Glatfelter (GLT) Q4 2022 Earnings Call Transcript

Glatfelter (GLT 5.20%)
Q4 2022 Earnings Call
Feb 21, 2023, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Q4 2022 Glatfelter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ramesh Shettigar. Please go ahead.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Thank you, Lynnette. Good morning, and welcome to Glatfelter's 2022 fourth-quarter earnings conference call. This is Ramesh Shettigar, senior vice president, chief financial officer, and treasurer. On the call to present our fourth-quarter is Thomas Fahnemann, president and chief executive officer, 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 results is included 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. Our 2021 Form 10-K and our 2022 Form 10-Qs, all of which have been filed with the SEC, and today's 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.

Thomas Fahnemann -- President and Chief Executive Officer

Thank you, Ramesh. Hello, everyone, and welcome to Glatfelter's fourth-quarter conference call. It is a pleasure to be with you today. Having now completed my first full quarter as Glatfelter CEO, I'm encouraged by the performance we delivered during the fourth quarter of 2022.

Our global team has quickly embraced the turnaround plan I announce shortly after joining Glatfelter. 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. And 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 on important 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 airlaid materials and composite fibers improved compared to the same period a year ago, and spunlace performance demonstrated improvement compared to the prior quarter, driven primarily by our branded Sontara pricing actions. In addition, the team achieved positive cash generation and improvement 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 turnaround toward the end of today's call. Before turning the call over to Ramesh, I'm very pleased to share that Glatfelter 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 2024 debt maturity. We are working with Angelo Gordon and its advisors and our bank group, led by PNC, to close the financings by the end of the first quarter. Ramesh will now provide additional details on our fourth-quarter financial performance. Ramesh.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Thank you, Thomas. Slide 3 of the investor presentation provides a summary of our fourth-quarter performance. We reported a GAAP EPS loss of $0.76 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 OberSchmitten 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. Airlaid materials and 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. Spunlace 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 5 shows a summary of fourth-quarter results for airlaid 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 costs pass-through, as well as price increases initiated for other customers without such arrangements.

Volume was lower by 5% year over year, mainly driven by shipments in wipes, homecare, and hygiene categories. The wipes' decline was related to end consumer demand softening at the end of the quarter due to inflationary pressures on multipack sizes, while the homecare and hygiene declines was more related to customer ordering patterns. Operations and production were slightly unfavorable to the prior year while mostly offset by lower spending and personnel costs. Foreign exchange and related currency hedging was in line with the fourth quarter of last year.

Slide 6 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, except food and beverage, were lower versus last year.

Wallcover 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 $0.6 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 7 shows a summary of fourth-quarter results for the spunlace 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 improved cash flows. However, spending on personnel was lower, reflecting the actions taken since the acquisition to manage the cost structure and integrate the segment into the broader Glatfelter portfolio.

Slide 8 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 material. After an extensive review, our quality and commercial teams proactively took the necessary steps to settle the matter directly with our customer. 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. The 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 it in corporate and other. Excluding this one-time charge, corporate costs were actually $1 million lower, reflecting reduced incentive accruals and headcount actions taken as part of our turnaround plan.

Slide 9 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 receivable due to price increases, and the termination of a U.S. spunlace factoring program in place when we acquired the Jacob Holm 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 31st, mainly due to the customer claim related to the faulty fiber material.

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 are in 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 as 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 providing annual guidance. 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 cash flow items, we expect capital expenditures, including spunlace integration, to be between $35 million 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 million and $25 million. This concludes my prepared remarks.

I will now turn the call back to Thomas.

Thomas Fahnemann -- President and Chief Executive Officer

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'm pleased to say we actually gained some early results with executing the plan as our fourth quarter EBITDA benefited by nearly $4 million. I remain confident in our ability to perform to the standard that has been set by the turnaround strategy through a disciplined approach and project management office whose sole responsibility is to hold the team accountable for delivering results.

To recap the turnaround strategy. It's 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; fourth, cash liberation; fifth, operational effectiveness; and sixth, returning spunlace 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 plan 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, and market leaders can fit well with Glatfelter's overall strength. Turning to margin improvement. We began to see a marked improvement in our fourth-quarter results in the airlaid materials and composite fiber segment, as well as our Sontara branded products in our spunlace segment.

This was achieved through our commitment to place greater focus on profitability rather than simply top-line 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 rate 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 toward 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 investment 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.

