Greetings, and welcome to the Materion Fourth Quarter 2021 Earnings Conference Call. There will be a Q&A session for today's conference following the presentation. Please press star one on your phone if you wish to enter the Q&A queue at any time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Zaranec, Vice President, Corporate Controller, and Investor Relations. Please go ahead, sir.
Good morning, and thank you everyone for joining us on our fourth quarter 2021 earnings conference call. This is John Zaranec, Vice President, Corporate Controller and Investor Relations for Materion Corporation. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we'll reference as part of today's review of the quarterly results. You can also access the materials throughout the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer, and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows. Jugal will provide opening comments on the quarter, a recap of the year, and an update on key strategic initiatives.
Following Jugal, Shelly will review the detailed financial results for the quarter and the year, in addition to discussing our expectations for 2022. Then we will open up the call for questions. Let me remind investors that any forward-looking statements made in this presentation, including those in the outlook section and during the question and answer portion, are based on current expectations. The company's actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest and taxes, net income, and earnings per share reflect the adjusted GAAP numbers shown in attachments four and five in this morning's press release.
The adjustments are made in the prior year period for comparative purposes and removes special items, non-cash charges, and certain discrete income tax adjustments. Now I'll turn over the call to Jugal for his comments.
Thanks, John, and welcome everyone. I'm pleased to share details of our record performance in both the fourth quarter and for the full year as we look forward to an exciting year ahead in 2022. The stage is set for another year of advancing our transformation strategy, resulting in above-market growth aligned with megatrends, increased earnings, and margin expansion. We delivered record sales and earnings in the fourth quarter, finishing out a tremendous year for our company. Sales grew 27% year-over-year, while EBIT was up 50%. Not only did demand in our market show continued strength, but our organic initiatives helped to drive double-digit growth. We are showing the power of our outgrowth initiatives as we continue to build our pipeline of exciting opportunities and place a sharp focus on commercialization and execution.
I'm very proud of our team for delivering for our customers despite the challenges the Omicron spike brought about. Like most companies, we saw record COVID cases and related absences during the second half of December that persisted into January, temporarily slowing our shipping rates, but we expect we'll make up those sales by the second quarter. Despite the impact of these challenges, we still delivered record results and expanded EBIT margins in Q4. While our vertical integration and pass-through pricing mechanisms keep us fairly insulated from major raw material pressures, we are closely managing the impact of other costs and labor inflation and implementing selective price adjustments. The fourth quarter also marked the closure of the largest and most exciting acquisition in our company's history, HCS Electronic Materials.
So far, the integration has been seamless, and our teams are coming together quickly and collaboratively with a sharp focus on delivering for our customers while managing strong growth. Thus far, this business is everything we expected it to be, with great people, high-quality products, and countless opportunities to create value. Financially, the acquisition contributed in line with expectations in the fourth quarter, and we expect a strong 2022. 2021 has been a remarkable year for Materion as we delivered record levels of sales and earnings while making significant advancements in our strategy. We grew value-added sales almost 30% while increasing EBIT an impressive 79% year-over-year. We are truly transforming our company into an advanced materials leader and becoming our customers' partner of choice.
I'm excited about the many advancements we've made with our customer-focused projects this year as we work together to deliver products and solutions for their next-generation applications. Construction of our Precision Clad Strip plant is complete, and we're moving on to the qualification phase. We are receiving excellent feedback from our customer, giving us confidence that the qualification will continue to progress smoothly. This opportunity is set to contribute more meaningfully this year as we start to ramp production in Q2. This year, we significantly increased our penetration in automotive, particularly in high-growth EV applications with strong upside potential. We also delivered tremendous above-market growth across several of our other end markets. Our R&D investments are contributing to this above-market growth as we're able to develop new products for our customers' latest applications.
2021 marked the first year our R&D spend crossed 3% of sales, and we expect to continue to drive increased levels of investment spending to fuel the opportunity pipeline. On the operational excellence front, our plans supported unprecedented levels of demand in the face of continued COVID uncertainty and labor challenges. In order to continue our efficiency progress, we implemented a pilot manufacturing AI initiative aimed at improving first-time quality and improving yields. Early results of this effort look quite promising. We continued our progress on the inorganic front with the transformative acquisition of HCS Electronic Materials, increasing our portfolio alignment with high-growth megatrends. As I mentioned, the acquisition is proving to be a very strong strategic fit as we combine our portfolios to further advance our presence in the semiconductor market with all of the top customers.
