Materion (MTRN) Q4 2021 Earnings Call Transcript

Materion (MTRN 2.03%)
Q4 2021 Earnings Call
Feb 17, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Materion fourth quarter 2021 earnings conference call. [Operation instructions] 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.

John Zaranec -- Vice President, Corporate Controller and Investor Relations

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 will 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 remove special items, non-cash charges, and certain discrete income tax adjustments. And now, I'll turn over the call to Jugal for his comments.

Jugal Vijayvargiya -- President and Chief Executive Officer

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 '22, 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 markets show continued strength, but our organic initiatives helped to drive double-digit growth. We are showing the power of our old growth 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 will 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 parcel 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 from 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.

And the operational excellence fund, our plants support at 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 looked quite promising. We continue to have progress on the inorganic fund 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. 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'm 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.

And we have the most talented and motivated team and 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 by 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 Shelly to cover the financials.

Shelly Chadwick -- Vice President and Chief Financial Officer

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 for $237.4 million for the quarter, up 27% from the prior year.

The increase was driven by strong and 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 a $3, 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 108 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, a 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 and market demand, plus the impact of our outgrowth initiatives, resulting in double-digit organic growth across major end markets. The late year edition 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 and 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-on-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 start-up costs persist through the first half as we work through customer qualifications, and complete the training and start-up 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 and 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, so 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 and 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 proforma leverage at 2.6 times 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 pay down. 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 and market performance, our customer focused our growth initiatives and contributions from our recent acquisitions. We expect adjusted EPS excluding acquisition amortization in the range of $5.30 to $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 to $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 start-up 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.

Questions & Answers:

Operator

Ladies and gentlemen, the floor is now open for questions. [Operator instructions] Our first question is coming from Marco Rodriguez from Stonegate Capital Markets. Marco, your line is live, you may proceed.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Good morning, everyone, and thank you for taking my questions.

Shelly Chadwick -- Vice President and Chief Financial Officer

Good morning, Marco --

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Good morning, 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 least than what we expected, and it looks like all three segments were off a little bit versus prior cadence. So, maybe if you can discuss also what kind of dynamics you saw in the quarter. I know you mentioned you saw some shipping issues with omicron.

But, just unpack some of those details there. And then, if you could maybe discuss how you guys are thinking about gross margins and the cadence as we enter fiscal '22?

Shelly Chadwick -- Vice President and Chief Financial Officer

Yeah. Let me start on that one, Marco. So if I think about gross margins in Q4 versus maybe Q3, there certainly was some mixed impact. Q3, we talked about stronger shipments to a defense customer and of our beryllium customer, which tend to be mixed positive.

So we did not see that in Q4. In addition, 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. So I would say those were the drivers, HCS electronic materials also that comes in, it's slightly lower on the gross margin line, although an expander at the EBITDA level. So those are some of the items I would point to.

As we think about next year, 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, and while we may start out slightly slow in Q1, again, because of the omicron and the build and the plant start up costs, I think you're going to see expansion for gross margins full year.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Very helpful. In terms of that mix impact [Inaudible] and the omicron impact, is there a way to rank it like was there more of a [Inaudible] impact from the lack of a defense order versus the absorption impact?

Shelly Chadwick -- Vice President and Chief Financial Officer

Yeah. I probably would order it the mix and plant start up costs more so than the absorption. 

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. Very helpful. And then, in terms of the acquisitions that you guys have just made recently, Optics Balzers and HCS. I know that obviously, the acquisition synergies there were more about driving the sales versus necessarily cost synergies.

Can you kind of update us on the process of getting those revenue synergies that Optics Balzers? And then, you will maybe if you can provide a sketch of your expectations for HCS? 

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. First of all, Marco, both of these acquisitions have been just fantastic additions to our portfolio. As we've indicated, Optics Balzers has allowed us to create a global optics portfolio, and then HCS is just been a fantastic ad and not only for the semiconductor market, which is, as you know, is a really, really strong market right now, but also great additions to our aerospace and defense and industrial markets. So we're really excited about the two acquisitions that we've done.

Like you said, our synergy level has been more focused on the top line and less focused on the bottom line. However, we're making the progress on the bottom line as well, we've had some early wins already back on the HCS side as we've looked at some of our combined procurement activities. Our team has been really excited about putting the leverage of the combined entity into the supply base. As we indicated already in our remarks of around $2 million of cost synergies on the Optics Balzers side.

