Q4 2022 Glatfelter Corp Earnings Call
Ladies and gentlemen, you're currently on hold for the Q4 2020, a tweet 22.
Glatfelter earnings conference call at this time, we aren't many of the small participants and should be underway momentarily. We do thank you for your P census increase continued to remain on the line.
[music].
Please standby we're about to begin.
Okay.
Good day, everyone and welcome to the Q4 2020 to Glatfelter earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to wear a mask set of GARP. Please go ahead.
Thank you Lynette good morning, and welcome to Glatfelter as 2022 fourth quarter earnings Conference call.
This is Rob <unk> Senior Vice President Chief Financial Officer and Treasurer.
On the call to present, our fourth quarter results as Thomas Vitamin President and Chief Executive Officer of blackout, there and myself.
Before we begin our presentation I have a few standard reminders.
During our call. This morning, we will use the term adjusted earnings as well as other non-GAAP financial measures.
A reconciliation of these financial measures to our GAAP.
Based result in today's earnings release and in the Investor slides. We will also make forward looking statements today that are subject to risks and uncertainties.
'twenty, one Form 10-K, and our 2022 form 10, Qs all of which have been filed with the SEC and todays release are available on our website and disclose factors that could cause our actual results to differ materially from these forward looking statements.
These statements speak only as of today, and we undertake no obligations to update them.
I will now turn the call over to Thomas Thank you Ramesh.
Hello, everyone and welcome to Gladstone does fourth quarter conference call. It is a pleasure to be with you today.
Having now completed my first full quarter as Gladstone, let's see Oh I'm encouraged by the performance we delivered during the fourth quarter of 2022.
Our global team has quickly embraced the turnaround plan I allowed shortly after joining clubs photo.
Through their efforts, we delivered adjusted EBITDA of $25 4 million for the underlying business when excluding the one time impact from a supplier quality issue that occurred in the quarter.
This result was on the upper end of our guidance of $23 million to $26 million.
When reflecting the financial impact of this issue our adjusted EBITDA was $22 3 million.
Our efforts were focused unimportant pricing actions and targeted productivity improvements across our three segments and we continue to shape the organization by investing in key talent to strengthen our operations leadership bench.
Performance in L, a and materials and composite fibers improved compared to the same period, a year ago and spun laced performance demonstrated improvement compared to the prior quarter driven primarily by our brand that's on top of our pricing actions.
In addition, the team achieved positive cash generation and improvements in working capital through concerted efforts to aggressively manage our accounts receivables and reduce inventory.
As anticipated our business continued to be impacted by macroeconomic challenges related to energy and raw material inflation as well as seasonal shifts in order patterns and demand.
Despite these challenges I remain confident in the underlying fundamentals of the business and the importance of continuing to deliver on our turnaround strategy in 2023.
I will provide additional details on our progress with the Toronto launched towards the end of today's call.
Before turning the call over to Ramesh I'm very pleased to share that perhaps there does signed a binding commitment letter with Angelo Gordon for a new six year term loan that will give the company sufficient runway to meet its financing needs for the long term.
This financing also allows us to address the upcoming February 'twenty 'twenty four debt maturity.
We are working with Angelo Gordon and its advisors and our bank group led by PNC to close the financing by the end of the first quarter.
Ramesh will now provide additional details on our fourth quarter financial performance Ramesh.
Thank you Thomas.
Slide three of the Investor presentation provides a summary of our fourth quarter performance, we reported a GAAP EPS loss of <unk> 76 cents for the quarter, which was primarily due to a goodwill impairment charge taken in composite fibers, resulting from the higher interest rate environment, and an asset impairment charge related to our oberst smitten operation.
Which is part of the composite fiber segment.
Adjusted EBITDA was $22 $3 million compared with our guidance range of $23 million to $26 million and includes a one time charge of $3 $1 million related to a customer claim that was caused by defective raw material from a synthetic fiber supplier.
Excluding this one time charge, which was not anticipated in our previous guidance, we were near the upper end of the EBITDA range for the fourth quarter.
Our lead materials in composite fibers operating income were both higher by 19% and 8% respectively compared to the fourth quarter of last year.
This was mainly driven by higher selling prices, resulting from multiple pricing actions taken in 2022, along with raw material pass through provisions and energy surcharges, helping offset inflationary pressures and narrowing the cumulative price cost gap from prior quarters.
Spun laced operating income was in line with Q4, 2021, but improved sequentially by approximately $3 $4 million from Q3 of 2022.
This segment also delivered benefits from selling price actions and cost controls to offset the continued inflation.
Working capital was positive in the fourth quarter, largely due to the inventory reduction initiatives as part of our ongoing focus on cash liberation.