With the acquisition of Optics Balzers, we delivered $2 million of cost synergies in 2021, ahead of our planned pace, while building a robust pipeline of opportunities that will drive future above-market growth. As we look forward to 2022, I am really excited about what our team is set to deliver. We expect to exceed $1 billion in VA sales for the first time as we grow our business and continue to outpace the end markets, which are poised for another year of solid growth. We are entering the year with the strongest order book we've seen in our company's history. To support our growth expectations, we are planning another year of robust capital spending as we invest to build new capabilities for our customers and respond to increasing levels of demand.
We have the most talented and motivated team that is well-aligned around our growth objectives. While challenges persist in today's environment, we expect we will successfully navigate and offset the impacts of labor constraints, inflationary pressures, and supply chain issues as we have in 2021. With all of that, I'm highly confident we can achieve another year of record value-added sales, earnings, and EPS, along with expanded margins. In closing, let me reiterate how proud I am of what our team has accomplished in 2021, delivering record performance while building a strong pipeline of opportunities for the future. We are very optimistic about 2022 and look forward to another exciting year. Now, let me turn the call over to Shelley to cover the financials.
Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on slide 15. As Jugal outlined, we achieved record quarterly value-added sales and adjusted EBIT in the fourth quarter. Value-added sales, which exclude the impact of pass-through precious metal costs, were $237.4 million for the quarter, up 27% from the prior year. The increase was driven by strong end market demand across most of our markets, including semiconductor, industrial, aerospace and defense, and automotive, as well as meaningful impact from our organic outgrowth initiatives. We also had two months of HCS Electronic Materials results this quarter, which were in line with our expectations. We delivered an adjusted EBIT margin of 11.8% and adjusted earnings per share of $1.03, up 47% as compared to the prior year.
Looking at slide 16, adjusted EBIT in the quarter was $28.1 million, up from $18.7 million last year. Our adjusted EBIT margin of 11.8% represents a 180 basis point improvement from a year ago. The increase in EBIT was largely driven by higher volume, improved pricing, stronger operating performance, and less unfavorable currency impact, as well as two months of contribution from HCS Electronic Materials. These drivers were partially offset by investments in R&D and sales and marketing, as well as higher incentive comp and new facility start-up costs related to our new Precision Clad Strip plant. Although we did see some slowdown in shipping rates in the back half of December due to the Omicron spike, we delivered impressive fourth quarter results above the midpoint of our guide.
Moving to slide 17, 2021 was a remarkable year for Materion as we delivered records for value-added sales, adjusted EBIT, and adjusted earnings per share. VA sales reached an all-time high of $859.7 million, up 29% from the prior year. The increase was driven by robust end market demand, plus the impact of our outgrowth initiatives, resulting in double-digit organic growth across major end markets. The late-year addition of HCS Electronic Materials also contributed nicely and is poised to be even more impactful in 2022. Adjusted EBIT for the year was $99.4 million, up 79% from $55.4 million last year. Our adjusted EBIT margin of 11.6% represents a 330 basis point increase from a year ago.
The increase was largely driven by higher volume, positive mix, improved pricing, and strong operating performance. This outstanding company performance resulted in a yearly record for adjusted EPS of $3.81, an increase of 88% versus the prior year. Now let me review fourth quarter performance by business segment, starting with our Performance Alloys and Composites business on slide 18. Value added sales were $115.8 million, an increase of 29% compared to the prior year. The year-over-year increase is driven by strong performance in the automotive, industrial, energy, and aerospace end markets. EBIT, excluding special items, was $17.6 million, or 15.2% of value added sales, compared to $11.7 million, or 13% of value added sales in the fourth quarter of 2020.
