Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fourth Quarter Fiscal Year 2015 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 Ms. Mary Jane Raymond, Chief Financial Officer. Ma'am, you may begin.

Thank you, Kelly, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our fourth quarter and year-end earnings call for fiscal year 2015. With me today on the call today is Francis Kramer, our Chairman and Chief Executive Officer; and Dr. Chuck Mattera, our President and Chief Operating Officer. As a reminder, this call is recorded on Tuesday, August 4, 2015. Any forward-looking statements we may make during this teleconference are given in the context of today only. We do not undertake any obligation to update these statements to reflect events subsequent to today. With that, I'll turn it over to Fran Kramer, our Chairman and CEO. Francis Kramer Thank you Mary Jane and thank you everyone for joining us. We had a record quarter that capped a record year. Bookings for fiscal year 2015 or $762 million, grew 10% over fiscal year 2014, including the full year impact of our latest acquisitions. Revenues for FY15 of $742 million grew 9% over FY14 from $683 million. Ignoring the estimated negative impact of foreign currency of $12 million, our growth rate would have been 11%. Our adjusted EPS was $0.94 per share, excluding the acquisition settlement in our favor in the second quarter of $0.11 compared to the reported $0.60 per share for fiscal year 2014. Revenues in the laser solutions segment were $288 million in fiscal year 2015, a 13% increase over fiscal year 2014. This segment was the most affected by the currency of $9 million or 3 percentage points of growth. The operating margin grew to 19% compared to 10% in fiscal year 2014 with contributions from every division in this segment. The Photonic segment revenues of $261 million grew 20% compared to fiscal year 2014. The operating margin was…

Thanks Fran. In our laser solutions segment, Q4 revenues of $74.1 million were up 1% sequentially following a record Q3 which grew at a very strong 8% driven largely by seasonal plant retooling demands. Our largest growth in this segment was in Asia, a 12%, which continues to be a robust market for us. We continue to see lots of opportunity in interest the quarter, across the whole spectrum of high power laser platforms for industrial materials processing. Laser solutions not only had strong growth from their own products, but it also pulled through complementary products from our other two segments. Our CO2 laser optics business continued to grow modestly in the quarter and increased market share and low power OpEx. These gains added to our high power market share and expanded our penetration into the addressable market, especially in China. The EUV market for our high performance optical and electro optical components was softer as it was for the structural components from performance products, but we believe this will be a good and long term growth market for us once the semiconductor industry roadmap experiences the inflection point to the 7 nanometer note. The adoption of our products in the direct diode in fiber and laser component space has been very good for both laser solutions and photonics. One micron component sales have recently climbed to 15% to 20% of our total business and it is still growing. From a regional perspective, the largest growth in one micron products came from Asia in part as a result of our large Asian presence. The combination of our broader portfolio due to recent acquisitions and product development investments, major investments in the establishment of new sales and customer service centers increased applications engineering staff and our substantial presence in China that…

Thank you, Chuck and Fran. For FY15 our revenue growth of 9% was 2% organic. Laser solutions 13% growth was 9% organic baring in mind it was this segments growth that was also the most affected by currency. Photonics 20% growth was 6% organic and there were no acquisition effects this year in performance product. As a second point on the revenue, our Q4 revenue of $197 million was over the top end of our guidance of $185 million to $193 million due to some of our customers requiring shipments in the fourth quarter that we would expect it to be in Q1 FY16. We did very well on our margin targets this year even though we were a little shy on the adjusted EBITDA margins due to currency effects and an intangible asset write-off of $2 million. Growth margin of 36.6% compared to 33.2% for FY14. The operating margin of 10.4% compared to 6.8% last year and the adjusted EBITDA margin without the settlement benefit was 17.3% compared to 15.1% in FY14. The operating and adjusted EBITDA margins are all inclusive of currency and restricting effects. They exclude the indemnification settlement in our favor of $7.6 million from the FY14 acquisitions. Our fourth quarter book-to-bill ratio of 1.0 caps a good year of improved bookings. Full year, the book to bill ratio was 1.03. Our backlog of $242 million consists of $73 million in laser solutions, $68 million in photonics, and $101 million in performance products. The currency effect on our revenue was $12 million or about 2% reduction in our annual growth rate. The euro and yen falling over 20% from June of 2014 coupled with the growth in our businesses at HIGHYAG in Berlin and Laser Enterprise in Zurich with their euro-based revenues really changed the currency…

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Thank you. Good morning.