Slide five shows a summary of fourth quarter results for early materials revenues were up 16% on a constant currency basis versus the same period last year, mainly driven by higher selling prices of approximately $23 million stemming from contractual cost pass throughs as well as price increases initiated for other <unk>.
Customers without such arrangements.
Volume was lower by 5% year over year, mainly driven by shipments in wipes home care and hygiene categories. The wipes decline was related to end consumer demand softening at the end of the quarter due to inflationary pressures on multi pack sizes, while the home care and hygiene declined.
It was more related to customer ordering patterns.
Operations and production were slightly unfavorable to the prior year, while mostly offset by lower spending on personnel costs.
Foreign exchange and related currency hedging was in line with the fourth quarter of last year.
Slide six shows a summary of fourth quarter results for the composite fiber segment.
Total revenues were up 12% on a constant currency basis, despite volume being lower by 17% versus the same quarter last year.
The revenue increase was mainly due to higher selling prices of approximately $19 million as we have successfully converted over half of the segment's revenue base to a floating price mechanism, coupled with multiple pricing actions and energy surcharges taken in 2022 to combat inflation.
All categories expect except food and beverage were lower versus last year.
I'll cover shipments accounted for approximately half of the volume decline as this category was the most impacted by EU sanctions on products sold into the Russian market.
Overall, this lower volume unfavorably impacted results by <unk> $6 million as the shortfall was partially offset by better mix from higher food and beverage shipments.
Continued escalation in the price of energy key raw materials, and freight lowered earnings by $14 $9 million versus the same quarter last year.
Operations and other were unfavorable $4 $5 million driven by lower production to manage inventory levels, but partially offset by reduced spending and lower depreciation following the Dresden impairment taken in the first quarter of 2022.
Foreign exchange was favorable $1 $5 million from the weaker British pound, creating a benefit in our U K manufacturing cost footprint.
Slide seven shows a summary of fourth quarter results for the spun laced segment.
Revenues were up 45%, while shipments were 20% higher than fourth quarter of last year, mainly driven by one additional month of ownership and shipments this year compared to the prior year.
Selling prices and energy surcharges were higher by $12 $7 million and more than offset the continued raw material and energy inflation.
Favorably impacting results by $1 $5 million the volume impact was only slightly favorable despite higher year over year shipments from the additional month, but was mostly offset by higher fixed costs.
Operations FX and other items were a net $1 $5 million unfavorable mainly driven by lower production to manage inventory levels and improve cash flows.
However, spending on personnel was lower reflecting the actions taken since the acquisition the manage the cost structure and integrate the segment into the broader glatfelter portfolio.
Slide eight shows corporate costs and other financial items.
For the fourth quarter corporate costs were higher by approximately $2 million versus the same period last year due to the one time charge of $3 $1 million from a customer claim caused by a defective synthetic fiber materials.
After an extensive review our quality and commercial teams proactively took the necessary steps to settle the matter directly with our customer.
This has this has no this has not impacted our relationship with the customer and we continue to ship other products in normal course.
In addition, we have also initiated a claim with the fiber supplier and its insurance carrier to recover our losses related to this issue.
Timing and final amount of the settlement is not known at this point.
Since this charge was related to a new product offering that never made it to market, we have recorded in corporate and other.
Excluding this one time charge corporate costs were actually $1 million, lower reflecting reduced incentive accruals and head count actions taken as part of our turnaround plan.
Slide nine shows our cash flow summary on a full year basis. Our 2022 adjusted free cash flow was lower by approximately $140 million versus 2021, primarily driven by higher working capital usage of $74 million.
Working capital was driven by multiple factors, including higher inventory values.
Due to the significant inflation in raw materials and energy consumed to produce our products elevated accounts receivables due to price increases and the termination of our U S. Panelist factoring program in place when we acquired the Akaba home business.
Lower earnings negatively impacted cash flows by $21 million and higher capital expenditures added $8 million to the cash usage.
Other contributing factors were higher taxes and higher cash paid for interest.
Slide 10 shows some balance sheet and liquidity metrics, our bank covenant leverage ratio increased to six times as of December 31.
Mainly due to the customer claim related to the 40 fiber materials.
As Thomas mentioned in his opening remarks, we have executed a commitment letter to refinance our upcoming debt maturity with a new six year term loan and around the process of working with Angelo Gordon and our Bank group led by PNC to conclude the financings by the end of the first quarter.
Our available liquidity at the end of Q4 was approximately $90 million and our near term focus continues to be on earnings growth cash flow generation, completing our refinancing and delevering the balance sheet.
Slide 11 is a summary of our guidance for 2023.
Looking ahead to the current year, we are optimistic about the company's earnings potential and the growth we expect to see at some of the macroeconomic headwinds abate, including Germany's introduction of an energy price cap program.