The increase was primarily due to higher volumes, positive pricing, and favorable operating performance, resulting in 220 basis points of margin expansion year-over-year. As it relates to the 2022 outlook, we currently have a strong order book heading into the year. We also expect the Precision Clad Strip project to contribute more meaningfully in the second half of the year. In the meantime, we will see the impact of plant startup costs persist through the first half as we work through customer qualifications and complete the training and startup protocols for the plant. Next, let's turn to Advanced Materials on slide 19. Value-added sales were a quarterly record of $89.5 million, up 52% versus the prior year and exceeding the previous record set in Q3.
The increase was driven by accelerating organic initiatives and strong end market demand, as well as two months of sales from HCS Electronic Materials. EBIT, excluding special items, was $12.5 million in the quarter compared to $7.2 million in the fourth quarter last year. Adjusted EBIT margins improved year-over-year by 180 basis points to 14%. The improvement in adjusted EBIT was due to increased demand, positive pricing, and strong mix. As we look forward to 2022, we expect the Advanced Materials business to deliver another year of strong outgrowth, especially in the semiconductor space. Additionally, a full year of HCS Electronic Materials will deliver a meaningful step up in both value added sales and earnings. Finally, turning to the Precision Optics segment on slide 20.
Fourth quarter value added sales were $32.4 million, down 16% compared to the prior year, but up 5% when excluding the LAC business and PCR filter sales from Q4 2020. The fourth quarter of 2020 saw the last quarter of shipments from the LAC business that was closed at the end of that year. We saw a significant amount of pre-buying in the final days. In addition, sales related to PCR COVID testing filters peaked in the fourth quarter last year. When excluding these two items, value added sales increased due to growth in the consumer electronics and industrial end markets. EBIT, excluding special items, was $3.9 million or 12% of value added sales, a year-over-year improvement of 90 basis points. Year to date, adjusted EBIT margins are up about 60 basis points from prior year.
The margin improvement resulted from cost management initiatives as we drove $2 million of cost synergies from the Optics Balzers acquisition for the full year of 2021. EBITDA margins for this business are 20% year to date, up 240 basis points versus the prior year, which is more indicative of the operational performance without the impact of higher acquisition related amortization. As we look out into 2022, we expect to return to year-on-year growth with new business opportunities coming online in the second half. The first half results will be tempered by some near term headwinds with the decline in COVID PCR testing filter demand and the discontinuation of a consumer electronics product application. This is a temporary impact as the opportunity pipeline for this business is robust and growing. Now moving to cash, debt, and liquidity on slide 21.
We ended the year with a net debt position of $435.3 million and approximately $176 million of available capacity on the company's credit facility. Our pro forma leverage at 2.6x remains well within our desired range. Strong operating performance allowed us to pay down $35 million of our recently assumed debt in the fourth quarter. As it relates to 2022, we are anticipating strong free cash flow, which will support continued investments in our business as well as additional debt paydown. Transitioning to slide 22, I want to take a moment to review some additional earnings metrics we will be reporting going forward. As our company continues to evolve, we want to focus on providing more visibility into our operational performance.
As a result, starting in 2022, we're adding EBITDA for total company and the business segments and EPS excluding acquisition amortization as key profitability metrics. These changes will align our results more closely with those of our peers and allow us to better reflect operational performance without the impact of non-cash charges. We plan to provide EBITDA information by segment for historical periods before we issue our Q1 2022 earnings. Lastly, turning to the guidance summary on slide 23. We expect to deliver another year of record results in 2022 with continued strong end market performance, our customer focused outgrowth initiatives, and contributions from our recent acquisitions. We expect adjusted EPS excluding acquisition amortization in the range of $5.30-$5.70 for the full year, an increase of 35% from 2021 at the midpoint.
While we are moving to this metric without amortization for 2022, as this is the first quarter providing guidance in this method, we are also providing the comparable guidance for adjusted EPS in the range of $4.80-$5.20, an increase of 31% from the prior year at the midpoint. Looking at the way the quarter is starting out, we expect results in the first quarter to be in line with those from Q4. This takes into account the Omicron impact continuing in January and new plant startup costs. We have also noted a few modeling assumptions for you on this slide, including some more detail on our expectations for capital investments.
