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EDITED TRANSCRIPT IIVI ‐ Q4 2015 II‐VI Inc Earnings Call
EVENT DATE/TIME: AUGUST 04, 2015 / 01:00PM GMT 1
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
CORPORATE PARTICIPANTS Mary Jane Raymond II‐VI Inc. ‐ CFO Francis Kramer II‐VI Inc. ‐ Chairman and CEO Chuck Mattera II‐VI Inc. ‐ President and COO CONFERENCE CALL PARTICIPANTS Jim Ricchiuti Needham & Company ‐ Analyst Ted Moreau Barrington Research ‐ Analyst Mark Miller The Benchmark Company ‐ Analyst Zachary Rodenbough Sidoti Capital ‐ Analyst Dave Kang B. Riley ‐ Analyst PRESENTATION Operator Good day, ladies and gentlemen, and welcome to the II‐VI Incorporated fourth quarter fiscal year 2015 earnings call. At this time, all participants are in a listen‐only mode. Later we will conduct a question and answer session, and instructions will follow at that time. (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. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Thank you, Kaylee, and good morning. I am Mary Jane Raymond, Chief Financial Officer here at II‐VI Incorporated. Welcome to our fourth quarter and year end earnings call for fiscal year 2015. With me 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, let me turn it over to Fran Kramer, our Chairman and CEO. 2
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Thank you Mary Jane and thank you everyone for joining us. We had a record quarter that capped a record year. Bookings for FY15 of $762M grew 10% over FY14 including the full‐
year impact of our latest acquisitions. Revenues for FY15 of $742M grew 9% over FY14, from $683M. Ignoring the estimated negative impact of foreign currency of $12M, our growth rate would have been 11%. Our Adjusted EPS was $0.94/share, excluding the acquisition settlement in our favor in Q2 of $0.11 compared to the reported $0.60 per share for FY14. Revenues in the Laser Solutions Segment were $288M in FY15, a 13% increase over FY14. This segment was the most affected by the currency, over $9M, or 3 percentage points of growth. The operating margin grew to 19% compared to 10% in FY14 with contributions from every division in this segment.
The Photonics Segment revenues of $261M grew 20% compared to FY14. The operating margin was 3% compared to breakeven in FY14, and includes the completion of a restructuring in the Optical Communications Group that is already showing a positive effect on margins. The Performance Products Segment revenues were $193M and declined 9% compared to FY14. This is primarily due to continued lower demand for our products serving the military and semi‐conductor capital equipment markets. As a result, the operating margin of 8% was lower than the 10% we achieved in this Segment in FY14. Reflecting on this year, we made significant progress. Our acquisitions of last year are showing solid improvements in market share and earnings, and we are optimistic about further growth prospects. Our legacy and core businesses, including our CO2 laser optics division also continued to penetrate the market and serve as a platform for go‐to‐market strategy and our ongoing collaboration with our customers. Importantly, they also provide excellent channels for both new products to existing customers and existing products to new customers. As we look to FY16, we have begun the new year with energy and enthusiasm. We look forward to continued growth as we focus on investing in new technologies and strategic acquisitions, leveraging our vertical integration, expanding our manufacturing capabilities, globalizing our quality processes, and continuing to improve our margins. Let me now turn it over to Chuck Mattera to comment on our worldwide businesses. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Thanks Fran. In our Laser Solutions segment, Q4 revenues of $74.1M 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 at 12%, which continues to be a robust market for us. 3
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
We continued to see lots of opportunity and interest across the whole spectrum of high power laser platforms for industrial material processing. Laser Solutions not only had strong growth from their own products, but it also pulled through complimentary products from our other two segments. Our CO2 laser optics business continued to grow modestly in the quarter with an increased market share in low power optics. 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 nm node. The adoption of our products in the direct diode and fiber laser components space has been very good for both Laser Solutions and Photonics. One micron component sales have recently climbed to 15‐20% of our total business, and it is still growing. From a regional perspective, the largest growth in the one micron products came from Asia 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 have all helped to fuel these increases. Laser diode revenue increased 14% sequentially and 19% compared to FY14. Our focus on productivity, yields and operating costs is paying dividends as margins have increased for both assemblies and components. We continue to develop several next generation platforms that target growth opportunities, and we are embarking on an aggressive plan to add capacity, increase automation, and bring critical processes in‐house to control even better the quality and cost structure. Last month we showcased an array of new products for the fiber laser and direct diode market at the Laser World of Photonics tradeshow in Munich. All of our new products target world class performance, efficiency and ease of use, and received significant interest from leading OEM laser manufacturers and integrators. We made great strides this year with our investments in differentiated technologies to enable the next generation fiber laser and direct diode laser applications. We believe they provide an excellent foundation for this year and beyond. In our Photonics