Omega Protein exits high concentrate fish oils business; refocuses on base oil supply

The move to exit the concentrated oils business could be seen as bolstering criticism of the company’s diversification strategy. Omega Protein has been under pressure in recent quarters from activist investor Wynnefield Capital, whose co founder Nelson Obus has said shareholders would be better served if the company were to be broken up and sold. In response Omega Protein has initiated a strategic corporate with input from J.P. Morgan, an effort which CEO Bret Scholtes said would continue into the second quarter of this year.

Scholtes said increasing competition from China has driven prices down in the 50% concentrated oils slice of the omega-3s supply chain to the point that Omega Protein was consistently losing money on the operation. Sources contacted by NutraIngredients-USA who were attending the Expo West trade show this past week said it’s true that Chinese competition is ramping up in the middle concentrates and the ingredients do tend to be somewhat cheaper. But they said that other non-Chinese suppliers are finding a way to compete. The real issue, they said, is that Chinese quality is ramping up to the point where acceptable oils can be found fairly routinely depending on which suppliers one works with. 

Omega Protein will continue to offer base concentrate omega-3 oil from its menhaden source, as well as blended krill oils, a capability it acquired when it bought oil ingredient specialist Bioriginal in 2014.  Scholtes said the decision to exit the concentrated oils segment, and an additional $18 million investment to further upgrade its Louisiana fish processing facility, were not recommendations arising from the strategic review. 

“I think it’s absolutely important to do it right now, because, for one, we’re losing money on our oil concentration business,”​ Scholtes said in an earnings call with analysts. The call was posted in transcript form on the site seekingalpha.com​

“It’s also very important to me that the capital has been put out the door, it is ready to go on day one of the 2017 fishing season. Those projects have long lead times, require lots of engineering work to get that done and I’d like to think that it’s also pretty much a no-brainer to put that to work at these desperate times in the business. But we feel so good about the macro fundamentals around those. Those are the two decisions that I thought needed to be made regardless of what the outcome of the strategic review process was,” ​Scholtes said.

Earnings details​

Omega Protein's revenues decreased 20% from $102.5 million in the same period last year to $82.3 million. The company attributed this drop to decreases in animal nutrition and human nutrition revenues of $14.9 million and $5.3 million, respectively. The composition of revenues by nutritional product line for the fourth quarter of 2015 was 54% fish meal, 35% dietary supplements, 9% fish oil, and 2% fish solubles and other. 

Revenues for the year ended December 31, 2015 increased 16% to $359.3 million compared to revenues of $308.6 million for the year ended December 31, 2014. The increase in revenues was due to a $74.3 million increase in human nutrition revenues partially offset by a $23.7 million decrease in animal nutrition revenues. The increase in human nutrition revenues was primarily due to the acquisition of Bioriginal in September 2014.

The market reacted harshly to the fourth quarter sales decline, perhaps preconditioned by the pressure exerted by Obus. Omega Protein’s stock price dropped sharply after the release of earnings on Wednesday, but recovered slightly in trading since. From a value of $21.93 the company’s shares traded at a low of $15.87 before recovering slightly to $18.80 at the close of trading on Friday.