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 Bank of America Life Science Tools & 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, a Chief Financial Officer. Damian, thanks for being here.
Michael, good to see you as always.
Format of the session will be the same as the, as prior ones, fireside chat. Feel free to shoot questions either of these portal. Just to kick it off, Damian, you know, you reported results just last week. Can you give us a brief recap of some of the key points from the print and the call?
Absolutely. Time flies, Michael. It's February 9th. We are at June 30th year-end, so that was our second quarter results. You know, 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. 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, 6% increase over the prior year. 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 three product categories that we report against, MFAs and Other Vaccines, and Nutritional Specialties.
Across those three product categories for the first and same- quarter prior- year growth across all seven. Pretty nice string. It's across the boards. If you ask, you know, what products or what type of products are driving 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. We had a $6.6 million non-operating, non-recurring charge related to some environmental costs on a site out in California. That's a legacy site. It's part of our Performance Products division. Our GAAP results were a little bit down as a result of that. Overall, we're actually glad. I think since the 1980s, believe it or not, but the lawsuit first started in 2014.
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. 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 billion-dollar company. Not everybody can say that. 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-$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.
Phibro, like everybody else, is feeling higher input costs and inflation, etc., which is a bit of a drag on earnings. 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.
Earnings is one big blur. It does feel like yesterday. I guess it has been two or three weeks now. I can sympathize there. You know, just your comments on the, on the bottom line there, hitting the EBITDA numbers. Can you give us a little bit more color on, you know, supply chains, what's been going on there? You know, how's 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, you know, talk us through the thinking there.
Absolutely. I think the good news, the headline would be, I think we are starting to see things clear up a little bit. 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 gotta be 12, 18, 24 months now. We do expect things to improve going forward. Again, we're looking forward to the second half 'cause 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 four months of inventory.
Right now, we're carrying about five months of inventory on average, and that extra month over the last trailing 12 months is worth about $58 million. Over that same trailing 12 months, our free cash flow was a negative $45 million that we reported. We're seeing it in margin depression as well as in the free cash flow. 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 positive. Right now, where we're seeing it the most is that inventory build is hitting us in the free cash flow numbers and the margins.
Got it. That's real helpful and that, 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.
That's good to hear that you're familiar with him. Alejandro Bernal joined our Board in February. He joined our Board meeting a couple days before our earnings call, and he was already making positive contributions. 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. We're excited, and I think it just further emphasizes our intent to build a Companion Animal portfolio. We're happy to have him on the board and, you know, he's up and running already.
He's, I mean, he's speaking later this afternoon. He's one of the speakers for PetDx.
I'll have to tune in.
You're gonna have to. All right. With that, I kinda wanna pivot to some of the things that you're seeing in the market. There's, you know, 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, the last two or three years have been a little bit wild. Wanna sort of dig into what you're seeing. First, let's start on cattle. You know, a lot has been made in 2022 about cattle feedlot placement trends, what that's expected to have in terms of herd size going forward. You know, what are you seeing? What's your exposure there? You know, how do you think that plays out?
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? Feedlot inventories are low. I think I saw something earlier this week said at a low since 1962. I don't know if you saw that article too, but they're awfully low. When you look at our business globally, our revenues are about 1/3 in cattle. 20% of those 33 points are on the Dairy side. 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.
We have very little exposure to Beef Cattle in the U.S. When you see those articles about feedlot placements, they don't have a big impact on Phibro's business, which is good. That's on our Animal Health. Mineral Nutrition, our other segment, second biggest segment, about 25%, give or take, of our revenues. That's primarily or almost entirely, I think it is entirely a U.S. business. There is some exposure in Mineral Nutrition. You know, 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 on 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. That's normal. What's not normal is weak demand in the second quarter, and we had weak demand. We ended with higher inventory in Mineral Nutrition, and that's the reason why, you know, 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. you know, pivoting to Dairy, which was the other part you called out of your cattle exposure. What's customer activity like there? How's demand trending? Obviously not related to the feedlot dynamic, but still.
We're pretty happy with our Dairy side of the business and our results. We believe there's still growth to be had this year and next. We haven't given guidance for fiscal year 2024 yet. The dairy business is doing pretty well in the U.S., and we think it'll continue to grow in the second quarter. Those assumptions are baked into the guidance, you know, that I mentioned earlier in the call and on our call on February 9th. Overall, we think dairy is doing pretty well right now.