The expected year over year EBITDA improvement can be largely attributed to traction from our turnaround strategy and favorable pricing offsetting raw material and energy inflation.
Furthermore, we're moving away from sequential quarter guidance to provide to providing annual guidance for.
For 2023, we expect full year EBITDA in the range of $110 million to $120 million.
Corporate costs of approximately $28 million, including incentive accruals.
D&A expense of approximately $64 million and full year interest and other financing costs to be approximately $73 million, which includes the latest projection of interest expense from the refinancing to be completed in the first quarter.
As for our class cash flow items, we expect capital expenditures, including spineless integration to be between 35 and $40 million. This is in line with our 2022 spend and further highlights our disciplined capital allocation.
We expect working capital to improve year over year by $20 million on account of lower inflation in raw materials and energy and continued focus on cash liberation actions.
And finally cash taxes are expected to be between 20 and $25 million.
This concludes my prepared remarks, I will now turn the call back to us. Thank.
Thank you Ramesh.
When I first introduced the concept of the turnaround plan I was optimistic we would begin to see improvements in our performance. During the first half of 2023 today I am pleased to say, we actually gained some early results with executing the plan as our fourth quarter EBITDA benefited by nearly 4 million.
Yeah.
I remain confident in our ability to perform to the standard that has been set by the tunnel one strategy through a disciplined approach and project management office, whose sole responsibility is to hold the team accountable for delivering results.
To recap the tone of one strategy.
Comprised of six key initiatives some of which we discussed earlier in today's call first portfolio optimization second margin improvement.
Third fixed cost reduction.
Cash liberation fifth operational.
Original effectiveness and six returning spun laced to profitability.
Our efforts with portfolio optimization are progressing as we review every part of the portfolio and consider the strategic and financial value of each asset for the near and long term.
We have not yet communicated any planned changes on this specific initiative. However, we continue to progress the essential work that is required to refine our portfolio and operational footprint.
Our main goal is to align our assets that have scale or the potential for scale are market leaders and fit well with clubs there does overall strength.
Turning to margin improvement, we began to see marked improvement in our fourth quarter results in the Elliott materials and composite fibers segment as well as our Sentara branded products and our spun laced segment.
This was achieved through our commitment to place greater focus on profitability rather than simply topline growth.
And while volumes may be impacted in the short term.
This initiative and subsequent pricing actions are absolutely essential to improving EBITDA and overall margins.
As inflation continues to be volatile.
We are confident in our ability to price our products competitively and at a productive way to improve our overall profitability.
Our third initiative is focused on reducing our fixed costs and achieving a leaner cost structure.
We are well on the way towards implementing full year run rate savings of approximately $11 million by 2024 with nearly 60% of the actions taken during the fourth quarter of 2022.
It is never easy to eliminate jobs throughout the organization and we remain committed to not risk jeopardizing safety product quality or investments in our people.
Additionally, we have initiated actions to examine indirect spending and I look forward to providing an update on the additional upside savings in this area as we progress the work.
As both Ramesh and I discussed earlier in today's call our fourth initiative cash liberation significantly contributed to our quarterly results.
[noise] work within this initiative is solely focused on paying down debt decreasing our leverage and increasing EBITDA.
The team working on this initiative is continually reviewing our capital allocation managing our accounts receivables and reviewing finished goods inventory and raw material pricing.
These efforts are in addition to the board's previously announced decision to suspend the dividend, which will free up approximately $25 million of cash annually.
Turning to initiative number five operational effectiveness.
The work in this area is arguably the most complex of our turnaround actions.
Each of our manufacturing sites have pocketed initiatives that collectively totaled $10 million of improvements, while also managing raw materials inventory levels and ongoing capital improvements.
In addition, we are well underway with rolling out stand at six Sigma principles to provide the tools needed to drive improvements, while ensuring we maintain excellent customer service.
This initiative is essential for offsetting the impact from a continued volatile labor market and ongoing wage inflation.
Our sixth initiative is aimed at improving performance in our spun laced segment, which comprises each of the previous five turnaround initiatives.
As mentioned earlier, we are pleased by the initial signs of progress, but we must continue with the intensity and urgency needed to achieve step change improvements. In this segment also the team continues to do good work to further leverage this on top of our branded business given its nonwovens manufacturing.
Technology and complementary fit to the elite and composite fiber markets.
So simply summarize our turnaround efforts to date the progress we made in the fourth quarter is just the start.
But to be successful in the months ahead, we must progress our key initiatives with speed and tenacity, while we continue to manage the price cost gaps that would prevail until energy prices better stabilized and raw material prices return to more normal levels.
I'm proud of our club sell our colleagues as they remain committed to driving the turnaround plan and focused on the fact US was in that daily control.
Working safely adapting to the menu required operational improvements and accepting new and expanded accountability all within the spirit of <unk> core values.
