Please ensure Javascript is enabled for purposes of website accessibility

WestRock (WRK) Q4 2021 Earnings Call Transcript

By Motley Fool Transcribing – Nov 9, 2021 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

WRK earnings call for the period ending September 30, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

WestRock (WRK 4.92%)
Q4 2021 Earnings Call
Nov 09, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, good morning, and thank you for standing by. At this time, I would like to welcome everyone to the WestRock Company fourth quarter 2021 conference call. [Operator instructions] Thank you. I would now like to turn today's call over to Mr.

James Armstrong. Please go ahead.

James Armstrong -- Vice President of Investor Relations

Good morning, and thank you for joining our fourth fiscal quarter 2021 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the investor relations section of our website. They can be accessed at ir.westrock.com or be link on the application you're using to view this webcast. With me on today's call are WestRock's chief executive officer, David Sewell; our chief financial officer, Ward Dickson; and Pat Lindner, president, Commercial, Innovation and Sustainability.

Our incoming CFO, Alex Pease, is also in the room with us today. Following our prepared comments, we will open the call for a question-and-answer session. During today's call, we will be making forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we discussed during the call.

10 stocks we like better than WestRock
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

They just revealed what they believe are the ten best stocks for investors to buy right now... and WestRock wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of October 20, 2021

We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2020. We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website.

And with that said, I'll turn it over to you, David.

David Sewell -- Chief Executive Officer

Thank you, James. In a moment, I'll walk you through our performance in the quarter, full year and our outlook for fiscal 2022 as we currently see it. But first, I would like to make some personal observations as we approach the end of the calendar year. It's clear that WestRock is a great company with 50,000 dedicated employees who work tremendously hard every day.

Since I joined WestRock, I've had the opportunity to dig into the business and now have a much clearer picture of both the challenges and substantial opportunities for our company. We will outline our vision for the future in greater detail at our investor day on February 24th, and we'll be taking a number of important steps between now and then to set us up for greater success in the future. Already, there are a number of things that are clear to me. To start, our business has been and remains very strong.

WestRock serves customers in a wide range of end markets with the broadest portfolio of packaging solutions in the industry, and this provides us with greater opportunity and flexibility to focus on growing markets where our differentiation is valued. Looking forward, we have to be more efficient. We have to accelerate our innovation efforts, and we have to move faster and focus on our core strategy, and we are doing just that. Now turning to the fourth quarter.

We achieved record sales growth in a dynamic environment. I want to thank our WestRock teammates for their continued hard work and dedication to serving our customers. In the quarter, sales of $5.1 billion were up 14% year over year. Adjusted segment EBITDA also improved significantly, rising to $878 million or 22% year over year, and adjusted earnings per share of $1.23 increased 68% compared to prior year.

In the quarter, we realized higher volumes along with higher pricing which more than offset the year-over-year inflation. We updated our guidance in September for the fourth quarter and achieved a bit better than we said we'd do. Packaging sales increased by 8% year over year, driven by the implementation of price increases across our business. Packaging volumes were down 1.6% year over year, with box volumes down 1%.

Labor shortages and supply chain issues caused disruption in our production and shipments to our customers. We are making all possible efforts to improve these conditions where we can. Paper volumes increased 13% year over year on strong demand across all grades. Overall inflation was higher across the industry than widely anticipated, and therefore, results came in at the low end of our guidance.

This inflation was driven by increased costs for recycled fiber, virgin fiber and natural gas. Our Corrugated adjusted segment EBITDA margins of 18.4% increased sequentially and year over year. The Brazil business generated 35% EBITDA margins driven by strong demand and the positive impact of the ramp-up of our Tres Barras Mill after the completion of the expansion project. Our Consumer Packaging segment performed very well with adjusted segment EBITDA margins of 15.9%, up 220 basis points from prior year and 40 basis points sequentially.

Overall, WestRock adjusted segment EBITDA margins of 17.2% were up 110 basis points versus prior year and 40 basis points sequentially. This adjusted segment EBITDA includes $5 million of proceeds from business interruption insurance. In the quarter, we generated adjusted free cash flow of $372 million. As part of our balanced capital allocation strategy, we repurchased $122 million of stock and redeemed $400 million of bonds that would have matured in March 2022.

Cost inflation increased at higher-than-normal levels throughout the year. Our implementation of the previously published price increases more than offset inflation for fiscal 2021. The latest August containerboard published price increase is currently being implemented. We are also in the process of implementing published price increases in craft paper and realizing higher pricing and export containerboard.

Consumer price flow through throughout and across all grades will continue into fiscal 2022, including the implementation of the most recent published price increases in October. As a result, we expect price realization to more than offset inflation to an even larger extent in fiscal 2022. Fiscal year 2021 was a year of opportunities, as well as challenges. Demand was very strong across most of our end markets, and our team stepped up to meet the needs of our customers.

Net sales for the year increased to $18.7 billion, and we reported adjusted segment EBITDA of $3 billion. Net sales and adjusted segment EBITDA were both up an impressive 7% year over year. Adjusted earnings per share of $3.39 was up 23%, and we generated record adjusted free cash flow of $1.5 billion. We also hit our net leverage target of two and a quarter times to two and a half times ending the year at 2.38 times.

Looking forward, we have momentum entering fiscal 2022. We have a strong balance sheet and our strategic investments are now ramping up and are set to generate significant benefits in 2022. Our innovation pipeline continues to grow, and we have reached an annual run rate of more than $280 million of sales from plastic replacement opportunities. We are well positioned to help our customers with integrated packaging solutions that help them grow their sales, reduce their risk and improve their sustainability.

Now turning to Slide 6. We generated $1.5 billion in adjusted free cash flow in fiscal 2021, the sixth straight year that WestRock has generated more than $1 billion in free cash flow. As we have shared before, our core capital allocation principles are very clear. We plan to reinvest in our business and maintain a sustainable and growing dividend.

