Omega Protein looking for organic growth, but acquisition pipeline remains open, CEO says

07-Mar-2013 - Last updated on 07-Mar-2013 at 14:35 GMT

Omega Protein CEO Bret Scholtes said the company is looking toward organic growth first in the wake of its acquisition of whey producer Wisconsin Specialty Protein. But doesn’t mean the company isn’t ready to pull the trigger if the right deal comes along.

“We have an acquisition pipeline that we’ve maintained for the last couple of years. We are still interested in doing these deals. We understand nutritional products and we know now they work in the body. Then it’s just a matter of determining what is the next product we can get into that is science based and fits with our expertise,” Bret Scholtes, Omega Protein CEO, said during a fourth quarter earnings conference call.

Omega Protein’s primary business has been the harvesting of menhaden, an oily forage fish, off the coasts of Virginia and North Carolina and in the Gulf of Mexico. It processes these into fish meal and oil for aquaculture and pet food markets and omega-3 oils for human nutrition. It is the largest vertically integrated fish oil processor in the US. In 2010, the company moved more squarely into the human nutrition markets with the acquisition of ingredient firm Cyvex Nutrition. In 2011 it acquired another company with oil processing and concentrating technology to boost its fish oil processing capacity. And just a few days ago it announced the acquisition of the Wisconsin whey firm. To underscore its commitment to the human nutrition sector, Omega Protein, for the first time, broke out human nutrition and animal nutrition financial results separately in its fourth quarter statement.

But all the financial planning in the world can’t get around the fact that the company is still based on harvesting a natural resource and that implies natural variability. Omega Protein’s 2012 catch yielded less oil than the five year average, Scholtes said. And fluctuation in the forth quarter financial results reflects that, though almost all of that was on the animal nutrition side with human nutrition results rising steadily.

“It’s difficult for us to say . . . there’s no simple answer to say that’s why it occurred,” Scholtes said. “There are a lot of things that affect yields and that’s determined by Mother Nature. One thing is there was a (relative) abundance of fish, and those individual fish are getting less nutrition than in years past.”

Long term trends bode well

Still, CFO Andrew Johannesen said long term prospects for demand both in aquaculture and human nutrition markets bode well for the company. Populations are rising worldwide, and affluence is growing, too, meaning more consumers who are interested in the value-added nutrition ingredients that Omega Protein sells. It fits into the company’s strategy toward growth in the higher value human segments, but the company is not looking at a rapid restructuring, Scholtes said.

“I’d shy away from saying we are going to be a certain percent human, certain percent animal by a certain date. Right now we are seeing very strong demand for both fish meal and fish oil,” he said.

Omega Protein is laboring under a couple of burdens, Scholtes said. The government body that regulates the Atlantic menhaden fishery has cut catch quotas by 20%, a reduction that will extend into 2014. Scholtes said in response the company has idled a vessel, and can mitigate the impact of the reduction by seeking to catch its quota of fish as much as possible in the latter half of the year, when oil yields are typically higher. And the Atlantic fishery only accounts for 30% of the company’s overall catch, he said.

The other headwind the company labored under is continued investigation and litigation costs resulting from the death of a worker at its Moss Point, MS plant. The company recorded a $3.6 million line item charge on this score in the quarter.

Strong results in human nutrition

Omega Protein’s revenues decreased 25% from the third quarter of 2012 to $63.1 million in the fourth quarter. Year-over-year, the fourth quarter revenues decreased 8% from $68.8 million in Q4 2011. Profits remained strong, though, as the company notched a gross profit of $12.9 million, or 20.5% as a percentage of revenues, for the fourth quarter of 2012, versus gross profit of $13.4 million, or 16.0% as a percentage of revenues, for the third quarter of 2012.

Revenues for the full year 2012 decreased 6% to $235.6 million compared to revenues of $251.7 million for the full year ended December 31, 2011. The decrease in revenues for 2012 was primarily due to a $22.9 million decrease in animal nutrition revenues, partially offset by a $6.8 million increase in human nutrition revenues.

The Company recorded gross profit of $42.1 million, or 17.8% as a percentage of revenues, for the full year 2012, versus gross profit of $54.7 million, or 21.7% as a percentage of revenues, for the full year 2011.