Okay.
Before opening todays call for questions I want to take this opportunity to speak to a few longer term strategic initiatives that we are progressing in parallel to the turnaround.
We recognize that to make a positive impact on our communities. We must first ensure we remain a profitable and growing business that begins with our turnaround strategy.
And while important the toner one strategy is simply not enough for us to deliver on our commitment toward addressing the world's easy G mandate, which leads me to discuss our innovation strategy.
Having now spent time assessing the company's approach to innovation.
I'm excited and confident.
That our focus on sustainability and new product development will provide the platform for cloud tell us long term organic growth.
As part of our ongoing work I'm pleased to share that we issued our 2022 sustainability report in December that outlined our first ever strategic ESG goals.
These cohorts are directly tied to our environmental social and governance and ethics priorities.
And will guide, our ESG and new product development efforts for the coming years.
In addition, we continue to invest in new product innovation to find alternative solutions through the use for renewable materials combined with our unique manufacturing technologies.
So with this approach we will create a competitive advantage for our customers as recently confirmed by our Blue Ocean closures initiative to develop an innovative natural fiber based SKU cap.
Perhaps most notably on the innovation front. The team has made excellent progress in the past several months with the development of our nonwovens based lithium ion battery separator, we are actively evaluating product drive material and reviewing the products unique characteristics and benefits with several key customers who are keenly.
Interested in the technology.
It's still early in the process, we look forward to sharing more details about the potential impact this product could have on the electrical battery market.
With that I will open the call for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
You are joining us today using speaker phone. Please make sure. Your mute function is turned off to a lack of signal to reach our equipment.
That is followed by the digit one we'll pause for just a moment.
I'll take your first question from the line of Roger Spitz Bank of America. Please go ahead.
Thank you good morning.
Yes.
Hey, Roger couple.
A couple of things.
On the free cash flow slide.
The 2023 interest other financial of 73 million is that meant to be a bulk number or is that a cash number which potentially would include.
Yeah.
Refinancing costs.
Sure Yeah, Roger that is April number the cash piece of that is about $60 million.
And the rest would be accruals some supply chain financing program costs, and so on but the cash interest out of that 70 threes about expected to be about 60.
Okay and that does that include the.
The two points upfront related to the.
The new $250 million 50 million Euro note.
Term loan well.
Presumably I D.
Yes, the amortization of that will be included is included in the 73, but not the entire 73, because that's amortized over the life of alone.
Okay got it.
And then.
Hi.
Let me, let me come back Thats. Good for now thank you sure yes, okay.
We'll hear next from the line of Joshua <unk> with Carlson capital.
Thomas <unk> mesh good morning, and congrats on some of the progress you made in Q4.
Thanks, Josh Thanks, Josh.
I'm going to start with a few high level Big picture questions, mostly around your insights as you've begun to implement the turnaround plan you introduced last quarter and then I have some more specific questions, but I may get back in the queue for those.
Thomas last quarter, you were very direct about the challenges presented by rapid inflation and escalating energy prices, particularly in Europe , while the inflation rate is still objectively high prices are no longer increasing at an accelerating rate.
Energy prices in Europe have cooled. So my question is at a very high level. How much is the macro environment changed and has the current backdrop supportive of your strategy.
It definitely does we have already seen really improvements in the macro environment, the certain raw materials have actually leveled off.
Some freight land costs are really coming down as well a very selective leap, but however, we still have some key raw materials, which are important to us such as fluff pulp, they're really still at elevated levels.
And they'll be going little bit higher so we are still at a very very high level.
Overall, if I look at 2023, we continue to expect raw materials prices to come down as the year progresses, which is actually a good sign for us and also for our customers.
With the pass through arrangements, because we have seen in certain areas that we are at a price level right now where our.
Customers are pushing back a little bit because consumers are not willing kind of to accept these high price levels. So that's actually good news and we are expecting.
As the year progresses.
This will help us.
And again, if I come back maybe to the turnaround strategy.
Again, our objective is to bring really our margins back to the pre pandemic levels. We have made really excellent progress already in the fourth quarter, but our job is not done yet. So we have to continuously work on that and we have to push price increases in order to really close the the price cost gap and.
So I think summarizing the answer for your question I think yes, we the current situation I think will be supportive of our strategy and our goals for 2023.
Okay well.
Let's talk a little bit about that.
Returning profitability to pre pandemic levels, and maybe specific to composite fibers. I know you expressed last quarter. Your goal is to get back to pre pandemic levels and I think you ended 2022.
Pretty far away from that and I'm looking at margin and EBITDA per ton. So not the absolute dollar level. So can you provide any additional insights into the steps youre taking to achieve this goal the timeline necessary and maybe specifically what kind of what level of scale will require given a lot of the volume degradation.
