“We do not plan to make meaningful additional investments near term in this segment as we focus on sales growth and increased profitability,” CEO Bret Scholtes told analysts in the company’s recent Q2 2016 earnings call. A transcript of the call was posted on the site seekingalpha.com.
Omega Protein is first and foremost a fishing company, with a fleet of 30 boats in the Atlantic and the Gulf of Mexico that harvest menhaden, a forage fish species. For decades the company has used this raw material to produce fish meal and fish oil for sale primarily into the animal feed markets. Beginning in about 2010, the company embarked on a foray into the human nutrition segment, first by refining and marketing an omega-3 ingredient from its fish oil stock and then by acquiring companies that manufactured and marketed dietary ingredients. Its most recent acquisition was Bioriginal, a lipid ingredients specialist that has coconut oil ingredients as one of its flagship products. Bret Scholtes, CEO of Omega Protein, has said the purpose of this strategic shift was to insulate the company from the vicissitudes of harvesting a fluctuating natural resource. Every quarter, the public company’s bottom line was tied to how many fish it could catch and the oil content of those fish that season. The human nutrition segment was seen as a more predictable, reliable cash generator.
But major shareholder Wynnefield Capital, led by principal Nelson Obus, didn’t see it that way. In Obus's view, the move into human nutrition had been mismanaged, and the company would have been better off using the capital spent on those acquisitions in improving its core business. Shareholders seemed to agree, as Wynnefield’s slate of board candidates was elected during the company’s recent annual meeting.
Disappointing human nutrition results
The results of the fiscal year so far seem bear out Obus’s criticisms. In its second quarter, Omega Protein's revenues increased 21% from $93.2 million in the same period last year to $112.7 million. The company attributed that increase to a jump in animal nutrition revenues of $24.7 million, partially offset by a $5.3 million decrease in human nutrition revenues.
Scholtes said problems in the human nutrition portion of the business included disappointing results in the solid coconut oil segment. And he said that the increasing trend toward online retail sales in the dietary supplement industry have driven down prices for finished goods, which has had fallout in the nutraceutical sector in terms of prices for dietary ingredients. In addition, competition in the whey sector depressed results at Wisconsin Specialty Protein, one of the company’s recent acquisitions. Omega Protein has also ended its efforts to develop a high concentrate version of its omega-3 menhaden oil.
Omega Protein had combined all of its human nutrition purchases under the Nutregrity name, and that move has yet to realize the full synergistic benefits first envisioned.
“Despite continued progress integrating our operations, implementing a channel-based sales approach, and selling some newer product, we posted disappointing segment results for the second quarter of 2016. We are intently focused on improving our operational execution and generating improved results,” Scholtes said.
On the plus side, Scholtes said investments in the company’s fish processing plants are yielding benefits in terms of greater capacity and better margins, and even with the money spent on the human nutrition acquisitions, the company is basically debt free. Going forward, Scholtes said the company intends to devote capital to further improving its fishing fleet by acquiring supply vessels from the oil and gas industry and converting them into fishing boats to replace older, smaller vessels.