Omega Protein's animal nutrition sector carries it through headwinds that have beset other omega-3 suppliers

For a number of years, Omega Protein has pursued a strategy of product diversification, moving into the human nutrition segment as a way to balance out the big swings in revenue and profitability that comes with being tied to harvesting a yearly, fluctuating marine resource, in this case menhaden fish caught in both the Gulf of Mexico and in the Atlantic in and near Cheasapeake Bay. 

 While the company remains committed to that strategy, in this quarter it was the bulk products from menhaden that carried the company.  Human nutrition revenues were actually off slightly.

“The sale of nutritional products for direct human consumption is a key component of our corporate strategy to access new higher value markets. This segment is an important component of our corporate goals to diversify, drive growth, decrease earnings volatility, and reduce capital intensity. We continue to be optimistic about the segment’s fundamentals and our growth opportunities given our unique position, although this segment faced headwinds during the second quarter,” ​Scholtes told analysts in an earnings call transcribed on the site seekingalpha.com.

Human nutrition headwinds​

Among those headwinds cited by Scholtes were increased competition in the protein markets and higher raw materials costs. Consistent drought in many areas of the country has driven milk prices to their highest levels since 2011.  Scholtes also alluded to the recent soft patch in omega-3 sales.  Other observers have noted that negative publicity about the safety and effectiveness of omega 3s combined with the ongoing maturation of the omega-3 supplements market in the United States has produced a decline in sales and a loss in absolute number of customers, something not seen since the supplements first appeared on the market in a big way.

“The overall omega-3 industry has been soft for the last few quarters, and we have not been able to avoid this impact on our own business. Our omega-3 results lagged in the second quarter as a result of lower than expected sales of concentrated fish oil and tolling services. The strength of the overall omega-3 industry and our position within this industry keeps us bullish on our long-term prospects in this sector,”​ Scholtes said.

Omega Protein is the largest processor of fish oil for human and animal nutrition based in the United States.  The company also has its Nutegrity division, in which it houses the assets of the ingredient supply company formerly known as Cyvex Nutrition, which it purchased in 2010.  Also within the division are the company’s omega-3 oil processing, and the assets of Wisconsin Specialty Protein, a whey producer the company bought last year.  The company recently completed an expansion of its protein plant in Reedsburg, WI to respond to strong demand for the company’s products, Sholtes said.

Earnings details​

Omega Protein’s revenues increased 72% from $41.8 million in the same period last year to $71.9 million.  Animal nutrition revenues rose by $30.8 million, whereas human nutrition product sales declined by $0.7 million.  The company’s second quarter reveunes rose 14.8% from the first quarter 2014, in which the company notched $63.5 million revenues. Net income for the second quarter of 2014 was $6.6 million ($0.31 per diluted share) compared to $4.0 million ($0.19 per diluted share) in the same period last year and $8.0 million ($0.37 per diluted share) for the first quarter of 2014.