasons. The company expects this business to be a stable source of earnings. Quinoa production in Bhutan On July 1, 217, euglena s survey regarding quinoa production and sales structure creation in Bhutan was adopted in JICA s Feasibility Survey for SDGs Business (SDGs: Sustainable Development Goals). It is one of five projects selected for the first publication of Feasibility Survey for SDGs Business in fiscal 216. The company plans to utilize a similar business model for the Mungbean Project in Bangladesh. The Bhutan project involves the company providing technical guidance on quinoa production and the post-harvest process, dietary education on the nutritional value of quinoa, and the establishment of a value chain for exporting quinoa in order to improve the nutritional intake of consumers and the income of small-scale farmers. Subsidies are estimated at JPY5mn, and the project is slated to last from August 217 to July 219. Energy and Environment segment In the Energy and Environment segment, one of the company s medium-term milestones is to make the Earth healthy through aviation biofuel and biodiesel fuel. Shared Research believes this focus stems from the feasibility of aviation biofuel and the use of fuel-use Euglena by-products as feed. The target market is large, and full-fledged adoption is slated for 22 or later. Aviation biofuel Aviation biofuel is at the base of the five Fs of biomass figure, meaning it has the lowest selling price per kg. Although the scale of consumption is high, this market is difficult to enter because costs will need to drop by an order of magnitude. The company is pursuing R&D by participating in multiple government projects and receiving subsidies. It has also entered an alliance with one of Japan s leading commercial airlines with the aim of implementing the Made-in-Japan Biofuel Project toward 22. The company produces its own Euglena, and differs from biofuel companies using feedstock such as corn and sugar cane: production time is shorter, at only one to two weeks, so is relatively impervious to market prices; biofuel Euglena residue can be reused as feed; the food business is generating stable earnings; and relatively less land is needed to produce the feedstock. Market scale The company aims to produce 5, barrels (8kl) of commercial-use aviation biofuel or bio-kerosene a day (3,kl/year). The Japanese market alone is large; sales of jet fuel in Japan amounted to 5.4mn kl (5,345,928kl) between October 216 and September 217. Multiplied by the average CIF prices for the year of JPY47.4/l this has a value of JPY25.bn. Important factors for whether euglena can successfully produce and supply commercial biofuel in the Japanese market will be attractive pricing in comparison with petroleum jet fuel and plants capable of large-scale production. As such, crude oil prices will play the largest role in biofuel sales. Jet fuel sales volume, average import prices (mn kl) 1.8 Sales volume of jet fuel in Japan (mn kl) 11 Average import price (JPY/L) CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY11 CY12 CY13 CY14 Source: Shared Research based on data from the Ministry of Economy, Trade and Industry and trade statistics Averafge import price (JPY/kg) CY15 CY16 CY17 26/6

27 LAST UPDATE: No concerns on the demand front Demand should not be a problem, the company believes, as long as it is able to provide biofuel at an attractive price. As long as the fuel meets standards, airlines will prefer biofuel, which represents added value (they can reduce purchases of CO2 emission credits). ANA FLY ECO 22 is an example of this trend. ANA HOLDINGS (TSE: 922), which participates in the Made-in-Japan Biofuel Project, recorded energy consumption (FY3/17) by the crude oil equivalent of 4.14mn kl. euglena's targeted 3,kl of biofuel amounts to less than 1% of this figure. Crude oil competes with euglena s biofuel more than other biofuels, so lowering production costs and large-scale feedstock supply are the largest issues. ANA FLY ECO22: By FY3/21, ANA is targeting a 2% reduction vs. FY3/6 in CO 2 emissions per paid transport ton-kilometer on its domestic and overseas flights. Establishing a price advantage The company s selection of biofuel feedstock is based on what is economically rational. Its ultimate target is to use Euglena as the pure feedstock for jet fuel, but it is considering the procurement of other biofuel ingredients as well. Unless processing volume increases, and its processing equipment is able to handle several thousand barrels per day, the company may be unable to bring refining costs down to the same level as the cost of refining petroleum crude oil. This is the reason why euglena is considering the procurement of other biofuel feedstock in addition to Euglena scaling up the plant size. A department concentrating on the biofuel business is working on profitability (buying feedstock cheaply and selling fuel for a higher price), and a department researching Euglena is trying to maximize earnings (producing Euglena at low cost). To produce biofuel, euglena is using US Chevron s Biofuels ISOCONVERSION Process (BIC Process) technology, which is also used by other companies. In principle, if it is unable to lower production costs enough to achieve profitability with Euglena, the biofuel team will select the other, more profitable biofuel feedstock. If the Euglena used in biofuel can be sold at JPY1/liter, for example, the business should be profitable if the commercial plant achieves a JPY8/liter production cost. However, lower crude oil prices may put pressure on reducing costs to JPY6/liter, which would be problematic. The company therefore needs to either find a way to sell the fuel at JPY8/liter or somehow make up the remaining JPY2/liter. The first might be accomplished through multi-year, fixed-rate contracts, and the latter by making use of Euglena residue. Alternatively, it may be possible to apply a subsidy corresponding to aircraft fuel taxes (JPY26/liter), leveraging the environmental benefits of biofuel. Selling price concept Fuel-use Euglena (1kg) Oil 4% (.4kg.5L) JPY21... Avg. jet fuel import price: JPY41,854/kl (Year through July 216, Trade Statistics of Japan, MOF) JPY13... Without fuel surcharge of JPY26/L Degreased Euglena 6%.6kg JPY11... Avg. fish meal import price: JPY169/kg (Year through July 216, Trade Statistics of Japan, MOF) Total JPY135 Utilizing residue The Euglena research team is also studying alternative uses (uses other than biofuel) for the residue of Euglena from which the lipids have been extracted (proteins, degreased Euglena). The company thinks the residue could be used in fish meal. Fish meal is the principal ingredient of the mixed feed used in aquaculture (53% of the total, 29), and both import dependency and prices are high. Annual imports amount to JPY25.9bn (October 216 to September 217), highlighting significant demand. At fisheries, feed costs are high in relation to revenues, putting a strain on management. For farmed yellowtail, which has a production value of more than JPY1bn per year (JPY17.1bn in 212), feed costs account for 73% of revenues for individually managed fisheries, and 89% for corporate entities. The Ministry of Agriculture, Forestry and Fisheries (MAFF) provides compensation through a fishery management safety net to help stabilize management, but an urgent need still exists to develop protein sources for an alternative fish meal. euglena s subsidiary euglena Taketomi Prawn Farm, which farms prawns, is studying the use of degreased Euglena as feed. 27/6

28 LAST UPDATE: Prices on mixed feed and imported fish meal for aquaculture (left, center), percentage cost of feed in fishing revenue (sales) for yellowtail and red sea bream (JPY'/ton) Avg. monthly compound feed price (JPY'/ton) 22 Import price (JPY'/ton) Jan 28 Jan 21 Jan 212 Jan 214 Jan 216 Jan 218 ('ton) Jan 28 Source: Shared Research based on Ministry of Agriculture, Forestry and Fisheries data and trade statistics Note: Yellowtail a is for entities managed privately, yellowtail b for corporate entities Jan 21 Import volume (' tons) Import value (JPYbn, right axis) Jan 212 Jan 214 Jan 216 Jan 218 (JPYbn) % 8% 7% 6% 5% Yellowtail a Yellowtail b Red sea bream a Red sea bream b FY26 FY28 FY21 FY212 In April 216, euglena and JA ZEN-NOH (the National Federation of Agricultural Cooperative Associations) signed a joint research agreement regarding the use of degreased Euglena as feed. After completing preparatory experiments under this agreement (January 215 to March 216), the partners conducted feeding trials using chickens, pigs, and other livestock (April 216 to end-march 217). Corn accounts for around half of the ingredients used in mixed and compound feed for livestock (46% in FY215), with soybean meal next (13%). The graphs below show domestic import prices and average prices. Feed costs account for a high percentage of costs, so demand for lower-cost alternatives is high. However, soybean prices are low in comparison to fish meal. Annual Japanese imports of soybean meal amount to JPY76.1bn (October 216 to September 217), at an average price of JPY48.1/kg. Imported soybean meal and corn (JPYbn) 4 Soybean cake import value (JPYbn) Soybean cake import price (JPY/kg, right axis) (JPY/kg) (JPYbn) Corn for feed import value (JPYbn) Corn for feed import price (JPY/kg, right axis) (JPY/kg) CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 Source: Shared Research based on trade statistics data CY16 CY17 CY8 CY9 CY1 CY11 CY12 CY13 CY14 CY15 CY16 CY17 Feed costs as a percentage of costs (left, FY214), percentage of use in mixed and compound feeds (right, FY215) Chaff and bran 2,65 11% Others 2,36 1% ('tons) 39% 43% Cattle for breeding Cattle for fattening 48% Cattle for milking 66% 66% 69% Pig for fattening Chicken for broiler Chicken for ovulation Other oil cake 1,35 6% Soybean oil cake 2,96 12% Other grain 3,45 15% Corn 1,8 46% Source: Shared Research based on data from the Ministry of Agriculture, Forestry and Fisheries Time axis As the following chart shows, the company plans to begin operating its biofuel production pilot plant in 219, and apply the knowledge it gains through this plant s operation to a commercial plant, which is to begin operating in the 22s. The commercial plant (target production of 3,kl/year) will be a large-scale production and supply facility, at more than 1,x the size of the pilot plant (125kl/year). (These pilot plant production volumes would enough for weekly round-trip flights between Tokyo and Sapporo.) 28/6