segment, sequential revenue growth was 12% and our book to bill ratio was a strong 1.09. During the quarter, we experienced increased demand across a variety of our products such as optical components and modules, driven largely by the Broadband China initiative and ongoing investments by global Cable TV operators to upgrade the capacity of their video and data networks around the world. While in general, the Optical Communications market demand has not been strong, we have seen recent strength in China’s deployment of fiber‐to‐the‐home and 4G wireless, as well as continued development of next generation wireless and associated fiber optic backhaul investments. This drives demand across our products in optical communications. This includes switching products, passive components and high reliability pump lasers for our undersea systems customers, as well as amplifier demand from customers in Asia. Worldwide amplifier demand has been steady, but softer than we had forecasted, due to both delays in new network deployments especially in North America and inventory rebalancing at some of our main customers. 4
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Our Photonics products shown in Munich also experienced a significant increase in interest in multiple new Fiber Laser product offerings. Our innovations have proven to deliver consistent quality solutions to the high power laser market. We will continue to invest and develop high power optics and assemblies for the emerging opportunities in the direct diode and fiber laser markets. We completed our planned streamlining of resources and operations in our Optical Communications Group within this segment with a charge of $1.5M this quarter. We are now geared to better serve our key customers, increase our market share, and improve profitability. We continue to invest in key products to support the ever‐growing bandwidth trends in the datacenter and cloud applications including the development of 40G and 100G transceivers. Turning now to our Performance Products Segment, this is our segment that cultivates products based on specialized and innovative materials, some of which are new platforms that tend to have long lead times to adoption. For example, the deployment of our thermoelectric devices into such applications as cooled beds. This segment experienced a sequential revenue increase of 12% largely from program schedules at some of our major military customers, though overall for the year, our military business declined 23%, leading the year over year revenue decline of 9% for the segment. This is why we undertook a $1.9M restructuring program to consolidate operations and reduce our cost structure. We expect to complete the restructuring during Q1 FY16 and return to steady operations over the remainder of the fiscal year. Our shipments of SiC ceramics also improved with initial advancements underway for the semiconductor capital equipment market. Shipments from our SiC substrate business remained strong, especially for our market‐leading 150mm diameter substrates. SiC substrates are integral to the growth in both base stations in the wireless infrastructure markets and for the future power electronics market. We are proud of our product innovations in this segment, in particular our recently‐announced world‐class 200mm diameter SiC substrate has attracted significant attention from potential new customers. Large diameter substrates will be a key driver of lower cost and growth in the SiC commercial markets; therefore, we are adding capacity including for crystal growth and look forward to continued market share gains. As I reflect back on the last few years, we set out to change the way we are organized and work with a strong focus on teamwork, increased efficiency and speed across the globe. During that time, we embarked on a very ambitious plan that involved a combination of new acquisitions, investments in new technology and products, and attention to quality and operational excellence that has defined II‐VI over the years. These are now among our strategic areas of focus and are all a part of our continuing work to build a scalable and sustainable growth company. We have acknowledged our earlier setbacks, but with determination and dispatch, we continue to work to establish new capabilities in the company, including a world class semiconductor laser platform. I would like to thank all of our 8,500 II‐VI employees worldwide who contributed to a successful Q4 and FY 15 despite a challenging environment. Looking forward to the remainder of FY 16, all of these initiatives will continue to be priorities as we work with the renewed energy and enthusiasm while striving to deliver increased value for our shareholders. I will now turn it over to Mary Jane to walk us through a review of our overall financial performance. Mary Jane? 5
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Thank you, Chuck and Fran. For FY15, our revenue growth of 9% was 2% organic. Laser Solutions 13% growth was 9% organic, bearing in mind it was this segment’s growth that was most affected by currency. Photonics 20% growth was 6% organic, and there were no acquisition effects this year in Performance Products. As a second point on the revenue, our Q4 revenue of $197M was over the top of our guidance of $185‐193M due to some customers’ requiring shipments in Q4 that we’d expected to be in Q1 FY16. We did very well on our margin targets for this year, even though we were a little shy on the adjusted EBITDA margin due to currency effects and an intangible asset write off of $2M. Gross margin of 36.6% compared to 33.2% for FY14, 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 restructuring effects; they exclude the indemnification settlement in our favor of $7.6M from the FY14 acquisitions. Our fourth quarter book to bill ratio of 1.00 caps a good year of improved bookings. Full year, the book to bill ratio was 1.03. Our