II-VI Incorporated (IIVI)

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II-VI, Inc. (IIVI)

F2Q08 (Qtr End 12/31/08) Earnings Call

January 21, 2009 09:00 a.m. ET


Craig A. Creaturo, Chief Financial Officer and Treasurer

Francis J. Kramer, President and Chief Executive Officer


Mark Douglass - Longbow Research

Avinash Kant - D.A. Davidson & Company

Jiwon Lee - Sidoti & Company

Scott Blumenthal - Emerald Advisers

Chris McDonald - Kennedy Capital



Good morning. My name is Leslie, and I will be your conference operator today. At this time I’d like to welcome everyone to the II-VI Incorporated fiscal year 2009 second 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)

Now I would like to introduce your speaker for today, Chief Financial Officer and Treasurer, Mr. Creaturo. You may begin your conference.

Craig Creaturo

Thank you, Leslie, and good morning everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Welcome to the second quarter fiscal year 2009 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Wednesday, January 21, 2009.

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. I'm Francis Kramer, President and CEO of II-VI Incorporated. The just completed second quarter was the most challenging and difficult quarter we have faced in many years. We entered the quarter with $121 million backlog, and we achieved our forecasted bookings in October.

However, the order rate decreased rapidly for the Infrared Optics segment and for the commercial portion of our Near-Infrared Optics segments in the latter half of the quarter in response to the worldwide economic problems.

The change in order rate for these segments was so sudden and of such a magnitude that we issued new guidance on December 2. We feel that today's guidance fairly represents our expectations for fiscal year 2009, as we anticipate considerable business changes as the year progresses. In my comments at the end of the first quarter, I indicated we were keeping a close eye on the bookings in all of our business segments. We did not expect the sudden change we encountered in November. However, we feel we reacted quickly and appropriately. We reduced costs quickly and were able to deliver a quarter with an 11% ROS and a 20% EBITDA margin despite a 15% decrease in sales versus the first quarter.

A strong performing business in the second quarter was our Exotic Electro-Optics business in the Military & Materials business segment. At the same time, within the Military & Materials business segment, our PRM business had results that were approximately 30% short of expectations. At Exotic, bookings and revenues exceeded forecasts. As guided on our October conference call, Exotic continues on a greater than 15% growth trajectory this year. Our sapphire-based products support Lockheed Martin's Advance Targeting Pod, named ATP Sniper, and the Electro-Optical targeting system on the Joint Strike Fighter aircraft.

Both of these programs continue to be prominent in the DOD's plans. In fact, the JSF is expected to be the next premier military fighter aircraft with production extending over many years. Orders for more ATP and JSF products should create strong third-quarter bookings. At PRM, bookings were lower than expected due to a reduction in the market prices for Selenium and Tellurium. Selenium and Tellurium are part of the minor metals market, and historically there has been significant price volatility.

These prices impact both the cost we pay for our raw material and our end-product selling prices. Worldwide slowdown in manufactured goods and the downturn of the Selenium metal market had a significant negative effect on our PRM second-quarter results. Bookings and revenues were lower than expectations due to the lack of demand for Selenium metal in the Chinese market, primarily related to reductions in steel and glass production.

PRM margins were lower than expected due to the lower sales volume and a greater than 35% drop in the market price of Selenium during the quarter. The decreased demand for Selenium was fundamental in this market price decline and required us to write down our selenium inventories to reflect the new market prices. We expect the market prices to stay at current levels through the remainder of fiscal year 2009.

Procurement of tellurium and selenium raw materials was at a level that met our second quarter expectations. However, we expect orders for selenium to be the largest challenge at PRM for the remainder of fiscal year 2009 and for the first half of 2010. Meanwhile, the overall demand for tellurium is expected to decrease slightly through the next 12 months as consumer goods manufacturing declines.

The supply of tellurium has historically been tight. The tellurium market price is expected to be volatile, fluctuating as much as plus or minus 15% for the next six months. Tellurium demand for the photovoltaic markets that we serve is stable to growing. Additionally, we maintained low inventories of tellurium products and we feel we can manage the price variation risk. During the quarter, our VLOC near-infrared optics business continued to expand its non-UV filter military opportunities.

Year-over-year increases in non-UV filter military realated bookings and revenues were 67% and 40% respectively. This help to offset the decline in the commercial side of the business caused by economic conditions. It is anticipated that the non-UV military sergment of VLOC will remain strong for the remainder of the year with orders nearly doubling for the full year 2009.

Driving this growth is enhanced competencies in optical crystal component fabrication coding metrology and assemblies. These competencies include CNC controlled polishing, diamond turning and (inaudible) sputtered coatings. During the quarter, this resulted in key orders (inaudible) for crystal and optical sub assemblies for startegic ground base laser designator systems, range finder programs, target acquisition and long-range surveillance systems.

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