Omega Protein's (OME) CEO Bret Scholtes on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Omega Protein (OME)

Omega Protein Corporation (NYSE:OME)

Q2 2014 Earnings Conference Call

August 7, 2014 08:30 a.m. ET

Executives

John D. Held – Executive Vice President, General Counsel and Secretary

Bret D. Scholtes – President and Chief Executive Officer

Andrew C. Johannesen – Executive Vice President and Chief Financial Officer

Analysts

Mitchell Pinheiro – Imperial Capital

Tyson Bauer – KC Capital Management

James Fronda – Sidoti & Company

Operator

Greetings and welcome to the Omega Protein Second Quarter 2014 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 Mr. John Held, Executive Vice President and General Counsel. Thank you, Mr. Held, you may now begin.

John D. Held

Good morning and welcome to Omega Protein’s second quarter 2014 earnings conference call. By now everyone should have had access to the earnings release for the second quarter ended June 30, 2014. 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 will be available on the company’s 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 second quarter ended June 30, 2014, earnings release, our Form 10-K for the full year 2013, and in the 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.

Please also note that on today's call, management will be referring to non-GAAP financial measures, including adjusted EBITDA. 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.

Bret D. Scholtes

Thanks, John. Good morning, everyone and thank you for joining us today. This morning, I will begin with a brief discussion of our business performance for the second quarter. Our CFO, Andrew Johannesen, will then review the financial results in more detail. I will discuss key drivers impacting our business during the remaining six months of 2014, and finally we will take your questions.

I am pleased to report solid second quarter 2014 financial results. For the quarter, we generated strong revenue growth and earnings of $0.31 per diluted share, an increase of 63% versus the same period last year. Our animal nutrition business continued to perform very well due to sustained elevated sales prices and strong inventory levels that helped drive higher consolidated gross profits. Our human nutrition segment, however, experienced headwinds that resulted in lower than expected results.

I will now focus on our 2014 fishing season, which is approximately halfway complete. Through last Friday, August 1, we processed approximately 198,000 short tons of fish, an 8% decrease over the same period in 2013 and 24% below the five-year average. Through last Friday, our total yield was 34%, which is close to our five-year average of 36%, while lower than the 40% recorded at this point last year.

Fishing in the Atlantic has been particularly strong in the first few months this season, but we will be limited by the annual catch limit. [Gulf] results have been roughly 20% lower than we would have expected to date after a rebound in July. While these results are primarily driven by weather conditions in the Gulf of Mexico, they are further impacted by our previously announced strategic decision to consolidate fishing operations, which resulted in the removal of three vessels from our fishing fleet.

Despite these results to date, we are encouraged by the strong harvest results posted by our Gulf operations last month. Keep in mind that given the nature of our fishing business, it is normal for fish catch and fish oil yield to fluctuate from year-to-year. While one season’s results are key drivers for our financial performance for the next few quarters, these seasonal fluctuations should not be misinterpreted as changes in long-term trends.

It is a long fishing season and we will provide an update on our next quarterly conference call. I would like to now provide an update on our animal nutrition business, which includes sales of protein and lipid ingredients for the production of animal diets and pet food. As Andrew will discuss momentarily, gross margins for this segment continue to outpace our historical averages, which traditionally have been in the high teens to mid-20% range.

This segment benefited from favorable global supply demand fundamentals that continue to drive positive financial results. Global demand remained strong despite prices that are high by historical standards. We continue to see solid demand for our animal nutrition ingredients, driven by the aquaculture, pet and pork industries. All three of these industries are doing well, I want to highlight the growth of the aquaculture industry, and the salmon industry in particular, which continues to set record production levels.

The short-term global supply picture for fish meal and fish oil continues to be uncertain. Weather issues have impacted fishing in South America, but governmental authorities are taking steps to help fishing companies catch more of their respective quota.

I would now move to our human nutrition business. As we discussed on prior calls, 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.

Our dairy protein business continued to produce good revenue growth, but higher input costs weighed on gross profits and margin. Revenue growth was driven by overall demand for protein powders, especially our organic whey protein concentrate. Despite the strong demand for our protein products, we continue to be hampered by high raw material costs and increased competition for these inputs. We have, however, are seeing signs that raw material costs are beginning to ease.

