TerraVia burns the boats and sets off for the Land of Übernutrition

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BD TS 081016 TerraVia smAt the outset of his historic Conquest, Cortés gathered the men and burned the boats.

As TerraVia jettisons its break-out industrial product line and completes the pivot to Food, what lies ahead in the New World? 

Gromeko: They’ve shot the Czar. And all his family. Oh, that’s a savage deed. What’s it for?
Zhivago: It’s to show there’s no going back.
Dr. Zhivago

In California, TerraVia recorded a loss of $27.4M for Q2 2016 on revenues of $9.9M as the company made milestone announcements in its transition from industrials to nutrition including the divestment of an 80% stake in Algenist to Tengram Capital Partners and the tapping of former Mars North America chief Apu Mody as the company’s new food-focused CEO.

Let’s take those in order.

The financial results

Thin sales, $9.9M vs last year’s $11.7M and the Street consensus of $11.4M. Excluding Algenist sales, the revenues were $4.4M for Q2 and the company did not break down further between industrials and nutrition except to note that these reflected “reflecting planned declines in industrial revenue partially offset by strong growth in food revenue,” and that food platform sales tripled in Q2 2016 compared to Q2 2015 and that Thrive “Culinary Algae Oil, saw a three-fold increase in units sold in the quarter versus Q1 of this year.”

Losses narrowed, $27.4M on a GAPP basis and $21.2M on non-GAAP, compared to $37,2M and $31,7M in the corresponding period last year. “EBIT of ($17.1mn) significantly outperformed our ($25.9mn) estimate, as the company delivered better than expected gross margins, and operating expenses,” writes Cowen & Company’s Jeffrey Osborne.

Market reaction

Osborne added: “The company announced mixed results for 2Q16. Sale of Algenist allows the company to remain exposed to cosmetics market, while allowing management to focus on its key end markets going forward. We are encouraged by the announcement of new CEO Apu Mody.  2016 revenue guidance (excluding Algenist)…remains unchanged with management continuing to look for high double digit revenue growth at a pro forma revenue assuming a ramp in food, decline in industrials, flat to modest increase in R&D programs and the 5x ramp at Moema. We are maintaining our $2.75 price target.”

Divesting Algenist

Just ahead of the Q2 earnings story was the divestment of Algenist.

For those less familiar, Algenist was TerraVia’s breakthrough product line, described these days as “a prestige beauty brand that delivers anti-aging and color correcting innovation based on a suite of TerraVia’s proprietary algae-based ingredients including Alguronic Acid and microalgae oil. The brand has achieved a global distribution footprint across 23 countries and including major retail channels like Sephora, ULTA and QVC.”

The companies said that they have formed a partnership focused on leveraging TerraVia’s innovative algae-based ingredient platform and Tengram’s brand-building and investment expertise to pursue compelling new opportunities in the beauty industry. Tengram will also “contribute significant capital to the business to accelerate broader commercialization.”

Overall, the company retains a 20% stake and will supply ingredients to the divested company — no commentary at this time on volume or timing of that. TerraVia will receive “approximately $20 million” at closing in Q3. That’s roughly a $25M valuation on the business, or 1.13X the current Q2 revenues.

For comparison purposes, the overall NASDAQ price-sales ratio is 3.373 and TerraVia’s ratio at the moment is 4.76 — so Algenist divested at a significant discount to TVIA’s market cap.

Tengram? It’s a private equity firm, “A private equity firm formed to acquire exceptional, highly recognizable, consumer brands.” which has investments current in Laura Geller, Differential Brands, Zanella, Luciano Barbera and a number of other companies.

That Which Remains

Crucially, the Unilever arrangement is there, and cost-plus — meaning that TerraVia will have a locked in cash flow to count on as it explores opportunities in the food and nutrition space. These are the AlgaPur oils, “including a more sustainable alternative to palm oil for the specialty personal care market.”

The brands that TerraVia has at the moment? Revenue-wise, it’s early-days but they include AlgaVia Protein-Rich Whole Algae, AlgaVia Lipid-Rich Whole Algae, and AlgaWise Ultra Omega-9, and Thrive Culinary Algae Oil, For the animal and aquaculture nutrition markets, they have AlgaPrime DHA, an omega-3 fatty acid.

Mody appointed as new CEO

The new CEO of the re-positioned and re-christened TerraVia is Apu Mody, most recently President of Mars Food America; previous to that, six years at Del Monte Foods, ultimately as SVP and GM for the $2.4B Consumer Products Division.

For the financial markets announce, Mody said:

“I’ve been passionate about Healthy Living and have seen many substantial changes across the industry. In my 25+ years in the food and CPG industry, nothing I have seen comes close to the exciting potential of TerraVia. I believe there are opportunities across the grocery store driven by accelerating demand for plant based foods and nutrition. And with TerraVia’s unique portfolio of ingredients that provide better nutrition and sustainability with outstanding taste, the Company is on the verge of great things.”

Mody’s commitment to, and analysis of, the opportunities in what can be called the New Nutrition are no joke. Taking the helm at TerraVia has been hush-hush, but Mody has been as outspoken and as visible as anyone in terms of seeing a transition from the old food company model to the New Nutrition. And the value of small companies in that effort.

Today, we publish remarks by Mody on the New Nutrition, here.

The Bottom Line

TerraVia made a big turn this week with Mody arriving and Algenist departing. A quibble over Algenist’s exit price aside, the company is staking its future in the New Nutrition and success therein — no doubt about it.

But here’s the thing. Mody in remarks elsewhere this season has noted that that gap in the food sector that established companies are struggling with is less about technology, or ideas. They have manufacturing expertise, they have distribution. They do line extensions well, they change ingredients and re-formulate well. Big Food companies are weak on brands that appeal to the New Consumer. That’s the chink in the food sector’s armor.

At the end of the day, TerraVia is not yet a brand company. The Algenist deal frames it: Tengram Capital Partners is infusing capital and “brand-building and investment expertise.” Incoming CEO Apu Mody inherits a company built as an industrial manufacturing play. It has been about developing new oils, getting technology to work at scale, and getting costs down.

What TerraVia has been brilliant at is developing new ingredient options. And the market needs new ingredients, for sure. But TerraVia either has to formulate new products, and develop brand traction, or count on someone else.

Of the roads forward, the first route looks tough. That means building a consumer marketing machine of real prowess inside a small company where dollars are scarce.

Which brings us to the other road — getting someone else to do the formulations. First, there’s the urgency problem. The company you engage with might dither. Elevance could write a book on it. The marketing partner could fail, or dump you and go it alone. Happened to the old Solazyme in its partnership with Roquette.

So, leaving the brand work to others has its own share of heartbreaks. If TerraVia could really push the needle on brand creation, the company would be a high-value farm club for the Big Food majors.

For now, it’s an ingredient manufacturer of real distinction, in a market that hasn’t yet decided whether it will adopt those ingredients. And the market is changing, as Mody has noted elsewhere, at a frenetic pace and in epic ways. That’s a challenge for smaller companies, and investors feel the peril.

And so, TerraVia sets off on its journey into the New Nutrition, which is replete with brassy companies based in bold technological advances and warrior pride in the certainty of their own ascendancy. Somewhere Friedrich Nietzsche must be smiling, with a copy of Also Sprach Zarathustra in his hands. The übermensch have arrived, grounded in biotechnology, risen above the limits placed by evolution and DNA in a sector as fundamental as food.

TerraVia calls algae “the mother of all foods, the original superfood“. There it is, the überessen from überalgae, and all in the city of Uber Technologies. But how many überventures the market could sustainably support, on that subject even Nietzsche was silent.

More on the story.