We will opportunistically repurchase shares and consider strategic investments and acquisitions when there is a clear line of sight to generate attractive returns on invested capital. And our actions align with this strategy. During fiscal 2021, we invested $816 million into our business through capital investments that maintained our assets and support our growth in the future. Given our consistent cash flow generation over multiple business cycles, we increased our dividend, raising it 20% in May, and then again, as announced in October, for a total increase of 25% since February.

We further strengthened our balance sheet as we reduced adjusted net debt by $1.3 billion to $7.7 billion and returned to our targeted leverage ratio. We repurchased $122 million of stock or 2.4 million shares. As noted earlier, we completed our investments at our Florence and Tres Barras Mills in fiscal 2021. We will continue to realize increasing benefits of these investments as we move into fiscal 2022.

And as we enter the new year, we remain disciplined in our capital allocation strategy and are committed to retaining an investment-grade credit profile. Overall demand remains strong. As we have highlighted, supply chain challenges negatively impacted our production and sales volumes. Looking at our markets, our demand for food and beverage products make up almost half of our packaging volumes.

Within food and beverage, retail food demand continues to be strong with COVID-related market gains continuing. Foodservice trends are improving, especially in quick serve and fast casual, although these channels are experiencing ongoing labor challenges, which are impacting total consumption. Volumes in the retail and the e-commerce channel were stable year over year. This channel makes up approximately 13% of our packaging volume, and our e-commerce remains a key driver of overall box demand.

The holiday buying season should be lengthened due to supply chain disruptions. We anticipate total projected growth rates to be in line with our overall fiscal 2022 expectation. Sales to the beauty and healthcare markets are 12% of our packaging volume. These markets were significantly impacted by the pandemic, and they continue to recover as markets reopen.

Our broad mix of end market participation enables us to remain resilient in the face of uncertainty, and our capabilities and manufacturing footprint allows us to quickly pivot to meet our customers' needs. We will continue to grow our packaging business, driven by our unique innovation portfolio and our ability to design solutions for our customers that optimize primary, secondary and tertiary packaging. Moving to Slide 8. One of the biggest challenges many of our consumer brand customers face is a demand for more sustainable packaging.

WestRock is helping these customers meet this demand through our innovative material science and design capabilities. This slide includes a few of our most recent customer partnerships, which range from designing plastic-free packaging to machinery that produces shelf-ready recyclable packaging that helps reduce labor costs and meet sustainability goals. Tim Hortons recently announced our partnership to test a recyclable and compostable hot beverage cup. We look forward to this work with a valued customer to move the recyclability of cups forward.

And these are just a few examples that have generated our current $280 million run rate of incremental sales from plastics replacement. We continue to believe this opportunity is in excess of $500 million incremental sales annually. I'd like to highlight a few of our award-winning packaging designs on Slide 9. The Paperboard Packaging Council recently held their annual awards, and I'm pleased to share that we won the Sustainability Award of the Year for our partnership with Coca-Cola Europacific Partners on their use of WestRock's can collar and the product packaging.

Can collar is a durable paperboard-based multipack solution for cans and it performs incredibly well throughout the supply chain. We also won 12 additional awards for sustainability, innovation and design. These awards are great recognition of the outstanding work of the WestRock team. Turning to Slide 10 and our financial guidance for the first quarter 2022.

We continue to successfully implement all previously published price increases. We expect sequential cost inflation driven by higher natural gas, diesel and recycled and virgin fiber costs. This commodity cost inflation combined with our seasonal increase in healthcare cost is forecasted to be approximately $100 million higher than the fourth quarter. However, the good news is that we expect the flow-through of the price increases that we are implementing to more than offset this inflation.

And due to delays in mill maintenance earlier in fiscal 2021, along with our originally planned outages, we have approximately 200,000 tons of scheduled downtime across our system that will negatively impact earnings by approximately $75 million. We have 10 major mill maintenance outages in the first fiscal quarter, one of the largest amounts in one quarter in WestRock's history. These assumptions, combined with three fewer shipping days and the normal seasonality in our consumer business, results in forecasted adjusted segment EBITDA of $660 million to $700 million and adjusted EPS of $0.56 to $0.67 per share. In fiscal 2022, we expect solid demand across most of our end markets and continued flow-through of the previously published price increases.

We expect a record fiscal year in sales and adjusted segment EBITDA. We anticipate some offset as a result of continued commodity input cost inflation. We fully anticipate the implementation of previously published price increases to outpace inflation. We also expect productivity to be unavoidably affected by ongoing supply chain challenges and higher labor costs that may persist through the fiscal year.

Our planned mill maintenance outage schedule declines throughout the fiscal year, but will still be approximately 100,000 tons higher than in fiscal 2021. Given these assumptions, we forecast adjusted segment EBITDA to be in the range of $3.3 billion to $3.7 billion. This range is driven by varying levels of commodity inflation. Since the formation of WestRock, we have been able to grow sales, earnings and adjusted free cash flows across various business cycles at attractive compounded annual rates.

We have a resilient business model, which was reinforced with record adjusted free cash flows in fiscal 2021 in the face of many challenges. Our outlook for fiscal 2022 continues the remarkable trend of growth in sales and adjusted segment EBITDA, as well as strong cash flow. With the industry's broadest portfolio of paper and packaging solutions, we can bring unique value to our customers and our shareholders. As we turn to fiscal 2022, I've decided to update our reporting structure into three new segments: Packaging, Paper and Distribution.

As we move forward with our strategy, this new structure will better align our reporting to the way we will be running our company and provide clarity into the performance of each area. Our Packaging segment will include our converted packaging businesses that serve diverse end markets with attractive margins. This segment is well positioned for future growth, fueled by WestRock's unrivaled capabilities. WestRock has an unmatched portfolio of sustainable packaging solutions and the ability to drive innovation that helps our customers' critical challenges.