How much of that is related to sort of post-COVID reopening dynamics? You know, because a lot of dairy market goes through different parts of the consumer chain, whether it's, you know, school lunches, right, restaurants versus at home. Is there a post-COVID reopening dynamic there?
I'm sure there is. I don't know if it's hitting our first half results given, you know, we're a June 30th year-end, so we're only talking since July 1st. I think most things were open by July 1st, 2022. Probably not in our current year results. You're right, that dynamic's happening. For us, the, you know, annualization's a bit different on our side. Yeah, all these things are pointing to positive growth.
Fair enough. Fair enough. Next I wanna pivot. We're just gonna keep going down the Species line. I wanna 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? Obviously, there's difference between what we're seeing in broilers versus layers. What's the impact there?
Although we sell across species and we sell in over 80 countries, you know, if you were to say, "Where's our concentration?" We have Poultry. 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 and the turkey industry, whereas our business is more on the broiler side, so it hasn't been seen on the broiler side. I would say the impact of avian flu on Phibro specifically has been minimal, thankfully. 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. We only have small exposure on the, you know, where the avian flu is hitting. Obviously it's hitting some farms, you know, harder than others.
Overall, it's been, you know, extreme for the U.S., but not necessarily for Phibro.
Is there any reason it can't impact broilers in 2020, you know, in the second half of the year or later next year? More geographically dependent, right, or?
I think it's geographical. 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 of a lifespan, prior to harvest, right, than a layer would. They're on the farm more, they're in feed more, et c. That's really the dynamic I think is driving it more than, more than anything.
Okay. All right. That's fair enough. Yeah, I mean, it's something we're monitoring closely. There's a lot of interest because, yes, there's been a major impact on birds in the market in general. as opposed to broilers. You know, that's the one that's really got to be protected. So far, you know, impact hasn't been as bad. Hopefully that. On China, both as a, you know, as a geography and as a customer, but also on African swine fever and the dynamics there. It's been really volatile the last couple years, even before COVID, because of ASF. What's the latest on the ground that you're seeing there? You know, how close are we to getting back to normal there?
We had a decent business in China back in 2019, as you're aware. Regulators took some action against some products. We lost a good chunk of business, which was at a good margin. 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. Not only are relations, you know, between U.S. and China strained, but they're just releasing their restrictions on COVID-related restrictions. We've said on our last several calls, 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. Haven't made much chance at all. Now we do have some business in China. It's small, though. It's really immaterial to our results, I would say. That's, you know, slow progress. We have some business, but not much.
Is there any opportunity to budge the regulators along on those other products or?
I don't know. That's a tricky one. I would say, you know, generally speaking, it's hard to budge regulators, particularly in China, obviously it's a market, you know, we'd like to get back into. You know, 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. Even if you're not in China, obviously, they're a big importer of animal protein, you know, beef, swine, et c. 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 wanna 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? You know, we're always wondering about global recession and concerns and macro pressures. on the other hand, animal. Any early signs you're seeing of any change in consumer demand for protein in some of these other parts of the world?
I would say Brazil, you know, 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. You know, 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. It depends how long an embargo, you know, 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.
You know, for us, we think it may delay some shipments, but hopefully not beyond, you know, maybe 30 to 60 days. After that, the inventory and the channel would hopefully return to normal. We're keeping an eye on that, as are lots of people. 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.
You know, we do have some business in Argentina, i t was on a broiler farm. Same sort of thing, I think the exports have been stopped for now. You know, both of these things overall not good for us because, you know, we have business in South America, and if our customers aren't exporting, they're gonna lower production, et cetera. 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. Yeah, no, 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, you know, every couple years it happens. Really depends on how long that suspension means comes. I think what we had read was that sometimes it is as little as 30 days, sometimes it was longer. You know, people are trying to figure out how much of that is, you know, geopolitical in nature, where companies are, you know, countries are trying to fire a shot across the bow for some other reason. We'll see how that plays out, but at least it's an atypical case, so should be, you know, relatively contained, right?
