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Edited Transcript of OME earnings conference call or presentation 2-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Omega Protein Corp Earnings Call

HOUSTON Oct 19, 2017 (Thomson StreetEvents) -- Edited Transcript of Omega Protein Corp earnings conference call or presentation Thursday, March 2, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Held

Omega Protein Corporation - EVP and General Counsel

* Bret Scholtes

Omega Protein Corporation - President & CEO

* Andrew Johannesen

Omega Protein Corp - EVP & CFO

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Conference Call Participants

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* Tim Ramey

Pivotal Research Group - Analyst

* Mitch Pinheiro

Wunderlich - Analyst

* Tyson Bauer

Kansas City Capital - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Omega Protein fourth quarter and full year 2016 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. John Held, Executive Vice President and General Counsel. Thank you. You may begin.

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John Held, Omega Protein Corporation - EVP and General Counsel [2]

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Good morning and welcome to Omega Protein's fourth quarter and full year 2016 earnings conference call. By now, everyone should have had access to the earnings release for the fourth quarter and year ended December 31, 2016. For a copy of the release, please visit Omega Protein's website at www.omegaprotein.com, under Investor Relations. This call is being webcast and a replay as well as a transcript of the prepared remarks will be available on our website for 30 days.

Before we begin, we would like to remind everyone that comments made by management during today's call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates, and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements.

Additional information about risk factors and the uncertainties associated with Omega Protein's forward-looking statements can be found in the Company's earnings release, the Company's Form 10-K for 2016, and in Company's other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Omega Protein disclaims any intention or obligation to update or revise any forward-looking statements, except as required by law.

Please also note that on today's call, management will be discussing non-GAAP financial measures, including adjusted EBITDA, adjusted earnings per share and other metrics. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release, which is available on our website. Some of the information presented is derived from third-party sources. And while we believe this information to be reliable, we have made no independent investigation of these third-party sources or attempted to verify the veracity of the third-party data in any way.

I would now like to turn the call over to our President and Chief Executive Officer, Bret Scholtes, for opening remarks.

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Bret Scholtes, Omega Protein Corporation - President & CEO [3]

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Thank you, John. Good morning everyone, and thank you for joining us today. I will begin with a brief summary of our annual business and financial performance. Our CFO, Andrew Johannesen, will then provide you with a more detailed review of fourth quarter and full financial results. Finally, we will open the call to take questions.

2016 was a strong year for Omega Protein. Our team executed on our strategic initiatives while managing the controllable aspects of our business to report the strongest gross profits in the Company's history. We also initiated programs to return capital to shareholders.

We reported consolidated revenues of approximately $391 million, adjusted earnings of $2.01 per diluted share and adjusted EBITDA of $95 million for the year.

Our Animal Nutrition segment performed well throughout 2016 and continued its strong, multi-year success. This is largely a result of continued high demand for our products, solid harvest results, and improved operational efficiencies. Our Human Nutrition segment underperformed for the year, but we are encouraged by recent results of our specialty oils and nutraceutical categories. We continue to focus on execution throughout our Company, including the previously announced strategic alternatives review of our human nutrition business segment. We remain committed to building a stronger nutrition company and taking the steps required to increase shareholder value.

We believe the Company is well-positioned to capitalize on the macroeconomic and industry trends that drive demand for our products. In our opinion, this competitive position, combined with our products, supply chain and customer relationships are the keys to creating or maintaining the competitive advantages needed to further enhance our operational and capital efficiencies. We expect this formula to generate increased profitability and cash flow over time and enhance shareholder value.

I would now like to provide a more detailed update on our business segments, beginning with the Animal Nutrition. As a reminder, this segment includes sales of specialty ingredients to formulators of companion and production animal diets. We measure the Animal Nutrition segment's success by three primary drivers, production volumes; revenue per ton; and cost per ton.

Production volumes are the result of our harvest and product yields. Total production in 2016 was approximately 170,000 tons, which is consistent with our three-year average, but less than our production in 2015 when we saw record fish catch at both of our Gulf facilities.

