Phibro Animal Health Corporation (PAHC) Earnings Call Transcript & Summary

At this time, it is my pleasure to turn the program over to your host, Michael Ryskin.

Great. Thanks for joining us. My name is Mike Ryskin. I'm on the BofA Life Science Tools and Diagnostics team, also covering Animal Health. For our next session, we have Phibro Animal Health joining us, and we're pleased to host Damian Finio, Chief Financial Officer. Damian, thanks for being here.

Michael, good to see you, as always.

Format of the session will be the same as prior ones, fireside chat. [Operator Instructions]

So just to kick it off, Damian, you reported results just last week. Can you give us a brief recap of some of the key points from the front end of call.

Yes, absolutely. And time flies, Michael. It was February 9. So we are at June 30th year-end, so that was our second quarter results. And hopefully, you heard on the call and you'll hear today, we were really optimistic about our results for the second quarter and our first half of our fiscal year 2023. So our sales in the second quarter were $245 million. That's a 5% increase over the same quarter prior year, while adjusted EBITDA was $31 million, a 6% increase over the prior year. And one of the things we wanted to highlight it was in Animal Health, which is our biggest segment. It's about 2/3 of our sales. We have 3 product categories that we report against, MFAs and other vaccines and nutritional specialties. Across those 3 product categories, for the seventh straight quarter, we've had quarter versus same quarter prior year growth across all 7. So pretty nice string. And so it's across the board. If you ask what products or what type of products are driving it? It's really across the board. It's across regions, and it's across products. We did report a little bit of noise in our GAAP results. So we had a $6.6 million nonoperating, nonrecurring charge related to some environmental costs on a site out in California. That's the legacy site. It's part of our Performance Products division. So our GAAP results were a little bit down as a result of that. But overall, we're actually glad that that's behind us now that's been going on, I think, since the '80s, believe it or not, but the lawsuit first started in 2014. So it's been an overhang for a while. We're glad to have settled out of court, and that's behind us. We also reiterated our guidance for the second time. So our guidance for the year is $960 million to $1 billion in sales. You can imagine that internally, employees, including myself, are pretty excited about the opportunity to work at a $1 billion company. Not everybody can say that. So we are striving for the upper end of our guidance, and hopefully, we'll hit that. Adjusted EBITDA, we kept the same at $113 million to $118 million. A little bit more of a challenge to hit the guidance on the bottom line. I'm sure we'll talk about it on this call. But Phibro, like everybody else, is feeling higher input cost, inflation, et cetera, which is a bit of a drag on earnings. But overall, we're feeling pretty good about the demand for our products and for our sales. And that's where we're at, at the end of the half year.

Yes. And yes, earnings is one big blur. So it does feel like yesterday, but I guess it has been 2 or 3 weeks now. So I can get sympathetic there. Just on your comments on the bottom line there, I think the EBITDA numbers, can you give us a little bit more color on supply chains? What's been going on there? How has that trended in recent weeks and months? I think you noted on the call, you're holding a little bit more inventory on hand to offset some of these disruptions. Just talk us through the thinking there.

Yes, absolutely. So I think the good news, the headline would be, I think we are starting to see things clear up a little bit. So shipping lanes are clearing up. We're starting to see freight costs come down. Still not back to normal, but I think headed in the right direction. So that's good. I mean for us, for everybody else, it's been a drag on our margins for the past, gosh, it's got to be 12, 18, 24 months now. But we do expect things to improve going forward. So again, we're looking forward to the second half because there should be some margin expansion. As you mentioned, we are carrying a bit more inventory. We tried to put a number on it roughly and said, usually, we carry, again, this is across products, across countries, but about 4 months of inventory. Right now, we're carrying about 5 months of inventory on average. And that extra month over the last trailing 12 months is worth about $58 million. And over that same trailing 12 months, our free cash flow was a negative $45 million that we reported. So we're seeing it in margin depression as well as in the free cash flow. Now over time, we hope to bring down inventories, which would free up cash. So we hope that metric will flip and go back to being -- going being positive. But right now, where we're seeing it the most is that the inventory build is hitting us in the free cash flow numbers and the margins.