Our assumptions on capital expenditures include a few previously established investments, including $10 million related to the second phase of our mine tailings pond project, and planned investments for additional capacity at our HCS Electronic Materials business to meet the extremely strong semiconductor demand. In closing, 2022 is shaping up to be another exciting year of strong growth and execution for Materion, resulting in record results and long-term sustainable value creation for our stakeholders. This concludes our prepared remarks. We will now open the line for questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question is coming from Marco Rodriguez from Stonegate Capital Markets. Marco, your line is live. You may proceed.
Good morning, everyone. Thank you for taking my questions.
Good morning, Marco.
Good morning, Marco.
Hi, guys. I was wondering if maybe you could talk a little bit more in detail about gross margins in the quarter. They came in a little bit weaker, at least than what we expected, and it kinda looks like all three segments were off a little bit versus prior cadence. Maybe if you can discuss also, you know, what kind of dynamics you saw in the quarter. I know you mentioned you saw some shipping issues with Omicron, but just kind of unpack some of those details there. If you could, maybe discuss how you guys are kinda thinking about gross margin and the cadence as we enter fiscal 2022.
Yeah. Let me start on that one, Marco. If I think about gross margins in Q4 versus maybe Q3, there certainly was some mixed impact. You know, Q3, we talked about stronger shipments to a defense customer and of our beryllium customer, which tend to be mixed positive. We did not see that in Q4. In addition, you know, when the Omicron spike happened later part of December, it has a bit of an absorption impact because we weren't getting quite as much product out the door. I would say those were the drivers. HCS Electronic Materials also that comes in is slightly lower on the gross margin line, although an expander at the EBITDA level. Those are some of the items I would point to.
As we think about next year, you know, I think that gross margins are going to be strong. We're looking for expansion in the gross margin line outside of the HCS impact. You know, while we may start out slightly slow in Q1, again, because of the Omicron and the build and the plant startup cost, I think you're gonna see expansion for gross margin full year.
Very helpful. In terms of that mix impact of the defense and the Omicron impact, is there a way to sort of rank it? Like, was there more of a two-thirds impact from the lack of the defense orders versus the absorption impacts?
Yeah. I probably would order it the mix and plant startup cost more so than the absorption.
Got it. Very helpful. In terms of the acquisitions that you guys have just made recently here, Optics Balzers and HCS, I know that obviously the acquisition synergies there were more about driving sales versus necessarily cost synergies. Can you kind of update us on the process of getting those revenue synergies at Optics Balzers? You will maybe if you can provide kind of a sketch of your expectations for HCS.
Yeah. First of all, Marco, both of these acquisitions have been just fantastic additions to our portfolio. You know, as we've indicated, Optics Balzers has allowed us to create a global optics portfolio, and then HCS has just been a fantastic add. Not only for the semiconductor market, which, as you know, is a really, really strong market right now, but also great additions to our aerospace and defense and industrial markets. We're really excited about the two acquisitions, you know, that we've done. Like you said, you know, our synergy level has been more focused on the top line and less focused on the bottom line. However, we're making good progress on the bottom line as well. We've had some early wins already.
In fact, on the HCS side, as we've looked at some combined procurement activities, our team's been really excited about putting the leverage of the combined entity into the supply base. We've had, as we indicated already in our remarks, around $2 million of cost synergies on the Optics Balzers side. You know, on the top line, on the commercial side, it's really going well. I can tell you that our teams on the optics side have been working very well together, have identified, I'm gonna guess in the neighborhood of, you know, $2 million-$4 million of synergies, top line synergies that we hope will start to kick in in the second half of this year, and then really into 2023 and 2024.
We're quite excited about that, and we think there's more, certainly to be done there. There's a lot of work going on, even though we've only had the company for three months with HCS Electronic Materials. There's a lot of work going on on the synergy side there. As you know, this gave us a great inroads into the top 15 semiconductor players in the world. We're able to leverage our portfolio both from our side and their side into the top 15 semiconductor players. It's quite exciting for us, you know, with these two acquisitions, and we hope to be able to talk more about the top line synergies as we realize them during the year.
Very, very helpful. Then, another kind of just larger picture question. You know, as you guys kind of look into fiscal 2022, you obviously have provided guidance, and it's helpful as always. Can you maybe discuss what you see as the biggest opportunities you see to be driving growth by segment perhaps? In that same vein, if you can maybe discuss what are the challenges you see to achieving those goals?
