II-VI Inc (IIVI) 2007 Q4 法說會逐字稿

My name is Arnika and I will be your conference operator today. At this time I would like to welcome to the II-VI Incorporated FY 2007 fourth-quarter year-end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. Mr. Creaturo, you may begin your conference.

Thank you, Arnika, and good morning to everyone. I'm Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Welcome to the fourth-quarter fiscal year 2007 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, August 7, 2007.

The forward-looking statements we may make during this teleconference speak as of today, and we do not undertake any obligations to update these statements to reflect events or circumstances occurring after today.

Thank you, Craig, for getting us started. We're going to change up the batting order today. I'm Francis Kramer, President and CEO. I'll be the lead-off hitter, and Craig will bat clean-up when he reports key points from a financial perspective later.

Before getting into the details on our segment results, let me tell you about the markets we serve. In reality we're a high-tech parts manufacturer, with know-how and materials that enable us to produce these difficult-to-manufacture parts. 50% of our business is delivered into the industrial market, mainly in the area of materials processing. 30% of our business addresses the military and defense markets, mainly in the area of infrared windows and UV filter assemblies.

We also have a large share of the thermoelectric cooler requirements in the defense, space and photonics arena. 10% of our products are medical components. These applications range from cooling of blood in blood glass analyzers, to medical laser components and cosmetic laser parts. The final 10% of our business is split between telecom, research, national labs and universities, with products for many applications.

Turning now to our segment reporting, the IR Optics unit experienced a 14% year-over-year increase in bookings this quarter, and set another record of $35.7 million for quarterly orders. North American and Japanese OEM's set records, while the demand for IR products in China more than doubled over last fiscal year. Worldwide demand is expected to remain strong for industrial lasers and systems. David Belforte, editor-in-chief for Industrial Laser Solutions and a laser industry expert, recently upgraded his calendar-year 2007 growth forecast for laser systems to 12%. David said, "Our revised forecast for the year is that the global market will increase over what we had previously estimated by at least another 2% to 3%, raising laser system revenues to more than $5.3 billion."

At II-VI we expect North American aftermarket bookings to rebound, along with the U.S. economy. Builders of high-and low-power lasers and systems in the U.S., Europe and Japan are forecast to produce at the highest rates ever, each holding expectations that these rates will continue well into the next calendar year.

At II-VI we've been mathematically modeling the consumption of worldwide carbon dioxide laser optics for a number of years. One of the key factors in this model is the economic health and projected GDP and durable goods growth of the major economies of the world. The output of this model contrasts the laser systems' growth rate to that modeled for CO2 optics. The model always projects CO2 optics growth at a rate a number of percentage points greater than that projected for laser systems revenues. We are therefore very bullish concerning the next 12 months in the IR Optics group.

Our IR materials growth capacity continues to lag behind market demand, limiting our ability to address external sales opportunities at a time when military and security applications demand appreciably more of the materials than we can grow. We continue to operate at full capacity to serve our commercial optics business, while simultaneously expanding resources in our materials growth area.

The Near-Infrared military fourth-quarter bookings and shipments were approximately $2 million each, and each represented an increase of greater than 20%. In fiscal '07 VLOC received an order of $1.2 million in the fourth quarter for mono-crystal assemblies, which we call MCA's, for use in military green light target designators and illuminators. This is an example of our subsidiary taking advantage of its core competencies in crystal growth and manufacturing, and collaborating with a customer, from design to production.

The performance of the VLOC factory groups has been mixed during the quarter. The UV operation was on target, but we had difficulties on our optics and crystals group and our YAG unit. Thin-film coatings, which affect all of these products, negatively impacted quality, delivery and costs. Upgrading out-of-date coating equipment continues, with the installation of two new state-of-the-art coating chambers during the fourth quarter. In addition, VLOC continues to work improving the coating process hardening, along with the recruiting of four engineers during the fourth quarter, will focus on the coating process.