Also, we recently completed a large project at our Reedsburg, Wisconsin facility that will increase the plant’s capabilities and capacity. We will now be able to process either [Indiscernible] into a larger variety of products. We believe that protein products will play a valuable role in the nutrition industry longer term, and these additional capabilities will provide the flexibility required to better meet customer needs and manage margins during cycles.

As we mentioned on our call last quarter, 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.

In addition to the category being backed by an extensive and growing portfolio of clinical studies and scientific papers, macro consumer trends in the Omega-3 market should benefit Omega Protein, as our vertically integrated business uniquely positions us to provide traceability from a sustainable US fishery through concentrated fish oil.

And with that, I would now like to turn the call over to our Executive Vice President and CFO, Andrew Johannesen to discuss the second quarter financial results in more detail.

Andrew C. Johannesen

Thank you, Bret, and good morning everyone. I will begin by reviewing our second quarter and six-month financial results, followed by some observations on our balance sheet and thoughts on the next few quarters.

Revenues for the second quarter of 2014 were $72 million, a $30 million increase from last year’s second quarter. These results reflect a significant increase in animal nutrition sales volumes, which drove an 89% increase in revenues for this segment. Fish oil sales volumes more than quintupled and fish meal sales volumes increased over 40% due largely to higher beginning inventory levels, as well as unusually [low ends] in last year’s second quarter.

This quarter’s incremental fish oil sales volumes were comprised primarily of our lower-priced, less refined fish oils, which shifted the fish oil product mix and resulted in a 37% decrease in overall fish oil sales prices. Fish meal sales prices for a quarter were virtually unchanged from a year ago. Average prices for both products were within 4% of those realized in 2014 first-quarter.

Turning to our human nutrition segment, revenues for the second quarter were $7.3 million, down $700,000 from the same period a year ago. This decrease was primarily due to lower sales of nutraceutical ingredients, and reduced [towing] revenues of our Chicago area refinery. [Towing] provides an opportunity to monetize underutilized capacity, but these revenues can be inconsistent from quarter-to-quarter. These declines were partially offset by a 20% increase in sales of protein products.

Consolidated gross profit for the second quarter was $20 million, up from $13 million in the same period last year. Gross profit as a percentage of revenues, or gross margin was 28.4% in the second quarter, down from 31.8% a year ago and 32.3% in the first quarter of 2014. Gross margin for the animal nutrition segment declined from 33.9% a year ago, to 30.3% due in part to higher unit costs for currencies and production. As way of background, the second quarter is when we typically finish selling production from the prior fishing season, and begin selling the current season’s production. In most years, second-quarter’s sales are comprised predominantly of prior season production, the current season production accounting for 20% to 40% of sales. Unit costs for current season production sold in the second quarter of each year are based on assumptions about full season costs and production levels, and are adjusted in the third and fourth quarters to actual full season costs and production become more certain.

As we think about the 2014 season, given the comparatively lower yields and weaker Gulf of Mexico fish catch results experienced year-to-date, we expect unit costs in the 2014 fishing season to be higher than in the 2013 season. Keep in mind that as 2014 yields decrease relative to those in 2013, we would expect a roughly proportionate increase in unit costs, but we would expect lower fish catch if it persists to drive higher unit costs, subject to a partial and modest offset from these variable costs. Finally, we would expect changes in input costs such as labor rates and steel prices to also impacting the costs.

How much unit costs change in the 2014 fishing season will therefore be heavily influenced by our fishing results over the next few months. Despite the impact of higher unit costs in the second quarter, we are pleased to record an unprecedented fifth consecutive quarter for animal segment gross margins above 30%. In the human nutrition segment, gross margins were 9.9% in the second quarter, a decrease from 22.1% a year ago and 16.9% in the first quarter of 2014. Compared to the same period a year ago, the decrease in gross margin was primarily due to increased feedstock costs in our protein business and lower tolling revenues.

Selling, general and administrative expenses for the second quarter increased $0.5 million to $6.5 million compared to the second quarter of 2013. As a result of last December’s closure of our Cameron plant, we recorded a $2.6 million charge in the second quarter. Going forward, we anticipate future charges of approximately $750,000 for severance and lease termination costs up to $1 million for additional impairment and equipment relocation charges and roughly another $1 million for other continuing site costs such as labor, insurance and taxes. While we expect to recognize most of these additional charges over the next two quarters, there is a portion that may not be recognizable until 2015 or later.

