Westrock Co
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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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question at that time, [operator Instructions]. If you would like to withdraw your question, [Operator Instructions]. Thank you. I would now like to turn today's call over to Mr. James Armstrong. Please go ahead.
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 via 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. We described these risks, uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30th, 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.
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 will 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, but 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're 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 a $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 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're 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 Três 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 a 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 a $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 Kraft paper, and realizing higher pricing in 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 teams 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 2.25 times to 2.5 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 6th 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 return to our targeted leverage ratio. We repurchased a $122 million of stock or 2.4 million shares. As noted earlier, we completed our investments at our Florence and Três 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 makes 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 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 reopened.
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 customer’s 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 would 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 Europe-Pacific partners on our use of WestRock's CanCollar and the product packaging. CanCollar is a durable paperboard-based multi pack 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 of 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 costs, is forecasted to be approximately a $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 1 quarter in WestRock's history. These assumptions combined with 3 fewer shipping days, and the normal seasonality in our consumer business, results in forecasted adjusted segment EBITDA of $660 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 scheduled declines throughout the fiscal year, but will still be approximately a 100 thousand 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've 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 through our marketable 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 have 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 customer's changing needs. The paper segment will be comprised of our external paper sales. We have strong customers and are attractive domestic containerboard and paperboard business, 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 innovations such as improvements in material science, converting, and machinery and automation. Growth and 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 spin-off 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 assistance as I joined the Company greatly, and know we will all miss them 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 improved 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.
Thank you, David. Operator, may we take our first question, please?
[Operator Instructions] Your first question comes from the line of George Staphos with Bank of America. Your line is open.
Hey, good morning. This is actually John Babcock sitting in for George Staphos. I guess just starting out, it will 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 go from there.
Hey, John, this is Ward. I will 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 3 fewer shipping days in our corrugated packaging business. This is the largest maintenance outage quarter since the merger. We had 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 fiscal first quarter, seasonally higher healthcare costs because everybody is past their deductibles and they're trying to get discretionary healthcare 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 startup cost, 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 into our customers. That our productivity 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, mid-point 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 okay, I will flip to the full year and walk you through the key elements of our guidance for the full year. The midpoint of the guidance for the full year reflects record sales and EBITDA and strong cash flow generation. And what we're 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 am going to give you some very specific assumptions that we've got in the midpoint of our guidance related to OCC and some other cost. 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 assume a $166 per ton for the full year. That's a $60 per ton increase from FY21. And our quarterly profile Q1, we assume a 175 bucks a ton, which is up $8 a ton from Q4. In Q2 and Q3, we see some reduction of a $165 a ton, and then in Q4 we see a $160 a ton. So the recycled fiber inflation is -- on a year-over-year basis is more than $325 million, it approaches $350 million for the full year.
And then natural gas is a similar story with September's costs as we exited FY21, they're 40% higher than the average was for the full year. So the current strips reflect a 50% increase versus FY21. 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 towards the end of the calendar year in FY22. 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 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 is 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 401(k) 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 and 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.
That's very helpful. And then just 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'll be great.
Yes. I'll do the full year, and 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 from 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?
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. 2002 (sic) [2022] GDP is expected to be about 4%. And durable and non-durable 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 in packing, especially corrugated and also the seasonal slowdown and 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 e -- the online and e-commerce market is really becoming a little bit blur between the online and brick-and-mortar because you've got the buy online and pick up in-store pickup at curbside. And so that's 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 will 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 every turn cup stock to the pre -pandemic levels. Commercial Print, which was down last year, is 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 to your [Indiscernible]. 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 talked about in August and September certainly impacted us. We think the worst is behind us there. And we're -- we saw sequential improvement as September was better than August, and October was 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 were generally positive on seeing sequential improvements in our corrugated box business in the quarter.
Great. Thank you.
Your next question comes from the line of Mark Wilde with Bank of Montreal. Your line is open.
Thank you. David, I wondered if you could start off by just talking a little bit about perspective 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.
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 a 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 focus on the high-value packaging segments, the paper markets, that we want to focus 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 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. 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.
Okay. And then just as a follow-on. Could you just address any perspective considering for incentive programs, both at the operating level and at the executive level at WestRock.
I apologize, Mark. You cut out a little bit with your question. I just want to reconfirm your question is what incentive programs were driving at our mill level as well as our leadership level?
Yes. I'm interested in any changes that we might see under your leadership.
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're 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.
Okay. Very good. I'll turn it over.
Thanks.
Again, if you would like to ask a question, [Operator Instructions]. Your next question comes from Phil Ng with Jefferies. Your line is open.