<unk> in this business was related to the conflict in Ukraine and sanctions, so assuming that doesn't change.
We're at the scale you're at so yes.
Maybe you can speak to that.
Yes, and again, Josh I mean, if I look at composite fiber. This is this is a mixed bag you have different segments with different levels of profitability, but what we are looking at right. Now we're looking really segment by segment and this is where we would like to get back to the pre pandemic profitability.
Our if I look at the Dresden asset, which was providing the wall cover a mature for the for the for Russia and the Ukraine. This was a relatively high margin business. So we don't expect over the next two to three years that this will come back to the levels, which we have so we had to substitute.
This piece of business with other businesses, which unfortunately are not really enjoying this kind of margin and there's not much. We can do about it right now to be quite honest what I'm talking about is really that we are looking at the food and beverage sector coffee tea, where we still have a way to go to get back to the profitability, which we enjoyed pre pandemic.
And go segment by segment one of the things we are seeing right. Now is although we are pretty pleased with the development in composite fibers, we see some market weakness right now in the laminate business.
Kind of building industry do it yourself projects and all that so that's leveling off and we are seeing some some weakness right right now specifically in the first half of 2023 and hopefully this will come back in the back part of 2023, but we are looking at it from a segment to segment standpoint, because like I said it always depends on.
On the product mix.
Okay.
One more on this issue can you elaborate on the actions you've taken it over Schmidt and site, including what are the range of strategic alternatives for the site are you considering selling the facility, but moving the volume and customers to another site, we're selling it with the customers and volume.
And then maybe Relatedly you mentioned Dresden I would've thought that this would have been kind of at the top of the pecking order given it was so directly impacted.
By the conflict in Ukraine, and the sanctions.
What is the status of reviewing alternatives for that side, either reducing production to make back those fixed costs or anything else.
Okay, Yeah, let me start with Wedbush Mitten, and also you're absolutely right Uber Schmidt in this part of our evaluation and right now all options on the table.
Okay. So we're looking at everything right now and working through all the details but.
But can just re emphasize all options are open.
As far as straightness concerned.
We really evaluated Dresden, but despite the fact that we lost the Ukraine Russian business, Russia business in early 2022.
<unk> is still providing positive EBITDA, so dresden is accretive to our bottom line and.
And we have been able and this by the way with utilization rates, which are far away from being optimum because we lost all of this volume. So we were able to kind of fill part of the.
Idle capacity with other businesses I mean, we are focusing on more copper in western Europe , Unfortunately, not as profitable as the Russian Ukrainian business, but still we filled it up and we're also looking at our innovation chain and we have some products, which we were able to convert to <unk>.
I don't want to paint a picture that raised and is fully loaded we are still away and we still have a lot of idle capacity in there but rates is accretive and is providing a positive EBITDA. So Tracy right now is not on the table as far as our portfolio issue is concerned.
Okay.
Maybe one more for me and then I'll get back in the queue.
Thomas you've had the benefit now of six months to evaluate Yakov home. So I have a few questions about the business I'm just going to ask all the questions and you can answer them in parts are collectively.
First do you have any significant observations about the key drivers of Bianca palms historical profitability, including the contribution from Sun Taro versus the more commoditized product lines relate.
Relatedly do you foresee changes around which markets Youre you choose to participate in your approach to pricing and strategies to leverage this Ontario brand more and then more generally what are the priorities.
To get the most out of this business in the medium and long term.
I will get back in the queue okay.
Yes, maybe to the first part what kind of contributed to the performance of a jackal palm before we acquired the company I think if you look at.
All the details on tower really generated the majority of the profit prior to Covid and during Covid.
And also the Covid tailwind significantly helped the medical business wholesale antero surgical drapes gowns masks and.
<unk> component and it also helped the hygiene and wipes business at Asheville unfolds.
Yeah, a couple of unsecured additional hard surface cleaning wipes contracts and also benefited from traditional wipes being used in new ways. You remember during the pandemic I mean, you just needed to get product price was not even a discussion point.
And specifically as fluids benefited from really making components of feminine hygiene products in diapers that have transitioned from cod spun laced to span led technology at much lower basis weights. Because this was really a big uplift for solar in that specific time during the pandemic.
And during that time prices were trending higher and raw material costs were falling providing a price benefit to cost I mean, the spreads just widened so I hope that addresses your question why these profit as well as high as they were.
And.
Looking forward I mean, our focus and what we envision as a much stronger focus on fonterra on critical cleaning and transitioning really our coated medical products Paloma fluorocarbon coding towards a more sustainable coated material.
To meet the changing regulations, which we expect to take place in Europe .