backlog is $242M and consists of $73M in Laser Solutions, $68M in Photonics and $101M in Performance Products The currency effect on our revenue was $12 million or a 2% reduction in our annual growth rate. The Euro and Yen falling over 20% from June of 2014, coupled with the growth in our business at Highyag in Berlin and Laser Enterprise in Zurich, with more Euro‐based revenues, really changed the profile of our currency exposure, but overall this had a less than half‐a‐percent effect on the operating margin. The restructuring costs recorded in this quarter are $2.6M, including the severing of a lease in Australia. This was $1.5M for Photonics and $1.1M for Performance Products. Full year the pre‐tax charge was $6.4M, $4.5M in Photonics and $1.9M for Performance Products. Adjusted EPS of $0.94 for this year, reported EPS of $1.05, compare to a reported $0.60 per share last year. We worked hard for this improvement and believe the improvements made will serve us well into the FY16 year. Turning to our cash and capital expenditures, our cash flow from operations was $129M compared to $95M for FY14. We paid down $66M of our debt this year, bringing our debt level to $176M. With $174M in cash, we should be in a net cash position by the first quarter of FY16. We did not repurchase any stock this quarter, but have purchased $13M in FY15. We reduced our share count 1.1 million shares. Our total share count is 62,586,000 compared to 63,686,000 for FY14. We invested $52M in capital this year including the $13M for the purchase the Highyag building in Germany during Q1. We expect FY16 capital investments to be similar to this year, or between $50‐55M. Our equity‐based compensation for the year was $11.4 million. For FY16, we expect equity‐based compensation to range from $12‐14 million. 6
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Our year to date effective tax rate was 17%, very close to our range of 14%‐16%. This rate compares to last year’s rate of 16% which also benefited from the R&D tax credit. For FY16, we expect it to range from 21‐23% on the theory the R&D tax credit is not renewed. Turning to our revenue outlook for Q1, for the first fiscal quarter ending September 30, 2015, our seasonally low quarter, the Company currently forecasts revenues to range from $180 million to $190 million and earnings per share to range from $0.20‐$0.25 per share‐diluted. We expect the second half to follow our usual pattern of being stronger than the first half. Comparable results for the quarter ended September 30, 2014 were revenues of $185.8 million and earnings per share of $0.20 per share‐diluted. This is all at prevailing exchange rates. Before we turn to questions, our first quarter earnings release date is slated for Tuesday, October 27, 2015. This concludes our prepared remarks. As we turn to Q&A, I’ll remind you that our answers to your questions may contain certain forward looking statements which are based on our best knowledge today, and for which actual results may differ materially. Kaylee, you may open the line for questions. QUESTION AND ANSWER Operator (Operator Instructions) Jim Ricchiuti, Needham & Company. Jim Ricchiuti ‐ Needham & Company ‐ Analyst Thank you. Good morning. Hi, question on gross margins. Mary Jane, maybe you can 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 about gross margins in fiscal 2016 just given some of the things you're doing, the benefits of the restructuring, and potentially mix. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Right. So, we have out there a margin range 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 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're not going to change it right now but do expect progress. 7
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Jim Ricchiuti ‐ Needham & Company ‐ Analyst No ‐‐ thank you, that's helpful, and I wonder if you could talk about what areas in Q4 where you did see some pull‐ins that may have come from Q1. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Largely in performance products. A little bit in the photonics segment. Again, largely driven by either program‐related or customer timing on how they wanted to be ready as they approach this quarter that ends on September 30. Jim Ricchiuti ‐ Needham & Company ‐ Analyst Okay, and the last question for me, thank you, is just on operating margins and 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 what not? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Right. 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 oftentimes hard year for them under which they took a significant amount of actions. 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 year's number. I don't know that we're 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 as a right of their restructuring, so therefore I would expect to see them if you think about the year overall to continue to make progress into next year. Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Certainly, the ‐‐ this is Fran ‐‐ the volume that we had in the quarter at photonics was very important for that margin lift, and we see the whole photonics business and optical communications group in particular having a few strong quarters as we look out. We can see a little further than usual, at least for a few quarters. Jim Ricchiuti ‐ Needham & Company ‐ Analyst Okay. Thanks very much. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO I think maybe to just add to Fran's ‐‐ generally speaking, I mean, we've said this before in other calls for all of our businesses and photonics perhaps the most, the market cooperating helps us a lot. 8
