In discussing the company’s year-end results with analysts yesterday, CEO Bret Scholtes said that while performance in the human nutrition segment had improved, the company is no longer looking to invest in that aspect of the company.
“For the year, Human Nutrition segment continued to face challenges in our dairy operations, but we are encouraged by the recent results in our specialty oils and nutraceuticals operations. Exiting our oil concentration facility will also be positive going into 2017. As I have stated previously, we do not plan to make meaningful additional investments near term in this segment as we focus on driving sales growth, operating efficiencies and increased profitability,” Scholtes said. A transcript of the call was posted on the site seekingalpha.com.
Strategy reversal
In the past Omega Protein has used revenues form its core menhaden fishing business to build out its human nutrition business. But that strategy led to a protracted proxy fight that ended with the election of a board member whose candidacy was backed by activist investor Wynnefield Capital.
For years Omega Protein’s management had sought ways to reduce the natural revenue fluctuations that come with harvesting a natural resource. The company’s core business is catching menhaden, a herring-like forage fish species, in the Gulf of Mexico and in and around Chesapeake Bay. The numbers of fish naturally varied, as did their oil content. For many years the company concentrated on turning these fish into fish meal and fish oil products that were sold primarily as animal feed.
A number of years ago the company’s management started to look for ways to derive higher value products from that raw material stream. The company first started refining an omega-3 oil for supplements from its menhaden oil. Then it used some of the cash generated by the fishing operations to purchase human nutrition businesses, including botanical ingredient supplier Cyvex, Wisconsin Specialty Protein, a whey protein manufacturer, and Bioriginal, a lipid ingredient specialist that sells omega-3 oils, coconut oil ingredients and other products.
Wynnefield’s main objection to this strategy was that the move into human nutrition segments was mismanaged, and the resulting company was an assortment of ill-fitting parts. Nelson Obus, principal of Wynnefield, claimed that Omega Protein had spent about $150 million on these acquisitions, and because of market and raw material price fluctuations, increased competition and other factors, the value of those investments had sunk to about $100 million. Obus was of the opinion that Omega Protein’s focus should more properly be placed on improving the core business of fish processing for the animal feed markets. Shareholders seemed to agree with Wynnefield, and elected the candidate backed by the investment firm. There has been no word yet on what that might mean for the future structure of the company.
Human nutrition review
Scholtes said that in addition to halting the attempt to bring a higher concentration omega-3 oil to market, the company has launched a more focused strategic review of all its human nutrition businesses with the possible aim of selling off one or more of them. Bioriginal was the best performer of the lot in the fourth quarter, while Wisconsin Specialty Protein was the weakest, meaning it could be the first division on the chopping block.
“Our dairy business which in recent years has accounted for approximately 10% of sales continued to struggle with commodity pricing, limited scale and excess capacity,” he said.
The company had conducted a strategic review of its entire operation following the proxy fight. This time, Scholtes said, the company is narrowing it down to just what should be done with the human nutrition businesses.
“This time, it is going to be focused specifically on the human nutrition segment. And we’re going to review it in two parts, one part being our dairy operation, one being the essential oils and nutraceuticals. And this is just part of continuing to try to look at where do we have competitive advantages, where we don’t we have competitive advantages, and what opportunities are there to increase shareholder value,” he said.