Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fiscal Year 2013 Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Craig Creaturo, Chief Financial Officer and Treasurer. Sir, you may begin.

Thank you, Sam, 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 2013 II-VI Incorporated Investor Teleconference. As a reminder, this teleconference is being recorded on Thursday, August 1, 2013. 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. We recognize that today's earnings release contained a lot of information, including some unique items that relate to our PRM and HIGHYAG subsidiaries. All those items are important, we don't want our investors to miss the broader point that we had a very strong ending to our fiscal year '13. And with the steps we have taken to rightsize and refocus PRM, we are placing ourselves in a better position moving forward. When the EPS impact to PRM for the just-completed quarter is excluded, our financial results were in the range of the guidance we've previously provided, while we delivered record revenues for both the quarter and the full year, as we concluded our 41st consecutive year of profitability. I will now review each of our business segments starting with the IR Optics. During the fourth quarter, bookings were up 10% quarter-over-quarter to $57.4 million, which was the highest quarter this fiscal year. Our German business continues to be stable, driven by demand for diamond optics in EUV systems. Japan had their highest quarter of bookings for the year at $5.8 million. Scan lens bookings remained strong from customers in Taiwan. South Korea has had business shifts away from Japan. For our IR Optics business in the U.S., orders from the domestic OEMs decreased 6% quarter-over-quarter, due to the timing of blanket orders from some of our key OEM accounts that we received in the third quarter. Shipments to our domestic OEMs increased 5% from last quarter. Aftermarket bookings were flat quarter-over-quarter, as machine utilizations rates remain steady. Raw material shipments were down quarter-over-quarter. Military bookings increased 160% quarter-over-quarter, as a result of a follow-on award from a key defense contractor. European bookings for the fourth quarter were…

Thank you, Fran. The next portion of this call will be dedicated to some financial highlights from the quarter and fiscal year, and we will also discuss in an additional detail of the financial implications of the refocused PRM business and the acquisition of the remaining 25% of HIGHYAG, both of which were highlighted in today's press release. We will start the session with a review of our bookings and backlog. As described in today's press release, consolidated bookings for the quarter ended June 30, 2013, reached $145.4 million, which was 2% higher than the same quarter last fiscal year and marked the third consecutive quarter of increased bookings. The 3 acquisitions we completed in the December 2012 quarter added $18 million in bookings during the just-completed quarter and $22 million in revenues. Total company backlog at June 30, 2013, was $184 million. The components of the backlog at June 30, 2013 were: Infrared Optics at $46 million, Near-Infrared Optics at $34 million, Military & Materials at $68 million and Advanced Products Group at $36 million. The gross margin for the quarter was 32.8% and was 35.4% for the fiscal year. When the reported gross margin is adjusted for the items we highlighted on the last page of today's press release, namely the charges for refocusing PRM's business and the write-downs of tellurium and selenium, the quarterly gross margin would have been 36.5% and the full year gross margin would have been 36.7%. Our Infrared Optics and military businesses have been strong consistent performers at the gross margin level, and we expect that our recent acquisitions will continue to improve their gross margin performance as we move into fiscal year 2014. The effective income tax rate for the quarter was 32.5% and for the fiscal year was 26.5%. The higher…

[Operator Instructions] Our first question comes from Avinash Kant of Davidson & Co.

So a few questions. Could you give us some idea about how big was HIGHYAG in fiscal year '13? And also the 2 discontinued businesses, tellurium and selenium, how many did they contribute to fiscal year '13, maybe both in revenue and earnings terms if you have that?

I would say that we can give you that -- a perspective of that from a revenue perspective. Roughly, HIGHYAG has been roughly about 10%, a little bit more than 10% of the total Infrared Optics segment in terms of both revenues, and the profitability levels are comparable to the Infrared Optics business. So that should give you a perspective a little bit more than $25 million or so in sales is the general range that they have been tracking. For the businesses that we are exiting, PRM, as a whole for fiscal year 2013, PRM as a whole was about a $25 million business. And the businesses -- those 2 businesses that were exiting or those 2 business lines that were exiting represent roughly about half of what the total business is. So that should give you some perspective.

And I was a little bit confused about one of the charges that you mentioned in your press release. The last bullet, when you talked about the after-tax income of $3.7 million, which is the $0.06 per share diluted. That's from the flooding in Thailand. Did that come into the quarter? It was in the fiscal year before hand?

