Enzymotec's (ENZY) CEO Dr. Ariel Katz on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Enzymotec Ltd. (ENZY)

Enzymotec Ltd. (NASDAQ:ENZY)

Q2 2014 Results Earnings Conference Call

August 5, 2014 8:30 AM ET

Executives

Katie Turner - Investor Relations

Dr. Ariel Katz - President and CEO

Oren Bryan - Vice President and CFO

Analysts

Scott Van Winkle - Canaccord Genuity

Brian Spillane - Bank of America

Jeffrey Schnell - Jefferies

Rommel Dionisio - Wedbush Securities

John Bumgarner - Wells Fargo

Operator

Good day, ladies and gentlemen. And welcome to the Enzymotec Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions)

As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference, Katie Turner. Please proceed.

Katie Turner

Good morning, everyone. Thank you for joining us today to review Enzymotec’s financial results for the second quarter ended June 30, 2014. On the call today representing Enzymotec are Dr. Ariel Katz, President and Chief Executive Officer; and Oren Bryan, Vice President and Chief Financial Officer.

Dr. Katz will review this morning the key operating and financial results for the quarter and provide an update on our growth strategy. Then Mr. Bryan will discuss the second quarter financial performance, as well as our outlook for 2014. Finally, the company will open the call for your questions.

Before we begin, we’d like to remind you that on today’s call management may make forward-looking statements. These statements may include management’s beliefs and expectations about the company’s future results.

Please be aware they are based on the best available information to management and assumptions that management believes are reasonable as of today’s date. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties.

Future results may differ materially from management’s current expectations. We refer all of you to Enzymotec’s second quarter earnings press release that was issued this morning and annual report on Form 20-F filed with the SEC on February 13, 2014 for more detailed information on the risk and uncertainties that have a direct bearing on the company’s operating results, performance and financial conditions.

On the call today management will also disclose certain non-GAAP financial measures, which are used as supplemental measures of performance. The company believes these measures are provided -- provide useful information to investors in evaluating their operations period-over-period.

For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly-comparable GAAP financial measures in the company’s earnings release.

Please note that non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or substitute for Enzymotec’s financial results prepared in accordance with GAAP.

And with that, I’d like to turn the call over to Dr. Ariel Katz.

Dr. Ariel Katz

Thank you, Katie. And welcome everyone to our second quarter 2014 earnings conference call. In the second quarter, our business experienced substantial challenges based on experiment, market dynamics, which hinders our financial performance. While we continue to communicate these expected headwinds to everyone when we reported our first quarter earnings results, the overall impact was greater than anticipated.

It is important to remember that Enzymotec Nutrition business is a B2B business, which is highly dependent on our customers on performance in addition the market and the industry trend.

While our sales declined in the second quarter, it was not related to decrease in our customer base as we were able to maintain customer’s loyalty. It is also important to note that, although, these headwinds were stronger than expected, our team was able to manage and contribute the aspect of this situation when and to adjust our operating cost accordingly while increasing gross margins and maintain profitability.

Today, I will provide overview of our operational performance in the second quarter and update on our plans to improve our mid and long-term results. As we walk to future executed upon to strategy growth objectives. Then our CFO, Oren Bryan, will review the second quarter financial and our fiscal year 2014 outlook in more details before we open the call up for your questions.

First, I will focus on our Nutrition segment. As we discussed last quarter, we expected revenue decline as a result of slower sales from China due to the Chinese government policy for infant nutrition industry.

As part of the government policy the new Chinese regulation require both, domestic and foreign infant formula companies to make certain changes to their supply and production change.

The Chinese government policy also creates increase price pressure and competition from local and international brand. In addition, there is a fast developing e-commerce market for infant formula in China, that increase price pressure and affect the market shift of the infant InFat customers.

This dynamics lead too much greater sales decline that we anticipated and as many of you know, China is a market on which we are currently highly dependent for sales of InFat product, which is marketed by Advanced Lipids, our joint venture with AAK.

We are focused on both our current and future business with an action plans to stabilize and improve our Nutrition segment results. With respect to InFat, we view these recent headwinds as a short-term in nature.

The essence to permit us which is InFat currently represents less than 10% of the vegetable oil used in infant formula and therefore, we continue to expect that as more customers incorporate InFat into their formula it will help to drive our growth.