As market trends evolve in this dynamic environment, WestRock is uniquely positioned to adapt to these trends and our customers' changing needs. The Paper segment will be comprised of our external paper sales. We have strong customers in our attractive domestic containerboard and paperboard businesses, and we will continue to partner with these customers. And as we do this, we will seek to reduce our exposure to the export containerboard and specialty SBS markets.

We are focused on driving cost reductions across our newly integrated supply chain and investing to improve the competitiveness of our mill system. And finally, the Distribution segment will be made up of our Victory Packaging business. This differentiated service solution is an important channel for WestRock's products. The business provides local warehousing and distribution services that enhance efficiency and provide flexibility in serving our customers.

We believe these new segments more closely align with our strategy and the way we will run our business going forward. I look forward to sharing more information on these segments when we report in this format in the first quarter. As we look to the future, we are investing in innovation with expansion of our research and development teams to bring an enhanced focus on innovation such as improvements in material science, converting and machinery and automation. Growth in digital technology and how smart packaging can drive sales and brand engagement is also an area on ongoing development at WestRock.

We are also building a sales excellence platform that leverages our broad and differentiated portfolio that will bring all of these solutions to customers in a way that fully leverages the power of the WestRock enterprise. The opportunities for WestRock are unrivaled in the industry, and I look forward to all that is ahead. And as I wrap up today, I would like to take this opportunity to thank Ward Dickson for his contributions to the success of WestRock. As CFO, Ward has been instrumental in the growth and development of our company, overseeing more than 20 mergers and acquisitions, including the merger of MeadWestvaco and RockTenn, the spinoff of Ingevity, the sale of our Home, Health and Beauty Plastics business, and the disposition of our land and development business.

I have benefited from his assistance as I joined the company greatly and know we will all miss him here at WestRock. Ward, I wish you the very best in your retirement. At the same time, I also want to welcome Alex Pease, WestRock's incoming CFO, who is sitting in with us today. Alex, I look forward to working with you as well.

We have great opportunities to grow our company and improve margins while providing value to our customers, teammates and shareholders. We are working to leverage the power of the enterprise and making the investments needed to lead in sustainability and accelerate our innovation platform. As we do this, we remain disciplined in our capital allocation strategy, and we'll look to use our strong cash flow to create shareholder value. As we implement our strategy, we have multiple levers to create value and grow sales and earnings.

We are excited about the opportunities ahead and look forward to further discussing our strategy and long-term goals at our investor day in New York on February 24th. Fiscal 2021 was a great year for WestRock. I want to thank our 50,000 team members for dedication and effort, and I look forward to the great things ahead for our company. That concludes my prepared remarks.

James, we are now ready for Q&A.

James Armstrong -- Vice President of Investor Relations

Thank you, David. Operator, may we take our first question, please?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of George Staphos with Bank of America. Your line is open.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. This is actually John Babcock sitting in for George Staphos. I guess just starting out, it would be great if you could provide some of the key assumptions that are driving the lower and upper ends of your guidance range? And then I'll kind of go from there.

Ward Dickson -- Chief Financial Officer

John, this is Ward. I'll start with quarter, Q4 to Q1, and then I'll try to walk you through some of the key assumptions for the range that we provided for the full fiscal year in FY '22. So the primary key drivers for Q1 is we have the benefit and the pricing flow-through from the PPW increases. Price does in fact outpace inflation.

We have seasonally lower volumes in our Corrugated -- or our Consumer Packaging business. We have three fewer shipping days in our Corrugated Packaging business. This is the largest maintenance outage quarter since the merger. We have 200,000 tons of maintenance outages in the quarter.

I think we're doing it across 10 mills in both our corrugated and consumer mill system. That accounts for $75 million worth of incremental costs from Q4 to Q1. And then we highlighted in the script that we have approximately $100 million worth of increased costs from Q4 to Q1, and that's driven by higher natural gas, higher virgin fiber because of the wet weather. The increases -- the full quarter increases in OCC that we had.

And then we always have in our fourth calendar quarter or our fiscal first quarter seasonally higher healthcare costs because everybody has passed their deductibles and they're trying to get discretionary healthcare in at the end of the year. And then finally, the supply chain challenges that we've had continue to hamper productivity. If you look at the impact of the outages and some of the start-up costs that aren't capitalized and amortized over our outage periods but are actually incurred in the quarter plus the challenges that we've had in moving material both around our system, from our mills to our converting operations and to our customers, that our productivity has been -- will be lower in Q1 relative to Q4. So those are the primary drivers.

And again, the quarter represents about 19% -- the midpoint of the guidance for the quarter represents about 19% of the total year midpoint of EBITDA. Last year, we generated about 21% or 22% of our full year in the first quarter. So we always have a seasonally slower start in the first half of the year relative to the second half of the year in our earnings generation. Now if that's OK, I will flip to the full year and walk you through the key elements of our guidance for the full year.

So the midpoint of the guidance for the full year reflects record sales and EBITDA and strong cash flow generation. And what we are assuming is the full year impact and flow-through of the previously published price increases and that price increases will outpace inflation. In fact, the biggest significant driver of the earnings growth from year-to-year is the price and inflation relationship. So we will have the full year impact of all these published price increases across all of our grades.

We have solid demand across both Paper and Packaging, and we'll have growth in our core markets. We have the ramp-up of the capital investment that we made in Brazil and its impact on volumes, both in our ability to sell external paper and to feed the ramp-up of our Porto Feliz box plant. Inflation really reflects the full year impact of the rapid increases that we had in fiber and energy cost during the second half of fiscal 2021. So I'm going to give you some very specific assumptions that we've got in the midpoint of our guidance related to OCC and some other costs.

And I think everyone needs to remember, OCC exited fiscal '21 at $80 per ton higher than the average for the full year. And so in our midpoint for OCC, we assumed $166 per ton for the full year. That's a $60 per ton increase from FY '21. And our quarterly profile, Q1, we assume $175 a ton, which is up $8 a ton from Q4.

