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Following our prepared comments, we will open the call for a question-and-answer session.
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.
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.
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 earnings per share 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.
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.
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.
James, we are now ready for Q&A.
Operator, may we take our first question, please?

user
compname reports fiscal 2021 fourth quarter results: record net sales of $5.1 billion up 14%.
q4 sales rose 14 percent to $5.1 billion.
qtrly adjusted earnings per share $1.23.

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