And we have a strong pipeline of sustainable offerings in both businesses and if you look at this in order to be plastic free in August you need binders in chemicals, and adhesive free and we need to use these products to produce on tower, we are making a lot of good progress and we are really very exciting projects in the <unk>.
Pipeline, specifically postal entire well.
And we also now leveraging and we're already seeing a <unk> us in the U S. But our biggest target market is really Europe and the rest of the world and we are leveraging the Sentara brand is a key differentiator and our sustainable offerings.
As a branded product we can offer sustainable products and I mean this is what we are pushing right now and we are producing them with a higher percentage of sustainable materials and relative to the alternatives, which are in the market.
And if our goal with this one part of the business. The second part of the business, our hygiene and wipes.
And I can just say the same I said three months ago, we have to really transform.
To a lower cost and operational stable manufacturer, we are making good progress I can tell you right now month by month, we are making progress it gets better but it just takes time.
And.
Again, the previous honest didn't accomplish this and we just really need to transfer this business to a low cost and and operational excellence needs to be introduced in that area and so we are really working hard and the team is working extremely hard at Asheville and salts to optimize these assets.
And really improving them and again I can just.
Repeat myself I mean, I'm really pleased with the progress we are making its little steps as mentioned been operations. The most complex area. We are dealing with but we're making progress every month is getting better.
And.
And again innovation also in this area might help us in order to get newer products on these lines switch.
Hopefully generating higher margins, but the biggest focus for the wipes and hygiene business in <unk> is to become more competitive by improving our operations.
Yeah.
At this time.
The next line in queue, Sean Nicholson from think O'brien Your line is open.
Good morning, guys.
I did want to ask I guess, maybe you can remind me or tell me if I'm wrong, but this is the first time I've seen annual guidance provided usually it was obviously the kind of forward looking quarter.
So kind of what made that.
Do you guys kind of think you had a good picture of the year in terms of.
How to put out a kind of a general range. There of what you can do on an EBITDA basis versus maybe.
So in the past.
Okay, Yes, maybe let me let me let me start giving you our rationale behind this and then maybe Ramesh can can add some details on that I mean to be honest our thinking right. Now is number one I think it's important to give our investors a yearly forecast will to see what they can expect on a yearly basis.
We are still seeing high highly volatile environment, and we'll have changes quarter by quarter. If I look at the things, which we can manage and we can control.
We would expect that quarter by quarter, you should see improvements in order to get to the 110 to 120, so actually more heavy load on the back end as we implement and are successful in implementing the steps what we're trying to walk strategy if I look at the.
Fixed cost reduction I mean, like I said, 60% of the program is already executed just takes time in Europe , you have longer time to get people.
And so you will see improvement quarter by quarter, but on the other hand, we still have a highly volatile environment and we need to be very quick in our decisions and so we think it makes much more sense to give a yearly forecast because we feel very confident to kind of get into the 110 to 120 range, but quarter by quarter you mean.
See some changes and you might see some fluctuations up and down but in general the things, which we can control you'll see you should see improvement quarter by quarter.
And Shaun what I would add to that is we've received feedback from investors over time and I you know I've been in the IR role for over six years and having seen the transformation when we sold our specialty papers. We did these acquisitions I think investors are looking for additional clarity around what the medium term picture looks like and when work.
Giving one quarter at a time guidance for each of the segments I think the bigger picture gets lost in that translation and so we wanted to kind of move away from that help complete the picture as Thomas mentioned with the turnaround strategy being a very significant element of our short to medium.
Term performance I think having investors understand what that looks like what that aggregates up to.
On a year over year basis.
We think is helpful and that is really I would say, what I would add to what prompted us to move from quarterly to annual.
Okay. That's helpful.
Just on the leverage side as you guys kind of think through that.
If you end the year in that guidance range.
Sure.
From an from deleveraging is that going to come predominantly from an asset sale versus any other.
Free cash flow that that re emerge I know you have some working capital tailwind, but you have higher interest costs.
And so when you kind of think through.
That will drive.
<unk> lower would have to be kind of an asset.
Sales side of it yes.
I would say it's.
It could come from multiple areas, Sean Theres no one piece that will solve.
The leverage formula for Us clearly the increase in EBITDA year over year from where we were of $99 million in 2022 versus we're guiding to 110 to 120 that that is a meaningful amount of improvement on EBITDA, we've talked about trying to improve our working capital by about.
$20 million compared to what the use of cash was in 2022.
We've talked about portfolio optimization, so youre right some asset sales could potentially contribute to that we're trying to keep.
Our capex as tight as we can cut.
Cut down we've eliminated the dividend that which we did last year. So I would say, it's multiple things all kind of coming together to help improve our leverage picture as we look forward here to 2023 and beyond and just classify it as being asset sales solving that equation for us.