While not included in our fourth quarter and fiscal year results, it is important to note that in late July our VLOC subsidiary reported a follow-on order for continued shipment of UV filter lens assemblies. This order, for $13.5 million, equates to continued sales of these units, at the current rates of shipment, well into calendar year 2008. Production of these units has increased 50% over the last 12 to 15 months.

Next, I'd like to talk about our Compound Semiconductor Group, or CSG. Marlow Industries, along with the Wide Bandgap Materials Group, eV PRODUCTS, and the worldwide Advanced Materials Development Group, make up our Compound Semiconductor Group. During the quarter, Marlow experienced continued increases in revenues and bookings from defense and space and medical market segments. However, the telecom product line experienced a slowing in demand, as inventories were rebalanced by their customers. The growth in new prospects was strong in both defense and space, and in the industrial market segments.

The Viet Nam factory capacity, capability and performance were strong contributors to the quarter, and are expected to be major drivers in the future. We shipped the first production units of two major systems out of Viet Nam in the fourth quarter.

Also during the quarter we significantly expanded our Asian region sales coverage and technical support, to better serve the [addressable] market segments in that region, where the industrial and telecom thermoelectric cooler products are most rapidly growing. Start-up challenges with our emerging Asian supply chain, as we ramp up to support new industrial opportunities, will be a focus of our global procurement and II-VI telenology's Beijing teams to resolve during fiscal year 2008.

In the fourth quarter our Wide Bandgap Materials Group, or WBG, was awarded a $4 million contract from the Air Force Research Laboratories, focused on furthering the development and manufacturing capability of three-inch diameter, 4H silicon carbide substrates for the power electronics industry. Northrop Grumman, SemiSouth and Mississippi State University are partners in the contract, and will help WBG accelerate progress toward a low-defect density, low-cost substrate.

The Group's continuous improvement focus is key to our goal of establishing the leadership position in the silicon carbide RF application segments in North America and Asia. We currently are in the loop for production qualification in Asia. We continue to make steady progress at our new production facility in Starkville, Mississippi, where we are staying on schedule relative to meeting shipment demands. To keep up with the requirements for silicon carbide, we are increasing our investments in infrastructure, capital equipment and top talent from the industry.

During the quarter, eV PRODUCTS continued increasing its capability to deliver into the growing x-ray imaging market segment, as a result in improvements that increase the robustness of the detector module fabrication. Meanwhile, the Deficit Reduction Act, or DRA, is having a negative impact on eV's products that are serving the bone mineral densitometry market. This business has declined, due to lower insurance reimbursement rates, and is expected to remain at a lower level for the foreseeable future, although pricing and costing actions are being planned to offset the decline in volumes.

The market's response to our eV PRODUCTS' recently-introduced iGEM product has been positive. iGEM is a hand-held, intelligent gamma energy measurement instrument, designed specifically to address the growing needs of the homeland security market. We are at a very early stage of market launch with iGEM, and have received a record number of RFQ's during the quarter. We expect to gain momentum with iGEM in fiscal year 2008, to help with the overall efforts to diversify our penetration into market segments to lessen our dependence on demand for medical imaging.

Within the Military and Materials segment, we will report our Exotic Electro-Optics military infrared optics business in our new subsidiary, located in the Philippines, called Pacific Rare Specialty Metals & Chemicals, Incorporated, which we refer to with the acronym PRM. At the Exotic Electro-Optics subsidiary during the quarter we received a multi-year $7.2 million order for the Arrowhead program. This contract established Exotic as sole-source supplier for three of the five IR window products and the leading provider of two other Arrowhead product assemblies. During the quarter a new three-year agreement was signed with our customer to provide Apache helicopter IR replacement windows. The contract also maintains Exotic as the sole-source provider of these windows for the Apache.

At least $1 million of bookings expected from repair depots during the quarter for other Apache windows and Bradley fighting vehicle windows were delayed, and are now expected to add to a strong first-quarter bookings projection at Exotic as we enter FY08.