Hi, Jim.

Hi. A question on gross margins, Mary Jane, maybe as you address this, as we look through the year, you showed nice improvement sequentially in gross margins particularly in Q4 and it looks like for the year, you came nicely above what you had set out as a target, and I’m wondering how we might think of that gross margins in fiscal 2016, just given some of the things you are doing, the benefits of the restructuring and potentially mix?

So, we have out there a margin raise for fiscal year 2016, which at present is ranging 36 to 40. I would say at this point, again, given that the first quarter is our smallest quarter, we are not changing that range right now. We would not expect to come in at the bottom of the range and we do expect to make improvement on this year, but I would say, again, given that the first quarter is the smallest quarter, we are not going to change it right now, but do expect progress.

Thank you. That’s helpful. And I’m wondering if you could talk about what areas in Q4 where you did see some pull-ins that may have come from Q1?

Largely in Performance Products, a little bit in the Photonics segment. Again, largely driven either program related or customer timing on how they wanted to be ready as they approach this quarter that ends of September 30.

Okay. And last question from me, thank you. Just on operating margins in the Photonics business, some nice improvement sequentially and how might we think about that just given the initiatives you have just in general to improve yields and whatnot?

Well, first of all, we are very proud of the Photonics segment in the quarter. Their results in the fourth quarter cap what was a very long and often times hard year for them under which they took a significant amount of action. I would say again, keeping in mind, we don’t give margin guidance by segment. We would expect to continue to progress on the overall years number. I don’t that we are expecting the fourth quarter number to repeat every single quarter next year, that’s important to point out. But Photonics has done a lot of work not only on their product portfolio, but [indiscernible] (00:23:49) restructuring. So therefore, I would expect to see them if you think about the year overall to continue to make progress into next year.

Certainly, this trend, the volume that we had in the quarter with Photonics was very important for that margin lift and we see the whole Photonics business in Optical Communications Group in particular having a few strong quarters if we look out. We can see a little further than usual – a few quarters.

Okay. Thanks very much.

I think maybe to just add to Fran, generally speaking, I mean, we’ve said this before in other calls for all our businesses and Photonics perhaps the most – the marketing cooperating helped us a lot.

Got it.

Also, just to add, we usually tell you not too much of what we think for the future quarter of Photonics. We have very short line of sight, maybe a quarter. Right now, I think we are thinking, maybe there is two or three quarter.

Okay. Thanks, again.

Thank you. [Operator Instructions] Our next question comes from the line of Ted Moreau with Barrington Research. Your line is now open.

Hi, Ted.

Good morning. Thank you very much. Congrats on a great quarter. How much revenue do you think you benefited in the quarter from the pull-ins in the Performance Products segment that you were indicating?

I don’t think it was material in the quarter. I mean it was certainly a few in the low single-digit.

Okay. Very helpful. Thanks.

Okay. And then visibility you are indicating a little bit better in the Photonics segments, what are the factors driving that? I mean we look out and see much are optical upgrades and data center expansion plans from [indiscernible] guys, but just kind of curious as to what you are seeing what factors will be driving that for you guys?

Ted, this is Chuck. I would say, overall, the data center interconnect market, the upgrade in the cable TV markets and then just across the board, it just seems that most of our customers are experiencing at least some near term uptick in demand.

Chuck had in his script and said about the China build-out, I think that was early one in that, that’s another feature.

Okay. Thanks for reminding me on that. And I think in the script you had mentioned wireless – 4G wireless in China, which seems to be a little bit different than some of the other guidance, supply chain, particularly in the semiconductor side. So just kind of curious, maybe what you are seeing there versus what some of the other guys, some other suppliers might be seeing and is there a difference in timeframes as far as when demand gets pulled, is that why there might be a different – little difference in when you are seeing things versus when some semiconductors guys are seeing things, if you could comment on that?