Net income for the second quarter was $6.6 million or $0.31 per diluted share compared to net income of $4 million or $0.19 per diluted share for the same period last year. Excluding plant closure charges and gain on disposal of assets, net income for the second quarter of 2014 would have been $8.3 million or $0.38 per diluted share. Adjusted EBITDA totaled $18 million for the second quarter of 2014, up from $12 million in the same period a year ago.

Looking at results for the first six months, revenues increased 49% to $135 million compared to $91 million for the six months ended June 30, 2013. Average revenue per ton increased from $1266 in the first half of last year to $1389 in the first half of this year. We reported gross profit of $41 million or 30.2% as a percentage of revenues versus gross profit of $25 million or 28% as a percentage of revenues for the first six months of 2013. The increase in gross margin was primarily due to higher revenue per ton.

Net income for the first six months was $14.6 million, or $0.68 per diluted share compared to $6.8 million or $0.33 per diluted share for the same period last year. Excluding the impact of the plant closure and net loss on the disposal of assets, net income for the six months ended June 30, 2014 would have been $17.3 million or $0.80 per diluted share compared to $7.1 million or $0.34 per diluted share. Adjusted EBITDA for the six months totaled $37 million this year, increasing from $22 million last year.

Turning to our balance sheet, the company's June 30, 2014 cash balance increased $6 million from December 31 to $40 million. Total debt decreased $2 million during the same period to $22 million. Stockholders' equity increased by $17 million to $264 million and our book value per share increased to $12.52. We have a strong balance sheet and believe that we will continue to provide the financial flexibility we need to pursue our growth objectives.

As we head into the second half of the year, a slow start to the Gulf of Mexico fishing season has contributed to June 30 animal nutrition segment finished goods inventory volumes that are roughly 25% less than we had at the end of 2013 second quarter. The unusually large inventory carryover volumes that were sold in the second quarter of 2014 combined with a 21% reduction in year-to-date production compared to last year suggest that we may not follow our typical pattern of meaningful sales volume growth from the second to the third and fourth quarters.

As of June 30, 2014 we had sold forward approximately 65,000 short tons of fish meal and 10,000 metric tons of fish oil for anticipated 2014 delivery subject to production. These sales are at prices generally in line or slightly below those realized in the first half of the year.

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

Bret D. Scholtes

Thanks, Andrew. We believe our strategy will continue to provide us with strong financial results over the long term. Additionally, our team will continue to review avenues for strategic growth and prudently invest in value creating opportunities through organic growth and/or acquisition.

We remain optimistic about the long-term outlook for both fish meal and fish oil as key global trends support consumption of our animal nutrition products. These trends include a growing global population, increased standard of living and consumers’ growing understanding of the benefits of Omega-3 for farm fish and pet food. We will invest in this business. For example, we announced this week that we are planning an investment at our Abbeville fish processing plant to improve efficiency and better equip us to process fish during peak fishing periods.

We are equally optimistic about our human nutrition business due to the increased awareness of the benefits of basic nutrition and the demand for pure sustainable products. We continue to believe we are positioned well for long-term success. We compete in large sectors with good long-term fundamentals and there remains robust demand for our products.

Our efforts remain focused on maintaining control of the manufacturing process, freeing avenues for organic growth and developing additional value-added products. In closing, our diversified nutritional business is evolving, providing us with the opportunity to take advantage of the growing demand for quality health and wellness products. We may continue to experience quarter-over-quarter variability in our margins near term as we execute on our growth plan, but we continue to believe that this is the best strategy towards stabilizing margins longer-term and reducing our vulnerability to uncontrollable environmental factors and commodity markets.

The company remains committed to managing the controllable aspects of our business, increasing shareholder value by wisely allocating capital and managing our business to increase earnings and cash flow.

That concludes our prepared remarks for today. On behalf of Andrew, John and I, 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?

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Mitchell Pinheiro of Imperial Capital. Please go ahead.

Mitchell Pinheiro – Imperial Capital

Hi, good morning.

Bret D. Scholtes

Good morning Mitch.