Our Gulf fishery ended its 2016 season on November 1st, and our Atlantic season ended on December 16, after catching 96% of our Atlantic quota. Our Western Gulf and Atlantic operations ended the year with good harvest results despite challenging sea conditions for extended periods during the season. Our eastern Gulf operation had one of its best seasons ever in 2016. We made investments at our Moss Point plant during the off-season to improve operations, including a project to move, refurbish and then install a dryer we previously operated at our Cameron facility. This additional equipment partially led to the outstanding production results at Moss Point during the year, notably increased meal yields and better quality product. For the year, our total yield for the Company was 38%, an increase compared to both 2015 and the three-year average.

We are encouraged by the regulatory decisions made in October of 2016 that reaffirmed that the health of both the Atlantic and Gulf Menhaden populations and the decision to raise the Atlantic Menhaden quota by 6.45% beginning this year. This increase is still quite conservative, and we believe that the peer-reviewed science supports further increases.

The second driver of success for the Animal Nutrition segment is revenue per ton which reflects the global supply and demand dynamics for fishmeal and fish oil. For 2016, we realized $1,455 of revenue per ton, the highest in our Company's history. This metric has increased over time as evidenced by the five-year and ten-year compounded annual growth rate of approximately 7%. Our product development has played a role in the increase. For example, we have developed a market for our naturally-stabilized fish meal which has a greater revenue per ton than standard meal. This protein ingredient is sold to the natural pet food manufacturers in the United States, and we sold over 20,000 tons in 2016.

Despite the growth rate trend for revenue per ton, we are seeing some weakness in current market prices compared to the prices realized in 2016, but we have not been impacted significantly because our current inventory is mostly sold forward at prices similar to those realized in 2016. It is too early to predict pricing for 2017, but we will continue to monitor prices as the global demand and supply picture becomes clearer in the coming months and we begin discussions to sell forward more of our 2017 production. Global demand remains strong, and industry consumption data reflects the increasing demand from customer segments that most highly value the nutritional benefits. For these reasons, we remain optimistic about the long term prospects for fish meal and fish oil pricing.

The third driver of success for this segment is our cost per ton which is calculated by dividing the cost to catch and process fish by our annual production. We continue to strategically invest capital in our fishing operations which has allowed us to harvest fish and manufacture our products more efficiently, notably by upgrading vessels to allow for increased catch-per-vessel over historical averages, increasing plant throughput capacity, and continuing to upgrade our processing equipment. Our average cost per ton of sales was $912 in 2016, and this metric has grown at a five-year compound annual growth rate of only 2%. Our ability to control costs has been an important contributor to our higher margin profile over the last few years.

We are moving forward with our planned strategic initiatives to build upon our solid foundation. Several of the capital projects announced in 2016 are on track to contribute in 2017. In addition to completing these projects, we expect to invest at least an additional $10 million of growth capital to strengthen our animal nutrition business. Some of these projects aim to reduce operating costs at our processing plants and shipyard. Another project seeks to increase the geographic range of our western Gulf fishing operations for Abbeville plant by purchasing Offshore Supply Vessel and converting it to a carry vessel. We will convert this vessel at our shipyard which is a competitive advantage for our Company. Another project will increase naturally stabilized meal storage capacity at our Moss Point plant to increase operational and sales flexibility.

I will now turn to our Human Nutrition segment, which includes sales of nutritional ingredients and products to food and supplement manufacturers and retailers. 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.

Our specialty oils business which has in recent years accounted for approximately 75% of segment sales recorded one of its best quarters in fourth quarter of 2016. Highlights for the quarter included additional volumes from a large, mass merchant customer and opportunistic sourcing. We are encouraged by our customer discussions, supply chain improvements, increased focus on product mix and customer diversification.

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.

Throughout 2016, we have carefully reviewed the performance of the Human Nutrition segment given the challenges we have experienced. As a result, the Board and our management team believe that this is an appropriate time to undertake a comprehensive strategic review.