Got it. That's really helpful and that makes sense. Other point, just to touch on really quick from the update earlier this month -- or last month. Can you talk about the change to the Board? You announced a new Board member that you added, someone that we're familiar with. But just talk us through the thinking there.

Yes. That's good to hear that you're familiar with some. So Alejandro Bernal joined our Board in February. He joined our Board meeting a couple of days before our earnings call, and he was already making positive contribution. So it was great to see a new face and a new perspective. He's an industry veteran. He's been a companion animal guy for a while. He worked at Mars. He worked at Zoetis. And he just recently was appointed the CEO of PetDx. So I'm sure you'll be seeing more of him. So we're excited, and I think it just further emphasizes our intent to build the companion animal portfolio. So we're happy to have him on the board, and he's up and running already.

Yes. He's -- I mean he's speaking later this afternoon. He's one of the speakers for PetDx. So...

I'll have to tune in.

Yes, [ you can have it scheduled on ] with that. All right. So with that, I kind of want to pivot to some of the things that you're seeing in the market. There's -- we tend to think that the livestock market typically doesn't have this much volatility and this much upheaval, but certainly during COVID and just, in general, last 2 or 3 years have been little bit a wild. So wanted to dig into what you're seeing. First, let's start on cattle. A lot has been made in 2022 about the cattle feedlot placement trends, what that's expected to have in terms of herd size going forward? What are you seeing? What's your exposure there? How do you think that plays out?

Yes. So -- and I'm sure you're familiar with this since you cover Animal Health, but I think it's worth saying. When we talk about feedlots, there's beef cattle and there's dairy cattle. Feedlots relates to beef cattle, right? So feedlot inventories are low. I think I saw something, earlier this weeks, at a low since 1962. I don't know if you saw that, that article too, but they're awfully low. But when you look at our business, globally, our revenues are about 1/3 in cattle. But 20% of that -- 20% of those 33 points are on the dairy side. So it's only about 13% on the beef cattle side. And the majority of that volume in those sales are not in the U.S. They're outside the U.S., mostly in Brazil and Mexico. So we have very little exposure to beef cattle in the U.S. So when you see those articles about feedlot placements, they don't have a big impact on Phibro's business, which is good. Our Mineral Nutrition, so that's on our Animal Health. Mineral Nutrition, our Other segment, second biggest segment, is about 25%, give or take, of our revenues. That's primarily, almost entirely, I think it is entirely a U.S. business. There is some exposure in Mineral Nutrition. And in our second quarter results that we posted, we mentioned that Mineral Nutrition was down. That's partly because of the feedlot placements that I just mentioned. And that's also partly why our inventories were a little bit higher at the end of December. We always talk in our first quarter call that we build up inventory in our Mineral Nutrition business because it's located along the banks of the Mississippi River. And you need to get inventory there in advance of the river freezing. So that's normal. But what's not normal is weak demand in the second quarter, and we had weak demand. So we ended with higher inventory in Mineral Nutrition. And that's the reason why the cash flow was a bit off, inventories are a bit high, and it's related partially, not entirely, to what we just talked about on the feedlot placements.

Okay. Okay. And then, yes, pivoting to dairy, which was the other point you called out of your cattle exposure. What's customer activity like there? How is demand trending, obviously, not led to the feedlot dynamic, but still.

Yes. So we're pretty happy with our dairy side of the business and our results. We believe there's still growth to be added this year and next. We haven't given guidance for fiscal year '24 yet. But the dairy business is doing pretty well in the U.S., and we think it will continue to grow in the second quarter. And those assumptions are baked into the guidance that I mentioned earlier in the call and on our call on February 9. So overall, we think dairy is doing pretty well right now.

