Materion Corporation (MTRN) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Materion Year-end 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Steve Shamrock, VP, Corporate Controller and Investor Relations. Please go ahead, sir.

Good morning. This is Steve Shamrock, Vice President, Corporate Controller and Investor Relations. 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 Vijayvargiya will provide opening comments on COVID-19, the company's financial performance and key strategic initiatives. Following Jugal, Shelly Chadwick will review detailed financial results for the quarter and full year, and then we will open up the call for questions. Before we begin, let me remind investors that any forward-looking statements made in this announcement, 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 attachment number 5 in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges and certain income tax adjustments. And now I'll turn it over to Jugal for his comments.

Thanks, Steve, and welcome, everyone. I hope all of you and your loved ones are in good health as we navigate through these challenging times. We remain focused on protecting the health and safety of our people as we continue to follow all recommended COVID-19 safety guidelines. The majority of our office employees continue to work productively from home, and all of our factories are fully operational as they have been throughout the pandemic. Despite the challenging environment, we delivered a very strong fourth quarter to close out 2020. Continuing the progress we made over the last 3 quarters since the pandemic started, let me cover a few highlights. Sales and earnings grew for the third consecutive quarter, with sales up 14% from Q3. Organically, up over 10%. Market demand continued to improve as we saw sequential improvement in every one of our key end markets. Sales outside the U.S. reached 50% for the first time, led by our recent acquisition of Optics Balzers and other new business growth. All 3 segments reported double-digit profit margins for the second consecutive quarter. We continued our investment in R&D despite overall challenging market conditions, positioning the company for significant organic growth. We recorded our first full quarter of shipments to the new precision glad engineered strip customer. We continued to drive cost structure improvements by completing 2 facility closures. We repaid $86 million of debt, which we used to finance the Optic Balzers acquisition, ending the year with a strong balance sheet. And we made meaningful progress on the integration of our Optics Balzers acquisition, creating the world's leading precision thin film optical coatings provider. I'm extremely proud of what the team delivered in the face of unprecedented challenges. We managed to keep all of our facilities open and directly supported the fight against COVID-19 by supplying products for health care equipment used by medical staff around the world. Now let me talk a little bit more about some of our important strategic initiatives. Over the last few quarters, I have spoken about a large business opportunity for our precision clad engineered strip product. I'm happy to report the project remains on schedule. As I mentioned, we completed our first full quarter of shipments to the customer from one of our existing facilities. You may recall, we're starting shipments from an existing facility and will shift production to a new leading edge manufacturing facility early next year. In regards to that, setup of the new facility remains on track. To date, we received $59 million in prepayments for the project, and we are diligently working towards launching production. Also, during the quarter we finalized our long-term supply agreement for the project. We continue to be very excited about the potential of this project and are looking forward to a long-term business relationship with the customer. We also continued our transition to becoming a global leader in Precision Optics. Back in July, we announced the acquisition of Optics Balzers, one of the founding leaders in this field. Since then, we have been busy creating a global precision thin film optics platform. Our teams continue to work collaboratively on combining the businesses and on identifying customer opportunities in support of our overall growth objectives. We have a number of synergistic initiatives underway and are looking forward to what the combination will bring. In parallel to the integration activities, we finished the closure of our large area coatings business. The acquisition of Optics Balzers and closure of large area coatings, combined with our legacy Precision Optics business, gives us the opportunity to rename this segment Materion Precision Optics, more clearly representing its focus and strategy. During the year, I have spoken about our relentless focus on cost structure, both short-term to address the current macroenvironment, and long term, to position us for improved offerings to our customers. With this in mind, I wanted to report that we have completed 2 facility closures, a manufacturing facility in Fremont, California, and a service center in Detroit, Michigan. These important strategic initiatives, along with many others, are positioning us to be a high-performing advanced materials company with a strong pipeline of organic growth opportunities. As I look forward to Q1, I'm optimistic by what I'm seeing. Despite the normal seasonality impacts we would expect in the first quarter, many of our markets are showing positive signs. With improving market conditions and the advancements our teams are leading every day, we expect to deliver more than a 50% year-over-year improvement in earnings for the first quarter. In closing, despite an extremely challenging 2020, I'm excited about the direction of the company as we enter 2021. I want to sincerely thank our people who have demonstrated tremendous resilience and focus during a particularly challenging year and positioned us well to meet our objectives. Now let me turn the call over to Shelly to cover the financials.