And then, on the top line, 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 going to guess in the neighborhood of $2 million to $4 million of synergies, top line synergies that we hope will start to kick in in the second half of this year, then into really into '23 and '24. So 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 the synergy side there.

As you know, this gave us a great inroads into the top 15 semiconductor players in the world. And so we're able to leverage our portfolio both from our side and their side into the top 15 semiconductor players. So it's quite exciting for us, with these two acquisitions and we hope they're want to talk more about the top line synergies as we realize them during the year. 

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

They're very helpful. And then, another just the larger picture question. As you guys look in the fiscal '22, you obviously provided guidance. It's helpful, as always.

But can you maybe discuss what you see as the biggest opportunities you see to be driving growth by segment, perhaps. And then in that same vein, if you can maybe discuss what are the challenges you see to achieving those goals? 

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. Clearly, we've got the the acquisition of HCS of course, that's going to drive growth for us, we've got the acquisition of Optics Balzers, those two things that we've talked about already. We've got the clad strip project that's going to help drive a meaningful step up growth for us in 2002. But really, at the end of the day, I think what we've really been focused on and we've been talking to about it for a number of quarters and back 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 2001, and we expect the markets to continue to be favorable going into '22 as we've noted in our deck. But I think our organic outgrowth is what we're really excited about. Our capital spending for '21, and our planned capital spending for '22 support that. So we're excited really across the board, whether you look at PAC segment with a number of opportunities we have using our tough net product, our supremist product, our copper nickel thin type alloys, whether you look at our ALB chemicals or aluminum scandium targets on the AM side, where you look at the automotive side of lidar, our precision optics, you look at the automotive side, with lidar opportunities and general filter growth opportunities, I think across a number of different markets.

The organic outgrowth is what's quite exciting for us, and we think the markets will help support that. But more importantly, I think our organic initiative that we have in the pipeline that we have, we're feeling good about.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

All right. Very helpful. Thank you, guys, appreciate your time.

Shelly Chadwick -- Vice President and Chief Financial Officer

Thanks, Marco.

Operator

Thank you. [Operator instructions] And the next question is coming from Phil Gibbs from KeyBanc. Phil, your line is live, you may proceed. 

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks very much. So was I to read from your comments that you expect pricing net of inflation to be positive for your results in '22, meaning you're more than offsetting cost headwinds?

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. Phil, we talk about this all the time that we do not want to be the sponge, right? We do not want to be the company in the middle of that, having to deal with whether it's inflationary pressures, labor costs, challenges, other things. We want to make sure that we're providing value to our customers and we're getting paid for that value. So we've got a very robust process in our system where we look at we look at everything that's going on in the business, and then we determine our pricing based on that.

So it's our expectation that the headwinds that we're all seeing right now on the labor market and the inflationary markets that we're taking those into account as we work with our customers and provide the right value to them.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

OK. And Shelly, on the clad piece, I think you're on your bridge, you had over a $3 million impact? 

Shelly Chadwick -- Vice President and Chief Financial Officer

Yeah --

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

From the qualification process or ramp-up process, I think that was probably a stronger headwind relative to what we were expecting. Was that stronger relative to what you all were expecting, too?

Shelly Chadwick -- Vice President and Chief Financial Officer

Well, I think we had talked about $0.20 to $0.25 for the year and it was certainly lighter in Q3. But if I look at Q3, Q4, we stacked up close to where I thought we would be. Coming into '22, there's still a lot to do in terms of making sure that the plant is ready to go. And it's not only qualifying the product, but also, safety and training protocols as expense going through there before we've got real revenue coming in.

So it's going to be really positive for the year, but a headwind up through the first half.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

That makes sense, and on the qualification piece, I think your deck said you were about 40% of the way through. -- 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. So 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 customer.

So is that something that assists that process? And then just where are you in terms of what else you need to do?

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. Phil, making the product in our current facility at a smaller scale certainly help, right? And gives us the 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, new production that we're going to do. I think our teams have done a great job of making sure that all the equipment that we have has been qualified.

So we've gone through what we call process qualification and that, we finished in the fourth quarter, and just early parts of the body 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 are going through a number of different tests on their side because we want to make sure that the process side and what we're doing from a new plant is going to be a good product for the customer.