Is that -- how much of that is related to sort of post-COVID reopening dynamics? Because a lot of dairy market goes through different parts of the consumer chain, whether it's school lunches, right, restaurants versus at-home. So is there a post-COVID reopening dynamic there?

Yes, I'm sure there is. I don't know if it's hitting our first half results given we're at June 30 year-end. So we're only talking since July 1. I think most things were opened by July 1, 2022. So probably not in our current year results. But you're right, that dynamic is happening. But for us, the annualization is a bit different on our side. But yes, all these things are pointing to positive growth.

Fair enough. Fair enough. Next, I want to pivot. We're just going to keep going down on the species line. I want to talk about poultry. A lot of news in recent months and in the past year about avian flu, HPAI, the outbreaks in the United States. Can you talk through your exposure there? You've got a pretty decent poultry business, but obviously, there's difference between what we're seeing in broilers versus layers. So what's the impact there?

Yes. Although we sell across species and we sell in over 80 countries, if you were to say, where is our concentration? We had a big concentration in the U.S. and in poultry. So fair statement. That said though, within the poultry section, avian flu has had an extreme impact on the U.S., but that impact is seen more on layers in the turkey industry. Whereas our business is more on the broiler side. So it hasn't been seen on the broiler side. So I would say that impact of avian flu on Phibro specifically has been minimal, thankfully. And that's our assumption again as we go into the second half of the year, that our business hasn't been impacted and won't be. So we only have small exposure on that, where the avian flu is hitting. And obviously, it's hitting some farms harder than others. But overall, it's been extreme for the U.S., but not necessarily for Phibro.

Is there any reason it can't impact broilers in 2020 in the second half of the year or later next year, more geographically dependent, right? Or...

It's -- I think it's geographical, and I'm not the expert on this, but I think part of it has to do with just the life cycle of a layer versus a broiler. Broilers don't have as long as a lifespan prior to harvest, right, than a live would. So they're on the farm more, they're in feed more, et cetera. So that's really the dynamic. I think that's driving it more than anything.

Okay. All right. That's fair enough. Yes, I mean it's something we're monitoring closely, and there's a lot of interest because, yes, there's been major impact on layers. But in terms of total number of birds in the market in general, more of the markets as opposed to broilers...

Yes.

So that's the one that's really got to be protected. And so far, impact hasn't been as bad. Hopefully, that stays the same. I want to touch a little bit on China, both as a geography and as a customer, but also on African Swine Fever and the dynamics there. It's been really evolved over the last couple of years even before COVID because of ASF. What's the latest on the ground that you're seeing there? How close are we to getting back to normal there?

Yes. So we had a decent business in China back in 2019, as you're aware. Regulators took some action again, some products. We lost a good chunk of business, which was at a good margin. And we've been working to get back in China since then. I would say, unfortunately, I don't think we've made much progress, to be honest. So not only are relations between U.S. and China strained, but they're just releasing the restrictions -- COVID-related restrictions. So we've said on our last several calls, haven't been able to get over to China. So technically, we still have a program that's ongoing with a joint venture with a Chinese developer. But I would say progress is fairly slow. So haven't made much chance at all. Now we do have some business in China. It's small. That's really immaterial to our results, I would say. So that's African swine fever and I think China in a nutshell. So for us, slow progress. We have some business, but not much.

Is there any opportunity to budget the regulators long on those other products or...

I don't know. That's a tricky one, I would say. Generally speaking, it's hard to budge regulators, particularly in China. But obviously, it's a market we'd like to get back into. There's an awful lot of people in China. So -- but one of the things I would say too is -- and I know Jack would say that if he was here, too. We try to be geographically agnostic as best as possible. So even if you're not in China, obviously, they're a big importer of animal protein, beef, swine, et cetera. So as long as we're selling in other countries, you can still get business that's indirectly related to China, even if you're not selling directly in China.