With that business overview, I would now like to turn the call over to our Executive Vice President and CFO, Andrew Johannesen, to discuss our financial results in more detail.

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [4]

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Thank you, Bret. Good morning, everyone.

I will begin by reviewing our fourth quarter and full year financial results, followed by some balance sheet highlights and thoughts on 2017.

At a consolidated level, revenues for the fourth quarter of 2016 were $85 million, an increase from $82 million in the same period a year ago due to higher Human Nutrition revenues. Gross profit for the fourth quarter was $23 million, consistent with the prior year's fourth quarter. Gross profit as a percentage of revenues, or gross margin, decreased from 28% in the prior year period to 27%, as a decrease in the Animal Nutrition segment was partially offset by an increase in the Human Nutrition segment.

Looking further into the Animal Nutrition segment results, revenues were consistent at $53 million on sales volumes of approximately 36,000 tons. Lower sales volumes of fish meal were partially offset by higher volumes of fish oil, and the resulting shift in product mix led to an increase in revenue per ton from $1,323 a year ago to $1,466, despite relatively flat underlying prices.

Total 2016 production of 170,000 tons came in at the low end of the range provided on last quarter's call, contributing to a modest increase in cost per ton for our 2016 season production. This cost per ton increase resulted in a $1.4 million fourth quarter adjustment for prior period sales of 2016 production. For the quarter, animal segment gross margin was 34%, or 36% excluding the prior period true-up, compared to 39% a year ago.

In the Human Nutrition segment, revenues increased $2.5 million from the fourth quarter of 2015 due to increased sales of specialty oils and protein products. Segment gross margin for the fourth quarter increased from 7% to 15% due primarily to improvement in specialty oils.

Returning to the consolidated results, fourth quarter selling, general, and administrative expenses, including research and development, were $12 million, up from $11 million in the same period a year ago. The increase reflects accruals related to the Bioriginal earn-out and other miscellaneous expenses.

Net income for the fourth quarter was $4.3 million, or $0.19 per diluted share, compared to net income of $2.9 million, or $0.13 per diluted share, for the same period a year ago. After making certain adjustments, which are detailed in our earnings release, adjusted net income for the fourth quarter of 2016 was $6.8 million, or $0.30 per diluted share, up modestly from $6.5 million or $0.29 per diluted share in the previous year.

As a reminder, GAAP requires us to use the "two class method" of calculating EPS as explained in the footnotes to our 10-K. The same EPS results can be derived by applying an average diluted share count of 22.7 million shares to net income.

Wrapping up the quarterly review, Adjusted EBITDA was $17 million, compared to $19 million for the prior year period.

For the full year, revenues increased 9% from 2015 to $391 million, and gross profit grew from $99 million to $114 million. Consolidated gross margin increased from 28% to 29%, reflecting improved Animal Nutrition results. In the Animal Nutrition segment, average revenue per ton edged up from $1,453 to $1,455, while average per unit cost of sales fell slightly from $919 to $912. As a result, Animal Nutrition gross margin improved from 36.8% to 37.3%. In the Human Nutrition segment, gross margin decreased slightly from 12.8% to 12.5% due primarily to the dairy protein business.

Net income for the year ended December 31, 2016 was $33 million, or $1.46 per diluted share, compared to $24 million, or $1.07 per diluted share, in the prior year. On an adjusted basis, net income for 2016 was $45 million, or $2.01 per diluted share, compared to $33 million, or $1.50 per diluted share. Adjusted EBITDA totaled $95 million for 2016, a 20% increase from $80 million in 2015.

Turning to our balance sheet, strong operating cash flow allowed us to pay down $23 million of debt in 2016, and we ended the year with $37 million of cash. We believe we are well-positioned to fund growth and other capital projects in our animal nutrition business, as well as our recently initiated quarterly dividend program.

Looking ahead, our Animal Nutrition segment ended the year with approximately 65,000 tons of product in inventory, or about 10,000 less tons than a year ago. We expect to sell most of this inventory in the first half of 2017, including approximately one-third in the first quarter.

