Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fiscal Year 2012 Fourth Quarter and Year-End Conference Call. [Operator Instructions] As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Craig Creaturo, CFO and Treasurer. Please go ahead, sir.

Thank you, Jonathan, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Thank you for participating in the Fourth Quarter Fiscal Year 2012 II-VI Incorporated Investor Teleconference. As a reminder, this teleconference is being recorded on Thursday, August 2, 2012. 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.

Thank you, Craig. I'm Francis Kramer, President and CEO of II-VI Incorporated. My prepared remarks today will discuss operational results for each of our businesses. But before we begin, let me provide some general thoughts on the markets and geographies that we service and some overall perspective on the current macroeconomic environment and its impact on our businesses. During the current quarter, the company continued to be negatively impacted by the declining pricing of tellurium at its PRM business due to decreased demand in the photovoltaic market. In addition, current quarter declines in pricing of selenium caused by unforeseen reduced demand in Chinese metallurgical applications added to these negative results. Furthermore, the worldwide economy is facing challenging headwinds due to the uncertainty in Europe and swelling growth in China. This current global economic environment, combined with the unpredictable volatility in pricing of our minor metals, has resulted in a cautious customer base company-wide. During our fourth quarter, our Infrared Optics segment including HIGHYAG had bookings of $52 million, down 2% compared to the fourth quarter of FY '11, down 12% compared to the third quarter of FY '12, which was a record quarter. Fourth quarter was a record shipment quarter at over $53 million as we shipped against the high order rate we experienced in the third quarter. Near the end of the quarter and into the month of July, we have seen softening in most markets with the biggest impact driven by Asia. We continue to be concerned as this softening is occurring at a time of lower customer spending -- lower consumer spending, vacation shutdowns around the world and slightly lower laser utilization as inventories worldwide are being adjusted. Still in our IR Optics unit at the HIGHYAG group, bookings for the fourth quarter were down 16% quarter-over-quarter…

Thank you, Fran. Here are the items I would like to highlight before we open up the question-and-answer portion of the call. As described in today's press release, consolidated bookings for the quarter ended June 30, 2012, were $142 million, which was 8% above the same quarter last year. Total company backlog at June 30, 2012 was $179 million, which was up 3% or $5 million from the March 31, 2012 backlog. The components of the backlog at June 30, 2012 were: Infrared Optics at $48.5 million; Near-Infrared Optics at $48 million; Military & Materials at $58 million; and Advanced Products Group at $24.5 million. The June 30, 2012 backlog is the highest in the company's history. The continued decline in the index price for tellurium for the third consecutive quarter and a new decline in the index price for selenium drove a need to make a lower across the market inventory write-down for our PRM business, part of the Military & Materials segment, in the June quarter of $2.2 million or $0.03 per share. FY '12 saw a continued erosion of the index price of tellurium with the per kilogram pricing starting at $300 at the end of fiscal Q1 and moving down to $220 and then to $160 and finally to $115 at the end of Q2, 3 and 4, respectively. In the June quarter, the index price for selenium moved from $61 per pound at the beginning of the quarter to $44 per pound at the end of the quarter. In today's press release, we have enhanced the disclosures around the impact of these write-downs, noting that the total FY '12 impact was $8.3 million or $0.13 per share. These write-downs were a component of cost of goods sold and negatively impacted overall II-VI's gross margins for…

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti from Needham & Company.

If we look at the -- your current guidance and compare it with the preliminary outlook you provided in mid-June, what were some of the factors that have contributed to this somewhat more cautious view of the year? I mean, I think it sounds like you're seeing some increased commodity price pressure but what are some of the other factors? Looks like China as well may have slowed for you.

I think you're pretty accurate. Certainly, it's the minor metals is that -- is really 80%, 90% of what changed our guidance, but we did and I try to make those comments and what we're commenting on is the consumer spending volatility, China, whether they put out a new infrastructure program and -- are things that are offsetting those downward thrusts. Our -- the business at Aegis is doing better and our IR businesses is good and in the second half of the year, we'll have more of our diamond product line sales which is moving into the EUV. So I think we had some down, some up and our net is really, if you boil it all down, it's really affected by that minor metal write-off we had here in the last quarter and we see that coming along maybe again -- we forecast no change in minor metals but it's a -- that concern we always have right now about this lack of demand is based on the market.