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Jim Ricchiuti ‐ Needham & Company ‐ Analyst Got it. Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Also just to add, we usually tell you not too much of what we think for the future quarters of photonics. We have very short line of sight, maybe a quarter. Right now I think we're thinking maybe there's two or three quarters. Jim Ricchiuti ‐ Needham & Company ‐ Analyst Okay. Thanks again. Operator (Operator Instructions) Ted Moreau, Barrington Research. Ted Moreau ‐ Barrington Research ‐ Analyst Good morning. Thank you very much. Congrats on a great quarter. How much revenue do you think you benefitted in the quarter from the pull‐ins in the performance products segment that you were indicating? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO I don't think it was material on the quarter. I mean, it was certainly a few; let's say in the low single digits. Ted Moreau ‐ Barrington Research ‐ Analyst Okay. Very helpful. Thanks. Okay, and then visibility sounds ‐‐ you're indicating a little bit better on the photonics segment. What are the factors driving that? I mean, we look out and see metro optical upgrades and data center expansion plans from Web 2.0 guys, but just kind of curious as to what you're seeing. What factors would be driving that for you guys? Chuck Mattera ‐ II‐VI Inc. ‐ President and COO 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. 9
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Chuck had in his script and said about the China buildout. I think that was an early one and that's another feature. Ted Moreau ‐ Barrington Research ‐ Analyst Right. Okay. Thanks for reminding me on that. And I think in the script you had mentioned wireless and 4G wireless in China, which seems to be a little bit different than some of the other guys in the supply chain, particularly on the semiconductor side. So just kind of curious maybe what you're seeing there versus what some of the other guys ‐‐ some other suppliers might be seeing and is there a difference in time frames as far as when demand gets pulled? Is that why there might be a different ‐‐ little difference in when you're seeing things versus when some semiconductors' guys are seeing things? If you could comment on that. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Yes, 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 is part of the overall China broadband initiative as well as in performance products our silicon carbide substrates under pin 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, if you read the most recent press, even in the last couple of months or so, 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 that they're expecting to build out over 600,000 new 4G network [base] stations that will ultimately end up delivering that kind of a service to over a couple of hundred million new mobile phone users. So we have a visibility or a view of certain parts of that network buildout where we are participating either directly or through our customers. Does that help? Ted Moreau ‐ Barrington Research ‐ Analyst It does. Yes. Okay. Great. Thank you so much. I'll hop back in queue and let some other guys take a chance. Thank you. Good luck. Operator Mark Miller, The Benchmark Company. Mark Miller ‐ The Benchmark Company ‐ Analyst Thank you. Congratulations on your record sales, and the margins are encouraging. I was on a call yesterday where a firm was citing some credit issues with their customers or crediting tightening or availability in China. Has there been any impact with any of your customers there? 10
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO We have not seen a particular shift in that direction. Credit terms in China generally speaking are quite a bit different from 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're trying to be good at it, in trying to manage that, and I wouldn't say that we've seen materially big differences. I would say in general though we watch for 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 in this Company funds a lot of growth and a lot of investment, and it's important to us. Mark Miller ‐ The Benchmark Company ‐ Analyst Your fiber laser components have been a good area for you, especially on a [modem]. How did that do in this quarter? Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Well, Chuck did make some comments already that we're ‐‐ 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 quarters, but in the most recent quarter it might be toward that higher end of that 20%. So, that's coming along nicely, and we expect it to keep growing. Chuck, anything? Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Yes, I would 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 FY14 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 although in this last quarter, meaning Q4, it did appear to slow down somewhat. Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO [From] 55, yes. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Right. Mark Miller ‐ The Benchmark Company ‐ Analyst I'm just wondering, you gave the year‐over‐year cash from operations. Could you break that out for the fourth quarter? 11
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO For the fourth quarter? So it was about $40 million in the fourth quarter of this year. For last year, probably was a ‐‐ last quarter was ‐‐ last year's fourth quarter was probably a pretty decent quarter. I'd say maybe it was about 10 up maybe compared to 30. Mark Miller ‐ The Benchmark Company ‐ Analyst Thank you very much. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Sure. Operator (Operator Instructions) Zachary Rodenbough, Sidoti Capital. Zachary Rodenbough ‐ Sidoti Capital ‐ Analyst Hi, everyone. Good morning. I was just wondering if you guys could talk about your use of cash in the near and long term. I know debt is coming down to more manageable levels, and are you expecting to continue to pay down debt more aggressively or do you have plans to kind of resume your buyback or is your focus more on paying off that debt and accumulating cash? And also kind of as a 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 kind of moratorium. Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO So, Zach, this is Fran, and we're sure interested to get back into the M&A business. I think we took a good year and a half to get ourselves aligned with what we've acquired, so we are starting to look. That doesn't mean we've got something ready to launch, but we'll put more efforts into that way to grow the business and we've spent this year quite a bit working on new product development. We'll continue to do that also. So then relative to the cash questions, maybe, Mary Jane Raymond, you take that? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO So having heard 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 as a 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 would then remain with a still a focus on the pay down of the 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. 12