Well, I wouldn’t be able to comment on what the semiconductor people are seeing or saying. In our case, Ted, across the company, we have products that are in the Photonics segment, which are addressing the 4G upgrade, wireless upgrade in China, as well as part of the overall China broadband initiative, as well as in Performance Products, our silicon carbide substrates underpin gallium nitride electronics, which are also ultimately we believe aiming through our customers at this China broadband expansion. I believe we talked about that last quarter. So I mean if you read the most recent press event in the last couple of months result from China, it’s apparent that they continue to press on with their efforts to boost information consumption, expand broadband coverage across China with the aim ultimately of offering 4 megabits per second to those in rural areas and then 20 megabits per second in the urban areas by 2020 and we think from those announcements in the China press, they are expecting to go above over 600,000 new 4G network base stations that will ultimately end up delivering that kind of a service to over a couple of 100 million new mobile phone users. So we have a visibility or a view of certain parts of that network build-out where we are participating either directly or through our customers. Does that help?

It does, yes. Okay, great. Thank you so much. I will hop back in queue and let some other guys take a change. Thank you. Good luck.

Thank you. Our next question comes from the line of Mark Miller with The Benchmark Company. Your line is now open.

Hi, Mark. Welcome.

Thank you. Congratulations on your record sales and the margins are encouraging. I just want to call you yesterday where our firm was signing some credit issues with their customers or credit tightening or availability in China. Has there been any impact with any of your customers there?

We have not seen a particular shift in that direction. Credit terms in China, generally speaking, are quite a bit different in the U.S. as you may know, long lead times unbelievably compared to even Europe. But we are over time have gotten very good at trying to figure out how to manage that and – or at least we are trying to be good at it and trying to manage that and I wouldn’t say that we’ve seen materially big difference. I would say in general that we watch lengthening of terms by all our customers on an ongoing basis and do try and be sure that we catch them before they get too far and then see what we can do about them, the cash flow and this company funds a lot of growth and a lot of investment, and it’s important to us.

Your fiber laser components have been a good area for you especially automotive, how did that do this quarter?

Well, Chuck, did make some comments already, 15%, 16%, to 20% of our overall sales are into that space. Truthfully, it might even be a little more. We gave you a good estimate over a couple of quarter, but in the most recent quarter, it might be towards that higher end of that 20%. So that’s coming along nicely and we expected to keep growing. Chuck, anything?

Yeah, I will say, a reference point might be our Q3. Last quarter, I reported that those sales into the fiber laser market had grown, year-over-year, meaning compared to Q3 of FY2014 by 55%. And that was our Q3 2015 compared to Q3 of 2014. Fran is right. We continue to see that market grow for us and we are expecting that it will continue to grow in the 10% to 20% per year range below low in this last quarter meaning Q4, it did appear to slow down somewhat.

I’m just wondering, you gave the year-over-year cash from operations, could you break that out for the fourth quarter?

So $40 million in the fourth quarter this year, last year’s fourth quarter was probably a pretty decent quarter I would say maybe, it was about $10 million up maybe compared to $30 million.

Thank you very much.

Sure.

[Operator Instructions] Our next question comes from the line of Zachary Rodenbough with Sidoti Capital. Your line is now open.

Hi, Zack.

Good morning. I was just wondering if you guys could talk about your use of cash in the near and long term. Debt is coming down at manageable levels. Are you expecting to continue to pay down debt more aggressively or do you have plans to resume your buyback or is your focus more on paying off that debt and accumulating cash? And also kind of as the second question, I was wondering if you guys could comment or maybe make an update to your acquisition outlook? I know you were kind of taking a step back for a while there, but it sounds like you might be coming out of that [indiscernible].

So Zack, this is Fran and we are sure and rested to get back into the M&A business. I think we took a good year and a half to get ourselves lined with what we’ve acquired. So we are starting to look. That doesn’t mean we’ve got something ready to launch, but we will put more efforts into that way to grow the business and we’ve spent this year quite a bit working on new product development that we’ll continue to do that also. So then relative to the cash questions, maybe Mary Jane, you take that.

So having Fran’s answer there, I would say the following. I think we’ve been pretty clear that we have two goals with the share repurchase. One is, it’s the first matter to offset dilution that we might have and secondly to be pretty opportunistic when we see the stock price moving. So I think those still remain the watch words for our share buyback, different things could cause us to – different circumstances could cause us to do different things but given Fran’s comment, I think we will then remain with stellar focus on the pay down of debt. But keeping in mind that notwithstanding we didn’t buy stock in the fourth quarter we would expect to buy stock through next year.