The purchase of Pacific Rare Specialty Metals & Chemicals subsidiary closed on June 26, 2007. I want to tell you about the company, which specializes in selenium and tellurium production. PRM was originally founded in 1984 by Robert Hisshion, who will remain with the subsidiary as the Chief Technology Officer. The subsidiary will report to our Vice President, Jim Martinelli, and on an interim basis will be lead by a II-VI - assigned ex-pat General Manager, [Abe Edu Bodcar]. The PRM unit will be profitable and accretive to II-VI earnings in fiscal year '08, with sales in excess of $20 million.

The first quarter could find the PRM unit suffering some losses, as inventories of raw materials were depleted as the sales process of PRM proceeded. Restarting the supply chain for raw materials is under way. Both customers and suppliers have viewed the acquisition favorably. PRM has a reputation for quality products and technology and II-VI adds financial stability, an additional supply line through our material recycling program and additional product demand for selenium and tellurium metals which are used in the production of infrared optics and thermoelectric coolers.

For competitive reasons, we are not at this time disclosing the purchase price of PRM as part of either our earnings release or during this conference call. We may provide further details of this transaction as required for our 10-K or other similar filings.

In our press release issued this a.m. we provided guidance that included our early expectations for PRM. With the pricing of both selenium and tellurium experienced some volatility, we anticipate gaining control of the factors needed to deliver PRM and II-VI results more favorably than stated in our outlook.

Craig, now since you're batting clean-up, can you review the highlights and key points of this past quarter and year from the financial perspective?

Sure, Fran. Here are the items I would like to highlight. First, the just-completed fourth quarter was a record revenue quarter for the Company, at nearly $72 million in sales, which was 11% higher than the same quarter last year. This marks the second consecutive record revenue quarter for II-IV, and our guidance for the first quarter of fiscal year 2008 suggests that this streak will continue, in spite of the slight seasonality in Europe that we normally experience in that quarter.

For the full fiscal year in 2007 we were able to grow revenues by nearly-- by over $30 million, or 13%, solely on an organic basis. During the quarter the Infrared Optics, Near-Infrared Optics and Compound Semiconductor Group business segments each achieved record quarterly revenues.

Second, our capital spending for the quarter was $6.4 million, and brought the full-year spending to just over $20 million. The more significant areas where we invested capital dollars in the fourth quarter included the expansion of our Infrared Optics material capacity, continued expansion of production capability and capacity for our UV filter product line, improved testing and measurement capabilities for several of our business units, and capacity and productivity improvements at a number of our coating operations.

Third, in the just-completed quarter II-VI had the ability to fund the initial payments on the Pacific Rare Metals, or PRM, acquisition, and to make a minority investment into Fuxin Electronic Technology. This was accomplished with only a small increase in debt. The increase in debt this quarter was the result of an increase of JPY100 million to our low-interest, yen-denominated loan, which we renewed and extended during this quarter. This loan acts as a natural balance sheet hedge against our yen-denominated monetary assets and needed to be increased to effectively match the increase in growth we have been experiencing in Japan. We are expecting to resume reductions in our debt in fiscal year 2008 as our cash flow allows, balancing this use of cash out with cash needed for any acquisitions that may occur, capital spending or our stock repurchase program.

Fourth, the year-to-date effective tax rate was reduced to around 24% from the rate of 25% that was used for the nine months ended March 31, 2007. The slight change to the full-year rate moved the quarterly rate down to around 21%. This rate is based on the possibility of our operations in the ten countries where we operate, and also reflects enacted or announced changes to tax rates and structures in some of the foreign countries where we do business.

The lower tax rates at our foreign manufacturing locations in Singapore, China and Viet Nam have been, and will be, an added benefit to the lower manufacturing cost structures of these locations. Further, the tax structure we will enjoy by operating PRM in the Philippines is also favorable, with the current tax structure of 5% of gross margin, which equates to an effective tax rate of around 8%.

Fifth, while the acquisition of PRM adds a solid revenue base to the Company, II-VI will now experience a little more variability in its revenues, as many of PRM's sales use minor metal index pricing. Historically, II-VI has seen its gross margins be impacted due to changes in the prices of certain raw materials. Now this variability will move up to the revenue line of the income statement, meaning that future guidance for revenues may be a little broader than in the past.