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Zachary Rodenbough ‐ Sidoti Capital ‐ Analyst Okay. 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 if that's something that you're expecting to kind of continue to drive growth and then how that affects the growth trajectory for that business as that plays out. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Zach, this is Chuck Mattera. I'll take a shot at it. Maybe Fran ‐‐ if 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're 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're attracting in North America and in Asia, as well. Fran, would you like to add something? Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO No, just maybe a few to add to, too, it 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 bought has carved out had customer challenges when we inherited the business or bought the business, and now we've brought some of those customers back into the fold and at the same time we've raised prices in some areas in that optical communications group. And that's sent some business away from us, but we're working to make it a more profitable business and to serve those customers better. I feel like we're on the tip of doing that. We've done some of it. Chuck, anything? Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Yes, I would 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 experiencing in doing business us, and that we are positioning ourselves to serve them even better in the future. Zachary Rodenbough ‐ Sidoti Capital ‐ Analyst Great. That's very helpful. I'm going to jump back in the queue. Thanks, guys. 13
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO 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's still about 10, so it's a $13 million difference from last year's fourth quarter. Last year's fourth quarter from the year‐to‐date third quarter grew $27 million. In this quarter it grew $40 million. Keep in mind our quarters can be a little bit lumpy. We had what we think is a very good cash flow year this year, and it was still lumpy in the first half. So, just to let you know that. I would say generally speaking Q4 for us is very similar to every other company's Q4, which is you really look hard to be sure all your ducks are in a row, your DSO and DPO are where you want them, and consequently causes Q4 to be a little bit higher. Operator Dave Kang, B. Riley. Dave Kang ‐ B. Riley ‐ Analyst Thank you. Good morning. Couple of questions. First, regarding your fiscal first quarter outlook, I was wondering if you can just go over some of the assumptions, which segment ‐‐ will all three go down or just more color on that? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO I would say that we are not expecting a dramatically different pattern than we normally see in each segment's first quarter performance. There is a certain seasonality in laser solutions, for example, because it misses the summer quarter. With respect to photonics, they also experience some of the same seasonality if for no other reason there's an awful lot of companies that have a June 30 year end in this industry. And the same for performance products. There are a number of U.S.‐based businesses, and we tend to have the same sort of summer effect. So, I don't know so much that it's every segment going down per se as it is I would say that's kind of a normal pattern for the Company. Dave Kang ‐ B. Riley ‐ Analyst Got it. And then regarding gross margin, you gave 36% to 40%. So this quarter's fiscal first quarter, we should expect sort of a low end and then expect steady improvement throughout the year? Is that sort of how we should think about it? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO 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 the ‐‐ we have a huge amount of crystal growth and material growth capacity in this Company. The market helps. So, I would say probably it is fair to say that we might have the lightest margin quarter in the first quarter. 14
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Dave Kang ‐ B. Riley ‐ Analyst Got it. And lastly, Chuck, I think that you talked about some regarding photonics division. There was some inventory correction and yet visibility seems to have improved. Just wondering if you can just kind of clarify that a little bit. So inventory correction debt took place in the fourth quarter or is happening right now? Chuck Mattera ‐ II‐VI Inc. ‐ President and COO That was a fourth quarter comment. Dave Kang ‐ B. Riley ‐ Analyst Oh, I see. I see. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO That was a fourth quarter comment. I think ‐‐ I would say that across the Board interest "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 under sea and for amplifier build out has been strong. Our amplifier business in the fourth quarter was softer than what we had expected, but overall we're feeling pretty good about the start of the first quarter. And as Fran indicated, we feel like at the moment, David, we can see at least one or two quarters beyond that in a way that would give us more than the usual confidence about our ability to deliver. Dave Kang ‐ B. Riley ‐ Analyst And what kind of exposure ‐‐ Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO You know, Dave ‐‐ this is Fran. I would say in some cases in this optical communication group we're a little further back in the food chain than some of the others that report. So we might be either 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 things. So, timing for us isn't exactly what the other system people will report. Dave Kang ‐ B. Riley ‐ Analyst Sure. Sure. Just lastly, what kind of ‐‐ or I guess what do you see in the data com market or data center market because one major Web 2.0 CFO said recently that she plans to be disciplined with spending going forward, so just wondering if you ‐‐ what kind of visibility do you have in the data center market? 15