I know I touched on it, but, you know, our strategy has been for years now to be geographically agnostic and species agnostic, right? Even if China's not importing beef from Brazil, there's a lot of people in China that want beef, they're gonna import it from somewhere. 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. If we're selling products across species in more than 80 countries, where we'll be short in one country, you know, we'll pick it up somewhere else. That's, that's been the strategy. That's been the goal. We've continued to add countries since we went public back in 2014. I think the strategy's working as reflected in our top-line sales growth.
Agreed. It's something, I mean, it's something we've seen in the industry before, right? I think we've talked about, just in the last few months, we've talked about BSE, avian flu, African swine fever. You know, clearly this is the golden age of infectious diseases, the world keeps chugging along because of that, you know, global exposure and the ability to offset other species, other geographies. Great. Wanna touch a little bit on, you know, going back to the economic environment and the inflationary environment. Pricing power, ability to offset some of those inflation impacts. You know, can you talk about what you have across the portfolio? how you think those through?
Sure. You know, plenty of headlines about inflation. Although we're starting to see some signs of improvement in the economy now, I mean, there's speculation the Fed's gonna increase rates again. Markets have been a little unsteady the last week or two. For us, again, we've talked, I think, since, gosh, 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 the, in margins, so we were increasing prices, but it wasn't necessarily covering our increased costs plus maintaining those margins. We saw a little bit of that, and we're still seeing some pressure on margins, like I mentioned.
Our sales, though, and, you know, we looked at some numbers after some of our bigger competitors, like Elanco and Zoetis, reported their annual results. 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%. They're down 5%, we're up 21%. It also shows that we've been able to raise prices. I would say of that increase, you know, again, roughly speaking, it's about 75% price and about 25% volume. We're growing demand, but we're also, you know, increasing prices.
Whether or not, you know, those prices stick, if the economy starts to cool off a little bit, you know, only time will tell. I will say that the majority, freight surcharges, so which we had said before would be more temporary, you know, they're price increases which tend to be a bit stickier. Again, be different by product, by region, et c. Right now, you know.
Got it. Yeah, I mean, that's really impressive because typically in the line of like a production animal, you don't see as much pricing power as you do in companion. That's very impressive to be overpassing in your opening remarks. Anything you can particularly attribute that to? I mean, is it really the entire portfolio? Is it something in terms of organization? I'm talking to, you know, your performance versus Zoetis or Elanco, livestock performance.
We like to-
Species.
I think we like to think that as there's higher input costs, higher feed costs, 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. There's more of a need for our products that we're hoping if they have to cut costs, you know, and, you know, maybe that's the case. Again, probably partially speculation, but that's what we like to think with our products. Again, I think it's across species, across country. There's some puts and takes, but overall, you know, I think that's how we've positioned it to customers, et c. I think too, I know Donnie maybe mentioned this on a call maybe one year ago or so.
We weren't the type of company that, "Hey, it's January first, time to increase." We've been around a long time, as you know, since the mid-1940s, good relationship with our customers. I think they trust Phibro. We don't just take price increases 'cause we can, and, you know, we collaborate, and we're in it with them, so they know that we're seeing higher input costs too. We can still offer products, you know, we're gonna need to take price, so we can keep our staff and do what we need to do. 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. That's helpful. again, on, some specific products going forward. You know, you talked about in the past, Mecadox and the discussions with the FDA. just have to ask, any updates and for the resolution?
The product continues to have demand. You know, we report this as part of our SEC filings, a trailing 12-month basis. It's been about, since I've been here, which is $20 million, give or take, of trailing 12-month sales at pretty decent margins. It's still about that. We have not heard anything back from the FDA. You know, fortunately, unfortunately, no news on the carbadox front.
There's no timeline for a resolution there? I mean, it could take. Just it's a sit and wait game.
There is not, yeah. Ball's in their court, so we're waiting to hear back.
Okay. Okay. I wanna touch on, we talked about, African swine fever earlier. We've had some conversations with you in the past regarding the potential for a vaccine, but it's always tough to say, you know, where in the development cycle that is. Is there anything that we could be looking for in the next couple years? Any updates you can give us on your internal-
On swine fever or?
Yeah. Yeah.
I think as I mentioned, you know, we're still pursuing a global solution with the initial focus, I would say, is on Asia and Eastern Europe. I would say there's nothing likely within the next, say, 18 months. I would say you're at least, you know, 18, 24 months out, if not a little bit longer, depending on, you know, some of the things I talked about earlier with China-U.S. relations, et c.