Sixth, and finally, the components of the June 30, 2007 backlog were Infrared Optics at $27 million, Near-Infrared Optics at $20.2 million, Military Infrared Optics at $22.8 million and Compound Semiconductor Group at $25.5 million, for a total of $95.5 million. In addition to these amounts the backlog of PRM was approximately $11.7 million, bringing the total June 30, 2007 backlog to $107.2 million. Backlog is defined as bookings that have not been converted into revenues by the end of the reporting period.

Fran, this concludes my prepared remarks. Before we begin the question-and-answer session, I would like to mention that these comments and answers to certain questions contain forward-looking statements, which are based on current expectations. Actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to the Risk Factors section of our Form 10-K for the fiscal year ended June 30, 2006.

Arnika, we are ready to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS). Your first question comes from Avinash Kant with First Albany Capital.

Good morning Francis and Craig.

Good morning.

Good morning.

Quick question. On the conference call in the last quarter you had talked about some yield issues and could you tell us where are you in terms of improvements on that front?

Yes, last time I think we spoke most about the zinc selenide process. We'd had slight deterioration on our yields there, and we were off working to recover the process. And during the quarter we've made considerable work on the design of experiments to find the cause-- why the slight deterioration. And we've weeded out some problems, but I cannot report that we've completely solved it. So I think we indicated it'd probably take us maybe a six-to-nine month period to put it all behind us, and I think we're on track to do that. It's not yet solved, but we're dealing with that by more capacity.

As we indicated before, we're building some more furnaces, so that's coming along nicely. We continue to make every bit of material that we need to produce our CO2 laser optics, and we are doing some sales of the material, maybe not as much as what we would if we didn't have the slight deterioration. But we're working it very hard, and I think we're getting our hands around it, but it's not solved.

So if I were to anticipate, the yield issues were not very significant if you can take care of it by increasing capacity, right? In the order of 5% to 10%, or significant-- more than that?

I think you're in the neighborhood, maybe toward the higher number you just mentioned. It-- in these kind of businesses where the material quality shifts a little, we will work very, very hard to mine out all the good material. So, if we have a defect, we'll work around that defect and throw that little defect in the trash, so down in our Asian facility we're working harder to produce the products by working around the defects. That adds a little bit more labor to do it, but it keeps us with a good supply of material to get the job done.

And, Craig, if you could highlight-- with the new acquisition now, how should we model the margin structure, and also the tax rate going forward?

Yes, the-- as far as the top line guidance we're saying revenues-- we're expecting $20 million or more. Margin-wise, as Fran kind of alluded to, we are-- we will be getting their supply line back on, back on line. They have been using materials that are not necessarily the primary stream of materials, and so we will be working to raise those margins up, to get the margins more back on line. The margins-- it's not an extremely high margin business, because it's-- their process, or their value-added is really in the refining side of the process. So we will be working through that, and as Fran mentioned, in the first quarter really working through getting those back on line and getting the margins back up to a more normalized level.

And then the tax rate-- we're saying the tax rate for PRM should be around 8% or so. They enjoy a very favorable tax rate, being in one of the Philippine economic zones, and that's something that carried over even with the acquisition by II-VI.

So your overall tax rate should come down some going forward?

I think we're modeling out that our tax rate should be around where we ended this year. We ended right around-- right on 24%. I think that we're thinking that, as some of our U.S. operations continue to ramp up, we're expecting better profitability from certain of those groups. Some of the expansion-- some of the continued profitability of our operations in California and in Florida, Texas and here in Pennsylvania as well-- I think those are going to pretty much offset the little bit of benefit that we will get from PRM. So we're modeling out the tax rate to be fairly consistent with where we ended this year.

The final question-- could you give us a break-up of the U.S. and international sales?

Yes. For the quarter, the international sales were 39% of total sales, and for the full year to date, they were 42% of total sales.

Thank you so much.