As of December 31, 2016, we had sold forward roughly 52,000 short tons of fish meal and 7,000 metric tons of fish oil for anticipated 2017 delivery at prices generally in line to slightly below those realized in 2016. We expect sales of 2016 production under these contracts to provide gross margins near the mid-30% range that we have experienced in recent quarters, and to comprise the majority of sales volumes in the first half of 2017. As is typical at this time of year, we have much less visibility into the volumes, prices and unit costs of 2017 production, which we typically begin to sell late in the second quarter. Prices will be determined by future market conditions, and volumes and unit costs will be heavily influenced by 2017 fish catch and yields. In the Human Nutrition segment, performance will continue to be influenced by sales volumes, product mix, prices and raw material costs. Segment gross margins have generally ranged from the low to mid-teens over the last several quarters, and are likely to continue to experience some variability quarter-over-quarter.

That concludes our financial review. I will now turn the call back to Bret for some brief closing remarks.

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Bret Scholtes, Omega Protein Corporation - President & CEO [5]

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Thank you, Andrew.

In closing, we believe the fundamentals driving the specialty protein and oil sectors, especially the fish meal and fish oil markets remained favorable. We believe that Omega Protein has a strong foundation to fuel future growth and enhance shareholder value. We are confident in our opportunities ahead and plan to continue to use the strength of our balance sheet and cash flow generation to prudently invest in our business and return value to shareholders.

This concludes our prepared remarks for today. On behalf of Andrew, John and myself, we would like to thank everyone for their interest in Omega Protein. The three of us, along with other members of our management team, are now available to take your questions. Operator?

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Tim Ramey with Pivotal Research Group. Please state your question.

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Tim Ramey, Pivotal Research Group - Analyst [2]

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Thanks so much. Just relative to your comments on the carry forward, looks like if we adjusted for that prior year period adjustment, in the fourth quarter, your margins would have been maybe 2 points higher gross margins, would have been 2 points higher. So, am I thinking about that right? I think I heard you say low-30s for the Animal Nutrition for the first half? Is that how we should be thinking about?

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [3]

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Good morning, Tim. This is Andrew. Yes, you heard that correctly. The adjustment in the fourth quarter for the prior period's cost of sales was $1.4 million. So, the Animal Nutrition gross margin, which was reported at 34%, would have been 36% without that; so another 2 points. And then looking forward, made the comment that we thought for the early part of 2017 while we are still selling out the 2016 production that we would expect margins in that mid-30% range.

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Tim Ramey, Pivotal Research Group - Analyst [4]

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Right. I would expected bonus accruals to be pretty high; this was your best year ever. We haven't seen that proxy yet. But, can you confirm that they were sort of high end of the range? And, I suppose, we start out with a foot in a hole for 2017 and so probably bonus accruals...

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [5]

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Yes. Tim, we do, the bonuses are accrued throughout the year and we revise those estimates as we go through the year, primarily in the back half. And so, those are all reflected in the Q3 and the Q4 numbers. Nothing that was significant enough to one being called out as a major driver of change relative to past periods, but they are included in there.

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Bret Scholtes, Omega Protein Corporation - President & CEO [6]

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I mean, we can see It is something very similar to last year.

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Tim Ramey, Pivotal Research Group - Analyst [7]

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Okay. And on the share repurchase, we have talked about it. But, unless you guys are like super good stock pickers and understand stock prices maybe better than all the rest of us, it seems like you are being panicky about what is a good level or what is an opportunistic level. And it ought to be a source of embarrassment for the Board to have come out last May and said, yes, we got a share repurchase program in place, we are going to do this; you didn't acquire that first share.

Today, you are going to get the stock price opportunity and you cannot function on it, because of the strategic review. I guess, It is not a question, It is more of a statement. But It is pretty frustrating to have you guys say you are going to do something and you didn't do it at all?