The larger InFat customers operating in China, which include some of the leaving providers of infant formula in the world are reacting and adjusting to the Chinese government regulatory change and dynamics as we expected to see a slight recovery in the third quarter and more robust recovery beginning in the market in the fourth quarter of 2014.

We also expect to see broader acceptance an adoption InFat in China and in the new markets over the coming quarters. We are in negotiation with potential multinational customers in infant formula market and have hopefully the deep discussion will lead to additional customer adoption in InFat and incorporating it in their infant formula brand.

And finally, we are continuing to develop innovative new infant Nutrition product. At Enzymotec we have very strong property technology which our team has build over the last several years focused on consumer health and wellness.

We have developed a tremendous reputation in the industry based on our clinical validation, patent, FDA and other local and global regulatory approval to position Enzymotec better than ever for future growth.

I believe, we are only beginning to realize the success of our hard work is evidence by recent instant, clinical studies and publication from the usage of our product and their benefits to infant.

I will now focus on our krill oil sales which also fall within our Nutrition segment. Last quarter we couldn’t communicated that we anticipated challenge in the second quarter a result like clinical -- (indiscernible) dietary supplements market trend, particularly, in the market where Enzymotec is most active in U.S. and Australian market.

Specifically, in these two niche mature markets there is decline in entire Omega-3 market which also affected our krill oil sale in the second quarter. This decline in combination with increase capacity by all leading krill oil manufacturing and supplier in anticipation of growing market is expected to create this competition going forward.

In addition to this general market decline in U.S. and Australia, the Australian market has experienced a decline of krill oil industry sales, which may also be related to non-compliance of leading Australian krill oil brand with the Australian PGA regulation and related krill oil product recall which we believe has reduced consumer confidence in krill oil product in Australia.

Despite these recent headwinds and U.S. and Australia, we believe that the global Omega-3 is still represents a business opportunity and there is a room for our premium Omega-3 product.

Our plan is to work to recover our krill oil sales in U.S. and Australia, and continue to work to grow our krill product in new markets, particularly in the Far East. We have recently recruited senior sales -- senior level sales executive and regional manager and we also believe that our technology advantages and culture of innovation will lead both our competitive product edge and leadership position in the krill market on the global basis to the few field sellers, diversify and accelerate our future sales growth.

We also continue to launch new innovative nutrition product. For example, we recently launched Omega PC. Omega PC is a new innovative premium fish based omega-3 product, the existing omega-3 market suffers from increased commoditization and lack of innovation.

Omega PC is an innovative product in the omega-3 category that bring new benefits to consumers compared to other omega-3 fish oil such as better absorbance that lead to better efficacy and higher accumulation of omega-3 fatty acids. It also better represents the omega-3 corresponding wild, cold water fish as it contains omega-3 fatty acids bounded to both triglycerides and phospholipids and also reduce fishy breaths.

Turning to our VAYA Pharma segment. Our VAYA Pharma segment sales force in U.S. ramped up in the second quarter of 2014 to nine states where we currently market our VAYA Pharma product. Although second quarter 2014, VAYA Pharma sales grew by 40% compared with the second quarter of 2013, the growth was slower than expected.

Our plan to accelerate the growth of our U.S. medical food business includes addressing our operational system and supply chain continuing to increase our VAYA Pharma sales force in U.S. and upgrading our VAYA Pharma infrastructures to support our extension of distribution of VAYA Pharma products. Most notably later this month, Mr. [Rob Klein] (ph) will join our team as a CEO of VAYA Pharma.

Mr. [Klein] (ph) has strong global management experience and a consistent track record of accelerating growth of medical nutrition and healthcare business in multinational companies such as Abbott (indiscernible). He holds BA from Harvard University and MBA from the University of Michigan.

We are receiving great feedbacks from MDs about the efficacy of our VAYA Pharma product and are receiving positive response from our targeted educational activities as product awareness has grown and we are beginning to see greater adoption and acceptance of our VAYA Pharma product, which we expect will help grow future sales in the medical food segment.

We believe that our ability to cost effectively and efficacy -- efficiently develop future prescription drug maybe reflect by the positive feedback we received from the FDA that let one of our VAYA Pharma product to late-stage drug development. The FDA feedback together with our unique platform and capabilities has already raised interest from players in this field.