29 LAST UPDATE: The company has licensed from Chevron Lummus Global of the US the BIC Process biofuel production technology developed by two US companies, Chevron (NYSE: CVX) and Applied Research Associates (ARA). Chiyoda Corporation (TSE: 6366) is handling localized plant design and construction. Jet fuel standards will be Jet A based on the American Society for Testing Materials (ASTM) standards. Airlines and airports employ these standards, and as of September 216 Chevron s application to use these hydrocarbon standards for biofuels refined using the BIC Process was under deliberation. Companies in the Made-in-Japan Biofuel Project Note: Companies on a blue background are partners in the Made-in-Japan BioFuel Project Schedule Supply chain euglena and ITOCHU ENEX CO., LTD. (TSE: 8133) will supply feedstock for biofuel. Jet fuel will be produced at the company s refining plant, and biofuel is expected to be supplied by refuelers directly to aircraft or by using hydrants. Biofuel feedstock Feedstock used in the Made-in-Japan Biofuel Project is not limited to Euglena, and Itochu Enex Co., Ltd. is scheduled to handle the procurement of biofuel sources other than Euglena. At present, no plan is in place to produce Euglena at overseas bases, and the jet fuel refining plant will use a location in Japan to supply domestic airports. However, euglena says it might set up overseas bases if it expands its business overseas. As a pilot project to produce biofuel algae, a pool for culturing biofuel-use microalgae was constructed in the town of Taki, Mie Prefecture, and testing is taking place from October 216 through March 219. On July 31, 217, the company announced the construction of a large-scale microalgae cultivation pool utilizing paddy field creation techniques, a project it has been working on jointly with Kobashi Kogyo based in Okayama city (Okayama prefecture). The Japanese technique to plaster ridges between paddy fields was applied to the construction of this pool, which is the first of its kind in the world. The size of one pool is approximately 1,sqm, and euglena plans to expand the facility up to 3,sqm in 218. The pool can be constructed at one tenth of the cost and one fourth of the construction period of a similar pool made of concrete, which means the company can reduce cost of mass producing biofuel-use microalgae and can swiftly expand production volume as necessary. 29/6

30 LAST UPDATE: euglena had signed an agreement with Kobashi Kogyo in September 214 to jointly research and develop a steady and efficient method of culturing microalgae. The two companies have been working together to apply paddy field creation techniques in the construction of a cultivation pool for biofuel-use microalgae and to develop ways to reduce associated construction costs. euglena of the future The company publicizes its vision for the future of Euglena (see below). It is already undertaking some of the initiatives. Shared Research believes these initiatives are in line with the company s corporate philosophy and principles, which are premised on social significance and will also help it grow. euglena of the future: The company conducts daily research to make people and the Earth healthy, and support companies that develop technologies toward these objectives. Factories of the future: These factories will produce environment-friendly products derived from Euglena, including biofuels, bioplastics, and pharmaceuticals. Food of the future: Euglena, a rich source of nutrients, will be used as fertilizer for agricultural products, turning Japan into a food-exporting country. Fuel of the future: Biofuels will become commonplace through low-cost mass production, and Japan will become a fuel-supplying country. Rivers of the future: Water purification characteristics will return waterways to their natural state, turning the world s tap water into delicious drinking water. Branded livestock of the future: euglena brand cows will be grown with nutrient-rich Euglena. School lunches of the future: Euglena, with its excellent nutritional balance, will be used in school lunches, becoming familiar foodstuffs from a young age. Space development of the future: Euglena will be used as an essential provider of air and food in spacecraft, making interstellar travel a real possibility. 3/6

31 LAST UPDATE: Business, market, and value chain Business overview Performance 16, 14, 12, 1, 8, 6, 4, 2, -2, Sales Operating profit GPM (right axis) OPM (right axis) 73% 74% 68% 13,887 61% 54% 53% 56% 54% 55% 11,13 5% 38% ,924 3,46 2,92 1,166 1, FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 8% 7% 6% 5% 4% 3% 2% 1% - -1% Quarterly performance (JPYbn) (JPYbn) % 68% 7% 72% 74% 73% 73% 75% 74% 74% 72% 66% % % % 54% 53% 55% 57% 59% 61% 59% 53% 55% FY9/12 Sales Gross profit Operating profit GPM (right axis) FY9/13 FY9/14 FY9/15 FY9/ FY9/17 8% 7% 6% 5% 4% 3% With mass cultivation technology for the Euglena gracilis microalgae 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 biofuel business). The company aims to generate cash flow in the Healthcare segment, the Agriculture and Aquaculture Products segment, and the Energy and Environment segment. It intends to invest the cash flow generated through these businesses to meet new growth targets. As of FY9/16, the Healthcare segment generated essentially all cash, sales, and operating profit. Sales breakdown FY9/14 OEM and ingredients 65% Group B2C sales 26% Group B2B sales 8% Other 1% FY9/15 OEM and ingredients 37% Group B2B sales 16% Group B2C sales 45% Other 2% FY9/16 OEM and ingredients 18% Group B2B sales 16% Group B2C sales 61% Other 5% 31/6

32 LAST UPDATE: Healthcare segment Performance 3, 2, 1, 36% Sales Operating profit OPM (right axis) 3,63 3,65 3,273 3,35 3% 29% 26% 28% 2,888 2,952 2,914 22% 22% 21% 22% 22% 21% 21% 2,34 21% 2% 22% 18% 1,793 18% 1,372 1,582 17% 1,162 11% 11% % % FY9/12 Q3 FY9/13 Q3 FY9/14 Q3 FY9/15 Q3 FY9/16 Q3 FY9/17 Q3 3% 2% 1% % Sales by category 3, Parent B2C sales épauler 6 Group B2B sales 8 OEM, ingredients, and overseas 25 Other 2,5 2, , , FY9/14 FY9/16 FY9/14 FY9/16 FY9/14 FY9/16 FY9/14 FY9/16 In the Healthcare segment, the company has succeeded in turning two of the five Fs of biomass into products: food (functional foods) and fiber (cosmetics). For feed, another of the five Fs, it has commercialized pet foods containing Euglena, but is still researching the application of Euglena as feed for stockbreeding and aquaculture. One source of cash flow is the OEM supply of Euglena powder, and the company is using the generated cash to strengthen the B2C sales business. Its flagship product is midorijiru (euglena farm s green juice), which has shown rapid growth and become a source of cash flow. The company handles a variety of products. Key products using Euglena as a main ingredient are described in the following chart. See the Medium- to long-term strategy section for details. Value chain Euglena: Latin for beauty (eu) and eyeball (glena) Euglena gracilis is a type of microalgae, as are Spirulina and Chlorella. Measuring.5mm 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 32/6

33 LAST UPDATE: nutrients and generates lipids. Like plants they produce nutrients through photosynthesis and absorb CO 2, 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. Paramylon: As a dietary fiber, Paramylon excels at absorbing oil but is indigestible, so it passes through the human body. Research findings suggest that Paramylon is effective in discharging fat and cholesterol, inhibiting purine absorption, reducing uric acid in the blood, and alleviating symptoms of atopic dermatitis, influenza, gastric ulcers, and rheumatoid arthritis. (Processed into film, Paramylon also has wound-healing effects.) Euglena and Paramylon Direct sales (B2C) channel Regular purchase customers (left, people) and sales (right, JPYmn) (') FY9/14 No. of regular customers: Chlorella Supply No. of regular customers: ex. Chlorella Supply 21 QoQ change (right axis) FY9/ FY9/16 FY9/17 (') 2,5 +4 2, +3 1,5 +2 1, +1 5 Group B2C sales Selling expenses QoQ change (right axis) +52 2,3662,375 2, ,115 1,751 1,748 1, , FY9/14 FY9/15 FY9/16 FY9/17 Overview and business scale The direct sales business is driving the company s growth over the short to medium term. The business involves direct sales of functional foods, such as the Euglena-containing midorijiru (euglena farm s green juice) and Chlorella. The domestic market for aojiru (green vegetable juice), a functional food similar to midorijiru, has a value of JPY6.bn (216 forecast, Fuji Keizai), and Chlorella has a market value of JPY2.bn (FY212, Yano Research Institute). Given the size of these markets, the company believes Euglena has ample market potential (JPY12.5bn in FY215, based on company estimates). The number of regular purchase customers continues to grow, and the company is investing aggressively in advertisement to acquire new subscribers. To raise lifetime value (LTV), the company is 1) raising sale per customer by encouraging a shift from buying midorijiru (euglena farm s green juice) to euglena PLUS, the higher-end supplement product, 2) promoting cross-selling by generating additional sales of related products and cosmetics, 3) and increasing the retention rate by analyzing the reasons for cause of cancellation and introducing alternative products such as MEDICA+ to avoid customers switching to competitors health foods such as blueberries. The company launched its direct-sale skincare brand, one, in May 216, and aims to expand B2C sales of cosmetics. In November 216, euglena announced its medium-term management targets: JPY2.bn in group B2C sales. 33/6

34 LAST UPDATE: Profitability The direct sales channel has the highest GPM within the Healthcare segment, at around 8% before accounting for SG&A expenses such as transportation and call center expenses. However, the OPM is affected by the major advertising expenses incurred to attract new customers. Once such upfront expenditures subside, the company expects OPM to improve for this business, which is anticipated to be a cash cow. The company aims for consolidated sales of JPY2.bn. Wholesale (B2B) channel Sales 2, 1,5 1, Food Cosmetics Total 97 1,767 1, Food Cosmetics Total FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 In this business, the company wholesales its products, such as Euglena beverage (JPY24, launched in May 214), to convenience stores and other retailers. Adopting a profit-focused strategy, the company is working to make Euglena beverage attractive enough for consumers to pay the JPY24 retail price. If it can lower costs, the company believes the market has significant growth potential, considering the size of the markets for vegetable juice (Kagome estimate of JPY149.2bn in 216) and lactic acid bacteria drinks (JPY97.7bn). (Cosmetics explained later.) Profitability In this market, GPMs differ by product but are typically around 5% (lower for beverages). If the company wants to capture some of the market for vegetable juice and lactic acid bacteria drinks, its profit margins may fall as it reduces prices. OEM, ingredients, overseas (B2B2B2C) Sales 2,5 2, 1,5 Food Cosmetics Total 1,993 2,188 1,951 2, Food Cosmetics Total , FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 As of FY9/16, this business was a cash cow. In the Healthcare segment, the company has transitioned the focus of its business structure from OEM supply to direct-to-consumer sales. Accordingly, the company has not cultivated new OEM clients since October 214 when euglena signed comprehensive agreement related to Euglena-blended products with Takeda Pharmaceutical Co., Ltd. The top 1 OEM clients account for 8% of OEM sales. Profitability For food products, the more middle men between the company and end-consumers (models: B2B2B2C for OEM supply, B2B2C for wholesale, B2C for direct sales), the lower the contribution of sales and profits to overall profit margins, and the more difficult it becomes to control the brand image of euglena. At the same time, OEM supply is low-cost in terms of SG&A expenses and 34/6