Okay. All right. Fair enough. Maybe we can talk about, another geography I want to touch on is Latin America. You touched on Brazil and your exposure there earlier. What are you seeing in terms of demand for these markets? We're always wondering about global recession and concerns and macro pressures. But then on the other hand -- any early signs you're seeing of any change in consumer demand for protein in some of these across the world?

Yes. So I would say Brazil, South America was one of our regions, along with North America, that were up for the first half of the year. I think we see positive growth again in South America for the second half of our year. I'm sure you and others have read some of the headlines around what will hopefully be an atypical case of BSE or what people refer to as mad cow disease. Our thoughts on that is that, overall, it won't impact demand in aggregate, but it may delay some shipments. So there may be -- it depends how long an embargo, may or may not go on. We went back to, I think it was 2019, there was a similar situation. I think the embargo was about 30 days. So for us, we think it may delay some shipments but hopefully not beyond maybe 30 to 60 days. And after that, the inventory in the channel would hopefully return to normal. So we're keeping an eye on that as are lots of people. And in that same market, you may have read, too, there was a bird flu case at an industrial farm in Argentina. And exports were stopped there as well. So we do have some business in Argentina. It was on a broiler farm, same sort of thing. I think the exports have been stopped for now. So both of these things, overall, not good for us because we have business in South America. And if our customers aren't exporting, they're going to lower production, et cetera. But again, I think we hope that both of those are temporary. Those embargoes would be lifted, and it would just be a timing issue rather than aggregate demand weakness.

Got it. Yes. We saw the BSE headlines. And you're absolutely right. I think it was reported as an atypical case, not the first one they've had it. Every couple of years it happens. So it really depends on how long that suspension need comes. I think what we have read was that sometimes it is a little 30 days. Sometimes it was longer and people are trying to figure out how much of that is geopolitical in nature where companies countries are trying to fire shot across the bow for some other reasons. So we'll see how that plays out. But at least it's an atypical case, so it should be relatively contained, right?

Yes. And I know I touched on it, but our strategy has been for years now to be geographically agnostic and species agnostic, right? So even if China is not importing beef from Brazil, there's a lot of people in China that want beef. So they're going to import it from somewhere. So although we look at our customers, obviously, as the people we sell directly to, ultimately, it's the end consumer. There's 8 billion people. I think 99% of them eat some form of animal protein. So if we're selling products across species in more than 80 countries, where we'll be short in one country, we'll pick it up somewhere else. That's been the strategy. That's been the goal. We've continued to add countries since we went public back in 2014. And I think the strategy is working, it's reflected in our top line sales growth.

Yes, I agreed. And it's something -- I mean it's something we've seen in the industry before, right? I mean we've talked about -- just the last time you mentioned, you talked about BSE, avian flu, African swine fever. Clearly, this is the golden age of infectious diseases, but the world keeps trudging along because of that low exposure and the ability to offset other species, other geographies.

Yes.

Great. Want to touch a little bit on -- going back to the economic environment and the inflationary environment. I want to talk a little bit about pricing power, the ability to offset some of those inflation impacts. Can you talk about what you have across the portfolio -- [ can you take us ] through?