As a result, we are considering collaboration with different potential partners in vehicle to leverage our products and potentially develop new drug based on our unique platform and capabilities. We are also on track to conduct additional clinical studies. These clinical studies are designed to reinforce science and market opportunity behind our current and future VAYA Pharma product.

In addition, we plan to outgrow VAYA Pharma sales outside of U.S. through additional strategic partnership such as our relationship we have developed with drug brands in Sechang in South Korea and PFM in Singapore. We are in the process of establishing subsidiaries with PFM in Singapore under the control and we expect to increase our sales in Singapore under the new structure. In addition, we are currently in early stage discussions with multinational companies about corporation and selling biopharma products worldwide.

In summary, although the fiscal year 2014 has turned out to be a very challenging year, I remain confident that Enzymotec is well positioned to turn to profitable growth transaction.

I think we can remain focus on managing and controllable aspects of our business and to present and increase our profitability. We have established strong added-value ingredients and recognize clinical validation which together with our unique marketing edge position us with strong, several development of customers’ relation and expansion of our global footprint.

We are confident that our proprietary lipid-based technology, focus on consumers’ needs, our solid reputation in large and growing nutrition market and our innovative product portfolio are key competitive strength that will help design to generate profitability growth in the long period.

With that overview, I would like to turn the call over to Oren Bryan.

Oren Bryan

Thank you, Ariel. Before I start let me remind you of some important information with regards to how we present our financial results. Under U.S. GAAP, we are required to account for the results of operations of Advanced Lipids, our 50% owned joint venture with AAK, using the equity method. This means that we recognize our share in the net results of Advanced Lipids as a share of profits of an equity investee.

Accordingly the revenues recognized from the arrangement are the amounts we charge to our joint venture partner or our direct cost of production plus our share of the joint venture for it.

To provide investors with a better understanding of our performance and for the purposes of segment reporting under U.S. GAAP, which require presentation on the same basis provided to and utilized by our management to analyze the relevant segments result of operations.

For management analysis and for segment reporting, we account for the result of operation of Advance Lipids, using the proportionate consolidation method. Under the proportionate consolidation method, we recognize our proportionate share of 50% of the gross revenues of Advance Lipids and record our proportionate share of the joint venture’s cost of production in our statement of operations.

And now let me discuss our financial results for second quarter ended June 30, 2014. Based on the proportionate consolidation method, our net revenues for the second quarter of 2014 decreased 34.4% to $11.5 million from $17.5 million for the second quarter of 2013.

Based on the equity method of accounting, our net revenues for the second quarter of 2014 decreased 39.8% to $9 million from $14.9 million for the second quarter of 2013. Our decrease in revenue was driven by lower nutrition segment revenue, partially offset by an increase in VAYA Pharma segment revenues.

Gross margin under equity method for the second quarter of 2014 increased over 1500 basis points to 62.0% from 46.5% for the second quarter of 2013. Over 800 basis points of this increase in gross profit margin was due to the operation of the new extraction facility and other improvement in production efficiency and ultimately 700 basis points resulted from changes in the mix of products sold as our net revenues in the three-months ended June 30, 2014 reflected an increase in the volume of sales of InFat which when accounted for the equity method carry a higher gross margin and an increase in sales of our VAYA Pharma product which carry a higher gross margin than some of our other products.

Selling and marketing expenses increased to $1.9 million from $1.7 million in the second quarter of 2013, primarily due to building the sales infrastructure of VAYA Pharma in the U.S. to help us expand sales to additional states.

General and administrative expenses increased to $1.8 million from $1.3 million in the second quarter of 2013. This increase was a result of higher public company expenses and patent-related legal expenses.

Our net income for the second quarter of 2014 decreased to $0.4 million or $0.02 per diluted share based on weighted average of 23.2 million shares from $2.3 million or $0.12 per diluted share based on the weighted average of 3.8 million shares for the second quarter last year.

Non-GAAP net income was $0.5 million or $0.02 per diluted share for the second quarter of 2014 compared to $2.4 million or $0.12 per diluted share in the second quarter of 2013. The adjusted EBITDA for the second quarter of 2014 was $1.2 million versus $2.9 million in the second quarter of last year.

Now moving to the balance sheet, as of June 30, 2014, we had $69.4 million in cash and cash equivalents, $24.3 million in other working capital items, and no debt. Finally, since the overall impact of the challenges that Ariel just mentioned was greater than anticipated. And such challenges are also expected to continue to adversely impact our financial performance for at least the next two quarters.