35 LAST UPDATE: contributes to stable operating performance. As OPM is unlikely to change significantly, the company believes this business will remain a cash cow. Cosmetics: OEM and B2B sales Sales (JPYmn, not disclosed from FY9/17) FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/12 FY9/14 FY9/16 Cosmetics sales are included in B2C sales; group B2B sales; and OEM, ingredients, and overseas categories. In the cosmetics subsegment (previous figure), the company primarily conducts sales on an OEM-basis (brand name: euga ) to Socie World Co., Ltd., and wholesales its own cosmetic brand, B.C.A.D. The company s direct sales brand one is included in B2C sales. OEM supply sales vary by quarter, and sales grow in quarters that see OEM shipments such as Q3 FY9/15 and FY9/16. The number of shops selling B.C.A.D. is on the rise, but slowly. The company aims to achieve growth by strengthening its product lineup. Profitability As with food, in the cosmetics business euglena is transitioning from OEM supply (B2B2B2C) to wholesale through distributors (B2B2C) and then to direct sales (B2C). Profitability is rising as more products are sold directly to end customers rather than through middlemen (retailers). The company aims to improve profitability further by boosting recognition of its B.C.A.D. and one brands. euga, B.C.A.D., one Other Healthcare business Items not included in the Healthcare segment above include an antenna shop in Ishigaki Island, sales of Chlorella and wild Kalahari watermelon, business in the Agriculture and Aquaculture Products sector such as prawn farming and mung bean imports, and overseas business. Ishigaki euglena Garden on Ishigaki Island Source: Shared Research 35/6

36 LAST UPDATE: Energy and Environment segment Performance FY9/12 Sales Operating profit FY9/13 FY9/14 FY9/15 FY9/ FY9/ In the Energy and Environment segment, the company continues to engage in R&D centered on biofuel development. euglena is also taking part in Japan Cabinet Ministry s Impulsing Paradigm Change through Disruptive Technologies Program (ImPACT) and contracted R&D for the Ministry of Land, Infrastructure, Transport and Tourism s Breakthrough by Dynamic Approach in Sewage High Technology Project (the B-DASH Project). DeuSEL Sales in this category come mainly from pilot testing under the DeuSEL Project, a plan for the adoption of biodiesel fuel. Because of the company s involvement in numerous R&D activities, however, this segment generates operating losses. DeuSEL Project: Began in July 214. The project is a joint research project toward the commercial use of next-generation biodiesel fuels and involves, as a first step, the regular operation of a DeuSEL bus. Isuzu Motors is in charge of travel and performance testing, while euglena handles R&D and production. In July 214, the bus commenced regular operation (on business days) between Isuzu s Fujisawa Factory and the nearest station. Next-generation biodiesel fuel: Conventional biodiesel fuels had a fatty acid methyl ester (FAME) molecular structure, containing oxygen, making 1% substitution for petroleum-based diesel fuel problematic. Accordingly, Japanese standards allowed mixing FAME with petroleum-based diesel fuel only up to 5%. As next-generation fuels have a hydrocarbon molecular structure, the same as petroleum-based diesel fuel, technically it can be used as a 1% substitute. (However, no regulation is currently in place in Japan.) Other business Production The company produces all the Euglena powder it uses in foods on Ishigaki Island, in Okinawa. For biofuel, the company is making use of the Fiscal 216 Subsidy for Pilot Project for the Production of Microalgae for Biofuel, provided by the Ministry of Economy, Trade and Industry s Agency for Natural Resources and Energy, to build one of Japan s biggest pools for culturing fuel-use microalgae, and began pilot testing in October 216. Shared Research estimates that Yaeyama Shokusan, which handles the production of Euglena powder as ingredients, produces Chlorella using a similar process as for Euglena (note, the company does not publish any information on its Euglena production methods). For fuel-use Euglena, the content rate of lipids is extremely important from a cost perspective. Furthermore, the cultivation facilities need to be larger than those for food-use Euglena in order to achieve economies of scale. Once the pilot plant proves successful, the company plans to perform culturing Euglena at a larger and lower cost commercial plant. Production capacity The Healthcare segment continues to grow at a rapid pace, doubling YoY, and the company says its facilities are operating at full capacity. The company recognizes that cultivation facilities and drying machines are production bottlenecks, and continues to increase production capacity. In terms of cash outflow, the increase of production capacity does not require large investments. However, the company is aware that its current concentration of production facilities on Ishigaki Island is an issue in respect of the diversification of risk. 36/6

37 LAST UPDATE: Research and development In FY9/16, R&D expenses accounted for 3% of sales, and this percentage has fallen as sales have increased. Part of the company s research is funded by government subsidies. For an R&D project that is 1% funded by subsidies, R&D expenses of JPY1mn by the company would be matched with JPY1mn in subsidies. Not all subsidies are booked as expenses, but the following should be noted: (1) Because subsidies are received sometime after the related investments and expenses are made, expenses are recorded temporarily in advance, giving the appearance of increases. (2) Subsidies are recorded as non-operating income, so the related investments and expenses appear to reduce operating profit. (3) Subsidies are paid in May June according to the national government s fiscal year (April through March), and may straddle the company s fiscal year (ending in September). R&D expenses R&D expenses % of sales (right axis) % 7% 6% 5% 4% 3% FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 2% Principal group companies M&A Merged % of voting shares Acquisition cost Before After Acquisition price Acquisition costs Yaeyama Shokusan Mar % 1% Cash price of shares held Advisory fee and others Plant High Technology Institute Nov % 11 9 Cash 2 Advisory fee and others euglena art Jul ,26 1,13 13 Advisory fee and others YU-KI May 215-1% 1,26 1,13 euglena common shares at market value 13 Advisory fee and others ART CORPORATION May 215-1% YU-KI 1:3998, Art 1:51 Advisory fee and others épauler Sep % euglena common share at market value (1:2849) 7 Advisory fee and others Taketomi Prawn Farm Sep % 9 85 Cash 5 Advisory fee and others Chlorella Supply Dec % Cash 6 Advisory fee and others YeaStar Jun % euglena common shares at market value (1:275) 7 Advisory fee and others Shares Goodwill Total assets Total liabilities Earnings contribution (') Depreciation Current Fixed Current Fixed Sales OP Yaeyama Shokusan , , Plant High Technology Institute 36 1-yr straight Euglena Art yr straight YU-KI 1-yr straight ART CORPORATION 1-yr straight épauler yr straight , Taketomi Prawn Farm Chlorella Supply yr straight YeaStar yr straight Note: Figures are as of acquisition dates Yaeyama Shokusan: Converted from ingredient producer to wholly owned subsidiary Since the time of its foundation, euglena has outsourced the production of Euglena powder as an ingredient to Yaeyama Shokusan, which it converted to a wholly owned subsidiary in March 213. euglena has taken over sales of Chlorella from Yaeyama Shokusan, which now concentrates solely on production, producing all the company s food-use Euglena, as well as producing fuel-use Euglena in the same facility. euglena art: Has proprietary distribution channel In May 215, euglena acquired shares in YU-KI Inc. and ART CORPORATION, both of which were its OEM client companies and had their own distribution channels such as beauty salons and small retailers. In July 215, euglena initiated an absorption-type merger, with euglena art (formerly YU-KI Inc.) as the surviving company and ART CORPORATION as the absorbed company. The new company strengthened its branding by incorporating the euglena brand and logo, began handling euglena s products, and reinforced product development. Integration synergies, such as through personnel exchanges and shared sales expertise, are beginning to appear. 37/6

38 LAST UPDATE: épauler: Has direct sales route In September 215, euglena converted épauler into a wholly owned subsidiary, which had been its OEM client and sold health products via direct sales. Integration synergies are appearing, similar to those at euglena art. Following the integration, euglena introduced advertising linkage and controls. Previously, euglena newspaper ads were run, for example, on Mondays and épauler ads on Tuesdays. By adopting a headquarter-driven advertising strategy, the company sought to improve ad efficiency. It has also reduced costs by integrating direct sales systems, logistics, and call centers, and strengthening raw materials purchasing power. euglena Taketomi Prawn Farm: part of the growth strategy in the Agriculture and Aquaculture Products sector In September 215, euglena acquired this company s shares and converted it to a wholly owned subsidiary. The subsidiary is located in Taketomi Island, Okinawa Prefecture (on the south of Taketomi Island, one of the Yaeyama Islands, which include Ishigaki Island, a 15-minute boat ride away). The subsidiary, which has 7,sqm of on-land aquaculture ponds, farms and sells prawns. In June 215, it had sales of JPY28mn, recurring profit of JPY9mn, and net income of JPY51mn. By undertaking direct sales (B2C), and acquiring prawn farming companies, the company plans to grow the prawn farming business. The subsidiary s results are highly seasonal. After the farmed prawns are shipped in June, the farming pool is cleaned in July August, and cultivation begins again in August September. Winter is the peak demand period for farmed prawn, and the subsidiary generates almost no sales in (July September). Unique among the group s subsidiaries, its fiscal year-end is June, when the cultivation cycle ends. Grameen euglena: part of the growth strategy in the Agriculture and Aquaculture Products sector In October 214, euglena acquired shares in this company from Yukiguni Maitake (formerly TSE2: 1378, delisted in June 215) and converted it to a consolidated subsidiary (5% stake, with the remaining 5% held by Grameen Group of Bangladesh). The subsidiary operates a mung bean project in Bangladesh. Social significance and revenue source The Mungbean Project offers benefits for Bangladesh, Japan, and euglena. For Bangladesh, the project provides employment opportunities in farming areas, the chance to improve nutrition, and cultivation technology support for increasing crop yields and quality, resulting in higher earnings. For Japan, the project offers a way to ensure a steady supply of mung beans, which are used for bean sprouts (accounting for more than 8% of Japanese production). Almost all mung beans are imported (9% of them from China), and this project provides a way to counter price fluctuation risk to support domestic producers of bean sprouts, many of which are going out of business. For euglena, the project is a way to increase earnings by selling mung beans imported from Grameen euglena to domestic producers of bean sprouts. In short, in addition to its social significance, this project could provide euglena with a source of earnings. Dhal: In Bangladesh, mung beans are crushed and made into a curry (dhal curry) and used in bean soup (dhal soup). The beans, which are a source of protein, serve as an everyday main dish. For this reason, in the marketplace the beans are often sold crushed, so until the launch of the project in 212, little attention was placed on the quality of the mung beans themselves. Grameen euglena and its predecessor, Grameen Yukiguni Maitake, have worked with farmers to increase awareness and provided technological instruction, leading to mung bean exports to Japan. The Mungbean Project made use of a JETRO system to begin testing, followed by the establishment of Grameen Yukiguni Maitake in July 211. Shanghai Euglena Shanghai Euglena generated sales of less than JPY1mn in FY9/16, but euglena sees much potential in overseas markets, and plans to engage in cross-border e-commerce. As in Japan, the company s goal is to transition its business development from OEM supply to sales through retailers (B2B) and then to sales directly to consumers (B2C). At the moment, recognition of Euglena within China is low. Due to business customs that differ from those in Japan, the company is proceeding on a trial-and-error basis, including for advertising methods. Shanghai Euglena was still generating operating losses in FY9/16, but is expected to move into the black by FY9/18. As its main business is OEM supply, Shared Research believes that operating costs are unlikely to rise substantially, so steady sales increases should translate into profits. As the company starts moving toward B2C sales, however, upfront costs are likely to increase. 38/6