So even though the existing materials, it is the same material, but it is from a different plant, so the customer is going through and putting it through their qualification process. We expect we're roughly around 40% complete with that. Our expectation is that will complete that here over the next few months, and then start to ramp-up here in the second quarter. So we think it's going really well right now.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks, and then last one for me is just on aerospace and defense, and then energy. What are you seeing there? What are your customers telling you in terms of your full year expectations? I mean, I know from your texture, in your slides that you're expecting high single-digit growth, but -- just anything more qualitatively that you can speak to? Thanks very much.

Jugal Vijayvargiya -- President and Chief Executive Officer

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 has happened. There is good increases that have happened in the build rate for the airplane.

But again, they're not anywhere near pre-pandemic levels. What we're hearing from our customers is we expect continued growth into '22 and we've kind of factor that in, as we've noted in our deck as well into our guide that we've given for '22. What's really exciting for us, though, Phil, on both of these markets is our content on increasing. So our content per plane.

So the newer planes tend to have more content, in fact, than than the earlier plane. So I think we're really excited about one the market growth of the bill rates that are going on in the oil rig count that are going up, etc. But what we're really even more excited about is the actual content increase per unit that we're going to be able to supply into '22. So we're positively thinking about both of those markets into into '22.

Operator

Thank you, and the next question is coming from Marisa Hernandez from Sidoti. Marisa, your line is live and you may proceed.

Marisa Hernandez -- Sidoti and Company -- Analyst

Thank you, and good morning, everybody.

Jugal Vijayvargiya -- President and Chief Executive Officer

Good morning, Marisa.

Marisa Hernandez -- Sidoti and Company -- Analyst

So 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?

Shelly Chadwick -- Vice President and Chief Financial Officer

You're talking for '22?

Marisa Hernandez -- Sidoti and Company -- Analyst

No, for '21. 

Shelly Chadwick -- Vice President and Chief Financial Officer

Sorry. 

Jugal Vijayvargiya -- President and Chief Executive Officer

For '21. She's asking what's the overall -- year-on-year growth future due to price?

Shelly Chadwick -- Vice President and Chief Financial Officer

Yeah. So we focus really on the price cost element of that, Marissa. And 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.

So while we are implementing price and in some cases it's mid-single, high-single digit pricing, you wouldn't see that in the total line for our sales. So 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. 

Marisa Hernandez -- Sidoti and Company -- Analyst

OK. So perhaps if you focus on the differential, can you share what the differential was between price increases and cost pressures?

Shelly Chadwick -- Vice President and Chief Financial Officer

Yeah. I would call it in the 25 basis points impact in terms of the impact to gross margins.

Marisa Hernandez -- Sidoti and Company -- Analyst

That's helpful. Thank you, Shelly. So, I know what [Inaudible] have is on the capex, obviously you're investing a little bit more than normal, I would say. But I noticed that you have [Inaudible] and dedicated to the new HCS business.

So what would be that use for?

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. Well, first of all, as we've indicated, I think last year, and again, I mean, for '22, we're really excited about the organic growth opportunities and then the associated capex that we can use to deliver that organic growth along with operational excellence, because a lot of our capex, we're really driving to improve our yields and improve our throughput into the end of the plant. 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.

So, 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 with that business is done in the past, so we have some nice-make-by type of thing. So those will be great synergy opportunities for us, so there's capex associated with that. And then let's face it, 80% of the business is semi-conductor, and we know the semiconductor market has done and what is expected to do, and we want to make sure we're properly sized to take full advantage of that semiconductor market growth along with our synergy growth opportunity. So we're we're making sure we're investing ahead of time on that to leverage the the growth.

So both growth cost structure margin expansion to make by types of decisions that we're making. All of that is all that is contributing to that $20 million.

Marisa Hernandez -- Sidoti and Company -- Analyst

Got it. Is the any specific type of facility investment, Jugal, for volume?

Shelly Chadwick -- Vice President and Chief Financial Officer

She said, "Is there a facility?". So it's not a facility, it's more equipment.

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. We're not building a new facility, new plant. It's we're leveraging the floor space that we have. We have a good amount of floor space.

So it is really just equipment upgrades, as well as new equipment that we're putting in, and it's something that we've been planning and we've had in our in our thinking really since we acquired.. And so we're quite excited about it.

Marisa Hernandez -- Sidoti and Company -- Analyst

Thank you. So another area I wanted to ask if you can elaborate a little bit is to a precision optics segment. Obviously, there's been a little bit of movement in terms of some product lines that you no longer have. So, what should one be expecting about an annual run rate of sales and profitability structure for this business?