That was in the fiscal year before hand, Avinash. That actually came in during the December quarter. So in the -- we mentioned in that bullet, we're saying that, that was something that impacted the whole year but not any of the quarters for which we were reporting. So that -- if you go back, that was part of the second quarter.

Right. So it's not this quarter. I think only the first 2 were the ones who impacted this quarter?

That is exactly correct. That's right.

Okay. So one other final question maybe. In terms of the guidance that you're providing for fiscal year '14, you were already assuming the discontinuation of these business and you're assuming the full contribution from HIGHYAG, right?

That is correct. Both of those have been factored into our initial guidance that's right.

Our next question comes from Jim Ricchiuti of Needham & Company.

A question I have is on the Infrared Optics business, as well as the Near-Infrared Optics business. It looks like you've shown the strongest bookings in both of those areas in some time and positive book to bill in both. We haven't seen that in several quarters. And so the question is, is that sustainable? Are you -- do you feel confident that we're seeing the pickup in those markets and that the momentum is sustainable?

Yes. I think -- we think it is sustainable as far as we can put our judgment to what we see. IR is stronger, no doubt about the infrared business. And the diamond business for UV helps that. But a lot of it has to do with how laser utilization is a little better right now around the world, and we do monitor that. So I think IR has a sustainable -- again our visibility might be out only a couple quarters. Then you go to our Near-Infrared, and we've had some better work in our optical communications, and that has picked up and it seems to run on kind of an up-and-down pattern. And we might be on the up part of the pattern right now. And whether that's sustainable for a couple of quarters, I think that might be what we think. So it's a better, stronger position than we've been in on both of our bigger businesses.

Okay, that's helpful. And just one final question. Marlow clearly benefited from the initial shipments, I guess, into the personal comfort market. Are you seeing -- can you give us any flavor for how the products are being received and whether we might see some order uptick after the initial spike that you saw?

I think the products are doing well is what -- we're way back in the food chain there. But what we hear is it's going well and it will have a nice period here right in the first quarter and maybe stronger toward the later part of the first than early here in July. But -- and we've got a good runway. Looks like it's going to be a nice product. Initial reaction seems good. And we really don't know about the follow-on orders for, shall we say, the second quarter, the third quarter, the fourth. The talk is real good, but it really depends on how the product sells. So we're optimistic. And so far, no complaints according to the customer.

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

Can we talk a little bit more about the order trends so far in July compared to the fourth quarter first, please?

Yes. Really, I don't have the complete picture for all 4 of our business segments. But one of our 2 big ones is well on track, maybe a little better than well on track, and that's related to the IR Optics business is having a very, very good July. It's a -- the usual summer doldrums issue happens in Europe sometimes, but this year it does not appear to be happening. So I think we're upbeat there. And what I heard on our optical communications for Near-IR, good so far.

And Fran, on that front, there's been a lot of concerns about the slowness in China. What kind of an assumption did you sort of kind of put in for fiscal 2014 outlook from that front?

Yes. I think we're in there modestly, maybe not as strong as what we'd have in North America and Europe. But there are many lasers deployed there, even if production is down. So laser optic utilization is still good. And that's why we're really -- we're not gaining as much business off the new assembly line builds, as you might think, it really comes in that aftermarket. And so we're not tempering it down a lot. But down a little because the economy is slowing in China, but it's really -- whatever goods they make, a lot of them consume optics on the laser. So we're down a little bit, not as much as the projections for GDP being down in China might suggest.

Okay. I think that's very fair. And if I missed the comment, I do apologize. But could you talk once again about the high-power versus the mid- to low-power IR Optics sort of...

Okay. I didn't really make any comments about high versus -- well, I really was talking all about high power. The low power business still remains a very nice business. It's -- the low power CO2 are very competitive and fibers are coming in the low power. But the CO2s are very cost effective. I think it's going to be a dogfight there for quite a while. So we're in good to very good shape on the low power optics business. And that's -- that right now, I cannot tell you in the last 60 days, whether it's up or down, but it just goes up and down as the economy -- because it's both. The machines for labeling, for scribing, for all the little punching holes and so on, those lower-end lasers, they're up and down. So I can't tell you if it's up or down right now, but it's not -- the high-power laser business is what swings our IR business. The low-power optics are -- they're also in there.

And maybe more questions for Fran. But the acquisitions that you made, as well as the steps you took on the PRM side, what type of margin expectations or the earnings expectations did you build in for '14 outlook?