39 LAST UPDATE: Expanding sales route by converting Chlorella Supply to a subsidiary In December 216, euglena converted Chlorella Supply to a wholly owned subsidiary. There are three objectives for this move: 1) acquire a base of more than 58, accumulated customers, 2) benefit from synergies with euglena s Chlorella sales business, and 3) integration synergies through expansion of euglena s business infrastructure (boosting profit). The 58, figure is the accumulated number of customers who have purchased health food products to date, mainly Chlorella, and are potential customers for euglena s food direct sales business. By marketing to these potential customers, euglena aims to increase the number of regular customers. Although the Chlorella market appears to be shrinking, euglena says it will focus on cultivating the new customer base for B2C sales, raising sales per customer by cross-selling other group products, acquiring regular customers for Chlorella Supply s products, and benefiting from efficiency improvements and other synergies. Even so, Shared Research believes the impact to consolidated earnings at the operating level will be slight in FY9/17, given the amount of goodwill. Chlorella Supply s operating performance 1, Sales FY12/13 FY12/14 FY12/15 FY12/17 Est. Shared Research based on company data 554 FY12/18 Est. 578 FY12/19 Est Operating profit Recurring profit OPM (right axis) % %.7% 1.1% FY12/13 FY12/14 FY12/15 FY12/17 Est. 5.5% FY12/18 Est. 1.1% FY12/19 Est. 12% 11.4% 1% 8% 6% 4% 2% % Alliances Business and R&D partners (red indicates euglena shareholders) Note: Impulsing Paradigm Change through Disruptive Technologies Program (ImPACT) and Cross-ministerial Strategic Innovation Promotion Program (SIP) are subsidized by Cabinet Office, Government of Japan. 39/6

40 LAST UPDATE: Strengths and weaknesses Strengths High barriers to entry Since the company achieved success with outdoor mass cultivation of Euglena on December 16, 25, no similar company has emerged. Barriers to entry are high, as success in the Euglena-related market is unlikely without the outdoor mass cultivation technology like that developed by the company. We see this as one of its major strengths. Core technologies and trade secrets Even if another company were to overcome the hurdle of outdoor mass cultivation of Euglena, euglena s strength is its technologies for producing Euglena that has a variety of functions and characteristics. Different from industrial products or software development, it is not possible to reverse engineer Euglena, produced through the use of special culture liquid and repeated cell division in a certain environment. Furthermore, the company s products use dried Euglena organisms, which cannot be brought back to life and cultured. Euglena s characteristics Food-use Euglena has 59 nutrients found in meat, fish, and vegetables (14 vitamins, 11 unsaturated fatty acids, 18 amino acids, 9 minerals, and 7 other components including Paramylon). As such, Euglena is a relatively competitive health food compared with aojiru (green vegetable juice) and vegetable juice. Euglena is also a competitive biofuel feedstock: compared with sugar cane and other biofuel feedstocks that take longer to harvest, Euglena can be produced in only around two weeks, allowing for a swift transition to other uses if biofuel becomes unprofitable due to fluctuations in crude oil prices. euglena differs from other biofuel companies in that it also generates cash flow from Euglena for food, which is a management advantage. Weaknesses Performance skewed toward the Healthcare segment, particularly for B2C sales The company is highly dependent on the Healthcare segment and food-use Euglena, its mainstay product. Furthermore, earnings rely heavily on B2C sales of midorijiru (euglena farm s green juice) and other health foods. If poor-quality Euglena were to enter the market, the company could suffer from harmful rumors that might lead to concerns about the quality of the health foods and a substantial loss of customers. This is a risk rather than a weakness, but the company s almost total dependence on a single product category can be seen as a weakness. Highly dependent on advertising Sales in the Healthcare segment continue to grow sharply, but the direct sales of the company s mainstay midorijiru (euglena farm s green juice) still account for only around JPY4. 5.bn per year. The domestic market for aojiru (green vegetable juice) has a value of JPY8.bn, suggesting that general recognition of the company s product is still low. As of FY9/16, the company still tried to raise brand recognition and attract new customers, so it invested nearly half of its gross profit in promotional and advertising expenses. Although the company is controlling these expenditures based on detailed analysis, its dependence on advertising is high, which may be constraining profitability. Personnel shortage due to rapid growth Despite its rapid growth, the company has limited production and employee capacity. Meanwhile, given its accumulated cash position, it needs to develop its business further to improve capital efficiency. It must allocate management resources to its growing, existing business, but this leaves it with a shortage of personnel to launch new businesses, hampering its business development. We believe aggressive recruiting will be key to the company s ability to hire talented personnel. 4/6

41 LAST UPDATE: Historical performance 1H FY9/18 earnings (out May 11, 218) 1H: Downward revision. The company planned for FY9/18 to be a period of greater upfront spending on advertising and promotion and actively invested during 1H. A prerequisite of such investment was that lifetime value (LTV) be greater than cost per order (CPO), but LTV was below expectations. Euglena therefore changed to an advertising and promotion plan focused on costs effectiveness. It has temporarily limited spending, with the Healthcare segment set to move into the black in 2H. Revised figures: The company announced new profit-related figures, with the forecast for operating loss at JPY1.8bn (JPY7mn in 2H) and net loss at JPY1.7bn. CPO: Number of regular customers is steady as expected. LTV: Repeat purchases by regular cosmetics customers were below expectations (in terms of duration of purchase history and frequency of purchases), so LTV was lower than expected. Policy change: a company message not to ostensibly increase numbers of regular customers and sales based only on CPO, without corresponding LTV 2H: Euglena will put more resources toward the development of new products and increasing repeat purchases by regular customers, with the aim of getting LTV above CPO. Development of new products: Euglena aims to re-accelerate growth in the direct sales business from FY9/19 by developing attractive new products that will stimulate customer demand. Increasing repeat purchases: The company aims to increase LTV by strengthening initiatives to increase repeat purchases and improve cross-selling. Regular customer numbers: The number of regular customers grew by 62, to reach 272,, on track to achieve its target of 3, regular customers for this fiscal year. The greatest gain was in the number of regular direct sales customers for cosmetics (surpassing 1,). Plan for domestic biofuel production: Preparations under way to get a system in place in preparation to start operation of a pilot production plant that is scheduled to be completed in October 218 (progressing as planned). Will utilize euglena-derived biofuel manufactured for testing in 212 as fuel for an electric generator (plans to use roughly 6kl from January to June). FY9/19: it is expected that a consolidated operating loss will arise from the lump-sum amortization of JPY5.8bn construction expenses for a pilot plant, built as part of domestic biofuel plans, in. In the Healthcare segment the company will focus on creating new products into which upfront expenditure can be directed, while aiming for positive operating cash flows and operating profit. 41/6

42 LAST UPDATE: Performance by quarter 4 Sales Gross profit Operating profit GPM (right axis) % 68% 7% 72% 74% 76% 73% 73% 75% 75% 74% 74% 72% % % % % % 54% 53% 55% 57% 59% 59% 2 53% 55% (JPYbn) FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 8% 7% 6% 5% 4% 3% Number of group direct sales (B2C) regular customers (left) and group B2C sales (right) (') FY9/14 No. of regular customers: Chlorella Supply No. of regular customers: ex. Chlorella Supply QoQ change (right axis) FY9/ FY9/16 FY9/ FY9/18 Group B2C sales Selling expenses QoQ change (right axis) (') 2,752 2, ,5 2,366 2,46 2, , , 1,751 1,748 1, ,447 1, , FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Overview of results In 1H FY9/18, the company posted sales of JPY7.2bn (+8.3% YoY) and operating loss of JPY1.1bn (-JPY1.4bn YoY). The mainstay group B2C sales business was the earnings driver, with sales up 16.% YoY, but group B2B sales (-3.3%) and OEM, ingredients, and overseas categories (-17.%) weighed on overall sales, resulting in only 8.3% growth. In terms of profits, euglena strategically strengthened advertising for direct sales of cosmetics, an area expected to generate sales and profits over the medium to long term, and this pushed up SG&A expenses by JPY1.3bn YoY. Although the number of regular customers is steadily growing (272, customers [+6,] toward a full-year target of 3, [+9,]), with the greatest gain in the number of regular direct sales customers for cosmetics, the duration of purchase history and frequency of purchases were below expectations. As a result, sales did not grow as expected, and the company booked an operating loss of JPY1.1bn. Therefore, euglena announced a downward revision of its sales forecast (from JPY18.bn initially to JPY15.bn after the revision). Since its plan for advertising and promotion spending has solidified, the company also disclosed profit-related forecasts (operating loss of JPY1.8bn, recurring loss of JPY1.5bn, and net loss of JPY1.7bn). Regarding downward revision Decided to reduce advertising investment, as direct sales cosmetics repeat purchases took a longer period than expected and LTV decreased As the company is seeking to strengthen its earnings base in the medium to long term, it had laid out a spending plan calling for active spending on advertising and promotion and R&D activities in FY9/18 (with the scale of such spending to be determined flexibly based on cost performance). It followed this plan in 1H, spending on advertising for products that would have a greater lifetime value (LTV) than cost per order (CPO) and for direct sales cosmetics, which proved to have a good customer acquisition ratio in FY9/17. In 1H, it achieved the targeted efficiency for CPO, but LTV was below expectations. In terms of R&D, progress was as planned. In terms of M&A, it conducted two acquisitions, with earnings contributions expected from FY9/19 onward. Results of advertising and promotion did not meet expectations, and so a deviation from forecasts arose. In FY9/18 the company invested primarily in advertising in order to increase the numbers of regular direct sales customers of cosmetics, for which a high CPO efficiency is expected. However, even though the company was able to steadily obtain new customers in line with targets, there was a longer 42/6