Andrew C. Johannesen

Good morning Mitch.

Mitchell Pinheiro – Imperial Capital

So I may have missed this, Andrew, sometimes you give sort of volume number, did you give a volume number for this quarter, an increase versus year ago?

Andrew C. Johannesen

Mitch, we did not give a total volume, but we spoke about the increases for the two main products, for fish meal and fish oil. The fish oil volumes I said were up about 5 times off of a fairly low base last year, and meal was up 40%. So if you look at it on an overall basis, it is a pretty significant increase and you can actually kind of run the math through based on the numbers that we provide for that segment revenues and revenue per ton, and the total volume increase was between 80% and 90% year-over-year.

Mitchell Pinheiro – Imperial Capital

Okay. So I must have missed that. I didn’t hear revenue per ton on the animal side. That was up, could you give –

Andrew C. Johannesen

Yes, that was up last – first six months of last year it was $1266. In the first six months of this year it was $1389.

Mitchell Pinheiro – Imperial Capital

Okay. That is helpful. Thank you, and then and you are still seeing as you sort of talked are you still seeing your cost per ton being somewhat favorable through the first half, but you outlined that a couple of the pressures that you will have in the second half, so cost per ton, if the fishing season sort of remains as you kind of see it, costs are going to be higher second half this year versus last year, correct, is that what I heard?

Andrew C. Johannesen

Mitch that is – would not be surprising. The – for everyone’s benefit, the product that we sell typically through most of the second quarter is prior-year product that has prior-year’s cost per ton attached to it. The new product that we started selling second-quarter and will be selling almost exclusively in the third quarter will have the New Year’s costs attached to it. The – simple level cost per ton is total cost of production divided by production. If you assume total cost were the same, production you can think of as catch times yield.

So, if the catch is the same, yields are down a bit this year, so that would tend to drive that up. If catch is down that will – it would drive cost per ton up a little bit further, but obviously there are lot of variables at play both in terms of the total production cost and the cash.

Mitchell Pinheiro – Imperial Capital

And then, and based on taking some vessels out of the Gulf that decision how does – does that have an impact on cost per ton?

Bret D. Scholtes

We don’t think that will have a significant impact on cost per ton. That move in isolation we believe should be largely neutral from a cost per ton perspective. It should reduce the long-term maintenance capital and the capital intensity of the business, but it should not have a significant impact on cost per ton.

Mitchell Pinheiro – Imperial Capital

Okay, and then looking at your broader sort of supply demand trends, so you kind – you called out, aquaculture I guess in particular and I guess is that demand, where is that aquaculture demand, is that – is that Europe, is that South America, is it Asia?

Andrew C. Johannesen

So, if you look at aquaculture, we sell both our protein and lipids on the animal side to aquaculture. On the lipid side, which should be the fish oil, that primarily goes to the salmon industry, and some to the pet food industry as well. From an aquacultural standpoint it is going primarily to the salmon industry. That is going primarily to Europe, a couple of locations, but primarily Europe.

On the protein side, the fish meal, that is going to everywhere from North America to Asia, a little bit in Europe. So it kind of depends on the – here in the past, we had a lot of it going into Asia, and it continues to be a good market, but I think we said in other calls that we are looking just how to spread that around the world a bit more going forward.

Mitchell Pinheiro – Imperial Capital

Is global demand just ready, a steady increase or are you seeing any like acceleration lately?

Andrew C. Johannesen

We continue to see good solid demand. I think, I mean since we sell everything that we produce, it is tough to get a feel for how much more we can produce [Indiscernible], where prices are as demand is quite good. If you look at overall the global supply of the product has been pretty flat to decreasing over the last several years, but that strong demand has been causing prices to go up in a good fashion. And – so what we do to try to really get a gauge for that is then look at those individual industries and look at how fast they are growing and with aquaculture being the biggest of those industries we sell into, and just seeing what is going on that continues to give us kind of a bullish feel for the future.

