IIVI

II-VI Incorporated (IIVI)

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II-VI Incorporated (IIVI)

F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

August 5, 2008 9:00 am ET

Executives

Craig Creaturo – CFO and Treasurer

Francis Kramer – President and CEO

Analysts

Pierre MacCagno – Needham

Jiwon Lee – Sidoti & Co.

Ian Fleischer – FBR Capital Market

Scott Blumenthal –Emerald Advisers

Presentation

Operator

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the II-VI Incorporated first fiscal year 2008 fourth quarter and year end earnings call. (Operator instructions) Mr. Creaturo, you may begin your conference.

Craig Creaturo

Thank you, Crystal, and good morning everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Welcome to the fourth quarter and fiscal year 2008 II-VI Incorporated investor teleconference.

As a reminder, this teleconference is being recorded on Tuesday, August 5, 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 of today’s conference call. I am Francis Kramer, President and CEO of II-VI Incorporated. Today, I will address some of the highlights that shaped our fourth quarter and full-year fiscal year 2008 results.

First, I am pleased to report that for continuing operations at all four of our business segments, revenues and earnings increased on average for the fourth quarter and for the full year as compared to last year 25% to 30%. Talk about the various segments and in the military and material segment, this group realized significant bookings during the quarter with completion of negotiations at the Exotic Electro-Optics military infrared optics business which we call EEO on a multiyear pricing agreement for accelerated deliveries of the Sapphire window shrouds for the sniper Advanced Targeting Pod which is flown on the F-15 and F-16 fighter aircraft. Production deliveries are scheduled to increase to 10 shrouds per month plus pairs starting in the late fourth quarter fiscal year 2009.

Exotic has also won multiyear orders for germanium windows from General Dynamics for M1 Abrams Tank totaling $7.7 million, of which $3 million was included in the fourth quarter bookings as this is the amount expected to be shipped within the next 12 months in accordance with our booking policy. A noted highlight at Exotic in the fourth quarter was the receipt of certification of the quality management system to ISO-9001 and AS9100 B quality standards.

The other half in the military and materials segment, the PRM subsidiary, completed its first full year of operation under II-VI ownership by meeting all of the objectives we set for the unit at the time of the acquisition. During the fourth quarter, raw material receipts were steady for both tellurium and selenium and are well positioned with our raw material supply. Prices for both tellurium and selenium have eroded 10% to 15% during the fourth quarter. This reduces the cost of our raw material and our product selling price, so it did not have a material impact on our fourth quarter profitability. Demand for our products continues to be strong and PRM currently has a solid order backlog, with 80% of fiscal year 2009 projected tellurium revenues currently under contract. Also during the fourth quarter, PRM was qualified as a selenium supplier to II-VI Infrared Optics business unit and has been awarded a contract for 40% to 60% of the total selenium requirements for fiscal year 2009. This will result in a lower net operating cost for the company and was one of the main drivers behind our acquisition of this business one year ago. Meanwhile, over the last two quarters, we have seen increases in the cost of processed chemicals at PRM. We are working diligently to review manufacturing and procurement processes to offset these increases.

The second business segment that performed well on the quarter and during the entire fiscal year is our near-infrared optics or VLOC segment. The military and medical bookings in our YAG and optics product lines in fiscal year 2008 grew by 29%, compared to fiscal year 2007. This included strong demand for optics used in medical and cosmetic laser applications. During the fourth quarter, this was driven by the booking of a $2.5 million follow-on order for production of windows used in conjunction with LASIK eye surgery. As described in prior quarters, we have been able to address this volume demand with our low-cost capacity in our Vietnam facility.

The UV filter business at VLOC continued to meet or exceed the required schedule for deliveries of UV filter assemblies to our prime customer. However, as discussed during last quarter’s call, our current forecast projects that the delivery rate will reduce during fiscal ‘09. We have been adjusting our production capacity accordingly by transferring and consolidating all production to our VLOC Florida operation.

The third business segment that performed well is the compound semiconductor group which we call CSG. In the CSG unit, the Wide Bandgap Materials group continues to make progress improving manufacturing yields. During the quarter, we shipped our first engineering samples of semi-insulating 100-millimeter silicon carbide substrates to a commercial customer. This is further evidence that WBG can meet the expectation of the industry road map. Through our emphasis on continuous quality improvements, we have obtained a qualified vendor status at one of our Asian semiconductor OEM customers.

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