Our updated fiscal year 2014 financial guidance is as follows, we expect net revenues, based on the equity method of accounting to be between $46 million and $52 million. We expect net revenues, based on the proportionate consolidation method to be between $62 million and $70 million. And we expect non-GAAP net income of between $8 million to $10 million and non-GAAP diluted earnings per share of between $0.34 to $0.43.

As a reminder, non-GAAP net income represents net income excluding share-based compensation expense and other unusual income or expenses. Non-GAAP diluted earnings per share is diluted earnings per share based on non-GAAP net income.

Please note, we will continue to provide you with an update on our annual guidance each quarter as we believe it is best to review our results on an annualized basis given the inherent variability in our business.

With that review, we would like to take your questions. I would like -- I would now like to turn the call back to the operator who will give the instructions on how to queue up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Scott Van Winkle from Canaccord Genuity. Your line is open.

Scott Van Winkle - Canaccord Genuity

Hi. Thanks. Ariel, can you talk a little bit more about the krill oil market in the U.S. We all know your omega-3 market has been weak. Certainly, it seems like Omega -- the krill oil side is still growing a little bit. Is this an inventory correction? You mentioned obviously, no customer changes coming ahead of a competitor coming back into the market with new supply in the next quarter or two. I’m just trying to gauge what was the incremental inflow on the short drop-off sequentially from Q1 to Q2 in krill oil volumes in the U.S.?

Dr. Ariel Katz

Thanks, Scott. The feedback that we are getting from our main customer is they still have high stock. They’ve prepared to higher growth than they’ve seen and therefore, they are not ordering on the same level that they use to order. What we see in the market with the krill, basically we see that the krill is heavy. Some negative impacts from the omega-3 in general. And we see also that krill that was a long-time a premium product become more main line of omega-3 product rather than super premium that it use to be.

Through that quarter, what we know from Nelsen report that quarter one was slight increase but our business in quarter one was also on the same level as it was before. We have started to see the decline in quarter two, 2014 and what we know from our customers now is they are expected that the high level of the stocks and the growth as well they were expected, they do not see it now.

Scott Van Winkle - Canaccord Genuity

Okay. And then how does this impact Omega PC, you have a lower price alternative coming into the market. I’m kind of wondering, given the environment we have today, does that make your customers more or less likely to want to adopt Omega PC in the near term. I could see both scenarios being hesitant to do it because the market is weak and then being eager to do it because it offers a cheaper alternative?

Dr. Ariel Katz

I think, what we are getting from the market and we believe this creates for us an opportunity and not the other way around. As we said krill, which was the super premium and suffering, the omega-3 market is totally commodity and branded company looking for something, which will not be expensive as a krill but will be more than commodity. And this premium segment in terms of ingredient is a huge market and we believe that they create us an opportunity as we are in the right spot towards it.

Scott Van Winkle - Canaccord Genuity

Okay. And then on the InFat side and maybe I misheard, you talked about expect challenges from the next couple of quarters, that seem to me a little bit more specific to the krill oil side. On InFat, you did say that you expect volumes to pick back up in Q4. I think AAK had some commentary around that regard as well?

Dr. Ariel Katz

Yes. As we’ve said, in the InFat, we see slight recovery in quarter three and we’ll see the recovery in quarter four. This is what I expected and this is inline with AAK published in the releases.

Scott Van Winkle - Canaccord Genuity

Okay. And then on the VAYA side of the business, the number of sales reps, was that consistent in Q2 with where it was in Q1 after the new market entry in the extra hires?

Dr. Ariel Katz

It was little bit declined but -- than the numbers of the reps, little bit decline, but on the same wall figures.

Scott Van Winkle - Canaccord Genuity

Okay. And it would look like the productivity of VAYA per sales rep in drug market still went up sequentially. I would assume, we expect that to continue to grow. And did you say that the international licensing opportunity, is that coming there to fruition a little sooner, is that a back half of the year expectation on getting international licenses?

Dr. Ariel Katz

I would say, we see VAYA as well as one of our engines for growth. We see well acceptance from MDs. We see some reps between the performance of the reps that are longer time in the company, compared with the new reps. But we believe that by having better leadership and infrastructure in VAYA Pharma will be able to leverage potential and this is why we announce today that we recruited new CEO with a lot of experience in medical nutrition that will help us to leverage the opportunities that we have there.