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Chuck Mattera ‐ II‐VI Inc. ‐ President and COO We have a lot of comments, Dave, a lot of touch points into the data center interconnect market. Dave Kang ‐ B. Riley ‐ Analyst Okay. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO 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's a lot of crosstalk at the interfaces and lots of discussion about current opportunities and our future roadmaps. Dave Kang ‐ B. Riley ‐ Analyst Got it. Thank you. Operator Ted Moreau, Barrington Research. Ted Moreau ‐ Barrington Research ‐ Analyst Thank you for taking my follow‐ups and thanks for the update on the fiber laser business, which sounds like is doing well. Another fiber laser company recently had great numbers ‐‐ reported great numbers last week and great guidance, and they were indicating that it seems 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 playing out maybe over the next year? Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO So, I'll give a little update and then you can take it from there. So, in the past we always talked about 5,000 new CO2s coming down the assembly line and maybe 500 to 1,000 fiber lasers or not quite 1,000, but right now I would say in this past year we annualized what happened. It was 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 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. Ted Moreau ‐ Barrington Research ‐ Analyst 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? 16
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO It's good. Ted Moreau ‐ Barrington Research ‐ Analyst Like ‐‐ I mean, is it ‐‐ I would imagine it's above corporate average. Is that a way to think about it or not really? Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Yes, that's true, for sure. And it's been that way quite a while as you see our numbers. That's been a real nice cash‐
generating segment for us. Ted Moreau ‐ Barrington Research ‐ Analyst Okay. And kind of a techy question on the photonics segment. Do you ‐‐ are you impacted at all by the move to [Pan 4] modulation and would you ‐‐ I mean, would there be a catalyst out there for you guys when merchant suppliers of Pan 4 chips come to market? Chuck Mattera ‐ II‐VI Inc. ‐ President and COO We see that ‐‐ it's emerging, Ted, and not to get into all the detail, but we see that as an opportunity for us. Ted Moreau ‐ Barrington Research ‐ Analyst Okay, and that's ‐‐ is that an opportunity for fiscal 2016 or is it further out than that? Chuck Mattera ‐ II‐VI Inc. ‐ President and COO It's an opportunity for us to tighten up on relationships in FY16 and to define our path. We think it'll be a longer‐term opportunity for us given our technology platforms and our competencies. Ted Moreau ‐ Barrington Research ‐ Analyst Okay. Great. Thank you so much. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Yep. 17
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Operator Mark Miller, The Benchmark Company. Mark Miller ‐ The Benchmark Company ‐ Analyst 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? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Yes. Mark Miller ‐ The Benchmark Company ‐ Analyst And just was wondering geographically, you said China was strong; how was Europe? Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO Well, Europe was probably sort of a not tremendously exciting market for us in the quarter. Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Certainly, we had the currency effects in the second half of the year that were heavier out of the Euro. That hurt us. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO I would just add despite the currency effects, we ‐‐ I would say that we had ‐‐ we were strong and despite the currency effects, we held our position and without the currency effects, we would've actually grown ‐‐ Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Right. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO ‐‐ our business at least one or two points, I believe, in Europe. 18
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
Mark Miller ‐ The Benchmark Company ‐ Analyst Thank you very much again. Chuck Mattera ‐ II‐VI Inc. ‐ President and COO Okay. Operator Thank you, and I am showing no further questions at this time. I'd like to turn the call back to Mary Jane Raymond for closing remarks. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO All right. If there are no further questions, we want to thank you again for joining us, and we want to remind you again that our call for the first quarter of fiscal year 2016 is Tuesday, October 27, 2015. Fran? Francis Kramer ‐ II‐VI Inc. ‐ Chairman and CEO Well, thank you very much, Mary Jane. I think we're ready to close here. Mary Jane Raymond ‐ II‐VI Inc. ‐ CFO All right. Thank you so much, and everyone have a good day. Operator 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. 19
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AUGUST 04, 2015 / 01:00PM GMT, IIVI - Q4 2015 II-VI Inc Earnings Call
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