Sure. So plenty of headlines about inflation. And although we're starting to see some signs of improvement in the economy now, there's speculation the Fed is going to increase rates again and there's -- markets have been a little unsteady the last week or 2. For us, and again, we've talked, I think, since -- actually, I think it was fall of 2021, about starting to raise prices. We thought we were a little bit behind when we started because we had a little slip in margins, so we were increasing prices, but it wasn't necessarily covering our increased costs, plus maintaining those margins. So we saw a little bit of that. And we're still seeing some pressure on margins, like I mentioned. Our sales, though -- and we looked at some numbers after some of our bigger competitors like Elanco and Zoetis reported their annual results. So although we typically look at our results on a fiscal year, if you looked at our calendar year sales for 2022 versus calendar year 2020, we're up over 20%, about 21%, according to my calculations. For the livestock or the farm animal portion of Zoetis and Elanco, again, my calculations, they're down like 5%. So they're down 5%, we're up 21%, that also show that we've been able to raise prices. And I would say of that increase, again, roughly speaking, it's about 75%, price and about 25%, volume. So we're growing demand, but we're also increasing prices. Whether or not those prices stick, if the economy starts to cool off a little bit, only time will tell. But I will say that the majority of our prices are not freight surcharges, so which we had said before, would be more temporary. There are price increases, which tend to be a bit stickier again, be different by product, by region, et cetera. But right now, that's what we're seeing. So we're seeing strong sales, and it's because we've been able to raise price.

Got it. Yes. I mean that's really impressive because typically, in the livestock production animal, you don't see as much pricing power as you, [ it depends ]. So that's very impressive to be able to pass it on. I know you kind of touched on this in your opening remarks, but anything you can particularly attribute that to? I mean, is it really the entire portfolio? Is it something in terms of organization? And I'm talking to your performance versus Zoetis or Elanco what are stock performance -- thesis...

Yes -- yes, I think we like to think that as there's higher input costs, higher feed costs, et cetera. Farmers got more money invested in his herd or in his flock, and our products help to keep those animals healthy and get them to reach their peak performance. So there's more of a need for our products. And we're hoping, if they have to cut costs, we're not one of them that's first on their list. And maybe that's the case, again, probably partially speculation, but that's what we'd like to think with our products. So again, I think it's across species, across country. There's some puts and takes. But overall, I think that's how we've positioned it to customers, et cetera. And I think too, I know Donny maybe mentioned this on maybe a year ago or so. We weren't a type of company that, hey, it's January, first time an increase, prices 3%. So I think we've had -- we've been around a long time, as you know, since the mid-1940s, good relationship with our customers, think they trust Phibro. We don't just take price increases because we can. And we collaborate and we're in it with them. So they know that we're seeing higher input costs, too. So we can still offer products. We're going to need to take price so we can keep our staff and do what we need to do. So I think they understood that. And the relationships that we've had with customers over the years, I'm sure has helped leverage that as well.

Got it. Got it. That's helpful. I want to touch a little bit again on some specific products going forward. You talked about on past Mecadox and the discussions with the FDA. Just have to ask any updates there? Sort of what's your base assumption for the resolution?

Yes. So the product continues to have demand. We report this as part of our -- as our SEC filings, a trailing 12-month basis. It's always about -- it's been about since I've been here, which is about 2.5 years now. It's been about $20 million, give or take, of trailing 12-month sales at pretty decent margins. But it's still about that. We have not heard anything back from the FDA. So unfortunately, unfortunately, no news to report on the Mecadox, carbadox front.

And there's enough time lines for a resolution there. I mean it could take just -- it's a set and wait game?

There is not -- yes. Ball's in their court, so we're waiting to hear, back.

Okay. Okay. And I want to touch on, we talked about African swine fever earlier. We've had some conversations with you in the past regarding the potential for vaccine. There's some work being done here. But it's always tough to say where in the development cycle that is. Is there anything that we could be looking for in the next couple of years? Any updates you can give us on your internal...

The swine fever or...

Yes.

Yes, I think, as I mentioned we're still pursuing a global solution with the initial focus, I would say, is on Asia and Eastern Europe. But I would say there's nothing likely within the next, say, 18 months. So I would say, here at least 18, 24 months out, if not a little bit longer, depending on some of the things I talked about earlier with the China-U.S. relations, et cetera.

Okay. Okay. And for -- just for infectious diseases like that, how should we think about commercialization opportunities? Because that's something where -- is the go-to-market strategy different than what it is for a typical product because there is this food security, food supply component. Would you anticipate that governments would get involved and would purchase the vaccine from you? How does that work in [indiscernible] Animal?