Scott Van Winkle - Canaccord Genuity

Okay. And then one question on the gross margin, obviously, the new facility added a lot to the gross profit. Is that all on the krill oil side or is there any impact on InFat, I mean, I’ve recognized a cost of good sold is very small in InFat anyway, but did that facility and new facility added capacity? Did that have any impact on InFat or is it all krill?

Oren Bryan

It was all krill. The new extraction facility relates only for the krill. We were able to even slightly increase the gross margin compared to quarter one versus quarter two and we have done best with a much lower base of revenue. So ultimately, our efficiency in the plan has grown this quarter when we use the production facility for krill entirely.

Scott Van Winkle - Canaccord Genuity

And then one more if I could on, on the inventory balance. And obviously, the lower than expected sales created the higher inventory? Are you expecting to grow inventory sequentially, I believe it was $12.5 million at the end of Q1, now it’s 17.5%, will you expecting that 12.5% to up sequentially and then so not all of the five incremental is above plan or kind of what’s the make-up there?

Oren Bryan

Yes. It was expected. First, you have to remember that the harvesting period start in December usually and ends in July or late June, and therefore, there is a pick in inventory when -- in that period in the second quarter. It is also important to tell, though, it’s not mentioned in the report the breakdown of the inventory per items that the vast majority of the increase is in raw materials and not in finished goods, and still finished goods represents more or less 10% of our inventory.

Scott Van Winkle - Canaccord Genuity

Okay. Thank you.

Operator

Thank you. Our next question will be coming from the line of Brian Spillane from Bank of America. Your line is open.

Brian Spillane - Bank of America

Hi. Good morning.

Dr. Ariel Katz

Hi, good morning.

Oren Bryan

Hi, Brian.

Brian Spillane - Bank of America

I have got a couple of questions. First, back on the just the krill business? Can you give us a sense for as your forward planning purposes beyond this year, has your outlook for the overall demand for krill changed at all? And I guess what I am trying to ask is, there is really two dynamics in the market, right, one there is some market share, there is more supply coming on, so there is some a question just Enzymotec share of the supply? And then the broader question is just whether or not the markets changing, evolving in such that the krill market maybe less growth or smaller than you are originally envisioning? So I guess, first, I would like to know is whether or not you have changed at all your long-term out term outlook for the krill market versus maybe where you were looking at a year ago?

Dr. Ariel Katz

So, first of all, I would say that, as I said in my earning release, we have not lost any material customers and we are keeping our customers very loyal. So if there is any change in the market share, there is the change in the market share of our customers and not between our customers.

And what we are expected that there will two dynamic to have growth in the krill business. The first one is the development in the Far East which currently is under the development and we see the movement there and we expect that that the market we growing these territories and we will be well -- in good position to take market share.

And the second under the current market share due to increased, all the suppliers were expected and that the business will continue to grow and the competitors invested a lot and build new plants and this is a public information, with big investment around it and we believe that we need to develop our value proposition for the current market for the mature market that will allow us to adjust ourselves for the changes and taking the lead.

Brian Spillane - Bank of America

So do I take that and I guess, I should rephrase, the market by market share, I mean your customers market share, so I guess, simplistically has your growth or with the potential size of the existing market. So forget about the develop -- the markets you want to develop in the Far East, but your existing base versus where it was a year ago? Do you expect that size of those markets to be bigger or smaller than what you were expecting a year ago?

And then maybe the second question, do you expect that your customer’s market shares will be higher or lower? I am just trying to get a sense for if there has been a change in your thinking about the future potential of those existing markets?

Oren Bryan

Brian, this is Oren. I think what we see in the -- and what we saw in the last quarter is a reduction from order from our current customers in the mature market. We also said that we expect these challenges that we face because our customers in the mature market takes these challenges, will continue to further into the fourth quarter and therefore, we will have by the end of the year, we will know better and prepare ourselves, we have plan how to increase both our market share as a supply of ingredient of krill to this kinds -- these mature markets we have the plan, which we are not yet prepared to discuss and of course, we will know better on the market how -- on the krill market how we develop in the next two quarters.