Yeah. I mean, clearly, you know, we've got the acquisition of HCS, of course, that's going to drive growth for us. We've got the acquisition of Optics Balzers. You know, those two things that we've talked about already. We've got the Precision Clad Strip project that's going to help drive you know, a meaningful step up growth for us in 2022. Really at the end of the day, I think what we've really been focused on, and we've been talking to you about it for a number of quarters and in fact past several years, as we have ramped up our R&D spending, is our organic growth.
The markets certainly have been strong, and the markets were strong in 2021, and we expect the markets to continue to be favorable going into 2022, as we've noted in our deck. I think our organic growth is what we're really excited about. You know, our capital spending for 2021 and our planned capital spending for 2022 support that. We're excited really across the board whether you look at our PAC segment with the number of opportunities we have using you know, our ToughMet product, our SupremEX product, our copper nickel tin type alloys.
Whether you look at our ALD chemicals or aluminum scandium targets on the AM side, or you look at the automotive side with LIDAR for Precision Optics, you know, with LIDAR opportunities and general filter growth opportunities, I think, across a number of different markets. You know, the organic outgrowth is what's quite exciting for us. We think the markets will help support that. But more importantly, I think our organic initiatives that we have in the pipeline, we're feeling good about.
All right. Very helpful. Thank you, guys. I appreciate your time.
Great. Thanks, Marco.
Thank you. Once again, ladies and gentlemen, you can enter the queue by pressing star one on your phone at any time. That's star one if you wish to ask a question. The next question is coming from Phil Gibbs from KeyBanc. Phil, your line is live. You may proceed.
Thanks very much. Was I to read from your comments that you expect pricing net of inflation to be positive for your results in 2022, meaning you're more than offsetting cost headwinds?
Yeah, Phil, as you know, we talk about this all the time that, you know, we do not wanna be the sponge, right? We do not wanna be the company in the middle that's having to deal with whether it's inflationary pressures, you know, labor cost challenges, you know, other things. We wanna make sure that we're providing value to our customers, and we're getting paid for that value. We've got a very robust process in our system where we look at everything that's going on in the business, and then we determine, you know, our pricing based on that.
It's our expectation that the headwinds that you know we're all seeing right now on the labor markets, on the inflationary markets that we're taking those into account as we work with our customers and provide the right value to them.
Okay. Shelly, on the clad piece, I think year-over-year in your bridge, you had over a $3 million impact.
Yeah
From the qualification process or ramp up process. I think that was probably stronger, a stronger headwind relative to what we were expecting. Was that stronger relative to what you all were expecting, too?
Well, I think we had talked about $0.20-$0.25 for the year, and it was certainly lighter in Q3. If I look at Q3, Q4, you know, we stacked up close to where I thought we would be. You know, coming into 2022, there's still, you know, a lot to do in terms of making sure that the plant is ready to go. It's not only qualifying the product but also, you know, safety and training protocols. There's expense, you know, going through there before we've got real revenue coming in. It's gonna be really positive for the year, but, you know, a headwind up through the first half.
That makes sense. On the qualification piece, I think your deck said you were about 40% of the way through.
Yeah.
Just what have you done so far? What else do you need to do? Because I think, at least my perception was, you've already been making some of this product already.
Yeah
You know the process and you know the business, and you've seen the product before, so it's not completely new to you all, and it's probably not completely new to your customers. Is that something that assists that process? Just where are you in terms of what else you need to do?
Yeah, Phil, making the product in our, you know, current facility at a smaller scale certainly helps, right? Gives us the runway into the new facility. Keep in mind, it is a completely new facility, right? With a completely new set of equipment and therefore, you know, new production that we're gonna do. I think our teams have done a great job of making sure that all the equipment that we have has been qualified. We've gone through what we call process qualification, and that, you know, we finished in the fourth quarter and just early parts of Q1. What we are really engaged in now is we are making the product in the new facility.
We've actually shared that product, and we'll continue to share that product as we're making it with the customer. They're going through a number of different tests on their side because what we wanna make sure is that the process side and what we're doing from the new plant is gonna be a good product for the customer. Even though the existing material, it is the same material, but it is from a different plant. The customer is going through and putting it through their qualification process. We expect we're roughly around, you know, 40% complete with that. Our expectation is that we'll complete that here over the next few months and then start to ramp up here in the second quarter.