Yes. I think that, that could be the case at some point. Whether or not we're the manufacturer at that point or not, I guess, would be seen. But yes, that's I think would work in general. And when I look at our growth drivers, I know we've said this before. In the short term, it's really 2 product categories with Animal Health where we're putting some money. So there's nutritional specialties. We bought Osprey back in 2019, so direct-fed microbials or probiotics. But vaccines as well. So vaccines continue to grow. We have a new facility that will have a soft opening, I would say, later this month, actually, in Brazil, an autogenous facility. And we continue to put money into vaccines. So back to the comment about avian flu, there are several strains of avian flu. So we are looking at developing vaccines for some of those strains, because Avian flu is causing high death rates globally. So even if right now, we're not necessarily exposed because we're more on the broiler side than the layer and the turkey, it doesn't mean we're not looking at vaccines that may help to solve the issue.

Got it. Okay. And that was -- one of my next question was going to be investment in future growth. Where is the incremental dollar going? Talk about nutritional specialties. That's been the case for a while, talk about vaccines has been case for a while, and also want to talk about companion expansion. So fair to say those are the 3 target areas we're looking at going forward?

Yes. When we gave guidance for fiscal year '23, we said that we'd spend about $37 million was our number in strategic investments, and that was up about $8 million or 25% from the year before. And roughly speaking, the split of that spend across those 3 that you just mentioned, vaccines, nutritional specialties and companion animals, was roughly equal. So that was our plan. So that's where we put our chips on the table there. So I mentioned already about vaccines. Nutritional specialties, we continued to find opportunities to drive growth in Osprey and moving some of the manufacturing out of the site that we acquired in Florida into other sites where we have capacity outside of the U.S. So -- and they continue to be input ingredients for other products that we sell. So we feel pretty good about the Osprey acquisition. On Companion Animals, development continues. So we have -- we could go through them. Why don't we go through the different projects that we have? So we have 5 projects that we've called out specifically, so I'll just go through each one. And the good news is they're all big markets. And we felt like -- forgot the term we use. I think we said maybe the -- we're happy with where we're at with the portfolio because we've made a couple of investments, so we're going to focus on these projects that we have. Right now, so not that we're not open to another licensing deal coming our way, et cetera. But right now, we're pretty happy with where we're at. So we have a novel early-stage approach for oral care for cats and dogs. It's in the pipeline. That's about a $2 billion market. We licensed in the pain management product. That was in development for dogs. So that's about $1 billion-plus market. There's an early-stage atopic dermatitis compound for dogs. It's another $1 billion market. And then we mentioned a few months back that we're in collaboration with Rejuvenate Bio for a first-of-its-kind gene therapy product in mitral valve disease in dogs, primarily smaller dogs. That's about a $200 million market. And we mentioned that Rejuvenate Bio intended -- this was their announcement. They intended to file for conditional approval with the FDA before the end of this calendar year. So in the next 9, 10 months. And lastly, smaller market, less than $100 million, but a novel line vaccine as well. So amongst those, those are big markets. And keep in mind, if our guidance is $113 million to $118 million, even a small portion or a small market share in any of these markets could be meaningful to our bottom line. And that's what we're hoping. Now we've cash that a little bit and said none of this is short term. These are medium-term opportunities. We haven't disclosed a lot about where these projects are in their development life cycle, but we also haven't reported that anything's dropped out. So you can -- that implies that things are progressing as expected.

Got it. That's really helpful, yes. And there's a lot of interesting potential products there. I guess the first question, I would say, I mean, you just said they're not imminent, so that would have been a question. But next question I'll say is can you talk a little bit about your commercialization strategy, maybe kind of going into what you've done with Rejensa and your experience there? What worked? What didn't. Just because you've got a great channel, you've got a great history in last like a production animal, but companion is obviously a very different approach, just with [ vets and animal ] how disparate fragments of the market is. So for some of these, whether you're going for oral care or the Rejuvenate Bio project or [ derm ], different markets there, right, different audience. So talk about what you're thinking for commercialization go-to-market here.