Okay got it and then one last one on pricing I know you've talked in the past you guys don't really had to eat a lot of that inflation early on.
Over the last year or so in terms of the pricing kept up with the.
The raw material inflationary backdrop last couple of quarters at least.
You haven't really been able to obviously go back and try to recapture what you've already had to absorb is that.
Look at the pricing I guess strategy this year.
Do you think that's able to happen where you can try to not only cover what to.
Today, but kind of recapture some of the lost profitability of the past.
Yeah, Let me let me answer this and again I think we have to differentiate a little bit by segment.
I think our airline segment is more or less fine I mean, we had we were able to pass that on and there was not actually a lot of issues. The composite fibers on the other hand, you're absolutely right there was actually a.
Cost price gap, which accumulated over the year and what we were able to do.
In the fourth quarter I mean, we initiated this in September and we implemented it is in October and November that we kind of.
Put the margins back to where they were before the inflation hit. So this is kind of end of 2021 levels.
Some things didn't really materialize in Q4, because we had customer commitments until the end of the year, we had to honor that but you should see this probably in Q1 coming through there. So thats something where we said okay. We are back to where we were but we haven't really recovered the $70 million to $80 million.
If you will.
Price cost gap, which accumulated in 2022, what we would expect is with prices hopefully coming down.
In Q2, Q3, Q4 that we would hopefully benefit from a little bit of windfall profits. If we are able to hold on to certain prices a little bit longer.
But to be very realistic.
<unk> talked before about $70 million to $80 million in cost price cap.
Don't think its realistic to expect that we are even getting close to that number might be five to 10, maybe if we're really successful, but yes part of it small amount, but we might be able to get this through the fact that raw material prices are coming down we will hopefully be able to hold onto higher prices a little bit longer.
But we will not be even close to the money, which accumulated in 2022 as fast related to the price cost gap.
And the same as <unk>.
In the span less area I.
I think we were very successful in fonterra on the other hand in the hygiene wipes area I mentioned before and Thats also where we lost volume on purpose, because we need to get our assets to the point, where they are really competitive.
I think that's fine.
The other problem here. The big question is really improving and increasing market share I mean, we have a pretty decent market share in the U S and our main focus is to get in.
And really penetrate Europe , and the rest of the world, where we see a lot of potential.
But hygiene wipes is still more mainly focused on operations and improving our operations in order to be competitive and then we can also get our volumes back.
Thank you.
Mhm.
The line of Roger Spitz from Bank of America with a follow up.
Thank you for the follow up.
<unk>.
2023 cash flow items, plus $60 million.
Cash interest item suggest 2023 cash flow of about $15 million.
But I'm wondering whether the sort of the new debt issue cost and perhaps any restructuring new initiative costs.
I will just make this closer to.
Just slightly positive 2023 fee free cash flow.
Yeah. So Roger good question first of all I just wanted to clarify.
When we look at the with all the guidance, we provided and we look at where the free cash flow as it will still be a negative free cash flow call. It.
$20 million to $30 million and Thats, primarily driven by this elevated interest expense or interest cost that we're going to be having from the refinancing.
Yes, there will be other cash uses as well like you mentioned that cost restructuring and so on but we're still working through all that.
Which will be incremental to.
The negative free cash flow, but we certainly see this as an improvement from 2022 going into 2023, and that's really what we wanted to make sure folks understood which is were.
Improving earnings were staying as tight as we can on Capex, we'll have elevated interest will have some improvement in working capital.
Cash taxes will be relatively flat.
And so.
Net net free cash flow will still be negative going into 2023, but the idea is to then.
Take some of the actions that are Thomas has been talking about regarding portfolio optimization, and so on and try and get that to a positive free cash flow and then continue to pay down debt.
Got it and that $16 million 20.
2023 cashed.
Interest does that include a full <unk>.
Cash pay or would you be making use of the up to 5%.
The new debt.
Yes.
Yes, so for right now that 60 assumes that we will pay the full cash interest for.
Great.
And then Kurt.
Lastly in terms of liquidity, so you're replacing the 220 million euro with a 250 million euro.
There's a two.
2% OID in that class.
Would you have pro forma additional maybe 30 or more million dollars of cash on the balance sheet pro forma for doing the refinancing does that give you that extra liquidity.
Well, yeah, I mean, you've got to also think about we will be using that to pay down some of our revolver borrowings. So that we're not grossing up the balance sheet. We've got some of the German <unk> b.
BW term loans that are coming due here later this year. So those will all eventually get used to pay down some of the other smaller debt maturities that we have later this year Roger So I wouldn't think of the balance sheet getting growth stopped for that delta of $30 million. If you will of extra proceeds from the from the new terms.
Loan.
Makes sense. Thank you very much for mesh.
Okay. Good.
Yeah.