In Q2 and Q3, we see some reduction of $165 a ton. And then in Q4, we see $160 a ton. So the recycled fiber inflation is -- on a year-over-year basis is more than $325 million. This approaches $350 million for the full year.

And then natural gas is a similar story with September's cost as we exited FY '21, they're 40% higher than the average was for the full year. So the current strips reflect a 50% increase versus FY '21. So this is a material cost inflation element on a year-over-year basis. And then virgin fiber, chemicals and transportation costs all ramped up during the second half of the year.

And we do not see any real changes to the supply chain environment until we get into our fourth quarter or toward the end of the calendar year in FY '22. So again, I think the key driver is we're going to get sales growth from price and volume. Price outpaces inflation. Supply chain disruptions continue and will impact productivity.

Our investments in Brazil ramp up and we start to get the benefits of that. And then we also get the benefit -- full year benefits from our investment in Florence. And then finally, I'll just really quickly talk about cash flow for the full year as well. Operating cash flow was flat on higher EBITDA, but that's really driven by the benefits of the pandemic action plan and their contribution to operating cash flow in FY '21.

I'll remind everybody that we made -- our payments for our 401K match and our short-term incentive were made in stock during FY '21, where they've returned back to cash. And then the CARES Act payroll deferrals for which we got a deferral in FY '21, that now flips and we actually have to make those payments, our first payment in FY '22. And then we are assuming that we're going to invest $1 billion in capital investments in our system. And that's what drives the cash flow generation year over year.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Got you. That's very helpful. And then, just kind of following up from some of the points on growth. Just overall, are you expecting volume growth in both Corrugated and Consumer Packaging to be positive in 2022? And then also, if you could provide some update on how demand trends are so far in the fiscal first quarter, that would be great.

Ward Dickson -- Chief Financial Officer

Yes. So I'll do the full year. The midpoint of our guidance assumes that we have growth across both our Corrugated and Consumer Packaging and Paper volumes increase as well. And that we get the benefits within the ramp-up in our Brazilian business.

And then I'll turn it over to Pat if he wants to talk about any end market trends or any short-term demand trends.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Sure, sure, sure. So thanks, Ward, for that. So overall, our market conditions going into the fiscal year are generally stable and healthy across most segments. Economic fundamentals are pretty solid.

2022 GDP is expected to be about 4%. And durable and nondurable goods are also showing positive trends. Consumer spending is strong. So we feel pretty good about that for the full year.

As Ward had mentioned, in the first quarter, we do have the fewer shipping days impacting us, especially Corrugated, and also the seasonal slowdown in Consumer Packaging, which happens every single year. But as we look at highlights for the full year, continued growth in e-commerce with the return of brick-and-mortar is certainly a tailwind for us. The online and e-commerce market is really becoming a little bit blurred between the online and brick-and-mortar because you've got to buy online and pick up in store, pick up at curb side. And so that's kind of blurring, which one is really e-commerce versus brick and mortar, but we do see growth there.

We see some important COVID reopening dependent trends, duty-free retail in the travel market. With international travel, we'll return high-end spirits, beauty and cosmetics. COVID test kits, depending on how things sort out around the world with COVID, will also have an impact. Foodservice, we do see strength in that, especially with QSR and certainly, sporting events and concerts coming back open, have returned cup stock to the pre-pandemic levels.

Commercial print, which was down last year, has also returned to pre-pandemic levels. So we feel really good about that. And David mentioned in his introductory comments that the center of the store and packaged food and beverage is still holding the pre-pandemic gains, so up significantly over a two-year trend. When we look at the start to the first quarter here and especially in corrugated box, I'll make just some brief comments.

Traditionally, we see the holiday season picking up, and we see -- we're starting to see some of that. But the comps year over year are pretty difficult because of the peak last year. We -- and the labor challenges that we had talked about in August and September certainly impacted us. We think the worst is behind us there.

And we saw sequential improvement as September was better than August and October is better than September. Operating rates across the industry are high. Backlogs are strong. And while there remains some uncertainty in the supply chain issues we've talked about, we're generally positive on seeing sequential improvement in our corrugated box business in the quarter.

John Babcock -- Bank of America Merrill Lynch -- Analyst

OK. Thank you. I'll get back to my que.

Operator

Your next question comes from the line of Mark Wilde with Bank of Montreal.  Your line is open.

Mark Wilde -- Bank of Montreal -- Analyst

Thank you. David, I wondered if you could start off by just talking a little bit about kind of prospective investments across the mill system. You highlighted wanting to drive down costs. I'm particularly interested in what you might do with both the containerboard mills and then the bleach board mills because that market is undergoing a lot of transition.

David Sewell -- Chief Executive Officer

Yes. Thanks, Mark. I would say, as we look at our mill system, as you know, earlier this year, we consolidated both our corrugated and consumer mills into -- under one leader. And we're already starting to see some nice efficiencies from doing that.

And what we're doing right now is we're really assessing all of our assets to make sure we have the best assets in the market. And assets that are underperforming, we're going to address it. And we're also going to innovate and invest where we can make them better. So I think as we announced our new structure change, as we focused on the high-value packaging segments, the paper markets that we want to focus on, on the domestic side, we're going to make sure we have world-class assets that align to that into the markets we want to grow.

And as we've mentioned before, we're also looking at how do we provide more flexibility into our mill system to adapt to the broad portfolio that we have, so we can take advantage of market trends. And as your point, to different grades, where there's growth and then where we can deemphasize grades where we don't want to grow. So that's how we're thinking about it. And we have multiple productivity programs underway right now.

So we really believe that this focus on driving cost out, world-class assets, higher productivity, driving grades that match the strategy of where we want to grow is going to help give us an advantage as we move forward.

Mark Wilde -- Bank of Montreal -- Analyst

OK. And then just as a follow-on. Could you just address any prospective changes that you're considering for incentive programs, both at the operating level and at the executive level at WestRock?