Yes. And I think that I was a pharmaceutical guy most of my career, so Animal Health only last couple of years. But you think of some of those bigger markets, almost like a primary care drug for a human where you've got a lot of coverage. So what a smaller company would maybe do on the pharma side is similar to what we do on the animal health side is. We have an exclusive deal with one of the larger distributors, and we're very happy with that arrangement. So right now, the sales force for Rejensa is external. It's a contract sales force, and we have an exclusive deal with them. Now as the product has grown and we have more coverage, that clinic started to open up over the last 12 to 18 months. We've worked with them to add more reps and trying to get Rejensa to fund itself basically. Not fund the development of future companion animal products, but a stand-alone P&L. We're adding reps. We're layering on reps to add revenue and add margin. And we're doing that sort of lockstep, right, as the product grows. At some point, when we have another product on the market and then another product after that, another product after that, you start to evolve and you start to bring some sales reps in-house and you have them complemented by a contract sales force. And eventually, you get big enough, makes sense. You bring it all in-house. That's years away, I would say, for Phibro. So right now, we're happy with our arrangement for Rejensa. And I think we'll make those decisions when product's ready to launch as part of the commercial strategy. And at some point, there'll be -- there will start to be a hybrid and eventually go to full in-house. But we've decided -- not that we've decided but we've talked about it, but we're not at that stage yet where we have to make those decisions, and we're happy with what we're doing right now.

Okay. Great. That's real helpful. Any thoughts for partnership for commercialization with an external, with an existing companion animal player? Or do you know -- or someone more on the early-stage biotech side. On the other hand to bring additional products in?

Yes. I think we're not opposed to any of these ideas right now. We're new to the market. I think if the math makes sense, that may be something that we do. So I'd say, we haven't closed off any of those types of ideas. I think we're open to ideas. These are the types of things. Alejandro coming on to the Board has some experience. Donny, as you know, he's not on today's call, but Donny has been working with his team on the Companion Animal side. We have some experienced people there. So I think we're open to all these ideas, but the math has to work. So we make those decisions as those opportunities present themselves.

Got it. That makes sense. Can you talk about -- for Rejensa specifically, you talked about doubling sales year-over-year again. You're still relatively early in the stage of that product. Anything you can say about the longer-term goals for Rejensa? How you see that as a sole product?

Yes. So as you mentioned, in our guidance a couple of calls ago, we said that it implied that we would double sales of Rejensa in fiscal year '23 over fiscal year '22. The product continues to do really well. I would say, we'll probably fall a little bit short of that goal of doubling, but it will be pretty close. And again, that's baked into our guidance. We haven't disclosed any dollar amounts for Rejensa. And I think I've mentioned before, too, right now, externally, it's reported as part of nutritional specialties. That's where Rejensa sits because we do not have a companion animal product category because, just for transparency or lack of transparency, we don't want to disclose the numbers because it would be just 1 product. So as we add more products and/or the product gets -- we add more products and that line item gets bigger, our plan is to pull it out of the nutritional specialties product category that sits in Animal Health, and Companion Animals would become our fourth product category. So that's the strategy. That's the goal, to grow that category to the point where it's big enough to pull it out and has enough products to pull it out as the fourth leg to the stool, if you want to call it that, of Animal Health. So that's the plan, I think, we'll fall a little short but still really amazing growth for the product. And again, we're happy with our arrangement with the distributor.

Got it. Yes. And you had talked about over time -- previously, when you were talking about Companion Animal and how you expect that to grow, you talked about it getting eventually to the same size as nutritional specialties on its own.

Yes.

Never really set a specific time line for that, but -- and I think that was before some of these newer products were incorporated into the pipeline. So is that still a general goal? Is that a rough ballpark how you think companion animal can scale for you?