Okay. That’s helpful. And just coming back to the HIGHYAG segment, I know that returning customers have been a large driver for growth over maybe the past year and before that. Can you talk about what portion of growth returning customers are still accounting for and that’s something that you are expecting to continue to drive growth and then how that affects the growth trajectory for that business as that plays out.

Zack, this is Chuck Mattera. I’ll take a shot at and maybe Fran or Mary Jane would like to add to it. I would say that, first of all, they delivered on a very, very solid year in FY15. And they are not only retaining the customers that they have, but they are attracting new customers along the way. As I’ve mentioned before, the team there as well as the global team around the company really has done a fine job. They are having a very good start here to FY16. Their bookings for the first month of the year have been very strong, stronger than what we expected and all of the businesses coming from the same customers along with new customers that they are attracting in North America, Indonesia as well. Franc, do you like to add something to that?

No, just maybe if you would add to it to in terms of customer acquisition and working relative to our Photonics group and I think we can say we’ve done a very good job. The businesses that we’ve bought is carved out head-to-head, customer challenges when we had the business and bought the business, and now we’ve got some of those customers back into the hole. And at the same time we’ve raised prices in some areas in that optical communications group and that send some business away from us, but we are working to make it a more profitable business and to serve those customers better, I feel like we are on the tip of doing that. We could done some of it. Chuck, anything?

Yes, I will say Fran that both in Photonics as well as in other parts of the company, increasing numbers of customers have reported to us that they are realizing our differentiation, the superior value of the experience in doing business with us and that we are positioning ourselves has driven even better in the future.

Great. That’s really helpful. I’m going to jump back in the queue. Thanks guys.

This is Mary Jane. I’ll just give you a little bit more color on Mark’s question with respect to the fourth quarter cash flow. So last year – so the answer is, it sold out $10 million. So it’s a $30 million difference from last year’s fourth quarter. Last year’s fourth quarter from the year-to-date third quarter grew $27 million and this quarter it grew $40 million. Keep in mind our quarters can be a little bit lumpy. We think it’s a very good cash flow year this year and it was still lumpy in the first half. So just to let you that I would say generally speaking Q4 for us is very similar to every other companies Q4 which is you really look hard to be sure [indiscernible] in a row, your DSO and DPO were where you want them and consequently causes Q4 to be a little bit higher.

Thank you. Our next question comes from the line of Dave King with B. Riley. Your line is now open.

Hi, Dave.

Thank you. Good morning. Couple of questions, first one regarding your fiscal first quarter outlook, I was wondering if you can just go over some of the assumptions, which segment – will all the three go down or just more color on that.

I would say that we are not expecting a dramatically different pattern than we normally say in each segments first quarter performance. There is a certain seasonality in Laser Solutions for example because if this is the summer quarter with respect to Photonics, they also experienced some of the same seasonality. No other reason there is an awful lot of companies that have June 30 year end in this industry. And the same for Performance Products, there are number of U.S. based businesses and we tend to have the same sort of summer effect. So I don’t know so much but if every segment going down per se as it is, I would say that’s kind of a normal pattern for the company.

Got it. And then regarding gross margins, you gave 36% to 40% so this quarter’s fiscal first quarter, we should expect sort of low end and then expect steady improvement throughout the year. Is that sort of how we should think about it?

I would say that we would strive to be above the low end for all the quarters but again given that it is the smallest quarter revenue wise, chances are it will have the lightest margin just because again – we have a huge amount of crystal growth and material growth capacity in this company if the market helps. So I would say probably it is fair to say that we might have avoided the lightest margin quarter in the first quarter.

Got it. And lastly, Chuck, I think you talked some – regarding Photonics division, there were some inventory correction and yet visibility seems to have improved. Just wondering if you can just kind of clarify that a little bit. So the inventory correction, that took place in the fourth quarter or is it happening right now?

That was a fourth quarter comment.

Oh, I see.