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 receivable, 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 targeted initiatives that collectively total $10 million of improvements while also managing raw materials, inventory levels, and ongoing capital improvements. In addition, we are well underway with rolling out standard 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 spunlace 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 the step-change improvements in this segment, although the team continues to do good work to further leverage the Sontara branded business, given its nonwovens manufacturing technology and complementary fit to the airlaid and composite fiber markets. To simply summarize our turnaround efforts to date, the progress we made in the fourth quarter is just the start. For us 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 will prevail until energy prices better stabilize and raw material prices return to more normal levels.

I'm proud of our Glatfelter colleagues as they remain committed to driving the turnaround plan and focused on the factors within their daily control, working safely, adapting to the many required operational improvements, and accepting new and expanded accountability, all within the spirit of Glatfelter's core values. Before opening today's 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 turnaround strategy is simply not enough for us to deliver on our commitment to addressing the board's ESG 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 Glatfelter's 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 goals 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 to 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 screw cap. Perhaps, most notably, on the innovation front, the team has made excellent progress in the past several months with the development of a non-woven-based lithium-ion battery separator. We are actively evaluating product trial material and reviewing the product's unique characteristics and benefits with several key customers who are keenly interested in the technology, but 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll take your first question from the line of Roger Spitz of Bank of America. Please go ahead.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning.

Thomas Fahnemann -- President and Chief Executive Officer

Hey, Roger.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Just a couple of things, Ramesh. On the free cash flow slide, the 2023 interest, other financial of 73 million, is that meant to be a book number, or is that a cash number which potentially would include, you know, the debt refinancing costs?

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Sure. Yeah, Roger, that is a book number. The cash piece of that is about 60 million. And the rest would be accruals and supply chain financing, program costs, and so on.

But the cash interests out of that 73 is about -- expected to be about 60.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

OK. And that -- does that include the 2 points upfront related to the new $250 million -- €250 million six-year term loan?

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

No.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Well, how much presumably?

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Yeah. 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 the loan.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

All right. OK, got it. And then, let me come back. That's good for now.

Thank you.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Sure, yeah. OK.

Operator

We'll hear next from the line of Josh Wool with Carlson Capital.

Josh Wool -- Carlson Capital -- Analyst

Thomas, Ramesh, good morning, and congrats on some of the progress made in Q4.

Thomas Fahnemann -- President and Chief Executive Officer

Thanks, Josh.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Thanks, Josh.

Josh Wool -- Carlson Capital -- Analyst

You know, 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, and energy prices in Europe have cooled.

So, my question is, at a very high level, how much has the macro environment changed, and is the current backdrop supportive of your strategy?

Thomas Fahnemann -- President and Chief Executive Officer

OK. OK, yeah. Thanks, Josh. Definitely, we have already seen really improvement in the macro environment.

Certain raw materials have actually leveled off. Some freight land costs are really coming down as well, very selectively. But however, we still have some key raw materials which are important to us, such as pulp. They are really still at elevated levels and might still be going a 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 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, that this will help us.

That's -- 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 price-cost gap. And so, I think summarizing and 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.

Josh Wool -- Carlson Capital -- Analyst

OK. Well, let's talk a little bit about, you know, 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 kind of 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 you're taking to achieve this goal, the timeline necessary? And maybe, specifically, what kind of what level of scale will that require given a lot of the volume degradation in this business was related to the conflict in Ukraine and sanctions? So, you know, assuming that doesn't change, you know, you're at the scale you're at. So, maybe you can speak to that.

Thomas Fahnemann -- President and Chief Executive Officer

Yeah. And again, Josh, I mean, if you look at composite fiber, this is a mixed bag. You have different segments with different levels of profitability. So, what we are looking at right now, we are 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 wallcover material 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, this kind of building industry, do-it-yourself projects, and all that, but that's leveling off. And we are seeing some weakness right now here, 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 the product mix.

Josh Wool -- Carlson Capital -- Analyst

OK. Maybe one more on this issue. Can you elaborate on the actions you've taken at the Ober-Schmitten site, including, you know, what are the range of strategic alternatives for this site? Are you considering selling the facility but moving the volume and customers to another site, or selling it with the customers and volume? And then, maybe related way, you mentioned Dresden. I would have 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.

You know, what is the status of reviewing alternatives for that site, either reducing production to make back those fixed costs or anything else?

Thomas Fahnemann -- President and Chief Executive Officer

OK. Yeah. Let me start with Ober-Schmitten. And, Josh, you're absolutely right, Ober-Schmitten is part of our valuation.

And right now, all options are on the table, OK? So, we are looking at everything right now and working through all the details. But can I just reemphasize, all options are open. As far as Dresden is concerned, we really evaluated Dresden. But despite the fact that we lost the Ukraine -- Russian business -- Russia business in early 2022, Dresden is still providing a positive EBITDA.