Thanks, Jugal, and good morning, everyone. It's great to be joining my first Materion earnings call, and I look forward to meeting those of you I do not yet know, sometime in the near future. Despite the ongoing impact of COVID-19, I am pleased to report that we saw sequential improvement again in the fourth quarter. Value-added sales, which exclude the impact of passthrough precious metal costs, were $191 million, up 14% compared to third quarter sales of $168 million. The growth compared to the third quarter was driven by the strong performance in the defense end market, sales to the new precision clad engineered strip customer, final sales of blood glucose test strip products from our large area coatings business, and a full quarter of sales from Optics Balzers. Before I comment on profitability, I wanted to mention that during the fourth quarter of 2020, we elected to change our method for valuing inventories that previously used the last in first out method to the first in first out method. We made the decision to change our accounting for inventory from LIFO to FIFO for book and tax purposes because it aligns better with how we manage our business and how the vast majority of our peers account for inventory. The timing was also attractive from a tax perspective. Our Q4 pretax income increased by $1.6 million as a result of this accounting change. We did not treat this item as special because we intend to report results on a FIFO basis going forward. We have also restated prior periods to reflect this change, and those details were included in the press release we issued this morning. Gross margin was $55.8 million in the fourth quarter compared to $45.3 million in the third quarter. Excluding special items, including mine development costs, COVID-19 related expenses, and the Optics Balzers acquisition charges, adjusted gross margin was $62.6 million or 33% of value-added sales, an improvement of 100 basis points compared to the third quarter's 32% due to higher volumes and improved manufacturing efficiencies. Selling, general and administrative expenses totaled $34.7 million, down $1 million from the third quarter spend. As a percentage of value-added sales, adjusted SG&A expense was 18% in the quarter, down 100 basis points from the third quarter. We continue to aggressively manage our SG&A costs given the uncertainty driven by the COVID-19 pandemic. Research and development expense was approximately 3% of value-added sales in the fourth quarter, consistent with the third quarter as we continue to make investments to drive long-term profitable growth through the development of new products and applications. In the fourth quarter, we recorded restructuring expense of $4.1 million related primarily to the previously announced closure of our Detroit and Fremont facilities and the closure of our large area coatings business. We reported fourth quarter earnings before interest and taxes of $7.9 million. Excluding special items, adjusted EBIT was $18.7 million or 10% of value-added sales. Looking at income taxes, we recorded a tax benefit of $1.2 million in the fourth quarter of 2020. Excluding special items, our adjusted effective tax rate was 18.6% for the period, in line with our previous guidance. Finally, net income in the fourth quarter totaled $8.1 million. On an adjusted basis, net income was $14.4 million or $0.70 per diluted share compared to $0.50 per share in the third quarter. The fourth quarter includes an increase of $0.06 per share from the change to FIFO accounting. Improved sales performance was the primary driver of the balance of the increase in adjusted earnings as compared to the third quarter. Let me briefly comment on full year 2020 consolidated financial performance. Full year value-added sales totaled $679 million, down from $734 million in 2019. Strong performance in the semiconductor end market, incremental sales related to the acquisition of Optics Balzers and the new precision clad engineered strip opportunity were more than offset by reduced demand in all of our other key end markets based on the ongoing COVID-19 pandemic. Particularly hard hit were the aerospace and defense, energy and industrial end markets. Adjusted EBIT was $55.4 million in 2020, down from the prior year amount of $85.8 million. Adjusted net income was $41.8 million or $2.03 per diluted share as compared to $3.32 per diluted share in 2019. Now let me review fourth quarter performance by business segment. Looking at our Performance Alloys and Composites business, value-added sales were $90 million, an increase of $8 million compared to the third quarter. The sequential increase is due primarily to strong performance in the defense and automotive end markets and sales to the new precision clad engineered strip customer. EBIT, excluding special items, was $11.7 million or 13% of value-added sales compared to $9.3 million or 11% of value-added sales in the third quarter. The sequential increase in EBIT is due mainly to higher sales volumes. Despite the global pandemic, PAC reported double-digit EBIT margins for the 12th consecutive quarter and improved EBIT margins by approximately 200 basis points compared to the third quarter. Moving now to Advanced Materials, value-added sales in the fourth quarter of 2020 were $62.4 million, up 8% versus the third quarter, driven by higher sales to the semiconductor end market as commercial performance initiatives and increased end market demand drove the growth. EBIT, excluding special items, was $7.2 million in the quarter compared to $5.8 million in the third quarter. EBIT margins also improved sequentially by 150 basis points from the third quarter to 11.5%. The improvement in EBIT margins was due to higher volume and improved manufacturing performance. We remain focused on continuing to improve advanced materials margins as we go forward. Turning finally to the Precision Optics segment, fourth quarter value-added sales were $39 million, up 37% compared to the third quarter, due in part to final sales of blood glucose test strip products in our large area coatings business, a full quarter of Optics Balzers sales, and strength in our legacy Precision Optics business. EBIT, excluding special items, was $4.3 million or 11% of value-added sales compared to $3.5 million in the third quarter. The increase in EBIT was due primarily to the higher sales volume. Moving now to the balance sheet and cash flow, the company ended the fourth quarter of 2020 with a net debt position of only $12.6 million and approximately $246 million available on the company's credit facility. We continue to have more than adequate liquidity to manage through this challenging environment. We completed the year with capital spending of $67 million. The increase versus the prior year is related to the customer-funded engineered strip growth opportunity. For financial modeling purposes, let me review a few expectations for 2021. Capital spending should come in at approximately $100 million. This higher amount is attributed to our strong pipeline of organic growth opportunities, particularly the new engineered strip project as well as exciting identified opportunities in each of our segments. A portion of the spend is also due to the need to construct a new tailings pond that collects waste material from our mining operations, which accounts for approximately $10 million of the spend. We do not expect additional mine development costs in 2021. Annual depreciation and amortization should run approximately $50 million for the year, and we expect a 17% to 19% effective tax rate, excluding special items. Moving now to the earnings outlook, the impact of COVID-19 continues to create heightened levels of uncertainty, making it difficult to predict full year expectations. As a result, we will be providing guidance for the first quarter only at this time. Based on our current demand levels, we expect adjusted earnings per diluted share in the first quarter to be in the range of $0.58 to $0.62 per share, an increase of over 50% from the first quarter of 2020. We will continue to execute on our key strategic growth initiatives, aggressively manage our cost structure and utilize our strong balance sheet to deliver value for our shareholders in 2021 and beyond. As we conclude our prepared remarks, I'd like to say that I'm very encouraged by what I see here at Materion thus far as I complete my first quarter with the company. This is an organization with great people, clear strategy and a strong pipeline of opportunities. I look forward to what we will do together in the days and years ahead. And with that, we will now open the line for questions.