That was a fourth quarter comment. I think I would say that a course of word interest, code activity has been running very strong. Our position with the major customers as I mentioned earlier is improving. The demand for pump lasers including for [indiscernible] amplifier build out has been strong. Our amplifier business in the fourth quarter was soften than what we had expected, but overall we are feeling pretty good about the start of the first quarter. And as Kramer indicated, we feel like at the moment we can see at least one or two quarters beyond that.

Got it.

In a way that, that would give us more than the usual confidence of our ability to deliver.

And what kind of exposure…

You know, Dave, this is Fran. I would say that in some cases in this optical communication, we are a little further back into food chain than some of the others that report. So we like the lagging a bit or ahead of others in the amplifier business, Chuck just said how it’s affected us but we’ve had a really good effect on the pump side of thing. So timing for us isn’t exactly what the other system people will record.

Sure. Just lastly, what kind of I guess what do you see in the data com market or data center market because one major CFO recently they see plans to be more discipline with spending going forward. So just wondering what kind of obviously we do have in the data center market.

We have a lot of connections, Dave. A lot of touch points into the datacenter interconnect market. And I could imagine such a comment coming from a CFO, but I can tell you that our touch points are extremely active and there is a lot of crosstalk at the interfaces and watch the discussion of current opportunities and our future roadmaps.

Got it. Thank you.

Thank you. And we have a follow-up question from the line of Ted Moreau with Barrington Research. Your line is now open.

Thank you for taking my follow-up and thanks for the update on the fiber laser business which sounds like it is doing well. Another fiber laser company recently had reported great numbers last week and great guide, and so they were indicating that since the fiber laser business is accelerating the move away from CO2 lasers, so can you give us an update on that and like how you see that plan out maybe over the next year?

So I will a update and then take it from there. So in the past, we always talked about 5,000 CO2s coming down the assembly line and 500 to 1,000 fiber lasers will not be 1,000 but right now I would say in this past year if we annualize what happened, it’s about 6,000 total machines put out there, of which maybe 2,800, 2,900 were CO2, 3,100, 3,200 are fiber laser. So the continuation of fiber to grow is true CO2. The new assembly line has reduced. It hasn’t come to a point where it’s affected the installed base and CO2 is still very good. And our run rate on CO2 optics is still very, very strong and a good part of that is worldwide economy doing well.

Okay. Thanks for that. And the cash flow on the CO2 lasers is quite strong, right. I mean that’s very healthy for you guys.

It’s good.

I mean is it – I would imagine it’s above corporate average. Is that the way to think about it or not really?

Yeah, that’s true for sure in that way quite a while. As you see our numbers, it’s been a real nice cash generating segment for us.

Okay. And so kind of a techie question on the Photonics segment, do you – are you impacted at all by the move to PAM-4 modulation and will there be a catalyst out there for you guys when merchant suppliers of PAM-4 chips come to market?

We see that – it’s emerging type and not to get into all the detail but we see that as an opportunity for us.

Okay. And that’s – is that an opportunity for fiscal 2016 or is it further out than that?

It’s an opportunity for us to tighten up on relationships in FY16 and to define our path. We think it will be a longer term opportunity for us given our technology platforms and our competencies.

Okay. Great. Thank you so much.

And our next question is a follow-up from the line of Mark Miller with The Benchmark Company. Your line is now open.

I just wanted to clarify I believe you said the year-over-year organic growth was 2%, is that correct? But it was 6% in Photonics?

Yeah.

And just I was wondering geographically you said China was strong, how was Europe?

Well, Europe was probably sort of a not tremendously exciting market for us in the quarter.

Certainly we had the currency effects in the second half of the year that were heavier out of the Euro. That’s hurt us.

And I would just add, despite the currency impacts, we – I would say that we were strong and despite the current effects, we held our position and without the currency effects, we would have actually grown our business at least one or two points I believe in Europe.

Thank you very much again.

Okay.

Thank you. And I’m showing no further questions at this time. I would like to turn the call back to Mary Jane Raymond for closing remarks.

Alright, if there are no further questions, we want to thank you again for joining us and we will remind you again that our call for the first quarter of fiscal year 2016 is Tuesday October 27, 2015. Fran?

Thank you very much, Mary Jane. I think we are ready to close here.

Alright. Thank you so much and everyone have a good day.

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