Okay. And I wonder -- that's helpful, Fran. I wonder if you'd be willing to talk a little bit about the outlook for the year as a whole for some of the major businesses. I mean, I think you've given us some sense as to directionally how things are going. But for instance, if we think of your Military business all in, what would you say that business is going to do versus fiscal '12? And the same question I think for Infrared Optics. It sounds like in the telecommunications market, it looks like you're expecting some continued growth in that market.

Yes. I think, for us, on our Military, and I'm talking Military, not including the Materials side, could be in the high single-digit year-over-year growth and that's driven a lot by our sapphire product and just our historical products. So it's smaller growth than what we're used to in Military. Go to the IR business, probably, a little bit bigger than that, driven mainly by the diamond product in the second half of the year. So you might get to double-digit growth year-over-year on the top line there. Go to our -- you hit it pretty well on the Near-Infrared with our telecom products. I think that's going to be better. We're off to a good start there. Then go to our Advanced Products Group, that might be a little less growth than what I said. It might be single-digits because of the gesture recognition program which seems to be running out and that's -- that one we did pretty well on in the last 2 years and I don't think it's going to be that good in this year coming up. So the average, probably, the higher performers would be IR, Near-IR, the Military part and then the ones who will be on the smaller side will be the Materials business and that's really going to net out on what happens on the index prices in APG.

Our next question comes from the line of Avinash Kant from D.A. Davidson.

Question a little bit on the margin front, like with the guidance that you are giving at this point and of course, the impact from the metal pricing, how do you see margins going forward and especially in fiscal year '13? Both on the gross and operating side?

Sure. I would say that we did factor that and have an option to the guidance. I think in the more detailed guidance we gave back in June, we were saying gross margin is ranging from 38% to 40% of revenues. I think we're still in that range for our current guidance, but I'd say we're trending a little bit toward the lower side of that range. As Fran mentioned, really some of the minor metal items going on there for selenium and tellurium and some other commodity costs, but I would say still probably around that -- still within that same 38% to 40% range, but trending towards the lower side.

Okay. And during the quarter also, when you gave guidance in mid-June, you have kind of accounted for roughly $0.03 in the -- because of pricing and that seems to be coming in at the end of the quarter too. So the differential between the guidance and the reporting is coming from ...?

I think it was -- I think we were pretty much right there as far as the guidance on the write-offs. I think that was pretty much in line with where we thought. I think we ended up as a quarter finished out a little less strength in certain of our product lines, I would say, specifically maybe within our Infrared Optics product line, maybe a little bit lighter than what we had expected towards the end of the quarter. But I would say all in all, pretty close to what we expected even when we factor in the expected write-off versus the actual write-off of tellurium. So --

I think, Avinash, I'd only add to that. Just light finish in fourth quarter would be on our APG as -- in the past, we've had startup a really heavy work on gesture recognition in June this year. That didn't happen and it's being pushed out some.

Okay. But -- and then you did talk about Photop I believe. So did you say you saw Photop coming -- continuing to improve or it's going to be down some going forward sequentially?

No. They are -- they've had an improving trend here in the fourth quarter and we expect to see that for a few quarters and if there's any more China infrastructure funding, it could do better than Q1, Q2.

Our next question comes from the line of Mark Douglass from Longbow Research.

Looking at the relative earnings release in IR, sequential sales improvement but earnings weakened. Can you talk to that? I mean, did that show up in the gross margin line, the pricing concerns there? And what do you think about gross margin in 2013 in IR?

I would say overall, Mark, for the -- we came in -- just for calibration purposes, I think that the segment margin back in Q3 in March quarter was about 27%, this quarter about 25%. Still very strong overall. Still the strongest of the businesses we have. I think it was a little bit higher commodity prices, a little bit more challenging pricing environment within IR, I'd say, would probably be the 2 things that added up there. I would say we still continue to see good market strength and financial performance from HIGHYAG but I would say a little bit more challenging on the cost side of things in the IR. I would say we are doing well over all on yields from impressive growth, and from a coating and fabrication perspective, but a little bit more challenging on the cost side and a little bit more challenged maybe on the pricing side. And I'll let Fran...