David Sewell -- Chief Executive Officer

I apologize, Mark. You cut out a little bit with your question. I just want to reconfirm your question is, what incentive programs we're driving at our mill level, as well as our leadership level?

Mark Wilde -- Bank of Montreal -- Analyst

Yes. I'm interested in any changes that we might see under your leadership.

David Sewell -- Chief Executive Officer

So as we go into the new year, we are really focused on a couple of things, and we're going to drive that in our compensation programs. We are going to focus on margin expansion, on EBITDA and EBITDA growth, top line growth. And we also want to maintain our cash flow, the strong cash flow that we generate. So from a leadership level, that's how we're going to be measured.

We're also going to hold ourselves accountable to important goals around safety and diversity and inclusion. And then at the mill level, we're going to -- we're really going to drive productivity, and we're going to hold our cost basis at each mill to our mill leaders, and we want our sales teams to be recognized for higher margin growth organically. So we are making changes to our comp plans, and they're going to align to our strategy.

Mark Wilde -- Bank of Montreal -- Analyst

OK. Very good. I'll turn it over.

David Sewell -- Chief Executive Officer

Thanks.

Operator

[Operator instructions] Your next question comes from Phil Ng with Jefferies. Your line is open.

Phil Ng -- Jefferies -- Analyst

Hey guys. Ward, thanks for all the great help through the years, and congratulations.

Ward Dickson -- Chief Financial Officer

Thanks, Phil. Appreciate it.

Phil Ng -- Jefferies -- Analyst

Yes. I guess, first off, a question for you, David. Inflation, supply chain headwinds have been more pronounced than almost anyone would have expected coming into the year and it's not unique to WestRock, too. All your peers are seeing it.

Do you think you've been able to get a fair -- you've been able to get a fair amount of pricing this year, but do you think you've gotten enough value for your products and services? And how much more pricing elasticity do you see in your business?

David Sewell -- Chief Executive Officer

So if you look at what this team has been able to do on published price increases, we are outpacing inflation. So we feel very good about that. What we're focused on, Phil, is value pricing with our customers. To your point, the world has really changed from a supply chain standpoint and the way our customers look at supply chain and solutions that we can provide are changing.

So what they want is supply assurance. And we have a broad portfolio on primary, secondary, tertiary packaging solutions. The other thing with labor challenges, the demand we're seeing from our automation and machinery business is extremely high. We're able to reduce labor for our customers.

We're able to be more efficient. And the other thing that we're really driving is the elimination of waste. We have a great portfolio of sustainable products, and we highlighted them a little bit on the beginning of the call. But the other thing that we're trying to do is -- with our design teams is how do we design and eliminate waste.

We have Box on Demand. We have great solutions. So our customers want to partner with us more than ever for supply chain assurance, innovation so they can connect with their customers, which is why we're investing in sustainability, as well as the elimination of waste. And I think our portfolio is truly unique and positions us extremely well to be a leader in the industry.

Phil Ng -- Jefferies -- Analyst

That's super helpful. I guess when you think about your 2022 guide, I appreciate you gave some color that you're expecting growth in Consumer and Corrugated. But any more color around that just because the Consumer segment, just from a growth standpoint, it's been a little choppier, but you've obviously made some big strides in terms of pivoting to some of these growth areas. It would be helpful to kind of give us a little more color on how you think about that growth opportunity.

Any way to kind of bucket some of the gains you're seeing on the sustainability front?

David Sewell -- Chief Executive Officer

Yes, so what I'll do is I'll talk very high level, then I'll turn it over to Pat on providing a little more specificity. The thing about the Consumer business, as you really dig into it, is you have to look more than volumes. It's also the solutions we're providing and the market share we're gaining. There's a lot more customization that's going on.

There's a lot more smaller runs that are going on. There's a lot more high value, high graphics that work. So we really believe we're gaining market share in this segment. It continues to grow.

We've consolidated our Consumer and MPS business, and we're already starting to see efficiencies there. And Pat, maybe you can just talk a little bit about some of the wins we're seeing, especially on the plastics replacement side?

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Sure, great. Thanks, David. And yes, the consumer business has seen some nice margin enhancement over the last several quarters. As David mentioned, we're almost 16% EBITDA margins and the -- it's up about 220 basis points year over year and 40 basis points sequentially.

So good momentum there and a big part of that, an important part of that in addition to productivity and some of the changes that we've made in the footprint and the products we're producing at Evadale. But a big part of that is certainly what we're seeing on organic growth, and sustainability is an important driver. There, connected packaging and digital solutions are also important and automation is critical there. So we've generated up to this point, a run rate of about $280 million worth of plastics replacement alone.

As David said earlier, that's going to be over $500 million annually that we'll get to in the next few years. We've shared a number of those examples in the past, and we're coming out with new offerings. We've got the Tim Hortons cup trial, and that's not just a paperboard solution, that's actually producing cups for us for the first time, and we have 11 patents on that application. So great opportunity for us to have a sustainable solution there, sustainable in terms of long-term economic value, as well as the environmental benefits we've talked about.

We also have launched a new PACK EXPO. We just launched a new fiber-based package for frozen food. And this is one that I really want to highlight because it's perhaps one of our best examples coming forward of optimizing primary, secondary and tertiary packaging, which is something that only WestRock can do. Nobody else has a fiber-based packaging solution that can do this.

And specifically, what we're doing as we're making a fiber-based bowl that's sustainable, recyclable and at some point, compostable. We're wrapping that bowl in a secondary package, and then we have a shelf-ready tertiary package, corrugated medium, to go around all of that. And this is all automated from the beginning until the end. And so when you look at what we can do around design, material science, digitally connected solutions, as well as automation, machinery and robotics.

This is a tremendous advantage for the company overall, and it's going to continue to deliver growth for the Consumer segment.