Thank you. [Operator Instructions] The first question is from Marco Rodriguez, Stonegate Capital Markets.

Yes, I was wondering if you could talk a little bit more about Optics Balzers, excuse me, on the integration work. I know you mentioned it, Jugal, a little bit in your prepared remarks. If you could just kind of give us a little bit of a better sense as far as where you are along the time line progressing towards those revenue synergies that you guys had sort of outlined from a high level back when you announced the acquisition itself would be helpful.

Yes, Marco, I'm happy to do that. So as you know, we acquired Optics Balzers in the July time frame. And then since then, we've really been working together with the team on putting together a global organization, which we now have done. We've got really a fantastic team in place made up of folks from the Optics Balzers side as well as the legacy Materion side, have created a new business name, as I have indicated, Materion Precision Optics. And it's being led by Ian Tribick, [Detlef], who ran the Optics Balzers side is the COO of the business. And as I said, the leadership team is made up of people from both sides of the organization. So we're really, really excited about that and have actually put that in place, and the team is off and running. We also mentioned, of course during our acquisition and multiple times after that, that this is really not a cost play for us. This is really a growth play for us. And I can't tell you how excited I am about the growth opportunities I think this presents for us. When we think about the opportunities from a regional synergy standpoint, technology standpoint, market standpoint, I mean, every one of those areas, I think, is a great opportunity for our teams to work together. So the sales and marketing team has been aggressively working to identify opportunities. As you can imagine, though, and we've said that a number of times, that growth opportunities certainly take a little bit longer to materialize than cost opportunities. And so we're having, I would say, really, really good success. We've actually done a very extensive brand study as well with our customers to leverage both the Optics Balzers brand, which is a brand in the European and Asian market with some great, great recognition, and then of course, the Materion brand. We're out marketing to our customers. So I'm really excited. And I think you will hopefully see over the next set of quarters that we're talking more about organic growth opportunities. This is one of the reasons that we have a little bit of a higher number for our capital spending. Because we want to be able to capitalize on those fantastic growth opportunities. So I think, Marco, I couldn't be more excited and more proud of what the team is doing, especially in a COVID challenged environment, working virtually. But things are progressing very well.

Got it. Very helpful. And then shifting here to your strip clad customer and the prepayments for the new facility, I know obviously you mentioned in your prepared remarks as well as in the press release that revenues have started to kind of ramp up there. Can you just kind of help frame that revenue in the quarter? Was it to a level that you were expecting? And then how should we be thinking about that revenue ramp as we move into this fiscal year?

Yes. So again, very excited about what the team is doing, again, especially with the COVID challenged environment. As you know, we have 2 aspects of that project. One is our near-term project with an existing facility that we've been upgrading. The other one is the longer-term project with the new facility. So the revenue that you're referencing is from our near-term facility. We really were able to get what I would say what we expected in Q4, so we're excited about that. I think as we go forward and we look at now Q1 and beyond, we would expect a similar revenue profile from our near-term facility. Our only block for being able to deliver more is just really our capacity that we have in the plant. And so the sooner we can get the new facility up and running, I think we should be able to then accelerate the ramp. And right now, we've got that targeted for first quarter of next year. As you can imagine, it's been really difficult working through all the situations that we have in front of us, but our team has just done a fantastic job of keeping that project on schedule. So we're still looking at a Q1 next year accelerator ramp.

Got it. And I apologize if you mentioned this on the call, but when -- what sort of increase in capacity would you have or increase in revenue from the new facility once that goes online versus where you are right now? And then also if maybe I could just kind of throw in there, on the CapEx guidance of $100 million, I did hear the $10 million for a new tailings pond, identification of some other opportunities for each segment, and then part CapEx spend for the new clad facility. If you could maybe -- I don't know if I missed the dollar amount that might be going to the new facility?

Yes. So in terms of the acceleration and the new capacity that we'll put in with the new plant, as you know, we've not talked about the size of the opportunity. This is a confidential project that we're working on. So what I can tell you is that right now, we're providing it what I would call basically a low volume type of delivery to the customer, and we expect to have a higher volume delivery to the customer come Q1 of next year. So we would expect a meaningful increase from current levels into what we would expect into 2022. With regard to the CapEx, we do have about $100 million, as has been mentioned. We would expect that approximately half would be related to the new project and the new facility setup that we're doing. About $10 million would be for this tailings pond adjustment that we have to make to our facility. And then the rest is really, really exciting growth opportunities, and of course, continued maintenance and safety-related projects that we normally have on a yearly basis. So we're quite excited about our organic growth pipeline.

Got it. And last quick question, just kind of a high-level question here. Just kind of given obviously the pandemic's impact on the facility footprint that you guys have, can you maybe talk about any sort of smart manufacturing techniques that may have been accelerated at your sites during this period of time? Whether that's an increase in automation, changes to your supply chain purchasing? Anything that might be making you more effective once things start to normalize a bit?