Yes, that's still the general goal. I'm probably not in a position today to be any more specific than that, but it's a medium-term opportunity and eventually grow to the point where it's big enough to pull it out.

Okay. That's fair. Maybe we're coming up at the end of our allotted time. So I want to just -- couple on the P&L and cash flow and things like that. So you talked about early prepared remarks, some of the factors impacting free cash flow in fiscal 2Q, just given the inventory dynamic. Any thoughts on how that improves through the rest of the year? And how do you think about the balance sheet as you're exiting fiscal year '23?

Yes. Thank you, yes. Our goal is to try to improve those metrics by the end of the year. So there's a couple of things I mentioned. So I said -- I mentioned that trailing 12-month free cash flow was minus $45 million, driven by a $58 million inventory build over the same 12 months. Where you see that impacting the balance sheet is we do have higher debt, which means a higher leverage ratio at the moment. I wanted to remind everybody, though, when we do say it as part of the webcast, back in, I think, it was March of 2020. So it was before I joined, I'd love to take credit for this, Michael, but I can. It was the guy before me. So he entered interest rate swap on $300 million of our debt. So although we have, call it, $485-ish million, I think, it is of debt at the end of December, $300 million of it doesn't float with the market. It's at a 0.61%, that was a LIBOR rate, which we eventually converted now to SOFR. So it's not fluctuating. So $300 million of it is at an interest rate swap. So we're not getting hit with higher interest expense for that. So that's good. So that helps that. We also have some cash on the balance sheet, and not all of that is needed to fund working capital. So we're getting some really good interest income on some of our short-term investments that also offsets the part of the debt -- that does flow with the market. So overall, goal is that these should improve by the end of the year, but it's going to depend on whether or not we can hit our guidance numbers in the second half, which I said at the beginning in the call, we're pretty confident on the sales number. Got some challenge in the adjusted EBITDA numbers, but we feel like we can get there. So all in all, I think if all these things work and the economy starts to get a little bit better, some of these other things we talked about don't -- like around mad cow disease, et cetera, don't exacerbate or stay around longer than anybody wants. We should be able to turn these metrics around as we start to bring inventory levels down. That's the goal.

Okay. Okay. And we've got sitting at about 3.5x, 3.4, 3.5x net debt-to-trailing 12-month EBITDA. Generally, you've kind of historically been in that 3-ish range. Is that a reasonable target going forward, 3, 3.5x? And what are your cash uses if you're going to draw that down?

Yes. So yes, I'd say that 3, 3.5 is probably about right. And keep in mind too, with our covenant agreement, there are other add backs that aren't disclosed necessarily. So what we use for pricing purposes on the debt is a different number than what you just quoted, right? And we don't disclose those numbers, but there are some other things that help those numbers from a covenant perspective. If we are to have more free cash flow, we continue to pay a dividend. It's about $5 million in aggregate a quarter in terms of dollars, but it's $0.12 per share, it has been for several quarters. So we'll continue to fund the dividend. We continue to invest in the future in the form of those projects that we talked about across nutritional specialties, vaccines and companion animals. But we also have some CapEx projects, which are adding manufacturing capacity. I mentioned the new plant coming online in Brazil for autogenous vaccines, right? So we're continuing to do that. We continue to invest in Sligo and ramp up the facility there as the products get registered in more countries. So we'll continue to invest in CapEx, in the development projects, funding the dividend and pay down debt, all those things.

Got it. No, that makes sense. We are at the top of the hour -- by the hour -- we're at the end of our session either way. But I just want to say thank you so much, Damian. And thanks for joining us. Really appreciate the discussion and always great to chat.

All right, Michael, good to talk. I think we'll see each other, hopefully, in May, in-person.

We will see you in Vegas, yes.

All right. Perfect.

It will be here before you know it.

All right. Thanks a lot. Thanks for having us today.

Cheers.