David Sewell -- Chief Executive Officer

Yes. And Pat, I think you answered that perfectly well. So one other thing I would add is with travel opening up, we're starting to see expansion in duty free. And we're also starting to see a nice uptick in healthcare segment as well.

So our Consumer segments, we believe, are definitely going in the right direction.

Phil Ng -- Jefferies -- Analyst

On that note, David, will those dynamics have like a favorable mix impact in your Consumer business? And then appreciating you're not looking to just sell volumes, you're selling a solution approach. One of your bigger competitors on the consumer side have generally said our business has been historically flattish. But with some of these gains on the sustainability side, we see a line of sight, call it, in the low single-digit growth. Are you kind of thinking about it in a similar fashion as well?

David Sewell -- Chief Executive Officer

Yes. I think that's well said. I believe the way we're really going to win in this segment is the high-value applications, customers that want to partner with us. And it's just the onslaught, and I'm saying that broadly, but the pickup in the number of customers that want innovation in plastics replacement in their portfolio and to partner with us to help design that and automate it where we can.

That's where we want to focus. We -- the very transactional pieces of this is a lower focus for us, and it's the partnerships on those high-value applications.

Phil Ng -- Jefferies -- Analyst

Thanks a lot. I really appreciate the color.

David Sewell -- Chief Executive Officer

Thanks, Phil.

Operator

Your next question comes from the line of Adam Josephson with KeyBanc. Your line is open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning, everyone and Ward, congratulations on your retirement, all the best to you and a pleasure working with you.

Ward Dickson -- Chief Financial Officer

Thank you. And the same is true with you, Adam. Thank you very much.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, Ward. Pat, I know you were asked about this earlier, but can you talk about your shipments in October just more quantitatively, a year-over-year percentage change. And for that matter, what you're expecting in the December quarter, just in the context of your expectation that fiscal '22 shipments you expect will be up?

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yes. So thanks for the question. And so just to go back to the corrugated box shipments in the quarter. We had labor challenges in August and September and supply chain challenges we've talked about before.

We think that was the bottom. So the worst is over. We are seeing an improvement from August to September to October. We're in a seasonally stronger period, obviously, in the quarter, and I can't give exactly forward-looking guidance in that.

But we will expect to continue to see sequential improvement in the box demand going from our fiscal fourth quarter into the first quarter. Again, operating rates remain high, backlogs are strong. There's always going to be, especially right now, some uncertainty in month-to-month on how things sort out because of the supply chain and labor challenges. But overall, we are pretty confident we'll see sequential improvement.

David Sewell -- Chief Executive Officer

And Adam, one other thing I would just add would be the tough comps that we have year over year from last year. So we feel very good about the demand that we have. If you even look at fourth quarter, while our box volumes were down, if you look at the labor challenges, supply chain challenges, if we could have produced what we wanted to, our box volumes would have been up a couple of percent. So we see that momentum carrying in.

We're just balancing and working through a very tough environment.

Ward Dickson -- Chief Financial Officer

And Adam, this is Ward. I would just -- I'd reiterate that the full year guidance assumes growth on a year-over-year basis, '22 versus '21, and I'll remind you that in '21, we had 5% full year growth. So we have the tough compares on the Q1 ramp, but we feel confident about the outlook for the full year.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Yes, perfect. A couple of other questions. Just on containerboard inventories. Obviously, for the industry as a whole, they grew quite a bit in the September quarter.

I'm just wondering how you would characterize your inventories? Are they where you'd like them to be? Are they lower? Are they higher? And what are your expectations along those lines in the December quarter and thereafter? In other words, are you trying to build? Are you trying to reduce? Are you having to carry more because of the supply chain mess that everyone's dealing with, etc.?

David Sewell -- Chief Executive Officer

So the way I would describe it is we knew we had a heavy outage in this first quarter with maintenance. And we had to delay some of that maintenance because of the ransomware attack and with COVID getting contractors into our mills, etc. So that kind of created the perfect storm for our first quarter mill with our planned outages. But if you look at the inventory builds that we wanted to do, we did build inventory coming into this quarter.

I would say it wasn't as much as we would have liked because of the demand that we're seeing. So we're probably a little behind in the inventory levels we'd like to be at, but we were able to build a little bit going into this first quarter.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

That's terrific. And Ward, just one last one for you. In terms of the 1Q -- the fiscal 1Q guidance onward, can you just help frame for me the expected sequential improvement based on the lower maintenance, based on any incremental pricing from fiscal 1Q onwards? Just to kind of help me with the bridge from 1Q to the balance of the year, just given the implied improvement. Obviously, from 1Q onward, you mentioned, I think, 1Q you're expecting to be, call it, 19% of full year EBITDA, which is below, obviously, what it was this past year.

And I think it's below previous years as well along those lines.

Ward Dickson -- Chief Financial Officer

Yes. So if you look at FY -- I'm going to give you a first half, second half of FY '21, and then I'll try to do the same thing for you for '22. OK so for FY '21, I think if you look at the $3 billion of EBITDA, we generated, I think, about 43% or 44% in the first half and then the rest of it in the second half. What I would say is, although our Q1 will be lower relative to the Q1 last year versus the total year, I think over the course of the first half, I think we're going to be at about the 43% if you look at the midpoint for the full year.

So the seasonal pattern first half, second half, the ramp-up, the full ramp-up of Porto Feliz and Tres Barras. And then you'll start to see -- I mentioned it's not material, but you'll start to see some of the -- some sequential declines in some of the recycled fiber cost. I think that's what gives us comfort. And then you've got also -- You've got the flow-through of the price increases that, as you know, on the Consumer side of the business, they take a little bit longer than the flow-through in Corrugated.

So we'll have the full benefit of the implementation of the price increases as well.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks so much Ward. All the best.

Ward Dickson -- Chief Financial Officer

Thank you. 