Mitchell Pinheiro – Imperial Capital

Okay, and my just last question on the human nutrition site, it had a rough quarter, you are adding the capacity here I guess coming on in this quarter that I guess will be a mixture of continued higher input costs, maybe some inefficiencies related to the new capacity, so is it fair to expect margin pressure in the second half or does that ease at all, number one, and then, number two is it relates to that, how should – what kind of revenue growth could be expected in the back half there, and you have tough Omega-3 and nutraceutical sales industry-wide, but then you are adding all this extra capacity, which I imagine you have hopefully found homes for – for that capacity. So if you can help color the second half there, it will be appreciated?

Bret D. Scholtes

Absolutely. The expansion that you mentioned in Reedville, we like that for two reasons, and I think we kind of touched on this in some comments. But, we are bumping up against just given the growth that we are seeing in the protein industry, we are bumping up against the current capacity we have, and so we felt it was the right thing to do to go ahead and expand it, and that is not something that we will be able to fill up in the next year or so, but having that extra capacity and doing it in a kind of now it made sense from a scale perspective was important.

Equally important to the capacity is the capabilities that we gain. Being able to have multiple inputs, as well as multiple outputs allows us to better meet customer needs and then also, when, new accounts and pricing dislocations gives you a little more flexibility, which should help with margins. As far as margin pressure on the back half of the year, a lot of that is probably going to depend on what happens with the cost of the raw materials.

We saw in the first half of the year it was an extreme increase in the pricing of a lot of the raw materials that we utilize, and based on our look out into the future and talk about people, we would expect that to ease in the back half of the year. It is tough to pinpoint exactly how much it is going to ease and in which quarter, but we do expect some of that to ease, and as far as revenue growth in the back half, now that this is – now that the expansion is up and running, we are starting to expand our efforts to increase supply from interiors so that we can produce more.

We are also working to build demand for some of the products that we will be producing that we did not produce in the first half. So it is – it is difficult to kind of pinpoint what we see from a revenue standpoint, but the drivers that you can look forward – look for in the back half and what we will look at the products that we are producing, how much additional supply we can get into the plant.

We are seeing quite a big demand as we referenced which is a good thing. But it is continuing to build out the demand for some of these products besides whey protein concentrate 80 that we will be looking to in the back half of the year.

Mitchell Pinheiro – Imperial Capital

Just my next question –

Andrew C. Johannesen

I was just going to add to that, Mitch, I think as we, as Bret alluded to in his comments, I think given the earlier stage of development of the Omega-3 business and some of the other activities you are seeing elsewhere, we have seen some lumpiness, if you will, in revenues and could see that continuing over the next couple of quarters.

So that my create a little bit of noise over the quarter-over-quarter trend, but I think the volumes will be important and that will drive both revenue and help with margin, particularly as you look at things like Omega-3 and tolling, and how those relate to the overall profitability. On the expansion, Bret spoke to that a fair amount. I will add to that from a financial perspective probably wouldn't expect a lot of impact in Q3, at least that plan is just starting to come online now, we are doing some testing and what not. We will probably start having some depreciation hitting in the third quarter. You may start ramping up some production but my expectation is, it will take at least a quarter or two for that to really start running.

Mitchell Pinheiro – Imperial Capital

Okay that’s helpful. Just related is that, my question I will get back in the queue is, don't you have pricing power on the weight side, I mean, your input costs are going up, but you are making a pretty high quality specialized organic weight product, I think it will have a little pricing power?

Bret D. Scholtes

I mean, we get good solid prices for the product due to, as you mentioned the purity of the product and the high quality ingredients that we use and then the price we get is definitely a good price, for this only a certain amount that pricing power that you can probably exert in any given quarter.

Andrew C. Johannesen

And then, you also have a fair amount of volume that's non-organic and supply for that is more competitive.

Mitchell Pinheiro – Imperial Capital

Okay, good. Thank you so much.

Operator

Thank you. The next question is from Tyson Bauer of KC Capital Management. Please go ahead.

Tyson Bauer – KC Capital Management

Good morning, gentlemen.

Bret D. Scholtes

Good morning Tyson, how are you?

Tyson Bauer – KC Capital Management

You want to start with the good or the bad?

Bret D. Scholtes

You pick it.

Tyson Bauer – KC Capital Management

I’ll start with some good. The Atlantic obviously, fish catch numbers have been extremely strong showing an abundant amount of fish there, gives you some flexibility whether you want to try to finish early in the Atlantic side to save some of your – on the water cost or maybe go after better yields and extend that season with later summer catch. How are you thinking about the Atlantic and are you – is it a positive to see that kind of early catch despite the political quarter there?