Hey guys. Ward, thanks for all the great help through the years and congratulations.
Thanks though. Appreciate it.
Yeah. I guess first off, a question for you David. Inflation supply chain headwinds have been more pronounced than almost anyone would have expected come into 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?
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 challenge is, the demand we're seeing from our automation and machinery business, is extremely high.
We were 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, and 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.
That's super helpful. I guess, when you think about your 2022 guide, appreciate you gave some color in that, you expecting growth in consumer and corrugated. But any more color around that just because the consumer segment just from a growth standpoint has been a little choppier, but you've obviously made some big strides in terms of pivoting to some of these growth areas. I'll be helpful, 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 gain that you're seeing on the sustainability front?
Yes. So, what I'll do is I'll talk very high level then we 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 in 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 higher value, high graphics that works. 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 in the segment.
Sure, great. Thanks, David. And the other the consumer business and seen some nice margin enhancements over the last several quarters as Eva mentioned we're almost 16% EBITDA margins than the -- its up about 220 basis points year-over-year and 40 basis points sequentially. So good momentum there and a big part of that and important part of that. And in addition to productivity in some of the changes that we've made in the footprint and the products are produced in EBITDA. But a big part of that is it's certainly what we're seeing an 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 will get to 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 [Indiscernible]. 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, is 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, materials high-end, digitally connected solutions, as well as automation machinery and robotic. This is a tremendous advantage for Company overall, and it's going to continue to deliver growth for the consumer segment.
And Pat, I think you answer 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.
On that note, David, will those dynamics have like a favorable mix impact in your consumer business? And appreciating you're not looking as just selling volumes, you're selling a solution approach. One of your bigger competitors on the consumer side generally said, our business has been historically flattish, but with some of these gains on the sustainability side, we see in line-of-sight call it a low single-digit growth. Are you kind of thinking about it in similar fashion as well?
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, I'm saying that broadly, but the pickup in the number of customers that want innovation and plastics replacement in their portfolio. And to partner with us to help design that in automated where we can. That's where we want to focus. What we -- the very transactional pieces of this are a lower focus for us and it's the partnerships on those high-value applications.
Thanks Ward. Really appreciate it.
Your next question comes from the line of Adam Josephson with KeyBanc. Your line is open.
Thanks. Good morning everyone, and Ward, congratulations on your retirement. All the best to you and a pleasure working with you.
Thank you. And the same is truly with you, Adam. Thank you very much.
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?
Thanks for the question. So just to go back to the corrugated box shipments in the quarter, we have -- we had labor challenges in August and September and supply chain challenges we've talked about before. We think that was a 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.
Operating rates remain high, backlogs are strong. There's always going to be especially right now some uncertainty in month-to-month, and how things sort out because of the supply chain and labor challenges. But overall, we are pretty confident we'll see sequential improvement
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've been up a couple percent. So we see that momentum carrying in, we're just balancing and working through a very tough environment.
And Adam, this is Ward. I would just 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. We have the tough compares on the Q1 ramp, but we feel confident about the outlook for the full year.
Thanks, Ward. A couple of other question just on containerboard inventories. Obviously for the industry as a whole, they grew quite a bit in the September quarter. I am just wondering how you would characterize your inventories. Are they where you 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 is dealing with, etc.
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 first quarter mill with our planned outages. But if you Look at the inventory build 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 in into this first quarter.
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 onward? 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've 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.
So if you look at FY -- I'm going to give you a first-half, second-half of FY '21, and then I will try to do the same thing for you for 22. Okay, 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 Puerto Felise and Trace Baha's, 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 costs. I think that's what gives us comfort. 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.
Thanks so much Ward, all the best.
Thank you.
[operator Instructions]. Your next question comes from the line of Gabe Hajde with Wells Fargo Securities. Your line is open.
Good morning, gentlemen. Thanks for taking the question. David, I guess, as the analyst, if you give an inch you 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, 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 to $170 million of annual non-material related inflation annually, and I think you guys have always kind of try to offset that through productivity and I'm assuming that might be the case going forward, but just Any help there.
Thanks, Gabe. Appreciate it, good morning to you. there are a couple 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 want to highlight just a couple of areas that I believe we're going to have 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 comments 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 spends 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. 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 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 will talk about is, commercial. So we recently in the first phase, consolidated our MPS in 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 as 1 face 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 will be more efficient in how we do that and how we service them. It really transcends across really, I think our whole organization, and we're really going to drive further productivity in 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 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 look forward to sharing more detail about them with you at our Investor Day.
Thank you.
Your next question comes from the line of Cleve Rueckert with UBS. Your line is open.
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 throughout the year. And 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 environment opens up for WestRock?