Operator

[Operator instructions] Your next question comes from the line of Gabe Hajde with Wells Fargo Securities. Your line is open.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Good morning gentlemen. Thanks for taking the question. David, I guess, as the analyst, if you've given an inch, I should take a mile. One of the things that I was thinking about that jumped out to me was your discussion about becoming more efficient.

And I'm curious if you could pinpoint for us areas, whether it's on the SG&A front, I don't know, commercial organization for operations, mills where you think, I guess, maybe you're not doing a good job at this point. And then maybe a way to try to quantify. I mean, I think about kind of the historical context of how WestRock would present to us. I think you have, I don't know, $150 million to $170 million of annual nonmaterial-related inflation annually.

And I think you guys had always kind of tried to offset that through productivity. And I'm assuming that might be the case going forward, but just any help there.

David Sewell -- Chief Executive Officer

Thanks, Gabe. Appreciate it. There's a couple of areas that we're really focused on. And you've probably heard me say in the past, the opportunities to better integrate the acquisitions that we've made over the past several years.

So I'm going to highlight just a couple of areas that I believe we're going to have a material impact on our productivity. The first is supply chain. We recently hired a new Chief Supply Chain Officer, Peter Anderson, who came over from Cummins, that we're really excited about. If you go back to the way we were structured before in our businesses, we had unique supply chain aspects across several of them.

So the productivity opportunity to consolidate our supply chain, consolidate our warehousing, get our S&OP right with the consolidation of our mills. Our freight spend, as you know, is very high, so we'll be able to look at that. We see tremendous opportunity to become more efficient in our supply chain. So that's one area that we think is going to drive material savings.

The second piece is bringing together our mills together in one organization and highlighting new productivity initiatives across the mill. So to your point on previous productivity -- or previous productivity programs with standard inflation. We're now pushing to see how do we significantly improve our productivity on top of inflation. And so we have multiple projects, both at our mill system, as well as our conversion sites.

We've identified several areas where we can reduce our waste, get a little bit better with our digital manufacturing footprint as far as predictive analytics, improve our unscheduled downtime. So we see great opportunities there. And then the last piece I'll talk about is commercial. So we recently, in the first phase, consolidated our MPS and consumer business.

And we've just recognized tremendous efficiencies there. We had multiple customer service teams. If you look at the backroom integration opportunities, as well as customer-facing opportunities where we can go is one phase with complete solutions to our customers. And now we'll expand that where customers want to buy across our portfolio with this new world that I've talked about in supply chain, primary, secondary, tertiary packaging.

So now we'll be more efficient in how we do that and how we service them. So it really transcends across really, I think, our whole organization, and we are really going to drive further productivity and cost out but we're not going to cost our way out of this. We're also going to invest in innovation. We're going to invest in digital, both on the customer smart packaging side that Pat talked about, as well as the manufacturing side.

We think there's tremendous opportunity to modernize the company. So we get really excited about the opportunities. A lot of those projects are underway, and we'll look forward to sharing more detail about them with you at our investor day.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Your next question comes from the line of Cleve Rueckert with UBS. Your line is open.

Cleve Rueckert -- UBS -- Analyst

Great. Thanks everybody. Thanks for taking the questions. Just thinking a little bit strategically or maybe even it's tactically next year.

But your guidance is calling for falling OCC prices sort of throughout the year. David, you called out a few times on this call already the breadth of WestRock's portfolio. I'm just curious if your strategy changes at all with certain raw material prices falling and if there are any differentiated opportunities that that environment opens up for WestRock?

David Sewell -- Chief Executive Officer

So thanks for that question. The way we look at -- and I'll just use OCC as an example. We're at about 65%, 35% from a virgin recycle mix. But as we've said in the past, we have the ability to flex on some of -- with that percentages.

So what we try to do though is look at it from a customer perspective versus an internal perspective. And providing those solutions, to your point on the breadth of our portfolio, they may want more lightweight grades. They may want more recycled grades. They may want more plastics replacements.

So the word that I like to use with our capability is flexibility. So with the resiliency of this company and if you look at that chart from back to 2016 to 2021, you can see through all different kinds of inflationary environments, capacity environments, we've grown top line very well. We've grown our EBITDA very well. And I just think this flexibility in this new world of supply chain and sustainability and innovation opportunities with our customers, I think our footprint just has us very well positioned to respond and adapt and innovate where we can drive great margin expansion and top line growth.

Cleve Rueckert -- UBS -- Analyst

OK. That's clear. And then I just wanted to follow up quickly on the opportunity for plastic replacement. I think originally, you pulled out the $280 million annual run rate as what you had achieved.

But then subsequently, you were discussing a $500 million annual run rate opportunity. I'm sorry if I missed it, but what's the timing on the $500 million sort of target or opportunity there?

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yes. So this is Pat. So thanks for that. We're looking at that over the next couple of years.

We think we can get to that $500 million run rate. We have a very strong portfolio of products and projects that are coming out from small ones to larger opportunities. So it's a pretty good run rate. We started tracking that $280 million against this $500 million in July of 2018.

So it started out and it's certainly increasingly. We kind of see that we're at the early stage of the growth that we'll probably see over the next several years. But in the next couple of years, we expect to get to the $500 million.

Cleve Rueckert -- UBS -- Analyst

OK. Thanks for the questions guys, appreciate it.

Operator

Your next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah, thanks very much. Good morning guys. You lined up $1 billion in capex, maybe you could just give us some details on some of the big buckets of spending.

Ward Dickson -- Chief Financial Officer

Paul, this is Ward. So historically, when you strip away the strategic capital investments and you look at the ongoing run rate, it's -- about half of it's maintenance, replacement, environmental and regulatory, and then half of it is the ongoing return generating projects that we have, both in our mill and converting systems. If you look kind of broadly, I'd say 60% of it is in the mill system, about 35% of it is in the converting system, and then we're going to be making some investments in IT systems to modernize our platform.