Bret D. Scholtes

You are right, what we are seeing out at the Atlantic is very encouraging and not surprising to us, but it's always encouraging to start the year with the success that we’ve had. The strategy going forward, whether will probably play a role going forward, it’s tough to say to what extent and when exactly. So, we are definitely off to a good start. As you know, yields do increase as the season progresses and that's kind of trade off that you mentioned. We will not try to finish the season in September or whenever I will see, we will continue to have take advantage of being a little bit ahead and give us some flexibility with the weather and we will continue to fish to the farm. So, we try to extend the season probably from a fishing standpoint little bit later than we may otherwise do, if we didn’t have fish catch limit.

Tyson Bauer – KC Capital Management

The other positive industry pricing remain strong, continues to tick up even though we maybe in some volume time period here, Peru being weak even without (inaudible) which may or may not come later on in their next season, we will find that out in October would you anticipate then that we should be in this stable pricing zone at least for through the end of this year?

Bret D. Scholtes

The pricing continues to be – we have very strong pricing compared to historical standards and as you referenced in Peru, the first season has concluded and the fish catch was less than what they had expected. I would expect that given the – the supply that's out there the pricing that we are seeing right now will last for little while longer because the next thing to watch is the October quarter that you mentioned that will come out in Peru. But right now pricings are at a good position. We are excited to see the fish catch that we had last month despite little bit slower start in the Gulf, it is great to see the strong fish catch in July when prices were they are, I hope that just continues to rest of the year. We will see.

Tyson Bauer – KC Capital Management

Let's put some numbers on that through June the Gulf catch overall was down 31%, through July it's down about 20% according to the federal data. So, we did pick up 10 points there obviously we have got ways to go which brings us into the other topic which things we have to work on here. Andrew, go through the process when we enter into Q3 what is – what check-up items there are for true ups on allocated cost floor which right now is 13.6% higher than a year ago even look one less plant when we are looking at fish and oil inventories down 38.7% at this point compared to last year and the yields being 34 versus 40 yet our fish meal inventory seems to be the same. So, it looks like our oil yields are down from a year ago. How much of that is just due to the geographic mix with the Atlantic typically being lower anyhow and the Gulf have enough slow start and would you expect that to kind of normalize to certain extent as the Gulf catches up on their fish catch.

Andrew C. Johannesen

Tyson, good question on the yields, as you alluded to and as Bret discussed the way the catch has played out this year where we had relatively strong Atlantic catch and relatively weaker Gulf catch to start the year, it does change the mix a little bit. The Atlantic fish tend to have lower yields than the Gulf particularly the Western Gulf where we saw the biggest drop off through June. As we look forward assuming that we catch the limit in the Atlantic and assuming that the Gulf continues to do relatively well as it has in July, we would expect to see that shift change a little bit by the end of the year to see higher representation of the Gulf catch in the overall mix. That probably would help yields a little bit based on what we have seen, each plant pretty much has yields in line with their five year average. So, if we have a similar mix we expect something in line with the overall five year average. I think you are getting back to the overall yields, we saw last year based on what we are seeing today would probably be pretty difficult.

Tyson Bauer – KC Capital Management

Okay. And then also when you go through the accounting based on true-ups what are we looking at, how big of a hole that we have to get out of it in Q3 as far as playing catch up in the Gulf to not have an increase in unit cost come through the income statement when you report next October?

Andrew C. Johannesen

Yes, I think not – you are talking about not having an increase in unit cost for the third quarter over Q1, Q2?

Tyson Bauer – KC Capital Management

Right. Based on your plans, I mean, 6% higher than a year ago right now.

Andrew C. Johannesen

Having 14 unit costs in line with 13 is going to be challenging based on the large part because of yields, so even if you assume we spend the same amount catching and processing the fish and we catch the same amount of fish, we have lower yields that's going to result in a higher unit cost. Obviously, you adjust for the Cameron closure, but as I said earlier, I think that's fairly a cost neutral from a unit cost basis. But that yield differential to overcome that we would have to have some combination of below average spend and/or extremely strong catch in the Gulf.