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. Well, I think our position for all three of our businesses is the same, which is we want to make sure we're driving above market growth, and the markets that those businesses are participating in, and we want to make sure we get to mid-teens margins. So that's the that's the roadmap that we have for all three of our businesses that the roadmap will want to 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, but we're confident that over the longer run, with the synergies that are going to happen between the two businesses, the continued operational excellence and efficiency improvement that will drive this business is going to contribute to that to the overall company goals of growth above market and deliver mid-teens type of margins.

Marisa Hernandez -- Sidoti and Company -- Analyst

Got it. OK. And -- go ahead. 

Jugal Vijayvargiya -- President and Chief Executive Officer

No, no, no. I was just going to say, this business was up full year we talked about that, right? It's not, but I think over 240 basis points of evidence and we expected to do the same for '22.

Marisa Hernandez -- Sidoti and Company -- Analyst

Yeah. I just think that sales have been a little bit light?

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. And I think, as we talked, there's a couple of key things that are contributing that one is, of course, the closure of the LAC business. Second, is that we did have a significant pick up in this business on the PCR testing and PCR testing filters. So that was a significant pick up in our in our 2020 for this business that has been declining, and in fact at some point, will be a very small part of the the sales.

And then third, is there is a contract that we had with a consumer application that is discontinued. So a combination of those two or three things is what's leading to, I think, the near-term headwinds. But we expect these headwinds to move away during the year and and start to deliver growth.

Marisa Hernandez -- Sidoti and Company -- Analyst

Right. Thank you for that, Jugal. And last but not least, if I can ask a little bit about the [Inaudible] project. Are you shipping for revenue or not yet?

Jugal Vijayvargiya -- President and Chief Executive Officer

Well, we've been shipping for revenue since Q4 of '20 --

Marisa Hernandez -- Sidoti and Company -- Analyst

I mean the new facility. That's what I'm asking.

Jugal Vijayvargiya -- President and Chief Executive Officer

No, no. The new facility we're right now in a qualification phase. So, our expectation is that we will get qualified, and then starting in the second quarter, we'll start to ramp, so we expect that to be the case. We think that from our existing facility to the new facility, we expect sales to, I would say, approximately double from from '21 to '22.

And we think that's going to have a meaningful contribution particularly, into the second half of this year.

Marisa Hernandez -- Sidoti and Company -- Analyst

So we should start seeing some revenue from this new facility in this second quarter?

Jugal Vijayvargiya -- President and Chief Executive Officer

I would say so, I think the second quarter right now, it's still a little bit late to be determined in terms of how much because it depends on the qualification timing, and how quickly in the second quarter we can start to ramp-up. But certainly in the third and fourth quarter, because that's what we have modeled. But yes, I would say initial inklings in the second quarter.

Marisa Hernandez -- Sidoti and Company -- Analyst

OK. So let me ask you the following. I am under the impression that the project is ramping maybe one quarter more slowly than I had thought. Is it the case from your point of view as well? And if so, is there an issue of volume of demand from the customer? Or just the qualification process takes a lot longer? Any color there would be great.

Jugal Vijayvargiya -- President and Chief Executive Officer

Yeah. I would say no. If the project is ramping, I think exactly as we have planned, which is we know we have planned on really finishing the facility by the end of last year, and then go through a qualification phase, and then start the ramp. So 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 facility build and the facility start-up had to go through. So I'm very, very impressed with what the team has delivered. I think from a customer standpoint, as we've indicated before, the customer is very interested in the product, and would take really any product that we can we can produce. We're limited in our capacity in the current facility.

Otherwise, the customer would even take more product from our than our current facility. So there is no issue from a demand standpoint, from the customer side. I think it's just making sure we get the ramp, sorry, the qualification done and then the ramp going so that we can really launch this business on a very flawless basis.

Marisa Hernandez -- Sidoti and Company -- Analyst

Thank you so much.

Jugal Vijayvargiya -- President and Chief Executive Officer

Thanks, Marissa.

Operator

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.

John Zaranec -- Vice President, Corporate Controller and Investor Relations

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 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.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

John Zaranec -- Vice President, Corporate Controller and Investor Relations

Jugal Vijayvargiya -- President and Chief Executive Officer

Shelly Chadwick -- Vice President and Chief Financial Officer

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Marisa Hernandez -- Sidoti and Company -- Analyst

More MTRN analysis

All earnings call transcripts