So, Dresden is accretive to our bottom line. And we have been able -- and this, by the way, with utilization rates, which are far away from being optimum because we lost all this volume. So, we were able to kind of fill part of the idle capacity with other businesses. I mean, we are focusing on world 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 Dresden. I don't want to paint a picture that Dresden is fully loaded. We are still away and we still have a lot of idle capacity in there.

But Dresden is accretive and is providing a positive EBITDA. So, Desden, right now, is not on the table as far as our portfolio issue is concerned.

Josh Wool -- Carlson Capital -- Analyst

OK. Maybe one more for me, and then get back in the queue. You know, Thomas, you've had the benefit now of six months to evaluate Jacob Holm, 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 or collectively.

First, do you have any significant observations about the key drivers of Jacob Holm's historical profitability, including the contribution from Sontara versus the more commoditized product lines? Relatedly, do you foresee changes around which markets you choose to participate in, your approach to pricing, and strategies to leverage the Sontara brand more? And then, more generally, what are the priorities, you know, to get the most out of this business in the medium and long term? And I'll get back in the queue.

Thomas Fahnemann -- President and Chief Executive Officer

OK. So, yeah, maybe to the first part, what kind of contributed to the performance of Jacob Holm before we acquired the company, I think if you look at all the details, Sontara really generated the majority of the profits prior to COVID and during COVID. And also, the COVID tailwind significantly helped the medical business for Sontara, the surgical-grade gowns, masks, and mask components. And it also helped the hygiene and wipes business at Asheville and Soultz.

Jacob Holm secured hard surface cleaning wipes contracts and also benefited from traditional wipes being used in new ways. Remember, during the pandemic, I mean, you just needed to get product; price was not even a discussion point. And specifically, Soultz benefited from really making components of feminine hygiene products and diapers that have transitioned from [Inaudible] to spunlace technology at much lower basis weights. So, that was really a big uplift for Soultz 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 profits were as high as they were. And looking forward, I mean, our focus and what we envision is a much stronger focus on Sontara, on critical cleaning, and transitioning really our coated medical products from a fluorocarbon coating toward 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 and all that, you need binders and chemicals and adhesive-free. And we need to use these products to produce Sontara. We are making a lot of good progress, and we have really very exciting projects in the pipeline, specifically for Sontara.

And we're also now leveraging and we are already seeing helping us in the U.S. But our biggest target market is really Europe and the rest of the world. We are leveraging the Sontara brand as a key differentiator in our sustainable offerings. This is 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 high percentage of sustainable materials and relative to the alternatives which are in the market. And if I go 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 operationally stable manufacturer. We are making good progress.

I can tell you that now, month by month, we are making progress. It gets better, but it just takes time. And again, the previous owners didn't accomplish this. And we just really need to transfer this business to a low cost, 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 so 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. It's little steps, but as mentioned, in operations in the most complex area we are dealing with, but we are making progress. Every month is getting better.

And so -- and again, innovation also in this area might help us in order to get newer products on these lines, which are hopefully generating higher margins. But the biggest focus for the wipes and hygiene business in spunlace is to become more competitive by improving our operations.

Operator

At this time, we'll move to the next line in the queue. Shaun Nicholson from Segall Bryant & Hamill. Your line is open.

Shaun Nicholson -- Segall, Bryant, and Hamill -- Analyst

Good morning, guys. I did want to -- I guess maybe, Ramesh, you can remind me if I'm -- 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. And so, kind of what maybe made -- that made you guys kind of think you had a good picture of the year in terms of, you know, how to put out a kind of a general range there of what you can do on an EBITDA basis versus maybe the practice of the past.

Thomas Fahnemann -- President and Chief Executive Officer

OK. Yeah, maybe, let me start giving you our rationale behind this. And then, maybe, Ramesh, you can kind of 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 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. But 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 of our turnaround 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 out, 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 might see some changes and you might see some fluctuations up and down.

But in general, the things which we can control, you should see improvement quarter by quarter.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

And, Shaun, what I would add to that, as you know, 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, you know, investors are looking for additional clarity around what the medium-term picture looks like. And when we're 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, you know, 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's really, I would say, what I would add as to what prompted us to move from quarterly to annual.

Shaun Nicholson -- Segall, Bryant, and Hamill -- Analyst

OK. That's helpful. Yeah, just on the leverage side, as you guys kind of think through the -- you know, if you end the year in that guidance range, from deleveraging, is that going to come predominately from an asset sale versus any other, you know, free cash flow that definitely emerge? I know you have some working capital tailwinds, but you have higher interest cost. And so, when you kind of think through, is that what would drive leverage lower would have to be kind of an asset sales side of it?