Brian Spillane - Bank of America

Okay. And then on, turning to InFat, you have had some success in further validating some of the product claims? Can you talk a little bit about where you stand today in terms of the process of selling the product into new customers. So I think one of the things at least that is been a little bit different from the way that we were looking at the business a year ago is just a pace of gaining new customers and having further adoption has maybe been a little bit slower? And so could you just talk a little bit about where you stand on that process and has, do these validate the claims that -- the studies that are further validating the product claims? Do you think that helping in terms of getting more business or getting new customers to sign-up?

Dr. Ariel Katz

So, first of all, what we have seen that the publication regarding the new venues that we create on InFat definitely accelerated the interest of player in the market, because it bring new venue, a new values to the product. So, definitely it helps to accelerate the process.

And we are in discussion with new customers, we are adding new customers to the business and as I said before, still InFat is the vegetable oil, vegetable oils are converted to starch, vegetable oils which in today approximately 10% of the market and we see that the potential to grow to the take market share from vegetable is moving and we expect, as I said, slightly recovery in quarter three and recovery in quarter four.

Brian Spillane - Bank of America

Okay. And then last question, there has been a lot, you have got quite a bit on your plate right now, right, you are developing the VAYA business, you are also in the process of trying to strength the product claims on InFat and sign new customers and at the same time you have got a lot of volatility in the businesses, where you actually make some money? Are you just -- did you feel at some point that you are maybe too stretched and is there any thought to either partnering with someone else or making some adjustments to ensure that the distractions in the base business don’t take away from the pressing needs to invest in developing both VAYA and InFat?

Dr. Ariel Katz

If we are looking on our business, the bottleneck in each business is different. So, although, we have a lot of activities outside of the bottleneck of each one of them as it -- is at different spot. So if I need to go over our businesses in the bio-active business we have the Omega PC, we have the partner on the manufacturing and raw materials and we need to develop the market there which is our main task, the same with the krill to reinforce our position which is mainly technology driven and market activities. As I said in my earnings release we had people and team senior original managers to help us to promote the product.

If you are looking on the InFat, we have relations with the customers, we added new value that we published on the. We have close relation which is highly constituted market. We are walking with AKA incorporation and we are on track to bring more and more customers that will adapt InFat. And regarding the VAYA Pharma, outside of United States, we have partners. And in United States, we did reinforce our business position there.

And the first thing that we are thinking now is to reinforce our leadership and our management position in VAYA, I know to leverage what we have build. And in the drugging business we never said that we will go alone almost without partner. So definitely we are looking on partners. We are looking for having additional corporation based on our technology and maximized the benefit.

And the reason why we are working with all this day through that our main income coming from dialectic and interest in our future as I said coming from the pharma side. And we cannot neglect the dialectic side and we have to move forward where we see most of our potential on the pharma side.

Brian Spillane - Bank of America

All right. Thank you.

Operator

Thank you. Our next question will be coming from the line of Jeffrey Schnell from Jefferies. Your line is open.

Jeffrey Schnell - Jefferies

Hi. Good morning. Will Enzymotec be interested in getting into new markets like blending omega-3 into food and beverage or do you think that the FDA are not allowing content to be shown on nutritional labels or having a DRI for omega-3 might stunt those juncture in market in near future?

Dr. Ariel Katz

Basically functional food in general is not -- main markets that we are looking. It is relatively small quantities, lower prices and this is not the market which we constructed.

Jeffrey Schnell - Jefferies

Okay. And then I think in 2015, you’re expecting to build new capacity with the market dynamic a bit slower, will that still have been on track?

Dr. Ariel Katz

At this stage, we plan to finalize the three projects. This is where we are in the three projects and we will see how the business is developing in quarter two and what visibility we have and based on that we will make our final decision.

Jeffrey Schnell - Jefferies

Okay. And then lastly on InFat, can you talk about any direct actions that you’re taking or -- to help mitigate those headwinds or is it mostly just waiting for your B2B customers to take action?

Dr. Ariel Katz

The headwinds that our customers suffer is something that we can control because we’re not B2C business, we’re B2B business. The way that we’re trying to manage the headwind is by adding more and more customers to the business and cover higher market share from the vegetable oil.

Jeffrey Schnell - Jefferies

Okay. Great. Thank you.

Operator

Thank you. Our next question will be coming from the line of Rommel Dionisio from Wedbush Securities. Your line is open.