Avinash, just to go back to your question on PRM, we could give you a little bit more explanation that-- PRM, really their raw materials are what they call in the industry slimes. So they buy from other refiners or mines, and their expertise is being able to take almost any slime that exists and process it, and convert it, and get out the important materials. So, if it's copper telluride coming out of a refiner in Mexico, or one out of Kazakhstan or you name it, and they do deal all over the world-- they 're able to adjust their processes, which are very interesting, and get out the tellurium out of a copper telluride stream, for example. Then they'll send the copper back to somebody, which is not too important, or if it's gold in which there's often loaded with some of their slimes, all that gold they return to the business that supplied the slime.

So their expertise is in getting selenium and tellurium out of these slimes, and their processing is very interesting because if they bring in one slime, expecting a certain set of impurities, and they get a little bit different, they have the expertise to adjust on the fly, and deal with it. So we find that it's going to be very interesting, because the demands for both of these materials, tellurium and selenium, is shooting up very nicely right now, and the other suppliers just do not have these type of skills to extract these materials.

All right. Thanks for the explanation. Thank you.

Okay.

Your next question comes Dave Kang with Roth Capital.

Thank you. Good morning, guys. Hey Craig, can you go over those backlog numbers once again? I think I missed a couple of them.

Sure. At June 30, Infrared Optics' backlog $27 million, Near-Infrared Optics $20.2 million, Military Infrared Optics $22.8 million and Compound Semiconductor at $25.5 million. And then our beginning backlog for the backlog of orders that we acquired as part of the PRM transaction was $11.7 million and--

Total then was $107.7 million, is that right?

$107.2 million.

Okay. $107.2 million. Got it. Okay. Thank you. And then on the OpEx situation, that seemed to be unusually low. Can you provide more color and whether that's sustainable or not?

I think there were some-- during this quarter I think we benefited nicely from the increase in revenues-- a little higher-- a little increase in where we had anticipated. We didn't mean, really, to add a lot to address, or to take care of, that additional sales. That was one good thing.

We've also-- as far as completing really two acquisitions, or two investments I probably should say, one the acquisition of PRM and the second the investment in Fuxin. Expenses that had been related to those transactions expensed in prior quarters-- we were able to capitalize those and put them in as either the purchase price or part of the investment, so there's a little bit of that. That was not a very significant amount, but that was something that was a little bit unique to Q4 that won't repeat in the future. The total of both of those transactions, for those transaction costs, was probably somewhere around $450,000 to $500,000, something like that.

Okay. And then on the gross margin situation, it was down once again. And I guess, from Fran's explanation, it may just stay at that level until you guys resolve it, maybe in the next six-to-nine months?

Yes, I think we're expecting it to be pretty consistent, at least in the near term, and I think that is right in the quarter we're in, the September quarter. I think then we will start, especially in the Infrared Optics Group-- that's when we kind of see the convergence of what we're expecting to be a pick-up in yield, and also additional material capacity. And I think those two definitely are factors that will be pulling the gross margin up. So, I'd say in the earlier part of the-- first half of FY08, the margins probably overall will be a little bit lower than they will in the back half of FY08.

Got it. Got it. And just a couple more? One on the PRM-- so $20 million or over $20 million this year, that seems to be a pretty nice growth from $13.6 million they did last year. What is the sustainable growth rate going forward?

That's going to be pretty hard for us to comment on, David. Just-- a lot of it depends upon the supply chain that we're working to restart for the slimes, or the raw materials. It is-- the capacity to convert is there to probably take it to double that number. But if we cannot get the supply chain coming in, we won't be making the sales on the way out. So, you might have the manpower and equipment capacity to double that number, but on the supply side I wouldn't go that high. Maybe we can take it 1.5, 1.75 times the $20 million. We just haven't converted and gotten all the contracts we need to have the raw materials. I've got to keep that open.

Got it. And then, on the capacity situation, on the last conference call you talked about capacity being limited, and you expect to add new capacity by December quarter, but it sounded like you added some already during the June quarter. Did I get that right, or--?