So, thanks for that question. The way we look at -- and I'll just use OCC as your example. We're at about 65%, 35% from virgin recycle mix. But as we've said in the past, we have the ability to flex on some of what that percentage is. What we tried 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 recycle grades, they may want more plastics replacement. So the word that I like to use with our capability is flexibility.
So with the resiliency of this Company is -- and if you look at that chart from back to 2016 to 2021, you can see through all different kinds of inflationary environment, capacity environments, we've grown top-line very well, we've grown our EBITDA very well. And I just think this flexibility and 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.
Okay, that's clear. And then I just wanted to follow up quickly on the opportunity for plastics replacement. I think originally you pulled out the $280 million annual run rate is what you had achieved, but then subsequently, we're discussing a $500 million annual run rate opportunity. I'm sorry if I missed it but, what's the timing on the $500 million target or opportunity there?
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 large -- larger opportunities. So it's pretty good run rate. We started tracking that $280 million against this $500 million in July of 2018. So it started out on and it's certainly increasing week. 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 the next couple of years we expect to be to the 500.
Okay. Thanks for the questions, guys. Appreciate. it.
Your next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open.
Yeah, thanks very much. Good morning, guys. You outlined a billion dollars in CapEx. Maybe you could just give us some details on some of the big buckets of spending.
Hey, Paul, this is Ward. Historically, when you strip away the strategic capital investments and you look at the ongoing run rate, it's about half of its maintenance, replacement, environmental, and regulatory and then half of it's the ongoing return-generating projects that we have both in our mill and converting systems. If you look broadly, I'd say 60% of it's in the mill system, about 35% of it's in the converting system, and then we're going to be making some investments in IT systems to modernize our platform.
Okay, thanks for that. 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 full-year '22?
So it's a meaningful growth drive and it's because of the investments that we made in both our mill and Greenfield box plant that we made at Porto Felize. So as we go through FY '22, I think Alex is going to be reporting to you that this is the highest margin portion of our business. And it's a meaningful contributor and will continue to get better As we go into FY '22 of the growth drivers. When we talked about the fact that we'll get a $125 million worth of incremental EBITDA next year from our strategic capital projects. This is the biggest driver.
Okay. And then just lastly, in the environment of supply chain constraints, what are the main benefits of owning distribution.
Well, I think it's proving to be very beneficial to our customers because they are 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 talked about a lot more brick-and-mortar e-commerce that needs local support. So it's really proven 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.
All right. Best of luck, guys. Thanks.
Thank you.
Your next question comes from the line of Mike Rockland -- Roxland with Truist Securities. Your line is open.
Thanks very much. Thanks for taking my questions. Ward, congrats on the retirement.
Thank you.
Alex, congrats on your new role.
Thank you.
Most of my questions have already been asked, but just 2 quick ones. You mentioned David, that e-commerce remains an overall driver on [indiscernible]and then do you mind telling us how much e-commerce has an increased in the quarter, and for the full year, and what you're seeing with respect to e-commerce today?
Yeah, so I'm just going to give a broad e-commerce comment, but I'm going to ask 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 there is 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 it's both. And so I think with the -- 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 when I turn it over to you to talk about specific growth trends, we're seeing in the segment.
Yes, thanks for that David. So just specific answer to your question around fiscal year '21 volume and e-commerce. We are 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 [indiscernible] in the fourth quarter, but we expect ongoing growth into next year. I think e-commerce, it's 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 2 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 Hostess folding carton solutions, Paperboard solutions, Kraft paper. They've got digital and physical displays, whether it's in the store or through the e-commerce channel distribution, the 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 omni -channel, I'd really believe and we really believe that we have the opportunity to provide unique solutions in this industry. So we will continue to be very important to us in the future and we're well-poised?.?
Great. Thank you. Just one quick follow-up. Documents in February, David, you mentioned this, you updated the guidance and you stated that you expected to be near the low end of your fiscal 4Q range, you wind up being in the middle. So I'm wondering what happened -- what's specifically occurred during last few weeks of September that caused the Company to outperform relative to what you said in mid-September?
I'll take it. This is Ward. The low-end of our guidance was $670 million EBITDA range. We did get $5 million worth of business interruption recoveries for the ramps more client that we didn't anticipate. And then the lower -- the stronger EPS was a lower tax rate and we have some state tax planning efforts that came through in the quarter that we closed down at the end of the quarter. Those are the two drivers.
Thank you very much, Ward.
There are no further questions at this time. I would like to turn the call back over to Mr. James Armstrong.
I appreciate everyone joining the call today. If you have any questions, please reach out. And thank you and have a great day.
Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.