Rommel Dionisio - Wedbush Securities

Yeah. Good morning. First question, one of you can just give us a little update on the PS basis. I realize it’s one of your smaller businesses but just how did that do in the quarter directionally?

Oren Bryan

Regarding the PS, which is another product that we’re agreeing here that we sell is by adding ingredient. The PS had grown compared to previous year slightly but we see that it may increase at the second half of 2014 higher than what we -- than it grow in the second half of 2013. So the PS in general will finish the year. We expected that the PS will finish the year higher than what it was in 2013.

Rommel Dionisio - Wedbush Securities

Okay and the …

Oren Bryan

We do not provide sales figure per product. So I did not mention numbers.

Rommel Dionisio - Wedbush Securities

No that’s fair, Oren. And just -- I realized it’s just been a few weeks out there but I wonder if one of you can just give us some initial feedback on your sales efforts with Omega PC in the market place or is it just too early to tell at this point?

Dr. Ariel Katz

We said it begins with the year that our aim was in 2015 to have introduction and to launch commercially the product. In quarter two, we from the market that we have the first commercial sales and the product is in the market currently And we see interest deposited premium business of Omega and ranged a lot of interest and still is the high premium of the commodity or the main stream low commoditized and we see a lot of interest and we’re working on this product and believed it in the future it will be positional as the premium products.

Rommel Dionisio - Wedbush Securities

Hey, thanks very much.

Operator

Thank you. Our next question will be coming from the line of John Bumgarner from Wells Fargo. Your line is open.

John Bumgarner - Wells Fargo

Thank you. Good morning. Ariel, just one of you can speak a little bit back on your comments on China in terms of the impact of e-commerce there. I think you had mentioned industry pricing was being impacted. One of you can just speak to that?

Dr. Ariel Katz

One of the issues that we have seen recently in both from our customers, the instant formula of product in China are higher. They have higher quality but they are also higher in prices and both recently we have seen is that there is some new venue of instant formula, which people order online from Europe, from the States, from multinational companies and bringing the product. So this is a chain of e-commerce in China, which is taking market share on the traditional where the health jobs and the Weekly Chinese.

John Bumgarner - Wells Fargo

Okay. And then, I guess, related to that on the supply chain side in China? Can you maybe speak to what you are seeing in terms of the industries capacity adjustments, why it’s taking a longer than expected?

Dr. Ariel Katz

I am not sure, I got your question, do you elaborate it please?

John Bumgarner - Wells Fargo

Sure. In terms of the change in supply change coming from the government regulations where that stands in terms of the manufacture upstream?

Dr. Ariel Katz

Yeah. Actually, the chain also in the regulation just started May -- been in affect from May. It is true that we see the inventorial levels that our customers built over the first quarter decreasing, I mean, slower than what we expected. We will see -- we will expect a slight increase in InFat business during the first quarter and in the fourth quarter, we expect much higher recovery.

The reasons for our customers for there is slower recovery from that change of regulation is not 100% clear for us. But this is a scenario there, this is the situation now, orders are coming back but slower than expected and we expect as we are in the discussion, been in discussion we follow customers that this recovery will be much higher in Q4.

John Bumgarner - Wells Fargo

Okay. And then, you lastly in turn of the VAYA business, do you have a sense for what the repeat sales rate is at this point in time?

Dr. Ariel Katz

You mean by refill of the doctors?

John Bumgarner - Wells Fargo

Correct.

Dr. Ariel Katz

We don’t have accurate number to tell you because we don’t buy this thing, relatively small business and we don’t buy the IMS data but built to something that we made, we believe that in published information that one of the doctor published recently after he checked the 700 (indiscernible). So he published in poster which is public information and he say that (indiscernible) for example on VAYA three months the compliance and refill our 80% of the patient.

John Bumgarner - Wells Fargo

Okay. Okay.

Dr. Ariel Katz

Yeah. Those will comply with three months and I can send you the poster with the information it includes.

John Bumgarner - Wells Fargo

Okay. Great. Thank you.

Operator

Thank you. And I am not showing any further questions at this time, I would now like to turn the call back over to management for any closing remarks.

Dr. Ariel Katz

Okay. So thank you everyone for your participation in questions. We look forward to updating you in our progress on our third quarter 2014 earnings call in the coming months. Have a great day.

Operator

Ladies and gentleman, thank you for participants in today’s conference. This thus concludes the program and you may all disconnect. Everyone have a great day.

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