We think it's going really well right now.
Thanks. Then last one for me is just on aerospace and defense and then energy. What are you seeing there? What are your, you know, customers telling you in terms of full-year expectations? I mean, I know from your texture in your slides that you're expecting high single-digit growth, but
Right.
You know, just anything more qualitatively that you can speak to. Thanks very much.
Well, I think first of all, from a market standpoint, we've had our third straight quarter of growth on the aerospace side, fourth straight quarter of growth on the oil and gas side, and we expect that to continue. Of course, it's clearly nowhere near the pre-pandemic levels as we've talked before. There is good increases in the oil rig count that had happened. There is good increases that have happened in the build rates for the airplane. But again, they're not anywhere near pre-pandemic levels.
We expect and what we're hearing from our customers is we expect continued growth into 2022, and we've kinda factored that in, as we've noted in our deck as well, into our guide that we've given for 2022. What's really exciting for us, though, Phil, on both of these markets is our content increasing, you know, per plane. The newer planes, you know, tend to have more content, in fact, than the earlier planes. I think we're really excited about, one, the market growth, so the build rates that are going on and the oil rig counts that are going up, et cetera.
What we're really even more excited about is the actual content increase per unit that we're gonna be able to supply, you know, into 2022. We're positively thinking about both of those markets into 2022.
Thank you. The next question is coming from Marisa Hernandez from Sidoti. Marisa, your line is live and you may proceed.
Thank you, and good morning, everybody.
Good morning, Marisa.
A couple of questions here. First of all, on the growth, on the sales growth for the year, the net sales growth for the year of 29%, how much of that is coming from pricing? What's the pricing impact on that?
You're talking for 2022?
No, for 2021.
Sorry.
For 2021. She's asking what's the overall
Yeah.
Year-over-year growth due to pricing.
Yeah, we focus really on the price cost element of that, Marisa. As Jugal talked about earlier, really making sure that we're not absorbing any of the cost increases that we see. As you know, we've got good protections from our pass-through metal and our vertical integration. While we are implementing price, and in some cases it's, you know, mid-single, high single digit pricing, you wouldn't see that in the total line for our sales. We don't really talk about the percent of sales price impact or the dollar impact other than to tell you it's positive on the price cost line.
Okay. Perhaps, if you focus on the differential, can you share what the differential was between price increases and cost pressures?
Yeah. I would call it in the you know 25 basis points kind of impact in terms of the impact to gross margins.
That's helpful. Thank you, Shelly. Another question I have is on the CapEx. Obviously you're investing a little bit more than normal, I would say. I noticed that you have $20 million dedicated to the new HCS business. What would be that used for?
Yeah. Well, first of all, Marisa, as we've indicated, I think, last year and again, I mean, for 2022, we're really excited about the organic growth opportunities and then the associated CapEx, you know, that we can use to deliver that organic growth, along with operational excellence, because a lot of our CapEx, you know, we're really driving to improve our yields and improve our throughput into the plan. When we look at the $20 million that is related to the new acquisition, it's a number of different things. One of the things is to substantially continue to improve the cost structure and expand the margins of that business.
You know, there's a number of things that that business does where they leverage outside partners, and we think we have an opportunity to do some things more in-house than what we have done in the past or what that business has done in the past. We have some nice make-buy type of things. Those will be great synergy opportunities for us. There's CapEx associated with that. Then let's face it, I mean, 80% of the business is semiconductor. We know what the semiconductor market has done and what it's expected to do, and we wanna make sure we're properly sized to take full advantage of that semiconductor market growth along with, you know, our synergy growth opportunities.
We're making sure we're investing sort of, you know, one ahead of time on that to be able to leverage the growth. Both growth, cost structure, you know, margin expansion, some make-buy type of decisions that we're making, all of that is contributing to that $20 million.
Got it. Is there any specific type of facility investment, Jugal, for volume? She said is there a facility? So it's not a facility, it's more equipment.
Yeah.
Yeah.
Yeah. We're not building a new, you know, facility, new plant. We're leveraging, you know, the floor space that we have. We have a good amount of floor space and so it is really just equipment upgrades as well as new equipment that we're putting in. You know, and it's something that, you know, we've been planning, and we've had in our thinking really since we acquired. We're quite excited about it.