Thomas Fahnemann -- President and Chief Executive Officer

Yeah. I would say it's -- it would come from multiple areas, Shaun. There is no one piece that will solve, you know, the leverage formula for us. Clearly, the increase in EBITDA year over year from where we were of 99 million in 2022 versus, you know, we're guiding to 110 to 120, that is a -- you know, a meaningful amount of improvement on EBITDA.

You know, we've talked about, you know, trying to improve our working capital by about $20 million compared to what the use of cash was in 2022. We've talked about, you know, portfolio optimization. So, you're right, you know, some asset sales could potentially contribute to that. We're trying to keep our capex as tight as we can.

We've 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 I couldn't just justify it as being asset sales solving that equation.

Shaun Nicholson -- Segall, Bryant, and Hamill -- Analyst

OK. Got it. And then, one last one on pricing. I know you've talked in the past, you guys, you know, really had to eat a lot of that inflation early on over the last year or so.

And kind of the pricing kept up with the raw material and inflationary backdrop the last couple of quarters at least. But you haven't really been able to obviously go back and try to recapture what you've already had to absorb. Is that -- when you look at the pricing, I guess, strategy this year, do you think that's able to happen where you can try to, you know, not only cover what's today but kind of recapture some of the lost profitability of the past?

Thomas Fahnemann -- President and Chief Executive Officer

Yeah. Let me answer this. And again, I think we have to differentiate a little bit by segment. I think our airlaid 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 there. 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 as an October, 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, that's something where we said, OK, we are back to where we were, but we haven't really recovered the 70, 80 million of, 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, I mean, I talked before about 70 to 80 million in cost-price gap, I don't think it's realistic to expect that we are even getting close to that number. Might it be five to 10, maybe if we are really successful. But yeah, part of it, smaller amount, but we might be able to get this through the fact that four mature pipes are coming down, we will hopefully be able to hold on to higher prices a little bit longer.

But we will not be even close to the the money which accumulated in 2022 as far as related to the price-cost gap. And the same is true, I mean, in the spunlace area. I think we were very successful in Sontara. On the other hand, in the hygiene wipes area I mentioned before, and that's also where we lost volume on purpose because we need to get our assets to the point where they are really competitive.

Sontara, I think, that's fine. That's not a 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 and really penetrate Europe and the rest of the world. There we see a lot of potential. But hygiene wipes is still mainly focused on operations and improving our operations in order to be competitive. And then we can also get our volumes back.

Shaun Nicholson -- Segall, Bryant, and Hamill -- Analyst

Thank you.

Operator

We'll move to the line of Roger Spitz from Bank of America with a follow-up.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Thank you for the follow-up. Ramesh, the 2023 cash flow items, plus the 60 million cash interest item, suggest 2023 cash flow of about 15 million. But I'm wondering whether sort of the new debt issue costs and perhaps any restructuring new initiative costs would just make this closer to, you know, just slightly positive 2023 free cash flow.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Yeah. So, Roger, good question. First of all, I just want to clarify, you know, when we look at the -- with all the guidance we provided and we look at where the free cash flow is, you know, it'll still be a negative free cash flow, you know, call it, you know, 20 million to 30 million. And that's primarily driven by this elevated interest expense or interest cost that we're going to be having from the refinancing.

You know, yes, there will be other cash uses as well. Like you mentioned, you know, debt costs, restructuring, and so on. But we're still working through all that which will be incremental to, you know, 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, you know, we're improving earnings were, you know, staying as tight as we can on capex. We'll have elevated interest. We'll have some improvement in working capital. You know, 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, you know, take some of the actions that 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.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Got it. And that's 60 million 2023 cash interest, does that include full cash pay, or would you be making use of the up to 5% of the new debt [Inaudible].

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Yeah. So for right now, that 60 assumes that we would pay the full cash interest.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Full cash. Great. And then, lastly, in terms of liquidity, so you're replacing the €220 million with a €250 million.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Yeah.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

There's a 2% OID and debt cost that's -- you know, would you have pro forma additional maybe 30 or more million of cash on the balance sheet, pro forma, for doing the refinancing? Does that give you that extra liquidity?

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Well, yeah. I mean, you've got to also think about, you know, we will be using that to pay down some of our revolver borrowing so that we're not grossing up the balance sheet. We've got some of the German IKB, you know, 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 grossed up for that delta of 30 million, if you will, of extra proceeds from the new term loan.

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Makes sense. Thank you very much, Ramesh.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

OK . Good.

Operator

We'll go to a follow-up from Josh Wool from Carlson Capital.

Josh Wool -- Carlson Capital -- Analyst

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, your hedging program, or maybe it's just reducing the volatility associated with price spikes that may have occurred in energy prices going forward?