Okay. Okay. Just for infectious diseases like that, how should we think about commercialization opportunities? 'Cause that's something where, you know, is the go-to-market strategy different than what it is for a typical product because there's this, you know, food security, food supply component. Would you anticipate that governments would get involved and would purchase the vaccine from you? You know, how does that, how does that work in production animal?
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 will be seen. That's I think how it would work in general. You know, when I look at our growth drivers, I know we've said this before, in the short term, it's really two product categories within Animal Health where we're putting some money. There's Nutritional Specialties. We bought Osprey back in 2019, direct-fed microbials or probiotics, but vaccines as well. 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. We continue to put money into vaccines. Back to the comment about avian flu.
You know, there's several strains of avian flu. We are looking at developing vaccines for some of those strains because avian flu is causing high death rates globally. Even if right now we're not necessarily, you know, exposed because we're more on the broiler side than the layer in the turkey, doesn't mean we're not looking at, you know, vaccines that may help to solve the issue.
Got it. Okay. That was one of my next questions was going to be, investment and future growth. Where's the incremental dollar going? Talked about Nutritional Specialties. That's been the case for a while. You talked about vaccines. That's been the case for a while. I also want to talk about companion expansion. You know, fair to say those are the three target areas we're looking at going forward.
When we gave guidance for fiscal year 2023, we said that we'd spend about $37 million was our number in strategic investments, that was up about $8 million or 25% from the year before. As mentioned, Vaccines, Nutritional Specialties and Companion Animals was roughly equal. That was our plan. That's where we put our chips on the table there. I mentioned already about Vaccines. Nutritional Specialties, opportunities to drive growth in Osprey, moving some of the manufacturing out of the site that we acquired in Florida into other sites where we have capacity outside of. They continue to be input ingredients for other products that we sell. We feel pretty good about the Osprey acquisition. On Companion Animals, development continues. We have, could go through them.
Why don't we go through the different projects that we have? We have five projects that we've called out specifically. I'll just go through each one. The good news is they're all big markets. We felt like I forget the term we used. I think we said maybe that 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 the. Right now. 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. We have a novel early-stage approach for oral care for cats and dogs that's in the pipeline. That's about a two. License in a pain management product that was in development for dogs.
That's about $1 billion+ market. There's an early-stage atopic dermatitis compound for dogs. That's another billion-dollar market. 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. 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. In the next, you know, nine, 10 months. Lastly, smaller market, less than $100 million as well. Amongst those are big markets. You know, keep in mind, if our guidance is $113 million-$118 million, even a small portion or a small market share in any of these markets could be meaningful to our bottom line. That's what we're hoping.
Now, we've cast 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. We also haven't reported that anything's dropped out. You can that implies that things are progressing as expected.
Got it. Interesting potential products there. I guess the first question I would say, I mean, you just said they're not, they're not limited, so that would have been another question. Next question I'll say is, you know, can you talk a little bit about your commercialization strategy and what it did? Just because you've got a great channel, you've got a great history in livestock or production animal, but companion is obviously a very different approach just with vets and, sort of, how disparate or fragmented the market is. For some of these, you know, whether you're going for oral care or the Rejuvenate Bio project or derm, different target vets, right? Different audience. Talk about what you're thinking for commercialization go-to-market here.
I think you know that I was a pharmaceutical guy most of my career, animal health only last couple of years. You think of some of those bigger markets, almost like a primary care drug for, you know, for a human where you've got a lot of coverage. 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. 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've had more coverage, vet clinics started to open up over the last 12 to 18 months. We've worked with them to add more rep. To fund itself, basically.
Not fund the development of future Companion Animal products, but a standalone 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 and 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, you know, it makes sense, and you bring it all in-house. That's years away, I would say, for Phibro. 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.
At some point, you know, there'll start to be a hybrid and eventually go to full in-house. We've decided, not that we've decided, but you know, 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. Aggression for commercialization with an external, with an existing, Companion Animal, player, or, you know, or someone more on the, to bring additional products in?