43 LAST UPDATE: interval between repeat purchases than the company expected (taking months, rather than cosmetics being consumed within one month), so LTV fell below company expectations. It seems that features of the company s products (the cream spreads smoothly, only a small amount need be used) also contributed. As the expected CPO efficiency is being achieved, the option of pursuing increased regular customer numbers and sales could be considered. However, the company decided to reduce investment in advertising, on the basis that ostensibly increasing regular customer numbers (and sales) without corresponding LTV is meaningless. Euglena is scaling down ad spending in 2H and moving focus to new product development and increasing repeat purchases by regular customers. (The company started to reduce advertising expenses in March, but the remaining portion of past orders seems to continue in Q3). Aims to re-accelerate growth in the Healthcare segment from FY9/19 through successful new product development (1) New product development: The company aims to further lower CPO by developing attractive new products that will stimulate customer demand, with target of development shifting to areas where short-term (rather than medium- to long-term) results can be expected. (2) Increasing regular customer repeat purchases: the company aims to increase LTV by strengthening initiatives to increase repeat purchases and improve cross-selling. (3) Lower regular customer cancellation rate: the company will lessen the impact of reduced advertisement expenses, which resulted in fewer regular customer numbers by strengthening measures to reduce the cancellation rate. (4) Reallocation of management resources: the company is taking intensive measures such as reorganizing the allocation of management resources and clarifying the order of priorities to correct the distortions occurred in 1H, in 2H. The company will aim for a return to positive operating cash flows and the re-acceleration of growth trends, by continuing investments that focus on cost-effectiveness and growth potential from FY9/19. Although there will still be a full-year operating loss, euglena plans to push the Healthcare segment into the black for 2H via these initiatives. The company plans to accelerate growth in the Healthcare segment again through successful new product development. Accordingly, there is no change to the policy of increasing direct sales. Further, the company expects sales growth through cross-selling (that there is little overlap between food and cosmetics regular customers is a source of potential), cosmetics for beauty salon distribution, and strengthening OEM. By reducing advertising expenses to the minimum level necessary, it appears to be possible (depending on the level of the reductions) for the Healthcare segment to achieve an operating profit in 2H (in 1H the Healthcare segment had an operating loss of JPY451mn, and consolidated advertising expenses [almost all of which were in the Healthcare segment) were JPY2.9bn). Advertising expenses, operating profit, and EBITDA 2, 1,5 1, 5-5 EBITDA Advertising expenses EBITDA + Advertising expenses ,214 1,1381,59 1,345 1,172 1,2561,3 1,16 1, 2, 1,5 1, 5-5 Operating profit EBITDA + Advertising expenses Advertising expenses 1,142 1,59 1,2591,55 1,132 1, , FY9/14 FY9/15 FY9/16 FY9/17 FY9/18-1, FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 It is expected that consolidated operating loss will continue in 2H, due to (1) Expenses relating to business expansion and advancing research: increases to expenses such as personnel expenses, management expenses, and R&D expenses; and (2) M&A: expenses increase such as Financial Advisory (FA) expenses, Due Diligence (DD) expenses, and goodwill (JPY77mn to be amortized using the straight-line method over ten years) for Hook, a subsidiary the company acquired in Q2. This can be considered as upfront expenditure for future growth. 43/6

44 LAST UPDATE: For FY9/19 as well, it seems that the company plans to control advertising expenses, assessing its percentage of sales. However, as excessive control of advertising expenditure could hinder growth, its balancing act with investments that focus on cost-effectiveness and growth potential is needed. In FY9/19, will re-emphasize creation of Healthcare segment operating cash flows and progress with biofuel R&D The company targets positive operating cash flows in FY9/19 (although the outlook is significantly negative cash flows due to lump-sum amortization of construction expenses). That is, the company intends to re-emphasize its original stance of positive free cash flow for the company as a whole by creating positive operating cash flows in the Healthcare segment and progressing with biofuel R&D. The company has left the target for consolidated group sales unchanged from the one in medium-term plan (JPY3.bn) in FY9/2. Additional information on performance Topics In March 218 the company launched a new brand, euglena MyHealth, its new brand in the Life Sciences and IT field. This leverages an expertise of Genequest Inc., which euglena made its wholly owned subsidiary in October 217, a pioneer of the area to provide large-scale gene analysis service to individuals. In March this new brand launched a gene analysis service (JPY29,8 for an analysis kit), in May genetic predispositions to alcohol check (JPY5,98 for an analysis kit), and it plans to gradually expand with a urine analysis service at early summer, and an intestinal flora examination service and individual medical consultation service in the second half of the year. In the future, the company aims to expand into the application (monetization) of the life sciences big data it accumulates, in scientific research and services. At a briefing the company suggested that it plans to invest a great deal over the next three years. Although it is included in the Healthcare segment in FY9/18, it is possible that it will be treated as an independent segment in the future. Healthcare segment Healthcare segment 36% 3,273 3,35 3,63 3,65 3,729 Sales Operating profit OPM (right axis) 3,442 3% 2,888 2,952 2,914 26% 28% 29% 3, 3% 22% 22% 2,34 21% 22% 22% 21% 21% 21% 22% 2% 2, 18% 1,793 18% 2% 1,162 1,372 1,582 17% 11% 11% , 4% % % % % , -9% -1% Q3 Q3 Q3 Q3 Q3 Q3 Q3 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 3, 2,5 2, 1,5 1, 5 FY9/14 Parent B2C sales FY9/16 épauler FY9/ FY9/14 Group B2B sales FY9/16 FY9/ OEM, ingredients, and overseas FY9/14 FY9/16 FY9/ FY9/14 Other FY9/16 FY9/18 New products: Various developments, including the company s first supplementary drink to help beauty care eu (direct sales), and euglenastyle+ (distributors), a new brand to support enhancing health. Overseas: the China business is in the process of reviewing not only OEM, but business strategy. 44/6

45 LAST UPDATE: Agriculture and Aquaculture Products segment: prospect of yield growth in FY9/19 for Bangladeshi Mungbean project. M&A: Hook, Inc. was brought into the group in February 218. It forecasts sales of JPY1.2bn and operating profit of JPY1.1mn in FY3/19. SG&A expenses (JPYbn) (JPYbn) % 31% 36% 45% 5% 52% 47% 4% 53% 59% 61% FY9/12 Personnel expenses Administrative expenses R&D expenses Selling expenses SG&A ratio FY9/13 FY9/14 52% % 93% 62% 59% 58% % 7% % % 74% 57% % 6% FY9/15 FY9/16 FY9/17 FY9/18 14% 12% 1% 8% 6% 4% 2% % 45/6

46 LAST UPDATE: Financial statements Income statement Income statement FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 FY9/18 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales ,166 1,586 2,92 3,46 5,924 11,13 13,887 18, Healthcare ,164 1,581 2,87 3,39 5,98 11,93 13,877 Energy and Environment YoY % 34.2% 232.9% 58.7% 36.% 31.9% 45.6% 94.5% 87.4% 25.1% 29.6% Healthcare % 34.2% 232.9% 58.4% 35.9% 32.% 45.6% 94.4% 87.8% 25.1% Energy and Environment % 1.% 45.7% 136.% -39.3% 1.7% CoGS ,198 1,95 2,966 2,678 CoGS ratio 62.4% 45.9% 49.7% 46.7% 44.3% 45.7% 45.3% 39.3% 32.2% 26.7% 19.3% Gross profit ,144 1,849 4,19 8,137 1,29 GPM 37.6% 54.1% 5.3% 53.3% 55.7% 54.3% 54.7% 6.7% 67.8% 73.3% 73.5% SG&A expenses ,76 3,543 7,443 9,258 Selling expenses ,25 5,39 6,532 Personnel expenses ,294 Administrative expenses ,1 R&D expenses Other YoY % -8.1% 67.% 48.6% 55.7% 75.2% 76.3% 17.6% 11.1% 24.4% Selling expenses % 157.4% 139.6% 21.2% Personnel expenses % 4.7% 63.1% 45.3% Administrative expenses % 78.6% 67.4% 23.6% R&D expenses 24.9% 2.7% 69.% 59.3% 33.8% 34.2% 56.3% 51.1% 34.7% 22.% Other 24.6% -9.9% 66.6% 46.6% 6.3% SG&A ratio (% of sales) 98.6% 94.7% 64.8% 32.5% 3.4% 34.8% 46.3% 56.% 59.8% 67.% 66.7% Selling expenses % 28.7% 38.% 48.5% 47.% Personnel expenses % 12.7% 9.2% 8.% 9.3% Administrative expenses % 8.9% 8.2% 7.3% 7.2% R&D expenses 6.3% 13.6% 1.4% 5.3% 5.3% 5.2% 5.3% 5.7% 4.4% 3.2% 3.1% Operating profit Healthcare ,122 1,577 1,92 Energy and Environment Adjustments YoY % 4.5% -42.7% -19.4% 234.7% 45.7% 37.% Healthcare % 15.4% -7.5% 2.2% 7.6% 4.5% 2.6% Energy and Environment OPM -6.9% -4.6% -14.5% 2.8% 25.3% 19.4% 8.4% 4.7% 8.% 6.3% 6.8% Healthcare -6.9% -4.6% -14.5% 41.4% 44.% 37.3% 26.2% 21.6% 18.9% 14.2% 13.7% Energy and Environment % -7.1% -5.8% -5.4% -5.5% -1.9% -1.8% -2.2% EBITDA ,14 1,413 YoY % 8.9% -34.% -1.2% 29.% 56.8% 39.3% EBITDA margin -6.9% -4.6% -14.5% 2.8% 25.3% 2.2% 1.1% 6.9% 1.9% 9.1% 1.2% Non-operating income (expenses) Financial income Gains on foreign exchange Equity in income of affiliates Other non-operating income Recurring profit ,27 YoY % 3.6% -18.7% -27.7% 279.3% 3.% 27.8% RPM -61.3% -39.7% -13.8% 24.9% 26.9% 2.5% 12.7% 6.3% 12.3% 8.5% 8.7% Extraordinary gains Loss on impairment of fixed assets Gain on bargain purchase Income taxes Implied tax rate % 34.6% 39.3% 17.8% 38.4% 38.6% 27.6% 35.2% Non-controlling interest Net income attrib. to parent company shareholders YoY % -3.6% 144.4% -75.5% 297.4% 43.4% 16.7% Net margin -63.7% -41.% -12.4% 24.9% 17.6% 12.5% 23.1% 3.9% 7.9% 6.1% 5.7% Capital expenditures Depreciation Depreciation (SG&A expenses) Amortization of goodwill EBITDA ,14 1,413 SG&A expenses Advertising, selling, and other marketing expenses make up a high percentage of SG&A expenses, and these expenses are highly variable. These expenses are high because the company is investing in new customer acquisition, with a focus on LTV in its mainstay food (B2C sales) business. Personnel expenses were also trending upward, as the company stepped up recruiting to expand. Some SG&A expenses, such as for sample products, logistics expenses, and credit settlement fees, are also variable and linked to sales. 46/6