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Bret Scholtes, Omega Protein Corporation - President & CEO [8]

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We do remain committed to returning capital to shareholders. And although we have not repurchased anything, we did put the dividend in place as another avenue to returning capital to shareholders. And returning capital to shareholders is something that is important to this Board. And we will continue to -- when the review is complete, I would expect us to continue to look for opportunities to repurchase.

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [9]

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And not to dispute the fact pattern you laid out Tim, we announced the program a little less than a year ago and nothing has been bought back to-date. At the same time, it was, at the time meant to be a three-year opportunistic plan and there is a view that we would modify the parameters of that as we went through it to exercise it over the course of three years and now for strategic review coming up and suspending the plan. That is something that was unanticipated a year ago. But, to Bret's point, returning capital to shareholders, remains something that is very much top of mind for us.

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Tim Ramey, Pivotal Research Group - Analyst [10]

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Right, but intrinsic in that is the view that your market timing and market timing means you did nothing when you could have been buying back stock at 10 times earnings. You know just my avenue. Okay, thanks much.

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Bret Scholtes, Omega Protein Corporation - President & CEO [11]

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Thanks Tim.

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Operator [12]

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Thank you. Our next question comes from the line of Mitch Pinheiro with Wunderlich Securities. Please state your question.

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Mitch Pinheiro, Wunderlich - Analyst [13]

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Yes. Good morning. So, a couple of things. First, in the K, you talk about the H-2B visa program and highlighted risk in being able to have some quality fishing employees available in the fishing season starts. How do we assess that risk of that you highlight in the K?

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Bret Scholtes, Omega Protein Corporation - President & CEO [14]

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Sure. For those of who may not be as familiar with the H-2B program as you, just to give everybody a kind of overview, we do access visa program which allows us to hire experienced fishermen from outside the United States to come work for us during the fishing season. It is not an opportunity to reduce costs; for us, It is an opportunity to absolutely bring in additional experience to help with that. And traditionally, these visa workers have come from Mexico. We have reduced the amount of H-2B visas requested over time, and it is something that we continue to evaluate and we continue to train our own workers to get more experience.

That said, we did submit an application for visa workers this year and we do expect that they would be helping us out as the year progresses. Just how the process works, it may not be a situation where everybody is on the vessels fishing the first day we are out. But given kind of a bell-shaped curve that tends to be our harvest during the year, having fewer workers for couple of weeks, if that is ends up being; do not expect that to be a challenge.

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Mitch Pinheiro, Wunderlich - Analyst [15]

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And relative to the new administrations, rhetoric around Mexico and visas et cetera, have you assessed that at all? I mean, do you feel a greater risk, no change in your ability to find quality fishermen for the upcoming season?

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Bret Scholtes, Omega Protein Corporation - President & CEO [16]

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So, there is no doubt that some of the things that you referenced probably had us little bit more just trying to understand all of our options this year. Given the Department of Labor actually have approved our visa applications and so for the upcoming year, we do not expect that to be a challenge, unless something unexpected pops up. But, we have gone through the process, the Department of Labor has approved us and we would expect that we would have access to the visa workers this year.

Going forward, we will continue to assess going forward. You never want too much reliance on any type of program. And that is one of the reasons we have continued to really increase the amount of training and amount of recruitment, job fairs that we are going to, reducing the amount of applications that we submit each year, to reduce our reliance there.

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Mitch Pinheiro, Wunderlich - Analyst [17]

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Okay. Thank you. And then, another regulatory matter relative to the Atlantic States Fisheries where there is I guess noise around reallocating the quota, not based on historical landings, but I don't know how they are going to do it. But, how do you see that? If they did got rid of the quotas on a state based on state landing, is that a positive or negative for you and Virginia, and how does that play out? I know it doesn't happen. I think It is not in effect for 2017. But, I am just curious what the impact could be.