Tyson Bauer – KC Capital Management

So, we kind of get back to, I mean, last year was somewhat of an anomaly because we did have such strong yields, we kind of bring those margins back down toward that 20% boggy level of the company that has in this long term history?

Andrew C. Johannesen

I think it's difficult to say what they will be as Bret mentioned, the kind of longer term range we’ve typically seen is high teens to mid 20s, you are getting kind of more prescriptive beyond that, it's pretty difficult at this stage.

Tyson Bauer – KC Capital Management

Okay. Last two items, obviously John is on the call, if he can give us any update on the ocean of investigation when we plan to get that facility up and going as much you legally can. And then second Bret, the Abbeville expansion what do you anticipate that will add in capacity and will that between moving fishing operations and expanding Abbeville, how close do we get to recovering the loss volume and production that we had from closing Cameron?

John D. Held

Yes, the ocean investigation is substantially complete, we expect the plant to turn to full production and capacity this week perhaps even today.

Bret D. Scholtes

And as regarding Abbeville, we mentioned that we will continue to opportunistically invest and Abbeville is absolutely the type of asset that whenever you can find opportunity to get some additional production given its cost position and location in Western Gulf and also the yields associated with it. We always want to look for those opportunities and so it's difficult to say what the capacity can do, I mean, week where the fish catch is good, but not great typically we can process and turn the boats. But when you look at the fishing season, there is certain weeks where it's hot out and there is no weather and the fish definitely showing and those are the weeks when you want to just do everything and possibly do because you know there is going to be other weeks we’re not going to be able to do that. So what this additional work is going to allow us to do is, to improve the efficiency and turn the boats quicker and in those weeks it may only be four, five weeks a year, but during those that time we are going to be able to do more. It's difficult to say exactly how close it comes to reducing the delta – right now we are trying to figure out just what the equipment we have today and the extra boats there, how close can we come to replacing that. It's going to depend exactly on how much – it's going to depend on how many weeks the fishing is such that we can take advantage of this extra capacity. But there is no doubt that steps like this are exactly what we are trying to do to cost effectively make up some of that production in Western Gulf.

Tyson Bauer – KC Capital Management

Alright. Thank you, gentlemen.

Bret D. Scholtes

Thank you.

Operator

Thank you. The next question is from James Fronda from Sidoti & Company. Please go ahead.

James Fronda – Sidoti & Company

Hi guys how are you?

Bret D. Scholtes

Hi James.

James Fronda – Sidoti & Company

Do you guys have sense I guess of the revenue per ton for the year will be, will it be similar to 2013 and compared to the back half of 2013?

Andrew C. Johannesen

James this is Andrew. As I mentioned, based on what we see in the contracts that we have in place which are likely to make up aligned share of sales in the second half, the prices that we see are generally in line to slightly below those that we saw in the first half of the year.

James Fronda – Sidoti & Company

Okay. And I guess just on the strong sale through of the carried over inventories is there any way to slow that down or just even and out for the remainder of the year, so it's not as awful as long as the demand there you guys are going to stall in?

Andrew C. Johannesen

Well that was really a second quarter phenomenon and as you may remember last year we had a very strong end to the season. And so, we caught a lot of fish at the tail end of the season after a lot of the seasonal demand had subsided for the product and so we carried that over into 2014, sold some of that in Q1 and sold a significant portion of it in Q2. And so that was really an unusual event in terms of the timing of the catch being so late and carrying that much over. We have really pretty much sold out a bit so it's history at this point. As I said, we actually come into Q3, our inventories are down roughly 25% more they were a year ago. So that carry over that unusually high carry over, we wouldn't expect to have any impacts in the third quarter.

James Fronda – Sidoti & Company

Okay, but it's still relatively earlier in the season right for the most part?

Andrew C. Johannesen

It is, we still have couple of months facing ahead of us.

James Fronda – Sidoti & Company

Okay. Alright. Thanks guys.

Bret D. Scholtes

Thanks James.

Operator

Thank you. We have no further questions in queue at this time. I’d like to turn the floor back over to management for any closing remarks.

John D. Held

On behalf of the management I would like to thank everybody for their time this morning, their interest in Omega Protein. Have a great day.

Operator

Thank you. Ladies and gentlemen this does concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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