Yes. We expect some continued margin improvement from all 3 of the acquisitions. We've seen -- we've now made it past all the acquisitions-related costs and purchase accounting and things like that. And we're really now starting to see the true picture of the gross margin profile, the businesses that we have, and we do think that there are some things we're working on from a synergy perspective that will continue to improve those gross margins. And I think we're -- our general expectation is that they will collectively get up to the collective gross margin of the overall II-VI business really quickly, a couple -- 1 or 2 of them may be here pretty soon and definitely before the end of fiscal year 2014. That was what was factored into our guidance. From a PRM perspective, we did factor in what our current expectation was for finishing out the 2 business lines that we have exited. Again, the tellurium and selenium chemical businesses, and what we think we will do here in the very near term as we wind those 2 product lines down. And then again, the remaining PRM business will be, from an external reporting standpoint, most focused on our rare-earth element production, but it would definitely be -- continue to be a critical and larger supplier to our zinc selenide businesses, as Fran was mentioning in his comments.

And lastly for me, what kind of an expectations -- with that -- the program timing and all that budget pressure going on, what kind of an expectation should we have for the military business?

I think we'll have a gentle climb up, where it won't be a large rate, but it's nicely profitable the way we have it positioned right now. And so we think we'll grow that modest 3% to 5% rate in our forecast that way, maybe I gave you a number there, and we might have a little stronger than that in our forecast, but I think you should think 3% to 5%. And the part that's -- and I mentioned haven't received the order for this IRST program, which is a foreign military sales, that was one of the drivers when we bought the business. We've received the order. But it's a nice, big order, spreads over 3 years. But with our 12-month recording of bookings, most all -- well it's all past our 12-month window. So it's not going to this -- that order I mentioned. It won't impact FY '14. But I think it's a nice -- we do it -- we do that product well. We've produced quite a few for the U.S. So it will be a good product. It's out there for the next year.

[Operator Instructions] Our next question comes from Dave Kang of B. Riley.

First of all, I just wanted to clarify that did I hear Photop sales increasing 17%, is that right?

Sorry, Dave, they increased 17% sequentially compared to Q3 that is correct, Q4 over Q3.

And then do you have orders number for Photop?

We didn't describe that in detail too much, Dave. Again, they really make up the lion's share of our Near-Infrared Optics segment, so I think you can look at that and get a feel for -- again it's really them and the Aegis business together. So I think you can get a perspective that way. So...

Okay. And then from Fran's comments, it sounds like there were certain products that did well, whereas certain products that's on the way down. Can you just go over and provide a little bit more color on that?

We've been really reluctant at times, Dave, to go into the details on the optical communications business. Although I put it in my prepared comments to put more detail out there, I really wouldn't want to do it. We've given as much because it's a very competitive field. My comments were -- and you know the business well. So I tried to give some smattering, datacom, CATV, what was there, we're trying to get more in 100G, 40G is down. I think what I've described is probably pretty much what you see from the other people in the space.

Sure. So it sounds like 100G is cannibalizing 40G especially in China, is that kind of what's happening?

I don't want to say cannibalizing, but it's coming on faster than anybody expected, and I think you know that. So yes, it's -- and there's -- it's a cannibalization, but there are still 40G sales that are going on, obviously.

And can you just provide a little more color region-by-region, North America, China and Europe?

No, I'm not prepared to do that. That -- and again, it becomes the same issue for us that -- and you know that market. I know you do. And so much of it is bought by multinationals in China who are dispersed around the rest of the world. So we're, at times, back in the food chain. So we don't know. But some of our people certainly do.

Got it. And then last question is regarding your September quarter guidance. What kind of expectations are you assuming for whether Photop or NIR? Any color there? Is it going to be up sequentially or down due to seasonality? Or...

I think it's a general -- I think we have the performance for that segment -- or as a whole, Dave, is kind of similar from a revenue perspective, maybe up a little bit from the quarter we just completed. Profitability-wise, I think we have them in a little bit higher of a rate of profitability than we just exited this most recent quarter. So I think comparable sales is up a little bit and profits, again, comparable, maybe up a little bit as well.

Thank you. And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any further comments.

Thank you, Sam. If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter ending September 30, 2013, is currently scheduled for Tuesday, October 22, 2013, before the market opens with a conference call to follow that same day at 9 a.m. Eastern Time. Thank you for participating in today's conference call.

Ladies and gentlemen, thank you for participation in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.