We'll go to a follow up from Josh well from Carlson capital.
Hey, guys I just had two more questions first can you provide a little bit more detail on how the gas caps in Germany.
Impact your costs, either direct costs Youre hedging program, where maybe its just reducing the volatility associated with price spikes that may have occurred.
In energy prices going forward.
Okay. Yeah, Let me let me let me let me try to.
Talk about to that.
If you look at the if you could talk about European gas caps I mean, this is actually Germany.
And this is the majority of our business and so what Germany did as they introduced gas cap and also actually a power cap price I mean, the gas cap is at 70 euros per megawatt hour and power is at 130 <unk>.
Megawatt hour and Thats actually.
But the government us as they look at your portfolio price. So whatever you did as far as hedging is concerned or pre buying or whatever so you apprised, if not higher and let me let me take gas as an example.
Then 70 euros per megawatt hour, okay. So thats kind of how the system works. The system is in place until the end of.
The first quarter of 2024.
Four five quarters and this is the guarantee guaranteed.
The price cap for the company, Okay that helps actually from Mandalay with our planning and all of this because we know and as you will remember Josh.
We have prices last year of $302 50, all over the place. So the 70 is really helps tremendously interesting what happened in the last I would say eight to 12 weeks due to the fact number one that the inventory of gas inventories in Europe overall, but specifically in Germany, we're really.
Hundred percent so they went into the season with full inventory.
And Luckily a relatively mild winter so not a lot got consumed so that even inventories right now end of February at relatively high levels, which actually enterprise cap kind of drove the market price down I mean, the market price was sometimes below the cap so but just even the best.
Outcome to be honest that the market is actually driving that way so.
Despite the fact and again the 70 euros is still probably four five times higher than the gas price in the U S. I mean, I, just don't want to ignore that but compared to what we were faced with in 2022 is a big relief for everybody not just for us, but also for our customers our suppliers and for that I mean, it gets through.
Certain planning stability and the best thing to be quite honest that happened is that the market is falling in line now and is actually stabilizing around this level and by the way. The same is true for power at the 130 level, Okay. So thats kind of helping and while I talked about Germany.
More or less in other ways and other government programs, France, and the UK are doing kind of the same thing so.
So this is kind of where we are right now and I have to say it really helps and.
And not just us, but the whole value chain.
Okay I've just got one more.
Pretty open ended question and just thinking about high glatfelter as reporting structure versus how you manage the business.
Since you completed the occupying deal and I guess more specifically.
<unk> always reported kind of on the basis of a product substrate, but now you have two substrates are laid in spot noise that could sell the same product, let's say a wipe into the same customer or even the same end market.
Planned marketing pricing R&D and other strategies do you plan by end market, let's say healthcare market consumer and if so.
Is that reporting structure or are there benefits to that versus doing it by substrate now that you have to kind of adjacent substrates and airways and spot noise.
Yeah, Okay. That's a good question.
And we had a lot of internal discussions about that so let me just tell you where we are right now so we are already aligning our organizations more towards end markets.
And we have also made steps in composite fibers.
And the innovation area and in ops.
Kind of to align more towards this kind of end market.
Our segmentation because it doesn't make any sense if the cloud further rep coming to one company three time. It just doesn't make any sense. So we are already doing that so that the customers are concerned we are already aligned by by really segment there.
What.
We also did is early January and I mentioned this before we really improved our.
Our expertise and knowledge SaaS operations is concerned we really very happy to have two.
Leadership ops people onboard and we are already aligned them along the segments and not really biotechnology. If you will so that's already taken care off now.
As it comes to public reporting and Josh.
Josh.
I mean, if I could do it I would do it immediately to be quite honest, but do know that this requires significant changes in our systems and all other things. So we are starting the work but to be quite honest as fast priority is concerned I think with our turnaround strategy.
I am extremely excited about the innovation side and the pipeline that we need to push this in order to really generate organic growth for us I think these things have higher priority ultimately I think you're absolutely right. I think we should probably report more towards market segments end markets, but I cannot promise that this will happen in the next 18 or 20.
Four months because this requires a lot of internal work as false reporting is concerned it systems and all that and right. Now we just have other priorities to be quite honest, we need to get the turnaround strategy that we need to kind of.
Develop the platform for organic growth with our innovations that has a higher priority than that but is this something we would like to go to absolutely.
Perfect well, thanks for all and it will take time.
Okay, great. Thanks.
Thanks for all the details guys Thats it from me.
Okay. Thanks, Joe.
At this time that does conclude our Q&A portion of today's call I would like to turn the conference back over to Thomas for any closing or additional remarks.
Okay. Thank you very much for your interest and the time you spent with US and then this concludes our call. Thank you. Thank you.
That does conclude today's teleconference. We thank you all for your participation.
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