47 LAST UPDATE: A changing cost structure: SG&A expenses (left), as a percentage of sales (right) (JPYbn) Personnel expenses Administrative expenses R&D expenses Selling expenses SG&A ratio Gross margin FY9/13 FY9/14 FY9/15 FY9/16 FY9/ % 75% 7% 65% 6% 55% 5% 45% 4% 18% 16% 14% 12% 1% 8% 6% 4% 2% % FY9/13 Personnel expenses Administrative expenses R&D expenses FY9/14 FY9/15 FY9/16 FY9/17 Equity in earnings of associated companies As of FY9/16 equity in earnings of affiliated companies applied only to one company, which operated the Real Tech Fund. This company was capitalized at JPY5mn, and euglena holds a 49% stake and the fund has gathered a total investment commitment of JPY7.5bn (all of which had been raised as of May 216). Earnings from dividends vary in line with the investment amount. Profit attributable to non-controlling interests As of FY9/16 non-controlling interests existed for two companies, euglena s subsidiary in Shanghai (7% stake) and Grameen euglena (5% stake), which both generated losses. The company expects losses at its Shanghai subsidiary to disappear as business in mainland China picks up, and it believes losses at Grameen euglena will disappear as exports of mung beans to Japan grow. 47/6

48 LAST UPDATE: Equity in earnings of associated companies (left) and profit attributable to non-controlling interests (right) Equity in earnings of affiliates Net income attributable to non-controlling 1 shareholders FY9/15 Q3 FY9/16 Q3 FY9/17 Q FY9/15 Q3 FY9/16 Q3-1 FY9/17 Q3 Real Tech Fund areas of support Business Target Press release Miraikikai, Inc. Robotics Solve future issues with leading edge robotics Aug. 215 Quantaglion Co., Ltd. Electronics, IoT More secure information community with Dec. 215 quantum random numbers Kinotech Solar Energy Corporation Environment, energy Solve global issues in zinc recycling Dec. 215 Man-Machine Synergy Effectors, Inc. Robotics Free the world from hard labor with humanoid Jan. 216 robots amelieff Biotechnology Society with healthy people through gene Feb. 216 analysis technology MELTIN MMI Co., Ltd. Robotics, electronics, biotechnology, AI Removing all biological barriers between man and Feb. 216 machine Kyulux, Inc. Electronics, new materials Ultimate luminescent material for organic EL to Feb. 216 the world Japanese Organization for Medical Device Medicine and medical equipment Contribute to the world with Japanese medical Feb. 216 Development, Inc. technologies 4D Sensor Inc. Electronics, IoT Ultra high speed and ultra precision shape Feb. 216 measurement iheart Japan Corporation Bio, medicine and medical equipment Develop next gen medicine that could replace May 216 heart transplant OryLab Inc. Robotics Meet whoever you want to meet, go wherever May 216 you want to go Space Link Co., Ltd. Electronics, environment, energy, new Change the world with electricity storage and Sep. 216 materials, aerospace, IoT positioning technologies Think-Lands Co., Ltd. Electronics, bio, new materials, medicine and Be the innovator of production technology with Sep. 216 medical equipment optical vortices technology from Japan QD Laser, Inc. Electronics and medical equipment Connect humans and cyberspace with optical Nov. 216 technologies Challenergy Inc. Environment, energy Innovate wind power generation; supply safe and Nov. 216 secure electric power to all humans E-thermo Gentech Co., Ltd. Environment, energy Improve efficiency of power generation based on Dec. 216 low -temperature heat emission Connectec Japan Corporation Electronics, IoT Provide semiconductor packaging based on lowtemperature, Feb. 217 low-load, free-of-damage bonding process Order-made Medical Research Inc. Pharmaceuticals Provide effective treatment for incurable Apr. 217 disorders such as cancer RESVO INC. Pharmaceuticals R&D related to therapy for related to incurable Jul. 217 diseases NeuroSpace Inc. Science Maximize human potential by securing good Oct. 217 sleep Intelligent Surfaces, Inc. Medical devices, new materials Aim for developing medical devices with least biological reaction Oct /6

49 LAST UPDATE: Balance sheet Balance sheet FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Current assets ,222 1,199 2,472 7,314 8,65 11,355 1,641 Cash and cash equivalents ,846 6,346 6,794 9,24 7,353 Accounts receivable ,59 1,26 Inventories ,562 Deferred tax assets Allowance for doubtful accounts Others Tangible fixed assets ,624 2,472 6,25 Depreciable and leased assets ,454 Land Construction in progress ,671 Intangible fixed assets ,175 1,238 1,627 Goodwill , ,162 Others Investments and other assets ,53 3, Investment securities ,982 2, Lease and guarantee deposits Allowance for doubtful accounts Others Fixed assets ,967 5,918 4,171 8,217 Total assets ,236 1,373 3,286 11,28 14,523 15,526 18,858 Current liabilities ,393 1,612 1,74 Accounts payable Short-term debt Current portion of long-term debt Accounts payable-other Income taxes payable Other current liabilities Noncurrent liabilities ,498 Long-term debt ,123 Deferred tax liabilities Others Total liabilities ,822 2,13 3,23 Net assets ,169 2,569 1,445 12,71 13,423 15,655 Shareholders' equity ,169 2,569 1,441 12,662 13,48 15,638 Capital stock ,796 4,826 4,863 5,424 Capital surplus ,696 6,65 6,686 7,569 Retained earnings ,418 2,91 2,877 Treasury shares Valuation and translation adjustments Valuation difference on securities Deferred gains or losses on hedges Foreign currency translation adjustment Subscription rights to new shares Non-controlling interest Total liabilities and capital ,236 1,373 3,286 11,28 14,523 15,526 18,858 Capital expenditures Depreciation Amortization of goodwill Working capital ,798 Total interest-bearing debt ,288 Net cash ,625 6,324 6,469 9,132 6,65 Accounts receivable turnover Inventory turnover Accounts payable turnover Working capital efficiency Current ratio 593% 893% 492% 72% 466% 613% 732% 1,175% 618% 75% 624% Fixed ratio 4.9% 1.8% 2.%.8% 1.3% 14.9% 31.7% 38.% 46.7% 31.1% 52.6% Equity ratio 83.8% 89.% 74.2% 85.9% 78.6% 85.1% 78.2% 92.5% 87.2% 86.3% 82.9% Cash position euglena s management is highly aware of its cash position excluding necessary capital expenditures. As of Q3 FY9/16, the company held JPY9.bn in cash and deposits and marketable securities. By our calculations, this amount includes JPY4.3bn slated for investment in the biofuel production pilot plant, which could rise to JPY5.bn due to personnel expenses; around JPY1.bn in working capital, assuming annual investment in advertising expenses of JPY3.bn and a recovery period of four to five months; and JPY1.8bn in working capital needed for operations, leaving a remainder of JPY1.2bn. The company plans to fund its pilot plant investment using cash on hand. 49/6

