In discussion its third quarter earnings with analysts, Omega Protein CEO Bret Scholtes said that the company’s human nutrition segment continues to underperform. Under Scholtes’ leadership, the company had embarked on a plan to diversify into ingredients for supplements and foods, a program that began with the acquisition of botanical ingredient supplier Cyvex Nutrition in 2010 and continued with the purchase of whey protein supplier Wisconsin Specialty Protein, a now-abandoned effort to offer a high concentrate omega-3 ingredient, and culminating with the company snatching up lipid ingredient supplier Bioriginal. That division has provided the latest disappointment in the sector. The foray into human nutrition was originally intended to insulate Omega Protein from the vicissitudes of harvesting a natural resource, that being the menhaden fishery off the Atlantic Coast and in the Gulf of Mexico. But the Bioriginal acquisition has in turn exposed the company to other market fluctuations.
“We were not able to grow [Bioriginal] sales in the third quarter of 2016 compared to the same period in 2015. The biggest challenge to sales growth has been the performance of virgin coconut oil, a product category that has declined due to increased competition and lower global pricing,” Schotes told analysts during the call. The call was posted in transcript form on the site seekingalpha.com.
Refocusing on core business
The human nutrition strategy was the focus of a fight for board control, a fight that in late June was decided in favor of activist investors who put forward board members who favored a plan to focus more narrowly on the company’s core business of fish oil and fish meal sold into animal nutrition markets. Animal nutrition was in fact a bright spot in the third quarter.
“Our animal nutrition segment continued its strong performance, which produced the highest quarterly consolidated adjusted EBITDA since we started calculating it,” Scholtes said.
The market has generally responded favorably to the shift on the company’s board. Despite the disappointment in Bioriginal revenues, the company beat analysts’ estimates for profit by a healthy margin and missed overall revenue expectations by only a small amount. The company’s stock was trading at a 52-week low of $16.34 during the height of the board struggle and was trading at more than $22 today.
One analyst bluntly asked whether the time was at hand for the company to start talking about divesting itself of some of its underperforming human nutrition segments. Wisconsin Specialty Protein, for example, has been a sore spot for several quarters. “When do we start making some hard decisions there?” the analyst asked.
“There is not a timeline out there for anything but I can promise you that both the management team and the Board is extremely focused on the underperformance of that business,” Scholtes said.