Paul Quinn -- RBC Capital Markets -- Analyst

OK. And then one area that was surprisingly good for -- I thought it would be a pickup was Brazil corrugated. That was a jump higher than we expected. Just wondering how sustainable that achievement is? And what do you expect going forward into year '22?

Ward Dickson -- Chief Financial Officer

So it's a meaningful growth driver, and it's because of the investments that we made in both our mill and greenfield box plant that we made at Porto Feliz. So as we go through FY '22, I think Alex is going to be reporting to you that this is the most highest margin portion of our business. And it's a meaningful contributor and will continue to get better as we go into FY '22. It's one of the growth drivers.

When we talked about the fact that we'll get $125 million worth of incremental EBITDA next year from our strategic capital projects, this is the biggest driver.

Paul Quinn -- RBC Capital Markets -- Analyst

OK. And then just lastly, in an environment of supply chain constraints, what are the main benefits of owning distribution?

David Sewell -- Chief Executive Officer

Well, I think it's proving to be very beneficial to our customers because they're looking for redundancy in supply chain. And what we're able to do is we have 65-plus distribution warehouses. We have our own fleet of trucks. And so we're able to support our customers with that assurance of supply, with quick delivery.

I talked a little bit about a lot more customization, as well as you heard Pat talk about a lot more brick-and-mortar, e-commerce that needs local support. So it's really proving to be a nice business for us with a nice value proposition that's growing. And we're really encouraged by the opportunity with our customers that are looking for the ability to supply the way we always were, but also have that ability with local distribution with our own platform.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. Best of luck guys. Thanks.

Operator

Your next question comes from the line of Mike Roxland with Truist Securities. Your line is open.

Mike Roxland -- Truist Securities -- Analyst

Thanks very much. Thanks for Taking my questions. Ward, congrats on the retirement.

Ward Dickson -- Chief Financial Officer

Thank you.

Mike Roxland -- Truist Securities -- Analyst

And Alex, congrats on the new role.

Alex Pease -- Executive Vice President and Chief Financial Officer

Thank you.

Mike Roxland -- Truist Securities -- Analyst

Most of my questions have already been asked, just two quick ones. You mentioned, David, that e-commerce remains an overall driver of box demand. Do you mind telling us how much e-commerce demand increased in the quarter and for the full year and what you're seeing with respect to e-commerce today?

David Sewell -- Chief Executive Officer

Yes. So I'm just going to give a broad e-commerce comment, but I'm going to have Pat just walk you through some of the details on exactly on how we're looking at that. But as we look at e-commerce, I think it's -- there's a new normal. We're continuing to see growth above pre-COVID levels.

I think consumer buying habits have changed. It's not an either/or. I think it's an and, and it's both. And so I think we're seeing a nice growth is in the omnichannel piece where there's those brick-and-mortars that are trying to get into more of an e-commerce channel.

And what I love about our business is our ability to differentiate. So while you'll see e-commerce, sometimes those boxes that have a lot of additional airspace in the packaging, we're really working with them on design with our automation equipment to be more efficient, eliminate waste. And Pat, why don't I turn it over to you to talk about specific growth trends which we're seeing in the segment?

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yes. Thanks for that, David. So just a specific answer to your question around fiscal year '21 volume in e-commerce. In e-commerce, we were up about 15% versus fiscal year '20.

So we saw good growth in that area. Certainly, with the supply chain disruptions that we've talked about before, we saw some flattening of that in the fourth quarter, but we expect ongoing growth into next year. We think e-commerce, it saw a huge spike, obviously, in fiscal year '20 with the stay-at-home economy, but we do expect it to continue to grow in that mid-teens range out in the future off of a much higher base than it was two years ago. And as David mentioned, it's a very dynamic marketplace with all the different omnichannel aspects.

And kind of just to wrap up, we have corrugated solutions, a whole host of folding carton solutions, paperboard solutions, craft paper. We've got digital and physical displays, whether it's in the store or through the e-commerce channel, distribution, machinery and automation, Box on Demand and other solutions that we've introduced there. Really, however, this market evolves in terms of the mix across the omnichannel, I really believe and we really believe that we have the opportunity to provide unique solutions in this industry. So it will continue to be very important to us in the future, and we're well poised to capitalize.

Mike Roxland -- Truist Securities -- Analyst

Great, Pat. Just one quick follow-up. Back in the September update, you mentioned this, you updated the guidance and you stated that you expected to be near the low end of your fiscal 4Q range. And you wind up being in the middle.

So I'm wondering what happened -- what specifically occurred during the last few weeks of September that caused the company to outperform relative to what you said in mid-September?

Ward Dickson -- Chief Financial Officer

Well, I'll take it. This is Ward.

David Sewell -- Chief Executive Officer

OK.

Ward Dickson -- Chief Financial Officer

The way -- the low end of our guidance was $670 million EBITDA range. We did get $5 million worth of business interruption recoveries for the ransomware claim that we didn't anticipate. And then, the lower -- the stronger EPS was a lower tax rate. And we had some estate tax planning efforts that came through in the quarter now that we closed out at the end of the quarter.

So those are the two drivers.

Mike Roxland -- Truist Securities -- Analyst

Got it. Thank you very much, guys.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. James Armstrong.

James Armstrong -- Vice President of Investor Relations

I appreciate everyone joining the call today. If you have any questions, please reach out. And thank you, and have a great day.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

James Armstrong -- Vice President of Investor Relations

David Sewell -- Chief Executive Officer

John Babcock -- Bank of America Merrill Lynch -- Analyst

Ward Dickson -- Chief Financial Officer

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Mark Wilde -- Bank of Montreal -- Analyst

Phil Ng -- Jefferies -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

Cleve Rueckert -- UBS -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Mike Roxland -- Truist Securities -- Analyst

Alex Pease -- Executive Vice President and Chief Financial Officer

More WRK analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool recommends WestRock. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.