I think, you know, we're not opposed to any of these ideas right now. We're new to the market. I think if the math makes sense, you know, that may be something that we do. I say we haven't closed off any of those. We're open to ideas. These are the types of things, you know, Alejandro coming onto the Board, you know, has some experience. Donnie, as you know, he's not on today's call, but Donnie's been working with his team on the Companion Animal side. We have some experienced people there. I think we're open to all these ideas, but the math has to work. We'll make those decisions as those opportunities, you know, present themselves.
Got it. That makes sense. Can you talk about, you know, for Rejensa specifically, you know, you talk about doubling sales year-over-year, again, relatively early in the stage of that product. Anything you can say about longer-term goals for Rejensa, how you see that, you know, as a solo product?
As you mentioned, that we would double sales of Rejensa in fiscal year 2023 over fiscal year 2022. 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'll be pretty close. 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. 'Cause we do not have a Companion Animal product category because, you know, just for transparency or lack of transparency, we don't wanna disclose the numbers 'cause it would be just one product.
As 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. 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 wanna call it that, of Animal Health. That's the plan. I think we'll fall a little short, but still really amazing growth for the product. Again, we're happy with our arrangement with the distributor.
Got it. Yeah. You had talked about over time, you know, previously when you were talking about, you know, 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. You know, never really set a specific timeline for that, but. I think that was before some of these newer products were incorporated into the, into the pipeline. Is that still a general goal? Is that a rough ballpark in how you think a Companion Animal could scale for you?
That's still the general goal and probably not in a position today to be any more specific than that. 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, at the end of our allotted time, so just a couple on the, on the P&L and cash flow and things like that. You talked about earlier in your remarks some of the factors impacting free cash flow, you know, in fiscal 2 Q, given the inventory dynamic. Any thoughts on how that improves through the rest of the year, and how do you think about, you know, the balance sheet as you're exiting fiscal year 2023?
Thank you. Yeah. Our goal of the year. There's a couple things to mention. I mentioned that trailing 12-month free cash flow was -$45 million, driven by a $58 million inventory build over those same 12 months. Where you see balance sheet is we do have higher debt, which means a higher leverage ratio at the moment. I wanted to remind everybody, though, and we do say it as part of the webcast. Back in, I think it was March of 2... It was before I joined. I'd love to take credit for this, Michael, but I can't. It was the guy before me. He entered an interest rate swap on $300 million of our debt.
Although we have, call it $485 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%, what was a LIBOR rate, which we eventually converted now to SOFR. It's not fluctuating. $300 million of it is at an interest rate swap, so we're not getting hit with higher interest expense for that. That, that's good. That helps that. The balance sheet and not all of that is needed to fund working capital. We're getting some really good interest income on some of our short-term investments that also offsets the part of the debt, excuse me, that does flow with the market.
Overall, goal is that these should improve by the end of the year, but it's gonna depend on whether or not we can hit our guidance numbers in the second half, which I said, you know, at the beginning of the call, we're pretty confident. On the sales number, we've got some challenge in the adjusted EBITDA numbers, but we feel like we can get there. 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. We've got you sitting at about 3.5x, 3.4x, 3.5x, net debt to trailing 12-month EBITDA. Generally, you know, you've kind of historically been in that, you know, three-ish range. Is that a reasonable target going forward, 3.5x? What are your cash uses, you know, if you're gonna draw that down?
I'd say that 3.5x is probably about right. Keep in mind too, with our covenant agreement, there are other add backs that aren't disclosed necessarily. What we use for pricing purposes on the debt, you know, is a different number than what you just quoted, right? We don't disclose those numbers, but there are some other things that help those numbers from a covenant perspective. If we are to, you know, have more free cash flow, you know, 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. 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. We also have some CapEx projects which are adding manufacturing capacity. I mentioned a new plant coming online in Brazil for autogenous vaccines, right? We continue to do that. We continue to invest in Sligo and ramp up the facility there as the products get registered in more countries. We'll continue to invest in CapEx, in the development projects, funding the dividend, and, you know, pay down debt, all those things.
Got it. No, that makes sense. We are at the, at the top of the hour or bottom of the hour. We're at the end of our session either way. I just wanna say, thank you so much, Damian. 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.
Of course.
Perfect.
It'll be here before you know it.
All right. Thanks a lot. Thanks for having us today.
Cheers.