No, I wanted to report that we are continuing on that adding program, and we will for sure have one of the new furnaces on line by Christmas, maybe earlier than that. So we're on target to bring that on, but we're hoping to get there sooner. But we're working hard with that activity. That's what we expect will hit us in the second quarter to help improve the gross margin compared to Q1.

Okay. And lastly, on the UV filter follow-on that you got in late July, I think originally you were expecting that to be something like the late fall, like maybe November or October time frame, so that seems to be a pretty significant [pulling]. Is that correct, Fran?

Yes, that's right. Maybe we get it 60-90 days early. It depends a lot on how the negotiation goes with our customer, with their customer, the Defense Department. And they were able to get that sooner, so it floated down to us sooner.

Okay. And what is the shipment timeframe for that? Is that another year, or--?

No, like I said in the comments, it will take us well into mid-calendar year 2008 at the rate we're running right now, which is really up there. I think we're in good, steady-state condition to do that.

Okay. And, lastly, on the UV filter, I think that you guys are still in the helicopter platform, and I think some of your folks were hoping to get into fixed-wing. Any update on that situation?

No, we do not. Not at this time. The whole defense procurement side of things seems to be in flux. The need is there to get it on the fixed-wing, but the budgeting and the amount of jockeying that's going on right now seems as if the DOD isn't willing to put it onto another platform yet. Looks like they might hold off six to twelve months to see what happens on the political side of the budgeting.

Got it. Thank you.

Okay.

(OPERATOR INSTRUCTIONS). Your next question comes from Jiwon Lee with Sidoti & Company.

Good morning.

Morning.

Morning.

Just a couple of clarification questions. I am a little bit confused, and I did jump into queue a little bit later. What is included in your annual guidance that you provided today? You have received, obviously, the UV filter orders in July, as well as the multi-year order on the PRM side, and then another on the Apache. So you sort of-- kind of help me through what is included in your guidance, and also cite the exact size of the UV filter follow-on order?

Yes, I think all of those items are in there. I think the only one, just for clarification, we were mentioning, or we started out saying what the backlog of orders were for PRM. We did not-- there's no impact to our income statement because of the transaction being right at the end of our fiscal year, so there's no impact in the FY07 numbers. That $11.7 million in backlog that we mentioned was really orders that we will fulfill here in FY08. And I think the other points that you had were right on. Maybe I'll let Fran repeat a little bit on the UV filter, but the timing of that is really that we took that order-- it is not included-- again, just for clarification, it's not included in our June 30 results. It happened in the month of July, and we thought it was timely enough that we wanted to report that. And so that will be part of our Q1 bookings that we report that large order.

So really, all of those factors that we know about-- and they were all taken into consideration in our overall guidance.

Hey, Jiwon, the UV filters order is $13.5 million. We'll be delivering on that starting late fall, early into the winter, and then runs well into mid-2008. So that order was always in our guidance. We're expecting it, just as Craig said. The Apache helicopter window replacement order-- that was in our guidance, so we'd expected that. And the PRM acquisition and what we expect there-- we put that into this guidance also.

Right. And this guidance is-- and I just for clarification again-- this guidance is the first time that our guidance has included the impact of PRM in there.

Okay. The UV filter-- the order was received a little bit earlier, like up to 90 days. On the other hand, the order size, as Fran alluded, you expect that will kind of go through until sometime in middle of '08. Does that mean that you expect another order sometime in early part of '08? Or is this sort of kind of the annual order size that we should be looking for?

No, you're right on. We'll get another order probably end of third-- calendar year first quarter-- end of calendar, first quarter--

Mm hmm.

-- or into the second quarter of calendar year '08. And this is the running rate, around 300 units a month, plus or minus, of these sets, that we expect to see well into '08. If there's another-- it's hard to tell whether they'll stay at that rate for the rest of '08 and '09, or whether it will go up or down. It's very difficult to us to get a handle on how much DOD money is going to be put toward this as this drags on. But right now I think we're covered by orders into mid-'08, with good indication from the prime that we supply to and their customer that it would go on after that.

I see. [And will] you have enough capacity to support this type of revenue [runway]?

Yes, we do.