Thomas Fahnemann -- President and Chief Executive Officer

OK. Yeah. Let me try to talk about that. I mean, if you look at the -- if you talk about European gas caps, I mean, this is actually Germany, and this is the majority of our business.

And so, what Germany did is they introduced gas cap and also actually a power cap price. I mean, the gas cap is at €70 per megawatt hour and power is at 130 per megawatt hour. And that's actually what the government does, is they look at your portfolio price. So, whatever you did, as far as hedging is concerned or pre-buying or whatever, so your price is not higher.

And let me take gas as an example, then €70 per megawatt hour, OK. So, that's kind of how the system works. The system is in place until the end of the first quarter of 2024. So for five quarters, and this is the guaranteed price cap for the company, OK.

And that helps actually tremendously with our planning and all this, because we know -- And as you'll remember, Josh, I mean, we had prices last year of 300 to 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 gas inventories in Europe overall but specifically in Germany were really 100%. 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 -- and the price cap kind of drove the market price down. I mean, the market price was sometimes below the cap, so -- which is even the best outcome, to be honest, that the market is driving that, right. So despite the fact and again, the €70 is still probably 4.5 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, it's a big relief for everybody, not just for us, but also for our customers, for our suppliers.

And for all that, I mean, it gives the certain planning stability. And the best thing, to be quite honest, that happen is that the market is falling in line now and it's actually stabilizing around this level. And by the way, the same is true for power at the 130 level. OK.

So that's kind of helping. And while I talked about Germany, more or less in other ways and other government programs, France and the U.K. are doing kind of the same thing. So, this is kind of where we are right now.

And I have to say, it really helps. And not just us, but the whole value chain.

Josh Wool -- Carlson Capital -- Analyst

OK. I've just got one more pretty open-ended question, and it's just thinking about Glatfelter's reporting structure versus how you manage the business since you completed the Jacob Holm. And I guess, you know, more specifically, you guys have always reported kind of on the basis of a product substrate. But now, you have two substrates, airlaid and spunlace, that could sell the same product, you know, let's say, wipes into the same customer or even the same end market.

When you plan marketing, pricing, R&D, and other strategies, do you plan by end market, you know, like, let's say, you know, healthcare market, consumer? And if so, is that reporting structure or the benefits to that versus doing it by substrate now that you have, you know, two kind of adjacent substrates, airlaid and spunlace?

Thomas Fahnemann -- President and Chief Executive Officer

Yeah. OK. That is 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 toward end markets. And we have also made steps in composite fibers and the innovation area and in ops kind of to align more toward this kind of end market segmentation because it doesn't make any sense if Glatfelter or up coming to one company [Inaudible], it doesn't make any sense. So, we are already doing that.

The customers are concerned, we are already aligned by really segment there. What we also did is early January, and I mentioned this before, we really improved our expertise and knowledge as far as operations is concerned. We really very happy to have two leadership ops people on board, and we already aligned them along the segments and not really by a technology, if you will. So that's already taken care of.

Now, as it comes to public reporting, and I mean, Josh, if -- I mean, if I could do it, I would do it immediately, to be quite honest. But, you know, this does require significant changes in our system and all other things. So, we are starting the work. But to be quite honest, as far as priority is concerned, I think with our turnaround strategy, again, I'm extremely excited about the innovation side and the pipeline.

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 toward market segments, end markets, but I cannot promise that this will happen in the next 18 or 24 months because this requires a lot of internal work as far as 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 done. We need to kind of develop the platform for organic growth with our innovations that have higher priority than that. But is this something we would like to go to? Absolutely.

Josh Wool -- Carlson Capital -- Analyst

Perfect. Well, thanks for [Inaudible].

Thomas Fahnemann -- President and Chief Executive Officer

And it will take time. OK.

Josh Wool -- Carlson Capital -- Analyst

Great. Thanks for all the details, guys. That's it for me.

Thomas Fahnemann -- President and Chief Executive Officer

OK. Thank you, Josh

Operator

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 Fahnemann for any closing or additional remarks.

Thomas Fahnemann -- President and Chief Executive Officer

OK. Thank you very much for your interest and the time you spent with us. And then, this concludes our call. Thank you.

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ramesh Shettigar -- Senior Vice President, Chief Financial Officer, and Corporate Treasurer

Thomas Fahnemann -- President and Chief Executive Officer

Roger Spitz -- Bank of America Merrill Lynch -- Analyst

Josh Wool -- Carlson Capital -- Analyst

Shaun Nicholson -- Segall, Bryant, and Hamill -- Analyst

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