Yes. Marco, this actually falls right in line with our digital transformation. As you know, that's one of our key pillars that we have. And I wouldn't necessarily say that this is something that we've accelerated as a result of COVID. I mean we have been dedicated and focused on it for actually the last couple of years on really getting digital transformation into our company, all the way from our transactional activities to the way we handle our financial activities to our HR activities to the manufacturing floor. That's one of the things that we're really using to drive improvements, efficiency improvements across the company. So on the manufacturing side, we actually have a number of projects underway. We are working, in fact, on one of the projects with an external company. We're involved in some AI, artificial intelligence type of work that we could perhaps utilize to drive up our efficiency and yields. And so we're getting started on that, which will certainly drive, I think, more of a smart factory approach. And so I hope that in the next quarters, we're able to talk more about that.

We have a question from Phil Gibbs, KeyBanc Capital Markets.

Regarding the fourth quarter, specifically the blood glucose piece within coatings, how much of that was topline and bottom line impact for you? Because obviously, it's not going to be recurring looking ahead.

Yes. So in Q4, I mean, we had approximately I'm going to say about $5 million worth of topline. I won't necessarily get into the specific bottom line number, Phil, but I'm sure just started with our normal flow through and those things, you can kind of maybe get an estimate yourself on what you think the bottom line impact may be. But it's around a $5 million impact in the Q4 timeframe.

Okay. Great. And the D&A number, Shelly, you provided $50 million for 2021, roughly high single-digit million increase year-on-year. Is that going to be fully reflected in the first quarter? Or is there a ramp to that number?

That should ramp as we move through the year, especially as you think about the big investments we're making this year. So I think you'll see that flow through the quarters as we move through the year.

Okay. That's helpful. And then the maneuvers you're making in PAC on the cost side, did you get any of that in the fourth quarter? Or is that $4 million to $5 million benefit annualized expected to hit in Q1?

Yes. I think it's more of a 2021 Q1 type of an impact. And we are still going through a lot of juggling back and forth on getting those facilities closed and getting the transitions done. Our most important objective on that was to make sure that we did not interrupt the customer in any way. We wanted to make sure it was just a seamless, flawless activity from a customer viewpoint. And I think now we can focus more on the actual bottom line impact of it.

Perfect. And then just looking at the business from the puts and the takes as you look out to the first part of this year, we're midway through the quarter, so we've got some decent visibility at this point. What's getting -- what are the pluses versus the fourth quarter? What are the minuses? We just talked about the PAC piece on the cost side perhaps coming in more favorably. Semis has been good. Auto is still recovering. What are the puts and takes as you look at the first quarter versus the fourth quarter?

Yes. I think there's 2, 3 things I would say, Phil, that are probably the larger impact items. From a market and business standpoint, I'll tell you that of course this blood glucose business, the large area coatings business is something that we won't have in Q1. We indicated that that's roughly about a $5 million topline impact from Q4 to Q1. There's seasonality, and in particular, the seasonality I'll reference here is the defense market. Typically, the defense market all tends to be very, very strong in Q4 and then, of course, very weak in Q1. I mean just to give you a datapoint, when you look at our defense market back in Q4 of 2019 to Q1 of 2020, just to give you an idea, there was about a 60% decline from Q4 to Q1, just based on the orders going out in Q4 and then, as I said, Q1 being lighter. You have I would say the other markets are continuing to move in the right direction, like you said. The one market that we have to keep an eye on much more closely, I would say, is semiconductor. I mean, semiconductor has been on a tear in general, right, with everything that happened in 2020, and Q4 was also a good market pickup on the semiconductor side as well. So what we have to keep an eye on is, can it grow further or does it just sort of maintain at the levels that it is? So semiconductor is I would say more of a let's see how it continues to progress. And then the other markets will I think continue to move I would say in the right type of direction. I think the other thing to note from a Q4 to Q1, and this is related to the LIFO, to the FIFO accounting and the $0.70. I mean, roughly about $0.06 of that is more of the restatement, so our operational performance for Q4 would be around $0.64. So I think there's those few factors that I would say that are going from Q4 to Q1.