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Bret Scholtes, Omega Protein Corporation - President & CEO [18]

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Sure. So, overall, I would say, peer reviewed science continues to be extremely strong. And we think that the approach to setting the quotas has been quite conservative. And we absolutely think conservatism, sustainability; we have been doing this for 100 years and have already intension for 100 more. We think that there is absolutely the ability to solve this issue and then make sure that the individuals who want increased quota, we think there is opportunities to do that without impacting who has quota these days. The way that the allocation works today, very much is based on who has made investments over time in the industry.

And Virginia does get a very large percentage of the quota on East Coast. And the main reason is because through the years, the amount of investment that has gone into the Menhaden industry to continue to keep it alive and not regulate, things like that have rewarded Virginia. Now that prices are up and the quota has been set, there is a move underway by certain other states to try to get additional quota and to extent that the overall pie is not larger, they are going to be looking for a greater piece of pie. So, we will see how all that plays out. I think that I have been very encouraged with the way that the process has worked to-date, the fact that we have been able to receive additional quota I think is very much a positive. And I would like to believe that everybody will be very constructive and working through this state. It will remain an uncertainty until this resolves probably within the next year or so.

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Mitch Pinheiro, Wunderlich - Analyst [19]

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Okay. And then, two more questions, again another regulatory issues. Reading the K, you disclosed that you received the subpoena from the SEC relating to I guess your probation terms. And that was back in December. Why wouldn't that have been something you had disclosed back at that time? I mean It is two months. Why so long or is it not material?

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John Held, Omega Protein Corporation - EVP and General Counsel [20]

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Hi, It is John Held, General Counsel. There is no requirement to disclose an event like that. We have put that in voluntarily just as additional information. And again, language in the 10-K really would have been the same in December as it is now. We received a subpoena and we are in the process of responding to it.

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Mitch Pinheiro, Wunderlich - Analyst [21]

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Okay. So, just curious, is there some element of materiality in the decision to disclose that or is that not part of the decision, just curious how that works? Does it imply immateriality?

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John Held, Omega Protein Corporation - EVP and General Counsel [22]

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It could. I mean, there is some element of materiality in making that decision. Yes.

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Mitch Pinheiro, Wunderlich - Analyst [23]

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Okay, alright. And then, finally, relating to 2017, if your fish catch in 2017 -- it looks like it matches 2016, so we get the same -- and the basic same levels of production and so kind of keeping those constant. Would you expect your cost per ton to be relatively stable too, or are there any puts and takes in your cost side that be favorable or unfavorable, all things being equal in 2017?

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [24]

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Hi, Mitch. It is Andrew. If you hold all else constant, as you said, catch yield production, our expectation would be that there would probably be a modest increase in cost per ton, just as a faction of the depreciation element tends to go up each year, there is some baseline inflation that is going to come through the numbers. So, those types of things are going to tend to draw it up. But, no major structural issue that we know of today that would cause us to have an expectation or a bias going into the season, if there would be a significant increase beyond that or decrease.

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Operator [25]

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Thank you. (Operator Instructions) The next question comes from the line of Tyson Bauer with KC Capital. Please state your question.

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Tyson Bauer, Kansas City Capital - Analyst [26]

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Just a quick question with regards to the strategic review. What is the difference between the strategic review this time as opposed to the first time that we just got done with not that long ago when everything was on the table then? Any different mandate that you have given your bankers that is scaled around as opposed to the first time?

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Bret Scholtes, Omega Protein Corporation - President & CEO [27]

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This time, it is going to be focused specifically on the Human Nutrition segment. And we are 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.

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Tyson Bauer, Kansas City Capital - Analyst [28]

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Okay. Andrew, in your K, you have $137 million of identifiable assets to the Human side, $26 million in tangibles. Can you break that down between Bioriginal and WSP, where those valuations lie and include your inventories, working capital, just so we get an idea of kind of what the hard asset values are of those two divisions?

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [29]

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Tyson, the inventory information is in the inventory footnote. I would say that at a general level, the net book value of that segment is, in rough terms, $125 million; about $75 million of that would be Bioriginal and nutraceuticals business, about 50 would be the dairy business. That would include the intangibles, which are primarily on the Bioriginal side as well as the inventory and other working capital levels.