50 LAST UPDATE: Inventories The inventory turnover period is three to four months. An appropriate level for Euglena powder, a raw ingredient, is four months. Given that manufacturing products after raw materials are on hand takes around two months, one month of which is needed to produce the raw materials themselves, the company has product inventories of around two months. Tangible fixed assets Two subsidiaries Yaeyama Shokusan and Taketomi Prawn Farm account for a large percentage of tangible fixed assets. Investment in the biofuel production pilot plant is booked as construction in progress. Accounts payable (current liabilities) Accounts payable vary in line with advertising expenses. Accounts payable 2,5 2, Accounts payable other Advertising expenses 1,6 1,4 1,2 Accounts payable other Advertising expenses 1,5 1, 1, H FY9/12 1H FY9/13 1H FY9/14 1H FY9/15 1H FY9/15 1H FY9/17 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 Number of shares FY9/11 FY9/12 FY9/13 (' shares, JPYmn) Aug. 19, 211 Sep. 3, 211 Sep. 14, 212 Dec. 19, 212 Jan. 21, 213 Apr. 1, 213 Sep. 3, 213 Shares issued 7 7 2,156 2,656 2,736 13,678 13,75 Change 2, , Capital stock Change Legal capital surplus Change Action Exercise new share rights Paid-in third-party allotment Stock split (3-for-1) Paid-in public offering Paid-in third-party allotment Stock split (5-for-1) Exercise new share rights (half year) FY9/14 FY9/15 (' shares, JPYmn) Oct. 1, 213 Dec. 3, 213 Jan. 6, 214 Sep. 3, 214 May 1, 215 Sep. 1, 215 Sep. 3, 215 Shares issued 68,748 73,748 74,645 77,975 78,511 79,81 82,43 Change 54,998 5, 898 3, ,963 Capital stock 919 4,166 4,749 4,796 4,796 4,796 4,826 Change 3, Legal capital surplus 819 4,66 4,649 4,696 5,79 6,62 6,65 Change 3, , Action Stock split (5-for-1) Paid-in public offering Paid-in third-party allotment Exercise new share rights (one year) Share exchange Share exchange Exercise new share rights (one year) FY9/16 FY9/17 (' shares, JPYmn) Sep. 3, 216 Dec. 31, 216 Mar. 31, 217 Jun. 3, 217 Jun. 1, 217 Jun. 9, 217 Shares issued 82,627 83,1 83,62 83,16 83,435 84,39 Change Capital stock 4,863 4,871 4,872 4,874 4,874 5,424 Change Legal capital surplus 6,686 6,694 6,695 6,698 7,19 7,569 Change Action Exercise new share rights (one year) Exercise new share rights (three months) Exercise new share rights (three months) Exercise new share rights (three months) Share exchange Paid-in third-party allotment 5/6

51 LAST UPDATE: Cash flow statement Cash flow statement FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities Income before income taxes ,26 Depreciation Amortization of goodwill Impairment losses Loss on retirement of fixed assets Change in accounts receivable Change in inventories Change in accounts payable-trade Change in accounts payable-other Change in accrued consumption tax Others Subtotal , Interest and dividends income received Interest expenses paid Income taxes paid Cash flows from operating activities Cash flows from investing activities Change in time deposits ,186 3, Change in investment securities Acquisition of fixed assets ,83-3,855 Proceeds from sale of fixed assets Payments for lease deposits Collection of lease deposits Purchase of long-term prepaid expenses Others , ,915 Cash flows from investing activities ,177 2, ,18 Cash flows from financing activities Change in short-term debt Change in long-term debt ,182 Change in bonds Proceeds from share issuance , ,116 Purchase of treasury shares Proceeds from disposal of treasury shares Cash dividends paid Proceeds from share issuance to minority shareholders Others Cash flows from financing activities , ,296 Effect of exchange rate on cash and cash equivalents Change in cash and cash equivalents ,314 2, Cash and cash equivalents (beginning of year) ,846 3,16 6,221 6,784 Cash and cash equivalents (year end) ,846 3,16 6,221 6,784 7,153 The cash collection period on the company s mainstay products in direct sales of food is short because most payments are made by credit card. The use of cash is trending upward because of euglena s investment in advertising, but the collection period on this investment averages four to five months, putting the company in a solid position because this investment is covered by operating cash flow. Because ramping up production capacity in the Healthcare segment does not involve major capex, the company has no noteworthy fluctuations in investment cash flow. We believe the company s cash position as of FY9/16 exceeded optimum levels. The company plans to pay for its investment in biofuel production pilot plant with cash on hand, so financing cash flows should remain stable. 51/6

52 LAST UPDATE: Other information News and topics February 218 On February 9, 218, the company announced M&A plan. The target company is Hook, Inc., which mainly sells supplements and health foods for women via its e-commence sites such as Biteki Town. Euglena plans to make Hook a wholly-owned subsidiary (effective April 1, 218) through share acquisition for JPY81mn and share exchange (number of shares to be issued: 963,36). Note that upon the share issuance, euglena plans to issue more common shares (total shares outstanding at end of FY9/18: 84,832,36). Hook s earnings and business plan after joining the group FY3/15 FY3/16 FY3/17 FY3/19 FY3/2 Act. Act. Act. Target Target Sales ,194 1,239 1,535 YoY 37.6% 2.4% 23.9% Operating profit OPM.4% 2.3% -2.3% 8.9% 17.9% Recurring profit RPM 1.7% 3.4% -1.7% 8.7% 17.8% Net income Net margin 1.% 1.9% -1.8% - - Net assets Total assets Net asset ratio 15.2% 16.% 18.4% ROA(RP-based) 16.7% -6.2% ROE 59.4% -39.3% Source: Shared Research based on company materials August 217 On August 31, 217, the company announced plans to establish a new advanced production and development building to research and develop production technologies for microalgae such as Euglena gracilis. The new building will be constructed on the premises of the Yaeyama Shokusan Ishigaki Plant. Construction will start from early September 217 and full-scale operation from August 218. Total investment is estimated at roughly JPY6mn (including peripheral equipment). The main purpose of the new development work will be to develop new production technologies for microalgae, and specific goals include 1) developing production methods for Euglena gracilis variants that contain high amounts of distinct substances in accordance with specific usage applications, such as high value-added substances (e.g., Paramylon, which is a functional component unique to Euglena gracilis) and lipids that can be used as fuel; 2) developing technologies that enable commercial production of other new microalgae; and 3) streamlining production systems through automated production of microalgae. In addition, the company applied for standardization (formulation of a quality standard that facilitates stable commercial supply of a product) of its Euglena gracilis EX55 product, which boasts a Paramylon content of over 55%, in August 217. With the addition of the new development building, management says it will aim to establish new standards covering Euglena gracilis-related materials, further expand microalgae usage applications, and enhance production efficiency. Following the start of full-scale operation, the company will also look into partial commercial production of the abovementioned EX55 as well as other microalgae and substances produced using technologies developed after the new building goes into operation. July 217 On July 31, 217, the company announced the construction of a large-scale microalgae cultivation pool utilizing paddy field creation techniques, a project it has been working on jointly with Kobashi Kogyo based in Okayama city (Okayama prefecture). The pool, constructed in Taki town (Mie prefecture), began operation on the same day. 52/6

53 LAST UPDATE: As part of a pilot project to produce biofuel algae, euglena pilot tested a cultivation pool for growing biofuel-use microalgae in Taki town, Mie prefecture. The Japanese technique to plaster ridges between paddy fields was applied to the construction of this pool, which is the first of its kind in the world. The size of one pool is approximately 1,sqm, and euglena plans to expand the facility up to 3,sqm in 218. The pool can be constructed at one tenth of the cost and one fourth of the construction period of a similar pool made of concrete, which means the company can reduce cost of mass producing biofuel-use microalgae and can swiftly expand production volume as necessary. euglena had signed an agreement with Kobashi Kogyo in September 214 to jointly research and develop a steady and efficient method of culturing microalgae. The two companies have been working together to apply paddy field creation techniques in the construction of a cultivation pool for biofuel-use microalgae and to develop ways to reduce associated construction costs. On July 1, 217, euglena s survey regarding quinoa production and sales structure creation in Bhutan was adopted in JICA s Feasibility Survey for SDGs Business (SDGs: Sustainable Development Goals). It is one of five projects selected for the first publication of Feasibility Survey for SDGs Business in fiscal 216. The company plans to utilize a similar business model for the Mungbean Project in Bangladesh. The Bhutan project involves the company providing technical guidance on quinoa production and the post-harvest process, dietary education on the nutritional value of quinoa, and the establishment of a value chain for exporting quinoa in order to improve the nutritional intake of consumers and the income of small-scale farmers. Subsidies are estimated at JPY5mn, and the project is slated to last from August 217 to July 219. On July 3, 217, the company announced that it had concluded a memorandum of understanding to make Genequest Inc. its wholly owned subsidiary through a share exchange. The share exchange agreement, scheduled for signing in the beginning of August, is expected to take effect on October 1, 217 (share exchange agreement was signed on August 21. Exchange ratio = JPY2,272,8 / average price of euglena s common stock [average closing price between September 11 15, 217; rounded off to the nearest whole number]: the company plans to issue new common stock at the time of the share exchange). Genequest was founded in 213 as a startup that specializes in gene analysis. With the mission to enrich people s lives by advancing gene research and promoting proper use of the analytics, the company provides customers with gene analysis that uncovers risks and predispositions related to various lifestyle diseases. It also engages in research anonymizing and analyzing the accumulated gene data, upon receiving customers consent. euglena entered into this share exchange agreement with the intent to combine its direct sales customer base, business partner network, financial resources, and strengths in product development and marketing with Genequest s knowledge and systems related to gene analysis services. By doing so, the company believes it can leverage bioinformatics technology to realize an innovative healthcare business. Genequest earnings Financial calendar change FY3/15 FY7/15 FY7/16 Sales Operating profit Recurring profit Net income Net assets Total assets EPS (JPY) 41,74-145, ,85 BPS (JPY) 776, ,269-16,817 53/6