So just to be clear, in the fourth quarter, Jugal, the accounting restatement, the $0.70 provided is a FIFO number and the $0.64 is a LIFO number? Is that what we're --

That's exactly what it is, yes.

Okay. So there wasn't any like accrual catch up or anything, you're just saying the FIFO versus LIFO number. Okay.

Yes. So prior periods were restated. So actually, the impact of going off LIFO was a $0.07 decline for the year, if you look at our restated full year results. But for the year, sorry, for the quarter, it was a $0.06 benefit.

Right. And then last question and I'll turn it over, is just the comment you made during your prepared remarks about a continued focus on improving your AM margins. We've obviously seen sequential progress as the year has moved on. What are the drivers to that? And what more can you do in terms of getting those in terms of the levers?

Yes, Phil, we are committed, and we've been saying that all along, that we are committed to get that business back to historical type of margins. And you made a note here about the sequential improvement. If I just go back to the Q1 of 2020, we're at 8.6% margins for that business. And we exited Q4 at 11.5%, so roughly a 300-basis point improvement from Q1 to Q4. And it was every quarter we improved throughout the year on the margins. I mean the team is committed to do that. As we look at that business, we've got to continue to drive improvements in our manufacturing. Certainly, the COVID related inefficiencies are a factor, but I think the COVID related inefficiencies, along with just general manufacturing yield improvement based on our new product launches, we have a lot of new products going through that business right now with aluminum scandium, with PC RAMS, larger rotatable targets and so on. And so we've got to continue to improve our manufacturing in that business. Of course sales growth is certainly a contributing factor as we move forward, and then introducing even more new products and more platforms through our strong organic growth pipeline, I think we've got. So those are some of the things that are going to play a key role in us continuing to push the AM business beyond the 11.5% that we reported in Q4. But we're quite happy with the progress that that business has made during 2020, and now it's on to 2021 and continuing the progress.

[Operator Instructions] The next question is from Justin Bergner, Gabelli & Company.

Thank you. Good morning, Jugal, and congratulations in joining as CFO, Shelly. I wanted to start by sort of honing in on the CapEx number. Could you remind us or share with us how much was spent in 2020 on the precision clad engineered strip project? And then maybe looking at the 2021 CapEx guide, if I take out the $50 million for the remaining precision clad engineered strip investment, the $10 million for the tailings dam, I guess I'm left with $40 million. I'm not really sure I understand, if there's more growth CapEx in there, or is that more of like a new run rate for how I should think about CapEx levels in the business looking in 2021?

Right. Yes. No, Justin, we can absolutely talk about that. We don't -- when we report our CapEx for last year and the spend that we shared with you, we don't break out any specific projects, including the clad strip project. But you can imagine that that was a sizable amount because that $67 million that we had for the CapEx spend was much higher than our prior year. So clearly, that project contributed to a big part of that spend. As we look at the $100 million or so, as I indicated, approximately half of that would be for the new project. And then $10 million for this tailings pond, which is sort of a once in a 40-year type of expense. And then we have the remaining roughly $40 million as you've done the calculation. It is heavy on organic growth opportunities. And even our maintenance, typical maintenance activity is I would say really supporting our growth. Because if we can improve our efficiency of an equipment and get our yields up, that allows us to produce more. That allows us to market our products more, and that allows us to reduce our backlog. And at the end of the day, sell more. So I look at each one of our maintenance activities as a growth opportunity as well as I look at new business opportunities clearly are growth opportunities. And then there's of course the annual safety and health and safety of our workers and just general maybe improvements to our facilities. Our safety record, if I look at just over the last 3 years, I mean, if I go back to 2017 when I came onboard to kind of where we're at, I mean, we're I would say a night and day difference in terms of the OSHA recordable type of rate that we have. I mean we've improved well over 70% in that timeframe. So we are really happy about, I think, the environment that we're providing for our people and kind of the safe nature of our, much safer nature of our businesses. So there is certainly some spending related to that, but I would say the majority of that is really between maintenance and new business growth, all growth-oriented spending.