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Tyson Bauer, Kansas City Capital - Analyst [30]

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Given the operations, I know you go through impairment review at the end of the year. The 50 million WSP, is that primarily that new equipment and hard PP&E with your inventory with those items there? Are you fairly confident, you can recover that valuation that is on your balance sheet?

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [31]

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The value of that business is largely a combination of PP&E and some working capital is the majority of that. And in terms of what we can recover, we will really have to see what happens with the process. It is too early to really opine on that.

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Tyson Bauer, Kansas City Capital - Analyst [32]

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Okay. You mentioned SG&A is similar to last year's level; you break it out in Human Animal and then corporate allocation. Do we have an idea -- obviously you have share costs, this has been a topic before of a creep and increasing your operating costs through the years. With a new strategy that may or may not include Human, is there the possibility to get that SG&A down either on a percentage basis or an absolute dollar basis, especially if you are in animal nutrition only company.

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Bret Scholtes, Omega Protein Corporation - President & CEO [33]

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This is Bret, I will start with that and then Andrew can chime in. I think the SG&A overall, if you look at our SG&A to revenue, I think we run pretty lean to start with. Regarding the unallocated SG&A, as the business has become larger and more complex, there are certain costs that are in the unallocated SG&A that if we were a smaller business would not be there.

For example, your odysseys would be lower there, probably certain types of legal fees and things like that. We do try -- if there is any particular cost that is specifically related to one of the business units, we would allocate it directly there. What you are looking at in terms of an allocated is going to be the service costs, the officers' salaries, forward costs, corporate office building, things like that. Andrew, do you want add anything to that?

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Andrew Johannesen, Omega Protein Corp - EVP & CFO [34]

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Sure. As Bret mentioned, the overall SG&A load, It is just something we benchmark ourselves against peers every year and we traditionally stacked up pretty well as total SG&A with about 11% of revenues in 2016. If you were to separate out the Human business, obviously a lot of SG&A is direct to that business and that would move with it. In terms of what is remaining, as Bret said, there might be some minor adjustments.

Another item to keep in mind is in 2016, there were a few costs that we wouldn't expect to recur. And so that run rate level probably comes down a little bit off of that. And then even within Human, you have got some costs that run through SG&A such as the deferred acquisition costs that will step down in 2017 and go away in 2018, if that all remains part of the consolidated results.

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Tyson Bauer, Kansas City Capital - Analyst [35]

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Okay. We have seen in the last few months, although, we don't have a lot of volume trading in the global market, fishmeal prices have come down ever since Peru announced its quota and hit it in early January. The rhetoric down there seems to be that we are going to get historical normal quota levels for above average quota levels as they try to recover some of that economic losses they have had in recent years.

That combined with the China Fishery's bankruptcy and the reallocation of quota down there whether It is [Casas] some of the other major players. How does that work into your outlook for your 2017 fishing season when we may be facing greater global competition as Peru recovers and may swing that pendulum a little further to the right where they are going to have a little elevated quota levels.

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Bret Scholtes, Omega Protein Corporation - President & CEO [36]

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Sure. I think, I will answer in two parts, one in terms of pricing and then in terms of what we are doing to prepare for that. We are seeing the same things that you mentioned as far as Peru trying to get back to more traditional quotas, and we will see where exactly those are set. Probably late April or so, we will have an idea of the first season quota there. A global supply overall will play a role in terms of where pricing is for this year. I made the comment during my prepared remarks that although we were seeing some weakness, we had sold forward what is in our current inventory which should take us through May or so.

And then, we will see. Right now, there is not a whole lot trading. So, It is difficult to really get a good read of where pricing actually is. We have been having conversations with the customers and have an idea. But I think that when we get to that April-May timeframe and global supply starts to come to better form, the same time we get closer to the aquaculture season and It is to really understand where demand is. In fact that is probably when we will really have or start to have an idea of where pricing is going to be for 2017.