It's a tremendous size of business that you're running right now, no?

Yes. Oh yes, it's been a very good, rapid climb in capacity that we accomplished. We do some of that materials growth here at our Advanced Materials Development here in Pennsylvania, and then the rest is done at our facility in Florida, at our VLOC facility. So, ramped to capacity quickly, dealt with yield problems very nicely, and are having a good delivery reputation with our customer.

Okay. On the other hand, it looks like you guys are a little conservative on the gross margin assumptions. Actually, with the PRM, I was assuming a portion of it would support your own internal sales. So how should we look at your margin control?

Yes, the transition for us ramping up and converting over our-- some of our selenium and tellurium needs, that will happen throughout fiscal '08. So we're modeling that out and we've put some factors into that, but I think we said on our last-- the last time we looked at this and modeled it out, we've basically been anticipating that we would get some assistance, or get away from contracts that we're currently under, and then get into PRM supplying a couple of our businesses, specifically our Infrared Optics business and our Marlow, our thermoelectric cooler business, probably more toward the latter half of our fiscal year 2008.

So that is something-- when we talk about margins, we will definitely get some benefit from that. That was one of the drivers of the transaction, not only the lower-- lowering our overall cost of supply, but also securing the supply as well, knowing that we have an in-house capability to, basically, refine as needed tellurium and selenium for us. So I think the benefit of that-- we're really going to continue to shake that out. As Fran said, I think in the next quarter or two it will be working through, getting some things back up on line. As far as supply streams, we will continue to work on things that we want to change and help the business, in things that we can help them be a little better than they already have been. And I think a lot of that, as far as supplying our other businesses, will come to pass in the latter half of '08.

Finally from me, you have now, with the PRM, separate moving pieces on the operating expense side, with Marlow continuing to transition to Viet Nam on the commercial side, as well as the PRM. So how should we look at the-- your operating expense levels going forward?

Yes, again, it's going to be-- I think it's something that we will--it will continue to evolve, Jiwon. It will-- we will continue to, and we have been. I think-- that's why in '07-- we didn't necessarily say it in our prepared remarks, but--

Yes.

-- it was really a breakthrough year for Marlow and also for our VLOC subsidiary, as far as utilizing the Viet Nam facility that we have. And so, they are continuing to do more and utilize that facility more and more. We're still doing very well in utilizing both our Singapore and China operations, and now with the addition of PRM, that's just one more operation that we can tap into.

So, I think the overall plan is-- we're fortunate that they're in good locations. We have the added benefit that they have-- that they're in nice, favorable tax jurisdictions as well, so that helps us out on the bottom line. So I think they're-- whether we did them on our own, made investments, or created the facility in Viet Nam, or whether it's through acquisition, I think any time we're looking at those international operations the goal is definitely that it would help us overall increase the margins, lower the overall operating costs. To give you any specifics, I'd be a little bit hard pressed to do that, but suffice it to say that the PRM acquisition definitely fits in that same mold.

Can we expect about 20%, or a little bit below, levels, in terms of the percentage, excluding your R&D, or is that a little aggressive?

Yes, I don't want to give you any specifics here, Jiwon, again. We just want to continue in the next few quarters, especially with the PRM side, to continue to work that out. And, again, from what we've seen from the date of acquisition until now, they're all very positive signs about the capabilities and the abilities of PRM, and we're able to tap into what they can bring to our company. And I think we-- we're also now looking for even additional opportunities where there might be other materials, other things, that they could supply that maybe have not historically done. So, I think we'll just to have to let that one age a little bit and maybe give you some more specifics on that in a quarter or two.

Okay, I had to try. That's all for me. Thanks.

At this time there are no further questions. Are there any closing remarks?

Yes, Arnika. If there are no more questions, I'd like to thank everyone for participating today. Our next earnings release for the quarter ending September 30, 2007, is tentatively scheduled for before the market opens on Tuesday, October 23, with a conference call to follow that same day at 9:00 a.m. ET. Thank you for participating in today's conference call.

This concludes today's conference call. You may now disconnect.