Okay. That's helpful. Maybe just one follow-up question on the topic of CapEx. Has your estimate for the required CapEx for the precision clad strip project materially changed from when you embarked on this addition to the portfolio?

Yes. I would say we're still in the middle of this project. I mean we still have a long way to go in order to go ahead and get the equipment and then the construction and then the trials and everything and launch that goes on with it. So I would expect it to continue to fluctuate. And there will be some elements that go up. There will be some elements that go down. And then as we have more progress and more definitive understanding of that, that's certainly something that we'll talk about, Justin, as we go forward.

Okay. But do you expect some carryover CapEx on this project into 2022? Or do you expect it to wrap up?

Our objective at this stage is really to try to wrap this up this year because we'd really love to be able to launch and have a good launch of this program come Q1 of next year. But certainly, we have to keep in mind that the current environment is quite challenging. And if there is some delay, then perhaps those are something that we have to deal with in the first part of the new year. But our objective is to get everything done this year.

Okay. So it seems like your CapEx guide assumes that you get everything done this year.

That is the plan.

Okay. Understood. Is it possible to quantify how much the shift from LIFO to FIFO is estimated to impact your first quarter adjusted EPS guide?

Justin, that's really tough. If you look back at the restatement over the last couple of years, you can see it kind of bounces up and down. So where it was a good guy in Q4, it was a little bit of a detriment for the full year. It was positive for 2019 and about breakeven for 2018. So it's really not been very meaningful. I wouldn't consider that a big driver of profitability going forward. So there's not really an estimate I can give you for Q1.

Okay. Maybe just remind us sort of which elements of your cost for raw materials base sort of would have led to that $0.06 of benefit to fourth quarter earnings as you shifted from LIFO to FIFO?

So you're talking about which materials or of which business? We would say that the PAC business was impacted more than the other 2 segments, and the mining operation would carry decent-sized inventory. So again, that's in PAC.

Yes. Just taking your common raw material there, Justin, I mean you've got hydroxide in that business, you've got nickel, copper, just your standard raw materials that were on LIFO.

Okay. That's helpful. And then lastly, just on the free cash flow, it seems like with the elevated CapEx level for 2021, that will consume sort of the bulk of your free cash flow. Is there anything else that you expect organically or inorganically or return to shareholders to consume large amounts of free cash flow through the remainder of this year?

Yes. I think let me just comment a little bit, I think, just in terms of our cash use, and then certainly Shelley can talk more specifics. But our general philosophy, I think, on our cash use is still the same which is organic is our top priority, making sure we're funding all of our organic initiatives, which this $100 million or so that we've talked about is there. Certainly, after that we'll look at inorganic investments. And then after that, figuring out ways that we can further return capital to the shareholders. We've had -- for the 8 years in a row, we've increased our dividend and we'll see what happens obviously this year, but we've done that the last 8 years. We've also done share buyback programs when it's appropriate. So we've done those types of moves as well. But we're not at all concerned from a cash flow standpoint. I mean, our business generates really good cash. And so we would expect that certainly there will be -- we'll have a lower cash flow than maybe in the prior years, but this is something that we're -- the investment itself, we're actually quite excited about. And we're not at all concerned about our liquidity or cash for the company.

Perfect.

We have a follow-on question from Phil Gibbs of KeyBanc Capital Markets.

My question was on the clad piece as well and whether or not you've actually started to break ground on the facility itself?

Yes. So we are in the process of where we have received, Phil, majority of the equipment actually is onsite, and we're going to be now over the next -- yes, the remainder of the year really, just putting that equipment in place, getting a lot of the construction in the facility up and running and starting to do some trials towards the end of the year. So we're I would say a good way into it.

Ladies and gentlemen, there are no further questions at this time. I'd like to turn the conference back over to Mr. Steve Shamrock for closing remarks. Please go ahead, sir.

Thank you. This is Steve Shamrock, and this concludes our fourth quarter 2020 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 the 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 very much.

This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.