IIVI

II-VI Incorporated (IIVI)

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II-VI Incorporated (IIVI)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 21, 2008 09:00 am ET

Executives

Craig Creaturo – CFO and Treasurer

Francis Kramer – President and CEO

Analysts

Avinash Kant – D.A. Davidson & Co.

Jiwon Lee – Sidoti & Co.

Greg Halter [ph]

Chris McDonald – Kennedy Capital

Joseph Garner [ph]

Presentation

Operator

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the II-VI Incorporated fiscal year 2009 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I’d now turn the conference over to Mr. Creaturo. You may begin your conference, sir.

Craig Creaturo

Thank you, Jackie, and good morning everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Welcome to the first quarter fiscal year 2009 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, October 21, 2008. The forward-looking statements we may make during this teleconference speak as of today, and we do not undertake any obligation to update these statements to reflect events or circumstances occurring after today.

Francis Kramer

Thank you, Craig, for the introduction. I am Francis Kramer, President and CEO of II-VI Incorporated. Our results exceeded expectations for the first quarter of fiscal year 2009 despite the difficult economic conditions we find in the world today. Historically, the fourth quarter of our fiscal year exceeds the first quarter of the subsequent year due to seasonality effects of European holidays and vacations in the months of July and August. The results for our just completed first quarter suggest that our business level has been very good.

The highlights during the first quarter at our Near-Infrared business segment focused on our military competencies. The Near-Infrared business began to leverage its strong quality ratings with key military customers and its high-level competency and optical and crystal component manufacturing and assembly. This has resulted in year-over-year growth in military shipments of 10% and more importantly has led to several new product opportunities with major military accounts. These opportunities include critical optical and mechanical sub-assemblies for strategic ground-based laser designator and range finder programs, as well as other opportunities such as YAG sub-assemblies for various target acquisition in laser range surveillance systems.

It is anticipated that the non-UV filter military business will remain strong for the remainder of the year with orders expected to increase for the full year fiscal year ’09 in excess of 30%. The UV filter product line shipments continue to meet or exceed the required schedule for deliveries of assemblies to our primary customer. However, as discussed during the last quarter’s call, we have seen a reduction in delivery rates for this product line. We have been adjusting our production capacity accordingly and taking appropriate cost-cutting measures to maintain the profit level of this business as revenues decrease.

The Near-Infrared business continued to utilize its low-cost manufacturing operations in Asia to expand its market share in a somewhat volatile medical laser market. We see this reflected in a slowing of the elective aesthetic laser market in applications such as LASIK eye surgery and skin rejuvenation while our non-elective surgical laser customers are still anticipating modest growth.

Bookings for the Military and Materials business segment were lower than expected for the quarter due to a reduction in the market prices for selenium and tellurium of approximately 15% and a temporary delay of two major orders related to military programs. Selenium and tellurium are a part of the miter metals market. And historically there has been significant price volatility. These prices impact both the cost that we pay for our raw material and our in-product selling price, but did not have a negative impact on earnings. The delayed military programs are expected to be received in the second quarter. We have received writing confirmation in the form of a letter contract for one of these orders that provides us with funding to procure long lead items.

Raw material procurement at Pacific Rare Specialty Metals & Chemicals, which we call PRM, for our selenium and tellurium products has met expectations for the quarter, and we currently have adequate inventory of these raw materials. Additionally, our order backlog for these products is solid with approximately 70% of our second quarter through fourth quarter projected revenues under contract. Based on the current market price, revenues for our selenium and tellurium products should grow in excess of 25% over fiscal year 2008.

Improved financial performance at PRM led the Military and Materials segment earnings increase of 90% for the just completed quarter compared to the same quarter last year. Our military business had Exotic Electro-Optics, which we call EEO, also continues to grow nicely. In spite of the two delayed orders mentioned earlier, order backlog is solid. We have good visibility of our revenues for the current fiscal year. We expect top line growth for this business to exceed 15%. This growth is primarily related to future military programs and not directly tied to the current war effort.

In particular, our sapphire window product line drives a significant portion of our growth. And our sapphire-based products support Lockheed Martin’s advanced Targeting Pod named ATP Sniper and the electro-optical targeting system on the Joint Strike Fighter aircraft. Both of these programs are expected to have a solid future. In fact, the Joint Strike Fighter is planned to be the next premier military fighter aircraft and production will continue for many years. We have recently submitted multi-year production pricing through the year 2016.

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