The only thing I would add is maybe we missed what we thought we would ship in that unit by a few million dollars in the quarter and that carries easily a 50% variable margin with it. So that's probably the final reason why were light in the dollars we could deliver per margin.

Okay, that's helpful. And then in the face of the pricing, demand is mixed across a lot of the businesses. Have you been implementing more cost controls, what -- do you have plans to do more there? I haven't seen a lot of fixed cost there's not much you can do about the -- sort of fixed cost but some of the variable cost, are you [indiscernible]

We really have gone into that and I didn't highlight it in this set of comments but we've made major cost reductions certain in our APG unit, our Marlow unit, all of our units. We're really controlling all those costs and adding to our staff which in some cases maybe we should, we're being more frugal. Just what you said, the volatility and the unpredictable niche. One of our business it will be up, another will be down and this has been going on now for 3, 4 quarters. We're finding that uncertainty just as strong for the next few quarters. So we're having to adjust. So we're keeping our cost under control.

Okay. But no exclusive programs that you can -- come to mind?

No. I would say each one for our 11 businesses has an express and explicit program. But we -- because we are 4 different business segments, 11 divisions, each one has a little bit different set of circumstances. But in general, we're applying it over the top of everything, with 3 or 4 units getting more of it because their business is more affected.

Our next question comes from the line of Jiwon Lee from Sidoti & Company.

Fran, just wanted to circle back and see if you can elaborate a little bit about the China OEMs slowdown, whether or not that is relatively recent events and whether or not that relates more to the high power or to low to mid-power?

I think maybe 6 months, 9 months ago, we started to talk about really down being in the low-power in China and high power continue to go recently well. Now it's almost the flip-flop. The high power is just slowing quite dramatically for us. Low-power has been back up and it's hanging in there pretty good. Aftermarket in China is good but not great. And we haven't found all the lasers in China that were deployed out there in the last 3, 4 years. So we still have a lot of market opportunity and aftermarket in China. We haven't been able to get as much as quick as we like because we need to strengthen our sales force there and we've been working at it. And so -- and I think we're coming but I would say it's high power OEMs that are not producing right now and it could be just the staffing up that they did in the country there. Over the last 3, 4 years, there seems to be just a slowing for putting up more capital in terms of big laser system. That's what we're seeing and I think it's -- it seems to be China on capital equipment in general right now, letting up a little bit.

But did I hear correctly then, the changes between mid-June and now relates mainly to the IR Optics and maybe some just on recognition or were there something else?

I think it was, if you're talking about for the guidance, you want to think we were pointing to PRM and kind of factoring those changes in there. And then I think we did note that secondarily, we've looked at and rethought the guidance for both IR as well as for Marlow and I think those were -- those are really the factors if you boil it all down that were the negative factors. Offsetting that, we've had some positive factors. We do have some businesses that look like they will be doing better than what we have forecasted a few months ago. But as far as the negative pieces, those were the 3 in that -- really in that order, PRM, Marlow and for IR.

Okay, that's helpful. And I wonder whether you can discuss a little bit about the revenue assumption you have for your telecom business, the Photop and Aegis and what kind of sort of a margin versus corporate average assumptions you built in for that business, please?

We usually don't go into that degree of explanation. It's -- in our overall Photop guidance that we've made comments on, it is improving and it seems to go in a cycle of 2 to 3 quarters up and then down 2 to 3 as the telecom business is -- how that rolls and it's really -- the Photop telecom business is quite heavily impacted by what China is doing. So we're -- is the government going to stimulate the economy there? We're okay for the first quarter and maybe into the second. We have no visibility on third and fourth. If they keep at this, it will be very, very good. If they put a little more out, it will be very good. But if they decide not to prime the pump some more, we'll be turning down a little bit. So it's hard for us to give more guidance but our Photop business is tied into the 2 or 3 pieces we talked about with the green laser, with the telecom business and the optics business. And in general, we're bullish on that right now. We're happy with where we are knowing we're looking at our world in the first half of this fiscal year and the second half. And we see up in the second half and in a couple of our areas, be it IR business, in the Military & Materials business and Photop, we can't call what the second half is going to be compared to the first. So it's the same problem we've been having which is reasonable visibility on all our businesses with not the good visibility on our Photop business, which is a higher percent telecom.