Okay. Thank you. Another area I wanted to ask if you can elaborate a little bit is your Precision Optics segment. Obviously there's been a little bit of movement in terms of some product lines that you no longer have. What should one be expecting about, you know, an annual run rate of sales and profitability structure for this business?
Yeah. Well, I think our position for all three of our businesses is the same, which is we wanna make sure we're driving above market growth in the markets that those businesses are participating in, and we wanna make sure we get to mid-teens margins. That's the roadmap that we have for all three of our businesses. It's a roadmap that we wanna make sure we're executing on. We've made great progress really in all three businesses. We have some of these near term headwinds that we spoke of already on the optics side.
We're confident that over the longer run, with the synergies that are gonna happen between the two businesses, the continued operational excellence and efficiency improvements that we'll drive, this business is gonna contribute to the overall company goals of grow above market and deliver mid-teens type of margins.
Got it. Okay. Yeah. Go ahead.
No, I'm just gonna say, as you know, I mean, this business was up, you know, full year. We talked about that, right? I mean, it's up, I think over 240 basis points of EBITDA and we expect it to do the same for 2022.
Yeah, I just think the sales have been, you know, a little bit light.
Yeah.
So, um-
I think, you know, as we talk, I mean, there's a couple of key things that are contributing to that. One is of course the closure of the LAC business. Second is that we did have a significant pickup in this business on the PCR testing and PCR testing filters. That was a significant pickup in our 2020 for this business that has been declining and in fact will at some point be a very small part of the sales. Third is there is a contract that we had with a consumer application that has discontinued.
Combination of those two, three things is what's leading to, I think, the near term headwinds. We expect these headwinds to move away during the year and start to deliver growth.
Great. Thank you for that, Jugal. Last but not least, if I can ask a little bit about the Precision Clad Strip project. Are you shipping for revenue or not yet?
Well, we've been shipping for revenue since Q4 of 2020. You know, from our existing-
I mean the new facility. That's what I'm asking.
No, no. The new facility, we're right now in a qualification phase. You know, our expectation is that we will get qualified and then, you know, starting in the second quarter, we'll start to ramp. We expect that to be the case. We think that, you know, from our existing facility to the new facility, we expect sales to, I would say approximately double, from 2021 to 2022. And we think that's gonna have a meaningful contribution, you know, into, particularly, you know, into the second half of this year.
We should start seeing some revenue from this new facility in the second quarter?
I would say so. I think the second quarter. You know, right now it's still a little bit, let's say, to be determined in terms of how much, because it depends on the qualification timing, and kind of how quickly in the second quarter we can start to ramp up. Certainly in the third and fourth quarter, because that's kind of what we have modeled. Yes, I would say initial inklings in the second quarter.
Let me ask you the following. I am under the impression that the project is, you know, ramping maybe one quarter more slowly than I had thought. Is this the case from your point of view as well? If so, is there an issue of volume of demand from the customer or just the qualification process takes a lot longer? What? Any color there would be great.
Yeah. I would say no. The project is ramping I think exactly as we have planned, which is that, you know, we had planned on really finishing the facility by the end of last year and then go through a qualification phase and then start to ramp. From our standpoint, I think it's exactly in line with what we had planned, and which by the way is quite impressive from our side considering all the COVID activity that the facility build and the facility startup, you know, had to go through. I'm very impressed with what the team has delivered.
I think from a customer standpoint, as we've indicated before, you know, the customer is very interested in the product and would take really any product that we can produce. We're limited in our capacity in the current facility, otherwise the customer would even take more product, you know, from our current facility. There's no issue from a demand standpoint from the customer side. I think it's just making sure we get the qualification done and then the ramp going so that we can really launch this business on a very flawless basis.
Thank you so much.
Thanks, Marisa.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to John Zaranec for closing remarks.
Thank you. This concludes our fourth quarter 2021 earnings call. A recorded playback of this call will be available on the company's website, materion.com. We would like to thank all of you for participating on this call this morning and your interest in Materion. I will be available to answer any follow-up questions. My direct number is 216-383-4010. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.