54 LAST UPDATE: May 217 On May 19, 217, the company made an announcement regarding the offering of shares to be issued through third-party allocation and the formation of capital alliances with five business partners. The number of shares to be issued in this offering will amount to 1.14% of the company s total outstanding shares as of end-march 217 (1.15% of total voting rights). euglena Co., Ltd. announced that it will implement capital increase through third-party allocation (number of shares issued: 954,9 common shares; capital raised: JPY1.1bn; issue price: JPY1,152 per share; payment date: June 9, 217) and form capital alliances with five business partners (Kobashi Kogyo Co., Ltd., Chiyoda Corporation, API Co., Ltd., Isuzu Motors Limited, and Itochu Enex Co., Ltd.). According to euglena, the purpose of the share offering is to push ahead the practical application and future commercialization of aviation biofuel and biodiesel fuel as well as to bolster the company s planning and development capability for health products that use microalgae Euglena and build the lineup of such products, through establishing long-term relationships and strengthening cooperative efforts with and among the five business partners. Allocated to Shares Details of collaboration (') Kobashi Kogyo Conducting joint research on using paddy field creation techniques to establish methods to construct cultivation facilities for Euglena for fuel, while mitigating construction costs. In September 214, concluded joint R&D agreement related to efficient and stable microalgae cultivation methods. Chiyoda Jointly engaging in preparation work for the construction of a pilot plant for biofuel production; tasks include technology 26.4 Corporation selection, basic design, and paperwork for the relevant authorities and organizations. One of euglena's partners in the Made-in-Japan Biofuel Project. Concluded contract for construction of the pilot plant in February 217. API 86.8 One of euglena's major contracted partners; relationship dates back to the days before euglena listed on TSE Mothers. Produces and processes final products (both euglena's proprietary and OEM health foods that use microalgae Euglena ); also develops new products jointly through knowledge sharing. Isuzu Motors 86.8 Working together on the DeuSEL Project whose goal is to establish practical application of next-generation biodiesel fuel; one of euglena's partners in the Made-in Japan Biofuel Project. Conducting studies on ways to evaluate and use the output of the pilot plant, as the company targets realization of road trials using next-generation biodiesel fuel. Concluded joint R&D agreement related to biodiesel fuel derived from microalgae Euglena in June 214. Itochu Enex 86.8 As one of euglena's partners in the Made-in-Japan Biofuel Project, concluded a memorandum of understanding in November 215 for the procurement of biofuel feedstock to be used at the pilot plant. Also assessing procurement of feedstock for biofuel other than microalgae, and evaluating supply/demand, distribution and sales of biofuels produced at the pilot plant. Usage of the capital raised and its schedule The company plans to allocate the JPY1.1bn raised through the offering for the following use: 1) JPY993mn as working capital for the operation of a pilot plant (to be used between July 217 and September 22), and 2) JPY99mn in R&D funds for algae cultivation facilities (to be used between July 217 and September 218). According to euglena, the effect of this capital increase through third-party allocation on the company s full-year FY9/17 earnings will be limited. Shareholders Before After (as of end of March, 217) transaction transaction Mitsuru Izumo 16.4% 16.22% Inspire Corporation 2.15% 2.12% JX Nippon Oil & Energy Corporation 1.8% 1.78% Tokyo Century Corporation 1.8% 1.78% Japan Trustee Services Bank, Ltd. (Trust account 5) 1.59% 1.57% Japan Trustee Services Bank, Ltd. (Trust account 1) 1.19% 1.18% Japan Trustee Services Bank, Ltd. (Trust account 2) 1.19% 1.17% Kengo Suzuki 1.11% 1.9% Japan Trustee Services Bank, Ltd. (Trust account) 1.9% 1.8% April 217 On April 25, 217, the company announced that its Made-in-Japan Biofuel Project has been certified by the City of Yokohama as a business eligible to receive benefits under the city s industrial location promotion act. The company plans to receive support such as lower fixed property tax and city planning tax as well as subsidies for investments in buildings and equipment for its 54/6

55 LAST UPDATE: biofuel production pilot plant (12% of the investment amount), which it was planning to build in Yokohama, Kanagawa Prefecture. On April 21, 217, the company announced that it will make YeaStar co., ltd. (number of outstanding shares: 1, shares) a wholly owned subsidiary through share exchange. The effective date of the transaction is scheduled for June 1, 217. The share exchange will take effect subject to the absorption-type merger between YeaStar and Hellsen with YeaStar being the surviving entity, and the exchange ratio will be calculated as follows: Exchange ratio = JPY325, / average price of euglena s common stock (Period: May 15-19, 217) Reasons for the share exchange The subject share exchange is part of euglena s M&A strategy, which is to bring in OEM clients to the group for vertical integration. YeaStar and Hellsen are both euglena s OEM clients, and are currently preparing to enter the mail order business in China through initiatives such as establishing a local subsidiary (founded in July 216). euglena, also eyeing future entry into the mail order business in China, has agreed to acquire 1% ownership of the Chinese subsidiary and leverage business affinity. Earnings Earnings YeaStar Hellsen YeaStar (new) FY8/14 FY8/15 FY8/16 FY3/16 FY8/18 target Sales Operating profit Recurring profit Net income Net assets Total assets EPS (JPY) 3,527 1,375 15,275 BPS (JPY) 17,539 18,915 34,19 March 217 On March 3, 217, the company announced that its Made-in-Japan Biofuel Project was recognized under the Select Kanagawa 1, an investment promotion program by Kanagawa Prefecture to encourage companies to choose to operate in Kanagawa. The company plans to receive support such as lower real estate acquisition taxes and subsidies for investments in land, buildings, and equipment for its biofuel production pilot plant (5% of the investment amount), which it was planning to build in Yokohama, Kanagawa Prefecture. January 217 On January 31, 217, the company announced that it was doubling production capacity of food-use microalgae Euglena to 16 tons. Construction has been completed to increase production capacity of food-use microalgae Euglena at the consolidated subsidiary Yaeyama Shokusan Co., Ltd. (Ishigaki City, Okinawa Prefecture). This production facility will begin full scale operation from February 1, 217. With this, annual production will increase from 8 tons to 16 tons. This increased production will meet the increasing demand in a market which is experiencing rapid growth both in Japan and overseas as well as allow the company to respond to the diversifying needs of its customers. The invested capital was approximately JPY8mn (including all surrounding facilities aside from cultivation facilities). The annual production capacity of 16 tons is on the basis of powder. Actual production volume could differ depending on climate and operational hours. 55/6

56 LAST UPDATE: Change in production capacity (MT) Production capacity (MT/year, year end) Sales (JPYbn, right axis) (JPYbn) FY9/14 FY9/15 FY9/16 FY9/ Corporate governance (as of December 216) Organizational form Organization Company with Audit & Supervisory Board and capital structure Controlling shareholders None Parent company ticker ー Directors Number of directors (per Articles of Incorporation) 12 Directors' term of office (per Articles of Incorporation) 1 years Number of directors 7 Outside directors 2 Independent outside officers 2 Audit & Supervisory Existence of Audit & Supervisory Board Y Board Number of Audit & Supervisory Board members 3 Full-time members 1 Outside directors 2 Other Foreign shareholding ratio Less than 1 % Independent officers 2 Implementation of measures regarding director incentives Stock option Eligible for stock option Officers and employees of the parent company, and officers and employees of subsidiaries Other Participation to electronic voting platform for independent officers None To be considered Efforts to improve environments for institutional investors' voting rights Disclosure of individual director's compensation None Policy to determine amount and calculation method of remuneration Y Corporate takeover defenses None At a general meeting of shareholders scheduled for December 2, 216, euglena is planning to transition to a company with an audit and supervisory committee. Top management President: Mitsuru Izumo (Born: January 17, 198, shares held as of September 3, 216: 13,359,) Mr. Izumo graduated from the University of Tokyo s Faculty of Agriculture (Agricultural Structure and Management) in March 22 and joined the Bank of Tokyo-Mitsubishi, Ltd. (now the Bank of Tokyo-Mitsubishi UFJ, Ltd.) in April. He became president and CEO of euglena in August 25. Director, Head of R&D: Kengo Suzuki (Born: November 19, 1979; shares: 922,) Mr. Suzuki became a director of euglena in August 25. In March 26, he completed a master s degree in the University of Tokyo Graduate School of Agriculture and Life Sciences, Faculty of Agriculture, and acquired a PhD from the University of Tokyo (Agriculture) in April 216. Director, Head of Healthcare Business Division: Takuyuki Fukumoto (Born: November 1, 1975; shares: 52,) Mr. Fukumoto became a director of High-Chlorella (now épauler) in March 1999 (managing director in September 24) and a director of euglena in August 25. Director, Head of Finance and Corporate Strategy: Akihiko Nagata (Born: December 6, 1982; shares: ) Mr. Nagata graduated from the Faculty of Business and Commerce of Keio University in March 27 and joined Inspire Corporation in April. He became an outside director of euglena in December 28 and director in April /6

57 LAST UPDATE: Dividend policy euglena has not paid dividends since its foundation. It does not plan to pay dividends in the foreseeable future, instead prioritizing the use of cash to reinforce its corporate structure and continue to engage in R&D activities. Nevertheless, the company recognizes return to shareholders as a management priority, and will consider the distribution of profits and dividends from surplus, taking into consideration its future operating performance and financial position. The company will consider dividends based on (1) whether it can use up the JPY7.5bn fundraised through a public offering in 213 (the proceeds was mainly used to establish a biofuel production pilot plant), and (2) the monetization of the biofuel business. The company had 83,38 individual shareholders as of March 31, 216 (up 2,172 from September 3, 215). Shareholders holding between one and five trading units (1 shares per trading unit) hold around 9.5mn shares, accounting for 7% of the total, with average holdings of 1.7 trading units. euglena provides discount coupons for its direct sales products as shareholder benefits, with coupons valid for less than one year having a value of JPY4, and those held for one year or more having a value of JPY6,. Based on its share price of JPY1,456 as of September 16, 216, these incentives would tentatively be worth under 3% to more than 4% of shareholdings. Shareholder composition Shareholders Shares (as of end of September, 217) (') % Mitsuru Izumo 12, % Inspire Corporation 1, % JXTG Holdings, Inc. 1,5 1.8% Tokyo Century Corporation 1,5 1.8% Japan Trustee Services Bank, Ltd. (Trust account 5) 1, % Japan Trustee Services Bank, Ltd. (trust account) 1,84 1.3% Japan Trustee Services Bank, Ltd. (Trust account 1) 1,34 1.2% Japan Trustee Services Bank, Ltd. (Trust account 2) 1,4 1.2% Kengo Suzuki % Nihon Kolmar Co.,LTD. 75.9% Treasury stock 138.2% Number of shares issued 84,39 1.% Employees FY9/7 FY9/8 FY9/9 FY9/1 FY9/11 FY9/12 FY9/13 FY9/14 FY9/15 FY9/16 FY9/17 Employees Healthcare Energy and Environment Company-wide Average temporary employees Healthcare Energy and Environment Company-wide Employees at parent Healthcare Energy and Environment Company-wide Average age Average years employed Average yearly salary Average temporary employees at parent Healthcare Energy and Environment Company-wide /6

58 LAST UPDATE: Other The euglena mall on Ishigaki Island (naming rights) Source: Shared Research 58/6