And, Fran, on that businesses, both Photop and Aegis, you were a little while ago fairly optimistic about some of the design wins that you had with the OEMs. And does that change a little bit or you just as positive on that front at least?

I think the design wins that we're most pushing for are the Aegis ones and we've started to see them in that Aegis business and even the Photop between when -- somebody says, "Well we're going to be using this product and we're going to go systemwide with it till it happens." There might be 3 months, 6 months or might even be 1.5 years before the order start to come. So design win to orders, yes, with the design win you get some order, a little prototype and what we're looking for is something coming 6 months later. So we did have good results with Aegis this quarter, a few design wins but also the better orders from the work we've done previously.

Understood. And lastly for me, obviously, it is deeply cold in this environment. But if you were to think about the upside and the downside to the fiscal '13 outlook, just knowing and seeing what you do now, which area would that be?

Are you asking whether we're up or down on our guidance -- on what we've talked about?

Yes.

Oh, okay. I think we're optimistic that this could be better. It's so driven by the worldwide economy and what happens second half of the year. But we are seeing good belief that it's going to get better -- consumer spending how is it going to be over the holiday and that will set up the second half of the year there. What's going to happen in our U.S. protocol scene, that affects us. But we're more optimistic than pessimistic against the numbers we just gave you.

Our next question comes from the line of Doug Thomas. Mr. Thomas, please state your company name.

JET Investment Research. So the last question or your answer to the last question kind of leads into my question which is -- and I appreciate the cautious outlook and so forth and the conservative tone. You have a buyback in place. I know you have to measure liquidity and all these other issues but we've seen this before. The business always bounces back. Conditions will improve over time. Does what you're seeing in the market now make you incline to want to repurchase more shares under your authorization? How do you balance that against the other uses of cash here? Because, obviously, you've got a very strong balance sheet?.

Yes, I would say, Doug, and I'll let Fran make some comments as well, I think we feel like we've made good progress on the repurchase program in the quarter we just completed. I think we will be back to that, especially, as you have noted kind of invited the strong cash generation we did have for the quarter and for the full year for that matter. I think it is something that we balance out. Obviously, we're very self-sufficient from a cash flow perspective from capital spending point of view. We're always looking for acquisitions that might get added into the II-VI organization, that's a potential use of cash and then share repurchases. And I think our board does a good job of managing and balancing out between those 3 demands pretty well. But I think, we do see kind of an improving outlook for many of our businesses and I think -- we do feel that deploying the capital in the repurchase program that's open right now is definitely a good move for us right now. So Fran, I'll let you add on to that.

I think Craig hit it right on. Yes, we'll -- like we said in our announcement, we'll be back finishing out our repurchase program. And whether we would do more than that, we're trying to balance and we think we should be keeping -- and we are doing -- we did this past year $40 million in CapEx and this coming year, we're going to do $35 million to $30 million in that range. We're going to keep building the business and if we need -- if we find the right acquisition, we like having the cash available, but we're not -- we don't have anything imminent. But, yes, we're going to keep doing the right thing which is deciding when we should buy more shares or not or put it into other investments. And if we don't have the other investment to put it in, well, then we'll have it in the balance sheet.

[Operator Instructions] Our next question is a follow-up question from the line of Jim Ricchiuti from Needham & Company.

Fran, I was wondering, you made some commentary around the green laser demand that you're seeing at Photop. Can you talk a little bit about the applications that are driving that?

I think I better not. It's a nice order, it's certainly a -- it's an unusual, it's a bigger order than what our guys have had before in the green laser business. That's about all I could go to. I really can't say it and that's why I didn't make a comment about it. We're -- I think we got a good product and were selected over a couple other alternatives and I can't go any further than that. I'm sorry, Jim.