We know that the prices -- and you probably know better than anyone, the prices in this business will bounce around. And having a little bit more global supply on the market I think is actually a good thing for the industry overall. It is important fishmeal and fish oil work extremely well and diet. I think It is important to keep inclusion rates where they are and to make sure that our customers have enough product in order to grow their own businesses. So, I would actually welcome some more global supply on the market.

We know that prices will bounce around. What we are going to do is we are going to continue to put capital into the business. That is what you have seen us do for five years or so; you have seen us put about $20 million in just to maintain our business; you have seen us start to refurbish our vessels. If you look by in 2010, I would say less than 5% of our fleet had been refurbed in the last five years. At the end of 2016, 40% of the fleet had been refurbed within five years and that percentage I would expect to go up over time. And those types of capital investments in the business will continue to make sure that from operating cost perspective, we are maximizing the operating cost but the quality of our products are as good as possible.

So, we are going to make sure that we continue to look for opportunities, increase production to decrease our cost per unit to improve the quality of our product and continue to -- we have an opportunity to make a differentiated product like the natural I referenced. That is what we are going to do. And each of those steps is going to position us better and better in the market overall.

And prices are going to go up and are going to go down but we are going to be -- because of what we are doing, our shareholders are going to be rewarded definitely in the up years but even in the down years will be less painful as a result of it. So, that is probably a longer answer than you were looking for but there definitely is the risk that pricing could be lower, the back half of 2017. We have to look and understand what is there. But, It is not going to change our results on this business, so the products we make are going to continue to make the Company stronger.

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Tyson Bauer, Kansas City Capital - Analyst [37]

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Okay. Last topic for myself, back in 2010 you had the BP oil settlement. Again, the Company had significant amount of cash. The decision at that point in time was to redeploy that capital in growth areas as opposed to return capital to the shareholder base. We are entering a possibility of a similar situation where you could end up with the large cash balance, depending on the strategic review. What is your preference as you look forward and you have some new Board members in regards to return of capital versus redeployment of that capital as you go forward in your second chance here?

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Bret Scholtes, Omega Protein Corporation - President & CEO [38]

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We have been the beneficiary of strong operating cash flow for the last several years and we have used that as an opportunity to absolutely improve our fishmeal and fish oil operations as well as expand our protein and fatty acid profile into the food and supplements. The priorities of this business going forward will absolutely be of course we need to maintain the strong balance sheet, because we will have fluctuation in prices. Some years, we will generate more cash than others. But as long as we have the business, we feel very good about the overall consolidated business long-term and the fact that sometimes some years will be better than others. We just need to make sure that we always have the balance sheet to weather the tougher times.

Secondly, we are quite encouraged and optimistic about opportunities to reinvest in the fishmeal and fish oil operations and you have seen us do it or the last several years. And I expect at least $2 million of growth capital to go into the business this year in addition to looking for opportunities to put money into bigger opportunities to increase availability of our assets. And we have announced two programs in 2016 to return capital to shareholders, both stock repurchase program and the dividend program.

And so, each year, we will evaluate just how you much excess capital we think we have and we continue to look at all those different programs and determine what the right way to deploy the capital is. And if we get an opportunity to strengthen the Company by some means other than what we have talked about, It is something we will definitely look at. But, I think investors should feel quite confident in the long-term prospects of the business in terms of the balance sheet, in terms of having programs to return capital to shareholders, as well as the opportunities for seeing to invest in the business itself.

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Operator [39]

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Thank you. There are no further questions at this time. That does conclude our question-and-answer session. I will now turn it back to management for closing remarks.

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Bret Scholtes, Omega Protein Corporation - President & CEO [40]

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I just want to thank you everyone once again for your time this morning, I know It is a busy time with earnings. So, we appreciate you taking an hour of your morning to learn more about the Company. If there is any question that we can answer, don't hesitate to give Andrew or myself a call, and I am sure that we will see you on the road in the near future. Hope you have a great day. Thanks.

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Operator [41]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.