Okay. But it sounds like it's with one customer.

Yes, that's fair.

And is there the potential for good follow-on business? Is that fair to characterize?

I think there could be a 3-year product deliveries like this and so on. But it would take another order or 2. Yes, it's a good business. I'd like it to be longer but right now, we have maybe that amount of visibility to see it out there, maybe that far.

Okay. And one final question for me. You guys alluded to the balance sheet and the potential use of cash for acquisitions. How would you characterize the pipeline for opportunities that you're seeing?

Good. There are a lot of opportunities that come that are now seem to be auction. People are thinking it's time to sell and they aren't the greatest businesses at times to be looking at. So some of them we really have passed on. Even today, we're talking to pass on one. So -- but then we have some ones that we're really quite interested and maybe moving along well. So -- and the ones whenever I say we're moving along well then we get to a certain point and decide we're not going to go higher on our prize then it falls off our -- what we're working on. So we have some that's right along in the right spot but whether we could complete it or not depends on how the final things, due diligence and negotiation would work out. But we're very active in it, but we are -- we really want to be selective to add businesses that are materials-centered, component-centered, connected to our materials, those types of businesses and that have good margin growth potential.

Our next question comes from the line of Jim Hollister from -- he's a private investor.

As I recall, but primary motive of your acquisition of [indiscernible] was to control the price of selenium in the use of your operations. Are there not cross currents in the diminution in price?

Yes, it does. You're right. The original purpose of our PRM acquisition, which was now a little bit more than 5 years ago, was to help with the protection of, before that[ph] material. The business has expanded quite a bit since we acquired it. And as Fran mentioned, we're moving now into a rare earth material that we are working on as well. So I think overall, the purpose of the business has worked well for us. You're right, Jim, we kind of somewhat root both ways for selenium because we are such a large consumer of it internally here for Infrared Optics. But it is also -- we do have quite a bit of external sales. Selenium is used for many metallurgical, agricultural applications as well. So it's a business that, unfortunately, because of the decrease in the index pricing, has been falling on some tough times lately. But if you look at in totality of over the 5 years that we've owned it, it's been a very strategic acquisition for us overall. Fran, do you want to add anything to that?

No. I think you hit on to a difficult subject for us because the way we have to account for these changes in selenium and tellurium is just the way we're doing it. We cannot hedge. There's no way to buy a hedge. It's such a small-market. We cannot make any accruals. We know it's going to happen and we know the price when it's going to go down because the demand fell off in photovoltaic so strongly. We couldn't hedge it. We couldn't provide an accrual for it, so this is the way we must do it. We have a good optimism that it might take -- it might be a year or so that, that business is going to come back. Probably, the #1 photovoltaic application which uses cadmium telluride is showing better results right now, just by the leading company that's using that product. So if they're starting to see a little comeback, it may be our chance to get our product selling better and get that -- move that price up even a little bit. It's 6 months out but you can see it coming, but it's so far out and we're having to take these write-offs. The only thing I can say, Jim, is the products are written off down to the market price now and we can make a margin on top of that from what we add to the value of it, because it's the price of the raw material that we bought that we written down. I think we'll have some modest margin if we can just stop this erosion of the index price, then after that, I think we'll be in very, very good shape. And what Craig said, we've had a very good return on our PRM investment which we bought. Very, very well low-priced at the time we bought it.

Out of curiosity, are you a consumer of tellurium as well?

Yes. We do use some tellurium in our Marlow business manufacturers grows cadmium -- that grows bismuth telluride. And that is used for all of our thermoelectric coolers. So when you consume tellurium, not quite the extent that we consume selenium but we are a consumer of tellurium as well.

This does conclude the question-and-answer session of today's program. I'd like to turn the program back over to management for any further remarks.

If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter ended September 30, 2012 is currently scheduled for Tuesday, October 23, 2012, before the market opens, with the conference call to follow that same day at 9:00 o'clock a.m. Eastern Time. Thank you for participating in today's conference call.

Thank you, ladies and gentlemen, for your participation in today's call. This does conclude the program. You may now disconnect. Good day.